1933 Act File No. 2-91090
1940 Act File No. 811-4017
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ..........
Post-Effective Amendment No. 31 ............ X
--
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 26 ......................... X
---
FEDERATED EQUITY FUNDS
(formerly, Federated Growth Trust)
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b)
on pursuant to paragraph (b)
------------
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
filed the Notice required by that Rule on ; or
-- --------------
X intends to file the Notice required by that Rule on or about
December 15, 1996; or
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant
to Rule 24f-2(b)(2), need not file the Notice.
Copy to:
Charles H. Morin, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
CROSS-REFERENCE SHEET
This amendment to the Registration Statement of Federated Equity Funds
(formerly, Federated Growth Trust), which is comprised of three portfolios:
(1) Federated Growth Strategies Fund consisting of three classes of shares,
(a) Class A Shares, (b) Class B Shares, and (c) Class C Shares; (2)
Federated Small Cap Strategies Fund consisting of three classes of shares,
(a) Class A Shares, (b) Class B Shares, and (c) Class C Shares; and (3)
Federated Capital Appreciation Fund consisting of three classes of shares,
(a) Class A Shares, (b) Class B Shares, and (c) Class C Shares, relates
only to Federated Small Cap Strategies Fund and Federated Capital
Appreciation Fund. The portfolios are comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page...............(1-3) Cover Page.
Item 2. Synopsis.................(1-3) Summary of Fund Expenses.
Item 3. Condensed Financial
Information..............(1) Financial Highlights.
Item 4. General Description of
Registrant...............(1-3) Gemeral Information; (1-3)
Investment Information; (1-3) Investment
Objective; (1-3) Investment Policies;
(1-3) Investment Limitations; (1-3)
Performance Information; (1)Portfolio
Turnover.
Item 5. Management of the Fund...(1-3) Trust Information; (1-3)
Management of the Trust; (1-3)
Distribution of Shares; (1-3)
Administration of the Fund;
(1(a),(b),(c)-3) Expenses of the Fund
and Class A Shares, Class B Shares, and
Class C Shares; (1-3) Brokerage
Transactions.
Item 6. Capital Stock and Other
Securities...............(1-2) Account and Share Information; (1-
3) Shareholder Information; (1-3) Voting
Rights; (1-3) Tax Information; (1-3)
Federal Income Tax; (1-3) State and
Local Taxes; (1(a)) Other Classes of
Shares.
Item 7. Purchase of Securities Being
Offered..................(1-3) Net Asset Value; (1-3) Investing
in the Fund; (1(a),(b),(c)-3) How to
Purchase Shares; (1(a))What Shares Cost;
(1(a),(b),(c)-3) Investing in Class A
Shares; (1(a),(b),(c)-3) Investing in
Class B Shares; (1(a),(b),(c)-3)
Investing in Class C Shares; (1-3)
Special Purchase Features; (1-3)
Exchange Privilege (1-3)
Item 8. Redemption or Repurchase.(1-3) How to Redeem Shares; (1-3)
Special Redemption Features; (1-3)
Contingent Deferred Sales Charge; (1-3)
Elimination of Contingent Deferred Sales
Charge.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page...............(1-3) Cover Page.
Item 11. Table of Contents........(1-3) Table of Contents.
Item 12. General Information and
History..................(1-3) General Information About the
Fund; (1-3) About Federated Investors;
(1) Massachusetts Partnership Law.
Item 13. Investment Objectives and
Policies.................(1-3) Investment Objective and Policies.
Item 14. Management of the Fund...(1-3) Federated Equity Funds Management.
Item 15. Control Persons and Principal
Holders of Securities....(1-3) Fund Ownership.
Item 16. Investment Advisory and Other
Services.................(1-3) Investment Advisory Services; (1)
Other Services (2-3) Administrative
Services; (2-3) Transfer Agent and
Dividend Disbursing Agent; (1-3)
Distribution Plan and Shareholder
Services Agreement.
Item 17. Brokerage Allocation.....(1-3) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities...............Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered .................(1-3) Purchasing Shares; (1-3)
Determining Net Asset Value; (1-3)
Redeeming Shares; (1-3) Exchanging
Securities for Shares; (3) Current
Distributions.
Item 20. Tax Status...............(1-3) Tax Status.
Item 21. Underwriters.............Not applicable.
Item 22. Calculation of Performance
Data.....................(1-3) Total Return; (1-3) Yield; (1-3)
Performance Comparisons; (1-3) Appendix.
Item 23. Financial Statements.....(1) Incorporated by reference to the
Annual Report to Shareholders of
Federated Growth Strategies Fund dated
October 31, 1995, pursuant to Rule 411
under the Securities Act of 1933. (File
No.811-4017).
.........................(2-3)Filed in Part A.
FEDERATED SMALL CAP STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES
SEMI-ANNUAL REPORT AND SUPPLEMENT TO THE PROSPECTUS DATED NOVEMBER 1, 1995.
A. Please delete the "Summary of Fund Expenses" tables for Class A, Class B,
and Class C Shares on pages 1-3 of the prospectus and replace it with the
following tables:
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................................. 5.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)....................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1).......................................................... 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).......................................... None
Exchange Fee................................................................................................ None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)........................................................................... 0.64%
12b-1 Fee (3)............................................................................................... 0.00%
Total Other Expenses........................................................................................ 0.71%
Shareholder Services Fee..................................................................... 0.25%
Total Class A Operating Expenses (4)................................................................ 1.35%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased and sold with a sales load and not
distributed by Federated Securities Corp. may be charged a contingent
deferred sales charge of 0.50 of 1.00% for redemptions made within one year
of purchase.
(2) The estimated management fee has been reduced to reflect the voluntary
waiver of a portion of the management fee. The adviser can terminate this
anticipated voluntary waiver at any time at its sole discretion. The maximum
management fee is 0.75%.
(3) The Class A Shares has no present intention of paying or accruing the 12b-1
fee during the period 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 "Class A
Information".
(4) The total Class A Shares operating expenses are estimated to be 1.46% absent
the anticipated voluntary waiver of a portion of the management fee.
* Total Class A 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 THE CLASS A SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS A SHARES" AND "TRUST INFORMATION".
WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL
FEES.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
--------- ---------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.......................... $73 $95
You would pay the following expenses on the same investment, assuming no redemption............. $68 $95
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)..................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)........................................................ 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None
Exchange Fee.............................................................................................. None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)......................................................................... 0.64%
12b-1 Fee................................................................................................. 0.75%
Total Other Expenses...................................................................................... 0.71%
Shareholder Services Fee................................................................... 0.25%
Total Class B Operating Expenses (3)(4).......................................................... 2.10%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge").
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this anticipated voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.75%.
(3) The Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase.
(4) The total Class B Shares operating expenses are estimated to be 2.21% absent
the anticipated voluntary waiver of a portion of the management fee.
* Total Class B 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 THE CLASS B SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS B SHARES" AND "TRUST INFORMATION".
WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL
FEES.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
--------- ---------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period......................... $78 $109
You would pay the following expenses on the same investment, assuming no redemption............ $21 $66
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS B SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)..................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)........................................................ 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None
Exchange Fee.............................................................................................. None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)......................................................................... 0.64%
12b-1 Fee................................................................................................. 0.75%
Total Other Expenses...................................................................................... 0.71%
Shareholder Services Fee................................................................... 0.25%
Total Class C Operating Expenses (3)............................................................. 2.10%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. For a more complete description, see "Redeeming
Class C Shares".
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this anticipated voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.75%.
(3) The total Class C Shares operating expenses are estimated to be 2.21% absent
the anticipated voluntary waiver of a portion of the management fee.
* Total Class C 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 THE CLASS C SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS C SHARES" AND "TRUST INFORMATION".
WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL
FEES.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
--------- ---------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period......................... $32 $66
You would pay the following expenses on the same investment, assuming no redemption............ $21 $66
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS B SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
B. Please insert the following "Financial Highlights" tables for Class A,
Class B, and Class C Shares immediately following the Summary of Fund
Expenses tables in the prospectus:
FEDERATED SMALL CAP STRATEGIES FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
APRIL 30, 1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income 0.00
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 4.07
- ------------------------------------------------------------------------------------------- -------
Total from investment operations 14.07
- ------------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.02)
- ------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 14.05
- ------------------------------------------------------------------------------------------- -------
TOTAL RETURN (B) 40.74%
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses 1.34%*
- -------------------------------------------------------------------------------------------
Net investment income (0.02%)*
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 5.31%*
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 6,101
- -------------------------------------------------------------------------------------------
Average commission rate paid $ .05
- -------------------------------------------------------------------------------------------
Portfolio turnover 57%
- -------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 1, 1995 (date of initial
public investment) to April 30, 1996.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
FINANCIAL HIGHLIGHTS--CLASS B SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
APRIL 30, 1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income (0.02)
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 4.06
- ------------------------------------------------------------------------------------------- -------
Total from investment operations 14.04
- ------------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income 0.00
- ------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 14.04
- ------------------------------------------------------------------------------------------- -------
TOTAL RETURN (B) 40.40%
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses 2.13%*
- -------------------------------------------------------------------------------------------
Net investment income (1.09%)*
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 5.00%*
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 3,632
- -------------------------------------------------------------------------------------------
Average commission rate paid $ 0.05
- -------------------------------------------------------------------------------------------
Portfolio turnover 57%
- -------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 1, 1995 (date of initial
public investment) to April 30, 1996.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
APRIL 30, 1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income (0.02)
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 4.05
- ------------------------------------------------------------------------------------------- -------
Total from investment operations 14.03
- ------------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income 0.00
- ------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 14.03
- ------------------------------------------------------------------------------------------- -------
TOTAL RETURN (B) 40.30%
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses 2.13%*
- -------------------------------------------------------------------------------------------
Net investment income (1.13%)*
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 4.87%*
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 599
- -------------------------------------------------------------------------------------------
Average commission rate paid $ 0.05
- -------------------------------------------------------------------------------------------
Portfolio turnover 57%
- -------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 1, 1995 (date of initial
public investment) to April 30, 1996.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
C. Effective May 1, the dividend cycle for Federated Small Cap Strategies
Fund will be changed from quarterly to annually. Therefore no payment will
be made in June. The next regular dividend payment will be made this
December. Therefore, under the Section entitled "ACCOUNT AND SHARE
INFORMATION", please replace the first sentence under the sub-section
"DIVIDENDS" on page 26 with the following:
"Dividends are declared and paid annually to all shareholders invested in
the Fund on the record date."
D. Under the section entitled "Administration of the Fund", on page 30,
delete all references to "Federated Administrative Services" and replace
them with "Federated Services Company".
E. Please delete all references to "Federated Services Company" the former
name of the current transfer agent, and replace with "Federated
Shareholder Services Company", in the following sections of the
prospectus; PURCHASING SHARES BY CHECK, TELEPHONE INSTRUCTIONS, REDEEMING
SHARES BY MAIL, CERTIFICATES AND CONFIRMATIONS and TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT, on pages 20, 22, 23, 26 and 30, respectively.
F. Please delete the last sentence in the section entitled "Making an
Exchange" on page 22 and replace it with the following:
"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 Shareholder Services Company, 1099
Hingham Street, Rockland, MA 02370-3317."
G. Please insert the following financial statements beginning on page 34 of
the prospectus:
FEDERATED SMALL CAP STRATEGIES FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--91.3%
- ---------------------------------------------------------------------------------------------------
BASIC INDUSTRY--4.9%
--------------------------------------------------------------------------------------
1,500 Cambrex Corp. $ 64,500
--------------------------------------------------------------------------------------
1,600 Carpenter Technology Corp. 60,200
--------------------------------------------------------------------------------------
1,000 (a)Cytec Industries, Inc. 82,875
--------------------------------------------------------------------------------------
2,200 (a)Fibreboard Corp. 56,375
--------------------------------------------------------------------------------------
8,500 Spartech Corp. 86,062
--------------------------------------------------------------------------------------
1,650 Texas Industries, Inc. 105,600
--------------------------------------------------------------------------------------
4,500 Universal Stainless & Alloy 49,500
-------------------------------------------------------------------------------------- -------------
Total 505,112
-------------------------------------------------------------------------------------- -------------
CONSUMER DURABLES--5.6%
--------------------------------------------------------------------------------------
2,500 Anthony Industries, Inc. 71,250
--------------------------------------------------------------------------------------
1,200 Bush Industries, Inc., Class A 36,300
--------------------------------------------------------------------------------------
1,500 (a)Cannondale Corp. 33,375
--------------------------------------------------------------------------------------
5,800 Cavalier Homes, Inc. 112,375
--------------------------------------------------------------------------------------
1,200 (a)Champion Enterprises, Inc. 45,600
--------------------------------------------------------------------------------------
5,000 (a)Equity Marketing, Inc. 64,375
--------------------------------------------------------------------------------------
900 Harman International Industries, Inc. 42,525
--------------------------------------------------------------------------------------
4,400 Norwood Promotional Products 100,100
--------------------------------------------------------------------------------------
2,300 (a)Toll Brothers, Inc. 37,375
--------------------------------------------------------------------------------------
1,350 Wynns International, Inc. 36,619
-------------------------------------------------------------------------------------- -------------
Total 579,894
-------------------------------------------------------------------------------------- -------------
CONSUMER NON-DURABLES--1.7%
--------------------------------------------------------------------------------------
6,300 (a)Morningstar Group, Inc. 63,000
--------------------------------------------------------------------------------------
2,300 Mossimo, Inc. 87,400
--------------------------------------------------------------------------------------
1,500 (a)The Boston Beer Co., Inc., Class A 28,313
-------------------------------------------------------------------------------------- -------------
Total 178,713
-------------------------------------------------------------------------------------- -------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
ENERGY MINERALS--1.5%
--------------------------------------------------------------------------------------
3,000 (a)American Exploration Co. $ 37,125
--------------------------------------------------------------------------------------
2,400 Getty Petroleum Corp. 34,200
--------------------------------------------------------------------------------------
7,920 Mercury Air Group, Inc. 79,200
-------------------------------------------------------------------------------------- -------------
Total 150,525
-------------------------------------------------------------------------------------- -------------
FINANCE--19.5%
--------------------------------------------------------------------------------------
1,100 Alex Brown, Inc. 59,537
--------------------------------------------------------------------------------------
2,500 (a)Amerin Corp. 56,562
--------------------------------------------------------------------------------------
2,500 BHC Financial, Inc. 34,688
--------------------------------------------------------------------------------------
1,200 Banknorth Group, Inc. 42,000
--------------------------------------------------------------------------------------
3,000 CapMAC Holdings, Inc. 87,375
--------------------------------------------------------------------------------------
3,000 Capital Re Corp. 112,500
--------------------------------------------------------------------------------------
3,300 Donegal Group, Inc. 59,400
--------------------------------------------------------------------------------------
7,000 Electro Rent Corp. 174,125
--------------------------------------------------------------------------------------
8,700 Executive Risk, Inc. 269,700
--------------------------------------------------------------------------------------
2,800 (a)IPC Holdings Ltd. 54,950
--------------------------------------------------------------------------------------
3,100 (a)Markel Corp. 248,000
--------------------------------------------------------------------------------------
6,000 Oriental Bank & Trust 108,750
--------------------------------------------------------------------------------------
5,500 Penn-America Group, Inc. 73,562
--------------------------------------------------------------------------------------
1,300 Penncorp Financial Group, Inc. 39,812
--------------------------------------------------------------------------------------
1,900 Peoples Heritage Financial Group 39,662
--------------------------------------------------------------------------------------
2,000 Quick & Reilly Group, Inc. 61,000
--------------------------------------------------------------------------------------
1,800 Selective Insurance Group, Inc. 56,475
--------------------------------------------------------------------------------------
2,400 (a)Silicon Valley Bancshares 55,800
--------------------------------------------------------------------------------------
4,100 TCF Financial Corp. 145,037
--------------------------------------------------------------------------------------
4,700 (a)United Insurance Cos., Inc. 99,287
--------------------------------------------------------------------------------------
2,700 Vesta Insurance Group, Inc. 86,737
--------------------------------------------------------------------------------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
FINANCE--CONTINUED
--------------------------------------------------------------------------------------
1,800 Webster Financial Corp. Waterbury $ 49,950
-------------------------------------------------------------------------------------- -------------
Total 2,014,909
-------------------------------------------------------------------------------------- -------------
HEALTH CARE--11.3%
--------------------------------------------------------------------------------------
3,700 (a)Amrion, Inc. 57,350
--------------------------------------------------------------------------------------
1,800 (a)Assisted Living Concepts, Inc. 35,550
--------------------------------------------------------------------------------------
2,500 (a)Bio Rad Laboratories, Inc., Class A 116,250
--------------------------------------------------------------------------------------
2,000 (a)Geltex Pharmaceuticals, Inc. 47,000
--------------------------------------------------------------------------------------
1,700 (a)Health Management Systems, Inc. 43,775
--------------------------------------------------------------------------------------
3,400 (a)Heartport, Inc. 121,550
--------------------------------------------------------------------------------------
3,400 (a)KeraVision, Inc. 53,975
--------------------------------------------------------------------------------------
6,000 (a)OEC Medical Systems, Inc. 69,000
--------------------------------------------------------------------------------------
16,000 (a)PolyMedica Industries, Inc. 134,000
--------------------------------------------------------------------------------------
4,000 (a)Prime Medical Services 62,500
--------------------------------------------------------------------------------------
3,200 (a)Rotech Medical Corp. 132,800
--------------------------------------------------------------------------------------
1,000 (a)Sierra Health Services, Inc. 33,000
--------------------------------------------------------------------------------------
8,800 Synthetech, Inc. 66,000
--------------------------------------------------------------------------------------
1,200 (a)Universal Health Services, Inc., Class B 66,600
--------------------------------------------------------------------------------------
1,900 (a)Veterinary Centers of America 57,950
--------------------------------------------------------------------------------------
3,200 Vital Signs, Inc. 67,400
-------------------------------------------------------------------------------------- -------------
Total 1,164,700
-------------------------------------------------------------------------------------- -------------
PRODUCER MANUFACTURING--5.7%
--------------------------------------------------------------------------------------
2,400 AGCO Corp. 60,600
--------------------------------------------------------------------------------------
2,200 (a)Cable Design Technologies, Class A 72,600
--------------------------------------------------------------------------------------
2,500 Cascade Corp. 40,625
--------------------------------------------------------------------------------------
1,000 Gleason Corp. 39,375
--------------------------------------------------------------------------------------
3,200 (a)Intermet Corp. 47,200
--------------------------------------------------------------------------------------
1,700 JLG Industries, Inc. 92,650
--------------------------------------------------------------------------------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
PRODUCER MANUFACTURING--CONTINUED
--------------------------------------------------------------------------------------
1,300 (a)Mueller Industries, Inc. $ 52,325
--------------------------------------------------------------------------------------
1,000 NACCO Industries, Inc., Class A 63,125
--------------------------------------------------------------------------------------
1,800 Regal Beloit Corp. 34,875
--------------------------------------------------------------------------------------
3,000 Titan Wheel International, Inc. 48,375
--------------------------------------------------------------------------------------
1,350 Tredegar Industries, Inc. 37,463
-------------------------------------------------------------------------------------- -------------
Total 589,213
-------------------------------------------------------------------------------------- -------------
RETAIL TRADE--2.9%
--------------------------------------------------------------------------------------
5,000 (a)MSC Industrial Direct Co. 181,875
--------------------------------------------------------------------------------------
1,400 (a)Orchard Supply Hardware 37,275
--------------------------------------------------------------------------------------
4,400 Riser Foods, Inc., Class A 83,600
-------------------------------------------------------------------------------------- -------------
Total 302,750
-------------------------------------------------------------------------------------- -------------
SERVICES--10.9%
--------------------------------------------------------------------------------------
2,000 (a)American Buildings Co. 50,812
--------------------------------------------------------------------------------------
2,500 American List Corp. 77,812
--------------------------------------------------------------------------------------
2,800 (a)BARRA, Inc. 93,100
--------------------------------------------------------------------------------------
2,000 (a)Catalina Marketing Corp. 155,750
--------------------------------------------------------------------------------------
1,700 (a)Day Runner, Inc. 52,913
--------------------------------------------------------------------------------------
2,300 ](a)Devon Group, Inc. 72,450
--------------------------------------------------------------------------------------
2,000 Employee Solutions, Inc. 77,500
--------------------------------------------------------------------------------------
2,250 Granite Construction, Inc. 44,438
--------------------------------------------------------------------------------------
2,000 (a)Newpark Resources, Inc. 62,750
--------------------------------------------------------------------------------------
5,900 (a)Prepaid Legal Services, Inc. 114,313
--------------------------------------------------------------------------------------
4,000 (a)Pride Petroleum Services, Inc. 65,500
--------------------------------------------------------------------------------------
4,500 (a)Right Management Consultants 154,125
--------------------------------------------------------------------------------------
1,000 (a)Scientific Games Holdings Corp. 32,750
--------------------------------------------------------------------------------------
200 (a)Sykes Enterprises, Inc. 7,100
--------------------------------------------------------------------------------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
SERVICES--CONTINUED
--------------------------------------------------------------------------------------
2,000 (a)Volt Information Science, Inc. $ 59,500
-------------------------------------------------------------------------------------- -------------
Total 1,120,813
-------------------------------------------------------------------------------------- -------------
TECHNOLOGY--23.1%
--------------------------------------------------------------------------------------
3,000 (a)Advent Software, Inc. 79,500
--------------------------------------------------------------------------------------
5,000 (a)Axent Technologies, Inc. 90,000
--------------------------------------------------------------------------------------
4,000 (a)Black Box Corp. 80,000
--------------------------------------------------------------------------------------
1,500 (a)Boca Research, Inc. 32,250
--------------------------------------------------------------------------------------
4,000 (a)Burr Brown Corp. 77,000
--------------------------------------------------------------------------------------
1,000 CTS Corp. 41,750
--------------------------------------------------------------------------------------
1,800 Computer Data Systems, Inc. 31,950
--------------------------------------------------------------------------------------
6,100 (a)Digital Systems Int., Inc. 120,475
--------------------------------------------------------------------------------------
2,000 (a)Documentum, Inc. 92,000
--------------------------------------------------------------------------------------
2,600 (a)ESS Technology, Inc. 58,825
--------------------------------------------------------------------------------------
3,200 (a)Encad, Inc. 110,000
--------------------------------------------------------------------------------------
1,000 (a)Engineering Animation, Inc. 23,250
--------------------------------------------------------------------------------------
2,400 (a)First USA Paymentech, Inc. 104,400
--------------------------------------------------------------------------------------
2,500 (a)Forte Software, Inc. 154,375
--------------------------------------------------------------------------------------
800 HMC Software 29,800
--------------------------------------------------------------------------------------
6,100 II-VI, Inc. 91,500
--------------------------------------------------------------------------------------
500 (a)Indus Group, Inc. 10,625
--------------------------------------------------------------------------------------
3,500 (a)Intervoice, Inc. 98,000
--------------------------------------------------------------------------------------
2,500 (a)JDA Software Group, Inc. 51,250
--------------------------------------------------------------------------------------
2,300 National Data Corp. 81,075
--------------------------------------------------------------------------------------
1,900 (a)Network Equipment Technologies, Inc. 48,450
--------------------------------------------------------------------------------------
3,400 (a)Photronic Labs, Inc. 89,675
--------------------------------------------------------------------------------------
2,500 (a)Planning Sciences International PLC, ADR 60,313
--------------------------------------------------------------------------------------
1,500 (a)SCI Systems, Inc. 64,313
--------------------------------------------------------------------------------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
TECHNOLOGY--CONTINUED
--------------------------------------------------------------------------------------
3,000 (a)Sapient Corp. $ 158,250
--------------------------------------------------------------------------------------
1,000 (a)Sync Research, Inc. 19,750
--------------------------------------------------------------------------------------
2,600 Telxon Corp. 59,800
--------------------------------------------------------------------------------------
3,600 (a)Tollgrade Communications, Inc. 85,500
--------------------------------------------------------------------------------------
4,000 Trident International, Inc. 70,000
--------------------------------------------------------------------------------------
5,200 (a)Worldtalk Communications, Inc. 67,600
--------------------------------------------------------------------------------------
2,200 Wyle Labs 92,125
--------------------------------------------------------------------------------------
1,800 (a)Xylan Corp. 115,313
-------------------------------------------------------------------------------------- -------------
Total 2,389,114
-------------------------------------------------------------------------------------- -------------
TRANSPORTATION--2.4%
--------------------------------------------------------------------------------------
1,100 (a)Alaska Air Group, Inc. 27,913
--------------------------------------------------------------------------------------
800 Comair Holdings, Inc. 29,600
--------------------------------------------------------------------------------------
4,400 Expeditors International Washington, Inc. 130,900
--------------------------------------------------------------------------------------
5,700 (a)Frontier Airlines, Inc. 47,025
--------------------------------------------------------------------------------------
700 Werner Enterprises, Inc. 16,975
-------------------------------------------------------------------------------------- -------------
Total 252,413
-------------------------------------------------------------------------------------- -------------
UTILITIES--1.8%
--------------------------------------------------------------------------------------
3,300 Interstate Power Co. 101,063
--------------------------------------------------------------------------------------
2,200 Teppco Partners, L.P. 83,050
-------------------------------------------------------------------------------------- -------------
Total 184,113
-------------------------------------------------------------------------------------- -------------
TOTAL COMMON STOCKS (IDENTIFIED COST $7,786,626) 9,432,269
-------------------------------------------------------------------------------------- -------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ----------- -------------------------------------------------------------------------------------- -------------
(B) REPURCHASE AGREEMENT--7.5%
- ---------------------------------------------------------------------------------------------------
$ 780,000 BT Securities Corporation, 5.35%, dated 4/30/1996, due 5/1/1996
(AT AMORTIZED COST) $ 780,000
-------------------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST $8,566,626)(C) $ 10,212,269
-------------------------------------------------------------------------------------- -------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government
obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated Funds.
(c) The cost for federal income tax purposes amounts to $8,566,626. The net
unrealized appreciation on a federal tax basis amounts to $1,645,643, which
is comprised of $1,790,992 appreciation and $145,349 depreciation at April
30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($10,332,083) at April 30, 1996.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
PLC--Public Limited Company
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $8,566,626) $ 10,212,269
- ----------------------------------------------------------------------------------------------------
Cash 311
- ----------------------------------------------------------------------------------------------------
Income receivable 3,664
- ----------------------------------------------------------------------------------------------------
Receivable for shares sold 381,538
- ----------------------------------------------------------------------------------------------------
Prepaid expenses 42,309
- ---------------------------------------------------------------------------------------------------- ------------
Total assets 10,640,091
- ----------------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------------------------
Payable for investments purchased $ 278,445
- -----------------------------------------------------------------------------------------
Accrued expenses 29,563
- ----------------------------------------------------------------------------------------- ---------
Total liabilities 308,008
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS for 735,436 shares outstanding $ 10,332,083
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- ----------------------------------------------------------------------------------------------------
Paid in capital $ 8,043,480
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,645,643
- ----------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 660,095
- ----------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (17,135)
- ---------------------------------------------------------------------------------------------------- ------------
Total Net Assets $ 10,332,083
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ----------------------------------------------------------------------------------------------------
CLASS A SHARES:
- ----------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($6,101,033 / 434,100 shares outstanding) $14.05
- ---------------------------------------------------------------------------------------------------- ------------
Offering Price Per Share (100 / 94.50 of $14.05)* $14.87
- ---------------------------------------------------------------------------------------------------- ------------
Redemption Proceeds Per Share $14.05
- ---------------------------------------------------------------------------------------------------- ------------
CLASS B SHARES:
- ----------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($3,631,606 / 258,619 shares outstanding) $14.04
- ---------------------------------------------------------------------------------------------------- ------------
Offering Price Per Share $14.04
- ---------------------------------------------------------------------------------------------------- ------------
Redemption Proceeds Per Share (94.50 / 100 of $14.04)** $13.27
- ---------------------------------------------------------------------------------------------------- ------------
CLASS C SHARES:
- ----------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($599,444 / 42,717 shares outstanding) $14.03
- ---------------------------------------------------------------------------------------------------- ------------
Offering Price Per Share $14.03
- ---------------------------------------------------------------------------------------------------- ------------
Redemption Proceeds Per Share (99.00 / 100 of $14.03)** $13.89
- ---------------------------------------------------------------------------------------------------- ------------
</TABLE>
* See "How to Purchase Shares" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------------------------
Dividends (net of foreign taxes withheld of $59) $ 22,190
- -----------------------------------------------------------------------------------------------------
Interest 18,733
- ----------------------------------------------------------------------------------------------------- -----------
Total income 40,923
- -----------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------
Investment advisory fee $ 24,133
- -----------------------------------------------------------------------------------------
Administrative personnel and services fee 91,488
- -----------------------------------------------------------------------------------------
Custodian fees 12,123
- -----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 17,343
- -----------------------------------------------------------------------------------------
Legal fees 2,053
- -----------------------------------------------------------------------------------------
Portfolio accounting fees 34,583
- -----------------------------------------------------------------------------------------
Distribution services fee--Class B Shares 4,149
- -----------------------------------------------------------------------------------------
Distribution services fee--Class C Shares 553
- -----------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 6,477
- -----------------------------------------------------------------------------------------
Shareholder services fee--Class B Shares 1,383
- -----------------------------------------------------------------------------------------
Shareholder services fee--Class C Shares 184
- -----------------------------------------------------------------------------------------
Share registration costs 13,752
- -----------------------------------------------------------------------------------------
Printing and postage 5,282
- -----------------------------------------------------------------------------------------
Insurance premiums 2,776
- -----------------------------------------------------------------------------------------
Miscellaneous 600
- ----------------------------------------------------------------------------------------- ----------
Total expenses 216,879
- -----------------------------------------------------------------------------------------
WAIVERS AND REIMBURSEMENTS--
- -----------------------------------------------------------------------------
Waiver of investment advisory fee $ (24,133)
- -----------------------------------------------------------------------------
Reimbursement of other operating expenses (144,577)
- ----------------------------------------------------------------------------- ----------
Total waivers and reimbursements (168,710)
- ----------------------------------------------------------------------------------------- ----------
Net expenses 48,169
- ----------------------------------------------------------------------------------------------------- -----------
Net operating loss (7,246)
- ----------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments 660,095
- -----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 1,645,643
- ----------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 2,305,738
- ----------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 2,298,492
- ----------------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
APRIL 30, 1996*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------------------
Net operating loss $ (7,246)
- ----------------------------------------------------------------------------------------------
Net realized gain on investments
($660,095 net gain, as computed for federal tax purposes) 660,095
- ----------------------------------------------------------------------------------------------
Net change in unrealized appreciation 1,645,643
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets resulting from operations 2,298,492
- ---------------------------------------------------------------------------------------------- ------------------
NET EQUALIZATION CREDITS (DEBITS)-- (30)
- ---------------------------------------------------------------------------------------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ----------------------------------------------------------------------------------------------
Distributions in excess of net investment income:
- ----------------------------------------------------------------------------------------------
Class A Shares (9,859)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets resulting from distributions to shareholders (9,859)
- ---------------------------------------------------------------------------------------------- ------------------
SHARE TRANSACTIONS--
- ----------------------------------------------------------------------------------------------
Proceeds from sale of shares 14,244,031
- ----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions declared 1,448
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (6,201,999)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets resulting from share transactions 8,043,480
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets 10,332,083
- ----------------------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------------------
Beginning of period --
- ---------------------------------------------------------------------------------------------- ------------------
End of period $ 10,332,083
- ---------------------------------------------------------------------------------------------- ------------------
</TABLE>
*For the period from November 1, 1995 (date of initial public investment) to
April 30, 1996.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Equity Funds (the "Trust") is registered under the Investment Company
Act of 1940, as amended (the "Act"), as an open-end, management investment
company. The Trust consists of three portfolios. The financial statements
included herein are only those of Federated Small Cap Strategies Fund (the
"Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are
segregated, and a shareholder's interest is limited to the portfolio in which
shares are held. The objective of the fund is to provide capital appreciation.
The Fund offers three classes of shares: Class A Shares, Class B Shares, and
Class C Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Listed equity securities are valued at the last sale
price reported on a national securities exchange. Short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at
the time of purchase may be valued at amortized cost, which approximates
fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the
Internal Revenue Code, as amended (the "Code"). Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (equivalent, on a per share basis, to
the amount of undistributed net investment income on the date of the
transaction) is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1996*
CLASS A SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 941,591 $ 10,235,032
- ---------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 126 1,448
- ---------------------------------------------------------------------------------------
Shares redeemed (507,617) (5,889,400)
- --------------------------------------------------------------------------------------- --------- -------------
Net change resulting from Class A share transactions 434,100 $ 4,347,080
- --------------------------------------------------------------------------------------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1996*
CLASS B SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 284,564 $ 3,479,188
- ----------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 0 0
- ----------------------------------------------------------------------------------------
Shares redeemed (25,945) (310,770)
- ---------------------------------------------------------------------------------------- --------- ------------
Net change resulting from Class B share transactions 258,619 $ 3,168,418
- ---------------------------------------------------------------------------------------- --------- ------------
<CAPTION>
PERIOD ENDED
APRIL 30, 1996*
CLASS C SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 42,870 $ 529,811
- ---------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 0 0
- ---------------------------------------------------------------------------------------
Shares redeemed (153) (1,829)
- --------------------------------------------------------------------------------------- --------- -------------
Net change resulting from Class C share transactions 42,717 $ 527,982
- --------------------------------------------------------------------------------------- --------- -------------
Net change resulting from share transactions 735,436 8,043,480
- --------------------------------------------------------------------------------------- --------- -------------
</TABLE>
* For the period from November 1, 1995 (date of initial public investment) to
April 30, 1996.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser,
(the "Adviser"), receives for its services an annual investment advisory fee
equal to 0.75% of the Fund's average daily net assets.
The Adviser may voluntarily choose to waive any portion of its fee and reimburse
certain operating expenses of the Fund. The Adviser can modify or terminate this
voluntary waiver and reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp., the principal distributor, from the net
assets of the Fund to finance activities
intended to result in the sale of the Fund's Class B and Class C shares. The
Plan provides that the Fund may incur distribution expenses according to the
following schedule annually, to compensate Federated Securities Corp.
<TABLE>
<CAPTION>
SHARE CLASS NAME % OF AVG. DAILY NET ASSETS OF CLASS
<S> <C>
Class A 0.25%
Class B 0.75%
Class C 0.75%
</TABLE>
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
For the six months ended April 30, 1996, Class A did not incur a distribution
services fee.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services, the Fund will pay Federated Shareholder
Services up to 0.25% of average daily net assets of each class of shares for the
period. The fee paid to Federated Shareholder Services is used to finance
certain services for shareholders and to maintain shareholder accounts.
Federated Shareholder Services may voluntarily choose to waive any portion of
its fee. Federated Shareholder Services can modify or terminate this voluntary
waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--FServ, through its
subsidiary, Federated Shareholder Services Company serves as transfer and
dividend disbursing agent for the Fund. The fee paid to FServ is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--Federated Services Company maintains the Fund's
accounting records for which it receives a fee. The fee is based on the level of
the Fund's average daily net assets for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses ($10,292) were initially borne
by Federated Securities Corp. The Trust has agreed to reimburse Federated
Securities Corp. for the organizational expenses during the five year period
following effective date. For the period ended April 30, 1996, the Trust paid
$57 pursuant to this agreement.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended
April 30, 1996, were as follows:
<TABLE>
<S> <C>
PURCHASES $ 10,780,232
- --------------------------------------------------------------------------------------------------- -------------
SALES $ 3,653,702
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Glen R. Johnson
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Executive Vice President
Gregor F. Meyer John W. McGonigle
John E. Murray, Jr. Executive Vice President and Secretary
Wesley W. Posvar Richard B. Fisher
Marjorie P. Smuts Vice President
David M. Taylor
Treasurer
S. Elliott Cohan
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not
insured or guaranteed by the U.S. government, the Federal Deposit Insurance
Corporation, the
Federal Reserve Board, or any other government agency. Investment in mutual
funds involves
investment risk, including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the Funds' prospectus which contains facts concerning their
objective and policies, management fees, expenses and other information.
FEDERATED
SMALL CAP
STRATEGIES
FUND
Combined
Semi-Annual Report and
Supplement to Prospectus
Dated November 1, 1995
[LOGO] FEDERATED INVESTORS
Since 1955
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
CUSIP# 314172404
CUSIP# 314172503
CUSIP# 314172602
G01658-01 (5/96)
FEDERATED SMALL CAP STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS
The shares of Federated Small Cap Strategies Fund (the "Fund") represent
interests in a diversified portfolio of Federated Equity Funds (the "Trust"), an
open-end management investment company (a mutual fund). The investment objective
of the Fund is to provide capital appreciation. Any income received from the
portfolio is entirely incidental. The Fund pursues its investment objective by
investing primarily in a portfolio of common stocks of small capitalization
companies.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information dated
November 1 , 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, which is in paper form only, or a
paper copy of this prospectus, if you have received your prospectus
electronically, 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 1 , 1995
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Synopsis.......................................................................4
Liberty Family of Funds........................................................5
Investment Information.........................................................6
Investment Objective.........................................................6
Investment Policies..........................................................6
Investment Limitations......................................................13
Net Asset Value...............................................................14
Investing in the Fund.........................................................15
How To Purchase Shares........................................................16
Investing in Class A Shares.................................................16
Investing in Class B Shares.................................................18
Investing in Class C Shares.................................................19
Special Purchase Features...................................................20
Exchange Privilege............................................................21
How To Redeem Shares..........................................................23
Special Redemption Features.................................................24
Contingent Deferred Sales Charge............................................24
Elimination of Contingent Deferred
Sales Charge.............................................................25
Account and Share Information.................................................26
Trust Information.............................................................27
Management of the Trust.....................................................27
Distribution of Shares......................................................28
Administration of the Fund..................................................30
Expenses of the Fund and Class A Shares,
Class B Shares, and Class C Shares.......................................31
Brokerage Transactions......................................................31
Shareholder Information.......................................................32
Voting Rights...............................................................32
Massachusetts Partnership Law...............................................32
Tax Information...............................................................33
Federal Income Tax..........................................................33
Pennsylvania Corporate and Personal
Property Taxes...........................................................33
Performance Information.......................................................34
- -------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED SMALL CAP STRATEGIES FUND
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..................................... 5.50%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................... 0.64%
12b-1 Fee (3)................................................................................................... 0.00%
Total Other Expenses............................................................................................ 0.71%
Shareholder Services Fee......................................................................... 0.25%
Total Class A Shares Operating Expenses (4)............................................................ 1.35%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales load and
not distribtued by Federated Securities Corp. may be charged a contingent
deferred sales charge of 0.50 of 1.00% for redemptions made within one full
year of purchase. (See "Contingent Deferred Sales Charge.")
(2) The estimated Management Fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this anticipated voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.75%.
(3) Class A Shares have no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending October 31, 1996. If Class A Shares were
paying or accruing the 12b-1 fee, 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."
(4) The Total Class A Shares Operating Expenses are estimated to be 1.46% absent
the anticipated voluntary waiver of a portion of the Management Fee.
* Total Class A Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class A Shares" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each time period........................................ $73 $95
You would pay the following expenses on the same investment, assuming no redemption............... $68 $95
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- ------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED SMALL CAP STRATEGIES FUND
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..................................... None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................................. 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................... 0.64%
12b-1 Fee....................................................................................................... 0.75%
Total Other Expenses............................................................................................ 0.71%
Shareholder Services Fee......................................................................... 0.25%
Total Class B Shares Operating Expenses (3) (4)........................................................ 2.10%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge.")
(2) The estimated Management Fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this anticipated voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.75%.
(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The Total Class B Shares Operating Expenses are estimated to be 2.21% absent
the anticipated voluntary waiver of a portion of the Management Fee.
* Total Class B Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class B Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class B Shares" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period....................................................... $78 $109
You would pay the following expenses on the same investment, assuming no redemption............... $21 $ 66
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS B SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- ------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED SMALL CAP STRATEGIES FUND
<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..................................... None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................... 0.64%
12b-1 Fee....................................................................................................... 0.75%
Total Other Expenses............................................................................................ 0.71%
Shareholder Services Fee......................................................................... 0.25%
Total Class C Shares Operating Expenses (3)............................................................ 2.10%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. (See "Contingent Deferred Sales Charge.")
(2) The estimated Management Fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this anticipated voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.75%.
(3) The Total Class C Shares Operating Expenses are estimated to be 2.21%%
absent the anticipated voluntary waiver of a portion of the Management Fee.
* Total Class C Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class C Shares" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period....................................................... $32 $66
You would pay the following expenses on the same investment, assuming no redemption............... $21 $66
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS C SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- --------------------------------------------------------------------------------
SYNOPSIS
The Trust was established as a Massachusetts business trust under 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 Trust'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. As of the
date of this prospectus, the Board of Trustees (the "Trustees") has established
three classes of shares for the Fund, known as Class A Shares, Class B Shares,
and Class C Shares (individually and collectively as the context requires,
"Shares").
Shares of the Fund are designed for individuals and institutions seeking capital
appreciation by investing primarily in a portfolio of common stocks of small
capitalization companies.
For information on how to purchase Shares of the Fund, please refer to "How to
Purchase Shares." The minimum initial investment for Class A Shares is $500. The
minimum initial investment for Class B Shares and Class C Shares is $1500.
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.
In general, Class A Shares are sold at net asset value plus an applicable sales
load and are redeemed at net asset value. However, a contingent deferred sales
charge is imposed under certain circumstances. For a more complete description,
see "How to Redeem Shares."
Class B Shares are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "How to Redeem Shares."
Class C Shares are sold at net asset value. A contingent deferred sales charge
of 1.00% will be charged on assets redeemed within the first 12 months following
purchase. See "How to Redeem Shares."
In addition, the Fund also pays a shareholder services fee at an annual rate not
to exceed 0.25% of average daily net assets.
Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds for which affiliates of Federated Investors
serve as investment adviser or principal underwriter (the "Federated Funds") can
be found under "Exchange Privilege."
Federated Management is the investment adviser (the "Adviser") to the Fund and
receives compensation for its services. The Adviser's address is Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including entering into repurchase agreements, investing in when-issued
securities and put and call options, and lending portfolio securities. These
risks are described under "Investment Policies."
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers 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:
American Leaders Fund, Inc., providing growth of capital and income through
high-quality stocks;
Capital Growth Fund, providing appreciation of capital primarily through equity
securities;
Federated Bond Fund, providing current income through high-quality corporate
debt;
Federated Growth Strategies Fund, providing appreciation of capital primarily
through equity securities of companies with prospects for above-average growth
in earnings and dividends;
Fund for U.S. Government Securities, Inc., providing current income through
long-term U.S. government securities;
International Equity Fund, providing long-term capital growth and income
through international securities;
International Income Fund, providing a high level of current income consistent
with prudent investment risk through high-quality debt securities denominated
primarily in foreign currencies;
Liberty Equity Income Fund, Inc., providing above-average income and capital
appreciation through income producing equity securities;
Liberty High Income Bond Fund, Inc., providing high current income through
high-
yielding, lower-rated corporate bonds;
Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;
Liberty U.S. Government Money Market Trust, providing current income consistent
with stability of principal through high-quality U.S. government securities;
Liberty Utility Fund, Inc., providing current income and long-term growth of
income, primarily through electric, gas, and communications utilities;
Limited Term Fund, providing a high level of current income consistent with
minimum fluctuation in principal value through investment grade securities;
Limited Term Municipal Fund, providing a high level of current income exempt
from federal regular income tax consistent with the preservation of principal,
primarily limited to municipal securities;
Michigan Intermediate Municipal Trust, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the state
of Michigan and Michigan municipalities, primarily through Michigan municipal
securities;
Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
Strategic Income Fund, providing a high level of current income, primarily
through domestic and foreign corporate debt obligations;
Tax-Free Instruments Trust, providing current income consistent with stability
of principal and exempt from federal income tax, through high-quality,
short-term municipal securities; and
World Utility Fund, providing total return primarily through securities issued
by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales loads on future purchases in and exchanges between the
Class A Shares of any funds in the Liberty Family of Funds, as long as they
maintain a $500 balance in one of the Liberty Funds.
- --------------------------------------------------------------------------------
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide capital appreciation. Any
income received from the portfolio is entirely incidental. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of common stocks of small capitalization companies. Under normal market
conditions, the Fund will invest at least 65% of its total assets in common
stocks of small capitalization companies. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
changes in these policies become effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests include, but are not limited to:
common stock of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets and are
considered by the Adviser to have potential for above-average appreciation;
corporate securities and convertible securities;
securities of foreign issuers;
restricted and illiquid securities;
securities of other investment companies; and
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
SMALL CAPITALIZATION COMPANIES
Small capitalization companies are those companies that have a market
capitalization of $1 billion or less at the time of purchase. Small
capitalization companies are positioned for rapid growth in revenues or earnings
and assets, characteristics which may provide for significant capital
appreciation. Small companies often pay no dividends and current income is not a
factor in the selection of stocks. Smaller companies often have limited product
lines, markets, or financial resources, and they may be dependent upon one or a
few key people for management. (See "Equity Investment Risk Considerations")
CORPORATE SECURITIES
The Fund may invest in preferred stocks, convertible securities, notes or
debentures rated investment grade, i.e., Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch") (or, if unrated, are deemed
to be of comparable quality by the Fund's Adviser), and warrants of these
companies. Corporate fixed income securities are subject to market and credit
risks. In addition, the prices of fixed income securities fluctuate inversely to
the direction of interest rates. It should be noted that securities receiving
the lowest investment grade rating are considered to have some speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated securities. In the event that a security which had an eligible
rating when purchased is downgraded below Baa or BBB, the Adviser will promptly
reassess whether continued holding of the security is consistent with the Fund's
objective.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities which may be converted at a
stated price within a specific period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities may take
the form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants, or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for
different investment objectives.
The Fund may invest in convertible securities rated Baa or lower by Moody's or
BBB or lower by S&P or Fitch, or if unrated, are deemed to be of comparable
quality by the Adviser.
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted, but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the security is converted
into equity. Usable bonds are corporate bonds that can be used, in whole or in
part, customarily at full face value, in lieu of cash to purchase the issuer's
common stock. When owned as part of a unit along with warrants, which are
options to buy the common stock, they function as convertible bonds, except that
the warrants generally will expire before the bond's maturity. Convertible
securities are senior to equity securities and, therefore, have a claim to
assets of the corporation prior to the holders of common stock in the case of
liquidation. However, convertible securities are generally subordinated to
similar nonconvertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stable stream of
income with generally higher yields than common stocks, but lower than
nonconvertible securities of similar quality.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying common
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the Adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objectives. Otherwise,
the Fund will hold or trade the convertible securities. In selecting convertible
securities for the Fund, the Adviser evaluates the investment characteristics of
the convertible security as a fixed income instrument, and the investment
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible security, the
Adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment alternatives,
trends in the determinants of the issuer's profits, and the issuer's management
capability and practices.
SYNTHETIC CONVERTIBLES
A "synthetic convertible" is created by combining distinct securities that
possess the two principal characteristics of a true convertible: a fixed-income
component and a convertibility component. This combination is achieved by
investing in nonconvertible fixed-income securities (nonconvertible bonds,
preferred stocks, and money market instruments) and in warrants or call options
traded on U.S. or foreign exchanges or in the over-the-counter markets granting
the holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case of
stock index options.
Synthetic convertibles differ from true convertible securities in several
respects. Unlike a true convertible, which is a single security having a unitary
market value, a synthetic convertible is comprised of two distinct securities,
each with its own market value. Therefore, the "market value" of a synthetic
convertible is the sum of the values of its fixed-income component and its
separate convertibility component. For this reason, the values of a synthetic
convertible and a true convertible security will respond differently to market
fluctuations.
A synthetic convertible may be more flexible than a convertible security. For
example, a synthetic convertible may offer different issuers in the fixed-income
component than are offered in the stock underlying the convertibility component.
A synthetic convertible allows the Adviser to combine components representing
distinct issuers, or to combine a fixed-income security with a call option on a
stock index, when it determines that such a combination would better promote the
Fund's investment objective and diversification. A synthetic convertible may
also offer flexibility in that its two components may be purchased separately.
For example, the Adviser may purchase a listed call option for
inclusion in a synthetic convertible, but temporarily hold short-term
investments while postponing purchase of a corresponding bond pending
development of more favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component, will
decline, causing a decline in the value of the call option or warrant. Should
the price of the stock or the level of the index fall below the exercise price,
and remain there throughout the exercise period, the entire amount paid for the
call option or warrant would be lost. Since a synthetic convertible includes a
fixed-income component, the holder of a synthetic convertible also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument. Finally, a synthetic convertible can be expected to
have greater transaction costs than a true convertible security.
A combination of convertible securities and synthetic convertibles may offer
certain advantages over an investment policy that allows for only one of these
investment vehicles. Since convertible securities and synthetic convertibles may
respond differently to varying market conditions, the ability to invest in both
types of securities should afford greater flexibility in managing the Fund's
portfolio.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
The convertible and synthetic convertible securities in which the Fund invests
are usually not in the three highest rating categories of a nationally
recognized statistical rating organization (AAA, AA, or A for S&P or Fitch and
Aaa, Aa, or A for Moody's), but are in the lower rating categories or are
unrated, but are of comparable quality and have speculative characteristics or
are speculative. Lower-rated bonds or unrated bonds are commonly referred to as
"junk bonds." There is no minimal acceptable rating for a security to be
purchased or held in the Fund's portfolio, and the Fund may, from time to time,
purchase or hold convertible and synthetic convertible securities rated in the
lowest rating category. A description of the rating categories is contained in
the Appendix to the Combined Statement of Additional Information.
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic, and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds.
The Adviser attempts to reduce the risks described above through diversification
of the portfolio and by credit analysis of each issuer as well as by monitoring
broad economic trends and corporate and legislative developments.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in the securities of foreign issuers which are freely traded
on United States securities exchanges or in the over-the-counter market in the
form of depositary receipts ("American Depositary Receipts" or "ADRs"). In
addition, the Fund may invest in other securities of foreign issuers. There may
be certain risks associated with investing in foreign securities. These include
risks of adverse political and economic developments (including possible
governmental seizure or nationalization of assets), the possible imposition of
exchange controls or other governmental restrictions, less uniformity in
accounting and reporting requirements, and the possibility that there will be
less information on such securities and their issuers available to the public.
In addition, there are
restrictions on foreign investments in other jurisdictions and there tends to be
difficulty in obtaining judgments from abroad and affecting repatriation of
capital invested abroad. Delays could occur in settlement of foreign
transactions, which could adversely affect shareholder equity. Foreign
securities may be subject to foreign taxes, which reduce yield, and may be less
marketable than comparable United States securities. As a matter of practice,
the Fund will not invest in the securities of a foreign issuer if any risk
identified above appears to the Adviser to be substantial. The Fund will not
invest more than 20% of its assets in foreign securities.
PUT AND CALL OPTIONS
The Fund may purchase put options on its portfolio securities. 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. 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 covered
call options on all or any portion of its portfolio to generate income. As a
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 will write call options on securities either held in
its portfolio, or which it has the right to obtain without payment of further
consideration, or for which it has segregated cash or U.S. government securities
in the amount of any additional consideration.
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
when options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers
and other financial institutions (such as commercial banks or savings
associations) deemed creditworthy by the Adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options or write put options, other than to close out open option positions,
without further notification to shareholders.
FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell futures contracts to hedge against the effects of
changes in the value of portfolio securities due to anticipated changes in
interest rates and market conditions. Futures contracts call for the delivery of
particular 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.
Stock index futures contracts are based on indexes that reflect the market value
of common stock of the firms included in the indexes. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
The Fund may also write call options and purchase put options on futures
contracts as a hedge to attempt to protect its portfolio securities against
decreases in value. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of selling a futures contract at a fixed price at
any time during a
specified period if the option is exercised. Conversely, as purchaser of a put
option on a futures contract, the Fund is entitled (but not obligated) to sell a
futures contract at the fixed price during the life of the option.
The Fund may also write put options and purchase call options on futures
contracts as a hedge against rising purchase prices of portfolio securities. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the Fund writes a put option on a futures
contract, it is undertaking to buy a particular futures contract at a fixed
price at any time during a specified period if the option is exercised. As a
purchaser of a call option on a futures contract, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the custodian (or the broker, if
legally permitted) to collateralize the position and thereby insure that the use
of such futures contracts are unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the underlying future
or security, or will make deposits to collateralize the position as discussed
above.
RISKS
When the Fund uses financial futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In addition,
the Adviser could be incorrect in its expectations about the direction or extent
of market factors such as stock price 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 these 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 in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restrictions on resale under
federal securities law. However, the Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, over-the-counter options,
and repurchase agreements providing for settlement in more than seven days after
notice, to 15% of its net assets.
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 purchase prices. Accordingly, the Fund may pay more or
less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
TEMPORARY INVESTMENTS
In such proportions as, in the judgment of its Adviser, prevailing market
conditions warrant, the Fund may, for temporary defensive purposes, invest in:
short-term money market instruments;
securities issued and/or guaranteed as to payment of principal and interest by
the U.S. government, its agencies or instrumentalities; and
repurchase agreements.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies, but it will
not own more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment company,
or invest more than 10% of its total assets in investment companies in general.
The Fund will invest in other investment companies primarily for the purpose of
investing short-term cash which has not yet been invested in other portfolio
instruments. It should be noted that investment companies incur certain expenses
such as management fees and, therefore, any investment by the Fund in shares of
another investment company would be subject to such duplicate expenses. The
Adviser will waive its investment advisory fee on assets invested in securities
of open-end investment companies.
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, 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 equal to at least 100% of the value of the securities
loaned at all times.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option, and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity,
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages, or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objectives, policies, and limitations.
EQUITY INVESTMENT RISK CONSIDERATIONS
As with other mutual funds that invest primarily in equity securities, the Fund
is subject to market risks. That is, the possibility exists that common stocks
will decline over short or even extended periods of time, and the United States
equity market tends to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease. However,
because the Fund invests primarily in small capitalization stocks, there are
some additional risk factors associated with investments in the Fund. In
particular, stocks in the small capitalization sector of the United States
equity market have historically been more volatile in price than larger
capitalization stocks, such as those included in the Standard & Poor's 500
Composite Stock Price Index ("Standard & Poor's 500 Index"). This is because,
among other things, small companies have less certain growth prospects than
larger companies; have a lower degree of liquidity in the equity market; and
tend to have a greater sensitivity to changing economic conditions. Further, in
addition to exhibiting greater volatility, the stocks of small companies may, to
some degree, fluctuate independently of the stocks of large companies. That is,
the stocks of small companies may decline in price as the prices 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 stock
market indices such as the Standard & Poor's 500 Index.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements (arrangements in
which the Fund sells a portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or pledge securities except,
under certain circumstances, the Fund may borrow up to one-third of the value
of its total assets and pledge its assets to secure such borrowings; or
with respect to 75% of its total assets, invest more than 5% of the value of
its total assets in securities of any one issuer (other than cash, cash items,
or securities issued or guaranteed by the U.S. government and its agencies or
instrumentalities, and repurchase agreements collateralized by such securities)
or acquire more than 10% of the outstanding voting securities of any one
issuer.
The above investment limitations cannot be changed without shareholder approval.
- --------------------------------------------------------------------------------
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, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
- -------------------------------------------------------------------------------
INVESTING IN THE FUND
The Fund offers investors three classes of Shares that carry sales loads and
contingent deferred sales charges in different forms and amounts and which bear
different levels of expenses.
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales load of 5.50% at
the time of purchase. Certain purchases of Class A Shares are not subject to a
sales load. See "Investing in Class A Shares." As a result, Class A Shares are
not subject to any charges when they are redeemed (except for special programs
offered under "Purchases with Proceeds From Redemptions of Unaffiliated
Investment Companies"). Certain purchases of Class A Shares qualify for reduced
sales loads. See "Reducing or Eliminating the Sales Load." Class A Shares have
no conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales load, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.
CLASS C SHARES
Class C Shares are sold without an initial sales load, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature.
- -------------------------------------------------------------------------------
HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)
In connection with any sale, Federated Securities Corp. may from time to time
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales load as follows:
<TABLE>
<CAPTION>
SALES LOAD AS DEALER
SALES LOAD AS A PERCENTAGE CONCESSION
A PERCENTAGE OF NET AS A PERCENTAGE
AMOUNT OF OF OFFERING AMOUNT OF PUBLIC
TRANSACTION PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>
*See sub-section entitled "Dealer Concession."
No sales load is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers Act of
1940, as amended, or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, investment adviser, or
retirement plan may be charged an additional service fee by the institution.
Additionally, no sales load is imposed for Class A Shares purchased through
"wrap accounts" or similar programs, under which clients pay a fee or fees for
services.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales load. Any portion of the sales load which is not paid to a
dealer will be retained by the distributor. However, the distributor may offer
to pay dealers up to 100% of the sales load retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement of
certain expenses of qualified employees and their spouses to attend
informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales load; however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price over
the first year following the purchase. Such payments are based on the original
purchase price of Shares outstanding at each month end.
The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
Effective as of the date of this prospectus, and until further notice, the
entire amount of the applicable sales load will be reallowed to dealers. In
addition, the distributor will pay dealers additional bonus payments in an
amount equal to 0.50 of 1.00% of the public offering price of Shares sold.
REDUCING OR ELIMINATING
THE SALES LOAD
The sales load can be reduced or eliminated on the purchase of Class A Shares
through:
quantity discounts and accumulated purchases;
concurrent purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated investment company
shares.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce the sales load paid. The
Fund will combine purchases of Class A Shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21 when
it calculates the sales load. In addition, the sales load, if applicable, is
reduced for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.
If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $30,000 and he purchases $20,000 more at the current public offering price,
the sales load on the additional purchase according to the schedule now in
effect would be 4.50%, not 5.50%.
To receive the sales load reduction, Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution at the time the
purchase is made that Class A Shares are already owned or that purchases are
being combined. The Fund will reduce the sales load after it confirms the
purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales load reduction, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Liberty
Family of Funds, the purchase price of which includes a sales load. For example,
if a shareholder concurrently invested $30,000 in one of the other funds in the
Liberty Family of Funds with a sales load, and $20,000 in this Fund, the sales
load would be reduced.
To receive this sales load reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will reduce the sales load
after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $50,000 of shares of the funds in
the Liberty Family of Funds (excluding money market funds) over the next 13
months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 5.50% of the total amount intended to
be purchased in escrow (in Shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales load.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales load applicable to
the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any fund in
the Liberty Family of Funds, excluding money market accounts, will be aggregated
to provide a purchase credit towards fulfillment of the letter of intent. Prior
trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales load. If the
shareholder redeems his Class A Shares in the Fund, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES
Investors may purchase Class A Shares at net asset value, without a sales load,
with the proceeds from the redemption of shares of an unaffiliated investment
company that were purchased or sold with a sales load or commission and were not
distributed by Federated Securities Corp. The purchase must be made within 60
days of the redemption, and Federated Securities Corp. must be notified by the
investor in writing, or by his financial institution, at the time the purchase
is made. From time to time, the Fund may offer dealers a payment of .50 of 1.00%
for Shares purchased under this program. If Shares are purchased in this manner,
fund purchases will be subject to a contingent deferred sales charge for one
year from the date of purchase. Shareholders will be notified prior to the
implementation of any special offering as described above.
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales load, under
certain circumstances described under "Contingent Deferred Sales Charge--Class B
Shares," a contingent deferred sales charge may be applied by the distributor at
the time Class B Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around the
fifteenth of the month eight full years after the purchase date, except as
noted below, and may no longer be subject to a distribution services
fee (see "Distribution of Shares"). Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. Class B Shares acquired by exchange from Class B Shares of
another fund in the Liberty Family of Funds will convert into Class A Shares
based on the time of the initial purchase. For purposes of conversion to Class
A Shares, Shares purchased through the reinvestment of dividends and
distributions paid on Class B Shares will be considered to be held in a
separate sub-account. Each time any Class B Shares in the shareholder's account
(other than those in the sub-account) convert to Class A Shares, an equal pro
rata portion of the Class B Shares in the sub-account will also convert to
Class A Shares. The conversion of Class B Shares to Class A Shares is subject
to the continuing availability of a ruling from the Internal Revenue Service or
an opinion of counsel that such conversions will not constitute taxable events
for federal tax purposes. There can be no assurance that such ruling or opinion
will be available, and the conversion of Class B Shares to Class A Shares will
not occur if such ruling or opinion is not available. In such event, Class B
Shares would continue to be subject to higher expenses than Class A Shares for
an indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge, see "Contingent Deferred Sales Charge--Class C
Shares."
PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.
The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by wire by calling
the Fund. All information needed will be taken over the telephone, and the order
is considered received immediately. Payment for purchases which are subject to a
sales load must be received within three business days following the order.
Payment for purchases on which no sales load is imposed must be received before
3:00 p.m. (Eastern time) on the next business day following the order. Federal
funds should be wired as follows: State Street Bank and Trust Company, Boston,
Massachusetts; Attn: EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund
Number); Account Number; Trade Date and Order Number; Group Number or Dealer
Number; Nominee or Institution Name; and ABA Number 011000028. Shares cannot be
purchased by wire on holidays when wire transfers are restricted.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the check is
received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under
this program, funds may be automatically withdrawn periodically from the
shareholder's checking account at an Automated Clearing House ("ACH") member and
invested in the Fund at the net asset value next determined after an order is
received by the Fund, plus the sales load, if applicable. Shareholders should
contact their financial institution or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
- -------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
CLASS A SHARES
Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds at net asset value. Shareholders
of Class A Shares may also exchange into certain other Federated Funds (as
defined in the "Synopsis" of this prospectus) which are sold with a sales load
different from that of the Fund's or with no sales load, and which are advised
by subsidiaries or affiliates of Federated Investors. These exchanges are made
at net asset value plus the difference between the Fund's sales load already
paid and any sales load of the Federated Fund into which the Shares are to be
exchanged, if higher. Neither the Fund nor any of the funds in the Liberty
Family of Funds imposes any additional fees on exchanges. Shareholders in
certain other Federated Funds may exchange their shares in the Federated Funds
for Class A Shares.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Liberty Family of Funds. (Not all funds in the Liberty
Family of Funds currently offer Class B Shares. Contact your financial
institution regarding the availability of other Class B Shares in the Liberty
Family of Funds.) Exchanges are made at net asset value without being assessed a
contingent deferred sales charge on the exchanged Shares. To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period. For more information, see "Contingent
Deferred Sales Charge."
CLASS C SHARES
Class C shareholders may exchange all or some of their Shares for Class C Shares
in other funds in the Liberty Family of Funds at net asset value without a
contingent deferred sales charge. (Not all funds in the Liberty Family of Funds
currently offer Class C Shares. Contact your financial institution regarding the
availability of other Class C Shares in the Liberty Family of Funds.) To the
extent that a shareholder exchanges Shares for Class C Shares in other funds in
the Liberty Family of Funds, the time for which the exchanged-for Shares are to
be held will be added to the time for which exchanged-from Shares were held for
purposes of satisfying the applicable holding period. For more information, see
"Contingent Deferred Sales Charge."
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds or certain Federated
Funds (where applicable) may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing and sent by
overnight mail to Federated Services Company, 500 Victory Road--2nd Floor,
North Quincy, Massachusetts 02171.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600 and deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the Fund before that time for Shares to be
exchanged the same day. Shareholders exchanging into a fund will begin receiving
dividends the following business day. This privilege may be modified or
terminated at any time.
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
as described below.
REDEEMING SHARES THROUGH
A FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp.
Proceeds will be mailed in the form of a check, to the shareholder's address of
record or by wire transfer to the shareholder's account at a domestic commercial
bank that is a member of the Federal Reserve System. The minimum amount for a
wire transfer is $1,000. Proceeds from redeemed Shares purchased by check or
through ACH will not be wired until that method of payment has cleared.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, 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.
Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption payable
other than to the shareholder of record must have their signatures
guaranteed by a bank which is a member of the Federal Deposit Insurance
Corporation, a trust company, a member firm of a domestic stock exchange, or
any other "eligible guarantor institution," as defined by the Securities and
Exchange Act of 1934, as amended. The Fund does not accept signatures
guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A
Shares are sold with a sales load, it is not advisable for shareholders to
continue to purchase Class A Shares while participating in this program. A
contingent deferred sales charge may be imposed on Class B Shares and Class C
Shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
CLASS A SHARES
Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of Shares of an unaffiliated investment company purchased or
redeemed with a sales load and not distributed by Federated Securities Corp. may
be charged a contingent deferred sales charge of .50 of 1.00% for redemptions
made within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT
]YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
</TABLE>
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS A SHARES, CLASS B SHARES, AND
CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) Shares
acquired through the reinvestment of dividends and long-term capital gains; (2)
Shares held for more than six full years from the date of purchase with respect
to Class B Shares and one full year from the date of purchase with respect to
Class C Shares and applicable Class A Shares; (3) Shares held for fewer than six
years with respect to Class B Shares and one full year from the date of purchase
with respect to Class C Shares and applicable Class A Shares on a first-in,
first-out basis. A contingent deferred sales charge is not assessed in
connection with an exchange of Fund Shares for Shares of other funds in the
Liberty Family of Funds in the same class (see "Exchange Privilege"). Any
contingent deferred sales charge imposed at the time the exchanged-for Shares
are redeemed is calculated as if the shareholder had held the Shares from the
date on which he became a shareholder of the exchanged-from Shares. Moreover,
the contingent deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds.
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended, of
a shareholder; (2) redemptions representing minimum required distributions from
an Individual Retirement Account or other retirement plan to a shareholder who
has attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Trustees, employees and sales representatives of the Fund, the
distributor, or affiliates of the Fund or distributor; employees of any
financial institution that sells Shares of the Fund pursuant to a sales
agreement with the distributor; and spouses and children under the age of 21 of
the aforementioned persons. Finally, no contingent deferred sales charge will be
imposed on the redemption of Shares originally purchased through a bank trust
department, an investment adviser registered under the Investment Advisers Act
of 1940, as amended, or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or any other financial institution, to the extent that no payments
were advanced for purchases made through such entities. The Trustees reserve the
right to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any Shares purchased prior to
the termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the Shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.
- --------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.
DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends and distributions are automatically
reinvested in additional Shares of the Fund on payment dates at the ex-dividend
date net asset value without a sales load, unless shareholders request cash
payments on the new account form or by contacting the transfer agent. All
shareholders on the record date are entitled to the dividend. If Shares are
redeemed or exchanged prior to the record date or purchased after the record
date, those Shares are not entitled to that quarter's dividend.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
- -------------------------------------------------------------------------------
TRUST INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust is managed by a Board of Trustees. The Trustees are responsible for
managing the Trust's business affairs and for exercising all the Trust's powers
except those reserved for the shareholders. An Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.75 of 1% of
the Fund's average daily net assets. The fee paid by the Fund, while higher than
the advisory fee paid by other mutual funds in general, is comparable to fees
paid by other mutual funds with similar objectives and policies. Under the
investment advisory contract, which provides for the voluntary waiver of the
advisory fee by the Adviser, the Adviser may voluntarily waive some or all of
its fee. This does not include reimbursement to the Fund of any expenses
incurred by shareholders who use the transfer agent's subaccounting facilities.
The Adviser can terminate this voluntary waiver at any time in its sole
discretion. The Adviser has also undertaken to reimburse the Fund for operating
expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940 ,
as amended . It is a subsidiary of Federated Investors. All of the Class A
(voting) Shares of Federated Investors are owned by a trust, the Trustees of
which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr.
Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President
and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,750 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.
James E. Grefenstette has been the Fund's portfolio manager since its inception.
Mr. Grefenstette joined Federated Investors in 1992 and has been an Assistant
Vice President of the Fund's investment adviser since October 1994. From 1992
until 1994, Mr. Grefenstette acted as an investment analyst. Mr. Grefenstette
was a credit analyst at Westinghouse Credit Corp. from 1990 until 1992, and an
investment officer at Pittsburgh National Bank from 1987 until
1990. Mr. Grefenstette received his M.S.I.A. from Carnegie Mellon University.
Aash M. Shah has been the Fund's portfolio manager since its inception. Mr.
Shah joined Federated Investors in 1993 as an Investment Analyst and has been
an Assistant Vice President of the Fund's investment adviser since 1995. Mr.
Shah was employed at Westinghouse Credit Corp. from 1990 to 1993 as an
Investment Analyst. Mr. Shah received his Masters in Industrial Administration
from Carnegie Mellon University with a concentration in finance and accounting.
Mr. Shah is a Chartered Financial Analyst.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the distributor may be paid a fee in an amount
computed at an annual rate of up to .25% for Class A Shares and up to .75% for
Class B Shares and Class C Shares of the average daily net assets of each class
of Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The Fund does not currently
make payments to the distributor or charge a fee under the Distribution Plan for
Class A Shares, and shareholders of Class A Shares will be notified if the Fund
intends to charge a fee under the Distribution Plan. For Class A Shares and
Class C Shares, the distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds,
investment advisers, and broker/dealers to provide sales services or
distribution-related support services as agents for their clients or customers.
With respect to Class B Shares, because distribution fees to be paid by the Fund
to the distributor may not exceed an annual rate of .75% of each class of
Shares' average daily net assets, it will take the distributor a number of years
to recoup the expenses it has incurred for its sales services and
distribution-related support services pursuant to the Plan.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts
("Shareholder Services"). 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 Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of sales services, distribution-related support
services, or shareholder services.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the capacities described above or should Congress
relax current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50 of 1% of the net asset value
of Class A Shares purchased by their clients or customers under certain
qualified retirement plans as approved by Federated Securities Corp. (Such
payments are subject to a reclaim from the financial institution should the
assets leave the program within 12 months after purchase.)
Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
the distributor may offer to pay a fee from its own assets to financial
institutions as financial assistance for
providing substantial marketing and sales support. The support may include
sponsoring sales, educational and training seminars for their employees,
providing sales literature, and engineering computer software programs that
emphasize the attributes of the Fund. Such assistance will be predicated upon
the amount of Shares the financial institution sells or may sell, and/or upon
the type and nature of sales or marketing support furnished by the financial
institution. Any payments made by the distributor may be reimbursed by the
Fund's Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at an annual rate which relates to the average aggregate
daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford Centre,
Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE FUND AND CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES
Holders of Class A Shares, Class B Shares, and Class C Shares pay their
allocable portion of Trust and portfolio 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 Trustees; legal fees of the Trust; association
membership dues; and such non-recurring and extraordinary items as may arise
from time to time.
The portfolio 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 portfolio and Class A Shares, Class B Shares, and Class C Shares
of the portfolio; 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 allocated specifically to Class A
Shares, Class B
Shares, and Class C Shares as classes are expenses under the Trust's
Distribution Plan and fees for Shareholder Services. However, the Trustees
reserve the right to allocate certain other expenses to holders of Class A
Shares, Class B Shares and Class C Shares as they deem appropriate ("Class
Expenses"). In any case, 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, and 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, and
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 related solely
to Class A Shares, Class B Shares, or Class C Shares.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
- -------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All Shares of each Fund or
class in the Trust have equal voting rights, except that in matters affecting
only a particular Fund or class, only Shares of that Fund or class are entitled
to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
- --------------------------------------------------------------------------------
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
PENNSYLVANIA CORPORATE AND
PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
the Trust is not subject to Pennsylvania corporate or personal property taxes;
and
Trust shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust
would be subject to such taxes if owned directly by residents of those
jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
- -------------------------------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for each class
of Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in each class of Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by each class of Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the maximum sales load or contingent deferred sales charges, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, and Class C Shares. Expense differences among Class A Shares, Class B
Shares, and Class C Shares may affect the performance of each class.
From time to time, advertisements for Class A Shares, Class B Shares, and Class
C Shares of the Fund may refer to ratings, rankings, and other information in
certain financial publications and/or compare the performance of Class A Shares,
Class B Shares, and Class C Shares to certain indices.
FEDERATED SMALL CAP
STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES
COMBINED PROSPECTUS
An Open-End, Diversified
Management Investment Company
November 1 , 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 314172404
Cusip 314172503
Cusip 314172602
G01228-04 (11/95)
FEDERATED SMALL CAP STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
SEMI-ANNUAL REPORT AND SUPPLEMENT TO THE PROSPECTUS DATED NOVEMBER 1, 1995.
A. Please delete the "SUMMARY OF FUND EXPENSES" table on page 1 of the
prospectus and replace it with the following table:
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................................. 5.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)....................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1).......................................................... 0.00%
Redemption Fees (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 (after waiver) (2)........................................................................... 0.64%
12b-1 Fees (3).............................................................................................. 0.00%
Total Other Expenses........................................................................................ 0.71%
Shareholder Services Fee..................................................................... 0.25%
Total Class A Operating Expenses (4)................................................................ 1.35%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased and sold with a sales load and not
distributed by Federated Securities Corp. may be charged a contingent
deferred sales charge of 0.50 of 1.00% for redemptions made within one year
of purchase.
(2) The estimated management fee has been reduced to reflect the voluntary
waiver of a portion of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.75%.
(3) The Class A Shares has no present intention of paying or accruing the 12b-1
fee during the period 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 "Class A
Information".
(4) The total Class A Shares operating expenses are estimated to be 1.46% absent
the anticipated voluntary waiver of a portion of the management fee.
* Total Class A 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 THE CLASS A SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF VARIOUS COSTS
AND EXPENSES, SEE "INVESTING IN CLASS A SHARES" AND "TRUST INFORMATION".
WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL
FEES.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
--------- ---------
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period. ........................ $73 $95
You would pay the following expenses on the same investment, assuming no redemption............. $68 $95
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
B. Please insert the following "FINANCIAL HIGHLIGHTS" table as page 2 of the
prospectus:
FEDERATED SMALL CAP STRATEGIES FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
APRIL 30, 1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income 0.00
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 4.07
- ------------------------------------------------------------------------------------------- -------
Total from investment operations 14.07
- ------------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.02)
- ------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 14.05
- ------------------------------------------------------------------------------------------- -------
TOTAL RETURN (B) 40.74%
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses 1.34%*
- -------------------------------------------------------------------------------------------
Net investment income (0.02%)*
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 5.31%*
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $6,101
- -------------------------------------------------------------------------------------------
Average commission rate paid $ .05
- -------------------------------------------------------------------------------------------
Portfolio turnover 57%
- -------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 1, 1995 (date of initial
public investment) to April 30, 1996.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
C. Effective May 1, the dividend cycle for Federated Small Cap Strategies
Fund will be changed from quarterly to annually. Therefore no payment will
be made in June. The next regular dividend payment will be made this
December. Therefore, under the Section entitled "ACCOUNT AND SHARE
INFORMATION", please replace the first sentence under the sub-section
"DIVIDENDS" on page 20 with the following:
"Dividends are declared and paid annually to all shareholders invested in
the Fund on the record date."
D. Under the section entitled "ADMINISTRATION OF THE FUND", on page 24,
delete all references to "Federated Administrative Services" and replace
them with "Federated Services Company".
E. Please delete all references to "Federated Services Company" the former
name of the current transfer agent, and replace with "Federated
Shareholder Services Company", in the following sections of the
prospectus; PURCHASING SHARES BY CHECK, TELEPHONE INSTRUCTIONS, REDEEMING
SHARES BY MAIL, CERTIFICATES AND CONFIRMATIONS and TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT, on pages 15, 16, 18, 20, and 24,
respectively.
F. Please delete the last sentence in the section entitled "MAKING AN
EXCHANGE" on page 16 and replace it with the following:
"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 Shareholder Services Company, 1099
Hingham Street, Rockland, Massachusetts 02370-3317."
G. Please insert the following financial statements beginning on page 28 of
the prospectus:
FEDERATED SMALL CAP STRATEGIES FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--91.3%
- ---------------------------------------------------------------------------------------------------
BASIC INDUSTRY--4.9%
--------------------------------------------------------------------------------------
1,500 Cambrex Corp. $ 64,500
--------------------------------------------------------------------------------------
1,600 Carpenter Technology Corp. 60,200
--------------------------------------------------------------------------------------
1,000 (a)Cytec Industries, Inc. 82,875
--------------------------------------------------------------------------------------
2,200 (a)Fibreboard Corp. 56,375
--------------------------------------------------------------------------------------
8,500 Spartech Corp. 86,062
--------------------------------------------------------------------------------------
1,650 Texas Industries, Inc. 105,600
--------------------------------------------------------------------------------------
4,500 Universal Stainless & Alloy 49,500
-------------------------------------------------------------------------------------- -------------
Total 505,112
-------------------------------------------------------------------------------------- -------------
CONSUMER DURABLES--5.6%
--------------------------------------------------------------------------------------
2,500 Anthony Industries, Inc. 71,250
--------------------------------------------------------------------------------------
1,200 Bush Industries, Inc., Class A 36,300
--------------------------------------------------------------------------------------
1,500 (a)Cannondale Corp. 33,375
--------------------------------------------------------------------------------------
5,800 Cavalier Homes, Inc. 112,375
--------------------------------------------------------------------------------------
1,200 (a)Champion Enterprises, Inc. 45,600
--------------------------------------------------------------------------------------
5,000 (a)Equity Marketing, Inc. 64,375
--------------------------------------------------------------------------------------
900 Harman International Industries, Inc. 42,525
--------------------------------------------------------------------------------------
4,400 Norwood Promotional Products 100,100
--------------------------------------------------------------------------------------
2,300 (a)Toll Brothers, Inc. 37,375
--------------------------------------------------------------------------------------
1,350 Wynns International, Inc. 36,619
-------------------------------------------------------------------------------------- -------------
Total 579,894
-------------------------------------------------------------------------------------- -------------
CONSUMER NON-DURABLES--1.7%
--------------------------------------------------------------------------------------
6,300 (a)Morningstar Group, Inc. 63,000
--------------------------------------------------------------------------------------
2,300 Mossimo, Inc. 87,400
--------------------------------------------------------------------------------------
1,500 (a)The Boston Beer Co., Inc., Class A 28,313
-------------------------------------------------------------------------------------- -------------
Total 178,713
-------------------------------------------------------------------------------------- -------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
ENERGY MINERALS--1.5%
--------------------------------------------------------------------------------------
3,000 (a)American Exploration Co. $ 37,125
--------------------------------------------------------------------------------------
2,400 Getty Petroleum Corp. 34,200
--------------------------------------------------------------------------------------
7,920 Mercury Air Group, Inc. 79,200
-------------------------------------------------------------------------------------- -------------
Total 150,525
-------------------------------------------------------------------------------------- -------------
FINANCE--19.5%
--------------------------------------------------------------------------------------
1,100 Alex Brown, Inc. 59,537
--------------------------------------------------------------------------------------
2,500 (a)Amerin Corp. 56,562
--------------------------------------------------------------------------------------
2,500 BHC Financial, Inc. 34,688
--------------------------------------------------------------------------------------
1,200 Banknorth Group, Inc. 42,000
--------------------------------------------------------------------------------------
3,000 CapMAC Holdings, Inc. 87,375
--------------------------------------------------------------------------------------
3,000 Capital Re Corp. 112,500
--------------------------------------------------------------------------------------
3,300 Donegal Group, Inc. 59,400
--------------------------------------------------------------------------------------
7,000 Electro Rent Corp. 174,125
--------------------------------------------------------------------------------------
8,700 Executive Risk, Inc. 269,700
--------------------------------------------------------------------------------------
2,800 (a)IPC Holdings Ltd. 54,950
--------------------------------------------------------------------------------------
3,100 (a)Markel Corp. 248,000
--------------------------------------------------------------------------------------
6,000 Oriental Bank & Trust 108,750
--------------------------------------------------------------------------------------
5,500 Penn-America Group, Inc. 73,562
--------------------------------------------------------------------------------------
1,300 Penncorp Financial Group, Inc. 39,812
--------------------------------------------------------------------------------------
1,900 Peoples Heritage Financial Group 39,662
--------------------------------------------------------------------------------------
2,000 Quick & Reilly Group, Inc. 61,000
--------------------------------------------------------------------------------------
1,800 Selective Insurance Group, Inc. 56,475
--------------------------------------------------------------------------------------
2,400 (a)Silicon Valley Bancshares 55,800
--------------------------------------------------------------------------------------
4,100 TCF Financial Corp. 145,037
--------------------------------------------------------------------------------------
4,700 (a)United Insurance Cos., Inc. 99,287
--------------------------------------------------------------------------------------
2,700 Vesta Insurance Group, Inc. 86,737
--------------------------------------------------------------------------------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
FINANCE--CONTINUED
--------------------------------------------------------------------------------------
1,800 Webster Financial Corp. Waterbury $ 49,950
-------------------------------------------------------------------------------------- -------------
Total 2,014,909
-------------------------------------------------------------------------------------- -------------
HEALTH CARE--11.3%
--------------------------------------------------------------------------------------
3,700 (a)Amrion, Inc. 57,350
--------------------------------------------------------------------------------------
1,800 (a)Assisted Living Concepts, Inc. 35,550
--------------------------------------------------------------------------------------
2,500 (a)Bio Rad Laboratories, Inc., Class A 116,250
--------------------------------------------------------------------------------------
2,000 (a)Geltex Pharmaceuticals, Inc. 47,000
--------------------------------------------------------------------------------------
1,700 (a)Health Management Systems, Inc. 43,775
--------------------------------------------------------------------------------------
3,400 (a)Heartport, Inc. 121,550
--------------------------------------------------------------------------------------
3,400 (a)KeraVision, Inc. 53,975
--------------------------------------------------------------------------------------
6,000 (a)OEC Medical Systems, Inc. 69,000
--------------------------------------------------------------------------------------
16,000 (a)PolyMedica Industries, Inc. 134,000
--------------------------------------------------------------------------------------
4,000 (a)Prime Medical Services 62,500
--------------------------------------------------------------------------------------
3,200 (a)Rotech Medical Corp. 132,800
--------------------------------------------------------------------------------------
1,000 (a)Sierra Health Services, Inc. 33,000
--------------------------------------------------------------------------------------
8,800 Synthetech, Inc. 66,000
--------------------------------------------------------------------------------------
1,200 (a)Universal Health Services, Inc., Class B 66,600
--------------------------------------------------------------------------------------
1,900 (a)Veterinary Centers of America 57,950
--------------------------------------------------------------------------------------
3,200 Vital Signs, Inc. 67,400
-------------------------------------------------------------------------------------- -------------
Total 1,164,700
-------------------------------------------------------------------------------------- -------------
PRODUCER MANUFACTURING--5.7%
--------------------------------------------------------------------------------------
2,400 AGCO Corp. 60,600
--------------------------------------------------------------------------------------
2,200 (a)Cable Design Technologies, Class A 72,600
--------------------------------------------------------------------------------------
2,500 Cascade Corp. 40,625
--------------------------------------------------------------------------------------
1,000 Gleason Corp. 39,375
--------------------------------------------------------------------------------------
3,200 (a)Intermet Corp. 47,200
--------------------------------------------------------------------------------------
1,700 JLG Industries, Inc. 92,650
--------------------------------------------------------------------------------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
PRODUCER MANUFACTURING--CONTINUED
--------------------------------------------------------------------------------------
1,300 (a)Mueller Industries, Inc. $ 52,325
--------------------------------------------------------------------------------------
1,000 NACCO Industries, Inc., Class A 63,125
--------------------------------------------------------------------------------------
1,800 Regal Beloit Corp. 34,875
--------------------------------------------------------------------------------------
3,000 Titan Wheel International, Inc. 48,375
--------------------------------------------------------------------------------------
1,350 Tredegar Industries, Inc. 37,463
-------------------------------------------------------------------------------------- -------------
Total 589,213
-------------------------------------------------------------------------------------- -------------
RETAIL TRADE--2.9%
--------------------------------------------------------------------------------------
5,000 (a)MSC Industrial Direct Co. 181,875
--------------------------------------------------------------------------------------
1,400 (a)Orchard Supply Hardware 37,275
--------------------------------------------------------------------------------------
4,400 Riser Foods, Inc., Class A 83,600
-------------------------------------------------------------------------------------- -------------
Total 302,750
-------------------------------------------------------------------------------------- -------------
SERVICES--10.9%
--------------------------------------------------------------------------------------
2,000 (a)American Buildings Co. 50,812
--------------------------------------------------------------------------------------
2,500 American List Corp. 77,812
--------------------------------------------------------------------------------------
2,800 (a)BARRA, Inc. 93,100
--------------------------------------------------------------------------------------
2,000 (a)Catalina Marketing Corp. 155,750
--------------------------------------------------------------------------------------
1,700 (a)Day Runner, Inc. 52,913
--------------------------------------------------------------------------------------
2,300 ](a)Devon Group, Inc. 72,450
--------------------------------------------------------------------------------------
2,000 Employee Solutions, Inc. 77,500
--------------------------------------------------------------------------------------
2,250 Granite Construction, Inc. 44,438
--------------------------------------------------------------------------------------
2,000 (a)Newpark Resources, Inc. 62,750
--------------------------------------------------------------------------------------
5,900 (a)Prepaid Legal Services, Inc. 114,313
--------------------------------------------------------------------------------------
4,000 (a)Pride Petroleum Services, Inc. 65,500
--------------------------------------------------------------------------------------
4,500 (a)Right Management Consultants 154,125
--------------------------------------------------------------------------------------
1,000 (a)Scientific Games Holdings Corp. 32,750
--------------------------------------------------------------------------------------
200 (a)Sykes Enterprises, Inc. 7,100
--------------------------------------------------------------------------------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
SERVICES--CONTINUED
--------------------------------------------------------------------------------------
2,000 (a)Volt Information Science, Inc. $ 59,500
-------------------------------------------------------------------------------------- -------------
Total 1,120,813
-------------------------------------------------------------------------------------- -------------
TECHNOLOGY--23.1%
--------------------------------------------------------------------------------------
3,000 (a)Advent Software, Inc. 79,500
--------------------------------------------------------------------------------------
5,000 (a)Axent Technologies, Inc. 90,000
--------------------------------------------------------------------------------------
4,000 (a)Black Box Corp. 80,000
--------------------------------------------------------------------------------------
1,500 (a)Boca Research, Inc. 32,250
--------------------------------------------------------------------------------------
4,000 (a)Burr Brown Corp. 77,000
--------------------------------------------------------------------------------------
1,000 CTS Corp. 41,750
--------------------------------------------------------------------------------------
1,800 Computer Data Systems, Inc. 31,950
--------------------------------------------------------------------------------------
6,100 (a)Digital Systems Int., Inc. 120,475
--------------------------------------------------------------------------------------
2,000 (a)Documentum, Inc. 92,000
--------------------------------------------------------------------------------------
2,600 (a)ESS Technology, Inc. 58,825
--------------------------------------------------------------------------------------
3,200 (a)Encad, Inc. 110,000
--------------------------------------------------------------------------------------
1,000 (a)Engineering Animation, Inc. 23,250
--------------------------------------------------------------------------------------
2,400 (a)First USA Paymentech, Inc. 104,400
--------------------------------------------------------------------------------------
2,500 (a)Forte Software, Inc. 154,375
--------------------------------------------------------------------------------------
800 HMC Software 29,800
--------------------------------------------------------------------------------------
6,100 II-VI, Inc. 91,500
--------------------------------------------------------------------------------------
500 (a)Indus Group, Inc. 10,625
--------------------------------------------------------------------------------------
3,500 (a)Intervoice, Inc. 98,000
--------------------------------------------------------------------------------------
2,500 (a)JDA Software Group, Inc. 51,250
--------------------------------------------------------------------------------------
2,300 National Data Corp. 81,075
--------------------------------------------------------------------------------------
1,900 (a)Network Equipment Technologies, Inc. 48,450
--------------------------------------------------------------------------------------
3,400 (a)Photronic Labs, Inc. 89,675
--------------------------------------------------------------------------------------
2,500 (a)Planning Sciences International PLC, ADR 60,313
--------------------------------------------------------------------------------------
1,500 (a)SCI Systems, Inc. 64,313
--------------------------------------------------------------------------------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------------- -------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------------------------
TECHNOLOGY--CONTINUED
--------------------------------------------------------------------------------------
3,000 (a)Sapient Corp. $ 158,250
--------------------------------------------------------------------------------------
1,000 (a)Sync Research, Inc. 19,750
--------------------------------------------------------------------------------------
2,600 Telxon Corp. 59,800
--------------------------------------------------------------------------------------
3,600 (a)Tollgrade Communications, Inc. 85,500
--------------------------------------------------------------------------------------
4,000 Trident International, Inc. 70,000
--------------------------------------------------------------------------------------
5,200 (a)Worldtalk Communications, Inc. 67,600
--------------------------------------------------------------------------------------
2,200 Wyle Labs 92,125
--------------------------------------------------------------------------------------
1,800 (a)Xylan Corp. 115,313
-------------------------------------------------------------------------------------- -------------
Total 2,389,114
-------------------------------------------------------------------------------------- -------------
TRANSPORTATION--2.4%
--------------------------------------------------------------------------------------
1,100 (a)Alaska Air Group, Inc. 27,913
--------------------------------------------------------------------------------------
800 Comair Holdings, Inc. 29,600
--------------------------------------------------------------------------------------
4,400 Expeditors International Washington, Inc. 130,900
--------------------------------------------------------------------------------------
5,700 (a)Frontier Airlines, Inc. 47,025
--------------------------------------------------------------------------------------
700 Werner Enterprises, Inc. 16,975
-------------------------------------------------------------------------------------- -------------
Total 252,413
-------------------------------------------------------------------------------------- -------------
UTILITIES--1.8%
--------------------------------------------------------------------------------------
3,300 Interstate Power Co. 101,063
--------------------------------------------------------------------------------------
2,200 Teppco Partners, L.P. 83,050
-------------------------------------------------------------------------------------- -------------
Total 184,113
-------------------------------------------------------------------------------------- -------------
TOTAL COMMON STOCKS (IDENTIFIED COST $7,786,626) 9,432,269
-------------------------------------------------------------------------------------- -------------
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ----------- -------------------------------------------------------------------------------------- -------------
(B) REPURCHASE AGREEMENT--7.5%
- ---------------------------------------------------------------------------------------------------
$ 780,000 BT Securities Corporation, 5.35%, dated 4/30/1996, due 5/1/1996
(AT AMORTIZED COST) $ 780,000
-------------------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST $8,566,626)(C) $ 10,212,269
-------------------------------------------------------------------------------------- -------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government
obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated Funds.
(c) The cost for federal income tax purposes amounts to $8,566,626. The net
unrealized appreciation on a federal tax basis amounts to $1,645,643, which
is comprised of $1,790,992 appreciation and $145,349 depreciation at April
30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($10,332,083) at April 30, 1996.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
PLC--Public Limited Company
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $8,566,626) $ 10,212,269
- ----------------------------------------------------------------------------------------------------
Cash 311
- ----------------------------------------------------------------------------------------------------
Income receivable 3,664
- ----------------------------------------------------------------------------------------------------
Receivable for shares sold 381,538
- ----------------------------------------------------------------------------------------------------
Prepaid expenses 42,309
- ---------------------------------------------------------------------------------------------------- ------------
Total assets 10,640,091
- ----------------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------------------------
Payable for investments purchased $ 278,445
- -----------------------------------------------------------------------------------------
Accrued expenses 29,563
- ----------------------------------------------------------------------------------------- ---------
Total liabilities 308,008
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS for 735,436 shares outstanding $ 10,332,083
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- ----------------------------------------------------------------------------------------------------
Paid in capital $ 8,043,480
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,645,643
- ----------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 660,095
- ----------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (17,135)
- ---------------------------------------------------------------------------------------------------- ------------
Total Net Assets $ 10,332,083
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ----------------------------------------------------------------------------------------------------
CLASS A SHARES:
- ----------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($6,101,033 / 434,100 shares outstanding) $14.05
- ---------------------------------------------------------------------------------------------------- ------------
Offering Price Per Share (100 / 94.50 of $14.05)* $14.87
- ---------------------------------------------------------------------------------------------------- ------------
Redemption Proceeds Per Share $14.05
- ---------------------------------------------------------------------------------------------------- ------------
CLASS B SHARES:
- ----------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($3,631,606 / 258,619 shares outstanding) $14.04
- ---------------------------------------------------------------------------------------------------- ------------
Offering Price Per Share $14.04
- ---------------------------------------------------------------------------------------------------- ------------
Redemption Proceeds Per Share (94.50 / 100 of $14.04)** $13.27
- ---------------------------------------------------------------------------------------------------- ------------
CLASS C SHARES:
- ----------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($599,444 / 42,717 shares outstanding) $14.03
- ---------------------------------------------------------------------------------------------------- ------------
Offering Price Per Share $14.03
- ---------------------------------------------------------------------------------------------------- ------------
Redemption Proceeds Per Share (99.00 / 100 of $14.03)** $13.89
- ---------------------------------------------------------------------------------------------------- ------------
</TABLE>
* See "How to Purchase Shares" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------------------------
Dividends (net of foreign taxes withheld of $59) $ 22,190
- -----------------------------------------------------------------------------------------------------
Interest 18,733
- ----------------------------------------------------------------------------------------------------- -----------
Total income 40,923
- -----------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------
Investment advisory fee $ 24,133
- -----------------------------------------------------------------------------------------
Administrative personnel and services fee 91,488
- -----------------------------------------------------------------------------------------
Custodian fees 12,123
- -----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 17,343
- -----------------------------------------------------------------------------------------
Legal fees 2,053
- -----------------------------------------------------------------------------------------
Portfolio accounting fees 34,583
- -----------------------------------------------------------------------------------------
Distribution services fee--Class B Shares 4,149
- -----------------------------------------------------------------------------------------
Distribution services fee--Class C Shares 553
- -----------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 6,477
- -----------------------------------------------------------------------------------------
Shareholder services fee--Class B Shares 1,383
- -----------------------------------------------------------------------------------------
Shareholder services fee--Class C Shares 184
- -----------------------------------------------------------------------------------------
Share registration costs 13,752
- -----------------------------------------------------------------------------------------
Printing and postage 5,282
- -----------------------------------------------------------------------------------------
Insurance premiums 2,776
- -----------------------------------------------------------------------------------------
Miscellaneous 600
- ----------------------------------------------------------------------------------------- ----------
Total expenses 216,879
- -----------------------------------------------------------------------------------------
WAIVERS AND REIMBURSEMENTS--
- -----------------------------------------------------------------------------
Waiver of investment advisory fee $ (24,133)
- -----------------------------------------------------------------------------
Reimbursement of other operating expenses (144,577)
- ----------------------------------------------------------------------------- ----------
Total waivers and reimbursements (168,710)
- ----------------------------------------------------------------------------------------- ----------
Net expenses 48,169
- ----------------------------------------------------------------------------------------------------- -----------
Net operating loss (7,246)
- ----------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments 660,095
- -----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 1,645,643
- ----------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 2,305,738
- ----------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 2,298,492
- ----------------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
APRIL 30, 1996*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------------------
Net operating loss $ (7,246)
- ----------------------------------------------------------------------------------------------
Net realized gain on investments
($660,095 net gain, as computed for federal tax purposes) 660,095
- ----------------------------------------------------------------------------------------------
Net change in unrealized appreciation 1,645,643
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets resulting from operations 2,298,492
- ---------------------------------------------------------------------------------------------- ------------------
NET EQUALIZATION CREDITS (DEBITS)-- (30)
- ---------------------------------------------------------------------------------------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ----------------------------------------------------------------------------------------------
Distributions in excess of net investment income:
- ----------------------------------------------------------------------------------------------
Class A Shares (9,859)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets resulting from distributions to shareholders (9,859)
- ---------------------------------------------------------------------------------------------- ------------------
SHARE TRANSACTIONS--
- ----------------------------------------------------------------------------------------------
Proceeds from sale of shares 14,244,031
- ----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions declared 1,448
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (6,201,999)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets resulting from share transactions 8,043,480
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets 10,332,083
- ----------------------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------------------
Beginning of period --
- ---------------------------------------------------------------------------------------------- ------------------
End of period $ 10,332,083
- ---------------------------------------------------------------------------------------------- ------------------
</TABLE>
*For the period from November 1, 1995 (date of initial public investment) to
April 30, 1996.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Equity Funds (the "Trust") is registered under the Investment Company
Act of 1940, as amended (the "Act"), as an open-end, management investment
company. The Trust consists of three portfolios. The financial statements
included herein are only those of Federated Small Cap Strategies Fund (the
"Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are
segregated, and a shareholder's interest is limited to the portfolio in which
shares are held. The objective of the fund is to provide capital appreciation.
The Fund offers three classes of shares: Class A Shares, Class B Shares, and
Class C Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Listed equity securities are valued at the last sale
price reported on a national securities exchange. Short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at
the time of purchase may be valued at amortized cost, which approximates
fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the
Internal Revenue Code, as amended (the "Code"). Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (equivalent, on a per share basis, to
the amount of undistributed net investment income on the date of the
transaction) is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1996*
CLASS A SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 941,591 $ 10,235,032
- ---------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 126 1,448
- ---------------------------------------------------------------------------------------
Shares redeemed (507,617) (5,889,400)
- --------------------------------------------------------------------------------------- --------- -------------
Net change resulting from Class A share transactions 434,100 $ 4,347,080
- --------------------------------------------------------------------------------------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1996*
CLASS B SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 284,564 $ 3,479,188
- ----------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 0 0
- ----------------------------------------------------------------------------------------
Shares redeemed (25,945) (310,770)
- ---------------------------------------------------------------------------------------- --------- ------------
Net change resulting from Class B share transactions 258,619 $ 3,168,418
- ---------------------------------------------------------------------------------------- --------- ------------
<CAPTION>
PERIOD ENDED
APRIL 30, 1996*
CLASS C SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 42,870 $ 529,811
- ---------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 0 0
- ---------------------------------------------------------------------------------------
Shares redeemed (153) (1,829)
- --------------------------------------------------------------------------------------- --------- -------------
Net change resulting from Class C share transactions 42,717 $ 527,982
- --------------------------------------------------------------------------------------- --------- -------------
Net change resulting from share transactions 735,436 8,043,480
- --------------------------------------------------------------------------------------- --------- -------------
</TABLE>
* For the period from November 1, 1995 (date of initial public investment) to
April 30, 1996.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser,
(the "Adviser"), receives for its services an annual investment advisory fee
equal to 0.75% of the Fund's average daily net assets.
The Adviser may voluntarily choose to waive any portion of its fee and reimburse
certain operating expenses of the Fund. The Adviser can modify or terminate this
voluntary waiver and reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp., the principal distributor, from the net
assets of the Fund to finance activities
intended to result in the sale of the Fund's Class B and Class C shares. The
Plan provides that the Fund may incur distribution expenses according to the
following schedule annually, to compensate Federated Securities Corp.
<TABLE>
<CAPTION>
SHARE CLASS NAME % OF AVG. DAILY NET ASSETS OF CLASS
<S> <C>
Class A 0.25%
Class B 0.75%
Class C 0.75%
</TABLE>
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
For the six months ended April 30, 1996, Class A did not incur a distrubtion
services fee.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services, the Fund will pay Federated Shareholder
Services up to 0.25% of average daily net assets of each class of shares for the
period. The fee paid to Federated Shareholder Services is used to finance
certain services for shareholders and to maintain shareholder accounts.
Federated Shareholder Services may voluntarily choose to waive any portion of
its fee. Federated Shareholder Services can modify or terminate this voluntary
waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--FServ, through its
subsidiary, Federated Shareholder Services Company serves as transfer and
dividend disbursing agent for the Fund. The fee paid to FServ is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--Federated Services Company maintains the Fund's
accounting records for which it receives a fee. The fee is based on the level of
the Fund's average daily net assets for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses ($10,292) were initially borne
by Federated Securities Corp. The Trust has agreed to reimburse Federated
Securities Corp. for the organizational expenses during the five year period
following effective date. For the period ended April 30, 1996, the Trust paid
$57 pursuant to this agreement.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended
April 30, 1996, were as follows:
<TABLE>
<S> <C>
PURCHASES $ 10,780,232
- --------------------------------------------------------------------------------------------------- -------------
SALES $ 3,653,702
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Glen R. Johnson
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Executive Vice President
Gregor F. Meyer John W. McGonigle
John E. Murray, Jr. Executive Vice President and Secretary
Wesley W. Posvar Richard B. Fisher
Marjorie P. Smuts Vice President
David M. Taylor
Treasurer
S. Elliott Cohan
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed
by any bank, and are not insured or guaranteed by the U.S. government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or
any other government agency. Investment in mutual funds involves
investment risk, including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the fund's prospectus which contains facts concerning their
objective and policies, management fees, expenses and other information.
FEDERATED
SMALL CAP
STRATEGIES
FUND
Class A Shares
Semi-Annual Report and
Supplement to Prospectus
dated November 1, 1995
[LOGO] FEDERATED INVESTORS
Since 1955
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
CUSIP# 314172404
G01658-02 (5/96)
FEDERATED SMALL CAP STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
PROSPECTUS
The Class A Shares of Federated Small Cap Strategies Fund (the "Fund") represent
interests in a diversified portfolio of Federated Equity Funds (the "Trust"), an
open-end management investment company (a mutual fund). The investment objective
of the Fund is to provide capital appreciation. Any income received from the
portfolio is entirely incidental. The Fund pursues its investment objective by
investing primarily in a portfolio of common stocks of small capitalization
companies.
THE CLASS A 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 CLASS A SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Class A 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 1, 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, which is in paper form only, or a paper copy of this prospectus, if
you have received your prospectus electronically, 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 1, 1995,
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
General Information............................................................2
Liberty Family of Funds........................................................2
Investment Information.........................................................4
Investment Objective.........................................................4
Investment Policies..........................................................4
Investment Limitations......................................................11
Net Asset Value...............................................................12
How to Purchase Shares........................................................12
What Shares Cost............................................................12
Special Purchase Features...................................................15
Exchange Privilege............................................................16
How to Redeem Shares..........................................................17
Special Redemption Features.................................................18
Contingent Deferred Sales Charge............................................19
Elimination of Contingent Deferred Sales
Charge...................................................................19
Account and Share Information.................................................20
Trust Information.............................................................21
Management of the Trust.....................................................21
Distribution of Class A Shares..............................................22
Administration of the Fund..................................................24
Expenses of the Fund and Class A
Shares...................................................................24
Brokerage Transactions......................................................25
Shareholder Information.......................................................26
Voting Rights...............................................................26
Massachusetts Partnership Law...............................................26
Tax Information...............................................................27
Federal Income Tax..........................................................27
Pennsylvania Corporate and Personal
Property Taxes...........................................................27
Performance Information.......................................................28
Other Classes of Shares.......................................................28
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED SMALL CAP STRATEGIES FUND
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..................................... 5.50%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable) (1)............................................................................................... 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................... 0.64%
12b-1 Fee (3)................................................................................................... 0.00%
Total Other Expenses............................................................................................ ]0.71%
Shareholder Services Fee......................................................................... 0.25%
Total Class A Shares Operating Expenses (4)............................................................ 1.35%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales load and
not distributed by Federated Securities Corp. may be charged a contingent
deferred sales charge of 0.50 of 1.00% for redemptions made within one full
year of purchase. (See "Contingent Deferred Sales Charge.")
(2) The estimated Management Fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this anticipated voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.75%.
(3) Class A Shares have no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending October 31, 1996. If Class A Shares were
paying or accruing the 12b-1 fee, 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."
(4) The Total Class A Shares Operating Expenses are estimated to be 1.46% absent
the anticipated voluntary waiver of a portion of the Management Fee.
* Total Class A Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class A Shares" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period....................................................... $73 $95
You would pay the following expenses on the same investment, assuming no redemption............... $68 $95
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under 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 Trust'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. As of the
date of this prospectus, the Board of Trustees (the "Trustees") has established
three classes of shares for the Fund, known as Class A Shares, Class B Shares,
and Class C Shares. This prospectus relates only to the Class A Shares (the
"Shares") of the Fund.
Shares of the Fund are designed for individuals and institutions seeking capital
appreciation by investing primarily in a portfolio of common stocks of small
capitalization companies.
For information on how to purchase Shares of the Fund, please refer to "How to
Purchase Shares." The minimum initial investment for Class A Shares is $500.
However, the minimum initial investment for a retirement account is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement plans which must be in amounts of at least $50.
In general, Class A Shares are sold at net asset value plus an applicable sales
load and are redeemed at net asset value. However, a contingent deferred sales
charge is imposed under certain circumstances. For a more complete description,
see "How to Redeem Shares."
In addition, the Fund also pays a shareholder services fee at an annual rate not
to exceed 0.25% of average daily net assets.
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers 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:
.American Leaders Fund, Inc., providing growth of capital and income through
high-quality stocks;
.Capital Growth Fund, providing appreciation of capital primarily through equity
securities;
.Federated Bond Fund, providing current income through high-quality corporate
debt;
.Federated Growth Strategies Fund, providing appreciation of capital primarily
through equity securities of companies with prospects for above-average growth
in earnings and dividends;
.Fund for U.S. Government Securities, Inc., providing current income through
long-term U.S. government securities;
.International Equity Fund, providing long-term capital growth and income
through international securities;
.International Income Fund, providing a high level of current income consistent
with prudent investment risk through high-quality debt securities denominated
primarily in foreign currencies;
.Liberty Equity Income Fund, Inc., providing above-average income and capital
appreciation through income producing equity securities;
.Liberty High Income Bond Fund, Inc., providing high current income through
high-
yielding, lower-rated corporate bonds;
.Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;
.Liberty U.S. Government Money Market Trust, providing current income consistent
with stability of principal through high-quality U.S. government securities;
.Liberty Utility Fund, Inc., providing current income and long-term growth of
income, primarily through electric, gas, and communications utilities;
.Limited Term Fund, providing a high level of current income consistent with
minimum fluctuation in principal value through investment grade securities;
.Limited Term Municipal Fund, providing a high level of current income exempt
from federal regular income tax consistent with the preservation of principal,
primarily limited to municipal securities;
.Michigan Intermediate Municipal Trust, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the state
of Michigan and Michigan municipalities, primarily through Michigan municipal
securities;
.Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
.Strategic Income Fund, providing a high level of current income, primarily
through domestic and foreign corporate debt obligations;
.Tax-Free Instruments Trust, providing current income consistent with stability
of principal and exempt from federal income tax, through high-quality,
short-term municipal securities; and
.World Utility Fund, providing total return primarily through securities issued
by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales loads on future purchases in and exchanges between the
Class A Shares of any funds in the Liberty Family of Funds, as long as they
maintain a $500 balance in one of the Liberty Funds.
- -------------------------------------------------------------------------------
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide capital appreciation. Any
income received from the portfolio is entirely incidental. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of common stocks of small capitalization companies. Under normal market
conditions, the Fund will invest at least 65% of its total assets in common
stocks of small capitalization companies. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
changes in these policies become effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests include, but are not limited to:
.common stock of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets and are
considered by the investment adviser to have potential for above-average
appreciation;
.corporate securities and convertible securities;
.securities of foreign issuers;
.restricted and illiquid securities;
.securities of other investment companies; and
.securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
SMALL CAPITALIZATION COMPANIES
Small capitalization companies are those companies that have a market
capitalization of $1 billion or less at the time of purchase. Small
capitalization companies are positioned for rapid growth in revenues or earnings
and assets, characteristics which may provide for significant capital
appreciation. Small companies often pay no dividends and current income is not a
factor in the selection of stocks. Smaller companies often have limited product
lines, markets, or financial resources, and they may be dependent upon one or a
few key people for management. (See "Equity Investment Risk Considerations")
CORPORATE SECURITIES
The Fund may invest in preferred stocks, convertible securities, notes or
debentures rated investment grade, i.e., Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch") (or, if unrated, are deemed
to be of comparable quality by the Fund's investment adviser), and warrants of
these companies. Corporate fixed income securities are subject to market and
credit risks. In addition, the prices of fixed income securities fluctuate
inversely to the direction of interest rates. It should be noted that securities
receiving the lowest investment grade rating are considered to have some
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated securities. In the event that a security
which had an eligible rating when purchased is downgraded below Baa or BBB, the
investment adviser will promptly reassess whether continued holding of the
security is consistent with the Fund's objective.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities which may be converted at a
stated price within a specific period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities may take
the form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants, or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for
different investment objectives.
The Fund may invest in convertible securities rated Baa or lower by Moody's or
BBB or lower by S&P or Fitch, or if unrated, are deemed to be of comparable
quality by the Fund's investment adviser.
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted, but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the security is converted
into equity. Usable bonds are corporate bonds that can be used, in whole or in
part, customarily at full face value, in lieu of cash to purchase the issuer's
common stock. When owned as part of a unit along with warrants, which are
options to buy the common stock, they function as convertible bonds, except that
the warrants generally will expire before the bond's maturity. Convertible
securities are senior to equity securities and, therefore, have a claim to
assets of the corporation prior to the holders of common stock in the case of
liquidation. However, convertible securities are generally subordinated to
similar nonconvertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stable stream of
income with generally higher yields than common stocks, but lower than
nonconvertible securities of similar quality.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying common
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the investment 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 investment 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 investment adviser considers numerous
factors, including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.
SYNTHETIC CONVERTIBLES
A "synthetic convertible" is created by combining distinct securities that
possess the two principal characteristics of a true convertible: a
fixed-income component and a convertibility component. This combination is
achieved by investing in nonconvertible fixed-income securities (nonconvertible
bonds, preferred stocks, and money market instruments) and in warrants or call
options traded on U.S. or foreign exchanges or in the over-the-counter markets
granting the holder the right to purchase a specified quantity of securities
within a specified period of time at a specified price or to receive cash in the
case of stock index options.
Synthetic convertibles differ from true convertible securities in several
respects. Unlike a true convertible, which is a single security having a unitary
market value, a synthetic convertible is comprised of two distinct securities,
each with its own market value. Therefore, the "market value" of a synthetic
convertible is the sum of the values of its fixed-income component and its
separate convertibility component. For this reason, the values of a synthetic
convertible and a true convertible security will respond differently to market
fluctuations.
A synthetic convertible may be more flexible than a convertible security. For
example, a synthetic convertible may offer different issuers in the fixed-income
component than are offered in the stock underlying the convertibility component.
A synthetic convertible allows the investment adviser to combine components
representing distinct issuers, or to combine a fixed-income security with a call
option on a stock index, when it determines that such a combination would better
promote the Fund's investment objective and diversification. A synthetic
convertible may also offer flexibility in that its two components may be
purchased separately. For example, the investment adviser may purchase a listed
call option for inclusion in a synthetic convertible, but temporarily hold
short-term investments while postponing purchase of a corresponding bond pending
development of more favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component, will
decline, causing a decline in the value of the call option or warrant. Should
the price of the stock or the level of the index fall below the exercise price,
and remain there throughout the exercise period, the entire amount paid for the
call option or warrant would be lost. Since a synthetic convertible includes a
fixed-income component, the holder of a synthetic convertible also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument. Finally, a synthetic convertible can be expected to
have greater transaction costs than a true convertible security.
A combination of convertible securities and synthetic convertibles may offer
certain advantages over an investment policy that allows for only one of these
investment vehicles. Since convertible securities and synthetic convertibles may
respond differently to varying market conditions, the ability to invest in both
types of securities should afford greater flexibility in managing the Fund's
portfolio.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
The convertible and synthetic convertible securities in which the Fund invests
are usually not in the three highest rating categories of a nationally
recognized statistical rating organization (AAA, AA, or A for S&P or Fitch and
Aaa, Aa, or A for Moody's), but are in the lower rating categories or are
unrated, but are of comparable quality and have speculative characteristics or
are speculative. Lower-rated bonds or unrated bonds are commonly referred to as
"junk bonds." There is no minimal acceptable rating
for a security to be purchased or held in the Fund's portfolio, and the Fund
may, from time to time, purchase or hold convertible and synthetic convertible
securities rated in the lowest rating category. A description of the rating
categories is contained in the Appendix to the Combined Statement of Additional
Information.
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic, and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each issuer
as well as by monitoring broad economic trends and corporate and legislative
developments.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in the securities of foreign issuers which are freely traded
on United States securities exchanges or in the over-the-counter market in the
form of depositary receipts ("American Depositary Receipts" or "ADRs"). In
addition, the Fund may invest in other securities of foreign issuers. There may
be certain risks associated with investing in foreign securities. These include
risks of adverse political and economic developments (including possible
governmental seizure or nationalization of assets), the possible imposition of
exchange controls or other governmental restrictions, less uniformity in
accounting and reporting requirements, and the possibility that there will be
less information on such securities and their issuers available to the public.
In addition, there are restrictions on foreign investments in other
jurisdictions and there tends to be difficulty in obtaining judgments from
abroad and affecting repatriation of capital invested abroad. Delays could occur
in settlement of foreign transactions, which could adversely affect shareholder
equity. Foreign securities may be subject to foreign taxes, which reduce yield,
and may be less marketable than comparable United States securities. As a matter
of practice, the Fund will not invest in the securities of a foreign issuer if
any risk identified above appears to the investment adviser to be substantial.
The Fund will not invest more than 20% of its assets in foreign securities.
PUT AND CALL OPTIONS
The Fund may purchase put options on its portfolio securities. 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. 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 covered
call options on all or any portion of its portfolio to generate income. As a
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 will write call options on securities either held in
its portfolio, or which it has the right to obtain without payment of further
consideration, or for which it has segregated cash or U.S. government securities
in the amount of any additional consideration.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
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 investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options or write put options, other than to close out open option positions,
without further notification to shareholders.
FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell futures contracts to hedge against the effects of
changes in the value of portfolio securities due to anticipated changes in
interest rates and market conditions. Futures contracts call for the delivery of
particular 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.
Stock index futures contracts are based on indexes that reflect the market value
of common stock of the firms included in the indexes. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
The Fund may also write call options and purchase put options on futures
contracts as a hedge to attempt to protect its portfolio securities against
decreases in value. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of selling a futures contract at a fixed price at
any time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on futures
contracts as a hedge against rising purchase prices of portfolio securities. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the Fund writes a put option on a futures
contract, it is undertaking to buy a particular futures contract at a fixed
price at any time during a specified period if the option is exercised. As a
purchaser of a call option on a futures contract, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the custodian (or the broker, if
legally permitted) to collateralize the position and thereby insure that the use
of such futures contracts are unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the underlying future
or security, or will make deposits to collateralize the position as discussed
above.
RISKS
When the Fund uses financial futures and options on futures as hedging devices,
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 investment adviser could be incorrect in its expectations about
the direction or extent of market factors such as stock price 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 investment adviser will
consider liquidity before entering into these 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 in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restrictions on resale under
federal securities law. However, the Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, over-the-counter options,
and repurchase agreements providing for settlement in more than seven days after
notice, to 15% of its net assets.
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 purchase prices. Accordingly, the Fund may pay more or
less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the investment
adviser deems it appropriate to do so. In addition, the Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
TEMPORARY INVESTMENTS
In such proportions as, in the judgment of its investment adviser, prevailing
market conditions warrant, the Fund may, for temporary defensive purposes,
invest in:
.short-term money market instruments;
.securities issued and/or guaranteed as to payment of principal and interest by
the U.S. government, its agencies or instrumentalities; and
.repurchase agreements.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies, but it will
not own more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment company,
or invest more than 10% of its total assets in investment companies in general.
The Fund will invest in other investment companies primarily for the purpose of
investing short-term cash which has not yet been invested in other portfolio
instruments. It should be noted that investment companies incur certain expenses
such as management fees and, therefore, any investment by the Fund in shares of
another investment company would be subject to such duplicate expenses. The
investment adviser will waive its investment advisory fee on assets invested in
securities of open-end investment companies.
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, 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
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral equal to at least 100% of the value
of the securities loaned at all times.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option, and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity,
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages, or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objectives, policies, and limitations.
EQUITY INVESTMENT RISK CONSIDERATIONS
As with other mutual funds that invest primarily in equity securities, the Fund
is subject to market risks. That is, the possibility exists that common stocks
will decline over short or even extended periods of time, and the United States
equity market tends to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease. However,
because the Fund invests primarily in small capitalization stocks, there are
some additional risk factors associated with investments in the Fund. In
particular, stocks in the small capitalization sector of the United States
equity market have historically been more volatile in price than larger
capitalization stocks, such as those included in the Standard & Poor's 500
Composite Stock Price Index ("Standard & Poor's 500 Index"). This is because,
among other things, small companies have less certain growth prospects than
larger companies; have a lower degree of liquidity in the equity market; and
tend to have a greater sensitivity to changing economic conditions. Further, in
addition to exhibiting greater volatility, the stocks of small companies may,
to some degree, fluctuate independently of the stocks of large companies. That
is, the stocks of small companies may decline in price as the prices 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
stock market indices such as the Standard & Poor's 500 Index.
INVESTMENT LIMITATIONS
The Fund will not:
.borrow money directly or through reverse repurchase agreements (arrangements in
which the Fund sells a portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or pledge securities except,
under certain circumstances, the Fund may borrow up to one-third of the value
of its total assets and pledge its assets to secure such borrowings; or
.with respect to 75% of its total assets, invest more than 5% of the value of
its total assets in securities of any one issuer (other than cash, cash items,
or securities issued or guaranteed by the U.S. government and its agencies or
instrumentalities, and repurchase agreements collateralized by such securities)
or acquire more than 10% of the outstanding voting securities of any one
issuer.
The above investment limitations cannot be changed without shareholder approval.
- -------------------------------------------------------------------------------
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 Class A Shares in the market value of
all securities and other assets of the Fund, subtracting the interest of Class A
Shares in the liabilities of the Fund and those attributable to Class A Shares,
and dividing the remainder by the total number of Class A Shares outstanding.
The net asset value for Class A Shares may differ from that of Class B Shares
and Class C Shares 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 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, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
- -------------------------------------------------------------------------------
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. Additional investments can be made
for as little as $100. The minimum initial and subsequent investment for
retirement plans is only $50. (Financial institutions may impose different
minimum investment requirements on their customers.)
In connection with any sale, Federated Securities Corp. may from time to time
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load as follows:
<TABLE>
<CAPTION>
SALES LOAD AS DEALER
SALES LOAD AS A PERCENTAGE CONCESSION
A PERCENTAGE OF NET AS A PERCENTAGE
AMOUNT OF OF OFFERING AMOUNT OF PUBLIC
TRANSACTION PRICE INVESTED OFFERING PRICE
----------- -------------- -------------- ---------------
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>
* See sub-section entitled "Dealer Concession."
No sales load is imposed for Shares purchased through bank trust departments,
investment advisers 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
to shareholders designated as Liberty Life Members. However, investors who
purchase Shares through a trust department, investment adviser, or retirement
plan may be charged an additional service fee by the institution. Additionally,
no sales load is imposed for Shares purchased through "wrap accounts" or similar
programs, under which clients pay a fee or fees for services.
DEALER CONCESSION
For sales of Shares, a dealer will normally receive up to 90% of the applicable
sales load. Any portion of the sales load which is not paid to a dealer will be
retained by the distributor. However, the distributor may offer to pay dealers
up to 100% of the sales load retained by it. Such payments may take the form of
cash or promotional incentives, such as reimbursement of certain expenses of
qualified employees and their spouses to attend informational meetings about the
Fund or other special events at recreational-type facilities, or items of
material value. In some instances, these incentives will be made available only
to dealers whose employees have sold or may sell a significant amount of Shares.
On purchases of $1 million or more, the investor pays no sales load; however,
the distributor will make twelve monthly payments to the dealer totaling 0.25%
of the public offering price over the first year following the purchase. Such
payments are based on the original purchase price of Shares outstanding at each
month end.
The sales load for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales load in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
Effective as of the date of this prospectus, and until further notice, the
entire amount of the applicable sales load will be reallowed to dealers. In
addition, the distributor will pay dealers additional bonus payments in an
amount equal to 0.50 of 1.00% of the public offering price of Shares sold.
REDUCING OR ELIMINATING
THE SALES LOAD
The sales load can be reduced or eliminated on the purchase of Shares through:
.quantity discounts and accumulated purchases;
.concurrent purchases;
.signing a 13-month letter of intent;
.using the reinvestment privilege; or
.purchases with proceeds from redemptions of unaffiliated investment company
shares.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce the sales load paid. The
Fund will combine purchases of 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 Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $30,000 and he
purchases $20,000 more at the current public offering price, the sales load on
the additional purchase according to the schedule now in effect would be 4.50%,
not 5.50%.
To receive the sales load reduction, Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution at the time the
purchase is made that Shares are already owned or that purchases are being
combined. The Fund will reduce the sales load after it confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales load reduction, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Liberty
Family of Funds, the purchase price of which includes a sales load. For example,
if a shareholder concurrently invested $30,000 in one of the other funds in the
Liberty Family of Funds with a sales load, and $20,000 in this Fund, the sales
load would be reduced.
To receive this sales load reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will reduce the sales load
after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $50,000 of shares of the funds in
the Liberty Family of Funds (excluding money market funds) over the next 13
months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 5.50% of the total amount intended to
be purchased in escrow (in Shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales load.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales load applicable to
the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any 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 Shares in the Fund have been redeemed, the shareholder has the privilege,
within 120 days, to reinvest the redemption proceeds at the next-determined net
asset value without any sales load. Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution of the
reinvestment in order to eliminate a sales load. If the shareholder redeems his
Shares in the Fund, there may be tax consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES
Investors may purchase 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.
PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by wire by
calling the Fund. All information needed will be taken over the telephone, and
the order is considered received immediately. Payment for purchases which are
subject to a sales load must be received within three business days following
the order. Payment for purchases on which no sales load is imposed must be
received before 3:00 p.m. (Eastern time) on the next business day following the
order. Federal funds should be wired as follows: State Street Bank and Trust
Company, Boston, Massachusetts; Attn: EDGEWIRE; For Credit to: (Fund Name)
(Fund Class); (Fund Number); Account Number; Trade Date and Order Number; Group
Number or Dealer Number; Nominee or Institution Name; and ABA Number 011000028.
Shares cannot be purchased by wire on holidays when wire transfers are
restricted.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the check is
received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
sales load, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
- -------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Class A 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 funds for which
affiliates of Federated Investors serve as investment adviser or principal
underwriter ("Federated Funds") 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.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds or certain Federated
Funds 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 8600, Boston, Massachusetts
02266-8600 and deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the Fund before that time for Shares to be exchanged the
same day. Shareholders exchanging into a fund will begin receiving dividends the
following business day. This privilege may be modified or terminated at any
time.
- -------------------------------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
as described below.
REDEEMING SHARES
THROUGH A FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire transfer to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, 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.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a bank which
is a member of the Federal Deposit Insurance Corporation, a trust company, a
member firm of a domestic stock exchange, or any other "eligible guarantor
institution," as defined by the Securities and Exchange Act of 1934, as amended.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Shares are sold with a sales
load, it is not advisable for shareholders to continue to purchase Shares while
participating in this program.
CONTINGENT DEFERRED SALES CHARGE
Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of Shares of an unaffiliated investment company purchased or
redeemed with a sales load and not distributed by Federated Securities Corp. may
be charged a contingent deferred sales charge of .50 of 1.00% for redemptions
made within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.
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 one
full year from the date of purchase. 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 one full year from
the date of purchase; (3) Shares held for fewer than one full year from the
date of purchase on a first-in, first-out basis. A contingent deferred sales
charge is not assessed in connection with an exchange of Fund Shares for Shares
of other funds in the Liberty Family of Funds in the same class (see "Exchange
Privilege"). Any contingent deferred sales charge imposed at the time the
exchanged-for Shares are redeemed is calculated as if the shareholder had held
the Shares from the date on which he became a shareholder of the exchanged-from
Shares. Moreover, the contingent deferred sales charge will be eliminated with
respect to certain redemptions (see "Elimination of Contingent Deferred Sales
Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds.
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended, of
a shareholder; (2) redemptions representing minimum required distributions from
an Individual Retirement Account or other retirement plan to a shareholder who
has attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Trustees, employees and sales representatives of the Fund, the
distributor, or affiliates of the Fund or distributor; employees of any
financial institution that sells Shares of the Fund pursuant to a sales
agreement with the distributor; and spouses and children under the age of 21 of
the aforementioned persons. Finally, no contingent deferred sales charge will be
imposed on the redemption of Shares originally purchased through a bank trust
department, an investment adviser registered under the Investment Advisers Act
of 1940, as amended, or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or any other financial institution, to the extent that no payments
were advanced for purchases made through such entities. The Trustees reserve the
right to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any Shares purchased prior to
the termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the Shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.
- -------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.
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 required minimum value of
$500. This requirement does not apply, however, if the balance falls below the
required minimum value because of changes in the net asset value of Shares.
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 the Fund's investment adviser,
Federated Management (the "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. The Adviser's address is Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.75 of 1% of
the Fund's average daily net assets. The fee paid by the Fund, while higher than
the advisory fee paid by other mutual funds in general, is comparable to fees
paid by other mutual funds with similar objectives and policies. Under the
investment advisory contract, which provides for the voluntary waiver of the
advisory fee by the Adviser, the Adviser may voluntarily waive some or all of
its fee. This does not include reimbursement to the Fund of any expenses
incurred by shareholders who use the transfer agent's subaccounting facilities.
The Adviser can terminate this voluntary waiver at any time in its sole
discretion. The Adviser has also undertaken to reimburse the Fund for operating
expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940, as
amended. It is a subsidiary of Federated Investors. All of the Class A (voting)
Shares of Federated Investors are owned by a trust, the Trustees of which are
John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's
wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and
Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,750 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.
James E. Grefenstette has been the Fund's portfolio manager since its
inception. Mr. Grefenstette joined Federated Investors in 1992 and has been an
Assistant Vice President of the Fund's investment adviser since October 1994.
From 1992 until 1994, Mr. Grefenstette acted as an investment analyst. Mr.
Grefenstette was a credit analyst at Westinghouse Credit Corp. from 1990 until
1992, and an investment officer at Pittsburgh National Bank from 1987 until
1990. Mr. Grefenstette received his M.S.I.A. from Carnegie Mellon University.
Aash M. Shah has been the Fund's portfolio manager since its inception. Mr. Shah
joined Federated Investors in 1993 as an Investment Analyst and has been an
Assistant Vice President of the Fund's investment adviser since 1995. Mr. Shah
was employed at Westinghouse Credit Corp. from 1990 to 1993 as an Investment
Analyst. Mr. Shah received his Masters in Industrial Administration from
Carnegie Mellon University with a concentration in finance and accounting. Mr.
Shah is a Chartered Financial Analyst.
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 CLASS A SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
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% of the average daily net assets 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
Shares, and shareholders will be notified if the Fund intends to charge a fee
under the Distribution Plan. For 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.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net
asset value of 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 Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of sales services, distribution-related support
services, or shareholder services.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the capacities described above or should Congress
relax current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the time of
purchase, an amount equal to .50 of 1% of the net asset value of Shares
purchased by their clients or customers under certain qualified retirement plans
as approved by Federated Securities Corp. (Such payments are subject to a
reclaim from the financial institution should the assets leave the program
within 12 months after purchase.)
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at an annual rate which relates to the average aggregate
daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
-------------- ----------------------
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford Centre,
Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE FUND AND
CLASS A SHARES
Holders of Shares pay their allocable portion of Trust and portfolio expenses.
The Trust expenses for which holders of Class A 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
Trustees; legal fees of the Trust; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
The portfolio expenses for which holders of Class A Shares pay their allocable
portion include, but are not limited to: registering the portfolio and Class A
Shares of the portfolio; 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 allocated specifically to Class A Shares
as a class are expenses under the Trust's Distribution Plan and fees for
Shareholder Services. However, the Trustees reserve the right to allocate
certain other expenses to holders of Class A Shares as they deem appropriate
("Class Expenses"). In any case, 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; 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; legal fees relating solely to Class A Shares; and Trustees'
fees incurred as a result of issues related solely to Class A Shares.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
- -------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All Shares of each Fund or
class in the Trust have equal voting rights, except that in matters affecting
only a particular Fund or class, only Shares of that Fund or class are entitled
to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them.
- -------------------------------------------------------------------------------
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
.the Trust is not subject to Pennsylvania corporate or personal property taxes;
and
.Trust shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust would be subject to such taxes if owned
directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
- -------------------------------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for Class A
Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in Class A 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 Class A Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by Class
A 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 Class A Shares and, therefore, may not correlate to the dividends or
other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the maximum sales load or contingent deferred sales charges, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, and Class C Shares.
From time to time, advertisements for Class A 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 to certain indices.
- -------------------------------------------------------------------------------
OTHER CLASSES OF SHARES
As of the date of this prospectus, the Fund also offers two other classes of
shares called Class B Shares and Class C Shares. This prospectus relates only to
Class A Shares.
Class B Shares are sold primarily to customers of financial institutions,
subject to a maximum contingent deferred sales charge of 5.50%. The Fund has
also adopted a Distribution Plan whereby the distributor is paid a fee of up to
.75 of 1% and a Shareholder Services fee of up to .25 of 1% of the Class B
Shares' average daily net assets with respect to Class B Shares. Investments in
Class B Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no initial sales load. Class C Shares are distributed pursuant
to a Distribution Plan adopted by the Fund whereby the distributor is paid a fee
of up to .75 of 1%, in addition to a Shareholder Services fee of .25 of 1% of
the Class C Shares' average daily net assets. In addition, Class C Shares may be
subject to certain contingent deferred sales charges. Investments in Class C
Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
Class A Shares, Class B Shares, and Class C Shares are subject to certain of the
same expenses. Expense differences, however, among Class A Shares, Class B
Shares, and Class C Shares may affect the performance of each class.
To obtain more information and a prospectus for either Class B Shares or Class C
Shares, investors may call 1-800-235-4669 or contact their financial
institution.
FEDERATED SMALL CAP
STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
November 1, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 314172404 [RECYCLE LOGO]
FEDERATED SMALL CAP STRATEGIES FUND
(A Portfolio of Federated Equity Funds)
Class A Shares, Class B Shares, and Class C Shares
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION DATED NOVEMBER 1, 1995.
A. Please insert the following two sentences to the end of the section
entitled "PORTFOLIO TURNOVER" on page 4 of the Statement of Additional
Information:
"For the period from November 1, 1995 to April 30, 1996, the Fund's
portfolio turnover rate was 56.6%. The portfolio turnover rate is
representative of only 6 months of activity."
B. Please replace the last sentence in the section entitled "PORTFOLIO
TURNOVER" on page 4 with the following:
"It is not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover exceeding
200%."
C. Please note the following changes to the FEDERATED EQUITY FUNDS
MANAGEMENT Officers and Trustees list on pages 7 through 11 of the
Statement of Additional Information:
All affiliations with FEDERATED ADMINISTRATIVE SERVICES and the former
transfer agent will be deleted and replace by affiliations with
FEDERATED SERVICES COMPANY, the service company parent.
D. Please insert the following information as a second paragraph under
the section entitled "FUND OWNERSHIP" on page 11 of the Statement of
Additional Information:
"As of May 6, 1996, the following shareholders of record owned 5% or
more of the outstanding Class A Shares of the Fund: Citpad & Co.,
owned 105,260.9390 shares (20.62%), Stephens, Inc., owned 36,594.7920
shares (7.17%) and Dickey & Co., owned 35,737.4970 shares (7.00%). No
shareholders of record owned 5% or more of the outstanding Class B
Shares of the Fund. The following shareholders of record owned 5% or
more of the outstanding Class C Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding shares for its clients)
owned 34,481.0000 shares (74.92%) of Class C Shares of the Fund."
E. Please insert the following sub-section immediately after the sub-
section entitled "ADVISER TO THE FUND" under the main section entitled
"INVESTMENT ADVISORY SERVICES" on page 13 of the Statement of
Additional Information:
"ADVISORY FEES
For its advisory services, Federated Management receives an annual
investment advisory fee as described in the prospectus.
From the Fund's start of business date, November 1, 1995, to April
30,1996, the Fund's adviser earned $24,133, of which $24,133 was
voluntarily waived. For funds with classes, the advisory fee is
allocated pro rata based on the net assets for each class of shares."
F. Please replace the section entitled "ADMINISTRATIVE SERVICES" and
"TRANSFER AGENT AND DIVIDEND DISPURSING AGENT" with the new title
"OTHER SERVICES" on page 13 of the Statement of Additional Information
and insert the following:
"OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee
as described in the prospectus. From September 13, 1995 (the Fund's
inception), to March 1, 1996, Federated Administrative Services served
as the Fund's Administrator. The Administrator and former
Administrator are subsidiaries of Federated Investors. For purposes
of this Statement of Additional Information, Federated Services
Company and Federated Administrative Services, may hereinafter
collectively be referred to as the "Administrators." From the Fund's
start of business date, November 1, 1995, to April 30, 1996, the Fund
incurred costs for administrative services of $91,488. Dr.
Henry J. Gailliot, an officer of Federated Management, the adviser to
the Fund, holds approximately 20% of the outstanding common stock and
serves as a director of Commercial Data Services, Inc., a company
which provides computer processing services to Federated Services
Company.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund. Federated Services
Company, Pittsburgh, Pennsylvania, provides certain accounting and
recordkeeping services with respect to the Fund's portfolio
investments. 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.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary
shareholder records and receives a fee based on the size, type and
number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One
Oxford Center, Pittsburgh, Pennsylvania 15219."
G. Please insert the following information as a final paragraph under the
sub-section entitled "DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
AGREEMENT" on page 14 of the Statement of Additional Information:
"From the Fund's effective date, November 1, 1995, to April 30,1996,
the Fund paid $4,702 pursuant to the Fund's Rule 12b-1 plan, none of
which was waived. For the same period, the Fund paid $8,044 in
shareholders service fees, none of which was waived.
H. Please insert the following information as a final paragraph under the
section entitled "TOTAL RETURN" on page 16 of the Statement of
Additional Information:
"The Funds cumulative total return for Class A Shares, Class B Shares,
and Class C Shares from November 1, 1995 (the Fund's start of
business) to April 30, 1996, was 40.74%., 40.40%, and 40.30%,
respectively. Cumulative total return reflects the Fund's total
performance over a specified period of time. The Fund's total return
is reflective of only 6 months of fund activity since the Fund's date
of initial public investment."
I. Please insert the following information as a final paragraph under the
section entitled "YIELD" on page 16 of the Statement of Additional
Information:
"The Fund's yield for Class A Shares, Class B Shares, and Class C
Shares of the Fund, was 0% for the thirty-day period ended April 30,
1996."
May 31 , 1996
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
Federated Investors Tower
PITTSBURGH, PA 15222-3779
CUSIP# 314172404
CUSIP# 314172503
CUSIP# 314172602
G01658-03 (5/96)
FEDERATED SMALL CAP STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
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, and the stand-alone prospectus for Class A Shares of Federated
Small Cap Strategies Fund (the "Fund") dated November 1, 1995. This
Statement is not a prospectus itself. To receive a copy of either
prospectus, write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated November 1, 1995
FEDERATED SECURITIES
CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE FUND1 FEDERATED EQUITY FUNDS MANAGEMENT7
INVESTMENT OBJECTIVE AND POLICIES1 Fund Ownership 11
Trustees Compensation 12
Corporate Debt Securities 1
Trustee Liability 12
Warrants 1
INVESTMENT ADVISORY SERVICES 13
Restricted and Illiquid Securities
1 Adviser to the Fund 13
Futures and Options Transactions1 Advisory Fees 13
Futures Contracts 2 Other Related Services 13
"Margin" in Futures Transactions2
Put Options on Financial Futures
Contracts 2
Stock Index Options 3
Call Options on Financial and Stock
Index Futures Contracts 3
Purchasing Put and Call Options on
Portfolio Securities 3
Writing Covered Put and Call Options
on Portfolio Securities 3
Over-the-Counter Options 4
When-Issued and Delayed Delivery
Transactions 4
Lending of Portfolio Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
Investment Limitations 4
ADMINISTRATIVE SERVICES 13 PERFORMANCE COMPARISONS 17
TRANSFER AGENT AND DIVIDEND ABOUT FEDERATED INVESTORS 18
DISBURSING AGENT 13
APPENDIX 20
BROKERAGE TRANSACTIONS 13
PURCHASING SHARES 14
Distribution Plan and Shareholder
Services Agreement 14
Conversion to Federal Funds 14
Purchases by Sales Representatives,
Trustees, and Employees of the Fund
14
DETERMINING NET ASSET VALUE 14
Determining Market Value of
Securities 15
REDEEMING SHARES 15
Redemption in Kind 15
EXCHANGING SECURITIES FOR SHARES15
Tax Consequences 16
TAX STATUS 16
The Fund's Tax Status 16
Shareholders' Tax Status 16
TOTAL RETURN 16
YIELD 16
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Federated Equity Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under 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. Shares of the Fund
are offered in three classes known as Class A Shares, Class B Shares, and Class
C Shares (individually and collectively referred to as "Shares" as the context
may require). This Combined Statement of Additional Information relates to all
three classes of Shares.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide capital appreciation. Any
income realized from the portfolio is entirely incidental. The Fund pursues its
investment objective by investing primarily in a portfolio of common stocks of
small capitalization companies. The investment objective cannot be changed
without approval of shareholders.
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same or a
different issuer, participations based on revenues, sales, or profits, or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit).
WARRANTS
The Fund may invest in warrants. Warrants are basically 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, most 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.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Trustees (the "Trustees") to determine the liquidity
of certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") 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 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 the
Rule. The Fund believes that the staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Trustees. The
Trustees may 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.
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,
and treats such commercial paper as liquid. 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.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put and call options on
portfolio securities and put options on financial futures contracts, and writing
call options on futures contracts. The Fund may also write covered call options
on its portfolio securities and covered put options to attempt to increase its
current income. The Fund will maintain its positions in securities, option
rights, and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions without necessarily buying or
selling the securities. The Fund also may purchase and sell stock index futures
to hedge against changes in prices. The Fund will not engage in futures
transactions for speculative purposes.
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. For example, in the fixed income
securities market, prices move 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.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
"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 initial margin in futures transactions 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.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from market
factors, such as an anticipated increase in interest rates. 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.
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 close out the position.
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
only the premium paid for the contract will be lost.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national securities
exchanges or traded in the over-the-counter market. A stock index fluctuates
with changes in the market values of the stocks included in the index.
The effectiveness of purchasing stock index options will depend upon the extent
to which price movements in the Fund's portfolio correlate with price movements
of the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss from the purchase of options on an
index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indices will be subject to the
ability of the Adviser to predict correctly movements in the directions of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed and
over-the-counter call options on financial and stock index futures contracts
(including cash-settled stock index options) to hedge its portfolio against an
increase in market interest rates or a decrease in stock prices. 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 stock prices fall or 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 substantially
offset the drop in value of the Fund's portfolio securities.
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 substantially 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.
PURCHASING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call 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. A call option gives the Fund, in return for a premium, the right to buy
the underlying securities from the seller.
WRITING COVERED PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered put and call options to generate income and
thereby protect against price movements in particular securities in the Fund's
portfolio. As the 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. As the writer of a put option, the
Fund has the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write 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). In the case of put options, the Fund will segregate cash or U.S.
Treasury obligations with a value equal to or greater than the exercise price of
the underlying securities.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange.
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.
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.
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. 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 found by the Fund's investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.
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 are 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. 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
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with buying stock index futures contracts,
put options on stock index futures, put options on financial futures and
portfolio securities, and writing covered call options, but may obtain such
short-term credits as are necessary for the clearance of purchases and
sales of portfolio securities. The deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
or related options transactions is not considered the purchase of a
security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount 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 in excess of 5% of its
total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets: margin
deposits for the purchase and sale of financial futures contracts and
related options, and segregation or collateral arrangements made in
connection with options activities or the purchase of securities on a when-
issued basis.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the Fund may invest 25% or more of the value
of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase put options on
stock index futures, put options on financial futures, stock index futures
contracts, and put options on portfolio securities, and may write covered
call options.
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.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes, bonds,
debentures, notes, certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other transactions
where permitted by the Fund's investment objective, policies, and
limitations or the Trust's Declaration of Trust.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities issued by 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) if, as a result, more than 5% of the
value of its total assets would be invested in the securities of that
issuer, and will not acquire more than 10% of the outstanding voting
securities of any one issuer.
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 changes
in these limitations become effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company,
invest no more than 5% of its total assets in any one investment company,
and invest no more than 10% of its total assets in investment companies in
general. The Fund will purchase securities of investment companies only in
open-market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, or acquisition of assets.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed time
deposits with maturities over seven days, over-the-counter options, and
certain restricted securities not determined by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers with records of less than three years of continuous
operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of the value of its total assets in
securities subject to restrictions on resale under the Securities Act of
1933, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Trustees.
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.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN OPTIONS
The Fund will not purchase put or call options on securities or futures
contracts, if more than 5% of the value of the Fund's total assets would be
invested in premiums on open option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value 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 or American Stock Exchanges. For purposes of
this investment restriction, warrants acquired by the Fund in units with or
attached to securities may be deemed to be without value.
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 having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund has no present intent to borrow money, pledge securities, or invest in
reverse repurchase agreements in excess of 5% of the value of its total assets
in the coming fiscal year. In addition, the Fund expects to lend not more than
5% of its total assets in the coming fiscal year.
To comply with registration requirements in certain states, the Fund (1) will
limit the aggregate value of the assets underlying covered call options or put
options written by the Fund to not more than 25% of its net assets, (2) will
limit the premiums paid for options purchased by the Fund to 5% of its net
assets, and (3) will limit the margin deposits on futures contracts entered into
by the Fund to 5% of its net assets. (If state requirements change, these
restrictions may be revised without shareholder notification.)
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.
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.
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 Trust.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, Pennsylvania
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.
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
Birthdate: January 13, 1947
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.
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.
* 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 Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government
Trust; Federated Growth Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
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; and 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 $20,688 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, Federated Management receives an annual investment
advisory fee as described in each 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 described in each
prospectus. Dr. Henry J. Gailliot, an officer of Federated Management, the
Adviser to the Fund, holds approximately 20% of the outstanding common stock and
serves as a director of Commercial Data Services, Inc., a company which provides
computer processing services to Federated Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee paid to the transfer agent is based upon the size,
type, and number of accounts and transactions made by shareholders.
Federated Services Company also maintains the 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 relation to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising 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 each 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 is explained in each 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 expect 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 OF THE FUND
Trustees, employees, and sales representatives of the Fund, Federated
Management, 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 people.
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in each prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities, other than options, are
determined as follows:
o according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices and for bonds and other
fixed income securities as determined by an independent pricing service;
o for unlisted equity securities, the latest bid prices; or
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or at fair value as
determined in good faith by the Board of Trustees.
Options are valued at the market values established by the exchanges at the
close of option trading unless the Trustees determine in good faith that another
method of valuing option positions is necessary.
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 each 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 Trust 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 respective 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. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held the
Fund Shares.
TOTAL RETURN
The average annual total return for each class of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the net asset value per share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load adjusted over the period by any additional Shares, assuming the quarterly
reinvestment of all dividends and distributions.
Any applicable contingent deferred sales charge is deducted from the ending
value of the investment based on the lesser of the original purchase price or
the net asset value of Shares redeemed.
YIELD
The yield for each class of Shares of the Fund is determined by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per share of the respective class on the last day of the
period. This value is annualized using semi-annual compounding. This means that
the amount of income generated during the thirty-day period is assumed to be
generated each month over a 12-month period and is reinvested every six months.
The yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to the 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.
PERFORMANCE COMPARISONS
The performance of each of the classes of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or any class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o RUSSELL 2000 SMALL STOCK INDEX is a broadly diversified index consisting of
approximately 2,000 small capitalization common stocks that can be used to
compare to the total returns of funds whose portfolios are invested
primarily in small capitalization common stocks.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (S&P 500), a
composite index of common stocks in industry, transportation, and financial
and public utility companies, can be used to compare to the total returns
of funds whose portfolios are invested primarily in common stocks. In
addition, the S & P 500 assumes reinvestments of all dividends paid by
stocks listed on its 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 STANDARD & POOR'S 600 SMALL CAPITALIZATION INDEX S&P Small Cap 600 is an
unmanaged index of 600 small capitalization common stocks with a market
capitalization generally ranging between $80 million and $600 million. The
index, monitored by Standard & Poor's Corporation, is cited as an indicator
of small capitalization stock performance.
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 "small company growth funds" category in advertising and sales
literature.
o LIPPER SMALL COMPANY GROWTH FUND AVERAGE is an average of the total returns
for 312 growth funds tracked by Lipper Analytical Services, Inc., an
independent mutual fund rating service.
o LIPPER SMALL COMPANY GROWTH FUND INDEX is an average of the net asset-
valuated total returns for the top 30 small company growth funds tracked by
Lipper Analytical Services, Inc., an independent mutual fund rating
service.
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 WILSHIRE 5000 EQUITY INDEX consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available, and can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks.
o STRATEGIC INSIGHT SMALL COMPANY GROWTH FUNDS INDEX consists of mutual funds
that invest primarily in companies below $750 million in total market
capitalization.
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 the "small company growth
funds" category in advertising and sales literature.
Advertisements and other sales literature for any class of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns 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 as it deems appropriate, 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 principles 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 the sales load on Class A Shares.
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.
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.*
*source: Investment Company Institute
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.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP LONG TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
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 Standard & Poor's Ratings Group
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC. LONG TERM BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain indentifiable 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.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- - Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
- - Well established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-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.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Cusip 314172404
Cusip 314172503
Cusip 314172602
G01228-06 (11/95)
FEDERATED CAPITAL APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES
SEMI-ANNUAL REPORT AND SUPPLEMENT TO THE PROSPECTUS DATED DECEMBER 21, 1995.
A. Please delete the "Summary of Fund Expenses" tables for Class A, Class B, and
Class C Shares on pages 1-3 of the prospectus and replace them with the
following table:
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)......... 5.50%
Maximum Sales Charge 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 OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(2)...................................................... 0.45%
12b-1 Fee(3).......................................................................... 0.00%
Total Other Expenses.................................................................. 0.70%
Shareholder Services Fee.......................................................... 0.25%
Total Operating Expenses(4).................................................. 1.15%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales charge 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 year of
purchase. See "Contingent Deferred Sales Charge."
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.75%.
(3) The Class A Shares has 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, 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 "Fund Information".
(4) The total operating expenses are estimated to be 1.45% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Class A Operating Expenses in the table above 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 "Fund Information".
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- -------------------------------------------------------------------------------- ------- --------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period............... $71 $ 90
You would pay the following expenses on the same investment, assuming no
redemption.................................................................... $66 $ 90
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)......... None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)(1)........................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(2)...................................................... 0.45%
12b-1 Fee............................................................................. 0.75%
Total Other Expenses.................................................................. 0.70%
Shareholder Services Fee.......................................................... 0.25%
Total Operating Expenses(3)(4)............................................... 1.90%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. See "Contingent Deferred Sales
Charge".
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.75%.
(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The total operating expenses are estimated to be 2.20% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Class B Shares Operating Expenses in the table above 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 "Fund Information".
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- -------------------------------------------------------------------------------- ------- --------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period............... $76 $104
You would pay the following expenses on the same investment, assuming no
redemption.................................................................... $19 $ 60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS B SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)......... None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)(1)........................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(2)...................................................... 0.45%
12b-1 Fee............................................................................. 0.75%
Total Other Expenses.................................................................. 0.70%
Shareholder Services Fee.......................................................... 0.25%
Total Operating Expenses(3).................................................. 1.90%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. For a more complete description, see "Contingent
Deferred Sales Charge".
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.75%.
(3) The total operating expenses are estimated to be 2.20% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Class C Operating Expenses in the table above are estimated based on
average expenses expected to be incurred during the period ending October 31,
1996. During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class C Shares" and "Fund Information".
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- -------------------------------------------------------------------------------- ------- --------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period........ $30 $ 60
You would pay the following expenses on the same investment, assuming no
redemption.................................................................... $19 $ 60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS C SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
B. Please insert the following "Financial Highlights" tables for Class A, Class
B, and Class C Shares immediately following the Summary of Fund Expenses
tables in the prospectus:
FEDERATED CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS-CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED) YEAR ENDED DECEMBER 31, (A)
APRIL 30, --------------------------------------------------------------------------------------
1996 (B) 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 87.58 $68.84 $71.39 $65.83 $61.65 $50.56 $54.93 $50.03 $46.19 $48.39
- ---------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ---------------------------
Net investment income 0.11 1.05 1.18 1.13 1.36 1.16 1.46 1.37 1.31 1.29
- ---------------------------
Net realized and
unrealized gain (loss) on
investments 9.30 24.39 (1.39) 6.30 5.57 12.62 (3.86) 7.34 5.08 (0.45)
- --------------------------- -------- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations 9.41 25.44 (0.21) 7.43 6.93 13.78 (2.40) 8.71 6.39 0.84
- --------------------------- -------- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
- ---------------------------
Distributions from net
investment income (0.08) (1.09) (1.14) (1.16) (1.38) (1.15) (1.51) (1.32) (1.29) (1.30)
- ---------------------------
Distributions from net
realized gain on
investments -- (5.61) (1.20) (0.71) (1.37) (1.54) (0.46) (2.49) (1.26) (1.74)
- --------------------------- -------- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.08) (6.70) (2.34) (1.87) (2.75) (2.69) (1.97) (3.81) (2.55) (3.04)
- --------------------------- -------- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF
PERIOD $ 96.91 $87.58 $68.84 $71.39 $65.83 $61.65 $50.56 $54.93 $50.03 $46.19
- --------------------------- -------- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL RETURN (C) 10.75% 37.17% (0.30%) 11.31% 11.38% 27.42% (4.43%) 17.58% 13.97% 0.88%
- ---------------------------
RATIOS TO AVERAGE NET
ASSETS
- ---------------------------
Expenses 1.18%* 1.08% 1.15% 1.15% 1.11% 1.12% 1.07% 1.13% 1.08% 0.92%*
- ---------------------------
Net investment income 0.35%* 1.29% 1.63% 1.59% 2.13% 1.97% 2.76% 2.45% 2.61% 2.29%*
- ---------------------------
Expense waiver/
reimbursement (d) 0.32%* 0.15% -- -- -- -- -- -- -- --
- ---------------------------
SUPPLEMENTAL DATA
- ---------------------------
Net assets, end of period
(000 omitted) $107,197 $98,200 $81,377 $88,949 $91,551 $90,503 $79,114 $95,422 $89,228 $89,371
- ---------------------------
Average commission rate
paid $0.05 -- -- -- -- -- -- -- -- --
- ---------------------------
Portfolio turnover 13% 81% 23% 26% 47% 54% 61% 41% 36% 39%
- ---------------------------
</TABLE>
* Computed on an annualized basis.
(a) Amounts presented prior to January 1, 1996 represent results of operations
for Federated Exchange Fund, Ltd.
(b) Reflects operations for the period from January 1, 1996 (the Fund's start of
business) to April 30, 1996.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS-CLASS B SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
APRIL 30, 1996 (A)
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $88.22
- -------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------
Net investment income (0.04)
- -------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 8.70
- ------------------------------------------------------------------------- -------
Total from investment operations 8.66
- ------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------
Distributions in excess of net investment income (0.01)
- ------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $96.87
- ------------------------------------------------------------------------- -------
TOTAL RETURN (B) 9.82%
- -------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------
Expenses 2.00%*
- -------------------------------------------------------------------------
Net investment income (0.42%)*
- -------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.29%*
- -------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,526
- -------------------------------------------------------------------------
Average commission rate paid $ 0.05
- -------------------------------------------------------------------------
Portfolio turnover 13%
- -------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1996 (date of initial
public offering) to April 30, 1996.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS-CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
APRIL 30, 1996 (A)
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $88.22
- -------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------
Net investment income (0.02)
- -------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 8.64
- ------------------------------------------------------------------------- -------
Total from investment operations 8.62
- ------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $96.84
- ------------------------------------------------------------------------- -------
TOTAL RETURN (B) 9.81%
- -------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------
Expenses 1.95%*
- -------------------------------------------------------------------------
Net investment income (0.24%)*
- -------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.29%*
- -------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 22
- -------------------------------------------------------------------------
Average commission rate paid $ 0.05
- -------------------------------------------------------------------------
Portfolio turnover 13%
- -------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1996 (date of initial
public offering) to April 30, 1996.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
C. Under the Section entitled "Investment Policies", please replace the third
sentence under the sub-section entitled "Put and Call Options" on page 10
with the following:
"The Fund may also write call options on all or any portion of its portfolio to
seek to generate income for the Fund."
D. Under the section entitled "Administration of the Fund", on page 30, delete
all references to "Federated Administrative Services" and replace them with
"Federated Services Company."
E. Please delete all references to "Federated Services Company" the former name
of the current transfer agent, and replace with "Federated Shareholder
Services Company", in the following sections of the prospectus; PURCHASING
SHARES BY CHECK, TELEPHONE INSTRUCTIONS, REDEEMING SHARES BY MAIL,
CERTIFICATES AND CONFIRMATIONS and TRANSFER AGENT AND DIVIDEND DISBURSING
AGENT, on pages 20, 22, 23, 26 and 30, respectively.
F. Please delete the last sentence in the section entitled "Making an Exchange"
on page 22 and replace it with the following:
"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 Shareholder Services Company, 1099 Hingham
Street, Rockland, MA 02370-3317."
G. Please insert the following financial statements beginning on page 37 of the
prospectus:
FEDERATED CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- --------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--100.2%
- -----------------------------------------------------------------------------------
BASIC INDUSTRY--2.3%
------------------------------------------------------------------
59,000 Millipore Corp. $ 2,470,625
------------------------------------------------------------------ ------------
CONSUMER DURABLES--4.3%
------------------------------------------------------------------
34,500 Eastman Kodak Co. 2,639,250
------------------------------------------------------------------
80,500 Mattel, Inc. 2,093,000
------------------------------------------------------------------ ------------
Total 4,732,250
------------------------------------------------------------------ ------------
CONSUMER NON-DURABLES--11.6%
------------------------------------------------------------------
29,900 Avon Products, Inc. 2,657,362
------------------------------------------------------------------
72,000 IBP, Inc. 1,926,000
------------------------------------------------------------------
31,600 International Flavors & Fragrances, Inc. 1,552,350
------------------------------------------------------------------
35,000 Nike, Inc., Class B 3,062,500
------------------------------------------------------------------
37,600 Philip Morris Cos., Inc. 3,388,700
------------------------------------------------------------------ ------------
Total 12,586,912
------------------------------------------------------------------ ------------
ENERGY MINERALS--2.5%
------------------------------------------------------------------
46,900 Chevron Corp. 2,720,200
------------------------------------------------------------------ ------------
FINANCE--22.8%
------------------------------------------------------------------
173,500 (a) Acceptance Insurance Cos., Inc. 2,710,937
------------------------------------------------------------------
28,000 Allstate Corp. 1,088,500
------------------------------------------------------------------
25,000 American Express Co. 1,212,500
------------------------------------------------------------------
23,600 Chase Manhattan Corp. 1,625,450
------------------------------------------------------------------
31,097 Citicorp 2,448,889
------------------------------------------------------------------
23,145 Dean Witter, Discover & Co. 1,261,403
------------------------------------------------------------------
100,000 Executive Risk, Inc. 3,100,000
------------------------------------------------------------------
110,000 Leucadia National Corp. 2,860,000
------------------------------------------------------------------
42,500 Mellon Bank Corp. 2,284,375
------------------------------------------------------------------
15,000 NationsBank Corp. 1,196,250
------------------------------------------------------------------
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- --------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- -----------------------------------------------------------------------------------
FINANCE--CONTINUED
------------------------------------------------------------------
78,000 Pioneer Group, Inc. $ 2,086,500
------------------------------------------------------------------
14,500 Providian Corp. 668,813
------------------------------------------------------------------
36,266 Travelers Group, Inc. 2,230,359
------------------------------------------------------------------ ------------
Total 24,773,976
------------------------------------------------------------------ ------------
HEALTH CARE--7.5%
------------------------------------------------------------------
6,900 (a) Agouron Pharmaceuticals, Inc. 279,450
------------------------------------------------------------------
37,000 Becton, Dickinson & Co. 2,983,125
------------------------------------------------------------------
33,400 Bristol-Myers Squibb Co. 2,747,150
------------------------------------------------------------------
55,000 (a) Scherer (R.P.) Corp. 2,172,500
------------------------------------------------------------------ ------------
Total 8,182,225
------------------------------------------------------------------ ------------
PRODUCER MANUFACTURING--5.6%
------------------------------------------------------------------
100,000 (a) Oak Industries, Inc. 2,700,000
------------------------------------------------------------------
50,000 Philips Electronics N.V., ADR 1,793,750
------------------------------------------------------------------
19,000 Textron, Inc. 1,629,250
------------------------------------------------------------------ ------------
Total 6,123,000
------------------------------------------------------------------ ------------
RETAIL TRADE--2.2%
------------------------------------------------------------------
48,350 Sears, Roebuck & Co. 2,411,456
------------------------------------------------------------------ ------------
SERVICES--5.8%
------------------------------------------------------------------
16,000 Gannett Co., Inc. 1,094,000
------------------------------------------------------------------
50,000 Interpublic Group Cos., Inc. 2,337,500
------------------------------------------------------------------
63,300 Reynolds & Reynolds Co., Class A 2,927,625
------------------------------------------------------------------ ------------
Total 6,359,125
------------------------------------------------------------------ ------------
TECHNOLOGY--27.9%
------------------------------------------------------------------
50,000 (a) Ceridian Corp. 2,387,500
------------------------------------------------------------------
50,000 (a) Compuware Corp. 1,425,000
------------------------------------------------------------------
45,000 (a) DST Systems, Inc. 1,653,750
------------------------------------------------------------------
200,000 (a) Data General Corp. 3,075,000
------------------------------------------------------------------
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- --------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- -----------------------------------------------------------------------------------
TECHNOLOGY--CONTINUED
------------------------------------------------------------------
50,000 ECI Telecommunications, Ltd. $ 1,306,250
------------------------------------------------------------------
103,500 Gandalf Technologies, Inc. 1,837,125
------------------------------------------------------------------
50,000 General Motors Corp., Class E 2,818,750
------------------------------------------------------------------
18,800 Hewlett-Packard Co. 1,990,450
------------------------------------------------------------------
75,000 (a) Intervoice, Inc. 2,100,000
------------------------------------------------------------------
40,200 Lockheed Martin Corp. 3,241,125
------------------------------------------------------------------
75,000 Lucent Technologies, Inc. 2,634,375
------------------------------------------------------------------
23,000 (a) Microsoft Corp. 2,607,625
------------------------------------------------------------------
25,000 (a) Sheldahl, Inc. 559,375
------------------------------------------------------------------
24,200 (a) Solectron Corp. 1,076,900
------------------------------------------------------------------
25,000 (a) Systeme, Anwendungen, Produkte in der Datevnerarbeitung, ADR 1,100,000
------------------------------------------------------------------
20,000 (a) Vanstar Corp. 272,500
------------------------------------------------------------------
5,000 (a) Wind River Systems, Inc. 195,000
------------------------------------------------------------------ ------------
Total 30,280,725
------------------------------------------------------------------ ------------
TRANSPORTATION--3.2%
------------------------------------------------------------------
50,000 Kansas City Southern Industries, Inc. 2,425,000
------------------------------------------------------------------
14,200 (a) Southern Pacific Railway Co. 355,000
------------------------------------------------------------------
10,400 Union Pacific Corp. 708,500
------------------------------------------------------------------ ------------
Total 3,488,500
------------------------------------------------------------------ ------------
UTILITIES--4.5%
------------------------------------------------------------------
60,000 (a) Columbia Gas System, Inc. 2,917,500
------------------------------------------------------------------
49,000 Enron Corp. 1,972,250
------------------------------------------------------------------ ------------
Total 4,889,750
------------------------------------------------------------------ ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $77,220,861) 109,018,744
------------------------------------------------------------------ ------------
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
(B) REPURCHASE AGREEMENT--2.5%
- -----------------------------------------------------------------------------------
$2,695,000 BT Securities Corporation, 5.35%, dated 4/30/1996, due 5/1/1996
(at amortized cost) $ 2,695,000
----------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $79,915,861)(C) $111,713,744
----------------------------------------------------------------- ------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(c) The cost of investments for federal tax purposes amounts to $79,915,861. The
net unrealized appreciation of investments on a federal tax basis amounts to
$31,797,883 which is comprised of $33,080,279 appreciation and $1,282,396
depreciation at April 30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($108,745,314) at April 30, 1996.
The following acronym is used throughout this portfolio:
ADR -- American Depository Receipt
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $79,915,861) $111,713,744
- --------------------------------------------------------------------------------------------------
Income receivable 70,569
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 380,625
- --------------------------------------------------------------------------------------------------
Receivable for shares sold 59,822
- -------------------------------------------------------------------------------------------------- -----------
Total assets 112,224,760
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------------------------
Payable for investments purchased $3,198,945
- -------------------------------------------------------------------------------------
Payable to Bank 169,478
- -------------------------------------------------------------------------------------
Accrued expenses 111,023
- ------------------------------------------------------------------------------------- ---------
Total liabilities 3,479,446
- -------------------------------------------------------------------------------------------------- -----------
NET ASSETS for 1,122,131 shares outstanding $108,745,314
- -------------------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid in capital $ 74,319,475
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 31,797,883
- --------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 2,594,112
- --------------------------------------------------------------------------------------------------
Undistributed net investment income 33,844
- -------------------------------------------------------------------------------------------------- -----------
Total Net Assets $108,745,314
- -------------------------------------------------------------------------------------------------- -----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- --------------------------------------------------------------------------------------------------
CLASS A SHARES:
- --------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($107,197,162 / 1,106,150 shares outstanding) $96.91
- -------------------------------------------------------------------------------------------------- -----------
Offering Price Per Share (100/94.50 of $96.91)* $102.55
- -------------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share $96.91
- -------------------------------------------------------------------------------------------------- -----------
CLASS B SHARES:
- --------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($1,526,163 / 15,754 shares outstanding) $96.87
- -------------------------------------------------------------------------------------------------- -----------
Offering Price Per Share $96.87
- -------------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share (94.50/100 of $96.87)** $91.54
- -------------------------------------------------------------------------------------------------- -----------
CLASS C SHARES:
- --------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($21,989 / 227 shares outstanding) $96.87
- -------------------------------------------------------------------------------------------------- -----------
Offering Price Per Share $96.87
- -------------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share (99.00/100 of $96.87)** $95.90
- -------------------------------------------------------------------------------------------------- -----------
</TABLE>
* See "Investing in Class A Shares," "Investing in Class B Shares" and
"Investing in Class C Shares" in the Prospectuses.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF OPERATIONS
PERIOD ENDED APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------
Dividends $ 483,912
- ---------------------------------------------------------------------------------------------
Interest 37,643
- --------------------------------------------------------------------------------------------- -----------
Total income 521,555
- ---------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------
Investment advisory fee $ 256,275
- ---------------------------------------------------------------------------------
Administrative personnel and services fee 61,160
- ---------------------------------------------------------------------------------
Custodian fees 7,680
- ---------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 15,634
- ---------------------------------------------------------------------------------
Directors'/Trustees' fees 4,283
- ---------------------------------------------------------------------------------
Auditing fees 5,929
- ---------------------------------------------------------------------------------
Legal fees 3,993
- ---------------------------------------------------------------------------------
Portfolio accounting fees 23,529
- ---------------------------------------------------------------------------------
Distribution services fee--Class B Shares 1,262
- ---------------------------------------------------------------------------------
Distribution services fee--Class C Shares 22
- ---------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 84,997
- ---------------------------------------------------------------------------------
Shareholder services fee--Class B Shares 421
- ---------------------------------------------------------------------------------
Shareholder services fee--Class C Shares 7
- ---------------------------------------------------------------------------------
Share registration costs 31,944
- ---------------------------------------------------------------------------------
Printing and postage 10,908
- ---------------------------------------------------------------------------------
Insurance premiums 2,783
- ---------------------------------------------------------------------------------
Miscellaneous 3,993
- --------------------------------------------------------------------------------- ---------
Total expenses 514,820
- ---------------------------------------------------------------------------------
Waivers--
- ---------------------------------------------------------------------------------
Waiver of investment advisory fee (110,371)
- --------------------------------------------------------------------------------- ---------
Net expenses 404,449
- --------------------------------------------------------------------------------------------- -----------
Net investment income 117,106
- --------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------
Net realized gain on investments 2,594,112
- ---------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 7,816,619
- --------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 10,410,731
- --------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $10,527,837
- --------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED) YEAR ENDED
APRIL 30, 1996(A) DECEMBER 31, 1995(A)
----------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------
Net investment income $ 117,106 $ 1,188,048
- ----------------------------------------------------------------
Net realized gain (loss) on investments ($2,594,112 net gain and
$16,693,345 net gain, respectively, as computed for federal tax
purposes) 2,594,112 18,575,112
- ----------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 7,816,619 9,195,528
- ---------------------------------------------------------------- ------------- --------------
Change in net assets resulting from operations 10,527,837 28,958,688
- ---------------------------------------------------------------- ------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ----------------------------------------------------------------
Distributions from net investment income
- ----------------------------------------------------------------
Class A Shares (88,613) (1,235,954)
- ----------------------------------------------------------------
Distributions in excess of net investment income
- ----------------------------------------------------------------
Class B Shares (98) --
- ----------------------------------------------------------------
Distributions from net realized gains
- ----------------------------------------------------------------
Class A Shares -- (6,164,051)
- ---------------------------------------------------------------- ------------- --------------
Change in net assets resulting from distributions to
shareholders (88,711) (7,400,005)
- ---------------------------------------------------------------- ------------- --------------
SHARE TRANSACTIONS(B)--
- ----------------------------------------------------------------
Proceeds from sale of shares 2,271,048 --
- ----------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 18,327 2,209,356
- ----------------------------------------------------------------
Cost of shares redeemed (2,183,445) (6,944,798)
- ---------------------------------------------------------------- ------------- --------------
Change in net assets resulting from share transactions 105,930 (4,735,442)
- ---------------------------------------------------------------- ------------- --------------
Change in net assets 10,545,056 16,823,241
- ----------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------
Beginning of period 98,200,258 81,377,017
- ---------------------------------------------------------------- ------------- --------------
End of period (including undistributed net investment income of
$33,844 and $5,448, respectively) $ 108,745,314 $ 98,200,258
- ---------------------------------------------------------------- ------------- --------------
</TABLE>
(a) See the Organizational Note in the Notes to the Financial Statements.
(b) Includes transactions in shares of partnership interest for Federated
Exchange Fund, Ltd. through December 31, 1995.
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Equity Funds (the "Trust") is registered under the Investment Company
Act of 1940, as amended (the "Act") as an open-end, management investment
company. The Trust consists of three portfolios. The financial statements
included herein are only those of Federated Capital Appreciation Fund (the
"Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The investment objective of the Fund is to provide capital appreciation.
The Fund offers three classes of shares: Class A Shares, Class B Shares, and
Class C Shares.
Pursuant to the terms of a merger agreement dated October 10, 1995, shareholders
of Federated Exchange Fund, Ltd. agreed to acquire shares of the Fund, effective
January 2, 1996. As part of the transaction, 1,121,204 Class A shares of the
Fund were issued in exchange for all the assets of Federated Exchange Fund,
Ltd., which amounted to $98,200,258. The shares issued as a result of this
transaction represented substantially all of the Fund's outstanding shares as of
the transaction date. Due to this, and due to the similarities in investment
objectives and policies between the Fund and Federated Exchange Fund, Ltd., the
historical performance of Federated Exchange Fund, Ltd. prior to January 2,
1996, has been incorporated into the Fund's financial statements.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Listed equity securities are valued at the last sale
price reported on a national securities exchange. Short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at
the time of purchase may be valued at amortized cost, which approximates
fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31, 1995(B)
APRIL 30, 1996
---------------------- ----------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 7,780 $ 729,188 -- $ --
- ---------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 194 18,232 25,468 2,209,356
- ---------------------------------------------------------
Shares redeemed (23,028) (2,143,320) (86,324) (6,944,798)
- --------------------------------------------------------- ------- ---------- ------- ----------
Net change resulting from Class A share transactions (15,054) $(1,395,900) (60,856) $(4,735,442)
- --------------------------------------------------------- ------- ----------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1996(A)
----------------------
CLASS B SHARES SHARES AMOUNT
- --------------------------------------------------------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 16,172 $ 1,520,260
- ---------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 1 95
- ---------------------------------------------------------
Shares redeemed (419) (40,125)
- --------------------------------------------------------- ------- -----------
Net change resulting from Class B share transactions 15,754 $ 1,480,230
- --------------------------------------------------------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1996(A)
----------------------
CLASS C SHARES SHARES AMOUNT
- --------------------------------------------------------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 227 $ 21,600
- ---------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared -- --
- ---------------------------------------------------------
Shares redeemed -- --
- --------------------------------------------------------- ------- -----------
Net change resulting from Class C share transactions 227 $ 21,600
- --------------------------------------------------------- ------- -----------
Net change resulting from share transactions 927 $ 105,930
- --------------------------------------------------------- ------- -----------
</TABLE>
(a) For the period ended January 4, 1996 (date of initial public offering) to
April 30, 1996.
(b) Includes transactions in shares of partnership interest for Federated
Exchange Fund, Ltd. through December 31, 1995.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser,
(the "Adviser"), receives for its services an annual investment advisory fee
equal to 0.75% of the Fund's average daily
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
net assets.The Adviser may voluntarily choose to waive any portion of its fee.
The Adviser can modify or terminate this voluntary waiver at any time at its
sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp.("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Class A Shares, Class B Shares and Class C Shares. The Plan
provides that the Fund may incur distribution expenses according to the
following schedule annually, to compensate FSC.
<TABLE>
<CAPTION>
% OF AVG. DAILY NET
SHARE CLASS NAME ASSETS OF CLASS
-------------------------------- --------------------------------
<S> <C>
Class A Shares 0.25%
Class B Shares 0.75%
Class C Shares 0.75%
</TABLE>
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--FServ, through its
subsidiary, Federated Shareholder Services Company serves as transfer and
dividend disbursing agent for the Fund. The fee paid to FServ is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1996, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $13,248,556
- ------------------------------------------------------------------------------- -----------
SALES $16,950,673
- ------------------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<S> <C>
TRUSTEES OFFICERS
- ---------------------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G, Bigley Chairman
John T. Conroy, Jr. Glen R. Johnson
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Executive Vice President
Gregor F. Meyer John W. McGonigle
John E. Murray, Jr. Executive Vice President and Secretary
Wesley W. Posvar Richard B. Fisher
Marjorie P. Smuts Vice President
David M. Taylor
Treasurer
S. Elliott Cohan
Assistant Secretary
</TABLE>
Mutual Funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds' prospectus which contains facts concerning
their objective and policies, management fees, expenses, and other information.
LOGO
FEDERATED SECURITIES CORP.
- --------------------------------------------------------------------------------
Distributor
A Subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSIP# 314172701
CUSIP# 314172800
CUSIP# 314172883
G010649-01 (5/96)
FEDERATED CAPITAL APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
The shares of Federated Capital Appreciation Fund (the "Fund") represent
interests in a diversified investment portfolio of Federated Equity Funds, an
open-end management investment company (a mutual fund). The Fund invests
primarily in equity securities that offer opportunities for capital
appreciation.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class A Shares, Class B Shares, and Class C Shares of the Fund. Keep
this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, and Class C Shares dated December 21, 1995, with the
Securities and Exchange Commission. The information contained in the Statement
of Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Statement of Additional Information or a paper copy of
this prospectus, if you have received your prospectus electronically, 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 December 21, 1995
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
General Information............................................................4
Investment Information.........................................................5
Investment Objective.........................................................5
Investment Policies..........................................................5
Investment Limitations......................................................13
Net Asset Value...............................................................14
Investing in the Fund.........................................................15
How to Purchase Shares........................................................16
Investing in Class A Shares.................................................16
Reducing or Eliminating the
Sales Charge.............................................................17
Investing in Class B Shares.................................................18
Investing in Class C Shares.................................................19
Special Purchase Features...................................................20
Exchange Privilege............................................................21
Requirements for Exchange...................................................21
How to Redeem Shares..........................................................23
Special Redemption Features.................................................24
Contingent Deferred Sales Charge............................................24
Elimination of Contingent
Deferred Sales Charge....................................................25
Account and Share Information.................................................26
Fund Information..............................................................27
Management of the Trust.....................................................27
Distribution of Shares......................................................28
Administration of the Fund..................................................30
Expenses of the Fund and Class A
Shares, Class B Shares, and
Class C Shares...........................................................30
Brokerage Transactions......................................................31
Shareholder Information.......................................................32
Voting Rights...............................................................32
Massachusetts Partnership Law...............................................32
Tax Information...............................................................33
Federal Income Tax..........................................................33
State and Local Taxes.......................................................33
Performance Information.......................................................33
Appendix......................................................................34
- -------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................... 5.50%
Maximum Sales Charge 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 (after waiver) (2)............................................................................... 0.45%
12b-1 Fee (3)................................................................................................... 0.00%
Total Other Expenses............................................................................................ 0.70%
Shareholder Services Fee......................................................................... 0.25%
Total Shares Operating Expenses (4).................................................................... 1.15%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales charge
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 estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3)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."
(4) The total operating expenses are estimated to be 1.45% absent the
anticipated voluntary waiver of a portion of the management fee.
* 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 "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period................. $71 $90
You would pay the following expenses on the same investment, assuming no redemption............... $66 $90
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- -------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)........................ None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1).................................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................... 0.45%
12b-1 Fee....................................................................................................... 0.75%
Total Other Expenses............................................................................................ 0.70%
Shareholder Services Fee......................................................................... 0.25%
Total Operating Expenses (3)(4)........................................................................ 1.90%
<CAPTION>
CLASS B SHARES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)........................
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price).............
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1).........................................................
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................
Exchange Fee.........................................................................................
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)....................................................................
12b-1 Fee............................................................................................
Total Other Expenses.................................................................................
Shareholder Services Fee.........................................................................
Total Operating Expenses (3)(4).............................................................
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. See "Contingent Deferred Sales
Charge."
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3)Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The total operating expenses are estimated to be 2.20% absent the
anticipated voluntary waiver of a portion of the management fee.
* 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 "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.......................... $76 $104
You would pay the following expenses on the same investment, assuming no redemption............... $19 $ 60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS B SHARES" FISCAL YEAR ENDING
OCTOBER 31, 1996.
- -------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)........................ None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................... 0.45%
12b-1 Fee....................................................................................................... 0.75%
Total Other Expenses............................................................................................ 0.70%
Shareholder Services Fee......................................................................... 0.25%
Total Operating Expenses (3)........................................................................... 1.90%
<CAPTION>
CLASS C SHARES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)........................
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price).............
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).......................................................................
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................
Exchange Fee.........................................................................................
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)....................................................................
12b-1 Fee............................................................................................
Total Other Expenses.................................................................................
Shareholder Services Fee.........................................................................
Total Operating Expenses (3)................................................................
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. For a more complete description, see
"Contingent Deferred Sales Charge."
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3) The total operating expenses are estimated to be 2.20% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Class C Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class C Shares" and "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.......................... $30 $60
You would pay the following expenses on the same investment, assuming no redemption............... $19 $60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS C SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- -------------------------------------------------------------------------------
GENERAL INFORMATION
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
charge and are redeemed at net asset value. However, a contingent deferred sales
charge is imposed under certain circumstances. For a more complete description,
see "How to Redeem Shares." Class A Shares are sold and redeemed at net asset
value for trust departments, investment advisers, and shareholders who receive
Shares in the reorganization of Federated Exchange Fund, Ltd., described above.
Class B Shares are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "How to Redeem Shares."
Class C Shares are sold at net asset value. A contingent deferred sales charge
of 1.00% will be charged on assets redeemed within the first 12 months following
purchase. See "How to Redeem Shares."
Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds for which affiliates of Federated Investors
serve as investment adviser or principal underwriter ("Federated Funds") can be
found under "Exchange Privilege."
Federated Management is the investment adviser (the "Adviser") to the Fund and
receives compensation for its services. The Adviser's address is Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including investing in convertible securities and zero coupon convertible
securities, entering into repurchase agreements, investing in when-issued and
delayed delivery securities, lending portfolio securities, the purchasing or
writing of put and call options, the purchasing and selling of financial futures
and options on futures, and investing in restricted and illiquid securities and
foreign securities. These risks are described under "Investment Policies."
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspaper under "Federated Liberty Funds."
- -------------------------------------------------------------------------------
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The investment policies described below may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
ACCEPTABLE INVESTMENTS
The Fund attempts to achieve its objectives by investing at least 65% of its
assets in equity securities. Equity securities include common stocks, preferred
stocks, and investment grade securities (including debt securities) that are
convertible into common stocks. The portion of the Fund's total assets invested
in common stocks, preferred stocks, and convertible securities will vary
according to the Fund's assessment of market and economic conditions and
outlook.
The Fund's stock selection emphasizes those common stocks in each industry
sector that offer significant potential for capital appreciation based upon
factors such as price/cash flow, price/book value, and projected earnings
growth. The Fund may also invest in the securities of companies involved in
mergers or restructuring, and may invest up to 20% of its total assets in
foreign securities.
COMMON STOCK
As described above, the Fund invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Fund is
subject to market risks. That is, the possibility exists that common stocks will
decline over short or even extended periods of time, and the United States
equity market tends to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease. However,
since the Fund invests in growth-oriented equity securities, there are some
additional risk factors associated with investment in the Fund. Growth-oriented
stocks may include issuers with smaller capitalization. Small and medium
capitalization stocks have historically been more volatile in price than larger
capitalization stocks, such as those included in the Standard & Poor's 500
Index. This is because, among other things, smaller companies have a lower
degree of liquidity in the equity market and tend to have a greater sensitivity
to changing economic conditions. That is, the stock of small and medium
capitalization companies may decline in price as the price of large company
stocks rise, or vice versa. Therefore, investors should expect that the Fund
will be more volatile than, and may fluctuate independently of, broad market
indices such as the Standard & Poor's 500 Index.
CORPORATE SECURITIES
The Fund may invest in preferred stocks, convertible securities, notes or
debentures rated investment grade, i.e., Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch") (or, if unrated, are deemed
to be of comparable quality by the Fund's Adviser), and warrants of these
companies. Corporate fixed income securities are subject to market and credit
risks. In addition, the prices of fixed income securities fluctuate inversely to
the direction of interest rates. It should be noted that securities receiving
the lowest investment grade rating are considered to have some speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated securities. In the event that a security which had an eligible
rating when purchased is downgraded below Baa or BBB, the Adviser will promptly
reassess whether continued holding of the security is consistent with the Fund's
objective.
CONVERTIBLE SECURITIES
The Fund may invest up to, but not including, 35% of the value of its total
assets in convertible securities that are not investment grade bonds or are not
rated but are determined by the Adviser to be of comparable quality. Convertible
securities are fixed-income securities which may be exchanged or converted into
a predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for
different investment objectives.
The Fund may invest in convertible securities rated Baa or lower by Moody's or
BBB or lower by S&P or Fitch, or if unrated, are deemed to be of comparable
quality by the Adviser.
Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until
the security is converted into equity. Usable bonds are corporate bonds that can
be used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying common
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the Adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objectives. Otherwise,
the Fund will hold or trade the convertible securities. In selecting convertible
securities for the Fund, the Adviser evaluates the investment characteristics of
the convertible security as a fixed-income instrument, and the investment
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible security, the
Adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment alternatives,
trends in the determinants of the issuer's profits, and the issuer's management
capability and practices.
SYNTHETIC CONVERTIBLES
A "synthetic convertible" is created by combining distinct securities that
possess the two principal characteristics of a true convertible: a fixed-income
component and a convertibility component. This combination is achieved by
investing in nonconvertible fixed-income securities (nonconvertible bonds,
preferred stocks, and money market instruments) and in warrants or call options
traded on U.S. or foreign exchanges or in the over-the-counter markets granting
the holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case of
stock index options.
Synthetic convertibles differ from true convertible securities in several
respects. Unlike a true convertible, which is a single security having a unitary
market value, a synthetic convertible is comprised of two distinct securities,
each with its own market value. Therefore, the "market value" of a synthetic
convertible is the sum of the values of its fixed-income component and its
separate convertibility component. For this reason, the values of a synthetic
convertible and a true convertible security will respond differently to market
fluctuations.
A synthetic convertible may be more flexible than a convertible security. For
example, a synthetic convertible may offer different issuers in the fixed-income
component than are offered in the stock underlying the convertibility component.
A synthetic convertible allows the Adviser to combine components representing
distinct issuers, or to combine a fixed-income security with a call option on a
stock index, when it determines that such a combination would better promote the
Fund's investment objective and diversification. A synthetic convertible may
also offer flexibility in that its two components may be purchased separately.
For example, the Adviser may purchase a listed call option for inclusion in a
synthetic convertible, but temporarily hold short-term investments while
postponing purchase of a corresponding bond pending development of more
favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component, will
decline, causing a decline in the value of the call option or warrant. Should
the price of the stock or the level of the index fall below the exercise price,
and remain there throughout the exercise period, the entire amount paid for the
call option or warrant would be lost. Since a synthetic convertible includes a
fixed-income component, the holder of a synthetic convertible also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument. Finally, a synthetic convertible can be expected to
have greater transaction costs than a true convertible security.
A combination of convertible securities and synthetic convertibles may offer
certain advantages over an investment policy that allows for only one of these
investment vehicles. Since convertible securities and synthetic convertibles may
respond differently to varying market conditions, the ability to invest in both
types of securities should afford greater flexibility in managing the Fund's
portfolio.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income from the security prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and avoid liability
of federal income taxes, the Fund will be required to distribute income accrued
from zero coupon convertible securities which it owns, and may have to sell
portfolio securities (perhaps at disadvantageous times) in order to generate
cash to satisfy these distribution requirements.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
The convertible, synthetic, and zero convertible securities in which the Fund
invests are usually not in the three highest rating categories of a nationally
recognized statistical rating organization (AAA, AA, or A for S&P or Fitch and
Aaa,
Aa, or A for Moody's), but are in the lower rating categories or are unrated,
but are of comparable quality and have speculative characteristics or are
speculative. Lower-rated bonds or unrated bonds are commonly referred to as
"junk bonds." There is no minimal acceptable rating for a security to be
purchased or held in the Fund's portfolio, and the Fund may, from time to time,
purchase or hold convertible and synthetic convertible securities rated in the
lowest rating category. A description of the rating categories is contained in
the Appendix to the prospectus.
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-
rated bonds tend to reflect short-term corporate, economic, and market
developments, as well as investor perceptions of the issuer's credit quality. In
addition, lower-rated bonds may be more difficult to dispose of or to value than
higher-rated, lower-yielding bonds.
The Adviser attempts to reduce the risks described above through diversification
of the portfolio and by credit analysis of each issuer as well as by monitoring
broad economic trends and corporate and legislative developments.
FOREIGN SECURITIES
The Fund reserves the right to invest up to 20% of its assets in foreign debt
and equity securities. These securities may be either dollar-
denominated or denominated in foreign currencies. Investments in foreign
securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation,
confiscatory taxation, currency fluctuations, the unavailability of financial
information or the difficulty of interpreting financial information prepared
under foreign accounting standards, less liquidity and more volatility in
foreign securities markets, the impact of political, social, or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. It may also be more difficult to enforce contractual obligations
abroad than would be the case in the United States because of differences in the
legal systems. Transaction costs in foreign securities may be higher. The
Adviser will consider these and other factors before investing in foreign
securities and will not make such investments unless, in its opinion, such
investments will meet the Fund's standards and objectives.
FOREIGN CURRENCY TRANSACTIONS
The Fund may enter into foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency transactions may be
conducted either on a spot or cash basis at prevailing rates or through forward
foreign currency exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund.
CURRENCY RISKS
To the extent that debt securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset
value; the value of interest earned; gains and losses realized on the sale of
securities; and net investment income and capital gain, if any, to be
distributed to shareholders by the Fund. If the value of a foreign currency
rises against the U.S. dollar, the value of the Fund's assets denominated in
that currency will increase; correspondingly, if the value of a foreign currency
declines against the U.S. dollar, the value of the Fund's assets denominated in
that currency will decrease.
FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a specific
price and on a future date agreed upon by the parties.
Generally no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated and are maintained until
the contract has been settled. The Fund will not enter into a forward contract
with a term of more than one year.
The Fund will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the transaction occurs
("trade date"). The period between trade date and settlement date will vary
between 24 hours and 30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the adviser
will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency. The Fund will not invest more than 20% of its total assets in
forward foreign currency exchange contracts.
PUT AND CALL OPTIONS
The Fund may purchase put options on its portfolio securities. These options
will be used as a hedge to attempt to protect securities which the Fund holds
against decreases in value. The Fund may also write call options on all or any
portion of its portfolio to generate income for the Fund. The Fund will write
call options on securities either held in its portfolio or for which it has the
right to obtain without payment of further consideration or for which it has
segregated cash in the amount of any additional consideration.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the Adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation.
Exchange-traded options have a continuous liquid market while over-the-counter
options may not. The Fund will not buy call options or write put options without
further notification to shareholders.
FINANCIAL FUTURES AND
OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and U.S. Treasury securities, equal to the
underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures as hedging
devices, much depends on the ability of the Adviser to predict market conditions
based upon certain economic analysis and factors. There is a risk that the
prices of the securities subject to the futures contracts may not correlate
perfectly with the prices of the securities in the Fund's portfolio. This may
cause the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Adviser could be
incorrect in its expectations about the direction or extent of market factors
such as interest rate movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest up to 10% of its net assets in restricted securities. This
restriction is not applicable to commercial paper issued under Section 4(2) of
the Securities Act of 1933, as amended. Restricted securities are any securities
in which the Fund may otherwise invest pursuant to its investment objectives and
policies but which are subject to restriction on resale under federal securities
law. The Fund will limit
investments in illiquid securities, including certain restricted securities
determined by the Trustees not to be liquid, non-negotiable time deposits and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily, in amounts of 35% or less of the Fund's
assets, in cash and cash items during times of unusual market conditions to
maintain liquidity. Cash items may include the following short-term obligations:
commercial paper and Europaper (dollar denominated commercial paper issued
outside the United States);
instruments of domestic and foreign banks and savings associations (such as
certificates of deposit, demand and time deposits, savings shares, and bankers'
acceptances);
obligations of the U.S. government or its agencies or instrumentalities;
repurchase agreements; and
other short-term instruments.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government or other securities to
the Fund and agree at the time of sale to repurchase them at a mutually agreed
upon time and price.
WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay
more/less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement, if the Adviser deems
it appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities,
on a short-term or a long-term basis, up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Adviser has determined are creditworthy
under guidelines established by the Trustees and will receive collateral in the
form of cash or U.S. government securities equal to at least 100% of the value
of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
DERIVATIVE CONTRACTS
AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option, and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity,
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objectives, policies, and limitations.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Adviser believes it
is appropriate to do so in light of the Fund's investment objective, without
regard to the length of time a particular security may have been held. The
Adviser to the Fund does not anticipate that portfolio turnover will result in
adverse tax consequences. Any such trading will increase the Fund's portfolio
turnover rate and transaction costs.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements (arrangements in
which the Fund sells a portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or pledge securities except
that the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings;
sell securities short except, under strict limitations, it may maintain open
short positions so long as not more than 10% of the value of its net assets is
held as collateral for those positions;
lend any of its assets except portfolio securities up to one-third of the value
of its total assets;
underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933, as amended, in connection with
the sale of restricted securities which the Fund may purchase pursuant to its
investment objectives, policies, and limitations; or
with respect to 75% of its total assets, invest more than 5% of the value of
its total assets in securities of any one issuer (other than cash, cash items,
or securities issued or guaranteed
by the U.S. government, its agencies, or instrumentalities, and repurchase
agreements collateralized by such securities) or acquire more than 10% of any
class of voting securities of any one issuer. For these purposes, the Fund
takes all common stock and all preferred stock of an issuer each as a single
class, regardless of priorities, series, designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations;
commit more than 5% of the value of its total assets to premiums on open put
option positions; or
invest more than 5% of its total assets in warrants.
- -------------------------------------------------------------------------------
NET ASSET VALUE
The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
The net asset value of each class of Shares of the Fund is determined as of the
close of trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange, Monday through Friday, except on: (i) days on which there are not
sufficient changes in the value of the Fund's portfolio securities that its net
asset value might be materially affected; (ii) days during which no Shares are
tendered for redemption and no orders to purchase Shares are received; or (iii)
the following holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
- -------------------------------------------------------------------------------
INVESTING IN THE FUND
This prospectus offers investors three classes of Shares that carry sales
charges 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 charge 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 charge. See "Investing in
Class A Shares." Certain purchases of Class A Shares qualify for reduced sales
charges. See "Reducing or Eliminating the Sales Charge." Class A Shares have no
conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.
CLASS C SHARES
Class C Shares are sold without an initial sales charge, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature.
- -------------------------------------------------------------------------------
HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased, as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS DEALER
SALES CHARGE AS A PERCENTAGE CONCESSION
A PERCENTAGE OF NET AS A PERCENTAGE
AMOUNT OF OF PUBLIC AMOUNT OF PUBLIC
TRANSACTION OFFERING PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million
or
greater 0.00% 0.00% 0.25%*
</TABLE>
*See sub-section entitled "DEALER CONCESSION."
No sales charge is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers Act of
1940, as amended, retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, to "wrap accounts" or similar programs for the benefit of clients of
financial institutions under which clients pay fees to such financial
institutions, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, investment adviser,
wrap account, or retirement plan may be charged an additional service fee by
that institution. In addition, shareholders who received Class A Shares through
the exchange of interests in Federated Exchange Fund, Ltd. through the tax-free
reorganization of the partnership may purchase Class A Shares without the
imposition of a sales charge.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge 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 charge 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 charge; 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 charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
REDUCING OR ELIMINATING THE SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Class A Shares
through:
quantity discounts and accumulated purchases;
concurrent purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated investment company
shares.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce the sales charge 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 charge. In addition, the sales charge, 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 charge on the additional purchase according to the schedule now in
effect would be 4.50%, not 5.50%.
To receive the sales charge 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 charge after it
confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder has the
privilege of combining concurrent purchases of two or more Class A Shares in the
Federated Funds, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the other
funds in the Federated Funds with a sales charge, and $20,000 in this Fund, the
sales charge would be reduced.
To receive this sales charge 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 charge
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 Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge 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 charge.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge 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 Federated Funds, excluding money market accounts, will be aggregated to
provide a purchase credit towards fulfillment of the letter of intent. Prior
trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. 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 charge. 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
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or sold with a sales charge 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 charge,
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 charge, fee or
other charge. Class B Shares acquired by exchange from Class B Shares of another
fund in the Federated Funds will convert into Class A Shares based on the time
of the initial purchase. For purposes of conversion to Class A Shares, Shares
purchased through the reinvestment of dividends and distributions paid on Class
B Shares will be considered to be held in a separate sub-account. Each time any
Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares. The conversion of
Class B Shares to Class A Shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B Shares to Class A Shares will not occur if such ruling or
opinion is not available. In such event, Class B Shares would continue to be
subject to higher expenses than Class A Shares for an indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see, "Contingent Deferred Sales Charge--Class C
Shares."
PURCHASING SHARES THROUGH A
FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.
The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by wire by calling
the Fund. All information needed will be taken over the
telephone, and the order is considered received immediately. Payment for
purchases which are subject to a sales load must be received within three
business days following the order. Payment for purchases on which no sales load
is imposed must be received before 3:00 p.m. (Eastern time) on the next business
day following the order. Federal funds should be wired as follows: State Street
Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the check is
received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
sales charge, 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 Federated Funds at net asset value. Shareholders of Class
A Shares may also exchange into certain other Federated Funds (as listed below)
which are sold with a sales charge different from that of the Fund's or with no
sales charge, 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 charge already paid and any sales charge of the
Federated Fund into which the Shares are to be exchanged, if higher. Neither the
Fund nor any of the funds in the Federated Funds imposes any additional fees on
exchanges. Shareholders in certain other Federated Funds may exchange their
shares in the Federated Funds for Class A Shares.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Federated Funds. (Not all funds in the Federated Funds
currently offer Class B Shares. Contact your financial institution regarding the
availability of other Class B Shares in the Federated 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 Federated 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 Federated Funds at net asset value without a contingent
deferred sales charge. (Not all funds in the Federated Funds currently offer
Class C Shares. Contact your financial institution regarding the availability of
other Class C Shares in the Federated Funds.) To the extent that a shareholder
exchanges Shares for Class C Shares in other funds in the Federated Funds, the
time for which the exchanged-for Shares are to be held will be added to the time
for which exchanged-from Shares were held for purposes of satisfying the
applicable holding period. For more information, see "Contingent Deferred Sales
Charge."
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
The Fund has exchange privileges with the following Federated Funds:
American Leaders Fund, Inc.; Capital Growth Fund (Class A Shares and Class C
Shares only); Federated Bond Fund; Federated Small Cap Strategies Fund; Fund for
U.S. Government Securities, Inc.; Federated International Equity Fund;
Federated International Income Fund; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Limited Term
Fund (Class A Shares only); Limited Term Municipal Fund (Class A Shares only);
Michigan Intermediate Municipal Trust (Class A Shares only); Pennsylvania
Municipal Income Fund (Class A Shares only); Strategic Income Fund; Tax-Free
Instruments Trust (Class A Shares only); and, World Utility Fund.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Shareholders of Class A Shares who have been designated Liberty Life Members are
exempt from sales charges on future purchases in and exchanges between the Class
A Shares of any funds in the Federated Funds, as long as they maintain a $500
balance in one of the Federated Funds.
Further information on the exchange privilege and prospectuses for the Federated
Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Federated Funds (where applicable) may be
given in writing or by telephone. Written instructions may require a signature
guarantee. Shareholders of the Fund may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his broker
or financial institution by telephone, it is recommended that an exchange
request be made in writing and sent by overnight mail to Federated Services
Company, 500 Victory Road--2nd Floor, North Quincy, Massachusetts 02171.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, P.O. Box 8000, Boston, Massachusetts
02266-8000 and deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the Fund before that time for Shares to be exchanged the
same day. Shareholders exchanging into a Fund will begin receiving dividends the
following business day. This privilege may be modified or terminated at any
time.
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
as described below.
REDEEMING SHARES THROUGH
A FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire transfer to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are restricted
should be directed to your shareholder services representative at the telephone
number listed on your account statement.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share certificates
have been issued, they should be sent unendorsed with the written request by
registered or certified mail to the address noted above.
The written request should state: the 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. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
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 commercial
or savings bank, trust company, or savings association whose deposits are
insured by an organization which is administered by the Federal Deposit
Insurance Corporation; a member firm of a domestic stock exchange; or any other
"eligible guarantor institution," as defined in the Securities Exchange Act of
1934. The Fund does not accept signatures guaranteed by a notary public.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A Shares are sold with a
sales charge, 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 charge and not distributed by Federated Securities Corp.
may be charged a contingent deferred sales charge of .50 of 1.00% for
redemptions made within one full year of purchase. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT
]YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) Shares acquired through the reinvestment of dividends and long-term capital
gains; (2) Shares held for more than six full years from the date of purchase
with respect to Class B Shares and one full year from the date of purchase with
respect to Class C Shares and applicable Class A Shares; (3) Shares held for
fewer than six years with respect to Class B Shares and one full year from the
date of purchase with respect to Class C Shares and applicable Class A Shares on
a first-in, first-out basis. A contingent deferred sales charge is not assessed
in connection with an exchange of Fund Shares for Shares of other funds in the
Federated Funds in the same class (see "Exchange Privilege"). Any contingent
deferred sales charge imposed at the time the exchanged for Shares are redeemed
is calculated as if the shareholder had held the Shares from the date on which
he became a shareholder of the exchanged-from Shares. Moreover, the contingent
deferred sales charge will be eliminated with respect to certain redemptions
(see "Elimination of Contingent Deferred Sales Charge").
ELIMINATION OF CONTINGENT
DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended, of
a shareholder; (2) redemptions representing minimum required distributions from
an Individual Retirement Account or other retirement plan to a shareholder who
has attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Trustees, employees and sales representatives of the Fund, the
distributor, or affiliates of the Fund or
distributor; employees of any financial institution that sells Shares of the
Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of Shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940, as amended, or retirement
plans where the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Trustees reserve the right to discontinue elimination
of the contingent deferred sales charge. Shareholders will be notified of such
elimination. Any Shares purchased prior to the termination of such waiver would
have the contingent deferred sales charge eliminated as provided in the Fund's
prospectus at the time of the purchase of the Shares. If a shareholder making a
redemption qualifies for an elimination of the contingent deferred sales charge,
the shareholder must notify Federated Securities Corp. or the transfer agent in
writing that he is entitled to such elimination.
- -------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Confirmations are sent to report dividends paid.
DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends and distributions are automatically
reinvested in additional Shares of the Fund on payment dates at the ex-dividend
date net asset value without a sales charge, unless shareholders request cash
payments on the new account form or by contacting the transfer agent. All
shareholders on the record date are entitled to the dividend. If Shares are
redeemed or exchanged prior to the record date or purchased after the record
date, those Shares are not entitled to that quarter's dividend.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
- --------------------------------------------------------------------------------
FUND 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
"Adviser"), 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. The Adviser's address is
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to .75 of 1% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than the
advisory fees paid by other mutual funds in general, is comparable to fees paid
by other mutual funds with similar objectives and policies. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can terminate this voluntary waiver at any time
at its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940, as
amended. It is a subsidiary of Federated Investors. All of the Class A (voting)
shares of Federated Investors are owned by a trust, the trustees of which are
John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's
wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and
Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest investment managers in the
United States. With more than 1,750 employees, Federated continues to be led by
the management who founded the company in 1955. Federated funds are presently at
work in and through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
J. Thomas Madden has been the Fund's portfolio manager since the Fund inception
date. Mr. Madden joined Federated Investors in 1977, and is an Executive Vice
President of the Adviser. Mr. Madden oversees portfolio management for the
Adviser in the domestic equity, high yield, and asset allocation areas, and
contributes to the formation of investment strategy at Federated. Mr. Madden is
a Chartered Financial Analyst and received his M.B.A. in Finance from the Darden
School, University of Virginia.
Peter R. Anderson has been the Fund's portfolio manager since the Fund inception
date. Mr. Anderson joined Federated Investors in 1972 as, and is presently, a
Senior Vice President of the Fund's investment adviser. Mr. Anderson is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Wisconsin.
Timothy E. Keefe has been the Fund's portfolio manager since the Fund inception
date. Mr. Keefe joined Federated Investors in 1987, and has been an Assistant
Vice President of the Adviser since 1993. Mr. Keefe served as an Investment
Analyst of the Adviser from 1991 until 1993, and from 1987 until 1991, he acted
as a Marketing Representative. Mr. Keefe is a Chartered Financial Analyst and
received his M.B.A. in Business Administration from the University of
Pittsburgh.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.
The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the distributor may be paid a fee in an amount
computed at an annual rate of up to .25% for Class A Shares and up to .75% for
Class B Shares and Class C Shares of the average daily net assets of each class
of Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The Fund does not currently
make payments to the distributor or charge a fee under the Distribution Plan for
Class A Shares, and shareholders of Class A Shares will be notified if the Fund
intends to charge a fee under the Distribution Plan. For Class A Shares and
Class C Shares, the distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. With respect to Class B
Shares, because distribution fees to be paid by the Fund to the distributor may
not exceed an annual rate of .75% of each class of Shares' average daily net
assets, it will take the distributor a number of years to recoup the expenses it
has incurred for its sales services and distribution-related services pursuant
to the Distribution Plan.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying, or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments of up to 0.25 of 1% of the average daily net asset
value of Class A Shares, Class B Shares, and Class C Shares to obtain certain
personal services for shareholders and for the maintenance of shareholder
accounts ("Shareholder Services"). Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
With respect to Class A Shares, Class B Shares, and Class C Shares, in addition
to payments made pursuant to the Distribution Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at an annual rate which relates to the average aggregate
daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford Centre,
Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE FUND AND
CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES
Holders of Class A Shares, Class B Shares, and Class C Shares pay their
allocable portion of Trust and Fund expenses.
The Trust expenses for which holders of Class A Shares, Class B Shares, and
Class C Shares pay their allocable portion include, but are not limited to: the
cost of organizing the Trust and continuing its existence; registering the
Trust with federal and state securities authorities; Trustees fees; auditors'
fees, the cost of meetings of the Trustees; legal fees of the Trust;
association membership dues; and such non-recurring and extraordinary items as
may arise from time to time.
The Fund expenses for which holders of Class A Shares, Class B Shares, and Class
C Shares pay their allocable portion include, but are not limited to:
registering the Fund and shares of the Fund; investment advisory services; taxes
and commissions; custodian fees; insurance premiums; auditors' fees; and such
non-recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocable specifically to Class A
Shares, Class B Shares, and Class C Shares as classes are expenses under the
Trust's Distribution Plan and fees for Shareholder Services. However, the
Trustees reserve the right to allocate certain other expenses to holders of
Class A Shares, Class B Shares, and Class C Shares as they deem appropriate (the
"Class Expenses"). In any case, the Class Expenses would be limited to:
distribution fees; transfer agent fees as identified by the transfer agent as
attributable to holders of Class A Shares, Class B Shares, or Class C Shares;
printing and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses, and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and to state
securities commissions; expenses related to administrative personnel and
services as required to support holders of Class A Shares, Class B Shares, or
Class C Shares; legal fees relating solely to Class A Shares, Class B Shares, or
Class C Shares; and Trustees fees incurred as a result of issues relating solely
to Class A Shares, Class B Shares, or Class C Shares.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All Shares of each Fund or
class in the Trust have equal voting rights, except that in matters affecting
only a particular Fund or class, only Shares of that Fund or class are entitled
to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them.
- --------------------------------------------------------------------------------
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
STATE AND LOCAL TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust, Trust
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust would be subject to such taxes if owned
directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for each class
of Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in each class of Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by each class of Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the maximum sales charge 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.
Consequently, the Adviser believes that the quality of fixed income securities
in which the Fund invests should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell, or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than one
service, each rating is evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
STANDARD AND POOR'S RATINGS
GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC--Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC--The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C--The rating "C" typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI--The rating "CI" is reserved for income bonds on which no interest is being
paid.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC.,
CORPORATE BOND RATINGS
Aaa--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated BAA are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC.,
LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong, but
may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
THIS PAGE INTENTIONALLY LEFT BLANK
THIS PAGE INTENTIONALLY LEFT BLANK
THIS PAGE INTENTIONALLY LEFT BLANK
FEDERATED CAPITAL
APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
December 21, 1995
[LOGO] FEDERATED SECURITIES CORP.
-----------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 314172701
Cusip 314172800
Cusip 314172883
G01489-01 (1/96)
FEDERATED CAPITAL APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
SEMI-ANNUAL REPORT AND SUPPLEMENT TO THE PROSPECTUS DATED DECEMBER 21, 1995.
A. Please delete the "Summary of Fund Expenses" table for Class A Shares on page
1 of the prospectus and replace it with the following table:
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)......... 5.50%
Maximum Sales Charge 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 OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(2)...................................................... 0.45%
12b-1 Fee(3).......................................................................... 0.00%
Total Other Expenses.................................................................. 0.70%
Shareholder Services Fee.......................................................... 0.25%
Total Operating Expenses(4).................................................. 1.15%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales charge 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 year of
purchase. See "Contingent Deferred Sales Charge."
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.75%.
(3) The Class A Shares has 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, 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 "Fund Information".
(4) The total operating expenses are estimated to be 1.45% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Class A Operating Expenses in the table above 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 "Fund Information".
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- -------------------------------------------------------------------------------- ------- --------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period............... $71 $ 90
You would pay the following expenses on the same investment, assuming no
redemption.................................................................... $66 $ 90
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
B. Please insert the following "Financial Highlights" table for Class A Shares
immediately following the Summary of Fund Expenses tables in the prospectus:
FEDERATED CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS-CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
PERIOD
ENDED
(UNAUDITED) YEAR ENDED DECEMBER 31, (A)
APRIL 30, --------------------------------------------------------------------------------------
1996 (B) 1995 1994 1993 1992 1991 1990 1989 1988 1987
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 87.58 $68.84 $71.39 $65.83 $61.65 $50.56 $54.93 $50.03 $46.19 $48.39
- -----------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------------
Net investment income 0.11 1.05 1.18 1.13 1.36 1.16 1.46 1.37 1.31 1.29
- -----------------------------
Net realized and unrealized
gain (loss) on investments 9.30 24.39 (1.39) 6.30 5.57 12.62 (3.86) 7.34 5.08 (0.45)
- ----------------------------- ------- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations 9.41 25.44 (0.21) 7.43 6.93 13.78 (2.40) 8.71 6.39 0.84
- ----------------------------- ------- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
- -----------------------------
Distributions from net
investment income (0.08) (1.09) (1.14) (1.16) (1.38) (1.15) (1.51) (1.32) (1.29) (1.30)
- -----------------------------
Distributions from net
realized gain on
investments -- (5.61) (1.20) (0.71) (1.37) (1.54) (0.46) (2.49) (1.26) (1.74)
- ----------------------------- ------- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.08) (6.70) (2.34) (1.87) (2.75) (2.69) (1.97) (3.81) (2.55) (3.04)
- ----------------------------- ------- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF
PERIOD $ 96.91 $87.58 $68.84 $71.39 $65.83 $61.65 $50.56 $54.93 $50.03 $46.19
- ----------------------------- ------- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL RETURN (C) 10.75% 37.17% (0.30%) 11.31% 11.38% 27.42% (4.43%) 17.58% 13.97% 0.88%
- -----------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------
Expenses 1.18%* 1.08% 1.15% 1.15% 1.11% 1.12% 1.07% 1.13% 1.08% 0.92%*
- -----------------------------
Net investment income 0.35%* 1.29% 1.63% 1.59% 2.13% 1.97% 2.76% 2.45% 2.61% 2.29%*
- -----------------------------
Expense waiver/
reimbursement (d) 0.32%* 0.15% -- -- -- -- -- -- -- --
- -----------------------------
SUPPLEMENTAL DATA
- -----------------------------
Net assets, end of period
(000 omitted) $107,197 $98,200 $81,377 $88,949 $91,551 $90,503 $79,114 $95,422 $89,228 $89,371
- -----------------------------
Average commission rate
paid $0.05 -- -- -- -- -- -- -- -- --
- -----------------------------
Portfolio turnover 13% 81% 23% 26% 47% 54% 61% 41% 36% 39%
- -----------------------------
</TABLE>
* Computed on an annualized basis.
(a) Amounts presented prior to January 1, 1996 represent results of operations
for Federated Exchange Fund, Ltd.
(b) Reflects operations for the period from January 1, 1996 (the Fund's start of
business) to April 30, 1996.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
C. Under the Section entitled "Investment Policies", please replace the third
sentence under the sub-section entitled "Put and Call Options" on page 8 with
the following:
"The Fund may also write call options on all or any portion of its portfolio to
seek to generate income for the Fund."
D. Under the section entitled "Administration of the Fund", on page 25, delete
all references to "Federated Administrative Services" and replace them with
"Federated Services Company."
E. Please delete all references to "Federated Services Company" the former name
of the current transfer agent, and replace with "Federated Shareholder
Services Company," in the following sections of the prospectus; PURCHASING
SHARES BY CHECK, TELEPHONE INSTRUCTIONS, REDEEMING SHARES BY MAIL,
CERTIFICATES AND CONFIRMATIONS and TRANSFER AGENT AND DIVIDEND DISBURSING
AGENT, on pages 16, 18, 19, 21 and 25, respectively.
F. Please delete the last sentence in the section entitled "Making an Exchange"
on page 17 and replace it with the following:
"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 Shareholder Services Company, 1099 Hingham
Street, Rockland, MA 02370-3317."
G. Please insert the following financial statements beginning on page 33 of the
prospectus:
FEDERATED CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- --------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--100.2%
- -----------------------------------------------------------------------------------
BASIC INDUSTRY--2.3%
------------------------------------------------------------------
59,000 Millipore Corp. $ 2,470,625
------------------------------------------------------------------ ------------
CONSUMER DURABLES--4.3%
------------------------------------------------------------------
34,500 Eastman Kodak Co. 2,639,250
------------------------------------------------------------------
80,500 Mattel, Inc. 2,093,000
------------------------------------------------------------------ ------------
Total 4,732,250
------------------------------------------------------------------ ------------
CONSUMER NON-DURABLES--11.6%
------------------------------------------------------------------
29,900 Avon Products, Inc. 2,657,362
------------------------------------------------------------------
72,000 IBP, Inc. 1,926,000
------------------------------------------------------------------
31,600 International Flavors & Fragrances, Inc. 1,552,350
------------------------------------------------------------------
35,000 Nike, Inc., Class B 3,062,500
------------------------------------------------------------------
37,600 Philip Morris Cos., Inc. 3,388,700
------------------------------------------------------------------ ------------
Total 12,586,912
------------------------------------------------------------------ ------------
ENERGY MINERALS--2.5%
------------------------------------------------------------------
46,900 Chevron Corp. 2,720,200
------------------------------------------------------------------ ------------
FINANCE--22.8%
------------------------------------------------------------------
173,500 (a) Acceptance Insurance Cos., Inc. 2,710,937
------------------------------------------------------------------
28,000 Allstate Corp. 1,088,500
------------------------------------------------------------------
25,000 American Express Co. 1,212,500
------------------------------------------------------------------
23,600 Chase Manhattan Corp. 1,625,450
------------------------------------------------------------------
31,097 Citicorp 2,448,889
------------------------------------------------------------------
23,145 Dean Witter, Discover & Co. 1,261,403
------------------------------------------------------------------
100,000 Executive Risk, Inc. 3,100,000
------------------------------------------------------------------
110,000 Leucadia National Corp. 2,860,000
------------------------------------------------------------------
42,500 Mellon Bank Corp. 2,284,375
------------------------------------------------------------------
15,000 NationsBank Corp. 1,196,250
------------------------------------------------------------------
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- --------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- -----------------------------------------------------------------------------------
FINANCE--CONTINUED
------------------------------------------------------------------
78,000 Pioneer Group, Inc. $ 2,086,500
------------------------------------------------------------------
14,500 Providian Corp. 668,813
------------------------------------------------------------------
36,266 Travelers Group, Inc. 2,230,359
------------------------------------------------------------------ ------------
Total 24,773,976
------------------------------------------------------------------ ------------
HEALTH CARE--7.5%
------------------------------------------------------------------
6,900 (a) Agouron Pharmaceuticals, Inc. 279,450
------------------------------------------------------------------
37,000 Becton, Dickinson & Co. 2,983,125
------------------------------------------------------------------
33,400 Bristol-Myers Squibb Co. 2,747,150
------------------------------------------------------------------
55,000 (a) Scherer (R.P.) Corp. 2,172,500
------------------------------------------------------------------ ------------
Total 8,182,225
------------------------------------------------------------------ ------------
PRODUCER MANUFACTURING--5.6%
------------------------------------------------------------------
100,000 (a) Oak Industries, Inc. 2,700,000
------------------------------------------------------------------
50,000 Philips Electronics N.V., ADR 1,793,750
------------------------------------------------------------------
19,000 Textron, Inc. 1,629,250
------------------------------------------------------------------ ------------
Total 6,123,000
------------------------------------------------------------------ ------------
RETAIL TRADE--2.2%
------------------------------------------------------------------
48,350 Sears, Roebuck & Co. 2,411,456
------------------------------------------------------------------ ------------
SERVICES--5.8%
------------------------------------------------------------------
16,000 Gannett Co., Inc. 1,094,000
------------------------------------------------------------------
50,000 Interpublic Group Cos., Inc. 2,337,500
------------------------------------------------------------------
63,300 Reynolds & Reynolds Co., Class A 2,927,625
------------------------------------------------------------------ ------------
Total 6,359,125
------------------------------------------------------------------ ------------
TECHNOLOGY--27.9%
------------------------------------------------------------------
50,000 (a) Ceridian Corp. 2,387,500
------------------------------------------------------------------
50,000 (a) Compuware Corp. 1,425,000
------------------------------------------------------------------
45,000 (a) DST Systems, Inc. 1,653,750
------------------------------------------------------------------
200,000 (a) Data General Corp. 3,075,000
------------------------------------------------------------------
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- --------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- -----------------------------------------------------------------------------------
TECHNOLOGY--CONTINUED
------------------------------------------------------------------
50,000 ECI Telecommunications, Ltd. $ 1,306,250
------------------------------------------------------------------
103,500 Gandalf Technologies, Inc. 1,837,125
------------------------------------------------------------------
50,000 General Motors Corp., Class E 2,818,750
------------------------------------------------------------------
18,800 Hewlett-Packard Co. 1,990,450
------------------------------------------------------------------
75,000 (a) Intervoice, Inc. 2,100,000
------------------------------------------------------------------
40,200 Lockheed Martin Corp. 3,241,125
------------------------------------------------------------------
75,000 Lucent Technologies, Inc. 2,634,375
------------------------------------------------------------------
23,000 (a) Microsoft Corp. 2,607,625
------------------------------------------------------------------
25,000 (a) Sheldahl, Inc. 559,375
------------------------------------------------------------------
24,200 (a) Solectron Corp. 1,076,900
------------------------------------------------------------------
25,000 (a) Systeme, Anwendungen, Produkte in der Datevnerarbeitung, ADR 1,100,000
------------------------------------------------------------------
20,000 (a) Vanstar Corp. 272,500
------------------------------------------------------------------
5,000 (a) Wind River Systems, Inc. 195,000
------------------------------------------------------------------ ------------
Total 30,280,725
------------------------------------------------------------------ ------------
TRANSPORTATION--3.2%
------------------------------------------------------------------
50,000 Kansas City Southern Industries, Inc. 2,425,000
------------------------------------------------------------------
14,200 (a) Southern Pacific Railway Co. 355,000
------------------------------------------------------------------
10,400 Union Pacific Corp. 708,500
------------------------------------------------------------------ ------------
Total 3,488,500
------------------------------------------------------------------ ------------
UTILITIES--4.5%
------------------------------------------------------------------
60,000 (a) Columbia Gas System, Inc. 2,917,500
------------------------------------------------------------------
49,000 Enron Corp. 1,972,250
------------------------------------------------------------------ ------------
Total 4,889,750
------------------------------------------------------------------ ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $77,220,861) 109,018,744
------------------------------------------------------------------ ------------
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
(B) REPURCHASE AGREEMENT--2.5%
- -----------------------------------------------------------------------------------
$2,695,000 BT Securities Corporation, 5.35%, dated 4/30/1996, due 5/1/1996
(at amortized cost) $ 2,695,000
----------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $79,915,861)(C) $111,713,744
----------------------------------------------------------------- ------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(c) The cost of investments for federal tax purposes amounts to $79,915,861. The
net unrealized appreciation of investments on a federal tax basis amounts to
$31,797,883 which is comprised of $33,080,279 appreciation and $1,282,396
depreciation at April 30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($108,745,314) at April 30, 1996.
The following acronym is used throughout this portfolio:
<TABLE>
<S> <C>
ADR -- American Depository Receipt
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $79,915,861) $111,713,744
- -----------------------------------------------------------------------------------------------
Income receivable 70,569
- -----------------------------------------------------------------------------------------------
Receivable for investments sold 380,625
- -----------------------------------------------------------------------------------------------
Receivable for shares sold 59,822
- ----------------------------------------------------------------------------------------------- -----------
Total assets 112,224,760
- -----------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------------------
Payable for investments purchased $3,198,945
- ----------------------------------------------------------------------------------
Payable to Bank 169,478
- ----------------------------------------------------------------------------------
Accrued expenses 111,023
- ---------------------------------------------------------------------------------- ---------
Total liabilities 3,479,446
- ----------------------------------------------------------------------------------------------- -----------
NET ASSETS for 1,122,131 shares outstanding $108,745,314
- ----------------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------
Paid in capital $ 74,319,475
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 31,797,883
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 2,594,112
- -----------------------------------------------------------------------------------------------
Undistributed net investment income 33,844
- ----------------------------------------------------------------------------------------------- -----------
Total Net Assets $108,745,314
- ----------------------------------------------------------------------------------------------- -----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -----------------------------------------------------------------------------------------------
CLASS A SHARES:
- -----------------------------------------------------------------------------------------------
Net Asset Value Per Share ($107,197,162 / 1,106,150 shares outstanding) $96.91
- ----------------------------------------------------------------------------------------------- -----------
Offering Price Per Share (100/94.50 of $96.91)* $102.55
- ----------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share $96.91
- ----------------------------------------------------------------------------------------------- -----------
CLASS B SHARES:
- -----------------------------------------------------------------------------------------------
Net Asset Value Per Share ($1,526,163 / 15,754 shares outstanding) $96.87
- ----------------------------------------------------------------------------------------------- -----------
Offering Price Per Share $96.87
- ----------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share (94.50/100 of $96.87)** $91.54
- ----------------------------------------------------------------------------------------------- -----------
CLASS C SHARES:
- -----------------------------------------------------------------------------------------------
Net Asset Value Per Share ($21,989 / 227 shares outstanding) $96.87
- ----------------------------------------------------------------------------------------------- -----------
Offering Price Per Share $96.87
- ----------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share (99.00/100 of $96.87)** $95.90
- ----------------------------------------------------------------------------------------------- -----------
</TABLE>
* See "Investing in Class A Shares," "Investing in Class B Shares" and
"Investing in Class C Shares" in the Prospectuses.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF OPERATIONS
PERIOD ENDED APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------
Dividends $ 483,912
- -------------------------------------------------------------------------------------
Interest 37,643
- ------------------------------------------------------------------------------------- -----------
Total income 521,555
- -------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $ 256,275
- -------------------------------------------------------------------------
Administrative personnel and services fee 61,160
- -------------------------------------------------------------------------
Custodian fees 7,680
- -------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 15,634
- -------------------------------------------------------------------------
Directors'/Trustees' fees 4,283
- -------------------------------------------------------------------------
Auditing fees 5,929
- -------------------------------------------------------------------------
Legal fees 3,993
- -------------------------------------------------------------------------
Portfolio accounting fees 23,529
- -------------------------------------------------------------------------
Distribution services fee--Class B Shares 1,262
- -------------------------------------------------------------------------
Distribution services fee--Class C Shares 22
- -------------------------------------------------------------------------
Shareholder services fee--Class A Shares 84,997
- -------------------------------------------------------------------------
Shareholder services fee--Class B Shares 421
- -------------------------------------------------------------------------
Shareholder services fee--Class C Shares 7
- -------------------------------------------------------------------------
Share registration costs 31,944
- -------------------------------------------------------------------------
Printing and postage 10,908
- -------------------------------------------------------------------------
Insurance premiums 2,783
- -------------------------------------------------------------------------
Miscellaneous 3,993
- ------------------------------------------------------------------------- ---------
Total expenses 514,820
- -------------------------------------------------------------------------
Waivers--
- -------------------------------------------------------------------------
Waiver of investment advisory fee (110,371)
- ------------------------------------------------------------------------- ---------
Net expenses 404,449
- ------------------------------------------------------------------------------------- -----------
Net investment income 117,106
- ------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------
Net realized gain on investments 2,594,112
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 7,816,619
- ------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 10,410,731
- ------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $10,527,837
- ------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED) YEAR ENDED
APRIL 30, 1996(A) DECEMBER 31, 1995(A)
----------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------
Net investment income $ 117,106 $ 1,188,048
- ------------------------------------------------------------
Net realized gain (loss) on investments ($2,594,112 net gain
and $16,693,345 net gain, respectively, as computed for
federal tax purposes) 2,594,112 18,575,112
- ------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 7,816,619 9,195,528
- ------------------------------------------------------------ -------------- ---------------
Change in net assets resulting from operations 10,527,837 28,958,688
- ------------------------------------------------------------ -------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------
Distributions from net investment income
- ------------------------------------------------------------
Class A Shares (88,613) (1,235,954)
- ------------------------------------------------------------
Distributions in excess of net investment income
- ------------------------------------------------------------
Class B Shares (98) --
- ------------------------------------------------------------
Distributions from net realized gains
- ------------------------------------------------------------
Class A Shares -- (6,164,051)
- ------------------------------------------------------------ -------------- ---------------
Change in net assets resulting from distributions to
shareholders (88,711) (7,400,005)
- ------------------------------------------------------------ -------------- ---------------
SHARE TRANSACTIONS(B)--
- ------------------------------------------------------------
Proceeds from sale of shares 2,271,048 --
- ------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of distributions declared 18,327 2,209,356
- ------------------------------------------------------------
Cost of shares redeemed (2,183,445) (6,944,798)
- ------------------------------------------------------------ -------------- ---------------
Change in net assets resulting from share transactions 105,930 (4,735,442)
- ------------------------------------------------------------ -------------- ---------------
Change in net assets 10,545,056 16,823,241
- ------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------
Beginning of period 98,200,258 81,377,017
- ------------------------------------------------------------ -------------- ---------------
End of period (including undistributed net investment income
of $33,844 and $5,448, respectively) $ 108,745,314 $ 98,200,258
- ------------------------------------------------------------ -------------- ---------------
</TABLE>
(a) See the Organizational Note in the Notes to the Financial Statements.
(b) Includes transactions in shares of partnership interest for Federated
Exchange Fund, Ltd. through December 31, 1995.
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Equity Funds (the "Trust") is registered under the Investment Company
Act of 1940, as amended (the "Act") as an open-end, management investment
company. The Trust consists of three portfolios. The financial statements
included herein are only those of Federated Capital Appreciation Fund (the
"Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The investment objective of the Fund is to provide capital appreciation.
The Fund offers three classes of shares: Class A Shares, Class B Shares, and
Class C Shares.
Pursuant to the terms of a merger agreement dated October 10, 1995, shareholders
of Federated Exchange Fund, Ltd. agreed to acquire shares of the Fund, effective
January 2, 1996. As part of the transaction, 1,121,204 Class A shares of the
Fund were issued in exchange for all the assets of Federated Exchange Fund,
Ltd., which amounted to $98,200,258. The shares issued as a result of this
transaction represented substantially all of the Fund's outstanding shares as of
the transaction date. Due to this, and due to the similarities in investment
objectives and policies between the Fund and Federated Exchange Fund, Ltd., the
historical performance of Federated Exchange Fund, Ltd. prior to January 2,
1996, has been incorporated into the Fund's financial statements.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Listed equity securities are valued at the last sale
price reported on a national securities exchange. Short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at
the time of purchase may be valued at amortized cost, which approximates
fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31, 1995(B)
APRIL 30, 1996
---------------------- ----------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 7,780 $ 729,188 -- $ --
- ---------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 194 18,232 25,468 2,209,356
- ---------------------------------------------------------
Shares redeemed (23,028) (2,143,320) (86,324) (6,944,798)
- --------------------------------------------------------- ------- ----------- ------- -----------
Net change resulting from Class A share transactions (15,054) $(1,395,900) (60,856) $(4,735,442)
- --------------------------------------------------------- ------- ----------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1996(A)
----------------------
CLASS B SHARES SHARES AMOUNT
- --------------------------------------------------------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 16,172 $ 1,520,260
- ---------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 1 95
- ---------------------------------------------------------
Shares redeemed (419) (40,125)
- --------------------------------------------------------- ------- -----------
Net change resulting from Class B share transactions 15,754 $ 1,480,230
- --------------------------------------------------------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1996(A)
----------------------
CLASS C SHARES SHARES AMOUNT
- --------------------------------------------------------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 227 $ 21,600
- ---------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared -- --
- ---------------------------------------------------------
Shares redeemed -- --
- --------------------------------------------------------- ------- -----------
Net change resulting from Class C share transactions 227 $ 21,600
- --------------------------------------------------------- ------- -----------
Net change resulting from share transactions 927 $ 105,930
- --------------------------------------------------------- ------- -----------
</TABLE>
(a) For the period ended January 4, 1996 (date of initial public offering) to
April 30, 1996.
(b) Includes transactions in shares of partnership interest for Federated
Exchange Fund, Ltd. through December 31, 1995.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser,
(the "Adviser"), receives for its services an annual investment advisory fee
equal to 0.75% of the Fund's average daily
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
net assets.The Adviser may voluntarily choose to waive any portion of its fee.
The Adviser can modify or terminate this voluntary waiver at any time at its
sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp.("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Class A Shares, Class B Shares and Class C Shares. The Plan
provides that the Fund may incur distribution expenses according to the
following schedule annually, to compensate FSC.
<TABLE>
<CAPTION>
% OF AVG. DAILY NET
SHARE CLASS NAME ASSETS OF CLASS
-------------------------------- --------------------------------
<S> <C>
Class A Shares 0.25%
Class B Shares 0.75%
Class C Shares 0.75%
</TABLE>
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--FServ, through its
subsidiary, Federated Shareholder Services Company serves as transfer and
dividend disbursing agent for the Fund. The fee paid to FServ is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
FEDERATED CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1996, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $13,248,556
- ------------------------------------------------------------------------------- -----------
SALES $16,950,673
- ------------------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<S> <C>
TRUSTEES OFFICERS
- ---------------------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Glen R. Johnson
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Executive Vice President
Gregor F. Meyer John W. McGonigle
John E. Murray, Jr. Executive Vice President and Secretary
Wesley W. Posvar Richard B. Fisher
Marjorie P. Smuts Vice President
David M. Taylor
Treasurer
S. Elliott Cohan
Assistant Secretary
</TABLE>
Mutual Funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds' prospectus which contains facts concerning
their objective and policies, management fees, expenses and other information.
LOGO
FEDERATED SECURITIES CORP.
- --------------------------------------------------------------------------------
Distributor
A Subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSIP# 314172701
FEDERATED CAPITAL APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
The shares of Federated Capital Appreciation Fund (the "Fund") represent
interests in a diversified investment portfolio of Federated Equity Funds, an
open-end management investment company (a mutual fund). The Fund invests
primarily in equity securities that offer opportunities for capital
appreciation.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class A Shares, Class B Shares, and Class C Shares of the Fund. Keep
this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, and Class C Shares dated December 21, 1995, with the
Securities and Exchange Commission. The information contained in the Statement
of Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Statement of Additional Information or a paper copy of
this prospectus, if you have received your prospectus electronically, 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 December 21, 1995
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
General Information............................................................4
Investment Information.........................................................5
Investment Objective.........................................................5
Investment Policies..........................................................5
Investment Limitations......................................................13
Net Asset Value...............................................................14
Investing in the Fund.........................................................15
How to Purchase Shares........................................................16
Investing in Class A Shares.................................................16
Reducing or Eliminating the
Sales Charge.............................................................17
Investing in Class B Shares.................................................18
Investing in Class C Shares.................................................19
Special Purchase Features...................................................20
Exchange Privilege............................................................21
Requirements for Exchange...................................................21
How to Redeem Shares..........................................................23
Special Redemption Features.................................................24
Contingent Deferred Sales Charge............................................24
Elimination of Contingent
Deferred Sales Charge....................................................25
Account and Share Information.................................................26
Fund Information..............................................................27
Management of the Trust.....................................................27
Distribution of Shares......................................................28
Administration of the Fund..................................................30
Expenses of the Fund and Class A
Shares, Class B Shares, and
Class C Shares...........................................................30
Brokerage Transactions......................................................31
Shareholder Information.......................................................32
Voting Rights...............................................................32
Massachusetts Partnership Law...............................................32
Tax Information...............................................................33
Federal Income Tax..........................................................33
State and Local Taxes.......................................................33
Performance Information.......................................................33
Appendix......................................................................34
- -------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................... 5.50%
Maximum Sales Charge 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 (after waiver) (2)............................................................................... 0.45%
12b-1 Fee (3)................................................................................................... 0.00%
Total Other Expenses............................................................................................ 0.70%
Shareholder Services Fee......................................................................... 0.25%
Total Shares Operating Expenses (4).................................................................... 1.15%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales charge
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 estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3)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."
(4) The total operating expenses are estimated to be 1.45% absent the
anticipated voluntary waiver of a portion of the management fee.
* 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 "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period................. $71 $90
You would pay the following expenses on the same investment, assuming no redemption............... $66 $90
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- -------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)........................ None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1).................................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................... 0.45%
12b-1 Fee....................................................................................................... 0.75%
Total Other Expenses............................................................................................ 0.70%
Shareholder Services Fee......................................................................... 0.25%
Total Operating Expenses (3)(4)........................................................................ 1.90%
<CAPTION>
CLASS B SHARES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)........................
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price).............
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1).........................................................
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................
Exchange Fee.........................................................................................
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)....................................................................
12b-1 Fee............................................................................................
Total Other Expenses.................................................................................
Shareholder Services Fee.........................................................................
Total Operating Expenses (3)(4).............................................................
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. See "Contingent Deferred Sales
Charge."
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3)Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The total operating expenses are estimated to be 2.20% absent the
anticipated voluntary waiver of a portion of the management fee.
* 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 "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.......................... $76 $104
You would pay the following expenses on the same investment, assuming no redemption............... $19 $ 60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS B SHARES" FISCAL YEAR ENDING
OCTOBER 31, 1996.
- -------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)........................ None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................... 0.45%
12b-1 Fee....................................................................................................... 0.75%
Total Other Expenses............................................................................................ 0.70%
Shareholder Services Fee......................................................................... 0.25%
Total Operating Expenses (3)........................................................................... 1.90%
<CAPTION>
CLASS C SHARES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)........................
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price).............
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).......................................................................
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................
Exchange Fee.........................................................................................
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)....................................................................
12b-1 Fee............................................................................................
Total Other Expenses.................................................................................
Shareholder Services Fee.........................................................................
Total Operating Expenses (3)................................................................
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. For a more complete description, see
"Contingent Deferred Sales Charge."
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3) The total operating expenses are estimated to be 2.20% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Class C Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class C Shares" and "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.......................... $30 $60
You would pay the following expenses on the same investment, assuming no redemption............... $19 $60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS C SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- -------------------------------------------------------------------------------
GENERAL INFORMATION
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
charge and are redeemed at net asset value. However, a contingent deferred sales
charge is imposed under certain circumstances. For a more complete description,
see "How to Redeem Shares." Class A Shares are sold and redeemed at net asset
value for trust departments, investment advisers, and shareholders who receive
Shares in the reorganization of Federated Exchange Fund, Ltd., described above.
Class B Shares are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "How to Redeem Shares."
Class C Shares are sold at net asset value. A contingent deferred sales charge
of 1.00% will be charged on assets redeemed within the first 12 months following
purchase. See "How to Redeem Shares."
Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds for which affiliates of Federated Investors
serve as investment adviser or principal underwriter ("Federated Funds") can be
found under "Exchange Privilege."
Federated Management is the investment adviser (the "Adviser") to the Fund and
receives compensation for its services. The Adviser's address is Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including investing in convertible securities and zero coupon convertible
securities, entering into repurchase agreements, investing in when-issued and
delayed delivery securities, lending portfolio securities, the purchasing or
writing of put and call options, the purchasing and selling of financial futures
and options on futures, and investing in restricted and illiquid securities and
foreign securities. These risks are described under "Investment Policies."
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspaper under "Federated Liberty Funds."
- -------------------------------------------------------------------------------
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The investment policies described below may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
ACCEPTABLE INVESTMENTS
The Fund attempts to achieve its objectives by investing at least 65% of its
assets in equity securities. Equity securities include common stocks, preferred
stocks, and investment grade securities (including debt securities) that are
convertible into common stocks. The portion of the Fund's total assets invested
in common stocks, preferred stocks, and convertible securities will vary
according to the Fund's assessment of market and economic conditions and
outlook.
The Fund's stock selection emphasizes those common stocks in each industry
sector that offer significant potential for capital appreciation based upon
factors such as price/cash flow, price/book value, and projected earnings
growth. The Fund may also invest in the securities of companies involved in
mergers or restructuring, and may invest up to 20% of its total assets in
foreign securities.
COMMON STOCK
As described above, the Fund invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Fund is
subject to market risks. That is, the possibility exists that common stocks will
decline over short or even extended periods of time, and the United States
equity market tends to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease. However,
since the Fund invests in growth-oriented equity securities, there are some
additional risk factors associated with investment in the Fund. Growth-oriented
stocks may include issuers with smaller capitalization. Small and medium
capitalization stocks have historically been more volatile in price than larger
capitalization stocks, such as those included in the Standard & Poor's 500
Index. This is because, among other things, smaller companies have a lower
degree of liquidity in the equity market and tend to have a greater sensitivity
to changing economic conditions. That is, the stock of small and medium
capitalization companies may decline in price as the price of large company
stocks rise, or vice versa. Therefore, investors should expect that the Fund
will be more volatile than, and may fluctuate independently of, broad market
indices such as the Standard & Poor's 500 Index.
CORPORATE SECURITIES
The Fund may invest in preferred stocks, convertible securities, notes or
debentures rated investment grade, i.e., Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch") (or, if unrated, are deemed
to be of comparable quality by the Fund's Adviser), and warrants of these
companies. Corporate fixed income securities are subject to market and credit
risks. In addition, the prices of fixed income securities fluctuate inversely to
the direction of interest rates. It should be noted that securities receiving
the lowest investment grade rating are considered to have some speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated securities. In the event that a security which had an eligible
rating when purchased is downgraded below Baa or BBB, the Adviser will promptly
reassess whether continued holding of the security is consistent with the Fund's
objective.
CONVERTIBLE SECURITIES
The Fund may invest up to, but not including, 35% of the value of its total
assets in convertible securities that are not investment grade bonds or are not
rated but are determined by the Adviser to be of comparable quality. Convertible
securities are fixed-income securities which may be exchanged or converted into
a predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for
different investment objectives.
The Fund may invest in convertible securities rated Baa or lower by Moody's or
BBB or lower by S&P or Fitch, or if unrated, are deemed to be of comparable
quality by the Adviser.
Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until
the security is converted into equity. Usable bonds are corporate bonds that can
be used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying common
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the Adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objectives. Otherwise,
the Fund will hold or trade the convertible securities. In selecting convertible
securities for the Fund, the Adviser evaluates the investment characteristics of
the convertible security as a fixed-income instrument, and the investment
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible security, the
Adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment alternatives,
trends in the determinants of the issuer's profits, and the issuer's management
capability and practices.
SYNTHETIC CONVERTIBLES
A "synthetic convertible" is created by combining distinct securities that
possess the two principal characteristics of a true convertible: a fixed-income
component and a convertibility component. This combination is achieved by
investing in nonconvertible fixed-income securities (nonconvertible bonds,
preferred stocks, and money market instruments) and in warrants or call options
traded on U.S. or foreign exchanges or in the over-the-counter markets granting
the holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case of
stock index options.
Synthetic convertibles differ from true convertible securities in several
respects. Unlike a true convertible, which is a single security having a unitary
market value, a synthetic convertible is comprised of two distinct securities,
each with its own market value. Therefore, the "market value" of a synthetic
convertible is the sum of the values of its fixed-income component and its
separate convertibility component. For this reason, the values of a synthetic
convertible and a true convertible security will respond differently to market
fluctuations.
A synthetic convertible may be more flexible than a convertible security. For
example, a synthetic convertible may offer different issuers in the fixed-income
component than are offered in the stock underlying the convertibility component.
A synthetic convertible allows the Adviser to combine components representing
distinct issuers, or to combine a fixed-income security with a call option on a
stock index, when it determines that such a combination would better promote the
Fund's investment objective and diversification. A synthetic convertible may
also offer flexibility in that its two components may be purchased separately.
For example, the Adviser may purchase a listed call option for inclusion in a
synthetic convertible, but temporarily hold short-term investments while
postponing purchase of a corresponding bond pending development of more
favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component, will
decline, causing a decline in the value of the call option or warrant. Should
the price of the stock or the level of the index fall below the exercise price,
and remain there throughout the exercise period, the entire amount paid for the
call option or warrant would be lost. Since a synthetic convertible includes a
fixed-income component, the holder of a synthetic convertible also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument. Finally, a synthetic convertible can be expected to
have greater transaction costs than a true convertible security.
A combination of convertible securities and synthetic convertibles may offer
certain advantages over an investment policy that allows for only one of these
investment vehicles. Since convertible securities and synthetic convertibles may
respond differently to varying market conditions, the ability to invest in both
types of securities should afford greater flexibility in managing the Fund's
portfolio.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income from the security prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and avoid liability
of federal income taxes, the Fund will be required to distribute income accrued
from zero coupon convertible securities which it owns, and may have to sell
portfolio securities (perhaps at disadvantageous times) in order to generate
cash to satisfy these distribution requirements.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
The convertible, synthetic, and zero convertible securities in which the Fund
invests are usually not in the three highest rating categories of a nationally
recognized statistical rating organization (AAA, AA, or A for S&P or Fitch and
Aaa,
Aa, or A for Moody's), but are in the lower rating categories or are unrated,
but are of comparable quality and have speculative characteristics or are
speculative. Lower-rated bonds or unrated bonds are commonly referred to as
"junk bonds." There is no minimal acceptable rating for a security to be
purchased or held in the Fund's portfolio, and the Fund may, from time to time,
purchase or hold convertible and synthetic convertible securities rated in the
lowest rating category. A description of the rating categories is contained in
the Appendix to the prospectus.
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-
rated bonds tend to reflect short-term corporate, economic, and market
developments, as well as investor perceptions of the issuer's credit quality. In
addition, lower-rated bonds may be more difficult to dispose of or to value than
higher-rated, lower-yielding bonds.
The Adviser attempts to reduce the risks described above through diversification
of the portfolio and by credit analysis of each issuer as well as by monitoring
broad economic trends and corporate and legislative developments.
FOREIGN SECURITIES
The Fund reserves the right to invest up to 20% of its assets in foreign debt
and equity securities. These securities may be either dollar-
denominated or denominated in foreign currencies. Investments in foreign
securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation,
confiscatory taxation, currency fluctuations, the unavailability of financial
information or the difficulty of interpreting financial information prepared
under foreign accounting standards, less liquidity and more volatility in
foreign securities markets, the impact of political, social, or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. It may also be more difficult to enforce contractual obligations
abroad than would be the case in the United States because of differences in the
legal systems. Transaction costs in foreign securities may be higher. The
Adviser will consider these and other factors before investing in foreign
securities and will not make such investments unless, in its opinion, such
investments will meet the Fund's standards and objectives.
FOREIGN CURRENCY TRANSACTIONS
The Fund may enter into foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency transactions may be
conducted either on a spot or cash basis at prevailing rates or through forward
foreign currency exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund.
CURRENCY RISKS
To the extent that debt securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset
value; the value of interest earned; gains and losses realized on the sale of
securities; and net investment income and capital gain, if any, to be
distributed to shareholders by the Fund. If the value of a foreign currency
rises against the U.S. dollar, the value of the Fund's assets denominated in
that currency will increase; correspondingly, if the value of a foreign currency
declines against the U.S. dollar, the value of the Fund's assets denominated in
that currency will decrease.
FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a specific
price and on a future date agreed upon by the parties.
Generally no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated and are maintained until
the contract has been settled. The Fund will not enter into a forward contract
with a term of more than one year.
The Fund will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the transaction occurs
("trade date"). The period between trade date and settlement date will vary
between 24 hours and 30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the adviser
will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency. The Fund will not invest more than 20% of its total assets in
forward foreign currency exchange contracts.
PUT AND CALL OPTIONS
The Fund may purchase put options on its portfolio securities. These options
will be used as a hedge to attempt to protect securities which the Fund holds
against decreases in value. The Fund may also write call options on all or any
portion of its portfolio to generate income for the Fund. The Fund will write
call options on securities either held in its portfolio or for which it has the
right to obtain without payment of further consideration or for which it has
segregated cash in the amount of any additional consideration.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the Adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation.
Exchange-traded options have a continuous liquid market while over-the-counter
options may not. The Fund will not buy call options or write put options without
further notification to shareholders.
FINANCIAL FUTURES AND
OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and U.S. Treasury securities, equal to the
underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures as hedging
devices, much depends on the ability of the Adviser to predict market conditions
based upon certain economic analysis and factors. There is a risk that the
prices of the securities subject to the futures contracts may not correlate
perfectly with the prices of the securities in the Fund's portfolio. This may
cause the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Adviser could be
incorrect in its expectations about the direction or extent of market factors
such as interest rate movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest up to 10% of its net assets in restricted securities. This
restriction is not applicable to commercial paper issued under Section 4(2) of
the Securities Act of 1933, as amended. Restricted securities are any securities
in which the Fund may otherwise invest pursuant to its investment objectives and
policies but which are subject to restriction on resale under federal securities
law. The Fund will limit
investments in illiquid securities, including certain restricted securities
determined by the Trustees not to be liquid, non-negotiable time deposits and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily, in amounts of 35% or less of the Fund's
assets, in cash and cash items during times of unusual market conditions to
maintain liquidity. Cash items may include the following short-term obligations:
commercial paper and Europaper (dollar denominated commercial paper issued
outside the United States);
instruments of domestic and foreign banks and savings associations (such as
certificates of deposit, demand and time deposits, savings shares, and bankers'
acceptances);
obligations of the U.S. government or its agencies or instrumentalities;
repurchase agreements; and
other short-term instruments.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government or other securities to
the Fund and agree at the time of sale to repurchase them at a mutually agreed
upon time and price.
WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay
more/less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement, if the Adviser deems
it appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities,
on a short-term or a long-term basis, up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Adviser has determined are creditworthy
under guidelines established by the Trustees and will receive collateral in the
form of cash or U.S. government securities equal to at least 100% of the value
of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
DERIVATIVE CONTRACTS
AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option, and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity,
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objectives, policies, and limitations.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Adviser believes it
is appropriate to do so in light of the Fund's investment objective, without
regard to the length of time a particular security may have been held. The
Adviser to the Fund does not anticipate that portfolio turnover will result in
adverse tax consequences. Any such trading will increase the Fund's portfolio
turnover rate and transaction costs.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements (arrangements in
which the Fund sells a portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or pledge securities except
that the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings;
sell securities short except, under strict limitations, it may maintain open
short positions so long as not more than 10% of the value of its net assets is
held as collateral for those positions;
lend any of its assets except portfolio securities up to one-third of the value
of its total assets;
underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933, as amended, in connection with
the sale of restricted securities which the Fund may purchase pursuant to its
investment objectives, policies, and limitations; or
with respect to 75% of its total assets, invest more than 5% of the value of
its total assets in securities of any one issuer (other than cash, cash items,
or securities issued or guaranteed
by the U.S. government, its agencies, or instrumentalities, and repurchase
agreements collateralized by such securities) or acquire more than 10% of any
class of voting securities of any one issuer. For these purposes, the Fund
takes all common stock and all preferred stock of an issuer each as a single
class, regardless of priorities, series, designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations;
commit more than 5% of the value of its total assets to premiums on open put
option positions; or
invest more than 5% of its total assets in warrants.
- -------------------------------------------------------------------------------
NET ASSET VALUE
The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
The net asset value of each class of Shares of the Fund is determined as of the
close of trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange, Monday through Friday, except on: (i) days on which there are not
sufficient changes in the value of the Fund's portfolio securities that its net
asset value might be materially affected; (ii) days during which no Shares are
tendered for redemption and no orders to purchase Shares are received; or (iii)
the following holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
- -------------------------------------------------------------------------------
INVESTING IN THE FUND
This prospectus offers investors three classes of Shares that carry sales
charges 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 charge 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 charge. See "Investing in
Class A Shares." Certain purchases of Class A Shares qualify for reduced sales
charges. See "Reducing or Eliminating the Sales Charge." Class A Shares have no
conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.
CLASS C SHARES
Class C Shares are sold without an initial sales charge, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature.
- -------------------------------------------------------------------------------
HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased, as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS DEALER
SALES CHARGE AS A PERCENTAGE CONCESSION
A PERCENTAGE OF NET AS A PERCENTAGE
AMOUNT OF OF PUBLIC AMOUNT OF PUBLIC
TRANSACTION OFFERING PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million
or
greater 0.00% 0.00% 0.25%*
</TABLE>
*See sub-section entitled "DEALER CONCESSION."
No sales charge is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers Act of
1940, as amended, retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, to "wrap accounts" or similar programs for the benefit of clients of
financial institutions under which clients pay fees to such financial
institutions, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, investment adviser,
wrap account, or retirement plan may be charged an additional service fee by
that institution. In addition, shareholders who received Class A Shares through
the exchange of interests in Federated Exchange Fund, Ltd. through the tax-free
reorganization of the partnership may purchase Class A Shares without the
imposition of a sales charge.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge 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 charge 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 charge; 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 charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
REDUCING OR ELIMINATING THE SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Class A Shares
through:
quantity discounts and accumulated purchases;
concurrent purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated investment company
shares.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce the sales charge 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 charge. In addition, the sales charge, 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 charge on the additional purchase according to the schedule now in
effect would be 4.50%, not 5.50%.
To receive the sales charge 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 charge after it
confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder has the
privilege of combining concurrent purchases of two or more Class A Shares in the
Federated Funds, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the other
funds in the Federated Funds with a sales charge, and $20,000 in this Fund, the
sales charge would be reduced.
To receive this sales charge 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 charge
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 Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge 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 charge.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge 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 Federated Funds, excluding money market accounts, will be aggregated to
provide a purchase credit towards fulfillment of the letter of intent. Prior
trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. 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 charge. 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
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or sold with a sales charge 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 charge,
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 charge, fee or
other charge. Class B Shares acquired by exchange from Class B Shares of another
fund in the Federated Funds will convert into Class A Shares based on the time
of the initial purchase. For purposes of conversion to Class A Shares, Shares
purchased through the reinvestment of dividends and distributions paid on Class
B Shares will be considered to be held in a separate sub-account. Each time any
Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares. The conversion of
Class B Shares to Class A Shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B Shares to Class A Shares will not occur if such ruling or
opinion is not available. In such event, Class B Shares would continue to be
subject to higher expenses than Class A Shares for an indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see, "Contingent Deferred Sales Charge--Class C
Shares."
PURCHASING SHARES THROUGH A
FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.
The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by wire by calling
the Fund. All information needed will be taken over the
telephone, and the order is considered received immediately. Payment for
purchases which are subject to a sales load must be received within three
business days following the order. Payment for purchases on which no sales load
is imposed must be received before 3:00 p.m. (Eastern time) on the next business
day following the order. Federal funds should be wired as follows: State Street
Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the check is
received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
sales charge, 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 Federated Funds at net asset value. Shareholders of Class
A Shares may also exchange into certain other Federated Funds (as listed below)
which are sold with a sales charge different from that of the Fund's or with no
sales charge, 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 charge already paid and any sales charge of the
Federated Fund into which the Shares are to be exchanged, if higher. Neither the
Fund nor any of the funds in the Federated Funds imposes any additional fees on
exchanges. Shareholders in certain other Federated Funds may exchange their
shares in the Federated Funds for Class A Shares.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Federated Funds. (Not all funds in the Federated Funds
currently offer Class B Shares. Contact your financial institution regarding the
availability of other Class B Shares in the Federated 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 Federated 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 Federated Funds at net asset value without a contingent
deferred sales charge. (Not all funds in the Federated Funds currently offer
Class C Shares. Contact your financial institution regarding the availability of
other Class C Shares in the Federated Funds.) To the extent that a shareholder
exchanges Shares for Class C Shares in other funds in the Federated Funds, the
time for which the exchanged-for Shares are to be held will be added to the time
for which exchanged-from Shares were held for purposes of satisfying the
applicable holding period. For more information, see "Contingent Deferred Sales
Charge."
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
The Fund has exchange privileges with the following Federated Funds:
American Leaders Fund, Inc.; Capital Growth Fund (Class A Shares and Class C
Shares only); Federated Bond Fund; Federated Small Cap Strategies Fund; Fund for
U.S. Government Securities, Inc.; Federated International Equity Fund;
Federated International Income Fund; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Limited Term
Fund (Class A Shares only); Limited Term Municipal Fund (Class A Shares only);
Michigan Intermediate Municipal Trust (Class A Shares only); Pennsylvania
Municipal Income Fund (Class A Shares only); Strategic Income Fund; Tax-Free
Instruments Trust (Class A Shares only); and, World Utility Fund.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Shareholders of Class A Shares who have been designated Liberty Life Members are
exempt from sales charges on future purchases in and exchanges between the Class
A Shares of any funds in the Federated Funds, as long as they maintain a $500
balance in one of the Federated Funds.
Further information on the exchange privilege and prospectuses for the Federated
Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Federated Funds (where applicable) may be
given in writing or by telephone. Written instructions may require a signature
guarantee. Shareholders of the Fund may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his broker
or financial institution by telephone, it is recommended that an exchange
request be made in writing and sent by overnight mail to Federated Services
Company, 500 Victory Road--2nd Floor, North Quincy, Massachusetts 02171.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, P.O. Box 8000, Boston, Massachusetts
02266-8000 and deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the Fund before that time for Shares to be exchanged the
same day. Shareholders exchanging into a Fund will begin receiving dividends the
following business day. This privilege may be modified or terminated at any
time.
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
as described below.
REDEEMING SHARES THROUGH
A FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire transfer to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are restricted
should be directed to your shareholder services representative at the telephone
number listed on your account statement.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share certificates
have been issued, they should be sent unendorsed with the written request by
registered or certified mail to the address noted above.
The written request should state: the 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. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
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 commercial
or savings bank, trust company, or savings association whose deposits are
insured by an organization which is administered by the Federal Deposit
Insurance Corporation; a member firm of a domestic stock exchange; or any other
"eligible guarantor institution," as defined in the Securities Exchange Act of
1934. The Fund does not accept signatures guaranteed by a notary public.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A Shares are sold with a
sales charge, 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 charge and not distributed by Federated Securities Corp.
may be charged a contingent deferred sales charge of .50 of 1.00% for
redemptions made within one full year of purchase. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT
]YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) Shares acquired through the reinvestment of dividends and long-term capital
gains; (2) Shares held for more than six full years from the date of purchase
with respect to Class B Shares and one full year from the date of purchase with
respect to Class C Shares and applicable Class A Shares; (3) Shares held for
fewer than six years with respect to Class B Shares and one full year from the
date of purchase with respect to Class C Shares and applicable Class A Shares on
a first-in, first-out basis. A contingent deferred sales charge is not assessed
in connection with an exchange of Fund Shares for Shares of other funds in the
Federated Funds in the same class (see "Exchange Privilege"). Any contingent
deferred sales charge imposed at the time the exchanged for Shares are redeemed
is calculated as if the shareholder had held the Shares from the date on which
he became a shareholder of the exchanged-from Shares. Moreover, the contingent
deferred sales charge will be eliminated with respect to certain redemptions
(see "Elimination of Contingent Deferred Sales Charge").
ELIMINATION OF CONTINGENT
DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended, of
a shareholder; (2) redemptions representing minimum required distributions from
an Individual Retirement Account or other retirement plan to a shareholder who
has attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Trustees, employees and sales representatives of the Fund, the
distributor, or affiliates of the Fund or
distributor; employees of any financial institution that sells Shares of the
Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of Shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940, as amended, or retirement
plans where the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Trustees reserve the right to discontinue elimination
of the contingent deferred sales charge. Shareholders will be notified of such
elimination. Any Shares purchased prior to the termination of such waiver would
have the contingent deferred sales charge eliminated as provided in the Fund's
prospectus at the time of the purchase of the Shares. If a shareholder making a
redemption qualifies for an elimination of the contingent deferred sales charge,
the shareholder must notify Federated Securities Corp. or the transfer agent in
writing that he is entitled to such elimination.
- -------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Confirmations are sent to report dividends paid.
DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends and distributions are automatically
reinvested in additional Shares of the Fund on payment dates at the ex-dividend
date net asset value without a sales charge, unless shareholders request cash
payments on the new account form or by contacting the transfer agent. All
shareholders on the record date are entitled to the dividend. If Shares are
redeemed or exchanged prior to the record date or purchased after the record
date, those Shares are not entitled to that quarter's dividend.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
- --------------------------------------------------------------------------------
FUND 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
"Adviser"), 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. The Adviser's address is
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to .75 of 1% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than the
advisory fees paid by other mutual funds in general, is comparable to fees paid
by other mutual funds with similar objectives and policies. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can terminate this voluntary waiver at any time
at its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940, as
amended. It is a subsidiary of Federated Investors. All of the Class A (voting)
shares of Federated Investors are owned by a trust, the trustees of which are
John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's
wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and
Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest investment managers in the
United States. With more than 1,750 employees, Federated continues to be led by
the management who founded the company in 1955. Federated funds are presently at
work in and through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
J. Thomas Madden has been the Fund's portfolio manager since the Fund inception
date. Mr. Madden joined Federated Investors in 1977, and is an Executive Vice
President of the Adviser. Mr. Madden oversees portfolio management for the
Adviser in the domestic equity, high yield, and asset allocation areas, and
contributes to the formation of investment strategy at Federated. Mr. Madden is
a Chartered Financial Analyst and received his M.B.A. in Finance from the Darden
School, University of Virginia.
Peter R. Anderson has been the Fund's portfolio manager since the Fund inception
date. Mr. Anderson joined Federated Investors in 1972 as, and is presently, a
Senior Vice President of the Fund's investment adviser. Mr. Anderson is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Wisconsin.
Timothy E. Keefe has been the Fund's portfolio manager since the Fund inception
date. Mr. Keefe joined Federated Investors in 1987, and has been an Assistant
Vice President of the Adviser since 1993. Mr. Keefe served as an Investment
Analyst of the Adviser from 1991 until 1993, and from 1987 until 1991, he acted
as a Marketing Representative. Mr. Keefe is a Chartered Financial Analyst and
received his M.B.A. in Business Administration from the University of
Pittsburgh.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.
The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the distributor may be paid a fee in an amount
computed at an annual rate of up to .25% for Class A Shares and up to .75% for
Class B Shares and Class C Shares of the average daily net assets of each class
of Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The Fund does not currently
make payments to the distributor or charge a fee under the Distribution Plan for
Class A Shares, and shareholders of Class A Shares will be notified if the Fund
intends to charge a fee under the Distribution Plan. For Class A Shares and
Class C Shares, the distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. With respect to Class B
Shares, because distribution fees to be paid by the Fund to the distributor may
not exceed an annual rate of .75% of each class of Shares' average daily net
assets, it will take the distributor a number of years to recoup the expenses it
has incurred for its sales services and distribution-related services pursuant
to the Distribution Plan.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying, or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments of up to 0.25 of 1% of the average daily net asset
value of Class A Shares, Class B Shares, and Class C Shares to obtain certain
personal services for shareholders and for the maintenance of shareholder
accounts ("Shareholder Services"). Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
With respect to Class A Shares, Class B Shares, and Class C Shares, in addition
to payments made pursuant to the Distribution Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at an annual rate which relates to the average aggregate
daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford Centre,
Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE FUND AND
CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES
Holders of Class A Shares, Class B Shares, and Class C Shares pay their
allocable portion of Trust and Fund expenses.
The Trust expenses for which holders of Class A Shares, Class B Shares, and
Class C Shares pay their allocable portion include, but are not limited to: the
cost of organizing the Trust and continuing its existence; registering the
Trust with federal and state securities authorities; Trustees fees; auditors'
fees, the cost of meetings of the Trustees; legal fees of the Trust;
association membership dues; and such non-recurring and extraordinary items as
may arise from time to time.
The Fund expenses for which holders of Class A Shares, Class B Shares, and Class
C Shares pay their allocable portion include, but are not limited to:
registering the Fund and shares of the Fund; investment advisory services; taxes
and commissions; custodian fees; insurance premiums; auditors' fees; and such
non-recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocable specifically to Class A
Shares, Class B Shares, and Class C Shares as classes are expenses under the
Trust's Distribution Plan and fees for Shareholder Services. However, the
Trustees reserve the right to allocate certain other expenses to holders of
Class A Shares, Class B Shares, and Class C Shares as they deem appropriate (the
"Class Expenses"). In any case, the Class Expenses would be limited to:
distribution fees; transfer agent fees as identified by the transfer agent as
attributable to holders of Class A Shares, Class B Shares, or Class C Shares;
printing and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses, and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and to state
securities commissions; expenses related to administrative personnel and
services as required to support holders of Class A Shares, Class B Shares, or
Class C Shares; legal fees relating solely to Class A Shares, Class B Shares, or
Class C Shares; and Trustees fees incurred as a result of issues relating solely
to Class A Shares, Class B Shares, or Class C Shares.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All Shares of each Fund or
class in the Trust have equal voting rights, except that in matters affecting
only a particular Fund or class, only Shares of that Fund or class are entitled
to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them.
- --------------------------------------------------------------------------------
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
STATE AND LOCAL TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust, Trust
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust would be subject to such taxes if owned
directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for each class
of Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in each class of Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by each class of Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the maximum sales charge 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.
Consequently, the Adviser believes that the quality of fixed income securities
in which the Fund invests should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell, or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than one
service, each rating is evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
STANDARD AND POOR'S RATINGS
GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC--Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC--The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C--The rating "C" typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI--The rating "CI" is reserved for income bonds on which no interest is being
paid.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC.,
CORPORATE BOND RATINGS
Aaa--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated BAA are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC.,
LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong, but
may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
THIS PAGE INTENTIONALLY LEFT BLANK
THIS PAGE INTENTIONALLY LEFT BLANK
THIS PAGE INTENTIONALLY LEFT BLANK
FEDERATED CAPITAL
APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
December 21, 1995
[LOGO] FEDERATED SECURITIES CORP.
-----------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 314172701
Cusip 314172800
Cusip 314172883
G01489-01 (1/96)
FEDERATED CAPITAL APPRECIATION FUND
(A Portfolio of Federated Equity Funds)
Class A Shares, Class B Shares, and Class C Shares
SUPPLEMENT TO THE STATEMENT OF ADDITION INFORMATION DATED DECEMBER 21,
1995.
A. Please insert the following two sentences to the end of the section
entitled "PORTFOLIO TURNOVER" on page 6 of the Statement of Additional
Information:
"For the period from January 1, 1996 to April 30, 1996, the Fund's
portfolio turnover rate was 17%. The portfolio turnover rate is
representative of only 4 months of activity."
B. Please insert the following paragraph entitled "SELLING SHORT AND
BUYING ON MARGIN" to be placed as the first sub-section under the
section entitled "INVESTMENT LIMITATIONS" on page 7:
"SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, other than in connection with buying index futures
contracts, put options on stock index futures, put options on
financial futures and portfolio securities, and writing covered call
options, but may obtain such short-term credits as are necessary for
the clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin."
C. Please note the following changes to the FEDERATED EQUITY FUNDS
MANAGEMENT Officers and Trustees list on pages 8 through 12 of the
Statement of Additional Information:
All affiliations with FEDERATED ADMINISTRATIVE SERVICES and the former
transfer agent will be deleted and replace by affiliations with
FEDERATED SERVICES COMPANY, the service company parent.
D. Please insert the following information as a second paragraph under
the section entitled "FUND OWNERSHIP" on page 11 of the Statement of
Additional Information:
"As of May 7, 1996, the following shareholders of record owned 5% or
more of the outstanding Class A Shares of the Fund: Paulette M.
Boiardi owned 91,356.7600 shares (8.28%). No shareholders of record
owned 5% or more of the outstanding Class B Shares of the Fund. The
following shareholders of record owned 5% or more of the outstanding
Class C Shares of the Fund; BHC SEC, Inc. owned 105.5800 shares
(46.53%), Thomas M. Sukbal owned 16.0230 shares (7.06%) and Bessie G.
Papas owned 51.8780 shares (22.86%)."
E. Please insert the following sub-section immediately after the sub-
section entitled "ADVISER TO THE FUND" under the main section entitled
"INVESTMENT ADVISORY SERVICES" on page 14 of the Statement of
Additional Information:
"ADVISORY FEES
For its advisory services, Federated Management receives an annual
investment advisory fee as described in the prospectus.
From the Fund's start of business date, January 1, 1996, to April 30,
1996, the Fund's adviser earned $256,275, of which $123,291 was
voluntarily waived. For funds with classes, the advisory fee is
allocated pro rata based on the net assets for each class of shares."
F. Please replace the sections entitled "ADMINISTRATIVE SERVICES" and
"TRANSFER AGENT AND DIVIDEND DISPERSING AGENT" with the new title
"OTHER SERVICES" on page 14 of the Statement of Additional Information
and insert the following:
"OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee
as described in the prospectus. From March 1, 1994, to March 1, 1996,
Federated Administrative Services served as the Fund's Administrator.
Prior to March 1, 1994, Federated Administrative Services, Inc. served
as the Fund's Administrator. Both former Administrators are
subsidiaries of Federated Investors. For purposes of this Statement
of Additional Information, Federated Services Company, Federated
Administrative Services, and Federated Administrative Services, Inc.
may hereinafter collectively be referred to as the "Administrators."
From the Fund's start of business date, January 1, 1996, to April 30,
1996, the Fund incurred costs for administrative services of $61,161.
Dr. Henry J. Gailliot, an officer of Federated Management, the adviser
to the Fund, holds approximately 20% of the outstanding common stock
and serves as a director of Commercial Data Services, Inc., a company
which provides computer processing services to Federated Services
Company.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund. Federated Services
Company, Pittsburgh, Pennsylvania, provides certain accounting and
recordkeeping services with respect to the Fund's portfolio
investments. 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.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary
shareholder records and receives a fee based on the size, type, and
number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One
Oxford Center, Pittsburgh, Pennsylvania 15219."
G. Please insert the following information as a final paragraph under the
sub-section entitled "DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
AGREEMENT" on page 14 of the Statement of Additional Information:
"From the Fund's start of business date, January 1, 1996, to April 30,
1996, the fund paid $1,284 pursuant to the Fund's Rule 12b-1 plan,
none of which was waived. For the same period, the Fund paid $82,546
in shareholder service fees, none of which was waived."
H. Please insert the following information as a final paragraph under the
section entitled "TOTAL RETURN" on page 18 of the Statement of
Additional Information:
"The Funds cumulative total return for Class A Shares from January 1,
1996 (the Fund's start of business), to April 30, 1996, was 4.65%. The
Funds cumulative total return for Class B Shares from January 4, 1996
(the Fund's start of business) to April 30, 1996, was 4.32%. The
Funds cumulative total return for Class C Shares from January 4, 1996
(the Fund's start of business) to April 30, 1996, was 8.81%.
Cumulative total return reflects the Fund's total performance over a
specified period of time. The Fund's total return is reflective of
only 4 months of fund activity since the Fund's date of initial public
investment."
I. Please insert the following information as a final paragraph under the
section entitled "YIELD" on page 16 of the Statement of Additional
Information:
"The Fund's yield for shares of Federated Exchange Fund, Ltd., the
predecessor to Class A Shares, was 0.25% for the thirty-day period
ended April 30, 1996. The yield for the Class B Shares and Class C
Shares for the same period was 0.00%.
May 31, 1996
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
Federated Investors Tower
PITTSBURGH, PA 15222-3779
CUSIP# 314172701
CUSIP# 314172800
CUSIP# 314172883
G010649-01 (5/96)
FEDERATED CAPITAL APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
STATEMENT OF ADDITIONAL INFORMATION
This 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 December 21, 1995.
This Statement of Additional Information is not a prospectus itself. To
receive a copy of the prospectus or a paper copy of this Statement of
Additional Information, if you have received it electronically, free of
charge by calling 1-800-235-4669.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement of Additional Information dated December 21, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE FUND
1
INVESTMENT OBJECTIVES AND POLICIES
1
CONVERTIBLE SECURITIES 1
TEMPORARY INVESTMENTS 1
WARRANTS 2
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS 2
REPURCHASE AGREEMENTS 2
FUTURES AND OPTIONS TRANSACTIONS2
FOREIGN CURRENCY TRANSACTIONS 4
RESTRICTED AND ILLIQUID
SECURITIES 6
LENDING OF PORTFOLIO SECURITIES6
REVERSE REPURCHASE AGREEMENTS 6
PORTFOLIO TURNOVER 6
INVESTMENT LIMITATIONS 7
FEDERATED EQUITY FUNDS MANAGEMENT8
FUND OWNERSHIP 13
TRUSTEES COMPENSATION 13
TRUSTEE LIABILITY 14
INVESTMENT ADVISORY SERVICES 14
ADVISER TO THE FUND 14
ADVISORY FEES 14
OTHER RELATED SERVICES 14
ADMINISTRATIVE SERVICES 14
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 14
BROKERAGE TRANSACTIONS 15
PURCHASING SHARES 15
DISTRIBUTION PLAN AND SHAREHOLDER
SERVICES AGREEMENT 15
CONVERSION TO FEDERAL FUNDS 15
PURCHASES BY SALES
REPRESENTATIVES, TRUSTEES, AND
EMPLOYEES 15
EXCHANGING SECURITIES FOR FUND
SHARES 16
DETERMINING NET ASSET VALUE 16
DETERMINING MARKET VALUE OF
SECURITIES 16
REDEEMING SHARES 17
REDEMPTION IN KIND 17
EXCHANGING SECURITIES FOR SHARES17
TAX CONSEQUENCES 17
TAX STATUS 18
THE FUND'S TAX STATUS 18
SHAREHOLDERS' TAX STATUS 18
TOTAL RETURN 18
YIELD 18
CURRENT DISTRIBUTIONS 19
PERFORMANCE COMPARISONS 19
ABOUT FEDERATED INVESTORS 20
APPENDIX 22
GENERAL INFORMATION ABOUT THE FUND
Federated Capital Appreciation Fund (the "Fund") is an investment portfolio of
Federated Equity Funds (the "Trust").The Trust was established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to a
Declaration of Trust dated April 17, 1984, under the name "Federated Growth
Trust." The Trust later changed its name to "Federated Equity Funds." The
Declaration of Trust permits the Trust to offer separate series and classes of
shares. The Fund was created for the purpose of soliciting the shareholders of
Federated Exchange Fund, Ltd., a California Limited Partnership, to exchange
their partnership interests for shares of beneficial interest in the Class A
Shares of the Fund. Until this transaction is completed, or until management of
the Fund determines that it will abandon its plan to acquire the assets of
Federated Exchange Fund, Ltd. in a reorganization transaction, shares of the
Fund will not be available for public investment. The Fund's address is Liberty
Center, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
Shares of the Fund are offered in three classes known as Class A Shares, Class B
Shares, and Class C Shares (individually and collectively referred to as
"Shares," as the context may require). This Combined Statement of Additional
Information relates to all classes of Shares of the Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders.
CONVERTIBLE SECURITIES
As with all fixed-income securities, various market forces influence the market
value of convertible securities, including changes in the level of interest
rates. As the level of interest rates increases, the market value of convertible
securities may decline and, conversely, as interest rates decline, the market
value of convertible securities may increase. The unique investment
characteristic of convertible securities, the right to be exchanged for the
issuer's common stock, causes the market value of convertible securities to
increase when the underlying common stock increases. However, since securities
prices fluctuate, there can be no assurance of capital appreciation, and most
convertible securities will not reflect quite as much capital appreciation as
their underlying common stocks. When the underlying common stock is experiencing
a decline, the value of the convertible security tends to decline to a level
approximating the yield-to-maturity basis of straight nonconvertible debt of
similar quality, often called "investment value," and may not experience the
same decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of purchasing a fixed-
income security with a possibility of capital appreciation due to the conversion
privilege. If this appreciation potential is not realized, the premium may not
be recovered.
TEMPORARY INVESTMENTS
The temporary investments in which the Fund may invest include, but are not
limited to:
o commercial paper rated A-1 or A-2 by Standard & Poor's Ratings Group,
Prime-1 or Prime-2 by Moody's Investors Service, Inc., or F-1 or F-2 by
Fitch Investors Service, Inc., and Europaper rated A-1, A-2, Prime-1, or
Prime-2. In the case where commercial paper or Europaper has received
different ratings from different rating services, such commercial paper or
Europaper is an acceptable temporary investment so long as at least one
rating is one of the preceding high-quality ratings and provided the Fund's
investment adviser, Federated Management (the "Adviser"), has determined
that such investment presents minimal credit risks;
o instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is insured by the Federal Deposit
Insurance Corporation. These instruments may include Eurodollar
Certificates of Deposits ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs"), and Eurodollar Time Deposits ("ETDs");
o obligations of the U.S. government or its agencies or instrumentalities;
o repurchase agreements; and
o other short-term instruments which are not rated but are determined by the
Adviser to be of comparable quality to the other temporary obligations in
which the Fund may invest.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, and Europaper are subject to different risks than
domestic obligations of domestic banks or corporations. Examples of these
risks include international economic and political developments, foreign
governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the
issuing entity, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for
ECDs, ETDs, and Yankee CDs because the banks issuing these instruments, or
their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as reserve
requirements, loan limitations, examinations, accounting, auditing,
recordkeeping, and the public availability of information. These factors
will be carefully considered by the Adviser in selecting investments for
the Fund.
WARRANTS
Warrants basically are options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less than a year to twenty years or may be perpetual. However, warrants
have expiration dates after which they are worthless. In addition, if the market
price of the common stock does not exceed the warrant's exercise price during
the life of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage increase
or decrease in the market price of the optioned common stock.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Adviser to be
creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees").
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
In the fixed-income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed-income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed-income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified price,
the purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to
assume a short position at the specified price.
The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out nor exercises
an option, the option will expire on the date provided in the option
contract, and the premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
call options on futures contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can offset
the drop in value of the Fund's fixed-income portfolio which is occurring
as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then offset the decrease in value of the hedged
securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that futures contract initial margin does not
involve the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good-faith deposit
on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or has segregated cash in
the amount of any additional consideration).
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental intervention,
speculation and other economic and political conditions. Although the Fund
values its assets daily in U.S. dollars, the Fund may not convert its
holdings of foreign currencies to U.S. dollars daily. The Fund may incur
conversion costs when its converts its holdings to another currency.
Foreign exchange dealers may realize a profit on the difference between the
price at which the Fund buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in
connection with their investments in the securities. The Fund will conduct
their foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market
or through forward contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
order to protect themselves against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and a foreign
currency involved in an underlying transaction. However, forward foreign
currency exchange contracts may limit potential gains which could result
from a positive change in such currency relationships. The Fund's
investment adviser believes that it is important to have the flexibility to
enter into forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so. The Fund will
not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts when they would be obligated to
deliver an amount of foreign currency in excess of the value of their
portfolio securities or other assets denominated in that currency or, in
the case of a "cross-hedge" denominated in a currency or currencies that
the Fund's investment adviser believes will tend to be closely correlated
with that currency with regard to price movements. Generally, the Fund will
not enter into a forward foreign currency exchange contract with a term
longer than one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the right to buy
or sell a stated amount of foreign currency at the exercise price on a
specified date or during the option period. The owner of a call option has
the right, but not the obligation, to buy the currency. Conversely, the
owner of a put option has the right, but not the obligation, to sell the
currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the
seller or the buyer may, in the secondary market, close its position during
the option period at any time prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign
currency generally falls in value if the underlying currency depreciates in
value. Although purchasing a foreign currency option can protect the Fund
against an adverse movement in the value of a foreign currency, the option
will not limit the movement in the value of such currency. For example, if
the Fund were holding securities denominated in a foreign currency that was
appreciating and had purchased a foreign currency put to hedge against a
decline in the value of the currency, the Fund would not have to exercise
their put option. Likewise, if the Fund were to enter into a contract to
purchase a security denominated in foreign currency and, in conjunction
with that purchase, were to purchase a foreign currency call options to
hedge against a rise in value of the currency, and if the value of the
currency instead depreciated between the date of purchase and the
settlement date, the Fund would not have to exercise its call. Instead, the
Fund could acquire in the spot market the amount of foreign currency needed
for settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain
additional risks associated with foreign currency options. The markets in
foreign currency options are relatively new, and the Fund's ability to
establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not
purchase or write such options unless and until, in the opinion of the
Fund's investment adviser, the market for them has developed sufficiently
to ensure that the risks in connection with such options are not greater
than the risks in connection with the underlying currency, there can be no
assurance that a liquid secondary market will exist for a particular option
at any specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of
the option position may vary with changes in the value of either or both
currencies and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions occurring in the
interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting
of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global, around-
the-clock market. To the extent that the U.S. option markets are closed
while the markets for the underlying currencies remain open, significant
price and rate movements may take place in the underlying markets that
cannot be reflected in the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on such contracts,
the Fund may be able to achieve many of the same objectives as they would
through the use of forward foreign currency exchange contracts. The Fund
may be able to achieve these objectives possibly more effectively and at a
lower cost by using futures transactions instead of forward foreign
currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS
Buyers and sellers of foreign currency futures contracts are subject to the
same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use
as a hedging device similar to those associated with options on futures
currencies, as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To
reduce this risk, the Fund will not purchase or write options on foreign
currency futures contracts unless and until, in the opinion of the Fund's
investment adviser, the market for such options has developed sufficiently
that the risks in connection with such options are not greater than the
risks in connection with transactions in the underlying foreign currency
futures contracts. Compared to the purchase or sale of foreign currency
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Fund because the maximum amount at risk
is the premium paid for the option (plus transaction costs). However, there
may be circumstances when the purchase of a call or put option on a futures
contract would result in a loss, such as when there is no movement in the
price of the underlying currency or futures contract.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under an Securities and Exchange Commission's Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933, as amended, (the "Rule"). The Rule is a non-exclusive, safe harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the Securities and Exchange Commission
has left the question of determining the liquidity of all restricted securities
(eligible for resale under Rule 144A) for determination of the Trustees. The
Trustees consider the following criteria in determining the liquidity of certain
restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Securities in the Fund's portfolio will be sold
whenever the Adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The Adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. Any such trading will increase the Fund's
portfolio turnover rate and transaction costs. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual rate of
portfolio turnover exceeding 100%.
INVESTMENT LIMITATIONS
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while any borrowings are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having a
market value not exceeding the lesser of the dollar amounts borrowed or 10%
of the value of total assets at the time of the borrowing. Margin deposits
for the purchase and sale of financial futures contracts and related
options are not deemed to be a pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933, as amended,
in connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objectives, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up to
one-third of the value of its total assets. This shall not prevent the
purchase or holding of corporate bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase agreements,
or other transactions which are permitted by the Fund's investment
objectives and policies.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets,
the Fund will not invest more than 5% of the value of its total assets in
securities of any one issuer (other than cash, cash items, or securities
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, and repurchase agreements collateralized by such
securities) or acquire more than 10% of any class of voting securities of
any one issuer. For these purposes, the Fund takes all common stock and all
preferred stock of an issuer each as a single class, regardless of
priorities, series, designations, or other differences.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their predecessors,
that have been in operation for less than three years.
PURCHASING 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; 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; Federated U.S. Government
Securities Fund: 5-10 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
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) (1) Financial Statements (Incorporated by reference to the Annual
Report to Shareholders of Federated Growth Strategies Fund dated
October 31, 1995 pursuant to Rule 411 under th e Securities Act of
1933.) (File No. 811-4017).
(2-3) Filed in Part A.
(b) Exhibits:
(1) Conformed copy of Declaration of Trust of the
Registrant; +
(2) Copy of By-Laws of the Registrant as amended ; +
(i)................Copy of Amendment No. 2 to By-Laws
effective February 2, 1987 ; +
(ii)................Copy of Amendment No. 3 to By-Laws
effective August 25, 1988; +
(3) Not applicable;
(4) (i)................Copy of Specimen Certificate for Shares
of Beneficial Interest of the Registrant (Federated
Small Cap Strategies Fund) ;(7.)
(ii)................Copy of Specimen Certificate for Shares
of Beneficial Interest of the Registrant (Federated
Growth Strategies Fund); (8.)
(iii)................Copy of Specimen Certificate for Shares
of Beneficial Interest of the Registrant (Federated
Capital Appreciation Fund); (9.)
(5) (i)................Conformed copy of Investment Advisory
Contract on behalf of Federated Growth Trust; (6)
(ii)................Conformed copy of Investment Advisory
Contract on behalf of Federated Equity Funds, which
includes exhibits for Federated Small Cap Strategies
Fund and Federated Capital Appreciation Fund; (10.)
(6) (i)................Conformed copy of Distributor's Contract
on behalf of Federated Growth Trust; +
(ii) Conformed copy of Distributor's Contract on behalf of
Federated Equity Funds, which includes exhibits for
Federated Small Cap Strategies Fund and Federated
Capital Appreciation Fund; (10.)
7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed June 30, 1995. (File Nos. 2-91090
and 811-4017)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed July 17, 1995. (File Nos. 2-91090
and 811-4017)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 on Form N-1A filed August 31, 1995. (File Nos. 2-
91090 and 811-4017)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed September 12, 1995. (File Nos. 2-
91090 and 811-4017)
(iii)................The Registrant hereby incorporates the
conformed copy of the specimen Mutual Funds Sales and
Service Agreement; Mutual Funds Service Agreement; and
Plan Trustee/Mutual Funds Service Agreement from Item
24(b)(6) of the Cash Trust Series II Registration
Statement on Form N-1A, filed with the Commission on
July 24, 1995. (File No. 33-38550 and 811-6269).
(7) Not applicable;
(8) Conformed Copy of the Custodian Agreement of the Registrant;
(6.)
(9) (i)................Conformed copy of Shareholder Services
Agreement of the Registrant; (6.)
(ii)................Conformed copy of Administrative
Services Agreement of the Registrant; (6.)
(iii)................Conformed Copy of Agreement for Fund
Accounting, Shareholder Recordkeeping, and Custody
Services Procurement; (6.)
(iv)................The responses and exhibits described in
Item 24(6) are hereby incorporated by reference.
(10) Conformed copy of the Opinion and Consent of Counsel
regarding legality of shares being registered; (6.)
(11) Not applicable;
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding; (2.)
(14) Not applicable;
(15) Conformed Copy of Distribution Plan; (10.)
(16) Copy of Schedule for Computation of Fund Performance Data for
Federated Growth Trust, the predecessor to Federated Growth
Strategies Fund; (6.)
(17) Copy of Financial Data Schedules; +
(18) Multiple Class Plan; (to be filed by amendment)
(19) Conformed copy of Power of Attorney; +
2. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed February 28, 1985. (File Nos. 2-
91090 and 811-4017)
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed December 29, 1994. (File Nos. 2-
91090 and 811-4017)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed September 12, 1995. (File Nos. 2-
91090 and 811-4017)
+ All exhibits have been filed electronically.
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of May 6, 1996
Shares of Beneficial Interest
(no par value)
Federated Growth Strategies Fund
Class A Shares 10,973,669.2870
Class B Shares 264,841.3760
Class C Shares 24,739.5720
Federated Small Cap Strategies Fund
Class A Shares 510,484.9850
Class B Shares 267,423.5220
Class C Shares 46,023.9240
Federated Capital Appreciation Fund
Class A Shares 1,103,176.21909
Class B Shares 15,881.5250
Class C Shares 226.9180
Item 27. Indemnification: (1.)
Item 28. Business and Other Connections of Investment Adviser:
For a description of the other business of the investment adviser,
see the section entitled "Trust Information - Management of the
Trust" in Part A. The affiliations with the Registrant of four of
the Trustees and one of the Officers of the investment adviser are
included in Part B of this Registration Statement under "Federated
Equity Funds Management - Officers and Trustees." The remaining
Trustee of the investment adviser, his position with the
investment adviser, and, in parentheses, his principal occupation
is: Mark D. Olson (Partner, Wilson, Halbrook & Bayard), 107 West
Market Street, Georgetown, Delaware 19947.
1. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed July 9, 1984. (File Nos. 2-91090 and
811-4017)
The remaining Officers of the investment adviser are: William D.
Dawson, Henry A. Frantzen, J. Thomas Madden, and Mark L. Mallon,
Executive Vice Presidents; Henry J. Gailliot, Senior Vice
President-Economist; Peter R. Anderson, Drew J. Collins, Jonathan
C. Conley, and J. Alan Minteer, Senior Vice Presidents; J. Scott
Albrecht, Joseph M. Balestrino, Randall A. Bauer, David A. Briggs,
Kenneth J. Cody, Deborah A. Cunningham, Michael P. Donnelly, Linda
A. Duessel, Mark E. Durbiano, Kathleen M. Foody-Malus, Thomas M.
Franks, Edward C. Gonzales, Timothy E. Keefe, Stephen A. Keen,
Mark S. Kopinski, Jeff A. Kozemchak, Marian R. Marinack, Susan M.
Nason, Mary Jo Ochson, Robert J. Ostrowski, Frederick L. Plautz,
Jr., Charles A. Ritter, James D. Roberge, Frank Semack, William F.
Stotz, Sandra L. Weber, and Christopher H. Wiles, Vice Presidents;
Thomas R. Donahue, Treasurer; and Stephen A. Keen, Secretary. The
business address of each of the Officers of the investment adviser
is Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
or 175 Water street, New York, New York 10038-4965, as applicable.
These individuals are also officers of a majority of the
investment advisers to the Funds listed in Part B of this
Registration Statement.
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the following
open-end investment companies: 111 Corcoran Funds; Annuity
Management Series; Arrow Funds; Automated Government Money Trust;
BayFunds; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds;
Federated Equity Income Fund, Inc.; Federated Fund for U.S.
Government Securities, Inc.; Federated GNMA Trust; Federated
Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated
Insurance Series;
Federated Master Trust; Federated Municipal Opportunities Fund,
Inc.; Federated Municipal Securities Fund, Inc.; Federated
Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; 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: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund,
Inc.; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Utility Fund, Inc.; High Yield Cash Trust; Independence
One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds;
Peachtree Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds;
Star Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Biltmore Funds; The Biltmore Municipal Funds; The Monitor
Funds; The Planters Funds; The Starburst Funds; The Starburst
Funds II; The Virtus Funds; Tower Mutual Funds; Trust for
Financial Institutions; Trust for Government Cash Reserves; Trust
for Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; Vision Group of Funds, Inc.; andWorld Investment
Series, Inc.
Federated Securities Corp. also acts as principal underwriter
for the following closed-end investment company: Liberty Term
Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President and
Pittsburgh, PA 15222-3779 Secretary
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Assistant Secretary, Treasurer
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Administrative Services
("Administrator")
Federated Management
("Adviser")
Federated Services Company P.O. Box 8600
("Transfer Agent and Dividend Boston, MA 02266-8600
Disbursing Agent")
State Street Bank and Trust Company P.O. Box 8600
("Custodian") Boston, MA 02266-8600
Item 31. Management Services: Not applicable.
Item 32. Undertakings:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, the Registrant, FEDERATED EQUITY
FUNDS (formerly, Federated Growth Trust), certifies that it meets all of the
requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of
Pittsburgh and Commonwealth of Pennsylvania, on the 11th day of June, 1996.
FEDERATED EQUITY FUNDS
(formerly, Federated Growth Trust)
BY: /s/ Charles H. Field
Charles H. Field, Assistant Secretary
Attorney in Fact for John F. Donahue
June 11, 1996
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:
NAME TITLE DATE
By:/s/ Charles H. Field Attorney In Fact June 11, 1996
Charles H. Field For the Persons
ASSISTANT SECRETARY Listed Below
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Glen R. Johnson* President
Edward C. Gonzales* Executive Vice President
David M. Taylor* Treasurer (Principal Financial
and Accounting Officer)
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
John E. Murray, Jr.* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
Exhibit 3(a) under Form N1-A
Exhibit 1 under Item 601/Reg. S-K
FEDERATED GROWTH TRUST
DECLARATION OF TRUST
Page
Article I Name and Definitions 1
1. Name 1
2. Definitions
(a) Affiliated Person, Assignment, Commission,
Interested Person, Majority Shareholder Vote,
Principal Underwriter 1
(b) Trust 1
(c) Accumulated Net Income 1
(d) Shareholder 2
(e) Trustees 2
(f) Shares 2
(g) 1940 Act 2
Article II Purpose of Trust 2
Article III Beneficial Interest 2
1. Shares of Beneficial Interest 2
2. Ownership of Shares 2
3. Investment in the Trust 3
4. No Pre-emptive Rights 3
Article IV The Trustees 3
1. Management of the Trust 3
2. Election of Trustees at 1984 Meeting of Shareholders 4
3. Terms of Office of Trustees 4
4. Termination of Service and Appointment of Trustees 4
5. Temporary Absence of Trustees 5
6. Number of Trustees 5
7. Effect of Death, Resignation, Ect. of a Trustee 5
8. Ownership of the Trust 6
Page
Article V Powers of the Trustees 6
1. Powers 6
2. Principal Transactions 10
3. Trustees and Officers as Shareholders 10
4. Parties to Contract 10
Article VI Trustees' Expenses and Compensation 11
1. Trustee Reimbursement 11
2. Trustee Compensation 12
Article VII Investment Adviser, Administrative Services, Principal
Underwriter and Transfer Agent 13
1. Investment Adviser 13
2. Administrative Services 13
3. Principal Underwriter 14
4. Transfer Agent 14
5. Provisions and Amendments 14
Article VIIIShareholders' Voting Powers and Meetings 15
1. Voting Powers 15
2. Meetings 15
3. Quorum and Required Vote 16
4. Additional Provisions 16
Article IX Custodian 16
1. Appointment and Duties 16
2. Central Certificate System 17
Page
Article X Distributions and Redemptions 18
1. Distributions 18
2. Redemptions and Repurchases 19
3. Determination of Accumulated Net Income 20
4. Net Asset Value of Shares 21
5. Suspension of the Right of Redemption 21
6. Trust's Right to Redeem Shares 21
Article XI Limitation of Liability and Indemnification 22
1. Limitation of Personal Liability and
Indemnification of Shareholders 22
2. Limitation of Personal Liability of
Trustees, Officers, Employees or
Agents of the Trust 23
3. Express Exculpatory Clauses and Instruments 23
4. Indemnification of Trustees, Officers,
Employees and Agents 24
Article XII Miscellaneous 25
1. Trust is not a Partnership 25
2. Trustee's Good Faith Action, Expert Advice, No
Bond or Surety 26
3. Establishment of Record Dates 26
4. Termination of Trust 27
5. Offices of the Trust, Filing of Copies,
References, Headings 28
6. Applicable Law 28
7. Amendments 29
8. Use of Name 29
FEDERATED GROWTH TRUST
DECLARATION OF TRUST
Dated
April 17, 1984
DECLARATION OF TRUST made April 17, 1984, by John F. Donahue, William J.
Copeland, James E. Dowd, Edward L. Flaherty, Jr., J. Joseph Maloney, Jr.,
Gregor F. Meyer, Wesley W. Posvar and Marjorie P. Smuts.
WHEREAS the Trustees desire to establish a trust fund for the investment
and reinvestment of funds contributed thereto;
NOW, THEREFORE, The Trustees declare that all money and property
contributed to the trust fund hereunder shall be held and managed under this
Declaration of Trust IN TRUST as herein set forth below.
ARTICLE I
NAMES AND DEFINITIONS
Section 1. Name. This Trust shall be known as the "Federated Growth
Trust".
Section 2. Definitions. Wherever used herein, unless otherwise
required by the context or specifically provided:
(a) The term "Affiliated Person," "Assignment," "Commission,"
"Interested Person," "Majority Shareholder Vote" (the 67% or 50%
requirement of the third sentence of Section 2(a)(42) of the 1940 Act,
whichever may be applicable) and "Principal Underwriter" shall have the
meanings given them in the Investment Company Act of 1940, as amended
from time to time;
(b) The "Trust" refers to Federated Growth Trust;
(c) "Accumulated Net Income" means the accumulated net income of
the Trust determined in he manner provided or authorized in Article X,
Section 3;
(d) "Shareholder" means a record owner of Shares of the Trust;
(e) The "Trustees' refer tot he individual Trustees in their
capacity as Trustees hereunder of the Trust and their successor or
successors for the time being in office as such Trustees:
(f) "Shares" means the equal proportionate units of interest into
which the beneficial interest in the Trust shall be divided from time to
time and includes fractions of Shares as well as whole Shares; and
(g) The "1940 Act" refers to the Investment Company Act of 1940,
as amended from time to time.
ARTICLE II
PURPOSE OF THE TRUST
The purpose of this Trust is to provide investors a continuous source of
managed investments primarily in securities.
ARTICLE III
BENEFICIAL INTEREST
Section 1. Shares of Beneficial Interest. The beneficial interest in
the Trust shall at all times be divided into transferable Shares, without par
value, each of which shall represent an equal proportionate interest in the
Trust with each other Share outstanding, none having priority or preference
over another. The number of Shares which may be issued is unlimited. The
Trustees may from time to time divide or combine the outstanding Shares into
a greater or lesser number without thereby changing the proportionate
beneficial interest in he Trust. Contributions to the Trust may be accepted
for, and Shares shall be redeemed as, whole Shares and/or fractions.
Section 2. Ownership of Shares. The ownership of Shares shall be
recorded in the books of the Trust or a transfer agent. The Trustees may
make such rules as they consider appropriate for the transfer of shares and
similar matters. The record books of the Trust or any transfer agent, as the
case may be, shall be conclusive as to who are the holders of Shares and as
to the number of Shares held from time to time by each.
Section 3. Investment in the Trust. The Trustees shall accept
investments in the Trust from such persons and on such terms a they may from
time to time authorize. After the date of the initial contribution of
capital (which shall occur prior to the initial public offering of Shares of
the Trust), the number of Shares to represent the initial contribution shall
be considered as outstanding and the amount received by the Trustees on
account of the contribution shall be treated as an asset of the Trust.
Subsequent to such initial contribution of capital, Shares (including Shares
which may have been redeemed or repurchased by the Trust) may be issued or
sold at a price which will net the Trust, before paying any taxes in
connection with such issue or sale, not less than the net asset value (as
defined in Article X, Section 4) thereof; provided, however, that the
Trustees may in their discretion impose a sales charge upon investments in
the Trust.
Section 4. No Pre-emptive Rights. Shareholders shall have no pre-
emptive or other right to subscribe to any additional Shares or other
securities issued by the Trust or the Trustees.
ARTICLE IV
THE TRUSTEES
Section 1. Management of the Trust. The business and affairs of the
Trust shall be managed by the Trustees, and they shall have all powers
necessary and desirable to carry out that responsibility. The Trustees who
shall serve until the election of Trustees at the 1984 Meeting of
Shareholders shall be John F. Donahue, William J. Copeland, James E. Dowd,
Edward L. Flaherty, Jr., J. Joseph Maloney, Jr., Gregor F. Meyer, Wesley W.
Posvar and Marjorie P. Smuts.
Section 2. Election of Trustees at 1984 Meeting of Shareholders. In
the year 1984, on a date fixed by the Trustees, which shall be subsequent to
the initial public offering of Shares of the Trust, the Shareholders shall
elect Trustees. The number of Trustees shall be determined by the Trustees
pursuant to Article IV, Section 6.
Section 3. Term of Office of Trustees. The Trustees hall hold office
during the lifetime of this Trust, and until its termination as hereinafter
provided; except (a) that any Trustee may resign his trust by written
instrument signed by him and delivered to the other Trustees, which shall
take effect upon such delivery or upon such later date as is specified
therein; (b) that any Trustee may be removed at any time by written
instrument signed by at least two-thirds of the number of Trustees prior to
such removal, specifying the date when such removal becomes effective; (c)
that any Trustee who requests in writing to be retired or who has become
mentally or physically incapacitated may be retired by written instrument
signed by a majority of the other Trustees, specifying the date of his
retirement; and (d) a Trustee may be removed at any special meeting of
Shareholder of the Trust by a vote of two-thirds of the outstanding Shares.
Section 4. Termination of Service and Appointment of Trustees. In case
of the death, resignation, retirement, removal or mental or physical
incapacity of any of the Trustees, or in case a vacancy shall, by reason of
an increase in number, or for any other reason, exist, the remaining Trustees
shall fill such vacancy by appointing such other person as they in their
discretion shall see fit. Such appointment shall be effected by the signing
of a written instrument by majority of the Trustees in office. Within three
months of such appointment, the Trustees shall cause notice of such
appointment to be mailed to each Shareholder at his address as recorded on
the books of the Trust. An appointment of a Trustee may be made by the
Trustees then in office and notice thereof mailed to Shareholders as
aforesaid in anticipation of a vacancy to occur by reason of retirement,
resignation or increase in number of Trustees effective at a later date,
provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of
Trustees. As soon as any Trustee so appointed shall have accepted this
Trust, the trust estate shall vest in the new Trustee or Trustees, together
with the continuing Trustees, without any further act or conveyance, and he
shall be deemed a Trustee hereunder. Any appointment authorized by this
Section 4 is subject to the provisions of Section 16(a) of the 1940 Act.
Section 5. Temporary Absence of Trustee. Any Trustee may, by power of
attorney, delegate his power for a period not exceeding six months at any one
time to any other Trustee or Trustees, provided that in no case shall less
than two of the Trustees personally exercise the other power hereunder except
herein otherwise expressly provided.
Section 6. Number of Trustees. The number of Trustees, not less than
three (3) nor more than twenty (20) serving hereunder at any time shall be
determined by the Trustees themselves.
Whenever a vacancy in the Board of Trustees shall occur, until such
vacancy is filled or while any Trustee is physically or mentally
incapacitated, the other Trustees shall have all the powers hereunder and the
certificate signed by a majority of the other Trustees of such vacancy,
absence or incapacity, shall be conclusive, provided, however, that no
vacancy which reduces the number of Trustees below three (3) shall remain
unfilled for a period longer than six calendar months.
Section 7. Effect of Death, Resignation, etc. Of a Trustee. The death,
resignation, retirement, removal, or mental or physical incapacity of the
Trustees, or any one of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Declaration
Trust.
Section 8. Ownership of the Trust. The assets of the Trust shall be
held separate and apart from any assets now or hereafter held in any capacity
other than as Trustee hereunder by the Trustee or any successor Trustee. All
of the assets of the Trust shall at all times be considered as vested in the
Trustees. No Shareholder shall be deemed to have a severable ownership in
any individual asset of the Trust or any right of partition or possession
thereof, but each Shareholder shall have a proportionate undivided beneficial
interest in the Trust.
ARTICLE V
POWERS OF THE TRUSTEES
Section 1. Powers. The Trustees in all instances shall act as
principals, and are and shall be free from the control of the Shareholders.
The Trustees shall have full power and authority to do any and all acts and
to make and execute any and all contracts and instruments that they may
consider necessary or appropriate in connection with the management of the
Trust. The Trustees shall not be bound or limited by present or future laws
or customs in regard to trust investments, but shall have full authority and
power to make any and all investments which they, in their uncontrolled
discretion, shall deem proper to accomplish the purpose of this Trust.
Without limiting the foregoing, the Trustees shall have the following
specific powers and authority, subject to any applicable limitation in this
Declaration of Trust or in the By-Laws of the Trust.
(a) To buy, and invest funds in their hands in, securities
including, but not limited to, common stocks, preferred stocks, bonds,
debentures, warrants and rights to purchase securities, certificates of
beneficial interest, money market instruments, notes or other evidences
or indebtedness issued by any corporation, trust or association,
domestic or foreign, or issued or guaranteed by the United States of
America or any agency or instrumentality thereof, by the government of
any foreign country, by any State of the United States, or by any
political subdivision or agency or instrumentality of any State or
foreign country, or in "when-issued" or "delayed-delivery" contracts for
any such securities, or in any repurchase agreement (agreements under
which the seller agrees at the time of sale to repurchase the security
at an agreed time and price), or retain Trust assets in cash, and from
time to time change the investments of the assets of the Trust;
(b) To adopt By-Laws not inconsistent with the Declaration of
Trust providing for the conduct of the business of the Trust and to
amend and repeal them to the extent that they do not reserve that right
to the Shareholders;
(c) To Elect and remove such officers and appoint and terminate
such agents as they consider appropriate;
(d) To appoint or otherwise engage a bank or trust company as
custodian of any assets of the Trust subject to any conditions set forth
in this Declaration of Trust or in the By-Laws;
(e) To appoint or otherwise engage transfer agents, dividend
disbursing agents, Shareholder servicing agents, investment advisers,
sub-investment advisers, principal underwriters, administrative service
agents, and such other agents as the Trustees may from time to time
appoint or otherwise engage;
(f) To provide for the distribution of interests of the Trust
either through a principal underwriter in the manner hereinafter
provided for or by the Trust itself, or both;
(g) To set record dates in the manner hereinafter provided for;
(h) To delegate such authority as they consider desirable to a
committee or committees composed of Trustees, including without
limitation, an Executive Committee, or to any officers of the Trust and
to any agent, custodian or underwriter;
(i) To sell or exchange any or all of the assets of the Trust,
subject to the provisions of Article XII, Section 4(b) hereof;
(j) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property; and to execute
and deliver powers of attorney to such person or persons as the Trustees
shall deem proper, granting to such person or persons such power and
discretion with relation to securities or property as the Trustees shall
deem proper;
(k) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
(l) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form; o
either in its own name or in the name of a custodian or a nominee or
nominees, subject in either case to proper safeguards according to the
usual practice of Massachusetts trust companies or investment companies;
(m) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or concern,
any security of which is held in the Trust; to consent to any contract,
lease, mortgage, purchase, or sale of property by such corporation or
concern, and to pay calls or subscriptions with respect to any security
held in the Trust;
(n) To engage in and to prosecute, compound, compromise, abandon,
or adjust, by arbitration, or otherwise, any actions, suits,
proceedings, disputes, claims, demands, and things relating to the
Trust, and out of the assets of the Trust to pay, or to satisfy, any
debts, claims or expenses incurred in connection therewith, including
those of litigation, upon any evidence that the Trustees may deem
sufficient (such powers shall include without limitation any actions,
suits, proceedings, disputes, claims, demands and things relating to the
Trust wherein any of the Trustees may be names individually and the
subject matter of which arises by reason of business for or on behalf of
the Trust);
(o) To make distributions of income and of capital gains to
Shareholders in the manner hereinafter provided for;
(p) To borrow money but only as a temporary measure for
extraordinary or emergency purposes and then (a) only in amounts not in
excess of 5% of the value of its total assets or (b) in any amount up to
one-third of the value of its total assets, including the amount
borrowed, in order to meet redemption requests without immediately
selling any portfolio securities. The Trust may also enter into reverse
repurchase agreements in amounts not in excess of one-third of its total
assets in order to meet redemption requests without immediately selling
any portfolio instruments. The Trustees shall not pledge, mortgage or
hypothecate the assets of the Trust, except in connection with any
borrowing described in (a) and (b) herein and in amounts not in excess
of the lesser of the dollar amounts borrowed or 10% of the value of the
Trust's total assets at the time of such borrowing.
(q) From time to time to issue and sell the Shares of the Trust
either for cash or for property whenever and in such amounts as the
Trustee may deem desirable, but subject to the limitation set forth in
Section 3 of Article III.
(R) To purchase insurance of any kind, including, without
limitation, insurance on behalf of any person who is or was a Trustee,
Officer, employee or agent of the Trust, or is or was serving at the
request of the Trust as a Trustee, Director, Officer, agent or employee
of another corporation, partnership, joint venture, trust or other
enterprise against any liability asseted against him and incurred by him
in any such capacity or arising out of his status as such.
No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see the
application of any payments made or property transferred tot he Trustees or
upon their order.
Section 2. Principal Transactions. The Trustees shall not on behalf of
the Trust buy any securities (other than Shares of the Trust) from or sell
any securities (other than Shares of the Trust) to, or lend any assets of the
Trust to, any Trustee or officer or employees of the Trust or any firm of
which any such Trustee or officer is a member acting as principal unless
permitted by the 1940 Act, but the Trust may employ any such other party or
any such person or firm or company in which any such person is an interested
person in any capacity not prohibited by the 1940 Act.
Section 3. Trustees and Officers as Shareholders. Any Trustee, officer
or other agent of the Trust may acquire, own and dispose of shares of the
Trust to the same extent as if he were not a Trustee, officer or agent; and
the Trustees may issue and sell or cause to be issued or sold Shares of the
Trust to and buy such Shares from any such person or any firm or company in
which he is an interested person subject only to the general limitations
herein contained as to the sale and purchase of such Shares; and all subject
to any restrictions which may be contained in the By-Laws.
Section 4. Parties to Contract. The Trustees may enter into any
contract of the character described in Section 1, 2, 3, or 4 of Article VII
or in Article IX hereof or any other capacity not prohibited by the 1940 Act
with any corporation, firm, trust or association, although one or more of the
shareholders, Trustees, officers, employees or agents of the Trust or their
affiliates may be an officer, director, Trustee, shareholder or interested
person of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such
relationship, nor shall any person holding such relationship be liable merely
by reason of such relationship for any loss or expense to the Trust under or
by reason of said contract or accountable for any profit realized directly or
indirectly therefrom, in the absence of actual fraud. The same person
(including a firm, corporation, trust or association) may be the other party
to contracts entered into pursuant to Sections 1, 2, 3 and 4 of Article VII
or Article IX or any other capacity deemed legal under the 1940 Act, and any
individual may be financially interested or otherwise an interested person of
persons who are parties to any or all of the contracts mentioned in this
Section 4.
ARTICLE VI
TRUSTEES' EXPENSES AND COMPENSATION
Section 1. Trustee Reimbursement. The Trustees shall be reimbursed
from the Trust estate for all of their expenses and disbursements, including,
without limitation, expenses of organizing the Trust and continuing its
existence; fees and expenses of Trustees and Officers of the Trust; fees for
investment advisory services, administrative services and principal
underwriting services provided for in Article VII, Sections 1, 2 and 3; fees
and expenses of preparing and printing its Registration Statements under the
Securities Act of 1933 and the Investment Company Act of 1940 and any
amendments thereto; expenses of registering and qualifying the Trust and its
shares under federal and state laws and regulations; expenses of preparing,
printing and distributing prospectuses and any amendments thereof sent to
shareholders, underwriters, broker-dealers and to investors who may be
considering the purchase of shares; expenses of registering, licensing or
other authorization of the Trust as a broker-dealer and of its Officers as
agents and salesmen under federal and state laws and regulations; interest
expense, taxes, fees and commissions of every kind; expense of issue
(including cost of share certificates), purchase, repurchase and redemption
of shares, including expenses attributable to a program of periodic issue;
charges and expenses of custodians, transfer agents, dividend disbursing
agents, shareholder servicing agents and registrars; printing and mailing
costs; auditing, accounting and legal expenses; reports to shareholders and
governmental officers and commissions; expenses of meetings of shareholders
and proxy solicitations therefor; insurance expenses; association membership
dues and nonrecurring items as may arise, including all losses and
liabilities by them incurred in administering the Trust, including expenses
incurred in connection with litigation, proceedings and claims and the
obligations of the Trust under Article XI hereof to indemnify its Trustees,
Officers, employees, shareholders and agents, and any contract obligation to
indemnify principal underwriters under Section 3 of Article VII and for the
payment of such expenses, disbursements, losses and liabilities, the Trustees
shall have a lien on the Trust estate prior to any rights or interests of the
Shareholders thereto. This section shall not preclude the Trust from
directly paying any of the aforementioned fees and expenses.
Section 2. Trustee Compensation. The Trustees shall be entitled to
compensation from the Trust for their respective services as Trustees, to be
determined from time to time by vote of the Trustees, and the Trustees shall
also determine the compensation of all Officers, consultants and agents who
they may elect or appoint. The Trust may pay any Trustee or any corporation,
firm, trust or association of which a Trustee is an interested person for
services rendered to the Trust in any capacity not prohibited by the 1940
Act, and such payments shall not be deemed compensation for services as a
Trustee under the first sentence of this Section 2 of Article VI.
ARTICLE VII
INVESTMENT ADVISER, ADMINISTRATIVE SERVICES,
PRINCIPAL UNDERWRITER, AND TRANSFER AGENT
Section 1. Investment Adviser. Subject to a Majority Shareholder Vote,
the Trustees may in their discretion from time to time enter into an
investment advisory contract whereby the other party to such contract shall
undertake to furnish the Trustees investment advisory services upon such
terms and conditions and for such compensation as the Trustees may in their
discretion determine. Subject to a Majority Shareholder Vote, the investment
adviser may enter into a sub-investment advisory contract to receive
investment advice and/or statistical and factual information from the sub-
investment adviser upon such terms and conditions and for such compensation
as the Trustees may in their discretion agree to. Notwithstanding any
provisions of this Declaration of Trust, the Trustees may authorize the
investment adviser or sub-investment adviser or any person furnishing
administrative personnel and services as set forth in Article VII, Section 2
(subject to such general or specific instructions as the Trustees may from
time to time adopt) to effect purchases, sales or exchanges of portfolio
securities of the Trust on behalf of the Trustees or may authorize any
officer or Trustee to effect such purchases, sales, or exchanges pursuant to
recommendations of the investment adviser (and all without further action by
the Trustees). Any such purchases, sales and exchanges shall be deemed to
have been authorized by the Trustees. The Trustees may also authorize the
investment adviser to determine what firms shall be employed to effect
transactions ins securities for the account of the Trust and to determine
what firms shall participate in any such transactions or shall share in
commissions or fees charged in connection with such transactions.
Section 2. Administrative Services. The Trustees may in their
discretion from time to time contract for administrative personnel and
services whereby the other party shall agree to provide the Trustees
administrative personnel and services to operate the Trust on a daily basis,
on such terms and conditions as the Trustees may in their discretion
determine. Such services may be provided by one or more entities.
Section 3. Principal Underwriter. The Trustees may in their discretion
from time to time enter into an exclusive or nonexclusive contract or
contracts providing for the sale of the Shares of the Trust to net the Trust
not less than the amount provided in Article III, Section 3 hereof, whereby
the Trust may either agree to sell the Shares to the other party to the
contract or appoint such other party its sales agent for such shares. In
either case, the contract shall be on such terms and conditions (including
indemnification of principal underwriters allowable under applicable law and
regulation) as the Trustees may in their discretion determine not
inconsistent with the provisions of this Article VII; and such contract may
also provide for the repurchase or sale of Shares of the Trust by such other
party as principal or as agent of the Trust and may provide that the other
party may maintain a market for shares of the Trust.
Section 4. Transfer Agent. The Trustees may in their discretion from
time to time enter into transfer agency and shareholder services contract
whereby the other party shall undertake to furnish the Trustees transfer
agency and shareholder services. The contracts shall be on such terms and
conditions as the Trustees may in their discretion determine not inconsistent
with the provisions of this Declaration of Trust or of the By-Laws. Such
services may be provided by one or more entities.
Section 5. Provisions and Amendments. Any contract entered into
pursuant to Sections 1 or 3 of this Article VII shall be consistent with and
subject to the requirements of Section 15 of the 1940 Act (including any
amendments thereof or other applicable Act of Congress hereafter enacted)
with respect to its continuance in effect, its termination and the method of
authorization and approval of such contract or renewal thereof.
ARTICLE VIII
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1. Voting Powers. The Shareholders shall have power to vote
(i) for the election of Trustees as provided in Article IV, Section 2; (ii)
for the removal of Trustees as provided in Article IV, Section 3(d); (iii)
with respect to any investment adviser or sub-investment adviser as provided
in Article VII, Section 1; (iv) with respect to the amendment of this
Declaration of Trust as provided in Article XII, Section 7; (v) to the same
extent as the shareholders of a Massachusetts business corporation as to
whether or not a court action, proceeding or claim should be brought or
maintained derivatively or as a class action on behalf of the Trust or the
Shareholders; and (vi) with respect to such additional matters relating to
the Trust as may be required by law, by this Declaration of Trust, or the By-
Laws of the Trust or any regulation of the Trust with the Commission or any
State, or as the Trustees may consider desirable. Each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote, and
each fractional Shares shall be entitled to a proportionate fractional vote.
There shall be no cumulative voting in the election of Trustees. Shares may
be voted in person or by proxy. Until Shares are issued, the Trustees may
exercise all rights of Shareholders and may take any action required or
permitted by law, this Declaration of Trust or any By-Laws of the Trust to be
taken by Shareholders.
Section 2. Meetings. A Shareholders meeting shall be held as specified
in Section 2 of Article IV at the principal office of the Trust or such other
place as the Trustees may designate. Special meetings of the Shareholders
may be called by the Trustees or the Chief Executive Officer of the Trust and
shall be called by the Trustees upon the written request of Shareholders
owning at least one-tenth of the outstanding Shares entitled to vote.
Shareholders shall be entitled to at least fifteen days' notice of any
meeting.
Section 3. Quorum and Required Vote. Except as otherwise provided by
law, to constitute a quorum for the transaction of any business at any
meeting of Shareholders there must be present, in person or by proxy, holders
of one-fourth of the total number of Shares of the Trust then outstanding and
entitled to vote at such meeting. If a quorum, as above defined, shall not
be present for the purpose of any vote that may properly come before the
meeting, the Shareholders present in person or by proxy and entitled to vote
on such matter may by vote adjourn the meeting from time to time to be held
at the same place without further notice than by announcement to be given at
the meeting until a quorum, as above defined, entitled to vote on such matter
shall be present, whereupon any such matter may be voted upon at the meeting
as though held when originally convened. Subject to any applicable
requirement of law or of this Declaration of Trust or the By-Laws, a
plurality of the votes cast shall elect a Trustee and all other matters shall
be decided by a majority of the votes cast entitled to vote thereon.
Section 4. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meeting and related matters.
ARTICLE IX
CUSTODIAN
Section 1. Appointment and Duties. The Trustees shall appoint or
otherwise engage bank or trust company having an aggregate capital, surplus
and undivided profits (as shown in its last published report) of at least two
million dollars ($2,000,000) as custodian with authority as its agent, but
subject to such restrictions, limitations and other requirements, if any, as
may be contained in the By-Laws of the Trust:
(1) To receive and hold the securities owned by the Trust and
deliver the same upon written order;
(2) To receive and receipt for any moneys due to the Trust and
deposit the same in its own banking department or elsewhere as the
Trustees may direct; and
(3) To disburse such funds upon orders or vouchers;
(4) To keep the books and accounts of the Trust and furnish
clerical and accounting services;
(5) To compute, if authorized to do so by the Trustees, the
Accumulated Net Income of the Trust and the net asset value of the
Shares in accordance with the provisions hereof;
all upon such basis of compensation as may be agreed upon between the
Trustees and the custodian. If so directed by a Majority Shareholder Vote,
the custodian shall deliver and pay over all property of the Trust held by it
as specified in such vote.
The Trustees may also authorize the custodian to employ one or more sub-
custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions, as may be agreed upon between
the custodian and such sub-custodian and approved by the Trustees, provided
that in every case such sub-custodian shall be a bank or trust company
organized under the laws of the United States or one of the states thereof
and having an aggregate capital, surplus and undivided profits (as shown in
its last published report) of at least two million dollars ($2,000,000).
Section 2. Central Certificate System. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct
the custodian to deposit all or any part of the securities owned by the Trust
in a system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission or otherwise in accordance with the 1940
Act as from time to time amended, pursuant to which system all securities of
any particular class or series of any issuer deposited within the system are
treated as fungible and may be transferred or pledged by bookkeeping entry
without physical delivery of such securities, provided that all such deposits
shall be subject to withdrawal only upon the order of the custodian at the
direction of the Trustees.
ARTICLE X
DISTRIBUTIONS AND REDEMPTIONS
Section 1. Distributions.
(a) The Trustees may from time to time declare and pay dividends, and
the amount of such dividends and the payment of them shall be wholly in the
discretion of the Trustees.
(b) The Trustees may, on each day Accumulated Net Income of the Trust
(as defined in Section 3 of this Article X) is determined and is positive,
declare such Accumulated Net Income as a dividend to Shareholders of record
at such time as the Trustees shall designate, payable in additional full and
fractional Shares or in cash.
(c) The Trustees may distribute in respect of any fiscal year as
ordinary dividends and as capital gains distributions, respectively, amounts
sufficient to enable the Trust as a regulated investment company to avoid any
inability for federal income taxes in respect of that year.
(d) The decision of the Trustees as to what, in accordance with good
accounting practice, is income and what is principal shall be final, and
except as specifically provided herein the decision of the Trustees as to
what expense and charges of the Trust shall be charged against principal and
what against the income shall be final. Any income not distributed in any
year may be permitted to accumulate and as long as not distributed may be
invested from time to time in the same manner as the principal funds of the
Trust.
(e) The Trustees shall have power, to the fullest extent permitted by
the laws of Massachusetts, at any time, or from time to time, to declare and
cause to be paid dividends, which dividends, at the election of the Trustees,
may be accrued, automatically reinvested in additional Shares (or fractions
thereof) of the Trust or paid in cash or additional Shares, all upon such
terms and conditions as the Trustees may prescribe.
(f) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute a dividend consisting of
shares of the Trust.
Section 2. Redemptions and Repurchases
(a) In case any Shareholder of record of the Trust at any time desires
to dispose of Shares recorded in his name, he may deposit a written request
(or such other form of request as the Trustees may from time to time
authorize) requesting that the Trust purchase his Shares, together with such
other instruments or authorizations to effect the transfer as the Trustees
may from time to time require, at the office of the Custodian, and the Trust
shall purchase his said Shares, but only at the net asset value of such
Shares (as defined in Section 4 of this Article X) determined by or on behalf
of the Trustees next after said deposit.
Payment for such Shares shall be made by the Trust to the Shareholder of
record within seven (7) days after the date upon which the request (and, if
required, such other instruments or authorizations of transfer) is deposited,
subject to the right of the Trustees to postpone beyond the date on which it
would normally occur by reason of a declaration by the Trustees suspending
the right of redemption pursuant to Section 5 of this Article X, the right of
the Shareholder to have his Shares purchased by the Trust shall be similarly
suspended, and he may withdraw his request (or such other instruments or
authorizations of transfer) from deposit if he so elects; or, if he does not
so elect, the purchase price shall be the net asset value of his Shares,
determined next after termination of such suspension and payment therefor
shall be made within seven (7) days thereafter.
(b) The Trust may purchase Shares of the Trust by agreement with the
owner thereof (1) at a price not exceeding the net asset value per Share
determined next after the purchase or contract of purchase is made or (2) at
a price not exceeding the net asset value per Share determined at some later
time.
(c) Shares purchased by the Trust either pursuant to paragraph (a) or
paragraph (b) of this Section 2 shall be deemed treasury Shares and may be
resold by the Trust.
(d) If the Trustees determine that economic conditions would make it
seriously detrimental to the best interests of the remaining Shareholders of
the Trust to make payment wholly or partly in cash, the Trust may pay the
redemption price in whole or in part by a distribution in kind of securities
from the portfolio of the Trust, in lieu of cash in conformity with
applicable rules of the Securities and Exchange Commission, taking such
securities at the same value employed in determining net asset value, and
selecting the securities in such manner as the Trustees may deem fair and
equitable.
Section 3. Determination of Accumulated Net Income. The Accumulated
Net Income of the Trust shall be determined by or on behalf of the Trustees
at such time as the Trustees shall in their discretion determine. Such
determination shall be made in accordance with generally accepted accounting
principles and practices and may include realized and/or unrealized gains
from the sale or other disposition of securities or other property of the
Trust. The power and duty to determine Accumulated Net Income may be
delegated by the Trustees from time to time to one or more of the Trustees or
officers of the Trust, to the other party to any contract entered into
pursuant to Section 1 or 2 of Article VII, or to the custodian or to a
transfer agent.
Section 4. Net Asset Value of Shares. The net asset value of each
Share of the Trust outstanding shall be determined at such time or times as
may be determined by or on behalf of the Trustees. The power and duty to
determine net asset value may be delegated by the Trustees from time to time
to one or more of the Trustees or Officers of the Trust, to the other party
to any contract entered into pursuant to Section 1 or 2 of Article VII or to
the custodian or to a transfer agent.
The net asset value of each Share of the Trust as of any particular time
shall be the quotient (adjusted to the nearer cent) obtained by dividing the
value, as of such time, of the net assets of the Trust (i.e., the value of
the assets of the Trust less its liabilities exclusive of capital and
surplus) by the total number of Shares outstanding (exclusive of treasury
Shares) at such time in accordance with the requirements of the 1940 Act and
applicable provisions of the By-Laws of the Trust in conformity with
generally accepted accounting practices and principles.
The Trustees may declare a suspension of the determination of net asset
value for the whole or any part of any period in accordance with the
Investment Company Act of 1940 and the rules and regulations adopted
thereunder.
Section 5. Suspension of the Right of Redemption. The Trustees may
declare a suspension of the right of redemption or postpone the date of
payment for the whole or any part of any period in accordance with the
Investment Company Act of 1940 and the rules and regulations adopted
thereunder.
Section 6. Trust's Right to Redeem Shares. The Trust shall have the
right to cause the redemption of Shares in any Shareholder's account for
their then current net asset value (which will be promptly paid to the
Shareholder in cash), of at any time the total investment in the account does
not have a minimum dollar value determined from time to time by the Trustees
in their sole discretion. Shares of the Trust are redeemable at the option
of the Trust if, in the opinion of the Trustees, ownership of Trust Shares
has or may become concentrated to an extent which would cause the Trust to be
a personal holding company within the meaning of the Federal Internal Revenue
Code (and thereby disqualified under Sub-chapter M of said Code); in such
circumstances the Trust may compel the redemption of Shares, reject any order
for the purchase of Shares or refuse to give effect to the transfer of
Shares.
ARTICLE XI
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Personal Liability and Indemnification of
Shareholders. The Trustees, officers, employees or agents of the Trust shall
have no power to bind any Shareholder personally or to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever,
other than such as the Shareholder may at any time agree to pay by the way of
subscription to any Shares or otherwise.
No Shareholder or former Shareholder of the Trust shall be liable solely
by reason of his being or having been a Shareholder for any debt, claim,
action, demand, suit, proceeding, judgment, decree, liability or obligation
of any kind, against, or with respect to the Trust arising out of any action
taken or omitted for or on behalf of the Trust, and the Trust shall be solely
liable therefor and resort shall be had solely to the Trust property for the
payment or performance thereof.
Each Shareholder or former Shareholder of the Trust (or their heirs,
executors, administrators or other legal representatives or, in case of a
corporate entity, its corporate or general successor) shall be entitled to
indemnity and reimbursement out of the Trust property to the full extent of
such liability and the costs of any litigation or other proceedings in which
such liability shall have been determined, including, without limitations,
the fees and disbursements o counsel if, contrary to the provisions hereof,
such Shareholder or former Shareholder of the Trust shall be held to personal
liability.
The Trust shall, upon request by the Shareholder or former Shareholders,
assume the defense of any claim made against any Shareholder for any act or
obligation of the Trust and satisfy any judgment thereon.
Section 2. Limitation of Personal Liability of Trustees, Officers,
Employees or Agents of the Trust. No Trustee, officer, employee or agent of
the Trust shall have the power to bind any other Trustee, officer, employee
or agent of the Trust personally. The Trustees, officers, employees or
agents of the Trust incurring any debts, liabilities or obligations, or in
taking or omitting any other actions for or in connection with the Trust are,
and each shall be deemed to be, acting as Trustee, officer, employee or agent
of the Trust and not in his own individual capacity.
Provided they have acted under the belief that their actions are in the
best interest of the Trust, the Trustee and officers shall not be responsible
for or liable in any event for neglect or wrongdoing by them or any officer,
agent, employee, investment adviser or principal underwriter of the Trust or
of any entity providing administrative services for the Trust, but nothing
herein contained shall protect any Trustee or officer against any liability
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Section 3. Express Exculpatory Clauses and Instruments. The Trustees
shall use every reasonable means to assure that all persons having dealings
with the Trust shall be informed that the property of the Shareholders and
the Trustees, officers, employees and agent of the Trust shall not be subject
to claims against or obligations of the Trust to any extent whatsoever. The
Trustees shall cause to be interested in any written agreement, undertaking
or obligation made or issued on behalf of the Trust (including certificates
for Shares of the Trust) an appropriate reference to this Declaration,
providing that neither the Shareholders, the Trustees, the officers, the
employees not any agent of the Trust shall be liable thereunder, and that the
other parties to such instrument shall look solely to the Trust property for
the payment of any claim thereunder or for the performance thereof; but the
omission of such provisions from any such instrument shall not render any
Shareholder, Trustees, officer, employee or agent liable, nor shall the
Trustee, or any officer, agent or employee of the Trust be liable to anyone
for such omission. If, notwithstanding this provision, any Shareholder,
Trustee, officer, employee or agent shall be held liable to any other person
by reason of the omission of such provision from any such agreement,
undertaking or obligation, the Shareholder, Trustee, officer, employee or
agent shall be entitled to indemnity and reimbursement out of the Trust
property, as provided in this Article XI.
Section 4. Indemnification of Trustees, Officers, Employees and Agents.
(a) Every person who is or has been a Trustee, officer, employee or
agent of the Trust and persons who serve at the Trust's request as director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise shall be indemnified by the Trust to
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any debt, claim,
action, demand, suit, proceeding, judgment, decree, liability or obligation
of any kind in which he becomes involved as a party or otherwise by virtue of
his being or having been a Trustee, officer, employee or agent of the Trust
or of another corporation, partnership, joint venture, trust or other
enterprise at the request of the Trust and against amounts paid or incurred
by him in the settlement thereof.
(b) The words "claim," "action," "suit" or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal, administrative,
legislative, investigative or other, including appeals), actual or
threatened, and the words "liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(c) No indemnification shall be provided hereunder to a Trustee,
officer, employee or agent against any liability to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of his office.
(d) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee, officer, employee or agent may
now or hereafter be entitled, shall continue as to a person who has ceased to
be such Trustee, officer, employee, or agent and shall inure to the benefit
of the heirs, executors and administrators of such a person.
(e) Expenses in connection with the preparation and presentation of a
defense to any claim, actions, suit or proceeding of the character described
in paragraph (a) of this Section 4 may be paid by the Trust prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
Trustees, officer, employee or agent secured by a surety bond or other
suitable insurance that such amount will be paid over by him to the Trust if
it is ultimately determined that he is not entitled to indemnification under
this Section 4.
ARTICLE XII
MISCELLANEOUS
Section 1. Trust is not a Partnership. It is hereby expressly declared
that a trust and not a partnership is created hereby.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety. The exercise by the Trustees of their powers and discretions
hereunder in good faith and with reasonable care under the circumstances then
prevailing, shall be binding upon everyone interested. Subject to the
provisions of Article XI, the Trustees shall not be liable for errors of
judgment or mistakes of fact or law. The Trustees may take advice of counsel
or other experts with respect to the meaning and operation of this
Declaration of Trust, and subject to the provisions of Article XI, shall be
under no liability for any act or omission in accordance with such advice or
for failing to follow such advice. The Trustees shall not be required to
give any bond as such, not any surety if a bond is required.
Section 3. Establishment of Record Dates. The Trustees may close the
Share transfer books of the Trust for a period not exceeding sixty (60) days
preceding the date of any meeting of Shareholders, or the date for the
payment of any dividend or the making of any distribution to Shareholders, or
the date for the allotment of rights, or the date when any change or
conversion or exchange of Shares shall go into effect; or in lieu of closing
the Share transfer books as aforesaid, the Trustees may fix in advance a
date, not exceeding sixty (60) days preceding the date of any meeting of
Shareholders, or the date for the payment of any dividend or the making of
may distribution to Shareholders, or the date for the allotment of rights, or
the date when any change or conversion or exchange of Shares shall go into
effect, or the last day on which the consent or dissent of Shareholders may
be effectively expressed for any purpose, as a record date for the
determination of the Shareholders entitled to notice of, and, to vote at, any
such meeting and any adjournment thereof, or entitled to receive payment of
any such dividend or distribution, or to any such allotment of rights, or to
exercise the rights in respect of any such change, conversion or exchange of
shares, or to exercise the right to give such consent or dissent, and in such
case such Shareholder and only such Shareholder as shall be Shareholders of
record on the date so fixed shall be entitled to such notice of, and to vote
at, such meeting, or to receive payment of such dividend or distribution, or
to receive such allotment or rights, or to exercise such rights, as the case
may be, notwithstanding any transfer of any Shares on the books of the Trust
after any such date fixed as aforesaid.
Section 4. Termination of Trust.
(a) This Trust shall continue without limitation of time but subject to
the provisions of paragraphs (b), (c) and (d) of this Section 4.
(b) The Trustees, with the approval of the holders of at least two-
thirds of the outstanding Shares, may be unanimous action sell and convey the
assets of the Trust to another trust or corporation organized under the laws
of any state of the United States, which is a diversified open-end management
investment company as defined in the 1940 Act, for an adequate consideration
which may include the assumption of all outstanding obligations, taxes and
other liabilities, accrued or contingent, of the Trust and which may include
shares of beneficial interest or stock of such trust or corporation. Upon
making provision for the payment of all such liabilities, by such assumption
or otherwise, the Trustees shall distribute the remaining proceeds ratably
among the holders of the Shares of the Trust then outstanding.
(c) Subject to a Majority Shareholder Vote, the Trustees may at any
time sell and convert into money all the assets of the Trust. Upon making
provisions for the payment of all outstanding obligations, taxes and other
liabilities, accrued or contingent, of the Trust, the Trustees shall
distribute the remaining assets of the Trust ratably among the holders of the
outstanding Shares.
(d) Upon completion of the distribution of the remaining proceeds of
the remaining assets as provided in paragraphs (b) and (c), the Trust shall
terminate and the Trustees shall be discharged of any and all further
liabilities and duties hereunder and the right, title and interest of all
parties shall be canceled and discharged.
Section 5. Officers of the Trust, Filing of Copies, References,
Headings. The Trust shall maintain a usual place of business in
Massachusetts, which, initially, shall be 31 Milk Street, Boston,
Massachusetts, and shall continue to maintain an office at such address
unless changed by the Trustees to another location in Massachusetts. The
Trust may maintain other offices as the Trustees may from time to time
determine. The original or a copy of this instrument and of each declaration
of trust supplemental hereto shall be kept at the office of the Trust where
it may be inspected by any Shareholder. A copy of this instrument and of
each supplemental declaration of trust shall be filed by the Trustees with
the Massachusetts Secretary of State and Boston City Clerk, as well as any
other governmental office where such filing may from time to time be
required. Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such supplemental declaration
of trust has been made and as to any matters in connection with the Trust
hereunder, and with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or
of any such supplemental declaration of trust. In this instrument or of any
such supplemental declaration of trust. In this instrument or of any such
supplemental declaration of trust, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer
to this instrument as amended or affected by an such supplemental declaration
of trust. Headings are placed herein for convenience of reference only and
in case of any conflict, the text of this instrument, rather than the
headings, shall control. This instrument may be executed in any number of
counterparts each of which shall be deemed an original.
Section 6. Applicable Law. The Trust set forth in this instrument is
created under and is to be governed by and construed and administered
according to the laws of the Commonwealth of Massachusetts. The Trust shall
be of the type commonly called a Massachusetts business trust, and without
limiting the provisions hereof, the Trust may exercise all powers which are
ordinarily exercised by such a trust.
Section 7. Amendments. Prior to the initial issuance of Shares
pursuant to the second sentence of Section 3 of Article III, a majority of
the Trustees then in office may amend or otherwise supplement this instrument
by making a Declaration of Trust supplemental hereto, which thereafter shall
form a part hereof. Subsequent to such initial issuance of Shares, if
authorized by a majority of the Trustees then in office and by a Majority
Shareholder Vote, or by any larger vote which may be required by applicable
law or this Declaration of Trust in any particular case, the Trustees shall
amend or otherwise supplement this instrument, by making a Declaration of
Trust supplemental hereto, which thereafter shall form a part hereof. Any
such supplemental Declaration of Trust shall be signed by at least a majority
of the Trustees then in office. Copies of the supplemental Declaration of
Trust shall be filed as specified in Section 5 of this Article XII.
Section 8. Use of Name. The Trust acknowledges that Federated
Investors, Inc. has reserved the right to grant the non-exclusive use of the
name "Federated" or any derivative thereof to any other investment company,
investment adviser, distributor, or other business enterprise, and to
withdraw from the Trust the use of the name "Federated".
IN WITNESS WHEREOF, the undersigned have executed this instrument the
day and year first above written.
/s/ John F. Donahue /s/ J. Joseph Maloney, Jr.
John F. Donahue J. Joseph Maloney, Jr.
/s/ William J. Copeland /s/ Gregor G. Meyer
William J. Copeland Gregor G. Meyer
/s/ James E. Dowd /s/ Wesley W. Posvar
James E. Dowd Wesley W. Posvar
/s/ Edward L. Flaherty, Jr. /s/ Marjorie P. Smuts
Exhibit (2)(i)
Amendment No. 2 to By-Laws
FEDERATED GROWTH TRUST
Effective February 2, 1987
ARTICLE II
POWERS AND DUTIES OF TRUSTEES AND OFFICERS
Section 2. Chairman of the Trustees ("Chairman"). The Chairman shall
be the chief executive officer of the Trust. He shall have general
supervision over the business of the Trust and policies of the Trust. He
shall employ and define the duties of all employees of the Trust, shall have
power to discharge any such employees, shall exercise general supervision
over the affairs of the Trust and shall perform such other duties as may be
assigned to him from time to time by the Trustees. He shall preside at the
meetings of shareholders and of the Trustees. The Chairman shall appoint a
Exhibit 2(ii)
FEDERATED GROWTH TRUST
AMENDMENT NO. 3 TO BY-LAWS
EFFECTIVE AUGUST 25, 1988
ARTICLE X
FISCAL YEAR
The fiscal year of the Trust shall be the period of twelve months ending
<TABLE>
<CAPTION>
Exhibit 99 under Form N1-A
Exhibit 16 under Item 601/Reg. S-K
<S> <C> <C> <C>
Federated Capital Appreciation Fund
Class A Shares
Yield = 2{( $131,251.40 - $108,480.50 )+1)^6-1}=
Computation of SEC Yield 1,107,883*( $96.91 - 0.028 )
40
As of: April 30, 1996
SEC Yield = 0.25%
Dividend and/or Interest
Inc for the 30 days ended $131,251.40
Net Expenses for $108,480.50
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 1,107,883
Maxium offering price $96.91
per share as of 4/30/96
Undistributed net income 0.02840
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Exhibit
99 under
Form N1-
A
Exhibit
16 under
Item
601/Reg.
S-K
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Federated Capital Appreciation Fund
Class A Shares Initial
Offering
Price/Share= $92.68
Return Since Inception 1/2/96 NAV= $96.91
ending 4/30/96
FYE: October 31, 1996
</TABLE>
<TABLE>
<CAPTION>
DECLARED: Quarterly
PAID: Quarterly
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning Capital Reinvest Ending Total
Reinvest Period Dividend Gain Price Period Ending Investment
Dates Shares /Share /Share /Share Shares Price Value
1/31/96 10.790 0.000000000 0.00000 $0.00 10.790 $91.06 $982.52
2/29/96 10.790 0.000000000 0.00000 $0.00 10.790 $93.72 $1,011.22
3/31/96 10.790 0.080000000 0.00000 $93.87 10.799 $93.87 $1,013.70
4/30/96 10.799 0.000000000 0.00000 $0.00 10.799 $96.91 $1,046.53
$1,000 (1+T) = Ending Value
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Exhibit 99
under Form
N1-A
Exhibit 16
under Item
601/Reg. S-K
Federated Capital Appreciation Fund
Class B Shares
Yield = 2{( $1,604.09 - $2,118.49)+1)^6-1}=
Computation of SEC Yield 13,525 *( $96.87 - 0.00320
As of: April 30, 1996
SEC Yield = -0.47%
Dividend and/or Interest
Inc for the 30 days ended $1,604.09
Net Expenses for $2,118.49
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 13,525
Maxium offering price $96.87
per share as of 4/30/96
</TABLE>
<TABLE>
<CAPTION>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Federated Capital Appreciation Fund
Class B Shares Initial
Offering
Price/Share= $88.22
Return Since Inception 1/3/96 Ending NAV= $92.02
ending 4/30/96
FYE: October 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Capital Reinvest Ending Total
DECLARED: Quarterly Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Quarterly Dates Shares /Share /Share /Share Shares Price Value
1/31/96 11.335 0.000000000 0.00000 $0.00 11.335 $91.06 $1,032.19
2/29/96 11.335 0.000000000 0.00000 $0.00 11.335 $93.72 $1,062.34
3/31/96 11.335 0.009000000 0.00000 $93.89 11.336 $93.89 $1,064.37
4/30/96 11.336 0.000000000 0.00000 $0.00 11.336 $92.02 $1,043.17
$1,000 (1+T) = Ending Value T = 4.32%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Federated Capital
Appreciation Fund
Class C Shares
Yield = 2{( $21.84 - $28.85 )+1)^6-
1}=
Computation of SEC Yield 184 *( $96.87 - 0.00180 )
As of: April 30, 1996
SEC Yield = -0.47%
Dividend and/or Interest
Inc for the 30 days ended $21.84
Net Expenses for $28.85
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 184
Maxium offering price $96.87
per share as of 4/30/96
</TABLE>
<TABLE>
<CAPTION>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Federated Capital Appreciation
Fund
Class C Shares Initial
Offering
Price/Share= $88.22
Return Since Inception 1/3/96 Ending NAV= $95.99
ending 4/30/96
FYE: October 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Capital Reinvest Ending Total
DECLARED: Quarterly Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Quarterly Dates Shares /Share /Share /Share Shares Price Value
1/31/96 11.335 0.000000000 0.00000 $0.00 11.335 $91.06 $1,032.19
2/29/96 11.335 0.000000000 0.00000 $0.00 11.335 $93.72 $1,062.34
3/31/96 11.335 0.005000000 0.00000 $93.89 11.336 $93.89 $1,064.33
4/30/96 11.336 0.000000000 0.00000 $0.00 11.336 $95.99 $1,088.13
$1,000 (1+T) = Ending Value
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Exhibit 99
under Form
N1-A
Exhibit 16
under Item
601/Reg. S-K
Federated Small Cap Strategies Fund
Class A Shares
Yield = 2{( $0.00 - $5,780.86 )+1)^6-1}=
Computation of SEC Yield 393,787 *( $14.05 - 0.0000)
0
As of: April 30, 1996
SEC Yield = -1.25%
Dividend and/or Interest
Inc for the 30 days ended $0.00
Net Expenses for $5,780.86
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 393,787
Maxium offering price $14.05
per share as of 4/30/96
</TABLE>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Federated Small Cap Strategies Fund
Class A Shares Initial
Offering
Price/Share= $10.58
Return Since Inception 11/1/95 NAV= $14.05
ending 4/30/96
FYE: October 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Capital Reinvest Ending Total
DECLARED: Quarterly Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Quarterly Dates Shares /Share /Share /Share Shares Price Value
11/30/95 94.518 0.000000000 0.00000 $0.00 94.518 $11.01 $1,040.64
12/31/95 94.518 0.020000000 0.00000 $11.47 94.683 $11.74 $1,111.58
1/31/96 94.683 0.000000000 0.00000 $0.00 94.683 $11.58 $1,096.43
2/29/96 94.683 0.000000000 0.00000 $0.00 94.683 $12.22 $1,157.02
3/31/96 94.683 0.000000000 0.00000 $0.00 94.683 $12.62 $1,194.90
4/30/96 94.683 0.000000000 0.00000 $0.00 94.683 $14.05 $1,330.29
$1,000 (1+T) = Ending Value T = 33.03%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Federated Small Cap Strategies Fund
Class B Shares
Yield = 2{( $0.00 - $4,487.80 )+1)^6-1}=
Computation of SEC Yield 196,051*( $14.04 - 0.00000)
As of: April 30, 1996
SEC Yield = -1.95%
Dividend and/or Interest
Inc for the 30 days ended $0.00
Net Expenses for $4,487.80
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 196,051
Maxium offering price $14.04
per share as of 4/30/96
</TABLE>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Federated Small Cap Strategies Fund
Class B Shares Initial
Offering
Price/Share= $10.00
Return Since Inception 11/1/95 NAV= $13.49
ending 4/30/96
FYE: October 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Capital Reinvest Ending Total
DECLARED: Quarterly Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Quarterly Dates Shares /Share /Share /Share Shares Price Value
11/30/95 100.000 0.000000000 0.00000 $0.00 100.000 $11.01 $1,101.00
12/31/95 100.000 0.000000000 0.00000 $0.00 100.000 $11.75 $1,175.00
1/31/96 100.000 0.000000000 0.00000 $0.00 100.000 $11.58 $1,158.00
2/29/96 100.000 0.000000000 0.00000 $0.00 100.000 $12.21 $1,221.00
3/31/96 100.000 0.000000000 0.00000 $0.00 100.000 $12.61 $1,261.00
4/30/96 100.000 0.000000000 0.00000 $0.00 100.000 $13.49 $1,349.00
$1,000 (1+T) = Ending Value T = 34.90%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Federated Small Cap Strategies Fund
Class C Shares
Yield = 2{( $0.00 - $790.96 )+1)^6-1}=
Computation of SEC Yield 34,575 *( $14.03 - 0.00000 )
As of: April 30, 1996
SEC Yield = -1.95%
Dividend and/or Interest
Inc for the 30 days ended $0.00
Net Expenses for $790.96
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 34,575
Maxium offering price $14.03
per share as of 4/30/96
</TABLE>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Federated Small Cap Strategies Fund
Class C Shares Initial
Offering
Price/Share= $10.00
Return Since Inception 11/1/95 NAV= $13.93
ending 4/30/96
FYE: October 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Capital Reinvest Ending Total
DECLARED: Quarterly Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Quarterly Dates Shares /Share /Share /Share Shares Price Value
11/30/95 100.000 0.000000000 0.00000 $0.00 100.000 $11.01 $1,101.00
12/31/95 100.000 0.000000000 0.00000 $0.00 100.000 $11.75 $1,175.00
1/31/96 100.000 0.000000000 0.00000 $0.00 100.000 $11.58 $1,158.00
2/29/96 100.000 0.000000000 0.00000 $0.00 100.000 $12.21 $1,221.00
3/31/96 100.000 0.000000000 0.00000 $0.00 100.000 $12.61 $1,261.00
4/30/96 100.000 0.000000000 0.00000 $0.00 100.000 $13.93 $1,393.00
$1,000 (1+T) = Ending Value T = 39.30%
</TABLE>
Exhibit 19 under Form N-1A
Exhibit 24 under Item 601/Reg. S-K
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretary of FEDERATED EQUITY FUNDS and
the Deputy General Counsel of Federated Investors, and each of them, their
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and
stead, in any and all capacities, to sign any and all documents to be filed
with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, by means of the Securities and Exchange Commission's electronic
disclosure system known as EDGAR; and to file the same, with all exhibits
thereto and other documents in connection thterewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to sign and perform each and
every act and thing requisite and necessary to be done in connection
thereiwth, as fully to all intents and purposes as each of them might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURES TITLE DATE
/s/ John F. Donahue Chairman December 1, 1995
John F. Donahue (Cheif Executive Officer)
/s/ Glen R. Johnson President December 1, 1995
Glen R. Johnson
/s/David M. Taylor Treasurer December 1, 1995
David M. Taylor (Principal Financial and
Accounting Officer)
/s/ Thomas G. Bigley Trustee December 1, 1995
Thomas G. Bigley
/s/ John T. Conroy, Jr. Trustee December 1, 1995
John T. Conroy, Jr.
/s/ William J. Copeland Trustee December 1, 1995
William J. Copeland
/s/ James E. Dowd Trustee December 1, 1995
James E. Dowd
/s/ Lawrence D. Ellis, M.D. Trustee December 1, 1995
Lawrence D. Ellis, M.D.
/s/ Edward L. Flaherty, Jr. Trustee December 1, 1995
Edward L. Flaherty, Jr.
/s/ Peter E. Madden Trustee December 1, 1995
Peter E. Madden
/s/ Gregor F. Meyer Trustee December 1, 1995
Gregor F. Meyer
/s/ John E. Murray, Jr. Trustee December 1, 1995
John E. Murray, Jr.
/s/ Wesley W. Posvar Trustee December 1, 1995
Wesley W. Posvar
/s/ Marjorie P. Smuts Trustee December 1, 1995
Marjorie P. Smuts
Sworn to and subscribed before me this 1st day of December, 1995.
/s/ Marie M. Hamm
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Federated Exchange Fund, Ltd.
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 66,157,403
<INVESTMENTS-AT-VALUE> 91,404,824
<RECEIVABLES> 1,794,666
<ASSETS-OTHER> 3,506
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 93,202,996
<PAYABLE-FOR-SECURITIES> 797,750
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 290,704
<TOTAL-LIABILITIES> 1,088,454
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 92,114,542
<SHARES-COMMON-STOCK> 1,140,441
<SHARES-COMMON-PRIOR> 1,182,060
<ACCUMULATED-NII-CURRENT> 35,988
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 66,831,133
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,247,421
<NET-ASSETS> 92,114,542
<DIVIDEND-INCOME> 1,111,116
<INTEREST-INCOME> 65,180
<OTHER-INCOME> 0
<EXPENSES-NET> 480,811
<NET-INVESTMENT-INCOME> 695,485
<REALIZED-GAINS-CURRENT> 3,335,554
<APPREC-INCREASE-CURRENT> 10,461,685
<NET-CHANGE-FROM-OPS> 14,492,724
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 712,852
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 43,664
<SHARES-REINVESTED> 2,045
<NET-CHANGE-IN-ASSETS> 10,737,525
<ACCUMULATED-NII-PRIOR> 53,355
<ACCUMULATED-GAINS-PRIOR> 66,537,926
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 291,041
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 480,811
<AVERAGE-NET-ASSETS> 86,245,295
<PER-SHARE-NAV-BEGIN> 68.840
<PER-SHARE-NII> 0.610
<PER-SHARE-GAIN-APPREC> 11.940
<PER-SHARE-DIVIDEND> 0.620
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 80.770
<EXPENSE-RATIO> 112
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class A
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 899
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 899
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 899
<SHARES-COMMON-STOCK> 30
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 300
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 700
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.000
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class B
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 899
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 899
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 899
<SHARES-COMMON-STOCK> 30
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 300
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 700
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.000
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class C
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 899
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 899
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 899
<SHARES-COMMON-STOCK> 30
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 299
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 700
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.000
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
