LIBERTY EQUITY INCOME FUND, INC.
CLASS B SHARES
PROSPECTUS
The Class B Shares of Liberty Equity Income Fund, Inc. (the "Fund"), represent
interests in an open-end, diversified management investment company (a mutual
fund) investing primarily in income-producing equity securities.
THE CLASS B SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
GOVERNMENT AGENCY. INVESTMENT IN THESE CLASS B SHARES INVOLVES RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class B Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for
Class A Shares, Class B Shares, Class C Shares, and Fortress Shares dated
September 27, 1994, with the Securities and Exchange Commission. The
information contained in the Combined Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Combined Statement of Additional Information free of charge by calling
1-800-235-4669. To obtain other information or to make inquiries about the
Fund, contact your financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated September 27, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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GENERAL INFORMATION 2
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LIBERTY FAMILY OF FUNDS 2
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Convertible Securities 4
Zero Coupon Convertible Securities 4
Temporary Investments 5
Repurchase Agreements 5
When-Issued and Delayed Delivery
Transactions 5
Lending of Portfolio Securities 5
Put and Call Options 6
Financial Futures and Options
on Futures 6
Risks 6
Restricted and Illiquid Securities 7
Foreign Securities 7
High-Yield Corporate Debt Obligations 7
Investment Limitations 8
NET ASSET VALUE 9
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INVESTING IN CLASS B SHARES 9
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Share Purchases 9
Through a Financial Institution 9
Directly from the Distributor 9
Minimum Investment Required 10
What Shares Cost 10
Conversion of Class B Shares 10
Systematic Investment Program 11
Exchanging Securities for Fund Shares 11
Certificates and Confirmations 11
Dividends and Distributions 11
Retirement Plans 11
EXCHANGE PRIVILEGE 12
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Requirements for Exchange 12
Tax Consequences 12
Making an Exchange 12
Telephone Instructions 12
REDEEMING CLASS B SHARES 13
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Through a Financial Institution 13
Directly from the Fund 13
By Telephone 13
By Mail 14
Signatures 14
Contingent Deferred Sales Charge 15
Elimination of Contingent
Deferred Sales Charge 15
Systematic Withdrawal Program 16
Reinvestment Privilege 16
Accounts with Low Balances 16
FUND INFORMATION 17
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Management of the Fund 17
Board of Directors 17
Officers and Directors 17
Investment Adviser 21
Advisory Fees 21
Adviser's Background 21
Distribution of Class B Shares 22
Distribution and Shareholder
Services Plans 22
Other Payments to Financial
Institutions 23
Administration of the Fund 23
Administrative Services 23
Custodian 23
Transfer Agent and Dividend
Disbursing Agent 23
Legal Counsel 23
Independent Auditors 23
Brokerage Transactions 23
Expenses of the Fund and
Class B Shares 24
SHAREHOLDER INFORMATION 24
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Voting Rights 24
TAX INFORMATION 25
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Federal Income Tax 25
Pennsylvania Corporate and Personal
Property Taxes 25
PERFORMANCE INFORMATION 25
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OTHER CLASSES OF SHARES 26
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Financial Highlights--Class A Shares 27
Financial Highlights--Class C Shares 28
Financial Highlights--Fortress Shares 29
ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).............................. None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1).............................................. 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)....................................... None
Exchange Fee............................................................................................. None
ANNUAL CLASS B SHARES OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee (after waiver) (2)........................................................................ 0.00%
12b-1 Fee................................................................................................ 0.75%
Total Other Expenses (after expense reimbursement)....................................................... 1.04%
Shareholder Services Fee...................................................................... 0.25%
Total Class B Shares Operating Expenses (3)(4)................................................... 1.79%
</TABLE>
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(1) The contingent deferred sales charge is 5.50% in the first year, declining
to 1.00% in the sixth year, and 0.00% thereafter. (See "Contingent Deferred
Sales Charge.")
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.60%.
(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The Total Class B Shares Operating Expenses are estimated to be 2.68% absent
the anticipated voluntary waiver of the management fee and the anticipated
voluntary reimbursement of certain other operating expenses.
*Total Class B Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending March 31, 1995. During
the course of this period, expenses may be more or less than the average amount
shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS B SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS B SHARES" AND "FUND
INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales loads permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual
return and (2) redemption at the end of each time period........................................ $ 75 $ 100
You would pay the following expenses on the same investment, assuming no redemption............. $ 18 $ 56
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING MARCH 31,
1995.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Fund. The Fund also offers three additional classes of
shares called Class A Shares, Class C Shares, and Fortress Shares. Class B
Shares, Class A Shares, Class C Shares, and Fortress Shares are subject to
certain of the same expenses; however, Class A Shares are subject to a maximum
sales load of 5.50% and may be subject to a 12b-1 fee of up to 0.50%, but are
not subject to a contingent deferred sales charge. Class C Shares are subject to
a 12b-1 fee of up to 0.75% and may be subject to a contingent deferred sales
charge of 1.00%, but are not subject to a front-end sales load. Fortress Shares
are subject to a 12b-1 fee of up to 0.25%, may be subject to a contingent
deferred sales charge of 1.00%, and are subject to a maximum sales load of
1.00%. See "Other Classes of Shares."
GENERAL INFORMATION
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The Fund was incorporated under the laws of the State of Maryland on July 29,
1986. The Fund's address is Liberty Center, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. The Articles of Incorporation permit the
Fund to offer separate series of shares representing interests in separate
portfolios of securities. The shares in any one portfolio may be offered in
separate classes. With respect to the Fund, as of the date of this prospectus,
the Board of Directors (the "Directors") has established four classes of shares,
known as Class A Shares, Class B Shares, Class C Shares, and Fortress Shares.
This prospectus relates only to the Class B Shares ("Shares") of the Fund.
Shares of the Fund are designed primarily for individuals and institutions
seeking high current income and capital appreciation through a professionally
managed, diversified portfolio of income-producing equity securities. A minimum
initial investment of $1,500 is required, unless the investment is in a
retirement account, in which case the minimum initial investment is $50.
Except as otherwise noted in this prospectus, Shares are sold at net asset value
and redeemed at net asset value. However, a contingent deferred sales charge is
imposed on certain Shares of the Fund which are redeemed within six full years
of the date of purchase.
LIBERTY FAMILY OF FUNDS
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This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
International Equity Fund, providing long-term capital growth and income
through international securities;
International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated corporate bonds;
Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas, and communications utilities;
Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value through investment-grade
securities;
Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;
Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;
Pennsylvania Intermediate Municipal Trust, providing current income
exempt from federal regular income tax and the personal income taxes
imposed by the Commonwealth of Pennsylvania, primarily through
Pennsylvania municipal securities;
Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax through
high-quality, short-term municipal securities; and
World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industry.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide above average income and
capital appreciation. The investment objective cannot be changed without
approval of shareholders. While there is no assurance that the Fund will achieve
its investment objective, it endeavors to do so by following the investment
policies described in this prospectus.
INVESTMENT POLICIES
The investment policies described below may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund attempts to achieve its objective by investing
at least 65% of its assets in income-producing equity securities. Equity
securities include common stocks, preferred stocks, and securities (including
debt securities) that are convertible into common stocks. The portion of the
Fund's total assets invested in common stocks, preferred stocks, and convertible
securities will vary according to the Fund's assessment of market and economic
conditions and outlook.
The Fund's stock selection emphasizes those common stocks in each sector that
have good value, attractive yield, and dividend growth potential. The Fund will
utilize convertible securities because such securities typically offer high
yields and good potential for capital appreciation.
CONVERTIBLE SECURITIES. Convertible securities are fixed-income securities
which may be exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified time
period. Convertible securities may take the form of convertible preferred
stock, convertible bonds or debentures, units consisting of "usable" bonds and
warrants or a combination of the features of several of these securities. The
Fund invests in convertible bonds rated "B" or higher by Standard & Poor's
Ratings Group ("Standard & Poor's") or Moody Investors Service, Inc.
("Moody's") at the time of investment or, if unrated, of comparable quality. If
a convertible bond is rated below "B" according to the characteristics set
forth hereafter after the Fund has purchased it, the Fund is not required to
drop the convertible bond from the portfolio but will consider appropriate
action. The investment characteristics of each convertible security vary
widely, which allows convertible securities to be employed for different
investment objectives.
Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality. The Fund
will exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stock in instances in which, in the investment
adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In selecting convertible
securities for the Fund, the Fund's adviser evaluates the investment
characteristics of the convertible security as a fixed-income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Fund's adviser considers numerous factors, including the economic and
political outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
ZERO COUPON CONVERTIBLE SECURITIES. Zero coupon convertible securities are debt
securities which are issued at a discount to their face amount and do not
entitle the holder to any periodic payments of interest prior to maturity.
Rather, interest earned on zero coupon convertible securities accretes at a
stated yield until the security reaches its face amount at maturity. Zero coupon
convertible securities are convertible into a specific number of shares of the
issuer's common stock. In addition, zero coupon convertible securities usually
have put features that provide the holder with the opportunity to sell the bonds
back to the issuer at a stated price before maturity. Generally, the prices of
zero coupon convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income from the security prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and avoid liability
of federal income taxes, the Fund will be required to distribute income accrued
from zero coupon convertible securities which it owns, and may have to sell
portfolio securities (perhaps at disadvantageous times) in order to generate
cash to satisfy these distribution requirements.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily, in amounts of 35%
or less of the Fund's assets, in cash and cash items during times of unusual
market conditions to maintain liquidity. Cash items may include short-term
obligations such as:
commercial paper and Europaper (dollar-denominated commercial paper
issued outside the United States);
instruments of domestic and foreign banks and savings and loans (such as
certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances);
obligations of the U.S. government or its agencies or instrumentalities;
repurchase agreements; and
other short-term instruments.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
U.S. government or other securities to the Fund and agree at the time of
sale to repurchase them at a mutually agreed upon time and price.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these
transactions may cause the Fund to miss a price or yield considered to be
advantageous. Settlement dates may be a month or more after entering into these
transactions, and the market values of the securities purchased may vary from
the purchase prices. Accordingly, the Fund may pay more/less than the market
value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneouly acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities, on a short-term or a long-term basis, up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Fund's Directors and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may also
write call options on all or any portion of its portfolio to generate income for
the Fund. The Fund will write call options on securities either held in its
portfolio or for which it has the right to obtain without payment of further
consideration or for which it has segregated cash in the amount of any
additional consideration.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options or write put options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in interest rates. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for in the
contract, and the buyer agrees to take delivery of the instrument at the
specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and U.S. Treasury securities, equal to the
underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, much depends on the ability of the portfolio
manager to predict market conditions based upon
certain economic analysis and factors. There is a risk that the prices of
the securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest up to 10% of its
net assets in restricted securities. This restriction is not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objectives and policies but which are subject to
restriction on resale under federal securities law. The Fund will limit
investments in illiquid securities, including certain restricted securities
determined by the Directors not to be liquid, non-negotiable time deposits,
over-the-counter options, and repurchase agreements providing for settlement in
more than seven days after notice to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
FOREIGN SECURITIES. The Fund reserves the right to invest in foreign securities
which are traded publicly in the United States. Investments in foreign
securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Fund's investment adviser will consider these and
other factors before investing in foreign securities and will not make such
investments unless, in its opinion, such investments will meet the Fund's
standards and objectives. The Fund will only purchase securities issued in U.S.
dollar denominations.
HIGH-YIELD CORPORATE DEBT OBLIGATIONS. The Fund may invest up to 35% of the
value of its total assets in corporate debt obligations that are not
investment-grade bonds or are not rated but are
determined by the Fund's investment adviser to be of comparable quality.
Securities which are rated BBB or lower by Standard & Poor's or Baa or lower by
Moody's either have speculative characteristics or are speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligations. A description of the rating categories is contained in the
Appendix to the Statement of Additional Information. There is no lower limit
with respect to rating categories for securities in which the Fund may invest.
Corporate debt obligations that are not determined to be investment grade are
high-yield, high-risk bonds, typically subject to greater market fluctuations
and greater risk of loss of income and principal due to an issuer's default. To
a greater extent than investment-grade bonds, lower-rated bonds tend to reflect
short-term corporate, economic and market developments, as well as investor
perceptions of the issuer's credit quality. In addition, lower-rated bonds may
be more difficult to dispose of or to value than high-rated, lower-yielding
bonds. The Fund does not intend to invest more than 5% of its total assets in
corporate debt obligations that are not investment-grade bonds during the
current fiscal year.
Federated Advisers, the Fund's investment adviser, attempts to reduce the risks
described above through diversification of the portfolio and by credit analysis
of each issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except that the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings;
underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objectives, policies, and limitations; or
invest more than 5% of its total assets in securities of one issuer
(except cash and cash items, repurchase agreements, and U.S. government
obligations) or acquire more than 10% of any class of voting securities
of any issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations;
commit more than 5% of the value of its total assets to premiums on open
put option positions; or
invest more than 5% of its total assets in warrants.
NET ASSET VALUE
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The Fund's net asset value per Class B Share fluctuates. The net asset value for
Class B Shares is determined by adding the interest of the Class B Shares in the
market value of all securities and other assets of the Fund, subtracting the
interest of the Class B Shares in the liabilities of the Fund and those
attributable to Class B Shares, and dividing the remainder by the total number
of Class B Shares outstanding. The net asset value for Class B Shares may differ
from that of Class A Shares, Class C Shares, and Fortress Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.
INVESTING IN CLASS B SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution who has a sales agreement with the
distributor or directly from the distributor, Federated Securities Corp., once
an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may, from time to time, offer certain items of
nominal value to any shareholder or investor. The Fund reserves the right to
reject any purchase request.
Orders for $250,000 or more of Class B Shares will normally be invested in Class
A Shares. (See "Other Classes of Shares.")
THROUGH A FINANCIAL INSTITUTION. Investors may call their financial
institution (such as a bank or an investment dealer) to place an order to
purchase Shares. Orders placed through a financial institution are considered
received when the Fund is notified of the purchase order or when converted into
federal funds. It is the financial institution's responsibility to transmit
orders promptly. Purchase orders through a registered broker/dealer must be
received by the broker before 4:00 p.m. (Eastern time) and must be transmitted
by the broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares
to be purchased at that day's price. Purchase orders through other financial
institutions must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be purchased at
that day's price.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge. (See "Contingent
Deferred Sales Charge.") In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods. (See
"Other Payments to Financial Institutions.")
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
complete and sign the new account form available from the Fund;
enclose a check made payable to Liberty Equity Income Fund, Inc.--Class B
Shares; and
mail both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, MA
02266-8604.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after State
Street Bank receives the check.
To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Liberty Equity Income
Fund, Inc.--Class B Shares; Title or Name of Account; Wire Order Number; and
Account Number. Shares cannot be purchased by wire on days on which the New York
Stock Exchange is closed and on federal holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Class B Shares is $1,500 unless the investment
is in a retirement account, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement accounts, which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no Shares are tendered for redemption and no orders to
purchase Shares are received; and (iii) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Class B Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on the
fifteenth day of the month, eight years after the purchase date, except as
noted below, and will be subject to a lower distribution fee. (See "Other
Classes of Shares.") Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee, or other
charge. Class B Shares acquired by exchange from Class B Shares of another fund
in the Liberty Family of Funds will convert into Class A Shares based on the
time of the initial purchase. For purposes of conversion to Class A Shares,
Shares purchased through the reinvestment of dividends and distributions paid
on Class B Shares will be considered to be held in a separate sub-account. Each
time any Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class
B Shares in the sub-account will also convert to Class A Shares. The
availability of the conversion feature is subject to the granting of an
exemptive order by the Securities and Exchange
Commission or the adoption of a rule permitting such conversion. In the event
that the exemptive order or rule ultimately issued by the Securities and
Exchange Commission requires any conditions additional to those described in
this prospectus, shareholders will be notified. The conversion of Class B Shares
to Class A Shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversions will not
constitute taxable events for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
Shares to Class A Shares will not occur if such ruling or opinion is not
available. In such event, Class B Shares would continue to be subject to higher
expenses than Class A Shares for an indefinite period.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the Fund. Shareholders may apply for participation in this program
through their financial institution or directly through the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange certain convertible securities or a combination of
securities and cash for Shares. The securities and any cash must have a market
value of at least $25,000. From time to time, the Fund will prepare a list of
securities which may be eligible for acceptance and furnish this list to brokers
upon request. Securities accepted by the Fund are valued in the same manner as
the Fund values its portfolio securities. Investors wishing to exchange
securities should first contact their investment broker, who will contact
Federated Securities Corp.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
in writing to the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional Shares on payment dates at the
ex-dividend date net asset value without a sales load, unless shareholders
request cash payments on the new account form or by writing to the Fund. All
shareholders on the record date are entitled to the dividend. If Shares are
redeemed or exchanged prior to the record date or purchased after the record
date, those Shares are not entitled to that month's dividend.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or
for IRA accounts. For further details, contact the Fund and consult a tax
adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class B shareholders may exchange all or some of their
Shares for Class B Shares of other funds in the Liberty Family of Funds at net
asset value without being assessed a contingent deferred sales charge on the
exchanged Shares. (Not all funds in the Liberty Family of Funds currently offer
Class B Shares. Contact your financial institution regarding the availability of
other Class B Shares in the Liberty Family of Funds.) To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for shares were held will be
added, or tacked, to the time for which the exchanged-from Shares were held for
purposes of satisfying the applicable holding period.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund into which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in Class B Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a short- or long-term capital
gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds or certain Federated
Funds may be given in writing or by telephone. Written instructions may require
a signature guarantee. Shareholders of the Fund may have difficulty in making
exchanges by telephone through brokers and other financial institutions during
times of drastic economic or market changes. If shareholders cannot contact
their broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to Federated
Services Company, c/o State Street Bank and Trust Company, P.O. Box 8604,
Boston, Massachusetts 02266-8604.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the Fund. Shares
may be exchanged between two funds by telephone only if the two funds have
identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604, and deposited to the
shareholder's account before being exchanged. Telephone exchange instructions
may be recorded. Such instructions will be processed as of 4:00 p.m. (Eastern
time) and must be received by the Fund before that time for Shares to be
exchanged the same day. Shareholders exchanging into a fund will not receive any
dividend that is payable to shareholders of record on that date. This privilege
may be modified or terminated at any time. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING CLASS B SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request, less any applicable contingent deferred sales
charge. (See "Contingent Deferred Sales Charge.") Redemptions will be made on
days on which the Fund computes its net asset value. Redemptions can be made
through a financial institution or directly from the Fund. Redemption requests
must be received in proper form.
THROUGH A FINANCIAL INSTITUTION
Shareholders may redeem Shares by calling their financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at their net asset value, less any applicable contingent deferred sales charge,
next determined after the Fund receives the redemption request from the
financial institution. Redemption requests through a registered broker/dealer
must be received by the broker before 4:00 p.m. (Eastern time) and must be
transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. Redemption requests
through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the Fund. The proceeds will
be mailed to the shareholder's address of record or wire transferred to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System, normally within one business day, but in no event longer
than seven days after the request. The minimum amount for a wire transfer is
$1,000. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as redeeming by mail, should be considered.
BY MAIL. Any shareholder may redeem Shares by sending a written request to
Federated Services Company, c/o State Street Bank and Trust Company, P.O. Box
8604, Boston, Massachusetts 02266-8604. The written request should include the
shareholder's name, the Fund name and class designation, the account number, and
the Share or dollar amount requested, and should be signed exactly as the Shares
are registered.
If Share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders should call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures of all registered owners on written redemption requests
guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within six full years of
the purchase date of those Shares will be charged a contingent deferred sales
charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
<S> <C>
One full year or less.............................. 5.50%
Two full years or less............................. 4.75%
Three full years or less........................... 4.00%
Four full years or less............................ 3.00%
Five full years or less............................ 2.00%
Six full years or less............................. 1.00%
Seven years and thereafter......................... 0.00%
</TABLE>
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and/or (2) Shares held for more than
six full years from the date of purchase. Redemptions will be processed in a
manner intended to maximize the amount of redemption which will not be subject
to a contingent deferred sales charge. In computing the amount of the applicable
contingent deferred sales charge, redemptions are deemed to have occurred in the
following order: (1) Shares acquired through the reinvestment of dividends and
long-term capital gains; (2) Shares held for more than six full years from the
date of purchase; and (3) Shares held for six years or less on a first-in,
first-out basis.
A contingent deferred sales charge is not assessed in connection with an
exchange of Fund Shares for shares of other Class B Shares of funds in the
Liberty Family of Funds. (See "Exchange Privilege.") Any contingent deferred
sales charge imposed at the time the exchanged-for shares are redeemed is
calculated as if the shareholder had held the shares from the date on which the
investor became a shareholder of the exchanged-from Shares. Moreover, the
contingent deferred sales charge will be eliminated with respect to certain
redemptions. (See "Elimination of Contingent Deferred Sales Charge.")
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from
an Individual Retirement Account or other qualified retirement plan to a
shareholder who has attained the age of 70-1/2; and (3) involuntary redemptions
by the Fund of Shares in shareholder accounts that do not comply with the
minimum balance requirements. In addition, to the extent that the distributor
does not make advance payments to certain financial institutions for purchases
made by their clients, no contingent deferred sales charge will be imposed on
redemptions of Shares held by Directors, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or distributor; employees
of any financial institution that sells Shares of the Fund pursuant to a sales
agreement with the distributor; and spouses and children under the age of 21 of
the aforementioned persons. Finally, no contingent deferred sales charge will
be imposed on the redemption of Shares originally purchased through a bank
trust department, an investment adviser registered under the Investment
Advisers Act of 1940, as amended, or a retirement plan where the third-party
administrator has entered into certain arrangements with Federated Securities
Corp. or its affiliates, or any other financial institution, to the extent that
no payments were advanced for purchases made through or by such entities.
The Directors reserve the right to discontinue elimination of the contingent
deferred sales charge. Shareholders will be notified of such elimination. Any
Shares purchased prior to the termination of such waiver would have the
contingent deferred sales charge eliminated as provided in the Fund's prospectus
at the time of the purchase of the Shares. If a shareholder making a redemption
qualifies for an elimination of the contingent deferred sales charge, the
shareholder must notify Federated Securities Corp. or the Fund in writing that
said shareholder is entitled to such elimination.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in Shares. For this reason, payments under this program
should not be considered as yield or income on the shareholder's investment in
Shares. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. Shareholders may apply for participation
in this program through their financial institution. A contingent deferred sales
charge will be imposed on Shares redeemed within six full years of their
purchase date. (See "Contingent Deferred Sales Charge.")
REINVESTMENT PRIVILEGE
If Shares have been redeemed, the shareholder has a one-time right, within 120
days, to reinvest the redemption proceeds into Class A Shares at the
next-determined net asset value without a sales load. (See "Other Classes of
Shares.") Federated Securities Corp. must be notified by the shareholder in
writing or by his or her financial institution of the reinvestment in order to
receive this privilege. If the shareholder redeems his or her Shares, there may
be tax consequences.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement accounts, and pay the proceeds
to the shareholder if the account balance falls below the required minimum value
of $1,500. This requirement does not apply, however, if the balance falls below
$1,500 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Fund's business affairs and for exercising all
the Fund's powers except those reserved for the shareholders. An Executive
Committee of the Board of Directors handles the Board's responsibilities between
meetings of the Board.
OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations, and present positions, including those with Federated
Advisers, its affiliates, and the "Funds" described in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director of the Fund
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue, Vice
President and Director of the Fund.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director of the Fund
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Director of the Fund
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
- --------------------------------------------------------------------------------
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Vice President and Director of the Fund
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Director of the Fund.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director of the Fund
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director of the Fund
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA
Director of the Fund
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park Restaurants,
Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Director of the Fund
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Director of the Fund
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director of the Fund
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, RAND Corporation, Online Computer Library Center, Inc.,
and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director of the Fund
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
President of the Fund
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer of the Fund
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary of the Fund
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Trustee and Secretary, Federated Shareholder Services; Director and
Executive Vice President, Federated Securities Corp.; Vice President and
Secretary of the Funds.
- --------------------------------------------------------------------------------
* This Director is deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940, as amended.
+ Members of the Fund's Executive Committee. The Executive Committee of the
Board of Directors handles the responsibilites of the Board of Directors
between meetings of the Board.
Officers and Directors own less than 1% of the Fund's outstanding shares.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser, subject to direction by the Directors.
The adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .60 of 1% of the Fund's average daily net assets. The adviser
may voluntarily choose to waive a portion of its fee or reimburse the Fund
for certain operating expenses. The adviser can terminate this voluntary
waiver or reimbursement at any time at its sole discretion. The adviser has
also undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk-averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Christopher H. Wiles has been the Fund's co-portfolio manager since July of
1991. Mr. Wiles joined Federated Investors in 1990 and has been a Vice
President of the Fund's investment adviser since 1992. Mr. Wiles served as
Assistant Vice President of the Fund's investment adviser from 1990 until
1992. Mr. Wiles was a portfolio manager at Mellon Bank from 1986 until
1990. Mr. Wiles is a Chartered Financial Analyst and received his M.B.A. in
Finance from Cleveland State University.
Timothy E. Keefe has been the Fund's co-portfolio manager since December of
1993. Mr. Keefe joined Federated Investors in 1987 and has been an
Assistant Vice President of the Fund's investment adviser since 1993. Mr.
Keefe served as an Investment Analyst of the investment adviser from 1991
until 1993, and from 1987 until 1991 he acted as a Marketing Representative
in the Broker Dealer Department. Mr. Keefe is a Chartered Financial Analyst
and received his M.B.A. in Business Administration from the University of
Pittsburgh.
DISTRIBUTION OF CLASS B SHARES
Federated Securities Corp. is the principal distributor for Shares. It is a
Pennsylvania corporation organized on November 14, 1969, and is the principal
distributor for a number of investment companies. Federated Securities Corp. is
a subsidiary of Federated Investors.
The distributor will pay financial institutions an amount equal to 5.50% of
the net asset value of Shares purchased by their clients or customers. These
payments will be made directly by the distributor from its assets, and will not
be made from the assets of the Fund. Dealers may voluntarily waive receipt of
all or any portion of these payments.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Class B Shares will pay to the distributor an amount, computed at an annual
rate of 0.75 of 1% of the average daily net assets of Class B Shares, to finance
any activity which is principally intended to result in the sale of Shares
subject to the Distribution Plan. The distributor may pay a portion of this
amount to financial institutions that waive all or any portion of the payments
discussed in the preceding paragraph. Because distribution fees to be paid by
the Fund to the distributor may not exceed an annual rate of 0.75 of 1% of the
Shares' average daily net assets, it will take the distributor a number of years
to recoup the expenses it has incurred for its distribution and
distribution-related services pursuant to the Distribution Plan.
The Distribution Plan is a compensation-type plan. As such, the Fund makes
no payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the Fund,
interest, carrying or other financing charges in connection with excess amounts
expended, or the distributor's overhead expenses. However, the distributor may
be able to recover such amounts or may earn a profit from future payments made
by the Class B Shares under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net assets of Class B Shares to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the capacities described above or should
Congress relax current restrictions on depository institutions, the Directors
will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.
The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Distribution Plan.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor may offer to pay a
fee from its own assets to financial institutions as financial assistance for
providing substantial marketing and sales support. The support may include
sponsoring sales, educational and training seminars at recreational-type
facilities, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may sell
and/or upon the nature and type of sales or marketing support furnished by the
financial institution. Any payments made by the distributor may be reimbursed by
the Fund's investment adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for shares of the Fund and dividend
disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst &
Young LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with the dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. In
selecting among firms believed to meet these criteria, the adviser may give
consideration to those firms which have sold or are selling shares of the Fund
and other funds distributed by Federated Securities Corp. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Directors.
EXPENSES OF THE FUND AND CLASS B SHARES
Holders of Shares pay their allocable portion of Fund expenses.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Fund and continuing
its existence; registering the Fund with federal and state securities
authorities; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; Directors' fees; auditors' fees; the cost of meetings
of Directors; legal fees of the Fund; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Shares as a
class are expenses under the Fund's Services and Distribution Plans. However,
the Directors reserve the right to allocate certain other expenses to holders of
Shares as they deem appropriate ("Class Expenses"). In any case, Class Expenses
would be limited to: distribution fees; transfer agent fees as identified by the
transfer agent as attributable to holders of Shares; fees under the Fund's
Services Plan; printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxies to
current shareholders; registration fees paid to the Securities and Exchange
Commission and state securities commissions; expenses related to administrative
personnel and services as required to support holders of Shares; legal fees
relating solely to Shares; and Directors' fees incurred as a result of issues
relating solely to Shares.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholders for vote. All shares of each portfolio or
class in the Fund have equal voting rights, except that, in matters affecting
only a particular portfolio or class, only shares of that portfolio or class are
entitled to vote.
As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
the Fund is subject to the Pennsylvania corporate franchise tax; and
Fund Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for Class B
Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in Class B Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Class B Shares is calculated by dividing the net investment income
per Share (as defined by the Securities and Exchange Commission) earned by Class
B Shares over a thirty-day period by the maximum offering price per Share on the
last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Class B Shares, and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the contingent deferred sales charge, which, if excluded, would increase the
total return and yield.
Total return and yield will be calculated separately for Class A Shares,
Class B Shares, Class C Shares, and Fortress Shares. Because Fortress Shares
and Class A Shares may be subject to lower Rule 12b-1 fees, the yield for
Fortress Shares and Class A Shares, for the same period, may exceed that of
Class B Shares and Class C Shares. Because Class A Shares are subject to a
higher maximum sales load, the total return for Class B Shares, Class C Shares,
and Fortress Shares, for the same period, may exceed that of Class A Shares.
Depending on the dollar amount invested and the time period for which any class
of shares is held, the total return for any particular class may exceed that of
another.
From time to time, the Fund may advertise the performance of Class B Shares
using certain financial publications and/or compare the performance of Class B
Shares to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Class A Shares are sold primarily to customers of financial institutions
subject to a front-end sales load of up to 5.50%. Under certain circumstances,
investors may qualify for reduced sales loads on purchases of Class A Shares.
Class A Shares are distributed pursuant to a Distribution Plan adopted by the
Fund whereby the distributor is paid a fee of up to 0.50 of 1% and an
additional Services Plan fee of up to 0.25 of 1% of the Class A Shares' average
daily net assets. Class A Shares are subject to a minimum initial investment of
$500, unless the investment is in a retirement account, in which case the
minimum investment is $50.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no initial sales load. Class C Shares are distributed pursuant
to a Distribution Plan adopted by the Fund whereby the distributor is paid a fee
of up to 0.75 of 1%, in addition to a Services Plan fee of 0.25 of 1%, of the
Class C Shares' average daily net assets. In addition, Class C Shares may be
subject to certain contingent deferred sales charges. Investments in Class C
Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
Fortress Shares offered by the Fund are sold primarily to customers of financial
institutions subject to a front-end sales load of up to 1.00% and may be subject
to certain contingent deferred sales charges. Fortress Shares are distributed
pursuant to a Distribution Plan adopted by the Fund whereby the distributor is
paid a fee of up to 0.25 of 1%, in addition to a Services Plan fee of up to 0.25
of 1%, of the Fortress Shares' average daily net assets. Investments in Fortress
Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
The amount of dividends payable to Class A Shares will generally exceed that of
Class B Shares, Class C Shares, and Fortress Shares by the difference between
Class Expenses and distribution and shareholder service expenses borne by shares
of each respective class.
The stated advisory fee is the same for all classes of shares.
LIBERTY EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated May 6, 1994, on the Fund's financial
statements for the year ended March 31, 1994, is included in the Annual Report
dated March 31, 1994, which is incorporated by reference. This table should be
read in conjunction with the Fund's Financial Statements and Notes thereto,
which may be obtained from the Fund free of charge.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, APRIL 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 1993 1992 1991 1990 1989 1988*** 1987**
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84 $ 9.22 $ 10.18 $ 10.00
- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------
Net investment income 0.43 0.55 0.69 0.84 0.91 0.89 0.72 0.23
- --------------------------------------
Net realized and unrealized
gain/(loss) on investments 0.15 1.22 1.08 (0.16) (1.18) 1.59 (0.81) 0.18
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- -----------
Total from investment operations 0.58 1.77 1.77 0.68 (0.27) 2.48 (0.09) 0.41
- --------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------
Dividends to shareholders from net
investment income (0.43) (0.53) (0.69) (0.86) (0.87) (0.86) (0.72) (0.23)
- --------------------------------------
Distributions to shareholders from
net realized gain on investment
transactions -- -- -- -- (0.52) -- (0.15) --
- --------------------------------------
Distributions in excess of net
investment income -- -- -- -- (0.41)*** -- -- --
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- -----------
TOTAL DISTRIBUTIONS (0.43) (0.53) (0.69) (0.86) (1.80) (0.86) (0.87) (0.23)
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 11.06 $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84 $ 9.22 $ 10.18
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- -----------
TOTAL RETURN* 5.29% 18.98% 21.19% 8.95% (3.19)% 28.25% (0.54)% 3.63%
- --------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------
Expenses 1.00% 0.99% 1.04% 1.05% 0.97% 0.77% 1.16%(a) 1.22%(a)
- --------------------------------------
Net investment income 3.82% 5.45% 7.36% 10.25% 9.34% 9.02% 8.32%(a) 6.93%(a)
- --------------------------------------
Expense waiver/reimbursement (b) 0.89% 1.60% 1.46% 1.46% 1.43% 1.25% 0.86 (a) 0.28 %(a)
- --------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------
Net assets, end of period (000
omitted) $84,665 $30,616 $25,176 $22,589 $22,052 $11,306 $8,895 $10,866
- --------------------------------------
Portfolio turnover rate 43% 79% 115% 31% 54% 49% 41% 24%
- --------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
** Reflects operations for the period from December 30, 1986 to April 30,
1987. For the period from the start of business, November 19, 1986 to
December 29, 1986 net investment income aggregating $0.0685 per share
($685) was distributed to the Fund's investment adviser. Such distribution
represented the net investment income of the Fund prior to the initial
public offering of Fund shares which commenced on December 30, 1986.
*** For the period from May 1, 1987 to March 31, 1988. (Effective November 1,
1987, the Fund changed its fiscal year-end from April 30 to March 31.)
****Distributions in excess of net investment was a result of certain book and
tax timing differences. This distribution did not represent a return of
capital for federal income tax purposes.
(a)Computed on an annualized basis.
(b)This voluntary expense decrease is reflected in both the expense and net
investment income ratio's shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated March 31, 1994, which can be obtained free of charge.
LIBERTY EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated May 6, 1994, on the Fund's financial
statements for the year ended March 31, 1994, is included in the Annual Report
dated March 31, 1994, which is incorporated by reference. This table should be
read in conjunction with the Fund's Financial Statements and Notes thereto,
which may be obtained from the Fund free of charge.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1994**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.76
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------
Net investment income 0.34
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments 0.28
- ------------------------------------------------------------------------------------------------- ---------------
Total from investment operations 0.62
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.32 )
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 11.06
- ------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* 5.66 %
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------
Expenses 1.79%(a)
- -------------------------------------------------------------------------------------------------
Net investment income 2.99%(a)
- -------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.89%(a)
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $24,632
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate 43%
- -------------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
** Reflects operations for the period May 3, 1993 (date of initial public
offering) to March 31, 1994.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and
net investment income ratio's shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated March 31, 1994, which can be obtained free of charge.
LIBERTY EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated May 6, 1994 on the Fund's financial
statements for the year ended March 31, 1994 is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's Financial Statements and Notes thereto, which may be obtained
from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
<S> <C>
1994**
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.74
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------
Net investment income 0.17
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments (0.68 )
- ------------------------------------------------------------------------------------------------- ---------------
Total from investment operations (0.51 )
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.17 )
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 11.06
- ------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* (4.43 )%
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------
Expenses 1.29%(a)
- -------------------------------------------------------------------------------------------------
Net investment income 3.71%(a)
- -------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.89%(a)
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $21,010
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate 43%
- -------------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
** Reflects operations for the period November 12, 1993 (date of initial public
offering) to March 31, 1994.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratio's shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated March 31, 1994, which can be obtained free of charge.
ADDRESSES
- --------------------------------------------------------------------------------
Liberty Equity Income Fund, Inc.
Class B Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- ------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ----------------------------------------------------------------------------
LIBERTY EQUITY INCOME
FUND, INC.
CLASS B SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
September 27, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
LIBERTY CENTER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
530461409
8062806A-B (9/94)
LIBERTY EQUITY INCOME FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
FORTRESS SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectuses of Class A Shares, Class C Shares, and
Fortress Shares of Liberty Equity Income Fund, Inc. (the "Fund"),
dated May 31, 1994, and for Class B Shares of the Fund dated September
27, 1994. This Statement is not a prospectus itself. To receive
a copy of any of the prospectuses, write or call the Fund.
LIBERTY CENTER
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated September 27, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Convertible Securities 1
Temporary Investments 1
Warrants 2
When-Issued and Delayed Delivery
Transactions 2
Repurchase Agreements 2
Futures and Options Transactions 2
Restricted and Illiquid Securities 4
Lending of Portfolio Securities 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
Investment Limitations 5
THE FUNDS 7
- ---------------------------------------------------------------
Fund Ownership 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 7
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 8
- --------------------------------------------------------------
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution of Shares 9
Distribution and Shareholder Services Plans 9
Conversion to Federal Funds 9
Other Payments to Financial Institutions
(Fortress Shares Only) 9
Purchases by Sales Representatives,
Fund Directors, and Employees 9
Exchanging Securities for Fund Shares 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
EXCHANGE PRIVILEGE (FORTRESS SHARES ONLY) 11
- ---------------------------------------------------------------
Reduced Sales Load 11
Requirements for Exchange 11
Tax Consequences 11
Making an Exchange 11
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
CURRENT DISTRIBUTIONS 13
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 13
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------------------------
APPENDIX 15
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund was incorporated under the laws of the State of Maryland on July 29,
1986. It is qualified to do business as a foreign corporation in Pennsylvania.
On December 21, 1992, shareholders of the Fund approved changing the name of the
Fund from Convertible Securities and Income, Inc., to Liberty Equity Income
Fund, Inc.
Shares of the Fund are offered in four classes known as Class A Shares, Class B
Shares, Class C Shares, and Fortress Shares (individually and collectively
referred to as "Shares" as the context may require). This Combined Statement of
Additional Information relates to all four classes of the above-mentioned
Shares.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide above average income and capital
appreciation. The investment objective cannot be changed without approval of
shareholders.
CONVERTIBLE SECURITIES
As with all fixed-income securities, various market forces influence the market
value of convertible securities, including changes in the level of interest
rates. As the level of interest rates increases, the market value of convertible
securities may decline and, conversely, as interest rates decline, the market
value of convertible securities may increase. The unique investment
characteristic of convertible securities, the right to be exchanged for the
issuer's common stock, causes the market value of convertible securities to
increase when the underlying common stock increases. However, since securities
prices fluctuate, there can be no assurance of capital appreciation, and most
convertible securities will not reflect quite as much capital appreciation as
their underlying common stocks. When the underlying common stock is experiencing
a decline, the value of the convertible security tends to decline to a level
approximating the yield-to-maturity basis of straight nonconvertible debt of
similar quality, often called "investment value," and may not experience the
same decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of purchasing a
fixed-income security with a possibility of capital appreciation due to the
conversion privilege. If this appreciation potential is not realized, the
premium may not be recovered.
TEMPORARY INVESTMENTS
The temporary investments in which the Fund may invest include, but are not
limited to:
.commercial paper rated A-1 or A-2 by Standard & Poor's Ratings Group,
Prime-1 or Prime-2 by Moody's Investors Service, Inc., or F-1 or F-2 by
Fitch Investors Service, Inc., and Europaper rated A-1, A-2, Prime-1, or
Prime-2. In the case where commercial paper or Europaper has received
different ratings from different rating services, such commercial paper
or Europaper is an acceptable temporary investment so long as at least
one rating is one of the preceding high-quality ratings and provided the
investment adviser has determined that such investment presents minimal
credit risks;
.instruments of domestic and foreign banks and savings and loans if they have
capital, surplus, and undivided profits of over $100,000,000, or if the
principal amount of the instrument is insured by the Federal Deposit Insurance
Corporation. These instruments may include Eurodollar Certificates of Deposits
("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar Time
Deposits ("ETDs");
.obligations of the U.S. government or its agencies or instrumentalities;
.repurchase agreements; and
.other short-term instruments which are not rated but are determined by the
investment adviser to be of comparable quality to the other temporary
obligations in which the Fund may invest.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, and Europaper are subject to different risks than
domestic obligations of domestic banks or corporations. Examples of these
risks include international economic and political developments, foreign
governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the
issuing entity, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for
ECDs, ETDs, and Yankee CDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject to the
same regulatory requirements that apply to domestic banks, such as
reserve requirements, loan limitations,
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examinations, accounting, auditing, recordkeeping, and the public
availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.
WARRANTS
Warrants basically are options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less than a year to twenty years or may be perpetual. However, warrants
have expiration dates after which they are worthless. In addition, if the market
price of the common stock does not exceed the warrant's exercise price during
the life of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage increase
or decrease in the market price of the optioned common stock.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled. The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20% of
the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Board of Directors
(the "Directors").
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future.
In the fixed-income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed-income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed-income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
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The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio against
an increase in market interest rates. When the Fund writes a call option
on a futures contract, it is undertaking the obligation of assuming a
short futures position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option is
exercised. As market interest rates rise, causing the prices of futures
to go down, the Fund's obligation under a call option on a future (to
sell a futures contract) costs less to fulfill, causing the value of the
Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed-income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the
Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good-faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
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PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. The Fund may only sell call options either
on securities held in its portfolio or on securities which it has the
right to obtain without payment of further consideration (or has
segregated cash in the amount of any additional consideration).
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under an SEC Staff position set forth in the adapting
release for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is
a non-exclusive, safe harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws. The
Rule provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible or resale
under Rule 144A. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities (eligible for
resale under Rule 144A) for determination of the Directors. The Directors
consider the following criteria in determining the liquidity of certain
restricted securities:
.the frequency of trades and quotes for the security;
.the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
.dealer undertakings to make a market in the security; and
.the nature of the security and the nature of the marketplace trades.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction is
similar to borrowing cash. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Securities in the Fund's portfolio will be sold
whenever the Fund's investment adviser believes it is appropriate to do so in
light of the Fund's investment objective, without regard to the length of time a
particular security may have been held. The adviser to the Fund does not
anticipate that portfolio turnover will result in adverse tax consequences. Any
such
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trading will increase the Fund's portfolio turnover rate and transaction costs.
For the fiscal years ended
March 31, 1994, and 1993, the portfolio turnover rates were 43% and 79%,
respectively.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain such
short-term credits as are necessary for clearance of transactions. The
deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.
SELLING SHORT
The Fund will not sell securities short unless during the time the short
position is open, it owns an equal amount of the securities sold or
securities readily and freely convertible into or exchangeable, without
payment of additional consideration, for securities of the same issue as,
and equal in amount to, the securities sold short; and not more than 10%
of the Fund's net assets (taken at current value) is held as collateral
for such sales at any one time.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while any borrowings are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
10% of the value of total assets at the time of the borrowing. Margin
deposits for the purchase and sale of financial futures contracts and
related options are not deemed to be a pledge.
INVESTING IN MINERALS OR REAL ESTATE
The Fund will not invest in oil, gas, or other mineral exploration or
development programs, or real estate, except that it may purchase
portfolio instruments issued by companies that invest in or sponsor such
interests.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, except that the Fund may
purchase and sell financial futures contracts and related options.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under federal securities law (except
for commercial paper issued under Section 4(2) of the Securities Act of
1933).
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objectives, policies, and
limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
purchase or holding of corporate bonds, debentures, notes, certificates
of indebtedness or other debt securities of an issuer, repurchase
agreements, or other transactions which are permitted by the Fund's
investment objectives and policies.
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CONCENTRATION OF INVESTMENTS
The Fund will not purchase portfolio instruments if, as a result of such
purchase, 25% or more of the value of its total assets would be invested
in any one industry.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of the value of its total assets in
securities of one issuer (except cash and cash items, repurchase
agreements, and U.S. government obligations) or acquire more than 10% of
any class of voting securities of any issuer. For these purposes, the
Fund takes all common stock and all preferred stock of an issuer each as
a single class, regardless of priorities, series, designations, or other
differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies
except as part of a merger, consolidation, or other acquisition.
ARBITRAGE TRANSACTIONS
The Fund will not engage in arbitrage transactions.
ACQUIRING SECURITIES
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may purchase up to
10% of the voting securities of any one issuer and may exercise its
voting powers consistent with the best interests of the Fund. In
addition, the Fund, other companies advised by the Fund's investment
adviser, and other affiliated companies may together buy and hold
substantial amounts of voting stock of a company and may vote together in
regard to such company's affairs. In some cases, the Fund and its
affiliates might collectively be considered to be in control of such
company. In some cases, Directors and other persons associated with the
Fund and its affiliates might possibly become directors of companies in
which the Fund holds stock.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND DIRECTORS
OF THE FUND
The Fund will not purchase or retain the securities of any issuer if the
officers and Directors of the Fund or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
WRITING COVERED CALL OPTIONS AND PURCHASING PUT OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment. The Fund will not purchase put options
on securities unless the securities are held in the Fund's portfolio. The
Fund will not commit more than 5% of the value of its total assets to
premiums on open option positions.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its total assets in warrants. No
more than 2% of this 5% may be warrants which are not listed on the New
York or American Stock Exchange.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including certain restricted securities (except for Section
4(2) commercial paper and restricted securities which the adviser
believes can be sold within seven days), non-negotiable time deposits in
repurchase agreements providing for settlement in more than seven days
after notice.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
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The Fund did not borrow money, invest in reverse repurchase agreements, pledge
securities, or sell securities short in excess of 5% of the value of its total
assets during the last fiscal year and has no present intention to do so in the
curent fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan association having capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment to be "cash items."
To comply with registration requirements in certain states, the Fund (1) will
not invest in real estate limited partnerships or oil, gas, or other mineral
leases and (2) will limit investment in warrants to 5% of its net assets. No
more than 2% will be in warrants which are not listed on the New York or
American Stock Exchanges. Also, to comply with certain state restrictions, the
Fund will limit its investment in restricted securities to 5% of total assets.
(If state requirements change, these restrictions may be revised without
shareholder notification.)
THE FUNDS
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"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series; Cash Trust Series II; Cash Trust Series, Inc.; D.G. Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Trust; Federated
Income Securities Trust; Federated Index Trust; Federated Institutional Trust;
Federated Intermediate Government Trust; Federated Master Trust; Federated
Municipal Trust; Federated Short-Intermediate Government Trust; Federated
Short-Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress
Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
Term Trust, Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain Funds;
The Medalist Funds; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securites Income Trust; New York Municipal
Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage
Funds; RIMCO Monument Funds; Short-Term Municipal Trust; The Shawmut Funds; Star
Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust for Government Cash Reserves;
Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
As of July 9, 1994, the following shareholder of record owned 5% or more of the
outstanding Shares of the Fund: Merrill Lynch Pierce Fenner & Smith (as record
owner holding Class A Shares, Class C Shares, and Fortress Shares for its
clients), Jacksonville, Florida, owned approximately 1,427,430 Class A Shares
(16.44%); 1,325,488 Class C Shares (51.07%); and 733,384 Fortress Shares
(28.75%).
INVESTMENT ADVISORY SERVICES
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ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers. It is a subsidiary of
Federated Investors. All the voting securities of Federated Investors are owned
by a trust, the trustees of which are John F. Donahue, his wife, and his son, J.
Christopher Donahue.
The adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, or sale of any security or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Fund.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual investment
advisory fee as described in the respective prospectuses. During the fiscal
years ended March 31, 1994, 1993, and 1992, the Fund's adviser earned
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$398,315, $157,855, and $136,400, respectively, all of which was voluntarily
waived because of undertakings to limit the Fund's expenses.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1.5% per year
of the remaining average net assets, the adviser will reimburse the Fund
for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
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Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectuses. Prior to March 1, 1994, Federated Administrative Services, Inc.,
also a subsidiary of Federated Investors, served as the Fund's administrator.
(For purposes of this Combined Statement of Additional Information, Federated
Administrative Services and Federated Administrative Services, Inc., may
hereinafter collectively be referred to as the "Administrators.") For the fiscal
year ended March 31, 1994, the Administrators collectively earned $308,878. For
the fiscal years ended March 31, 1993, and 1992, Federated Administrative
Services, Inc., earned $213,672 and $193,049, respectively. Dr. Henry J.
Gailliot, an officer of Federated Advisers, the adviser to the Fund, holds
approximately 20% of the outstanding common stock and serves as a director of
Commercial Data Services, Inc., a company which provides computer processing
services to Federated Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
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Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee is based on the size, type and number of accounts
and transactions made by shareholders.
Federated Services Company also maintains the Fund's accounting records. The fee
is based on the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
BROKERAGE TRANSACTIONS
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The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the adviser
and may include:
.advice as to the advisability of investing in securities;
.security analysis and reports;
.economic studies;
.industry studies;
.receipt of quotations for portfolio evaluations; and
.similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising certain other accounts. To the
extent that receipt of these services may supplant services for which the
adviser or its affiliates might otherwise have paid, it would tend to reduce
their expenses.
During the fiscal years ended March 31, 1994, 1993, and 1992, the Fund paid
total brokerage commissions of $125,372, $36,022, and $26,462, respectively.
PURCHASING SHARES
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Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales load on Class A Shares
and Fortress Shares only) on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares of the Fund is explained in the
respective prospectuses under "Investing in Class A Shares," "Investing in Class
B Shares," "Investing in Class C Shares," and "Investing in Fortress Shares."
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
For the fiscal years ended March 31, 1994, 1993, and 1992, the distributor was
paid $1,179,335, $253,028, and $239,749, respectively. During the same periods,
the distributor retained $29,487, $10,145, and $27,731, respectively, after
dealer concessions.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Directors expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objective. By identifying potential
investors whose needs are served by the Fund's objective, and properly servicing
these accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholder's requests and
inquiries concerning their accounts.
During the fiscal years ended March 31, 1994, 1993, and 1992, payments in the
amount of $85,071, $50,224, and $54,773, respectively, were made pursuant to the
Distribution Plan, all of which were paid to financial institutions. In
addition, for the fiscal year ended March 31, 1994, payments in the amount of
$137,050 were made pursuant to the Shareholder Services Plan.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS (FORTRESS SHARES ONLY)
The administrative services for which the distributor will pay financial
institutions include, but are not limited to, providing office space, equipment,
telephone facilities, and various clerical, supervisory, and computer personnel
as is necessary or beneficial to establish and maintain shareholders' accounts
and records, process purchase and redemption transactions, process automatic
investments of client account cash balances, answer routine client inquiries
regarding the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund may
reasonably request.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp., or their affiliates, or any investment dealer
who has a sales agreement with Federated Securities Corp., and their spouses and
children under 21, may buy Shares at net asset value without a sales load and
are not subject to a contingent deferred sales charge (Class B Shares, Class C
Shares, and Fortress Shares only) to the extent the financial institution
through which the Shares are sold agrees to waive any initial payment to which
it might otherwise be entitled. Shares may also be sold without sales charges to
trusts or pension or profit-sharing plans for these persons.
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These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange convertible securities they already own for Shares, or
they may exchange a combination of convertible securities and cash for Shares.
Any securities to be exchanged must meet the investment objective and policies
of the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale.
The Fund will prepare a list of securities which are eligible for acceptance and
furnish this list to brokers upon request. The Fund reserves the right to reject
any security, even though it appears on the list, and the right to amend the
list of acceptable securities at any time without notice to brokers or
investors.
An investment broker acting for an investor should forward the securities in
negotiable form with an authorized letter of transmittal to Federated Securities
Corp. Federated Securities Corp. will determine that transmittal papers are in
good order and will forward them to the Fund's custodian, State Street Bank and
Trust Company. The Fund will notify the broker of its acceptance and valuation
of the securities within five business days of their receipt by State Street
Bank and Trust Company.
The Fund values such securities in the same manner as the Fund values its
portfolio securities. The basis of the exchange will depend upon the net asset
value of Shares on the day the securities are valued. One Share will be issued
for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, conversion, or
other rights attached to the securities become the property of the Fund, along
with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the cost basis of the securities
exchanged for Shares, a gain or loss may be realized by the investor.
DETERMINING NET ASSET VALUE
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Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the respective prospectuses.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
.according to the last sale price on a national securities exchange, if
available, or on the basis of prices provided by an independent pricing
service;
.for most short-term obligations, according to the average of the last offer to
buy and the last offer to sell the security, as provided by independent pricing
services;
.for options traded in the over-the-counter market, according to the mean
between the last bid and the last asked price for the option as provided by an
investment dealer or other financial institution that deals in the option;
.for short-term obligations with remaining maturities of 60 days or less at the
time of purchase, at amortized cost; or
.at fair value as determined in good faith by the Fund's Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
.yield;
.quality;
.coupon rate;
.maturity;
.type of issue;
.trading characteristics; and
.other market data.
EXCHANGE PRIVILEGE (FORTRESS SHARES ONLY)
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This section relates only to Fortress Shares of the Fund. For information
regarding the Exchange Privilege for Class A Shares, Class B Shares, and Class C
Shares of the Fund, please see the respective prospectuses for these classes of
Shares.
The Securities and Exchange Commission has issued an order exempting the Fund
from certain provisions of the Investment Company Act of 1940. As a result, Fund
shareholders are allowed to exchange all or some of their Fortress Shares for
shares in other Fortress Funds or certain Federated funds which are sold with a
sales load different from that of the Fund or with no sales load and which are
advised by subsidiaries or affiliates of Federated Investors. These exchanges
are made at net asset value plus the difference between the Fund's sales load
already paid and any sales load of the fund into which the Fortress Shares are
to be exchanged, if higher.
The order also allows certain other funds, including funds that are not advised
by subsidiaries or affiliates of Federated Investors, which do not have a sales
load, to exchange their shares for Fund Shares on a basis other than their
current offering price. These exchanges may be made to the extent that such
shares were acquired in a prior exchange, at net asset value, for shares of a
Federated fund carrying a sales load.
REDUCED SALES LOAD
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales load, the shareholder must notify Federated Securities
Corp.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Fortress Shares having a net
asset value of at least $1,500. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Fortress Shares submitted for exchange are
redeemed and the proceeds invested in shares of the other fund.
Further information on the exchange privilege and prospectuses for Fortress
Funds or certain Federated funds are available by calling the Fund.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a short-term or long-term capital
gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for Fortress Funds or certain Federated funds may be
given in writing or by telephone. Written instructions may require a signature
guarantee.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with
the Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the Fund.
Shares may be exchanged between two funds by telephone only if the two
funds have identical shareholder registrations.
Telephoned exchange instructions may be recorded and will be binding upon
the shareholder. They must be received by the Fund before 4:00 p.m.
(Eastern time) for Shares to be exchanged that day. Telephone exchange
instructions may be recorded. If reasonable procedures are not followed
by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING SHARES
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The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions of Class B Shares,
Class C Shares, and Fortress Shares may be subject to a contingent deferred
sales charge. Redemption procedures are explained in the respective prospectuses
under "Redeeming Class A Shares," "Redeeming Class B Shares," "Redeeming Class C
Shares" or "Redeeming Fortress Shares." Although the transfer agent does not
charge for telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Fortress Shares redeemed within one to four years of purchase may be subject to
a contingent deferred sales charge. The amount of the contingent deferred sales
charge is based upon the amount of the advance payment paid at the time of
purchase by the distributor to the financial institutions for services rendered,
and the length of time the investor remains a shareholder in the Fund. Should
financial institutions elect to receive an amount
- --------------------------------------------------------------------------------
less than the advance payment that is stated in the prospectus for servicing a
particular shareholder, the contingent deferred sales charge and/or holding
period for that particular shareholder will be reduced accordingly.
REDEMPTION IN KIND
Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price, in whole or in part, by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Directors determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem Shares for any shareholder
in cash up to the lesser of $250,000 or 1% of a class of Shares' net asset value
during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
.derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of its gross income from the sale of securities held less
than three months;
.invest in securities within certain statutory limits; and
.distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction to the Fund if the Fund were a regular corporation and to the extent
designated by the Fund as so qualifying. These dividends, and any short-term
capital gains, are taxable as ordinary income.
CAPITAL GAINS
Capital gains or losses may be realized on the sale of portfolio
securities and as a result of discounts from par value on securities held
to maturity. Sales would generally be made because of:
the availability of higher relative yields;
differentials in market values;
new investment opportunities;
changes in creditworthiness of an issuer; or
an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares. Any loss by a shareholder on Shares
held for less than six months and sold after a capital gains distribution
will be treated as a long-term capital loss to the extent of the capital
gains distribution.
TOTAL RETURN
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The Fund's average annual total returns for Class A Shares for the one-year and
five-year periods ended March 31, 1994, were 0.58% and 8.87%, respectively.
The Fund's cumulative total return for Fortress Shares for the period from
November 12, 1993 (date of initial public offering), to March 31, 1994 was
(6.34%).
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The Fund's cumulative total return for Class C Shares for the period from May 3,
1993 (date of initial public offering), to March 31, 1994 was 4.61%.
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional Shares, assuming a quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.
Cumulative total return reflects the Fortress Shares' and Class C Shares' total
performance over a specific period of time. This total return assumes and is
reduced by the payment of the maximum sales load, if applicable. The Fortress
Shares' total return is representative of only five months of investment
activity since the date of initial public offering. The Class C Shares' total
return is representative of only eleven months of investment activity since the
date of initial public offering.
YIELD
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The Fund's yields for Class A Shares, Fortress Shares, and Class C Shares were
3.47%, 3.36%, and 2.90%, respectively, for the thirty-day period ended March 31,
1994.
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the SEC) earned by any class of
Shares over a thirty-day period by the maximum offering price per Share of any
class of Shares on the last day of the period. This value is then annualized
using semi-annual compounding. This means that the amount of income generated
during the thirty-day period is assumed to be generated each month over a
twelve-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by any class of Shares because of
certain adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
CURRENT DISTRIBUTIONS
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Class A Shares', Fortress Shares' , and Class C Shares' average net annualized
current distributions rate for the thirty days ended March 31, 1994, were 3.29%,
3.15%, and 2.72%, respectively.
Each class of Shares calculates its current distributions daily based upon its
past twelve months' income dividends and short-term capital gains distributions
per Share divided by its offering price per Share on that day. Each class of
Shares may reduce the time period upon which it bases its calculation of current
distributions if the investment adviser believes a shortened period would be
more representative in light of current market conditions.
PERFORMANCE COMPARISONS
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The Fund's performance of each class of Shares depends upon such variables as:
.portfolio quality;
.average portfolio maturity;
.type of instruments in which the portfolio is invested;
.changes in interest rates and market value of portfolio securities;
.changes in the Fund's or a class of Shares' expenses; and
.various other factors.
A class of Shares' performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings and
offering price per Share are factors in the computation of yield and total
return.
The Fund may compare the performance of equity income funds to other types of
stock funds and indices.
- --------------------------------------------------------------------------------
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
.LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the convertible
securities and fixed income funds categories in advertising and sales
literature.
.DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and transportation
companies. The DJIA indicates daily changes in the average price of stocks in
any of its categories. It also reports total sales for each group of
industries. Because it represents the top corporations of America, the DJIA
index is a leading economic indicator for the stock market as a whole.
.STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS is a composite
index of common stocks in industry, transportation, and financial and public
utility companies which compares total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard & Poor's index
assumes reinvestment of all dividends paid by stocks listed on its index. Taxes
due on any of these distributions are not included, nor are brokerage or other
fees calculated, in the Standard & Poor's figures.
.MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
The Fund may compare the performance of equity income funds to other types of
stock funds and indices.
In addition, the Fund will, from time to time, use the following standard
convertible securities indices against which it will compare its performance:
Goldman Sachs Convertible 100; Kidder Peabody Convertible Bond Index; and Value
Line Convertible Bond Index.
Advertisements and other sales literature for any class of Shares may quote
total returns which are calculated on nonstandardized base periods. These total
returns also represent the historic change in the value of an investment in any
class of Shares based on quarterly reinvestment of dividends over a specified
period of time.
From time to time, the Fund may advertise the performance of any class of Shares
using charts, graphs, and descriptions, compared to federally insured bank
products, including certificates of deposit and time deposits, and to money
market funds using the Lipper Analytical Services money market instruments
average. In addition, advertising and sales literature for the Fund may use
charts and graphs to illustrate the principals of dollar-cost averaging and may
disclose the amount of dividends paid by the Fund over certain periods of time.
Advertisements may quote performance information which does not reflect the
effect of a sales load or contingent deferred sales charge, as applicable
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements for the fiscal year ended March 31, 1994, are
incorporated herein by reference to the annual report of the Fund dated March
31, 1994 (File Nos. 33-6901 and 811-4743). A copy of the report may be obtained
without charge by contacting the Fund.
APPENDIX
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STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
BA--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in
this class.
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B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligator's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well-established access to a
range of financial markets and assured sources of alternate liquidity.
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P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment.
530461409
8062806B (9/94) 1
