[Graphic]
FEDERATED CAPITAL APPRECIATION FUND
SEMI-ANNUAL REPORT
APRIL 30, 1997
ESTABLISHED 1977
PRESIDENT'S MESSAGE
[Graphic]
Dear Fellow Shareholder:
Federated Capital Appreciation Fund was created in 1977, and I am pleased to
present its 21st Semi-Annual Report.
This report covers the six-month period from November 1, 1996, to April 30,
1997. It starts with a discussion with Peter R. Anderson, Senior Vice
President, Federated Management. Following his discussion are three
additional items of shareholder interest: a series of graphs showing the
fund's long-term investment performance, a complete list of the fund's
highly diversified stock holdings, and the fund's financial statements.
While volatility impacted the stock market in March, the fund's portfolio of
high-quality, mid- to large-cap common stocks performed well over the
six-month period and beat the average growth fund on a total return basis.
Total return for the six-month period ended April 30, 1997, which reflects a
net asset value increase, income dividends, and a sizable realized capital
gain, is shown below for each share class.*
<TABLE>
<CAPTION>
CAPITAL
TOTAL INCOME GAIN
RETURN DISTRIBUTIONS DISTRIBUTIONS NAV INCREASE
<S> <C> <C> <C> <C>
Class A Shares 8.41% $0.39 $5.54 $97.01 TO $99.06=2%
Class B Shares 8.01% $0.00 $5.54 $96.70 TO $98.74=2%
Class C Shares 8.07% $0.00 $5.54 $96.76 TO $98.86=2%
</TABLE>
Remember, as a shareholder, you have two easy, automatic ways to increase
your opportunity to participate in the growth and earnings of quality
American companies. First, if you are not already doing so, you can reinvest
your dividends and capital gains automatically in additional shares -- and
help your shares increase in number through the benefit of quarterly
compounding. Second, you can "pay yourself first," by investing in the fund
through a systematic investment program. This program withdraws a specific
amount from your checking account on a regular basis to purchase more fund
shares. You can contact your investment representative or Federated
Securities Corp. for more information.**
Thank you for entrusting a portion of your wealth to Federated Capital
Appreciation Fund, Inc. As always, we welcome your comments and suggestions.
Sincerely,
[Graphic]
Glen R. Johnson
President
June 15, 1997
* Performance quoted is based on net asset value and reflects past
performance. Performance is not indicative of future results. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Total returns
for the period based on offering price or the payment of a contingent
deferred sales charge for Class A, B and C Shares were 2.44%, 2.19%, and
7.01%, respectively.
** Systematic investing does not ensure a profit or protect against loss in
declining markets.
Investment Review
[Graphic]
Peter R. Anderson
Senior Vice President
Federated Management
[Graphic]
THE STOCK MARKET CONTINUED TO CLIMB TO NEW LEVELS, BUT VOLATILITY FINALLY
RAISED ITS HEAD IN THE FIRST FOUR MONTHS OF 1997. WHAT IS YOUR ANALYSIS?
The equity market, as measured by the S&P 500 Index,* turned in strong
14.71% total return performance over the six-month period. Major stock
indexes continued to reach new all-time highs as economic conditions --
moderate growth, stable interest rates, subdued inflation, and rising
corporate profits -- were favorable for equities. However, the last few
months have been marked by a degree of volatility that investors have not
seen in over five years. After reaching a new high on March 11, 1997, the
S&P 500 fell almost 10% over the following month before beginning a strong
rally that carried through April 30, 1997. While the S&P 500's total return
in March was -0.11%, the April recovery produced a one-month total return of
5.97%. The same economic factors have supported this recent strength.
[Graphic]
HOW DID FEDERATED CAPITAL APPRECIATION FUND PERFORM FOR ITS SHAREHOLDERS?
For the six-month period, the fund's Class A Shares produced a total return
of 8.41%. The fund's Class B and C Shares delivered total returns of 8.01%
and 8.07%, respectively, through April 30, 1997. This performance is based
on net asset value and includes capital appreciation, income dividends, and
capital gains.** The fund outperformed its peer group, the Lipper Growth
Funds Average, which had a total return of 7.16% for the same six-month
period.+
[Graphic]
DID YOU MAKE ANY SIGNIFICANT CHANGES TO THE FUND'S SECTOR WEIGHTINGS DURING
THE PERIOD?
No. At the present time we see no reason to be meaningfully over- or
under-weight in any sector. This sector neutrality is also a function of our
defensiveness.
Our strategy continues to focus on the strongest recommendations of our
analysts from both our value and growth disciplines across all industry
sectors.
* The S&P 500 is an unmanaged index comprising stocks in industry,
transportation, and financial and public utility companies. Investments
cannot be made in an index.
** Performance quoted reflects past performance. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Total returns for the
period based on offering price or the payment of a contingent deferred sales
charge for Class A, B and C Shares were 2.44%, 2.19%, and 7.01%,
respectively.
+ Lipper figures represent the average of the total returns reported by all
of the mutual funds designated by Lipper Analytical Services, Inc. as
falling into the respective category indicated. This figure does not
reflect any sales charges.
On behalf of the fund's shareholders, we seek the most attractive stocks
from our value and growth disciplines, including both large-cap and mid-cap
stocks. Our quality large-cap names include CITICORP, GE AND LUCENT
TECHNOLOGIES. We also recently added some attractively valued mid-cap stocks
such as DIAMOND OFFSHORE DRILLING and PARKER HANNIFIN. The fund's total
stock holdings now number 78 issues.
[Graphic]
PLEASE TELL US ABOUT RECENT STOCK PURCHASES.
Our recent purchases include the following:
AMR CORP. (0.6% of portfolio): AMR, the parent of American Airlines and The
Sabre Group, appeared undervalued, and had become very cheap relative to
other airlines due to the overhang of a pilots' strike. Given that American
Airlines represents 20% of U.S. airline capacity, the government would
probably put a quick end to any strike and impose a settlement.
CIGNA CORP. (1.7% of portfolio): This multi-line insurance company now
derives half of its profits from health care and has compiled an outstanding
record over the past five years. Given this exposure to health care, CIGNA
appears to be undervalued at 11X earnings. CIGNA management might sell the
domestic property-casualty unit, which would be a positive for the stock.
PROFFITTS, INC. (0.7% of portfolio): Proffitts is a mid- to high-end
retailer that is very acquisition-oriented. The acquisitions tend to be in
the defensible geographic locations of smaller cities. Management owns a
large amount of stock, and Proffitts is among the cheapest stocks in the
retailing sector based on our valuation work.
TYCO INTERNATIONAL (1.4% of portfolio): TYCO is a multi-industry company
with an emphasis on fire and safety systems and medical bandages. It is a
market leader in most of its businesses. TYCO's excellent management team is
highly focused on profitability and shareholder value.
DIAMOND OFFSHORE DRILLING (1.3% of portfolio): Diamond is an offshore
contract driller with virtually no debt and substantial operating leverage.
Demand is strong from the integrated oil companies; thus the day rates
(rent) that the drillers are receiving is climbing. New supply of drilling
rigs is minimal due to the cost and time to build.
[Graphic]
WHAT WERE THE FUND'S TOP 10 HOLDINGS AS OF APRIL 30, 1997, AND HOW IS THE
FUND DIVERSIFIED BY INDUSTRY?
The top 10 holdings and sector weightings were as follows:
TOP 10 HOLDINGS
PERCENTAGE
NAME OF PORTFOLIO
Bristol-Myers Squibb 2.7%
Textron, Inc. 2.3%
Travelers Corp. 2.3%
Avon Products, Inc. 2.2%
Tosco Corp. 2.0%
Morton International 1.8%
Repsol, SA 1.8%
Dean Witter Discover 1.7%
Interpublic Group 1.7%
CIGNA Corp. 1.7%
Total percentage of portfolio 20.2%
PORTFOLIO COMPOSITION
PERCENTAGE S&P 500
SECTOR OF PORTFOLIO SECTOR WEIGHTING
Finance 15.3% 14.8%
Technology 13.1% 15.1%
Health Care 10.1% 11.1%
Consumer Non-Durables 9.8% 12.5%
Utilities 9.3% 9.5%
Energy Minerals 8.2% 8.8%
Producer Manufacturing 7.7% 7.7%
Basic Industry 5.6% 6.0%
Services 5.3% 5.1%
Retail Trade 3.9% 4.4%
Consumer Durables 2.8% 3.6%
Transportation 1.6% 1.4%
Miscellaneous 7.3% 0.0%
[Graphic]
WHAT IS YOUR OUTLOOK FOR THE REMAINDER OF 1997?
Contrary to many market observers, ourselves included, the U.S. stock market
continued to show strength in the first four months of 1997, even after the
substantial increases of 1995 and 1996. However, the market has been showing
little mercy to companies that warn of earnings estimate shortfalls. As a
result, the market has been paying more for quality and consistency of
earnings.
We continue to believe that 1997 will prove to be a challenging year for
investors, and that stock selection will be of critical importance in this
environment. Historic valuation and risk control measures, which have been
all but ignored by investors over the past few years, should play an
important role in this market. We believe that our adherence to these
disciplines should reward the fund's shareholders.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FEDERATED CAPITAL APPRECIATION FUND
INITIAL INVESTMENT:
IF YOU HAD MADE AN INITIAL INVESTMENT OF $21,000 IN THE CLASS A SHARES OF
FEDERATED CAPITAL APPRECIATION FUND ON 1/1/77, REINVESTED DIVIDENDS AND
CAPITAL GAINS, AND DIDN'T REDEEM ANY SHARES, YOUR ACCOUNT WOULD BE WORTH
$288,977 ON 4/30/97. YOU WOULD HAVE EARNED A 13.76%* AVERAGE ANNUAL TOTAL
RETURN FOR THE 20-YEAR INVESTMENT LIFE SPAN.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the
number of shares on which you can earn future dividends, and you gain the
benefit of compounding.
As of 3/31/97, the Class A Shares' average annual one-year, five-year, and
ten-year total returns were 4.27%, 13.53%, and 10.08%, respectively. Class B
Shares' one-year and since inception (1/4/96) total returns were 3.59% and
9.12%, respectively. Class C Shares' one-year and since inception (1/4/96)
total returns were 8.55% and 13.23%, respectively.**
[Graphic-see appendix]
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 5.50%
sales charge applicable to an initial investment in Class A Shares.
Data quoted represents past performance and does not guarantee future
results. Investment return and principal value will fluctuate so an
investor's shares, when redeemed, may be worth more or less than their
original cost.
** Total return stated takes into account the 5.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge on Class B Shares, and
the 1.00% contingent deferred sales charge on Class C Shares.
FEDERATED CAPITAL APPRECIATION FUND
ONE STEP AT A TIME:
$1,000 INVESTED EACH YEAR FOR 20 YEARS (REINVESTING ALL DIVIDENDS AND
CAPITAL GAINS) GREW TO $108,868.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of
Federated Capital Appreciation Fund on 1/1/77, reinvested your dividends and
capital gains, and didn't redeem any shares, you would have invested only
$21,000, but your account would have reached a total value of $108,868* by
4/30/97. You would have earned an average annual total return of 14.03%.
A practical investment plan helps you pursue long-term performance from
growth-oriented stocks. Through systematic investing, you buy shares on a
regular basis and reinvest all earnings. An investment plan works for you
when you invest only $1,000 annually. You can take it one step at a time.
Put time, money, and compounding to work!
[Graphic-see appendix]
* No method of investing can guarantee a profit or protect against loss in
down markets. However, by investing regularly over time and buying shares at
various prices, investors can purchase more shares at lower prices, and all
accumulated shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
FEDERATED CAPITAL APPRECIATION FUND
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR A COLLEGE EDUCATION
David and Joan Rice are a fictitious couple who, like many shareholders, are
searching for a way to make their money grow over time.
David and Joan are planning for the college education of their child. On
April 30, 1987, they invested $5,000 in the Class A Shares of Federated
Capital Appreciation Fund. Since then, David and Joan have made additional
investments of $250 every month.
As this chart shows, over 10 years, the original $5,000 investment along
with their additional monthly $250 investments totaling $35,000 has grown to
$73,065. This represents a 12.47% average annual total return.* For the
Rices, a dedicated program of monthly investment really paid off.
[Graphic-see appendix]
* This hypothetical scenario is provided for illustrative purposes only and
does not represent the results obtained by any particular shareholder. Past
performance does not guarantee future results.
FEDERATED CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 79.5%
BASIC INDUSTRY -- 5.6%
57,000 Morton International, Inc. $ 2,386,875
26,147 Potash Corporation of Saskatchewan, Inc. 2,010,051
35,000 Schweitzer-Mauduit International, Inc. 1,141,875
66,000 Sigma-Aldrich Corp. 1,980,000
Total 7,518,801
CONSUMER DURABLES -- 2.8%
27,000 Eastman Kodak Co. 2,254,500
55,000 Mattel, Inc. 1,533,125
Total 3,787,625
CONSUMER NON-DURABLES -- 9.0%
47,800 Avon Products, Inc. 2,945,675
20,000 Dean Foods Co. 737,500
29,000 Interstate Bakeries Corp. 1,504,375
30,000 Nike, Inc., Class B 1,687,500
56,000 PepsiCo, Inc. 1,953,000
45,000 Philip Morris Cos., Inc. 1,771,875
53,500 Russell Corp. 1,484,625
Total 12,084,550
ENERGY MINERALS -- 6.3%
15,000 British Petroleum Co. PLC, ADR 2,064,375
16,000 Mobil Corp. 2,080,000
57,000 Repsol SA, ADR 2,386,875
66,000 Tosco Corp. 1,955,250
Total 8,486,500
FINANCE -- 14.3%
25,000 Allstate Corp. 1,637,500
15,000 CIGNA Corp. 2,255,625
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
FINANCE -- CONTINUED
23,600 Chase Manhattan Corp. $ 2,185,950
19,500 Citicorp 2,196,188
59,290 Dean Witter, Discover & Co. 2,267,843
38,000 Executive Risk, Inc. 1,719,500
60,000 (a)Nationwide Financial Services, Inc., Class A 1,590,000
54,666 Travelers Group, Inc. 3,027,130
23,000 Vesta Insurance Group, Inc. 960,250
5,300 Wells Fargo & Co. 1,413,775
Total 19,253,761
HEALTH CARE -- 8.6%
31,000 American Home Products Corp. 2,053,750
22,500 Becton, Dickinson & Co. 1,035,000
56,000 Bristol-Myers Squibb Co. 3,668,000
45,000 Columbia/HCA Healthcare Corp. 1,575,000
50,000 Pharmacia & Upjohn, Inc. 1,481,250
22,000 Smithkline Beecham Corp., ADR 1,773,750
Total 11,586,750
PRODUCER MANUFACTURING -- 7.7%
20,000 General Electric Co. 2,217,500
30,000 Parker-Hannifin Corp. 1,492,500
28,000 Textron, Inc. 3,118,500
30,000 Tyco International, Ltd. 1,830,000
27,000 Xerox Corp. 1,660,500
Total 10,319,000
RETAIL TRADE -- 3.2%
25,000 Dayton-Hudson Corp. 1,125,000
15,000 (a)Kohl's Corp. 733,125
25,000 (a)Proffitts, Inc. 934,375
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
RETAIL TRADE -- CONTINUED
30,500 Sears, Roebuck & Co. $ 1,464,000
Total 4,256,500
SERVICES -- 3.2%
30,000 Hollinger International Publishing, Inc. 300,000
40,000 Interpublic Group Cos., Inc. 2,265,000
42,000 Manpower, Inc. 1,685,250
Total 4,250,250
TECHNOLOGY -- 11.8%
41,200 (a)BA Merchant Services, Inc., Class A 576,800
28,000 (a)Ceridian Corp. 934,500
17,000 (a)Compaq Computer Corp. 1,451,375
26,000 Computer Associates International, Inc. 1,352,000
52,000 (a)DST Systems, Inc. 1,475,500
49,000 Electronic Data Systems Corp. 1,635,375
24,300 Hewlett-Packard Co. 1,275,750
10,500 Intel Corp. 1,607,813
20,500 Lockheed Martin Corp. 1,834,750
24,000 Lucent Technologies, Inc. 1,419,000
75,000 (a)Mastech Corp. 862,500
7,000 (a)Microsoft Corp. 850,500
76,000 (a)National Processing, Inc. 532,000
Total 15,807,863
TRANSPORTATION -- 1.0%
8,000 (a)AMR Corp. 745,000
10,400 Union Pacific Corp. 663,000
Total 1,408,000
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
UTILITIES -- 6.0%
46,000 CMS Energy Corp. $ 1,460,500
29,500 GTE Corp. 1,353,313
40,000 Panenergy Corp. 1,770,000
36,000 Sprint Corp. 1,579,500
142,000 (a)Tele-Communications, Inc., Class A 1,961,375
Total 8,124,688
TOTAL COMMON STOCKS (IDENTIFIED COST $77,918,090) 106,884,288
CORPORATE BONDS -- 4.8%
ENERGY MINERALS -- 1.3%
$ 1,750,000 Diamond Offshore Drilling, Inc., Conv. Bond, 3.75%, 2/15/2007 1,784,388
HEALTH CARE -- 1.5%
1,600,000 Tenet Healthcare Corp., Conv. Bond, 6.00%, 12/1/2005 1,979,008
RETAIL TRADE -- 0.7%
1,200,000 Saks Holdings, Inc., Conv. Bond, 5.50%, 9/15/2006 975,852
TECHNOLOGY -- 1.3%
1,600,000 (b)Solectron Corp., Conv. Bond, 6.00%, 3/1/2006 1,774,864
TOTAL CORPORATE BONDS (IDENTIFIED COST $5,437,113) 6,514,112
PREFERRED STOCKS -- 8.4%
CONSUMER NON-DURABLES -- 0.9%
194,500 RJR Nabisco Holdings Corp., Conv. Pfd., Series C, $.60 1,142,688
ENERGY MINERALS -- 0.6%
14,000 (b)Tosco Corp., Conv. Pfd. 777,000
FINANCE -- 1.0%
50,000 National Australia Bank, Ltd., Melbourne, Exchangeable Capital Unit, $1.97 1,325,000
</TABLE>
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
PREFERRED STOCKS -- CONTINUED
SERVICES -- 2.2%
47,000 Browning-Ferris Industries, Inc., ACES, $2.58 $ 1,433,500
143,200 Hollinger International Publishing, Inc., Conv. Pfd., $.95 1,485,700
Total 2,919,200
TRANSPORTATION -- 0.5%
10,000 Continental Airlines, Inc., Conv. Pfd., $4.25 728,820
UTILITIES -- 3.2%
38,000 (b)CalEnergy Co., Inc., Conv. Pfd. 2,045,084
16,800 Salomon, Inc., DECS, Series CSN, $3.48 940,800
16,250 WorldCom, Inc., DECS 1,356,875
Total 4,342,759
TOTAL PREFERRED STOCKS (IDENTIFIED COST $11,644,559) 11,235,467
(C)REPURCHASE AGREEMENT -- 7.3%
$ 9,770,000 BT Securities Corporation, 5.43%, dated 4/30/1997, due 5/1/1997,
(AT AMORTIZED COST) 9,770,000
TOTAL INVESTMENTS (IDENTIFIED COST $104,769,762)(D) $ 134,403,867
</TABLE>
(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At April 30, 1997, these securities amounted
to $4,596,948 which represents 3.4% of net assets.
(c) 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 accounts with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to
$104,769,762. The net unrealized appreciation/depreciation of investments
on a federal tax basis amounts to $29,634,105 which is comprised of
$31,890,186 appreciation and $2,256,081 depreciation at April 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($134,383,196) at April 30, 1997.
The following acronyms are used throughout this portfolio:
ACES -- Adjustable Convertible Extendable Securities
ADR -- American Depositary Receipt
DECS -- Dividend Enhanced Convertible Stock
PLC -- Public Limited Company
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $104,769,762) $ 134,403,867
Cash 17,552
Income receivable 249,609
Receivable for investments sold 1,131,737
Receivable for shares sold 178,341
Total assets 135,981,106
LIABILITIES:
Payable for investments purchased $ 1,533,541
Payable for shares redeemed 1,627
Accrued expenses 62,742
Total liabilities 1,597,910
NET ASSETS for 1,356,943 shares outstanding $ 134,383,196
NET ASSETS CONSIST OF:
Paid in capital $ 97,043,932
Net unrealized appreciation of investments 29,634,105
Accumulated net realized gain on investments 7,548,856
Accumulated undistributed net investment income 156,303
Total Net Assets $ 134,383,196
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($122,029,828 / 1,231,851 shares outstanding) $99.06
Offering Price Per Share (100/94.50 of $99.06)* $104.83
Redemption Proceeds Per Share (99.50/100 of $99.06)** $98.56
CLASS B SHARES:
Net Asset Value Per Share ($11,060,451 / 112,014 shares outstanding) $98.74
Offering Price Per Share $98.74
Redemption Proceeds Per Share (94.50/100 of $98.74)** $93.31
CLASS C SHARES:
Net Asset Value Per Share ($1,292,917 / 13,078 shares outstanding) $98.86
Offering Price Per Share $98.86
Redemption Proceeds Per Share (99.00/100 of $98.86)** $97.87
</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)
<TABLE>
<CAPTION>
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,032,030
Interest 306,009
Total income 1,338,039
EXPENSES:
Investment advisory fee $ 464,773
Administrative personnel and services fee 91,740
Custodian fees 11,867
Transfer and dividend disbursing agent fees and expenses 41,700
Directors'/Trustees' fees 4,378
Auditing fees 14,507
Legal fees 4,421
Portfolio accounting fees 36,095
Distribution services fee -- Class B Shares 32,008
Distribution services fee -- Class C Shares 3,819
Shareholder services fee -- Class A Shares 142,982
Shareholder services fee -- Class B Shares 10,669
Shareholder services fee -- Class C Shares 1,273
Share registration costs 17,376
Printing and postage 11,998
Insurance premiums 2,896
Taxes 905
Miscellaneous 1,991
Total expenses 895,398
Waiver of investment advisory fee (82,224)
Net expenses 813,174
Net investment income 524,865
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 7,554,053
Net change in unrealized appreciation of investments 1,823,531
Net realized and unrealized gain on investments 9,377,584
Change in net assets resulting from operations $ 9,902,449
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS PERIOD YEAR
ENDED ENDED ENDED
(UNAUDITED) OCTOBER 31, DECEMBER 31,
APRIL 30, 1997 1996(A) 1995(B)
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 524,865 $ 259,736 $ 1,188,048
Net realized gain (loss) on investments ($7,554,053,
$9,100,399 and $16,693,345, net gains, respectively,
as computed for federal tax purposes) 7,554,053 9,100,399 18,575,112
Net change in unrealized appreciation (depreciation) 1,823,531 3,829,310 9,195,528
Change in net assets resulting from operations 9,902,449 13,189,445 28,958,688
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Class A Shares (450,177) (178,012) (1,235,954)
Class B Shares (11) (98) --
Class C Shares -- -- --
Distributions from net realized gains
Class A Shares (6,319,819) (2,209,569) (6,164,051)
Class B Shares (426,677) (89,485) --
Class C Shares (48,727) (11,319) --
Change in net assets resulting from distributions
to shareholders (7,245,411) (2,488,483) (7,400,005)
SHARE TRANSACTIONS --
Proceeds from sale of shares 17,139,883 13,529,456 --
Net asset value of shares issued to shareholders in
payment of distributions declared 2,670,756 887,243 2,209,356
Cost of shares redeemed (3,967,656) (7,434,744) (6,944,798)
Change in net assets resulting from share transactions 15,842,983 6,981,955 (4,735,442)
Change in net assets 18,500,021 17,682,917 16,823,241
NET ASSETS:
Beginning of period 115,883,175 98,200,258 81,377,017
End of period (including undistributed net investment
income of $156,303, $81,626 and $5,448, respectively) $ 134,383,196 $ 115,883,175 $ 98,200,258
</TABLE>
(a) Reflects operations for the period from January 1, 1996 (start of
business) to October 31, 1996.
(b) Amounts presented prior to January 31, 1996 represents results of
operations for Federated Exchange Fund, Ltd.
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
(UNAUDITED) ENDED
APRIL 30, OCTOBER 31, YEAR ENDED DECEMBER 31,(A)
1997 1996(B) 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING
OF PERIOD $97.01 $87.58 $68.84 $71.39 $65.83 $61.65 $50.56 $54.93 $50.03 $46.19
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income 0.44 0.24 1.05 1.18 1.13 1.36 1.16 1.46 1.37 1.31
Net realized and
unrealized gain
(loss) on
investments 7.54 11.35 24.39 (1.39) 6.30 5.57 12.62 (3.86) 7.34 5.08
Total from
investment operations 7.98 11.59 25.44 (0.21) 7.43 6.93 13.78 (2.40) 8.71 6.39
LESS DISTRIBUTIONS
Distributions
from net
investment
income (0.39) (0.16) (1.09) (1.14) (1.16) (1.38) (1.15) (1.51) (1.32) (1.29)
Distributions
from net realized
gain on
investments (5.54) (2.00) (5.61) (1.20) (0.71) (1.37) (1.54) (0.46) (2.49) (1.26)
Total
distributions (5.93) (2.16) (6.70) (2.34) (1.87) (2.75) (2.69) (1.97) (3.81) (2.55)
NET ASSET VALUE,
END OF PERIOD $99.06 $97.01 $87.58 $68.84 $71.39 $65.83 $61.65 $50.56 $54.93 $50.03
TOTAL RETURN(C) 8.41% 13.36% 37.17% (0.30)% 11.31% 11.38% 27.42% (4.43)% 17.58% 13.97%
RATIOS TO AVERAGE
NET ASSETS
Expenses 1.25%* 1.23%* 1.08% 1.15% 1.15% 1.11% 1.12% 1.07% 1.13% 1.08%
Net investment
income 0.91%* 0.31%* 1.29% 1.63% 1.59% 2.13% 1.97% 2.76% 2.45% 2.61%
Expense waiver/
reimbursement(d) 0.13%* 0.27%* 0.15% -- -- -- -- -- -- --
SUPPLEMENTAL DATA
Net assets, end
of period (000
omitted) $122,030 $108,804 $98,200 $81,377 $88,949 $91,551 $90,503 $79,114 $95,422 $89,228
Average
commission
rate paid(e) $0.0528 $0.0012 -- -- -- -- -- -- -- --
Portfolio
turnover 40% 79% 81% 23% 26% 47% 54% 61% 41% 36%
</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 (start of
business) to October 31, 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.
(e) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
This disclosure is required for fiscal years beginning on or after
September 1, 1995.
(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 EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) PERIOD ENDED
APRIL 30, OCTOBER 31,
1997 1996(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $96.70 $88.22
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.07(b) (0.25)(b)
Net realized and unrealized gain (loss) on investments 7.51 10.74
Total from investment operations 7.58 10.49
LESS DISTRIBUTIONS
Distributions from net investment income -- (0.01)
Distributions from net realized gain on investments (5.54) (2.00)
Total distributions (5.54) (2.01)
NET ASSET VALUE, END OF PERIOD $98.74 $96.70
TOTAL RETURN(C) 8.01% 12.00%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.01%* 1.98%*
Net investment income 0.15%* (0.36)%*
Expense waiver/reimbursement(d) 0.13%* 0.27%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $11,060 $6,369
Average commission rate paid(e) $0.0528 $0.0012
Portfolio turnover 40% 79%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1996 (date of initial
public investment) to October 31, 1996.
(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.
(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.
(e) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
This disclosure is required for fiscal years beginning on or after
September 1, 1995.
(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 EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) PERIOD ENDED
APRIL 30, OCTOBER 31,
1997 1996(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $96.76 $88.22
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.07(b) (0.25)(b)
Net realized and unrealized gain (loss) on investments 7.57 10.80
Total from investment operations 7.64 10.55
LESS DISTRIBUTIONS
Distributions from net investment income -- (0.01)
Distributions from net realized gain on investments (5.54) (2.00)
Total distributions (5.54) (2.01)
NET ASSET VALUE, END OF PERIOD $98.86 $96.76
TOTAL RETURN(C) 8.07% 12.05%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.01%* 1.98%*
Net investment income 0.15%* (0.37)%*
Expense waiver/reimbursement(d) 0.13%* 0.27%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $1,293 $710
Average commission rate paid(e) $0.0528 $0.0012
Portfolio turnover 40% 79%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1996 (date of initial
public investment) to October 31, 1996.
(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.
(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.
(e) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
This disclosure is required for fiscal years beginning on or after
September 1, 1995.
(See Notes which are an integral part of the Financial Statements)
FEDERATED CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997 (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 four 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 Fund offers three classes of shares: Class A Shares,
Class B Shares and Class C Shares. The investment objective of the Fund is
to provide capital appreciation.
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. Listed corporate
bonds are generally valued at the mean of the latest bid and asked price as
furnished by an independent pricing service. Short-term securities are
valued at the prices provided by an independent pricing service. 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.
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.
RESTRICTED SECURITIES -- Restricted securities are securities that may only
be resold upon registration under federal securities laws or in transactions
exempt from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Board of Directors. The Fund will not
incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary
market or, if no market prices are available, at the fair value as
determined by the Fund's pricing committee.
Additional information on each restricted security held at April 30, 1997 is
as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
<S> <C> <C>
CalEnergy Co., Inc., Conv. Pfd. 2/20/97 $ 1,900,000
Tosco Corp., Conv. Pfd. 12/10/96 - 12/17/96 699,363
Solectron Corp., Conv. Bond 1/17/97 1,808,000
</TABLE>
CHANGE IN FISCAL YEAR -- The Fund has changed its fiscal year-end from
December 31, to October 31, beginning January 2, 1996.
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>
SIX MONTHS PERIOD ENDED YEAR ENDED
ENDED OCTOBER 31, DECEMBER 31,
APRIL 30, 1997 1996(A) 1995(B)
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Shares sold 115,548 $ 11,308,464 66,891 $ 6,413,221 -- $ --
Shares issued to
shareholders in
payment of distributions
declared 23,161 2,226,847 8,506 788,628 25,468 2,209,356
Shares redeemed (28,420) (2,810,925) (75,039) (7,185,625) (86,324) (6,944,798)
Net change resulting
from Class A Share
transactions 110,289 $ 10,724,386 358 $ 16,224 (60,856) $ (4,735,442)
</TABLE>
(a) Reflects operations for the period from January 1, 1996 (start of
business) to October 31, 1996.
(b) Includes transactions in shares of partnership interest for
Federated Exchange Fund, Ltd.
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
APRIL 30, 1997 OCTOBER 31, 1996(C)
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 53,090 $ 5,234,001 67,529 $ 6,418,841
Shares issued to shareholders in payment of
distributions declared 4,173 400,527 955 88,155
Shares redeemed (11,112) (1,079,211) (2,621) (248,515)
Net change resulting from
Class B Share transactions 46,151 $ 4,555,317 65,863 $ 6,258,481
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
APRIL 30, 1997 OCTOBER 31, 1996(C)
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 6,084 $ 597,418 7,228 $ 697,394
Shares issued to shareholders in
payment of distributions declared 451 43,382 113 10,460
Shares redeemed (791) (77,520) (7) (604)
Net change resulting from Class C Share
transactions 5744 $ 563,280 7,334 $ 707,250
Net change resulting from share
transactions 162,184 $ 15,842,983 73,555 $ 6,981,955
</TABLE>
(c) For the period ended January 4, 1996 (date of initial public
investment) to October 31, 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. The Adviser
can modify or terminate this voluntary waiver at any time at its sold
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.
PERCENTAGE OF
AVERAGE DAILY
SHARE CLASS NAME NET ASSETS OF CLASS
Class A Shares 0.25%
Class B Shares 0.75%
Class C Shares 0.75%
For the six months ended April 30, 1997, Class A Shares did not incur a
distribution services fee.
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 AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ, through
its subsidiary, Federated Shareholder Services Company ("FSSC") serves as
transfer and dividend disbursing agent for the Fund. The fee paid to FSSC 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.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1997, were as follows:
PURCHASES $54,826,271
SALES $47,685,926
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Glen R. Johnson
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
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 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 its objective and policies, management fees, expenses and other
information.
[Graphic]
Federated Securities Corp., Distributor
Cusip 314172701
Cusip 314172800
Cusip 314172883
G01649-04 (6/97)
[Graphic]
[Graphic]
Federated Growth Strategies Fund
SEMI-ANNUAL REPORT
APRIL 30, 1997
ESTABLISHED 1984
PRESIDENT'S MESSAGE
[Graphic]
Dear Shareholder:
Federated Growth Strategies Fund was created in 1984, and I am pleased to
present its 13th Semi-Annual Report.
This report covers the six-month period from November 1, 1996, through April
30, 1997. It starts with a discussion with portfolio manager Jim
Grefenstette, Vice President of Federated Management. Following his
discussion, there are three additional items of shareholder interest: a
series of graphs showing long-term investment performance, a complete
listing of the fund's stock holdings, and the fund's financial statements.
Federated Growth Strategies Fund is managed to pursue long-term growth
through a highly diversified portfolio of mid- and large-capitalization
stocks selected for their strong price and earnings momentum. The fund's
portfolio includes common stocks and convertible securities representing 12
key business sectors with many familiar names that you'll recognize
immediately, for example, General Electric, Travelers Group, Citicorp and
Merck.
This diversified portfolio produced a strong total return relative to the
average growth fund during the six-month period ended April 30, 1997,
primarily through gains realized from security price appreciation.*
<TABLE>
<CAPTION>
TOTAL CAPITAL
RETURN GAINS INCOME NAV CHANGE
<S> <C> <C> <C> <C>
Class A Shares 8.83% $2.82 $0.002 $25.84 to $25.17= -3%
Class B Shares 8.38% $2.82 $0.00 $25.65 to $24.86= -3%
Class C Shares 8.45% $2.82 $0.00 $25.68 to $24.91= -3%
</TABLE>
It is easy to increase your opportunity to participate in the growth of
American companies by reinvesting your earnings automatically in additional
fund shares or investing on a regular basis through a systematic investment
program.**
Thank you for selecting Federated Growth Strategies Fund to pursue your
financial goals. As always, we welcome your comments and suggestions.
Sincerely,
[Graphic]
Glen R. Johnson
President
June 15, 1997
* Performance quoted is based on net asset value, reflects past performance,
and is not indicative of future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Total returns for the period
based on offering price or the payment of a contingent deferred sales charge
for Class A, B, and C Shares were 2.85%, 2.40% and 7.36%, respectively.
** Systematic investing does not ensure a profit or protect against loss in
declining markets.
INVESTMENT REVIEW
[Graphic]
Jim E. Grefenstette, CFA
Vice President
Federated Management
[Graphic]
OVERALL, NOVEMBER 1, 1996, THROUGH APRIL 30, 1997, WAS REWARDING, BUT
VOLATILITY IMPACTED STOCKS -- PARTICULARLY GROWTH STOCKS -- LATE IN THE
PERIOD. WHAT ARE YOUR COMMENTS?
The equity market continued to reach new all-time highs in the fourth
quarter of 1996 as economic conditions -- moderate growth, stable interest
rates, subdued inflation, and rising corporate profits -- were favorable for
equities.
However, the first quarter of 1997 definitely suffered from a split
personality. A pleasant January led us out of the gates, as the market was
equally kind to almost all stocks with high single-digit returns. February
and March, however, were impacted by evidence supporting a
stronger-than-expected economy, which pushed up interest rates and pressed
down longer duration equities -- such as growth stocks -- in favor of more
cyclically sensitive stocks. April ended with less confusion about the
strength of the economy, as both stocks and bonds began to price in a
stronger economy for the rest of 1997.
[Graphic]
HOW DID FEDERATED GROWTH STRATEGIES FUND PERFORM OVER THE SIX-MONTH PERIOD
ENDED APRIL 30, 1997 COMPARED TO THE LIPPER GROWTH FUNDS AVERAGE?
The fund produced relatively strong total returns. For example, Class A, B,
and C Share returns were 8.83%, 8.38%, and 8.45%, respectively, based on net
asset value -- which includes capital appreciation of the shares, and adding
income dividends and realized capital gain to the fund's net asset value.*
These returns all outperformed the fund's peer group, the Lipper Growth
Funds Average, which had a total return of 7.16% for the same period.**
* Performance quoted reflects past performance. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Total returns for the
period based on offering price or the payment of a contingent deferred sales
charge for Class A, B, and C shares were 2.85%, 2.40% and 7.36%,
respectively.
** Lipper figures represent the average of the total returns reported by all
of the mutual funds designated by Lipper Analytical Services, Inc. as
falling into the respective category indicated. This figure does not reflect
any sales charges.
[Graphic]
CAN YOU SINGLE OUT PORTFOLIO HOLDINGS WITH PARTICULARLY INTERESTING STORIES?
HONDA MOTORS CO. LTD. (1.00% of portfolio): The world's largest manufacturer
of internal combustion engines, HMC is benefiting from strong revenue growth
in its automobile and motorcycle businesses, margin expansion, and the weak
yen.
INTERSTATE BAKERIES CORP. (0.80% of portfolio): This is the number one
bakery and distributor of fresh bakery products in the U.S. IBC's Twinkies
and Wonder Bread remain family favorites. IBC continues to soar past
consensus estimates as it realizes consolidation savings from the 1995
merger that created this company.
BIOCHEM PHARMA, INC. (0.40% of portfolio): This is a biotechnology company
moving from a product development story to an earnings story with partner
Glaxo Wellcome. The 3TC/Lamivudine for AIDS/Hepatitis B has $2 billion
product potential from which earnings should grow rapidly.
UNIVERSAL HEALTH SERVICES, INC. (1.20% of portfolio): This is the smallest
public hospital company with one of the fastest growth rates from admission
growth, expansion of services and consolidation opportunities.
[Graphic]
WHAT IS YOUR OUTLOOK FOR GROWTH STOCKS THROUGH 1997, AND HOW HAS THAT
INFLUENCED YOUR SECTOR WEIGHTINGS?
While we continue to believe that, through the year, the market will be
disappointed with the rate of growth generated by the economy, as it
currently stands, the economy appears stable. The lack of core price
inflation at either the producer or consumer level and absence of growth in
capital goods orders (excluding defense and aircraft orders) are two
indicators that tell us the current pace of economic growth, however, is not
sustainable.
Once consensus views on the economy shift to reflect more moderation, money
should flow into stocks that are less sensitive to the strength of the
economy. Consequently, we continue to favor with modest overweights sectors
that offer the potential for strong secular growth, namely TECHNOLOGY,
FINANCE and HEALTH CARE. We are also modestly underweight in economically
sensitive sectors such as PRODUCER MANUFACTURING, BASIC INDUSTRIES, CONSUMER
DURABLES AND UTILITIES.
At the end of the period, the portfolio composition and top ten holdings
were as follows:
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF S&P 500*
SECTOR NET ASSETS SECTOR WEIGHTING
<S> <C> <C>
Finance 19.9% 14.8%
Technology 17.2% 15.0%
Health Care 12.9% 11.1%
Consumer Non Durables 8.6% 12.5%
Energy/Minerals 7.6% 8.8%
Producer Manufacturing 5.2% 7.7%
Utilities 5.2% 9.5%
Basic Industry 4.4% 6.0%
Retail 4.2% 4.4%
Services 3.3% 5.1%
Consumer Durables 3.0% 3.6%
Transportation 1.4% 1.4%
Miscellaneous 5.9% --
</TABLE>
TOP 10 HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE
OF PORTFOLIO
<S> <C>
MBNA Corp. 1.6%
Travelers Group, Inc. 1.5%
General Electric Co. 1.4%
Pfizer, Inc. 1.3%
NationsBank Corp. 1.3%
Citicorp 1.3%
Mellon Bank Corp. 1.3%
Merck & Co., Inc. 1.2%
Universal Health Services, Inc. 1.2%
SunAmerica, Inc. 1.1%
Total Percentage of Portfolio 13.2%
</TABLE>
* The S&P 500 is an unmanaged index of common stocks in industry,
transportation, and financial and public utility companies. Investments may
not be made in an index.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FEDERATED GROWTH STRATEGIES FUND
INITIAL INVESTMENT:
IF YOU HAD MADE AN INITIAL INVESTMENT OF $13,000 IN THE CLASS A SHARES OF
FEDERATED GROWTH STRATEGIES FUND ON 8/23/84, REINVESTED DIVIDENDS AND
CAPITAL GAINS, AND DIDN'T REDEEM ANY SHARES, YOUR ACCOUNT WOULD HAVE BEEN
WORTH $79,049 ON 4/30/97. YOU WOULD HAVE EARNED A 15.29%* AVERAGE ANNUAL
TOTAL RETURN FOR THE 13-YEAR INVESTMENT LIFE SPAN.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends,
and you gain the benefit of compounding.
As of 3/31/97, the Class A Shares' average annual one-year, five-year and
ten-year total returns were 7.92%, 9.63%, and 11.01%, respectively. Class B
Shares' one-year and since inception (8/16/95) total returns were 6.94% and
14.31%, respectively. Class C Shares' one-year and since inception (8/16/95)
total returns were 12.23% and 17.92%, respectively.**
[Graphic-see Appendix]
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 5.50%
sales charge applicable to an initial investment in Class A Shares.
Data quoted represents past performance and does not guarantee future
results. Investment return and principal value will fluctuate so an
investor's shares, when redeemed, may be worth more or less than their
original cost.
** Total return stated takes into account the 5.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge on Class B Shares, and
the 1.00% contingent deferred sales charge on Class C Shares.
FEDERATED GROWTH STRATEGIES FUND
ONE STEP AT A TIME:
$1,000 INVESTED EACH YEAR FOR 13 YEARS (REINVESTING ALL DIVIDENDS AND
CAPITAL GAINS) GREW TO $33,755.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of
Federated Growth Strategies Fund on 8/23/84, reinvested your dividends and
capital gains and didn't redeem any shares, you would have invested only
$13,000, but your account would have reached a total value of $33,755* by
4/30/97. You would have earned an average annual total return of 13.46%.
A practical investment plan helps you pursue long-term performance from
growth oriented stocks. Through systematic investing, you buy shares on a
regular basis and reinvest all earnings. An investment plan works for you
when you invest only $1,000 annually. You can take it one step at a time.
Put time, money, and compounding to work!
[Graphic-see Appendix]
* No method of investing can guarantee a profit or protect against loss in
down markets. However, by investing regularly over time and buying shares at
various prices, investors can purchase more shares at lower prices, and all
accumulated shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
FEDERATED GROWTH STRATEGIES FUND
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR A COLLEGE EDUCATION
David and Joan Rice are a fictitious couple who, like many shareholders, are
searching for a way to make their money grow over time.
David and Joan are planning for the college education of their child. On
April 30, 1987, they invested $5,000 in the Class A Shares of Federated
Growth Strategies Fund. Since then, David and Joan have made additional
investments of $250 every month.
As this chart shows, over 10 years, the original $5,000 investment along
with their additional monthly $250 investments totaling $35,000 has grown to
$73,017. This represents a 12.46% average annual total return.* For the
Rices, a dedicated program of monthly investment really paid off.
[Graphic-see Appendix]
* This hypothetical scenario is provided for illustrative purposes only and
does not represent the results obtained by any particular shareholder. Past
performance does not guarantee future results.
FEDERATED GROWTH STRATEGIES FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- 92.4%
<C> <S> <C>
BASIC INDUSTRY -- 4.4%
103,600 Canadian Pacific Ltd. $ 2,525,250
56,300 (a)Cytec Industries, Inc. 2,118,287
84,300 Freeport-McMoRan Copper & Gold, Inc., Class B 2,455,237
42,700 Potash Corporation of Saskatchewan, Inc. 3,282,563
42,200 Praxair, Inc. 2,178,575
145,000 (a)Royal Group Technologies Ltd. 3,244,375
140,300 (a)Steel Dynamics, Inc. 2,735,850
Total 18,540,137
CONSUMER DURABLES -- 3.0%
93,200 Carlisle Cos., Inc. 2,621,250
69,300 Honda Motor Co. Ltd., ADR 4,331,250
95,300 Leggett and Platt, Inc. 3,311,675
35,800 Sony Corp., ADR 2,626,825
Total 12,891,000
CONSUMER NON-DURABLES -- 8.6%
57,700 Avon Products, Inc. 3,555,762
90,800 Campbell Soup Co. 4,642,150
61,200 Coca-Cola Co. 3,893,850
30,000 Gillette Co. 2,550,000
64,800 Interstate Bakeries Corp. 3,361,500
67,200 Kimberly-Clark Corp. 3,444,000
42,900 Nike, Inc., Class B 2,413,125
67,200 Philip Morris Cos., Inc. 2,646,000
30,000 Procter & Gamble Co. 3,772,500
81,100 RJR Nabisco Holdings Corp. 2,412,725
57,000 (a)Tommy Hilfiger Corp. 2,265,750
55,000 Universal Corp. 1,540,000
Total 36,497,362
</TABLE>
FEDERATED GROWTH STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
ENERGY MINERALS -- 7.6%
67,400 (a)BJ Services Co. $ 3,176,225
82,900 Baker Hughes, Inc. 2,860,050
28,300 (a)Benton Oil & Gas Co. 413,887
22,000 British Petroleum Co. PLC, ADR 3,027,750
32,100 (a)Diamond Offshore Drilling, Inc. 2,066,437
23,600 (a)ENSCO International, Inc. 1,121,000
79,900 (a)Global Marine, Inc. 1,607,988
106,600 (a)Nabors Industries, Inc. 1,998,750
134,800 (a)Oryx Energy Co. 2,696,000
62,000 (a)Petroleum Geo-Services, ADR 2,387,000
88,300 (a)Rowan Companies, Inc. 1,589,400
12,000 Royal Dutch Petroleum Co., ADR 2,163,000
68,000 Unocal Corp. 2,592,500
163,000 YPF Sociedad Anonima, ADR 4,502,875
Total 32,202,862
FINANCE--19.9%
84,600 Aflac, Inc. 3,637,800
104,000 Ahmanson (H.F.) & Co. 3,965,000
58,700 Allstate Corp. 3,844,850
25,000 American International Group, Inc. 3,212,500
92,400 Bank of New York Co., Inc. 3,649,800
34,000 BankAmerica Corp. 3,973,750
48,100 Citicorp 5,417,262
115,400 Conseco, Inc. 4,774,675
81,800 Federal National Mortgage Association 3,364,025
40,000 Green Tree Financial Corp. 1,185,000
69,200 Greenpoint Financial Corp. 3,831,950
203,925 MBNA Corp. 6,729,525
</TABLE>
FEDERATED GROWTH STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
FINANCE -- CONTINUED
20,000 MGIC Investment Corp. $ 1,625,000
63,600 Mellon Bank Corp. 5,286,750
25,200 Merrill Lynch & Co., Inc. 2,400,300
41,700 Morgan Stanley Group, Inc. 2,632,313
91,400 NationsBank Corp. 5,518,275
125,800 Schwab (Charles) Corp. 4,607,425
104,300 SunAmerica, Inc. 4,797,800
99,800 TCF Financial Corp. 4,079,325
113,800 Travelers Group, Inc. 6,301,675
Total 84,835,000
HEALTH CARE -- 12.9%
53,900 (a)Amgen, Inc. 3,173,362
100,000 (a)BioChem Pharma, Inc. 1,798,437
96,000 (a)Centocor, Inc. 2,700,000
50,100 (a)Geltex Pharmaceuticals, Inc. 826,650
46,300 HBO & Co. 2,477,050
66,400 (a)HCIA, Inc. 1,369,500
155,000 (a)HEALTHSOUTH Rehabilitation 3,061,250
55,800 Johnson & Johnson 3,417,750
86,800 Jones Medical Industries, Inc. 3,059,700
40,800 Lilly (Eli) & Co. 3,585,300
47,000 (a)Lincare Holdings, Inc. 1,844,750
70,500 (a)Liposome Co., Inc. 1,564,219
56,600 Merck & Co., Inc. 5,122,300
58,500 Pfizer, Inc. 5,616,000
25,800 (a)Quintiles Transnational Corp. 1,312,575
120,700 (a)Safeskin Corp. 2,700,663
131,400 (a)Universal Health Services, Inc., Class B 4,976,775
</TABLE>
FEDERATED GROWTH STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
HEALTH CARE -- CONTINUED
63,000 (a)Vencor, Inc. $ 2,622,375
20,600 Warner-Lambert Co. 2,018,800
49,100 (a)Watson Pharmaceuticals, Inc. 1,755,325
Total 55,002,781
PRODUCER MANUFACTURING -- 5.2%
45,000 (a)American Standard Cos. 1,884,375
138,300 (a)Cable Design Technologies, Class A 2,610,412
51,400 General Electric Co. 5,698,975
65,500 Precision Castparts Corp. 3,504,250
61,500 Tyco International, Ltd. 3,751,500
84,000 (a)U.S. Filter Corp. 2,551,500
80,000 (a)U.S. Office Products Co. 2,040,000
Total 22,041,012
RETAIL TRADE -- 4.2%
140,400 (a)General Nutrition Cos., Inc. 3,018,600
184,300 Pier 1 Imports, Inc. 3,639,925
69,300 (a)Proffitts, Inc. 2,590,088
98,000 (a)Safeway, Inc. 4,373,250
47,500 TJX Cos., Inc. 2,244,375
51,400 Tiffany & Co. 2,036,725
Total 17,902,963
SERVICES -- 3.3%
80,400 (a)Boston Chicken, Inc. 1,919,550
55,300 (a)HFS, Inc. 3,276,525
52,700 New York Times Co., Class A 2,279,275
204,800 (a)Philip Environmental, Inc. 3,225,600
99,500 (a)USA Waste Services, Inc. 3,258,625
Total 13,959,575
</TABLE>
FEDERATED GROWTH STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
TECHNOLOGY -- 17.2%
85,600 (a)ADC Telecommunications, Inc. $ 2,236,300
47,900 Adobe System, Inc. 1,874,087
97,100 (a)Advanced Micro Devices, Inc. 4,126,750
45,900 (a)Altera Corp. 2,274,919
84,100 (a)Applied Materials, Inc. 4,614,987
114,700 (a)BA Merchant Services, Inc., Class A 1,605,800
80,100 (a)Cadence Design Systems, Inc. 2,563,200
33,000 (a)Compaq Computer Corp. 2,817,375
47,600 (a)Dell Computer Corp. 3,983,525
90,700 ECI Telecommunications, Ltd. 1,984,063
74,500 (a)First USA Paymentech, Inc. 1,797,312
82,700 HNC Software 2,191,550
65,000 Hewlett-Packard Co. 3,412,500
22,100 Intel Corp. 3,384,063
178,200 (a)Iomega Corp. 3,096,225
46,000 (a)KLA Instruments Corp. 2,047,000
67,700 (a)LSI Logic Corp. 2,589,525
40,300 Lucent Technologies, Inc. 2,382,738
130,100 (a)Mastech Corp. 1,496,150
33,200 (a)Microsoft Corp. 4,033,800
52,050 (a)Oracle Corp. 2,068,988
65,900 (a)Pairgain Technologies, Inc. 1,713,400
49,700 (a)Qualcomm, Inc. 2,323,475
55,500 (a)SCI Systems, Inc. 3,427,125
65,700 (a)Seagate Technology, Inc. 3,013,988
58,100 (a)StorMedia, Inc. 733,513
116,600 (a)Sun Microsystems, Inc. 3,359,538
74,100 Telefonaktiebolaget LM Ericsson, Class B 2,491,612
Total 73,643,508
</TABLE>
FEDERATED GROWTH STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
TRANSPORTATION -- 0.9%
76,400 Comair Holdings, Inc. $ 1,613,950
81,900 Expeditors International Washington, Inc. 2,047,500
Total 3,661,450
UTILITIES -- 5.2%
99,300 (a)CalEnergy Co., Inc. 3,885,112
66,300 Cincinnati Bell, Inc. 3,712,800
73,700 Sonat, Inc. 4,210,113
55,400 Telefonos de Mexico, Class L, ADR 2,285,250
96,750 Williams Cos., Inc. (The) 4,244,906
156,100 (a)WorldCom, Inc. 3,746,400
Total 22,084,581
TOTAL COMMON STOCKS (IDENTIFIED COST 393,262,231
$313,363,748)
CONVERTIBLE SECURITIES -- 0.5%
TRANSPORTATION -- 0.5%
26,600 Continental Airlines, Inc., Conv. Pfd., $4.25 1,938,661
(IDENTIFIED COST $1,584,063)
(B)REPURCHASE AGREEMENTS -- 5.9%
$ 25,210,000 BT Securities Corporation, 5.43%, dated
4/30/1997, due 5/1/1997
(AT AMORTIZED COST) 25,210,000
TOTAL INVESTMENTS (IDENTIFIED COST $ 420,410,892
$340,157,811)(C)
</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
$340,157,812. The net unrealized appreciation of investments on a federal
tax basis amounts to $80,253,081 which is comprised of $94,754,771
appreciation and $14,501,690 depreciation at April 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($425,708,257) at April 30, 1997.
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 GROWTH STRATEGIES FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $420,410,892
$340,157,811)
Income receivable 337,290
Receivable for investments sold 17,325,465
Receivable for shares sold 1,000,354
Total assets 439,074,001
LIABILITIES:
Payable for investments purchased $ 12,769,762
Payable for shares redeemed 32,250
Payable to Bank 323,875
Payable for taxes withheld 2,669
Accrued expenses 237,188
Total liabilities 13,365,744
NET ASSETS for 16,924,160 shares outstanding $425,708,257
NET ASSETS CONSIST OF:
Paid in capital $300,105,367
Net unrealized appreciation of investments 80,253,097
Accumulated net realized gain on investments 45,304,985
Undistributed net investment income 44,808
Total Net Assets $425,708,257
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($403,539,905 / 16,032,673 shares outstanding) $25.17
Offering Price Per Share (100/94.50 of $25.17)* $26.63
Redemption Proceeds Per Share (100.00/100 of $25.17)** $25.17
CLASS B SHARES:
Net Asset Value Per Share ($18,310,576 / 736,626 shares outstanding) $24.86
Offering Price Per Share (100/100.00 of $24.86)* $24.86
Redemption Proceeds Per Share (94.50/100 of $24.86)** $23.49
CLASS C SHARES:
Net Asset Value Per Share ($3,857,774 / 154,861 shares outstanding) $24.91
Offering Price Per Share (100/100.00 of $24.91)* $24.91
Redemption Proceeds Per Share (99.00/100 of $24.91)** $24.66
</TABLE>
* See "What Shares Cost" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GROWTH STRATEGIES FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,772,883
Interest 636,262
Total income 2,409,145
EXPENSES:
Investment advisory fee $ 1,487,281
Administrative personnel and services fee 149,735
Custodian fees 29,307
Transfer and dividend disbursing agent fees and expenses 249,306
Directors'/Trustees' fees 2,505
Auditing fees 9,202
Legal fees 2,506
Portfolio accounting fees 55,874
Distribution services fee -- Class B Shares 54,118
Distribution services fee -- Class C Shares 14,620
Shareholder services fee -- Class A Shares 472,847
Shareholder services fee -- Class B Shares 18,039
Shareholder services fee -- Class C Shares 4,873
Share registration costs 16,044
Printing and postage 37,395
Insurance premiums 2,896
Taxes 18,310
Miscellaneous 4,916
Total expenses 2,629,774
Waivers --
Waiver of shareholder services fee -- Class A Shares $ (274,511)
Waiver of shareholder services fee -- Class C Shares (2,615)
Total waivers (277,126)
Net expenses 2,352,648
Net investment income 56,497
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 45,867,226
Net change in unrealized appreciation of investments 17,769,457
Net realized and unrealized gain on investments 63,636,683
Change in net assets resulting from operations $ 63,693,180
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED GROWTH STRATEGIES FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTH
ENDED YEAR ENDED
(UNAUDITED) OCTOBER 31,
APRIL 30, 1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 56,497 $ 353,605
Net realized gain on investments ($45,867,226 and $34,792,008,
respectively, as computed for federal tax purposes) 45,867,226 34,229,221
Net change in unrealized appreciation/depreciation 17,769,457 25,049,643
Change in net assets resulting from operations 63,693,180 59,632,469
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Class A Shares (26,989) (439,174)
Distributions from net realized gains
Class A Shares (32,989,453) (50,905,303)
Class B Shares (1,366,243) (314,552)
Class C Shares (434,938) (47,135)
Change in net assets resulting from distributions
to shareholders (34,817,623) (51,706,164)
SHARE TRANSACTIONS --
Proceeds from sale of shares 119,448,497 150,175,756
Proceeds from shares issued in connection with the acquisition 74,233,048(a) 16,771,825
Net asset value of shares issued to shareholders in payment
of distributions declared 22,808,621 29,896,567
Cost of shares redeemed (142,064,862) (132,875,327)
Change in net assets resulting from share transactions 74,425,304 63,968,821
Change in net assets 103,300,861 71,895,126
NET ASSETS:
Beginning of period 322,407,396 250,512,270
End of period (including undistributed net investment
income of $44,808 and $15,300, respectively) $ 425,708,257 $ 322,407,396
</TABLE>
(a) Includes $32,244,540 of unrealized appreciation.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GROWTH STRATEGIES FUND
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
(UNAUDITED) ENDED
APRIL 30, YEAR ENDED MAY 31,
OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(A) 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $25.84 $26.22 $21.28 $23.92 $21.16 $21.58 $16.78 $20.99 $17.18 $16.93 $17.67
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income -- 0.04 0.24 0.21 0.20 0.33 0.57 0.75 0.59 0.09 0.25
Net realized and
unrealized gain
(loss)
on investments 2.15 5.01 5.64 (2.18) 2.96 0.45 5.97 (2.69) 3.80 1.08 (0.23)
Total from
investment
operations 2.15 5.05 5.88 (1.97) 3.16 0.78 6.54 (1.94) 4.39 1.17 0.02
LESS DISTRIBUTIONS
Distributions
from
net investment
income -- (0.04) (0.26) (0.19) (0.23) (0.33) (0.61) (0.79) (0.52) (0.15) (0.20)
Distributions
from
net realized
gain on
investment
transactions (2.82) (5.39) (0.68) (0.48) (0.17) (0.87) (1.13) (1.48) (0.06) (0.77) (0.56)
Total (2.82) (5.43) (0.94) (0.67) (0.40) (1.20) (1.74) (2.27) (0.58) (0.92) (0.76)
distributions
NET ASSET VALUE,
END OF PERIOD $25.17 $25.84 $26.22 $21.28 $23.92 $21.16 $21.58 $16.78 $20.99 $17.18 $16.93
TOTAL RETURN(B) 8.83% 23.16% 29.03% (8.43%) 15.06% 3.93% 41.54% (10.41%) 25.87% 6.95% 0.50%
RATIOS TO AVERAGE
NET ASSETS
Expenses 1.14%* 1.13% 1.10% 0.99% 0.96% 1.01% 1.01% 1.01% 1.01% 1.00%* 1.00%
Net investment
income 0.07%* 0.15% 1.05% 0.89% 0.90% 1.54% 2.88% 4.00% 2.99% 1.30%* 1.39%
Expense waiver/
reimbursement(c) 0.14%* 0.15% 0.16% -- -- -- 0.10% 0.22% 0.14% 0.60%* 0.15%
SUPPLEMENTAL DATA
Net assets, end
of period (000 $403,540 $307,882 $249,110 $320,630 $460,811 $391,655 $275,561 $138,407 $134,735 $104,146 $102,395
omitted)
Average
commission
rate paid .0568 .066 -- -- -- -- -- -- -- -- --
Portfolio 42% 89% 125% 59% 57% 46% 54% 67% 79% 24% 88%
turnover
</TABLE>
* Computed on an annualized basis.
(a) For the five months ended October 31, 1988. The Fund changed its fiscal
year end from May 31 to October 31.
(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 GROWTH STRATEGIES FUND
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
APRIL 30, APRIL 30,
1997 1996 1995(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $25.65 $26.23 $25.51
INCOME FROM INVESTMENT OPERATIONS
Net investment income (0.03) (0.10) (0.02)
Net realized and unrealized gain (loss) on investments 2.06 4.91 0.74
Total from investment operations 2.03 4.81 0.72
LESS DISTRIBUTIONS
Distributions from net realized gain on investments (2.82) (5.39) --
NET ASSET VALUE, END OF PERIOD $24.86 $25.65 $26.23
TOTAL RETURN(B) 8.38% 22.03% 2.82%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.03%* 2.03% 2.04%*
Net investment income (0.82%)* (0.79%) (0.66%)*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $18,311 $10,858 $1,345
Average commission rate paid(d) $0.0568 $0.0566 --
Portfolio turnover 42% 89% 125%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 15, 1995 (date of initial
public offering) to October 31, 1995.
(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.
(d) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GROWTH STRATEGIES FUND
FINANCIAL HIGHLIGHTS -- CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
APRIL 30, APRIL 30,
1997 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $25.68 $26.22 $25.51
INCOME FROM INVESTMENT OPERATIONS
Net investment income (0.08) (0.05) (0.02)
Net realized and unrealized gain (loss) on investments 2.13 4.90 0.73
Total from investment operations 2.05 4.85 0.71
LESS DISTRIBUTIONS
Distributions from net realized gain on investments (2.82) (5.39) --
NET ASSET VALUE, END OF PERIOD $24.91 $25.68 $26.22
TOTAL RETURN(B) 8.45% 22.12% 2.78%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.90%* 1.92% 2.05%*
Net investment income (0.68%)* (0.72%) (0.71%)*
Expense waiver/ reimbursement(c) 0.13%* 0.12% --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $3,858 $3,667 $57
Average commission rate paid(d) $0.0568 $0.0566 --
Portfolio turnover 42% 89% 125%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 15, 1995 (date of initial
public offering) to October 31, 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.
(d) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GROWTH STRATEGIES FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997 (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 four portfolios. The financial
statements included herein are only those of Federated Growth 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 Fund offers three classes of shares: Class A Shares,
Class B Shares and Class C Shares. The fund seeks appreciation of capital by
investing primarily in equity securities of companies with prospects for
above-average growth in earnings and dividends.
On December 13, 1996, the Fund acquired all the net assets of State Bond
Common Stock Fund ("Acquired Fund") pursuant to a plan of reorganization
approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 3,104,686 shares of the Fund (valued
at $74,233,048) for the 7,784,543 shares of the Acquired Fund outstanding on
December 13, 1996. The Acquired Fund's net assets of $74,233,048, which
consisted of $41,988,508 of Paid in Capital and $32,244,540 of Unrealized
Appreciation, at that date were combined with those of the Fund. The
aggregate net assets of the Fund and the Acquired Fund immediately before
the acquisition were $317,425,545 and $74,233,048, respectively.
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. Unlisted securities
and private placement securities are generally valued at the mean of the
latest bid and asked price as furnished by an independent pricing service.
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.
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>
APRIL 30, 1997 OCTOBER 31, 1996
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 5,543,230 $ 109,139,064 5,737,956 $ 136,990,799
Shares issued in connection with the
acquisition 3,104,686 74,233,048 616,434 14,812,920
Shares issued to shareholders in
payment
of distributions declared 878,652 21,166,734 1,358,129 29,564,831
Shares redeemed (5,409,852) (138,327,414) (5,295,894) (129,571,078)
Net change resulting from Class A
Share
transactions 4,116,716 $ 66,211,432 2,416,625 $ 51,797,472
<CAPTION>
APRIL 30, 1997 OCTOBER 31, 1996
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 350,326 $ 8,896,216 479,932 $ 11,412,701
Shares issued to shareholders in payment of
distributions declared 53,636 1,280,288 13,074 284,612
Shares redeemed (90,657) (2,283,228) (120,979) (2,885,554)
Net change resulting from Class B Share
transactions 313,305 $ 7,893,276 372,027 $ 8,811,759
<CAPTION>
APRIL 30, 1997 OCTOBER 31, 1996
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 55,067 $ 1,413,217 71,373 $ 1,772,256
Shares issued in connection with the 81,928 1,958,905
acquisition
Shares issued to shareholders in payment of
distributions declared 15,123 361,599 2,164 47,124
Shares redeemed (58,136) (1,454,220) (14,839) (418,695)
Net change resulting from Class C Share
transactions 12,054 $ 320,596 140,626 $ 3,359,590
Net change resulting from share
transactions 4,442,075 $ 74,425,304 2,929,278 $ 63,968,821
</TABLE>
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.
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 Trust'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.
PERCENTAGE OF
AVERAGE DAILY NET
SHARE CLASS NAME ASSETS OF CLASS
Class B 0.75%
Class C 0.75%
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 shares for the period.
The fee paid to FSS is used to finance certain services for shareholders and
to maintain shareholder accounts. FSS may voluntarily choose to waive any
portion of its fee. FSS can modify or terminate this voluntary waiver at any
time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- Federated
Services Company ("FServ"), through its subsidiary, Federated Shareholder
Services Company ("FSSC") serves as transfer and dividend disbursing agent
for the Fund. The fee paid to FSSC 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.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities and
in-kind contributions, for the period ended April 30, 1997, were as follows:
PURCHASES $246,122,224
SALES $152,253,515
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Glen R. Johnson
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
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 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 its objective and policies, management fees, expenses and other
information.
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Cusip 314172107
Cusip 314172206
Cusip 314172305
8010409 (6/97)
[Graphic]
[Graphic]
Federated Small Cap Strategies Fund
SEMI-ANNUAL REPORT
APRIL 30, 1997
ESTABLISHED 1995
PRESIDENT'S MESSAGE
[Graphic]
Dear Shareholder:
Federated Small Cap Strategies Fund was founded in 1995, and I am pleased to
present its Second Semi-Annual Report covering the six-month period from
November 1, 1996, through April 30, 1997.
This report starts with a discussion with Aash Shah, Vice President, who
co-manages the fund with Jim Grefenstette, Vice President, both with
Federated Management. Following Aash's discussion are two additional items
of shareholder interest: a complete listing of the fund's stock holdings and
the fund's financial statements.
Federated Small Cap Strategies Fund is managed to offer shareholders
significant opportunities for long-term growth by owning a highly
diversified portfolio of small-cap stocks. These stocks, issued by companies
with a market capitalization of less than $1 billion, offer the potential
for high returns over time in exchange for a higher level of risk compared
to stocks issued by large, well-established companies.* To help reduce risk
and seek opportunities in this dynamic market, the fund's portfolio is
carefully selected and diversified with 98 stocks across 12 industry
sectors.
In its first full year of operation, this diversified portfolio produced an
extraordinarily strong total return through growth in net asset value (on
October 31, 1996, Class A, B, and C Shares' returns were 47.06%, 46.20%, and
46.00%, respectively, based on net asset value).** For example, the initial
net asset value of Class A Shares on November 1, 1995 was $10.00 per share
and rose to $14.68 per share on October 31, 1996. However, during the fund's
most recent six-month fiscal operating period, small-company stocks
experienced a downturn. In this environment, the net asset values of the
fund's share classes declined. For example, Class A Shares net asset value
declined to $13.83. As a result, the fund turned in negative total
performance for the recent six-month period ended April 30, 1997.*** Price
volatility in small-cap stocks is to be expected.
* In return for this potential, these stocks have historically experienced
greater volatility than average.
** Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. As of April 30, 1997, the Class A Shares' one-year and since
inception (11/1/95) total returns based on offering price were -5.67% and
20.89%, respectively. Class B Shares' one-year and since inception (11/1/95)
total returns were -6.29% and 21.85%, respectively. Class C Shares' one-year
and since inception (11/1/95) total returns were -12.63% and 24.61%,
respectively.
*** Total returns for the period based on offering price or the payment of a
contingent deferred sales charge for Class A, B, and C Shares were -9.67%,
-10.01%, and -5.79%, respectively.
CAPITAL
TOTAL GAIN
RETURN DISTRIBUTIONS NAV CHANGE
Class A Shares -4.44% $0.22 $14.68 TO $13.83 = -6%
Class B Shares -4.81% $0.22 $14.62 TO $13.72 = -6%
Class C Shares -4.81% $0.22 $14.60 TO $13.70 = -6%
Remember, the best measure of performance when investing in stocks,
particularly small-cap stocks, is over a period of years rather than months.
Short-term negative periods are to be expected when investing in small-cap
stocks.
Over time, you can easily increase your opportunity to participate in the
growth of smaller American companies by reinvesting your earnings
automatically in additional fund shares. And, you can add to your account on
a regular basis through a systematic investment program. In fact, buying
shares regularly, i.e., monthly additions of the same dollar amount,
automatically accumulates more shares in your account at lower prices.+
Thank you for selecting Federated Small Cap Strategies Fund to pursue your
long-term financial goals. We welcome your comments and suggestions.
Sincerely,
[Graphic]
Glen R. Johnson
President
June 15, 1997
+ Systematic investing does not ensure a profit or protect against loss in
declining markets.
Investment Review
[Graphic]
Aash Shah, CFA
Vice President
Federated Management
[Graphic]
Jim Grefenstette, CFA
Vice President
Federated Management
[Graphic]
OVER THE SIX-MONTH REPORTING PERIOD, THE STOCK MARKET CONTINUED TO CLIMB TO
NEW LEVELS, BUT SMALL-CAP STOCKS BORE THE BRUNT OF MARKET VOLATILITY THAT
OCCURRED LATE IN THE PERIOD. WHAT IS YOUR ANALYSIS?
The equity market, as measured by the S&P 500 Index,* turned in strong
overall performance over the six-month period with a total return of 14.71%.
Major stock indexes continued to reach new all-time highs in the fourth
quarter of 1996 as economic conditions -- moderate growth, stable interest
rates, subdued inflation, and rising corporate profits -- were favorable for
stocks. While the end of the period was marked by a degree of volatility
that investors have not seen in over five years -- the S&P 500's total
return on March 30, 1997, was -4.11% -- the market recovered in April,
producing a one-month total return of 5.97% on April 30, 1997.
On the other hand, with a total return of 1.75%, small caps, as measured by
the S&P 600 Small-Cap Index,* considerably underperformed the large caps
during the six-month period. For example, during the first quarter of 1997,
the S&P 600 Small Cap Index was down over 5% while the S&P 500 was up almost
3%. In April, although the S&P 600 Small-Cap Index turned in a positive
total return of 1.22%, it trailed the S&P 500's total return of 5.97%.
Still, earnings growth in the small-cap sector remains very strong. By most
fundamental measures, both in relative and absolute terms, small-cap stocks
are still attractive, and valuations are within the "normal range." As an
asset class of equity investing, small-cap stocks do not move in tandem with
large-cap stocks.
[Graphic]
HOW DID FEDERATED SMALL CAP STRATEGIES FUND PERFORM OVER THE SIX-MONTH
PERIOD COMPARED TO THE LIPPER SMALL COMPANY GROWTH FUNDS AVERAGE?
After producing outstanding returns in its first year of operation (Class A,
B, and C Shares returns were 47.06%, 46.20%, and 46.00%, respectively, based
on net asset value on October 31, 1996), the fund's performance reflected
the market's subsequent short-term volatility. The fund's six-month total
return was -4.44% for Class A Shares, -4.81% for Class B Shares, and -4.81%
for Class C Shares based on net asset value. These returns were consistent
with the -3.50% total return of the Lipper Small Company Growth Funds
Average.**
* The S&P 500 is an unmanaged index comprising stocks in industry,
transportation, and financial and public utility companies. Investments
cannot be made in an index. The S&P 600 Small Cap Index is an unmanaged
capitalization weighted index that measures the performance of selected U.S.
stocks with a small market capitalization.
** Lipper figures represent the average of the total returns reported by all
of the mutual funds designated by Lipper Analytical Services, Inc. as
falling into the respective categories indicated. These figures do not
reflect sales charges.
[Graphic]
WHAT IS YOUR OVERALL STRATEGY TO TAP THE HISTORICALLY REWARDING LONG-TERM
PERFORMANCE OF THE SMALL-CAP STOCK MARKET?
Our overall goal is to invest in the best small companies within each of 12
economic sectors. We typically target companies with a market capitalization
of less than $1 billion (currently the average capitalization is $330
million). Our strategy is to remain fully invested in small, fast-growing,
attractively valued companies -- the best 2% of small companies we can find
across a universe of over 7,000 small companies in the U.S. We use a
combination of quantitative models and fundamental analysis in the process
of selecting these companies. The management style can be described as a
blend of value and growth.
There are two characteristics of this fund that help make it an ideal
investment vehicle for this market: First, sector discipline -- we stay
invested in all 12 economic sectors at all times with appropriate
overweights and underweights. Second is small-cap discipline. We have kept
the median capitalization of the fund below $1 billion, making this truly a
small-cap fund. Again, the current average capitalization of the holdings in
the fund is $330 million.
[Graphic]
IN LIGHT OF CURRENT MARKET CONDITIONS, IN WHAT SECTORS ARE YOU FINDING
OPPORTUNITIES?
The TECHNOLOGY sector experienced a severe downturn during the first
quarter, with networking stocks down 30%, computer software stocks down 25%,
and telecommunications equipment stocks down 24%. Some may argue that this
was a much needed correction in lofty valuations of technology stocks.
However, with the economy still strong, we believe technology spending will
continue to be strong, albeit at a slightly slower pace than over the past
several years. Accordingly, we have continued to selectively add to
positions in the Technology sector, absorbing some short-term pain to set us
up for longer term gain.
We have also added to positions in HEALTH CARE and SERVICES sectors. Our
strategy of being very selective on new issues has kept us out of some of
the extremely overvalued initial public offerings. Our disciplined approach
to security selection has led us to attractive small-cap stocks that are
reasonably valued based on business fundamentals.
Currently, we are maintaining our cash position below 10%, which is
effectively a fully invested position. Under low inflation and moderate
economic growth conditions, we expect small caps to do well.
[Graphic]
HOW HAVE YOU STRUCTURED THE PORTFOLIO AS OF APRIL 30, 1997?
The portfolio composition and top ten holdings were as follows:
PERCENTAGE OF
PERCENTAGE S&P 600 SECTOR
SECTOR OF PORTFOLIO WEIGHTING
Technology 20.4% 17.8%
Finance 17.1% 17.1%
Health Care 11.3% 10.5%
Retail 9.7% 5.8%
Services 9.3% 10.3%
Producer Manufacturing 6.6% 7.2%
Basic Industry 5.4% 7.2%
Consumer Non Durables 3.9% 3.9%
Energy Minerals 3.8% 5.8%
Consumer Durables 3.5% 6.3%
Utilities 3.4% 5.3%
Transportation 1.2% 2.8%
Miscellaneous 4.4%
PERCENTAGE
TOP 10 HOLDINGS OF PORTFOLIO
Frontier Insurance Group, Inc. 1.4%
Prime Service, Inc. 1.3%
Caribiner International, Inc. 1.3%
U.S. Office Products Co. 1.3%
ACT Networks, Inc. 1.3%
Exar Corp. 1.3%
Universal Health Services, Inc. 1.3%
Vesta Insurance Group, Inc. 1.3%
Redwood Trust, Inc. 1.3%
Prime Hospitality Corp. 1.2%
Total Percentage of Portfolio 13.0%
[Graphic]
WHAT IS YOUR OUTLOOK FOR SMALL-CAP STOCKS THROUGH 1997?
The small cap market remains very attractive, with two powerful longer term
drivers: One, valuation levels of small-cap stocks are extremely attractive,
and two, earnings growth in the small-cap market is expected to outpace
larger cap stocks over the next 3-5 years. The recent downturn in the
small-cap market created a tremendous opportunity to average down, and we
did in a number of our holdings. Like fund shareholders, we invest for the
longer term.
FEDERATED SMALL CAP STRATEGIES FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 95.9%
BASIC INDUSTRY -- 5.4%
138,200 (a)Chirex, Inc. $ 1,364,725
39,800 Donaldson Company, Inc. 1,363,150
41,800 (a)Fibreboard Corp. 1,536,150
69,300 (a)Royal Group Technologies Ltd. 1,550,588
112,900 Spartech Corp. 1,312,463
Total 7,127,076
CONSUMER DURABLES -- 3.5%
55,600 Action Performance Companies, Inc. 1,466,450
51,500 Carlisle Cos., Inc. 1,448,437
44,400 (a)Equity Marketing, Inc. 777,000
40,200 Wynns International, Inc. 969,825
Total 4,661,712
CONSUMER NON-DURABLES -- 3.9%
38,700 (a)Blyth Industries, Inc. 1,528,650
96,700 (a)North Face, Inc. 1,365,888
79,900 (a)Sport-Haley Inc. 1,298,375
78,800 (a)USA Detergents, Inc. 896,350
Total 5,089,263
ENERGY MINERALS -- 3.8%
38,200 Devon Energy Corp. 1,260,600
20,200 (a)Energy Ventures, Inc. 1,350,875
89,800 (a)Tuboscope Vetco International Corp. 1,257,200
39,100 Vintage Petroleum, Inc. 1,104,575
Total 4,973,250
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
FINANCE -- 17.2%
76,700 Aames Financial Corp. $ 1,179,262
41,900 CMAC Investment Corp. 1,592,200
82,900 (a)D & N Financial Corp. 1,440,387
44,700 (a)Delphi Financial Group, Inc., Class A 1,586,850
94,800 (a)Delta Financial Corp. 1,279,800
29,700 Executive Risk, Inc. 1,343,925
55,900 (a)FIRSTPLUS Financial Group, Inc. 1,236,787
34,800 Frontier Insurance Group, Inc. 1,792,200
73,000 (a)Leasing Solutions, Inc. 912,500
45,200 Peoples Heritage Financial Group 1,418,150
78,400 (a)Prime Service, Inc. 1,754,200
35,200 Redwood Trust, Inc. 1,654,400
43,500 Sirrom Capital Corp. 1,353,938
96,900 (a)Southern Pacific Funding 1,029,563
33,800 TCF Financial Corp. 1,381,575
39,700 Vesta Insurance Group, Inc. 1,657,475
Total 22,613,212
HEALTH CARE -- 11.3%
81,100 (a)American HomePatient, Inc. 1,561,175
69,800 (a)Cambridge Neuroscience, Inc. 584,575
51,100 (a)Curative Technologies, Inc. 1,207,237
124,000 (a)Cyanotech Corp. 635,500
88,700 (a)FPA Medical Management, Inc. 1,441,375
51,100 (a)Genesis Health Ventures, Inc. 1,526,612
56,500 (a)Medicis Pharmaceutical Corp., Class A 1,384,250
155,400 (a)Prime Medical Services 1,437,450
73,200 (a)Respironics, Inc. 1,363,350
92,500 (a)Rotech Medical Corp. 1,456,875
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
HEALTH CARE -- CONTINUED
44,300 (a)Universal Health Services, Inc., Class B $ 1,677,863
82,100 (a)VIDAMED, Inc. 564,438
Total 14,840,700
PRODUCER MANUFACTURING -- 6.6%
69,700 (a)AFC Cable Systems, Inc. 1,533,400
91,850 (a)Ballantyne of Omaha, Inc. 1,331,825
66,500 (a)Cable Design Technologies, Class A 1,255,187
218,500 (a)Raster Graphics Inc. 1,338,313
42,500 (a)Sinter Metals, Inc. 1,551,250
67,400 (a)U.S. Office Products Co. 1,718,700
Total 8,728,675
RETAIL TRADE -- 9.7%
77,600 (a)Amrion, Inc. 1,358,000
31,600 (a)CDW Computer Centers, Inc. 1,516,800
75,100 (a)Central Garden & Pet Co. 1,497,306
41,200 (a)Express Scripts, Inc., Class A 1,514,100
88,000 (a)Just For Feet, Inc. 1,397,000
40,800 (a)Microage, Inc. 515,100
99,500 (a)Paul Harris Stores, Inc. 1,281,063
43,200 (a)Pomeroy Computer Resources 1,047,600
39,200 (a)Proffitts, Inc. 1,465,100
33,900 Riser Foods, Inc., Class A 1,173,788
Total 12,765,857
SERVICES -- 9.4%
51,600 (a)American Radio Systems Corp. 1,509,300
54,600 (a)BARRA, Inc. 1,419,600
32,900 (a)Caribiner International, Inc. 1,743,700
75,100 FactSet Research Systems 1,520,775
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
SERVICES -- CONTINUED
31,900 (a)Newpark Resources, Inc. $ 1,431,512
63,900 (a)Personnel Group of America, Inc. 1,533,600
96,400 (a)Prime Hospitality Corp. 1,602,650
49,300 (a)SFX Broadcasting, Inc. 1,552,950
Total 12,314,087
TECHNOLOGY -- 20.5%
127,100 (a)ACT Networks, Inc. 1,715,850
47,600 (a)Adtran, Inc. 1,410,150
75,100 (a)Alphanet Solutions, Inc. 979,500
53,600 Anadigics, Inc. 1,514,200
106,700 (a)Award Software International, Inc. 1,240,388
73,800 (a)BA Merchant Services, Inc., Class A 1,033,200
91,500 (a)Benchmarq Microelectronics, Inc. 1,601,250
54,500 (a)Claremont Technology Group 735,750
60,900 (a)Cybex Computer Products Corp. 1,065,750
31,300 (a)Ducommun, Inc. 747,287
38,400 (a)Dynatech Corp. 1,334,400
64,700 (a)ESS Technology, Inc. 889,625
45,100 (a)Elexsys International, Inc. 524,287
100,000 (a)Exar Corp. 1,700,000
59,700 (a)II-VI, Inc. 1,089,525
52,400 (a)Integrated Measurement Systems, Inc. 694,300
94,600 (a)Mastech Corp. 1,087,900
85,800 (a)Micro Linear Corp. 1,362,075
</TABLE>
FEDERATED SMALL CAP STRATEGIES FUND
<TABLE>
<CAPTION>
SHARES OR
PAR VALUE VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
TECHNOLOGY -- CONTINUED
81,200 (a)National Processing, Inc. $ 568,400
83,500 (a)Network General Corp. 1,148,125
19,500 (a)Perceptron, Inc. 550,875
40,800 (a)Photronic Labs, Inc. 1,412,700
54,100 (a)Stratasys, Inc. 1,048,187
75,400 (a)Tollgrade Communications, Inc. 1,489,150
Total 26,942,874
TRANSPORTATION -- 1.2%
56,000 (a)Atlas Air, Inc. 1,540,000
UTILITIES -- 3.4%
33,000 CMS Energy Corp. 1,047,750
31,600 (a)CalEnergy Co., Inc. 1,236,350
18,100 Cincinnati Bell, Inc. 1,013,600
39,600 Enron Global Power & Pipelines, L.L.C. 1,168,200
Total 4,465,900
TOTAL COMMON STOCKS (IDENTIFIED COST $131,213,836) 126,062,606
(B)REPURCHASE AGREEMENT -- 4.4%
$ 5,785,000 BT Securities Corporation, 5.43%, dated 4/30/1997, due 5/1/1997
(AT AMORTIZED COST) 5,785,000
TOTAL INVESTMENTS (IDENTIFIED COST $136,998,836)(C) $ 131,847,606
</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
$136,998,836. The net unrealized depreciation of investments on a federal
tax basis amounts to $5,151,230 which is comprised of $7,864,811
appreciation and $13,016,041 depreciation at April 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($131,407,586) at April 30, 1997.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $136,998,836) $ 131,847,606
Cash 2,897
Income receivable 30,425
Receivable for investments sold 561,201
Receivable for shares sold 1,186,611
Total assets 133,628,740
LIABILITIES:
Payable for investments purchased $ 2,081,319
Payable for shares redeemed 77,515
Accrued expenses 62,320
Total liabilities 2,221,154
Net Assets for 9,553,163 shares outstanding $ 131,407,586
NET ASSETS CONSIST OF:
Paid in capital $ 139,595,896
Net unrealized depreciation of investments (5,151,230)
Accumulated net realized loss on investments (2,427,389)
Accumulated distributions in excess of net investment income (609,691)
Total Net Assets $ 131,407,586
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($48,947,658 / 3,540,013 shares outstanding) $13.83
Offering Price Per Share (100/94.50 of $13.83)* $14.63
Redemption Proceeds Per Share $13.83
CLASS B SHARES:
Net Asset Value Per Share ($70,494,044 / 5,139,730 shares outstanding) $13.72
Offering Price Per Share $13.72
Redemption Proceeds Per Share (94.50/100 of $13.72)** $12.97
CLASS C SHARES:
Net Asset Value Per Share ($11,965,884 / 873,420 shares outstanding) $13.70
Offering Price Per Share $13.70
Redemption Proceeds Per Share (99.00/100 of $13.70)** $13.56
</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
SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 164,827
Interest 336,534
Total income 501,361
EXPENSES:
Investment advisory fee $ 370,129
Administrative personnel and services fee 91,605
Custodian fees 15,511
Transfer and dividend disbursing agent fees and expenses 63,838
Directors'/Trustees' fees 336
Auditing fees 4,620
Legal fees 1,578
Portfolio accounting fees 35,330
Distribution services fee -- Class B Shares 197,672
Distribution services fee -- Class C Shares 32,149
Shareholder services fee -- Class A Shares 46,770
Shareholder services fee -- Class B Shares 65,891
Shareholder services fee -- Class C Shares 10,716
Share registration costs 51,194
Printing and postage 4,460
Insurance premiums 1,668
Miscellaneous 3,223
Total expenses 996,690
Waiver --
Waiver of investment advisory fee $ (76,391)
Net expenses 920,299
Net operating loss (418,938)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (2,609,380)
Net change in unrealized depreciation of investments (7,089,081)
Net realized and unrealized loss on investments (9,698,461)
Change in net assets resulting from operations $ (10,117,399)
</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>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
APRIL 30, OCTOBER 31,
1997 1996(A)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net operating loss $ (418,938) $ (175,647)
Net realized gain (loss) on investments ($2,609,380 net loss and
$1,389,302 net gain, respectively, as computed for federal tax purposes) (2,609,380) 1,375,654
Net change in unrealized appreciation (depreciation) (7,089,081) 1,937,851
Change in net assets resulting from operations (10,117,399) 3,137,858
NET EQUALIZATION CREDITS (DEBITS) -- -- (30)
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions in excess of net investment income
Class A Shares -- (9,870)
Distributions from net realized gains
Class A Shares (479,065) --
Class B Shares (622,004) --
Class C Shares (97,800) --
Change in net assets resulting from distributions to shareholders (1,198,869) (9,870)
SHARE TRANSACTIONS --
Proceeds from sale of shares 96,037,180 67,377,652
Net asset value of shares issued to shareholders in payment of
distributions declared 1,012,470 1,448
Cost of shares redeemed (15,175,518) (9,657,336)
Change in net assets resulting from share transactions 81,874,132 57,721,764
Change in net assets 70,557,864 60,849,722
NET ASSETS:
Beginning of period 60,849,722 --
End of period $ 131,407,586 $ 60,849,722
</TABLE>
(a) For the period from November 1, 1995 (date of initial public investment)
to October 31, 1996.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
APRIL 30, OCTOBER 31,
1997 1996(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.68 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net operating loss (0.02)(b) (0.05)(b)
Net realized and unrealized gain (loss) on investments (0.61) 4.75
Total from investment operations (0.63) 4.70
LESS DISTRIBUTIONS
Distributions in excess of net investment income -- (0.02)(f)
Distributions from net realized gain on investments (0.22) --
Total distributions (0.22) (0.02)
NET ASSET VALUE, END OF PERIOD $13.83 $14.68
TOTAL RETURN(C) (4.44%) 47.06%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.39%* 1.35%
Net investment income (0.38%)* (0.39%)
Expense waiver/reimbursement(d) 0.16%* 1.70%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $48,948 $23,242
Average commission rate paid(e) $0.0488 $0.0264
Portfolio turnover 79% 83%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 1, 1995 (date of
initial public investment) to October 31, 1996.
(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.
(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.
(e) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
(f) Distributions in excess of net investment income were a result of
certain book and tax timing differences. These distributions do not
represent a return of capital for federal income tax purposes.
(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 EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
APRIL 30, OCTOBER 31,
1997 1996(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.62 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net operating loss (0.08)(b) (0.16)(b)
Net realized and unrealized gain (loss) on investments (0.60) 4.78
Total from investment operations (0.68) 4.62
LESS DISTRIBUTIONS
Distributions from net realized gain on investments (0.22) --
NET ASSET VALUE, END OF PERIOD $13.72 $14.62
TOTAL RETURN(C) (4.81%) 46.20%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.14%* 2.10%
Net investment income (1.13%)* (1.27%)
Expense waiver/reimbursement(d) 0.16%* 1.70%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $70,494 $32,112
Average commission rate paid(e) $0.0488 $0.0264
Portfolio turnover 79% 83%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 1, 1995 (date of
initial public offering) to October 31, 1996.
(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.
(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.
(e) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
(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 EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
APRIL 30, OCTOBER 31,
1997 1996(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.60 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net operating loss (0.08)(b) (0.16)(b)
Net realized and unrealized gain (loss) on investments (0.60) 4.76
Total from investment operations (0.68) 4.60
LESS DISTRIBUTIONS
Distributions from net realized gain on investments (0.22) --
NET ASSET VALUE, END OF PERIOD $13.70 $14.60
TOTAL RETURN(C) (4.81%) 46.00%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.14%* 2.10%
Net investment income (1.13%)* (1.28%)
Expense waiver/reimbursement(d) 0.16%* 1.70%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $11,966 $5,496
Average commission rate paid(e) $0.0488 $0.0264
Portfolio turnover 79% 83%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 1, 1995 (date of
initial public offering) to October 31, 1996.
(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.
(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.
(e) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SMALL CAP STRATEGIES FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997 (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 four 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 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.
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.
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.
Distributions in excess of net investment income were a result of certain
book and tax timing differences. These distributions do not represent a
return of capital for federal income tax purposes.
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.
FUTURES CONTRACTS -- The Fund purchases futures contracts to manage
cashflows, enhance yield, and to potentially reduce transaction costs. Upon
entering into a futures contract with a broker, the Fund is required to
deposit in a segregated account a specified amount of cash of U.S.
government securities. Futures contracts are valued daily and unrealized
gains or losses are recorded in a "variation margin" account. Daily, the
Fund receives from or pays to the broker a specified amount of cash based
upon changes in the variation margin account. When a contract is closed, the
Fund recognizes a realized gain or loss. Futures contracts have market
risks, including the risk that the change in the value of the contract may
not correlate with changes in the value of the underlying securities. For
the period ended April 30, 1997, the Fund had a net realized loss of
$227,688 on future contracts. As of April 30, 1997, the Fund had no
outstanding futures contracts.
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>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1997 OCTOBER 31, 1996(A)
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 2,606,547 $ 39,415,867 2,243,995 $ 29,137,057
Shares issued to shareholders in payment
of distributions declared 22,726 351,365 126 1,448
Shares redeemed (672,177) (10,030,032) (661,204) (8,108,029)
Net change resulting from
Class A Share transactions 1,957,096 $ 29,737,200 1,582,917 $ 21,030,476
(a) For the period from November 1, 1995 (date of initial public investment) to
October 31, 1996.
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1997 OCTOBER 31, 1996(B)
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,160,653 $ 47,972,096 2,289,952 $ 32,610,920
Shares issued to shareholders in payment
of distributions declared 36,944 568,196 -- --
Shares redeemed (253,854) (3,795,482) (93,965) (1,283,271)
Net change resulting from
Class B Share transactions 2,943,743 $ 44,744,810 2,195,987 $ 31,327,649
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1997 OCTOBER 31, 1996(B)
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 579,668 $ 8,649,217 395,842 $ 5,629,675
Shares issued to shareholders in payment
of distributions declared 6,049 92,909 -- --
Shares redeemed (88,604) (1,350,004) (19,535) (266,036)
Net change resulting from
Class C Share transactions 497,113 $ 7,392,122 376,307 $ 5,363,639
Net change resulting from share 5,397,952 $ 81,874,132 4,155,211 $ 57,721,764
transactions
</TABLE>
(b) For the period from November 1, 1995 (date of initial public offering)
to October 31, 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. 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 shares. The Plan provides that the Fund
may incur distribution expenses according to the following schedule
annually, to compensate FSC.
PERCENTAGE OF
AVERAGE DAILY NET
SHARE CLASS NAME ASSETS OF CLASS
Class A Shares 0.25%
Class B Shares 0.75%
Class C Shares 0.75%
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, 1997, Class A Shares did not incur a
distribution services fee.
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 shares for the period.
The fee paid to FSS is used to finance certain services for shareholders and
to maintain shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ, through
its subsidiary, Federated Shareholder Services Company ("FSSC") serves as
transfer and dividend disbursing agent for the Fund. The fee paid to FSSC 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.
ORGANIZATIONAL EXPENSES -- Organizational and/or start-up administrative
service expenses of $10,292 were borne initially by FServ. The Fund has
agreed to reimburse FServ for the expenses during the five-year period
following the effective date. For the six months ended April 30, 1997, the
Fund paid $401 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, 1997, were as follows:
PURCHASES $ 152,972,675
SALES $ 72,565,369
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Glen R. Johnson
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
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 its objective and policies, management fees, expenses and other
information.
[Graphic]
Federated Securities Corp., Distributor
Cusip 314172404
Cusip 314172503
Cusip 314172602
G01658-05 (6/97)
[Graphic]
Appendix
Federated Growth Strategies Fund
A. The graphic representation here displayed entitled `Initial Investment
of $13,000,''consists of a boxed legend in the upper left quadrant
indicating the components of the corresponding mountain chart. The lighter-
shaded portion represents the value of Reinvested Income for the Class A
Shares of Federated Growth Strategies Fund (the `Fund''). The darker-
shaded portion reflects the Principal Value of a $13,000 (1,228 Shares)
investment in the Fund. The color-coded mountain chart is a visual
representation of the narrative text above it, which shows that an initial
investment of $13,000/1,228 Shares in the Fund on 8/23/84, would have a
reinvested total worth of $79,049/3,140 Shares on 4/30/97. The `x'' axis
reflects annual computation periods from 8/23/84 to 4/30/97. The right
margin of the chart reflects the ending values of a hypothetical investment
of $13,000 in the Fund measured in increments of $10,000 ranging from $0 to
$80,000.
B.. The graphic representation here displayed, entitled `Yearly
Investments of $1,000,''consists of a boxed legend in the upper left
quadrant indicating the components of the corresponding mountain chart. The
lighter-shaded portion represents the value of Reinvested Income for the
Class A Shares of Federated Growth Strategies Fund (the `Fund''). The
darker-shaded portion reflects the Principal Value of annual $1000
Investments (totaling $13,000 by 4/30/97). The color-coded mountain chart
is a visual representation of the narrative text above it, which shows that
$1,000 annual investments in the Fund beginning on 8/23/84 would have a
reinvested total value of $33,755/1,341 Shares on 4/30/97. The `x'' axis
reflects computation periods from 8/23/84 to 4/30/97. The right margin of
the chart reflects the ending values of hypothetical annual investments of
$1,000 in the Fund measured in increments of $5,000 ranging from $0 to
$35,000.
C. The graphic representation here displayed, entitled `Growth Over
Time,''consists of a boxed legend in the upper left quadrant indicating
the components of the corresponding mountain chart. The lighter-shaded
portion represents the value of Reinvested Income for the Class A Shares of
Federated Growth Strategies Fund (the `Fund'') the darker-shaded portion
represents the Principal Value of Original and Subsequent Investments
(totaling $35,000 by 4/30/97). The color-coded mountain is a visual
representation of the narrative text above it, which shows that an original
$5,000/263 Shares investment in the Fund on 4/30/87 and additional
investments of $250 every month following for ten years would have grown to
a reinvested total value of $73,017/2,900 Shares on 4/30/97. The `x'' axis
reflects computation periods from 4/30/87 to 4/30/97. The right margin of
the chart reflects the ending values of a hypothetical original investment
and subsequent annual investments in the Fund measured in increments of
$20,000 ranging from $0 to $80,000.
Federated Capital Appreciation Fund
A. The graphic representation here displayed entitled `Initial Investment
of $21,000,''consists of a boxed legend in the upper left quadrant
indicating the components of the corresponding mountain chart. The lighter-
shaded portion represents the value of Reinvested Income for the Class A
Shares of Federated Capital Appreciation Fund (the `Fund''). The darker-
shaded portion reflects the Principal Value of a $21,000 (992 Shares)
investment in the Fund. The color-coded mountain chart is a visual
representation of the narrative text above it, which shows that an initial
investment of $21,000/992 Shares in the Fund on 1/1/77, would have a
reinvested total worth of $288,977/2,917 Shares on 4/30/97. The `x'' axis
reflects annual computation periods from 1/1/77 to 4/30/97. The right
margin of the chart reflects the ending values of a hypothetical investment
of $21,000 in the Fund measured in increments of $50,000 ranging from $0 to
$300,000.
B.. The graphic representation here displayed, entitled `Yearly
Investments of $1,000,''consists of a boxed legend in the upper left
quadrant indicating the components of the corresponding mountain chart. The
lighter-shaded portion represents the value of Reinvested Income for the
Class A Shares of Federated Capital Appreciation Fund (the `Fund''). The
darker-shaded portion reflects the Principal Value of annual $1000
Investments (totaling $21,000 by 4/30/97). The color-coded mountain chart
is a visual representation of the narrative text above it, which shows that
$1,000 annual investments in the Fund beginning on 1/1/77 would have a
reinvested total value of $108,868/1,099 Shares on 4/30/97. The `x'' axis
reflects computation periods from 1/1/77 to 4/30/97. The right margin of
the chart reflects the ending values of hypothetical annual investments of
$1,000 in the Fund measured in increments of $20,000 ranging from $0 to
$120,000.
C. The graphic representation here displayed, entitled `Growth Over
Time,''consists of a boxed legend in the upper left quadrant indicating
the components of the corresponding mountain chart. The lighter-shaded
portion represents the value of Reinvested Income for the Class A Shares of
Federated Capital Appreciation Fund (the `Fund'') the darker-shaded
portion represents the Principal Value of Original and Subsequent
Investments (totaling $35,000 by 4/30/97). The color-coded mountain is a
visual representation of the narrative text above it, which shows that an
original $5,000/84 Shares investment in the Fund on 4/30/87 and additional
investments of $250 every month following for ten years would have grown to
a reinvested total value of $73,065/738 Shares on 4/30/97. The `x'' axis
reflects computation periods from 4/30/87 to 4/30/97. The right margin of
the chart reflects the ending values of a hypothetical original investment
and subsequent annual investments in the Fund measured in increments of
$15,000 ranging from $0 to $75,000.
