1933 Act File No. 33-6901
1940 Act File No. 811-4743
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ..........
Post-Effective Amendment No. 23 ............. X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 20 .......................... X
FEDERATED EQUITY INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
on pursuant to paragraph (b)
----------
X 60 days after filing pursuant to paragraph (a) (i)
pursuant to paragraph (a) (i)
- --- ----------
75 days after filing pursuant to paragraph (a) (ii)
- ---
on pursuant to paragraph (a) (ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
- ---
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
X filed the Notice required by that Rule on May 15, 1997; or intends
to file the Notice required by that Rule on or about
; or
------------
during the most recent fiscal year did not sell any securities
pursuant to Rule 24f-2 under the Investment Company Act of 1940, and,
pursuant to Rule 24f-2(b)(2), need not file the Notice.
Copies to:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin and Oshinsky, LLP
2101 L Street, N.W.
Washington, D.C. 20037
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of Federated Equity
Income Fund, Inc., which is comprised of four classes of shares, (1)
Class A Shares, (2) Class B Shares, (3) Class C Shares and (4) Class F
Shares, is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page...............Cover Page (1-4).
Item 2. Synopsis.................General Information (1-4) Summary of
Fund Expenses (1-4).
Item 3. Condensed Financial
Information..............Financial Highlights (1-4); Performance
Information (1-4).
Item 4. General Description of
Registrant ..............Investment Objective (1-4); Investment
Policies (1-4); Investment Limitations
(1-4); Other Classes of Shares (1-4);
Appendix (1-4).
Item 5. Management of the Fund...Fund Information (1-4); Management of
the Fund (1-4); Distribution of Shares
(1-4); Supplemental Payments to
Financial Institutions (1-4);
Administration of the Fund (1-4);
Brokerage Transactions (1-4).
Item 6. Capital Stock and Other
Securities...............Shareholder Information (1-4); Tax
Information (1-4); Federal Income Tax
(1-4); State and Local Taxes (1-4).
Item 7. Purchase of Securities Being
Offered..................Net Asset Value (1-4); Purchasing Shares
(1-4); Investing in the Fund (1-4);
Class A Shares (1); Class B Shares (2);
Class C Shares (3); Share Purchases (1-
4); Redeeming and Exchanging Shares (1-
4).
Item 8. Redemption or Repurchase.Eliminating the Contingent Deferred
Sales Charge (1-4); Account and Share
Information (1-4).
.
Item 9. Pending Legal Proceedings None
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page...............Cover Page (1-4).
Item 11. Table of Contents........Table of Contents (1-4).
Item 12. General Information and
History..................General Information About the Fund (1-
4); About Federated Investors (1-4).
Item 13. Investment Objectives and
Policies.................Investment Objectives and Policies (1-
4).
Item 14. Management of the Fund...Federated Equity Income Fund, Inc.,
Management (1-4).
Item 15. Control Persons and Principal
Holders of Securities....Fund Ownership (1-4); Directors
Compensation (1-4).
Item 16. Investment Advisory and Other
Services.................Investment Advisory Services (1-4);
Other Services (1-4).
Item 17. Brokerage Allocation.....Brokerage Transactions (1-4).
Item 18. Capital Stock and Other
Securities...............Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered..................Purchasing Shares (1-4); Determining Net
Asset Value (1-4); Determining Market
Value of Securities (1-4); Redeeming
Shares (1-4).
Item 20. Tax Status...............Tax Status (1-4).
Item 21. Underwriters.............See Part A - Distribution of Shares (1-
4).
Item 22. Calculation of Performance
Data.....................Total Return (1-4); Yield (1-4); Current
Distributions (1-4); Performance
Comparisons (1-4);
Item 23. Financial Statements.....Incorporated by reference to Annual
Report of Registrant dated March
31,1997, (File Nos. 33-6901 and 811-
4743).
FEDERATED EQUITY INCOME FUND, INC.
Class F Shares
PROSPECTUS
The Class F Shares of Federated 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 SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Class F Shares of the Fund. Keep this prospectus
for future reference.
The Fund has also filed a Statement of Additional Information for
Class A Shares, Class B Shares, Class C Shares, and Class F Shares
dated July 31, 1997, with the Securities and Exchange Commission
("SEC"). The information contained in the Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Statement of Additional Information or a paper
copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-341-7400. To obtain
other information or make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information,
material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated July 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights -- Class F Shares 2
General Information 3
Calling the Fund 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Portfolio Turnover 6
Investment Limitations 6
Net Asset Value 7
Investing in the Fund 7
Purchasing Shares 7
Purchasing Shares Through a Financial Intermediary 8
Purchasing Shares by Wire 8
Purchasing Shares by Check 8
Systematic Investment Program 8
Retirement Plans 8
Reducing or Eliminating the Sales Charge 8
Redeeming and Exchanging Shares 9
Redeeming or Exchanging Shares Through
a Financial Intermediary 9
Redeeming or Exchanging Shares by Telephone 9
Redeeming or Exchanging Shares by Mail 9
Requirements for Redemption 10
Requirements for Exchange 10
Systematic Withdrawal Program 10
Contingent Deferred Sales Charge 10
Account and Share Information 11
Confirmations and Certificates 11
Dividends and Distributions 11
Accounts with Low Balances 11
Fund Information 11
Management of the Fund 11
Distribution of Class F Shares 12
Administration of the Fund 13
Brokerage Transactions 13
Shareholder Information 13
Tax Information 13
Federal Income Tax 13
State and Local Taxes 14
Performance Information 14
Other Classes of Shares 14
Appendix 15
</TABLE>
SUMMARY OF FUND EXPENSES
CLASS F SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a 1.00%
percentage of offering price)
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of
original purchase
price or redemption proceeds, as applicable)(1) 1.00%
Redemption Fee (as a percentage of amount redeemed, if None
applicable)
Exchange Fee None
</TABLE>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fee 0.60%
12b-1 Fee 0.25%
Total Other Expenses 0.51%
Shareholder Services Fee (after waiver)(2) 0.24%
Total Operating Expenses(3) 1.36%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the
lesser of the original purchase price or the net asset value of
Shares redeemed within four years of their purchase date. For a
more complete description, see `Investing in the Fund" and
"Contingent Deferred Sales Charge."
(2) The shareholder services fee has been reduced to reflect the
voluntary waiver of a portion of the shareholder services fee. The
shareholder service provider can terminate this voluntary waiver
at any time at its sole discretion. The maximum shareholder
services fee is 0.25%.
(3) The total operating expenses would have been 1.37% absent the
voluntary waiver of a portion of the shareholder services fee.
The purpose of this table is to assist an investor in understanding
the various costs and expenses that a shareholder of Class F Shares of
the Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Investing in the
Fund" and "Fund Information." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF
THE MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, (2) redemption at the end of each time period,
and (3) payment of the maximum sales charge. <TABLE> <S> <C>
1 Year $ 34
3 Years $ 64
5 Years $ 84
10 Years $172
</TABLE>
You would pay the following expenses on the same investment assuming
no redemption.
<TABLE>
<S> <C>
1 Year $ 24
3 Years $ 53
5 Years $ 84
10 Years $172
</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.
FINANCIAL HIGHLIGHTS -- CLASS F 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 12, 1997, on the Fund's
financial statements for the year ended March 31, 1997, and on the
following table for the periods presented, is included in the Annual
Report, which is incorporated herein 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,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.26 $11.51 $11.06 $11.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.38 0.39 0.42 0.17
Net realized and unrealized gain (loss) on
investments 2.16 2.99 0.46 (0.68)
Total from investment operations 2.54 3.38 0.88 (0.51)
LESS DISTRIBUTIONS
Distributions from net investment income (0.37) (0.38) (0.43) (0.17)
Distributions from net realized gain on
investments (0.84) (0.25) -- --
Total distributions (1.21) (0.63) (0.43) (0.17)
NET ASSET VALUE, END OF PERIOD $15.59 $14.26 $11.51 $11.06
TOTAL RETURN(B) 18.50% 30.06% 8.05% (4.43)%
Ratios to average net assets
Expenses 1.36% 1.30% 1.24% 1.29%*
Net investment income 2.41% 2.95% 3.79% 3.71%*
Expense waiver/reimbursement(c) 0.01% 0.18% 0.36% 0.89%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $88,454 $51,707 $34,886 $21,010
Average commission rate paid(d) $0.0530 -- -- --
Portfolio turnover 75% 96% 91% 43%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 12, 1993 (date of
initial public offering) to March 31, 1994.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided
by total portfolio shares purchased or sold on which commissions
were charged. This disclosure is required for fiscal years
beginning on or after September 1, 1995.
Further information about the Fund's performance is contained in the
Fund's annual report for the fiscal year ended March 31, 1997, which
can be obtained free of charge.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on
July 29, 1986. Class F Shares of the Fund ("Shares") are designed for
individuals and institutions seeking high current income and capital
appreciation through a professionally managed, diversified portfolio
of convertible securities.
The Fund's current net asset value and offering price may be found in
the mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing.
CALLING THE FUND
Call the Fund at 1-800-341-7400.
INVESTMENT INFORMATION
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 objectives 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 include a spectrum of securities which can be
exchanged for or converted into common stock. Convertible securities
may include, but are not limited to: convertible bonds or debentures;
convertible preferred stock; units consisting of usable bonds and
warrants; or securities which cap or otherwise limit returns to the
convertible security holder, such as DECS (Dividend Enhanced
Convertible Stock, or Debt Exchangeable for Common Stock when issued
as a debt security), LYONS (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons
and are convertible into stock), PERCS (Preferred Equity Redemption
Cumulative Stock, (an equity issue that pays a high cash dividend, has
a cap price and mandatory conversion to common stock at maturity), and
PRIDES (Preferred Redeemable Increased Dividend Securities (which are
essentially the same as DECS; the difference is little more than who
initially underwrites the issue).
Convertible securities are often rated below investment grade or not
rated because they fall below debt obligations and just above common
equity in order of preference or priority on the issuer's balance
sheet. Hence, an issuer with investment grade senior debt may issue
convertible securities with ratings less than investment grade or not
rated. Convertible securities rated below investment grade may be
subject to some of the same risks as those inherent in junk bonds. The
Fund does not limit convertible securities by rating, and there is no
minimal acceptance rating for a convertible security to be purchased
or held in the Fund. Therefore, the Fund invests in convertible
securities irrespective of their ratings. This could result in the
Fund purchasing and holding, without limit, convertible securities
rated below investment grade by a nationally recognized statistical
rating organization or in the Fund holding such securities where they
have acquired a rating below investment grade after the Fund has
purchased it.
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 the following
short-term obligations:
* commercial paper and Europaper (dollar denominated commercial paper issued
outside the United States);
* instruments of domestic and foreign banks and savings associations
(such as certificates of deposit, demand and time deposits, savings
shares, and bankers' acceptances); or
* 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.
The Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser (`Adviser") deems it appropriate to do so. In
addition, the Fund may enter into transactions to sell its purchase
commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities, on a short-term or a long-term basis, up to one-third of
the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions
which the Adviser has determined are creditworthy under guidelines
established by the 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.
There is the risk that when lending portfolio securities, the
securities may not be available to the Fund on a timely basis and the
Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition
of the securities may be delayed pending court action.
INVESTING IN OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment
companies. It should be noted that investment companies incur certain
expenses, such as management fees, and, therefore, any investment by
the Fund in shares of other investment companies may be subject to
such duplicate expenses.
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 Adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded
options are third party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while
over-the-counter options may not. The Fund will not buy call options
or write put options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge
all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt
instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for
in the contract and the buyer agrees to take delivery of the
instrument at the specified future time.
The Fund may also write call options and purchase put options on
financial futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value. When the Fund
writes a call option on a futures contract, it is undertaking the
obligation of selling a futures contract at a fixed price at any time
during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled
(but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on
the Fund's existing futures positions and premiums paid for related
options would exceed 5% of the market value of the Fund's total
assets. When the Fund purchases futures contracts, an amount of cash
and U.S. Treasury securities, equal to the underlying commodity value
of the futures contracts (less any related margin deposits), will be
deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and
thereby insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures
as hedging devices, much depends on the ability of the Adviser to
predict market conditions based upon certain economic analysis and
factors. There is a risk that the prices of the securities subject to
the futures contracts may not correlate perfectly with the prices of
the securities in the Fund's portfolio. This may cause the futures
contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Adviser could
be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In these events, the
Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Adviser
will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at
any particular time. The Fund's ability to establish and close out
futures and options positions depends on this secondary market.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities and as a matter of
fundamental investment policy, which may not be changed without
shareholder approval, will limit such investments to 10% of its net
assets. 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. As a
matter of non-fundamental investment policy, the Fund will limit
investments in illiquid securities, including certain restricted
securities determined by the Directors not to be liquid,
non-negotiable time deposits and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net
assets.
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. 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. AMERICAN DEPOSITARY
RECEIPTS
The Fund may purchase American Depositary Receipts ("ADRs") issued by
U.S. Banks as a substitute for direct ownership of securities of
foreign companies.
ADRs are traded in the United States on stock
exchanges and in the over-the-counter markets like stocks of domestic companies.
SECURITIES OF FOREIGN ISSUERS
Investing in non-U.S. securities carries substantial risks in addition
to those associated with domestic investments. In an attempt to reduce
some of these risks, the Fund diversifies its investments broadly
among foreign countries, including both developed and developing
countries. The Fund will take advantage from opportunities for higher
returns available from investing in developing countries and may
invest in the securities of such countries. These investments carry
considerably more volatility and risk because they are associated with
less mature economies and less stable political systems. Foreign
securities are denominated in foreign currencies. Therefore, the value
in U.S. dollars of the Fund's assets and income may be affected by
changes in exchange rates and regulations. Although the Fund values
its assets daily in U.S. dollars, it will not convert its holding of
foreign currencies to U.S. dollars daily. When the Fund converts its
holdings to another currency, it may incur conversion costs. Foreign
exchange dealers realize a profit on the difference between the prices
at which they buy and sell securities. Other differences between
investing in foreign and U.S. companies include: less publicly
available information about foreign companies; the lack of uniform
financial accounting standards applicable to foreign companies; less
readily available market quotations on foreign companies; differences
in government regulation and supervision of foreign stock exchanges,
brokers, listed companies, and banks; generally lower foreign stock
market value; the likelihood that foreign securities may be less
liquid or more volatile; foreign brokerage commissions may be higher;
unreliable mail service between countries; and political or financial
changes which adversely affect investments in some countries.
Securities prices in developing countries can be significantly more
volatile than in developed countries, reflecting the greater
uncertainties of investing in lesser developed markets and economies.
In particular, developing countries may have relatively unstable
governments, and may present the risk of nationalization of
businesses, expropriation, confiscatory taxation or, in certain
instances, reversion to closed markets, centrally planned economies.
Such countries may also have restrictions on foreign ownership or
prohibitions on the repatriation of assets, and may have less
protection of property rights than developed countries. The economies
of developing countries may be predominantly based on a few industries
or dependent on revenues from particular commodities or on
international aid or development assistance, may be highly vulnerable
to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. In addition,
securities markets in developing countries may trade a small number of
securities and may be unable to respond effectively to increased
trading volume, potentially resulting in a lack of liquidity and in
volatility in the price of securities traded on those markets. Also,
securities markets in developing countries typically offer less
regulatory protection for investors. In the past, U.S. government
policies have discouraged or restricted certain investments abroad by
investors such as the Fund. Although the Fund is unaware of any
current restrictions, investors are advised that these policies could
be reinstituted.
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 securities or
are not rated but are determined by the Adviser to be of comparable
quality and may include bonds in default. 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 this Prospectus. There is no lower limit
with respect to rating categories for securities in which the Fund may
invest.
Corporate debt obligations that are not determined to be
investment-grade are high-yield, high-risk securities (i.e., `junk
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 securities, lower rated
securities 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 securities may be more difficult to
dispose of or to value than high-rated, lower-yielding securities. The
Fund does not intend to invest more than 5% of its assets in corporate
debt obligations that are not investment-grade securities (excluding
securities convertible into equity securities) during the current
fiscal year.
The prices of fixed income securities generally fluctuate inversely to
the direction of interest rates. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to
make principal and interest payments with respect to these securities
than for higher rated securities. The Adviser attempts to reduce the
risks described above through diversification of the portfolio and by
credit analysis of each issuer as well as by monitoring broad economic
trends and corporate and legislative developments.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Adviser
believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security
may have been held. The Adviser to the Fund does not anticipate that
portfolio turnover will result in adverse tax consequences. Any such
trading will increase the Fund's portfolio turnover rate and
transaction costs.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a
set date) or pledge securities except that, under certain
circumstances, the Fund may borrow up to one-third of the value of
its total assets and pledge assets to secure such borrowings;
* sell securities short except, under strict limitations, it may
maintain open short positions so long as not more than 10% of the
value of its net assets is held as collateral for those positions;
or
* 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.
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;
or
* commit more than 5% of the value of its total assets to premiums on
open put option positions; or invest more than 5% of its total
assets in warrants.
NET ASSET VALUE
The Fund's net asset value ("NAV") per Share fluctuates and is based
on the market value of all securities and other assets of the Fund.
The NAV for Shares may differ from that of the Fund's other classes of
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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund.
The NAV is determined as of the close of trading on the New York Stock
Exchange (normally 4:00 p.m., Eastern time) every day the New York
Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers Class F Shares with the characteristics
described below.
<TABLE>
<CAPTION>
CLASS F
<S> <C>
Minimum and Subsequent Investment Amount $500/$100
Minimum and Subsequent Investment Amount for $50
Retirement Plans
Maximum Sales Charge 1.00%*
Maximum Contingent Deferred Sales Charge** 1.00%**
</TABLE>
* There is no sales charge for purchases of $1 million or more. In
addition, no sales charge is imposed for Shares purchased through
certain entities or programs. Please see the section entitled
"Reducing or Eliminating the Sales Charge."
** Computed on the lesser of the NAV of the redeemed Shares at the
time of purchase or the NAV of the redeemed Shares at the time of
redemption.
The following contingent deferred sales charge schedule applies to
Class F Shares:
<TABLE>
<CAPTION>
CONTINGENT
SHARES HELD DEFERRED
AMOUNT OF PURCHASE LESS THAN SALES CHARGE
<S> <C> <C>
Up to $1,999,999 Four Years 1.00%
$2,000,000 to $4,999,999 Two Years .50%
Over $5,000,000 One Year .25%
</TABLE>
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock
Exchange is open. Shares of the Fund may be purchased as described
below, either through a financial intermediary (such as a bank or
broker/dealer) or by sending a wire or check directly to the Fund.
Financial intermediaries may impose different minimum investment
requirements on their customers. An account must be established with a
financial intermediary or by completing, signing, and returning the
new account form available from the Fund before Shares can be
purchased. Shareholders in Class F Shares of certain other funds
advised and distributed by affiliates of Federated Investors
("Federated Funds") may exchange their Shares for Class F Shares of
the Fund. The Fund reserves the right to reject any purchase or
exchange request.
In connection with any sale, Federated Securities Corp. may, from time
to time, offer certain items of nominal value to any shareholder or
investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received
when the Fund is notified of the purchase order or when payment is
converted into federal funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary and transmitted to the Fund
before 4:00 p.m. (Eastern time) in order for Shares to be purchased at
that day's price. It is the financial intermediary's responsibility to
transmit orders promptly. Financial intermediaries may charge fees for
their services. The financial intermediary which maintains investor
accounts in Class F Shares with the Fund must do so on a fully
disclosed basis unless it accounts for share ownership periods used in
calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to
financial intermediaries may be subject to reclaim by the distributor
for accounts transferred to financial intermediaries which do not
maintain investor accounts on a fully disclosed basis and do not
account for share ownership periods.
PURCHASING SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling 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 Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston, MA;
Attention; EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund
Number -- this number can be found on the account statement or by
contacting the Fund); Account Number; Trade Date and Order Number;
Group Number or Dealer Number; Nominee or Institution Name; and ABA
Number 011000028. Shares cannot be purchased by wire on holidays when
wire transfers are restricted.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of
the Fund (designate class of Shares and account number) to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600.
Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the
check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds may be automatically withdrawn periodically
from the shareholder's checking account at an Automated Clearing House
("ACH") member and invested in the Fund. Shareholders should contact
their financial intermediary or the Fund to participate in this
program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or
IRA accounts. For further details, contact the Fund and consult a tax
adviser.
REDUCING OR ELIMINATING THE SALES CHARGE
Class F Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS F SHARES PURCHASED:
* through bank trust departments;
* through investment advisers registered under the Investment Advisers
Act of 1940 purchasing on behalf of their clients;
* by sales representatives, Directors, and employees of the Fund, Federated
Advisers, Federated Securities Corp. or their affiliates;
* by any investment dealer who has a sales agreement with Federated
Securities Corp., their spouses and children under age 21; or
* by any trusts or pension or profit-sharing plans where the third
party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates to the extent that no
payment was advanced for their purchases.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
* purchasing in quantity and accumulating purchases;
* combining concurrent purchases of two or more funds;
* using the reinvestment privilege; or
* signing a letter of intent to purchase a specific quantity of shares
within 13 months.
Consult a financial intermediary or Federated Securities Corp. for
details on these programs. In order to eliminate the sales charge or
receive sales charge reductions, Federated Securities Corp. must be
notified by the shareholder in writing or by a financial intermediary
at the time of purchase.
DEALER CONCESSION
For sales of Shares, a dealer will normally receive up to 100% of the
applicable sales charge. Any portion of the sales charge which is not
paid to a dealer will be retained by the distributor. However, the
distributor may offer to pay dealers up to 100% of the sales charge
retained by it. Such payments may take the form of cash or promotional
incentives, such as reimbursement of certain expenses of qualified
employees and their spouses to attend informational meetings about the
Fund or other special events at recreational-type facilities, or items
of material value. In some instances, these incentives will be made
available only to dealers whose employees have sold or may sell a
significant amount of Shares. On purchases of $1 million or more, the
investor pays no sales charge; however, the distributor will make
twelve monthly payments to the dealer totaling 0.25% of the public
offering price over the first year following the purchase. Such
payments are based on the original purchase price of Shares
outstanding at each month end. Federated Securities Corp. may pay fees
to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the establishment of customer accounts and purchases
of Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Class F
Shares of other Federated Funds on days on which the Fund computes its
NAV. Shares are redeemed at NAV less any applicable contingent
deferred sales charge. Exchanges are made at NAV. Depending upon the
circumstances, a capital gain or loss may be realized when Shares are
redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your
financial intermediary before 4:00 p.m. (Eastern time). In order for
these transactions to be processed at that day's NAV, financial
intermediaries (other than broker/dealers) must transmit the request
to the Fund before 4:00 p.m. (Eastern time), while broker/dealers must
transmit the request to the Fund before 5:00 p.m. (Eastern time). The
financial intermediary is responsible for promptly submitting
transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial
intermediary for this service. Appropriate authorization forms for
these transactions must be on file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount,
or exchanged, by calling 1-800-341-7400. Appropriate authorization
forms for these transactions must be on file with the Fund. Shares
held in certificate form must first be returned to the Fund as
described in the instructions under "Redeeming or Exchanging Shares by
Mail." Redemption proceeds will either be mailed in the form of a
check 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. The minimum amount for a wire
transfer is $1,000.
Telephone instructions will be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If this occurs, "Redeeming or
Exchanging Shares By Mail" should be considered. The telephone
transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a
written request to: Federated Shareholder Services Company, Fund Name,
Fund Class, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they must accompany the written
request. It is recommended that certificates be sent unendorsed by
registered or certified mail.
All written requests should state: Fund Name and the Share Class name;
the account name as registered with the Fund; the account number; and
the number of Shares to be redeemed or the dollar amount of the
transaction. An exchange request should also state the name of the
Fund into which the exchange is to be made. All owners of the account
must sign the request exactly as the Shares are registered. A check
for redemption proceeds is normally mailed within one business day,
but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the
day that a redemption or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption
payable other than to the shareholder of record, must have their
signatures guaranteed by a commercial or savings bank, trust company
or savings association whose deposits are insured by an organization
which is administered by the Federal Deposit Insurance Corporation; a
member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of
1934. The Fund does not accept signatures guaranteed by a notary
public.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having a NAV equal to the minimum
investment requirements of the fund into which the exchange is being
made. Contact your financial intermediary directly or the Fund for
free information on and prospectuses for the Federated Funds into
which your Shares may be exchanged. Before the exchange, the
shareholder must receive a prospectus of the fund for which the
exchange is being made.
Upon receipt of proper instructions and required supporting documents,
Shares submitted for exchange are redeemed and proceeds invested in
the same class of shares of the other fund. Signature guarantees will
be required to exchange between fund accounts not having identical
shareholder registrations. The exchange privilege may be modified or
terminated at any time. Shareholders will be notified of the
modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic
withdrawal payments in an amount directed by the shareholder. To be
eligible to participate in this program, a shareholder must have an
account value of at least $10,000, other than retirement accounts
subject to required minimum distributions. A shareholder may apply for
participation in this program through his financial intermediary or by
calling the Fund.
Because participation in this program may reduce, and eventually
deplete, the shareholder's investment in the Fund, payments under this
program should not be considered as yield or income. It is not
advisable for shareholders to continue to purchase Class F Shares
subject to a sales charge while participating in this program. A
contingent deferred sales charge will be imposed on Shares redeemed
through this program within four years of their purchase dates.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will be
retained by the distributor. 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. The contingent deferred
sales charge will not be imposed with respect to Shares acquired
through the reinvestment of dividends or distributions of long-term
capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares
received through an exchange will include the period for which your
original Shares were held.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon written notification to Federated Securities Corp. or the transfer
agent, no contingent deferred sales charge will be imposed on redemptions:
* following the death or disability, as defined in Section 72(m)(7) of
the Internal Revenue Code of 1986, of the last surviving
shareholder;
* representing minimum required distributions from an Individual
Retirement Account or other retirement plan to a shareholder who has
attained the age of 59 1/2;
* a total or partial distribution from a qualified plan, other than an
Individual Retirement Account, Keogh Plan, or a custodial account
following retirement;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* of Shares held by Directors, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or distributor,
and their immediate family members; 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; and
* by the Fund of Shares originally purchased through a bank trust
department, an investment adviser registered under the Investment
Advisers Act of 1940 or retirement plans where the third party
administrator has entered into certain arrangements with Federated
Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for
purchases made through such entities.
For more information regarding the contingent deferred sales charge or
any of the above provisions, contact your financial intermediary or
the Fund. The Fund reserves the right to discontinue or modify these
provisions.
Shareholders will be notified of such action.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND CERTIFICATES
Shareholders will receive detailed confirmations of all transactions
and monthly confirmations reporting any dividends paid. Share
certificates are not issued unless requested in writing to Federated
Shareholder Services Company.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested
in the Fund on the record date. Net long-term capital gains realized
by the Fund, if any, will be distributed at least once every twelve
months. Dividends and distributions are automatically reinvested in
additional Shares of the Fund on payment dates at the ex-dividend date
NAV without a sales charge, unless shareholders request cash payments
on the new account form or by contacting the transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the
Fund may close an account by redeeming all Shares and paying the
proceeds to the shareholder if the account balance falls below the
applicable minimum investment amount. Retirement plan accounts and
accounts where the balance falls below the minimum due to NAV changes
will not be closed in this manner. Before an account is closed, the
shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
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.
INVESTMET 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 and sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.60%
of the Fund's average daily net assets. The Adviser may voluntarily
waive a portion of its fee or reimburse the Fund for certain operating
expenses.
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. With over $110 billion
invested across more than 300 funds under management and/or
administration by its subsidiaries, as of December 31, 1996, Federated
Investors is one of the largest mutual fund investment managers in the
United States. With more than 2,000 employees, Federated continues to
be led by the management who founded the company in 1955. Federated
funds are presently at work in and through 4,500 financial
institutions nationwide.
Linda A. Duessel has been the Fund's portfolio manager since February 1997.
Ms. Duessel joined Federated Investors in 1991 and has been a Vice President
of the Fund's investment adviser since 1995. Ms. Duessel was an Assistant
Vice President of the Fund's investment adviser from 1991 until 1995. Ms.
Duessel is a Chartered Financial Analyst and received her M.S. in Industrial
Administrationn from Carnegie Mellon University.
Steven J. Lehman will be named an additional portfolio manager of the Fund,
pending completion of his registration as an Investment Adviser
Representative with the Commonwealth of Pennsylvania. Mr. Lehman joined the
Fund's adviser in May 1997, as a Vice President. From 1985 to May 1997, Mr.
Lehman served as a Portfolio Manager, then Vice President/Senior Portfolio
Manager, at First Chicago NBD Investment Management Company. Mr. Lehman is a
Chartered Financial Analyst; he received his M.A. from the University of
Michigan.
Both the Fund and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its
portfolio securities. These codes recognize that such persons owe a
fiduciary duty to the Fund's shareholders and must place the interests
of shareholders ahead of the employees' own interest. Among other
things, the codes: require preclearance and periodic reporting of
personal securities transactions; prohibit personal transactions in
securities being purchased or sold, or being considered for purchase
or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less
than sixty days. Violations of the codes are subject to review by the
Board of Directors, and could result in severe penalties.
DISTRIBUTION OF CLASS F SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment
Company Act Rule 12b-1 (the "Distribution Plan"), the Fund will pay to
the distributor an amount, computed at an annual rate of 0.25% of the
average daily net asset value of Class F Shares to finance any
activity which is principally intended to result in the sale of shares
subject to the Distribution Plan. The distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds,
investment advisers, and broker/dealers to provide sales services or
distribution-related support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund
makes no payments to the distributor except as described above.
Therefore, the Fund does not pay for unreimbursed expenses of the
distributor, including amounts expended by the distributor in excess
of amounts received by it from the Fund, interest, carrying or other
financing charges in connection with excess amounts expended, or the
distributor's overhead expenses. However, the distributor may be able
to recover such amount or may earn a profit from future payments made
by the Fund under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of
Federated Investors, under which the Fund may make payments up to
0.25% of the average daily net asset value of Class F Shares to obtain
certain personal services for shareholders and for the maintenance of
shareholder accounts. Under the Shareholder Services Agreement, with
Federated Shareholder Services, will either perform shareholder
services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based
upon shares owned by their clients or customers. The schedules of such
fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, for
distribution and/or administrative services, an amount equal to 1.00%
of the offering price of the Shares acquired by their clients or
customers on purchases up to $1,999,999, 0.50% of the offering price
on purchases of $2,000,000 to $4,999,999, and 0.25% of the offering
price on purchases of $5,000,000 or more. (This fee is in addition to
the 1.00% sales charge on purchases of less that $1 million.) The
financial institutions may elect to waive the initial payment
described above; such waiver will result in the waiver by the Fund of
the otherwise applicable contingent deferred sales charge.
Furthermore, in addition to payments made pursuant to the Distribution
Plan and Shareholder Services Agreement, Federated Securities Corp.
and Federated Shareholders Services, from their own assets may pay
financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize
the attributes of the Fund. Such assistance will be predicated upon
the amount of Shares the financial institution sells or may sell,
and/or upon the type and nature of sales or marketing support
furnished by the financial institution. Any payments made by the
distributor may be reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services (including certain
legal and financial reporting services) necessary to operate the Fund.
Federated Services Company provides these at an annual rate which
relates to the average aggregate daily net assets of all funds advised
by affiliates of Federated Investors as specified below: <TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
<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 Services Company may choose voluntarily to waive a portion
of its fee.
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 utilize those who are recognized dealers in specific
portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. In selecting among firms believed to
meet these criteria, the Adviser may give consideration to those firms
which have sold or are selling shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions
on portfolio transactions and selects brokers and dealers subject to
review by the Directors.
SHAREHOLDER INFORMATION
Each Share of the Fund 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.
Directors may be removed by the Directors or by 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.
As of July 7, 1997, the following shareholder of record owned 25%
or more of the outstanding Class C Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class C Shares for its
clients), Jacksonville, Florida, owned approximately 3,046,357 Class C
Shares (43.88%) and, therefore, may, for certain purposes, be deemed
to control the Fund and be able to affect the outcome of certain
matters presented for a vote of shareholders.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code 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.
STATE AND LOCAL TAXES
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 F Shares.
Total return represents the change, over a specific period of time, in
the value of an investment in Class F 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 F Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by Class F Shares over a thirty-day period by the
maximum offering price per share of Class F Shares 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 F Shares, and therefore, may not correlate to the
dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring
charges, such as the maximum sales charge, contingent deferred sales
charges, which, if excluded, would increase the total return and
yield.
Total return and yield will be calculated separately for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares. Expense
differences between Class A Shares, Class B Shares and Class C Shares
may affect the performance of each class.
From time to time, advertisements for the Class A Shares, Class B
Shares, Class C Shares and Class F Shares of the Fund may refer to
ratings, rankings, and other information in certain financial
publications and/or compare the performance of Class A Shares, Class B
Shares, Class C Shares and Class F Shares to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers other classes of shares called Class A Shares,
Class B Shares and Class C Shares which are all sold primarily to
customers of financial institutions subject to certain differences.
Class A Shares are sold subject to a front-end sales charge and a
Shareholder Services Agreement. Investments in Class A Shares are
subject to a minimum initial investment of $500, unless the investment
is in a retirement account, in which the minimum investment is $50.
Class A Shares are subject to a 12b-1 Plan, however it is not
currently making payments, nor does it anticipate doing so in the
immediate future.
Class B Shares are sold at net asset value and are subject to a 12b-1
Plan and a Shareholder Services Agreement. Investments in Class B
Shares are subject to a minimum initial investment of $1,500, unless
the investment is in a retirement account, in which the minimum
investment is $50. A contingent deferred sales charge is imposed on
certain shares which are redeemed within six full years of purchase.
Class C Shares are sold at net asset value and are subject to a 12b-1
Plan and a Shareholder Services Agreement. Investments in Class C
Shares are subject to a minimum investment of $1,500, unless the
investment is in a retirement account, in which the minimum investment
is $50. A contingent deferred sales charge is imposed on assets
redeemed within the first full 12 months following purchase.
Class A Shares, Class B Shares, Class C Shares, and Class F Shares are
subject to certain of the same expenses, however, the front-end sales
load for Class F Shares is lower than that for Class A Shares. Expense
differences, however, between Class A Shares, Class B Shares, C Shares
and Class F Shares may affect the performance of each class.
To obtain more information and a combined prospectus for Class A
Shares, Class B Shares and Class C Shares, investors may call
1-800-341-7400 or contact their financial institution.
APPENDIX
DESCRIPTION OF BOND RATINGS
A rating by a rating service represents the service's opinion as to
the credit quality of the security being rated. However, the ratings
are general and are not absolute standards of quality or guarantees as
the creditworthiness of an issuer.
Consequently, the Adviser believes that the quality of fixed income
securities in which the Fund invests should be continuously reviewed
and that individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a recommendation
to purchase, sell, or hold a security, because it does not take into
account market value or suitability for a particular investor. When a
security has received a rating from more than one service, each rating
is evaluated independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of
such information, or for other reasons.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA -- Debt rated "AAA" has the highest rating assigned by Standard &
Poor's Corporation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small
degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category than in
higher rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The "BB" rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The "B" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
CC -- The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt rating.
C -- The rating "C" typically is applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating.
The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI -- The rating "CI" is reserved for income bonds on which no
interest is being paid.
D -- Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA -- Bonds which are rated AAA are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in AAA
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in AAA securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA -- Bonds which are rated BA are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
CA -- Bonds which are rated CA represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A -- Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment
grade is higher for bonds with higher ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B -- Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C -- Bonds are in imminent default in payment or 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.
FEDERATED EQUITY
INCOME FUND, INC.
CLASS F SHARES
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA
15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
FEDERATED EQUITY
INCOME FUND, INC.
Class F Shares
PROSPECTUS
JULY 31, 1997
An Open-End, Diversified
Management Investment Company
Federated Securities Corp., Distributor
Cusip 313915407
8062806A-F (7/97)
FEDERATED EQUITY INCOME FUND, INC.
Class A Shares, Class B Shares, Class C Shares
PROSPECTUS
The shares of Federated 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 SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Class A Shares, Class B Shares and Class C Shares
of the Fund.
Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for
Class A Shares, Class B Shares, Class C Shares, and Class F Shares
dated July 31, 1997, with the Securities and Exchange Commission
("SEC"). The information contained in the Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Statement of Additional Information or a paper
copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-341-7400. To obtain
other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information,
material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated July 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights -- Class A Shares 2
Financial Highlights -- Class B Shares 3
Financial Highlights -- Class C Shares 4
General Information 5
Calling the Fund 5
Investment Information 5
Investment Objective 5
Investment Policies 5
Portfolio Turnover 8
Investment Limitations 8
Net Asset Value 9
Investing in the Fund 9
Purchasing Shares 10
Purchasing Shares through a
Financial Intermediary 10
Purchasing Shares by Wire 10
Purchasing Shares by Check 10
Systematic Investment Program 10
Retirement Plans 10
Class A Shares 10
Class B Shares 11
Class C Shares 11
Redeeming and Exchanging Shares 11
Redeeming or Exchanging Shares
through a Financial Intermediary 11
Redeeming or Exchanging Shares
by Telephone 11
Redeeming or Exchanging Shares by Mail12
Requirements for Redemption 12
Requirements for Exchange 12
Systematic Withdrawal Program 12
Contingent Deferred Sales Charge 12
Account and Share Information 13
Confirmations and Certificates 13
Dividends and Distributions 13
Accounts with Low Balances 13
Fund Information 13
Management of the Fund 13
Distribution of Shares 14
Administration of the Fund 15
Brokerage Transactions 16
Shareholder Information 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 16
Performance Information 17
Other Classes of Shares 17
Appendix 18
</TABLE>
SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a 5.50% None None
percentage of offering price)
Maximum Sales Charge Imposed on Reinvested
Dividends
(as a percentage of offering price) None None None
Contingent Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds, as applicable)(1) None 5.50% 1.00%
Redemption Fee (as a percentage of amount None None None
redeemed, if applicable)
Exchange Fee None None None
</TABLE>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Management Fee 0.60% 0.60% 0.60%
12b-1 Fee 0.00%(2) 0.75% 0.75%
Total Other Expenses 0.48% 0.52% 0.52%
Shareholder Services Fee 0.21%(after waiver)(3) 0.25% 0.25%
Total Operating Expenses 1.08%(4) 1.87%(5) 1.87%
</TABLE>
(1) For shareholders of Class B Shares, the contingent deferred sales
charge is 5.50% in the first year declining to 1.00% in the sixth
year and 0.00% thereafter. For shareholders of Class C Shares, the
contingent deferred sales charge assessed is 1.00% of the lesser
of the original purchase price or the net asset value of Shares
redeemed within one year of their purchase date. For a more
complete description, see `Investing in the Fund" and "Contingent
Deferred Sales Charge."
(2) Class A Shares has no present intention of paying or accruing the 12b-1
fee during the fiscal year ending March 31, 1998. If Class A Shares were
paying or accruing the 12b-1 fee, Class A Shares would be able to pay up to
0.50% of its average daily net assets for the 12b-1 fee. See "Fund
Information."
(3) For shareholders of Class A, the shareholder services fee has been
reduced to reflect the voluntary waiver of a portion of the
shareholder services fee. The shareholder service provider can
terminate this voluntary waiver at any time at its sole
discretion. The maximum shareholder services fee is 0.25%.
(4) The total operating expenses for Class A Shares would have been
1.12% absent the voluntary waiver described in note 3 above.
(5) Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase.
The purpose of this table is to assist an investor in understanding
the various costs and expenses that a shareholder of the Fund will
bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Investing in the Fund" and "Fund
Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE CLASS A CLASS B CLASS C
<S> <C> <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, and (3) payment of the maximum sales charge.
1 Year $ 65 $ 76 $ 29
3 Years $ 87 $ 103 $ 59
5 Years $ 111 $ 124 $ 101
10 Years $ 179 $ 198 $ 219
</TABLE>
You would pay the following expenses on the same investment, assuming
no redemption.
<TABLE>
<S> <C> <C> <C>
1 Year $ 65 $ 19 $ 19
3 Years $ 87 $ 59 $ 59
5 Years $ 111 $ 101 $ 101
10 Years $ 179 $ 198 $ 219
</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.
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 12, 1997, on the Fund's
financial statements for the year ended March 31, 1997, and on the
following table for the periods presented, is included in the Annual
Report, which is incorporated herein 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,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(A) 1987(B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $14.26 $11.50 $11.06 $10.91 $ 9.67 $ 8.59 $ 8.77 $10.84 $ 9.22 $10.18 $10.00
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income 0.42 0.46 0.49 0.43 0.55 0.69 0.84 0.91 0.89 0.72 0.23
Net realized and
unrealized gain
(loss) on
investments 2.16 2.96 0.40 0.15 1.22 1.08 (0.16) (1.18) 1.59 (0.81) 0.18
Total from
investment
operations 2.58 3.42 0.89 0.58 1.77 1.77 0.68 (0.27) 2.48 (0.09) 0.41
LESS DISTRIBUTIONS
Distributions
from
net investment
income (0.41) (0.41) (0.45) (0.43) (0.53) (0.69) (0.86) (0.87) (0.86) (0.72) (0.23)
Distributions in
excess of net
invest-
ment income(c) -- -- -- -- -- -- -- (0.41) -- -- --
Distributions
from net realized
gain on
investments (0.84) (0.25) -- -- -- -- -- (0.52) -- (0.15) --
Total
distributions (1.25) (0.66) (0.45) (0.43) (0.53) (0.69) (0.86) (1.80) (0.86) (0.87) (0.23)
NET ASSET VALUE,
END OF PERIOD $15.59 $14.26 $11.50 $11.06 $10.91 $ 9.67 $ 8.59 $ 8.77 $10.84 $ 9.22 $10.18
TOTAL RETURN(D) 18.82% 30.37% 8.31% 5.29% 18.98% 21.19% 8.95% (3.19)% 28.25% (0.54)% 3.63%
RATIOS TO
AVERAGE
NET ASSETS
Expenses 1.08% 1.03% 1.00% 1.00% 0.99% 1.04% 1.05% 0.97% 0.77% 1.16%* 1.22%*
Net investment
income 2.68% 3.19% 4.01% 3.82% 5.45% 7.36% 10.25% 9.34% 9.02% 8.32%* 6.93%*
Expense waiver/
reimbursement(e) 0.04% 0.20% 0.36% 0.89% 1.60% 1.46% 1.46% 1.43% 1.25% 0.86%* 0.28%*
SUPPLEMENTAL DATA
Net assets, end
of period (000
omitted) $431,281 $220,268 $108,683 $84,665 $30,616 $25,176 $22,589 $22,052 $11,306 $8,895 $10,866
Average commis-
sion rate
paid(f) $0.0530 -- -- -- -- -- -- -- -- -- --
Portfolio
turnover 75% 96% 91% 43% 79% 115% 31% 54% 49% 41% 24%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations 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.)
(b) Reflects operations for the period from December 30, 1986 (date of
initial public investment) to April 30, 1987.
(c) Distributions in excess of net investment inome were a result of
certain book and tax differences. These distributions did not
represent a return of capital for federal income tax purposes.
(d) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(e) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(f) Represents total commissions paid on portfolio securities divided
by total portfolio shares purchased or sold on which commissions
were charged. This disclosure is required for fiscal years
beginning on or after September 1, 1995.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE
FUND'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 1997, WHICH
CAN BE OBTAINED FREE OF CHARGE.
FINANCIAL HIGHLIGHTS -- CLASS B 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 12, 1997, on the Fund's
financial statements for the year ended March 31, 1997, and on the
following table for the periods presented, is included in the Annual
Report, which is incorporated herein 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,
1997 1996 1995(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.26 $11.50 $11.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.34 0.32(d) 0.19
Net realized and unrealized gain (loss) on investments 2.13 3.01 0.26
Total from investment operations 2.47 3.33 0.45
LESS DISTRIBUTIONS
Distributions from net investment income (0.30) (0.32) (0.19)
Distributions from net realized gain on investments (0.84) (0.25) --
Total distributions (1.14) (0.57) (0.19)
NET ASSET VALUE, END OF PERIOD $15.59 $14.26 $11.50
TOTAL RETURN(B) 17.92% 29.40% 4.14%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.87% 1.83% 1.80%*
Net investment income 1.85% 2.31% 3.42%*
Expense waiver/reimbursement(c) -- 0.16% 0.47%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $418,675 $71,019 $6,072
Average commission rate paid(e) $0.0530 -- --
Portfolio turnover 75% 96% 91%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from September 27, 1994 (date
of initial public offering) to March 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(d) Calculated using average outstanding shares.
(e) Represents total commissions paid on portfolio securities divided
by total portfolio shares purchased or sold on which commissions
were charged. This disclosure is required for fiscal years
beginning on or after September 1, 1995.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE
FUND'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 1997, WHICH
CAN BE OBTAINED FREE OF CHARGE.
FINANCIAL HIGHLIGHTS -- CLASS C 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 12, 1997, on the Fund's
financial statements for the year ended March 31, 1997, and on the
following table for the periods presented, is included in the Annual
Report, which is incorporated herein 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,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.26 $11.50 $11.06 $10.76
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.30 0.32 0.37 0.34
Net realized and unrealized gain (loss) on investments 2.16 3.00 0.44 0.28
Total from investment operations 2.46 3.32 0.81 0.62
LESS DISTRIBUTIONS
Distributions from net investment income (0.29) (0.31) (0.37) (0.32)
Distributions from net realized gain on investments (0.84) (0.25) -- --
Total distributions (1.13) (0.56) (0.37) (0.32)
NET ASSET VALUE, END OF PERIOD $15.59 $14.26 $11.50 $11.06
TOTAL RETURN(B) 17.90% 29.39% 7.52% 5.66%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.87% 1.80% 1.76% 1.79%*
Net investment income 1.89% 2.43% 3.25% 2.99%*
Expense waiver/reimbursement(c) -- 0.18% 0.36% 0.89%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $101,588 $48,161 $30,189 $24,632
Average commission rate paid(d) $0.0530 -- -- --
Portfolio turnover 75% 96% 91% 43%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 3, 1993 (date of
initial public offering) to March 31, 1994.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided
by total portfolio shares purchased or sold on which commissions were
charged. This disclosure is required for fiscal years beginning on or
after September 1, 1995.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE
FUND'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 1997, WHICH
CAN BE OBTAINED FREE OF CHARGE.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on
July 29, 1986. Class A Shares, Class B Shares, and Class C Shares of
the Fund ("Shares") are designed for individuals and institutions
seeking high current income and capital appreciation through a
professionally managed, diversified portfolio of convertible
securities.
The Fund's current net asset value and offering price may be found in
the mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing.
CALLING THE FUND
Call the Fund at 1-800-341-7400.
INVESTMENT INFORMATION
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 objectives 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 include a spectrum of securities which can be
exchanged for or converted into common stock. Convertible securities
may include, but are not limited to: convertible bonds or debentures;
convertible preferred stock; units consisting of usable bonds and
warrants; or securities which cap or otherwise limit returns to the
convertible security holder, such as DECS (Dividend Enhanced
Convertible Stock, or Debt Exchangeable for Common Stock when issued
as a debt security), LYONS (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons
and are convertible into stock), PERCS (Preferred Equity Redemption
Cumulative Stock, an equity issue that pays a high cash dividend, has
a cap price and mandatory conversion to common stock at maturity), and
PRIDES (Preferred Redeemable Increased Dividend Securities, which are
essentially the same as DECS; the difference is little more than who
initially underwrites the issue).
Convertible securities are often rated below investment grade or not
rated because they fall below debt obligations and just above common
equity in order of preference or priority on the issuer's balance
sheet. Hence, an issuer with investment grade senior debt may issue
convertible securities with ratings less than investment grade or not
rated. Convertible securities rated below investment grade may be
subject to some of the same risks as those inherent in junk bonds. The
Fund does not limit convertible securities by rating, and there is no
minimal acceptance rating for a convertible security to be purchased
or held in the Fund. Therefore, the Fund invests in convertible
securities irrespective of their ratings. This could result in the
Fund purchasing and holding, without limit, convertible securities
rated below investment grade by a nationally recognized statistical
rating organization or in the Fund holding such securities where they
have acquired a rating below investment grade after the Fund has
purchased it.
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 the following
short-term obligations:
* commercial paper and Europaper (dollar denominated commercial paper issued
outside the United States);
* instruments of domestic and foreign banks and savings associations
(such as certificates of deposit, demand and time deposits, savings
shares, and bankers' acceptances); or
* 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.
The Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser (`Adviser") deems it appropriate to do so. In
addition, the Fund may enter in transactions to sell its purchase
commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities, on a short-term or a long-term basis, up to one-third of
the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions
which the Adviser has determined are creditworthy under guidelines
established by the 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.
There is the risk that when lending portfolio securities, the
securities may not be available to the Fund on a timely basis and the
Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition
of the securities may be delayed pending court action.
INVESTING IN OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment
companies. It should be noted that investment companies incur certain
expenses, such as management fees, and, therefore, any investment by
the Fund in shares of other investment companies may be subject to
such duplicate expenses.
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 Adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded
options are third-party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while
over-the-counter options may not. The Fund will not buy call options
or write put options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge
all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt
instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for
in the contract and the buyer agrees to take delivery of the
instrument at the specified future time.
The Fund may also write call options and purchase put options on
financial futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value. When the Fund
writes a call option on a futures contract, it is undertaking the
obligation of selling a futures contract at a fixed price at any time
during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled
(but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on
the Fund's existing futures positions and premiums paid for related
options would exceed 5% of the market value of the Fund's total
assets. When the Fund purchases futures contracts, an amount of cash
and U.S. Treasury securities, equal to the underlying commodity value
of the futures contracts (less any related margin deposits), will be
deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and
thereby insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures
as hedging devices, much depends on the ability of the Adviser to
predict market conditions based upon certain economic analysis and
factors. There is a risk that the prices of the securities subject to
the futures contracts may not correlate perfectly with the prices of
the securities in the Fund's portfolio. This may cause the futures
contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Portfolio
Manager could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these
events, the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Adviser
will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at
any particular time. The Fund's ability to establish and close out
futures and options positions depends on this secondary market.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities and as a matter of
fundamental investment policy, which may not be changed without
shareholder approval, will limit such investments to 10% of its net
assets. 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. As a
matter of non-fundamental investment policy, the Fund will limit
investments in illiquid securities, including certain restricted
securities determined by the Directors not to be liquid,
non-negotiable time deposits and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net
assets.
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. 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. AMERICAN DEPOSITARY
RECEIPTS
The Fund may purchase American Depositary Receipts ("ADRs") issued by
U.S. Banks as a substitute for direct ownership of securities of
foreign companies.
ADRs are traded in the United States on stock
exchanges and in the over-the-counter markets like stocks of domestic companies.
SECURITIES OF FOREIGN ISSUERS
Investing in non-U.S. securities carries substantial risks in addition
to those associated with domestic investments. In an attempt to reduce
some of these risks, the Fund diversifies its investments broadly
among foreign countries, including both developed and developing
countries. The Fund will take advantage from opportunities for higher
returns available from investing in developing countries and may
invest in the securities of such countries. These investments carry
considerably more volatility and risk because they are associated with
less mature economies and less stable political systems. Foreign
securities are denominated in foreign currencies. Therefore, the value
in U.S. dollars of the Fund's assets and income may be affected by
changes in exchange rates and regulations. Although the Fund values
its assets daily in U.S. dollars, it will not convert its holding of
foreign currencies to U.S. dollars daily. When the Fund converts its
holdings to another currency, it may incur conversion costs. Foreign
exchange dealers realize a profit on the difference between the prices
at which they buy and sell securities. Other differences between
investing in foreign and U.S. companies include: less publicly
available information about foreign companies; the lack of uniform
financial accounting standards applicable to foreign companies; less
readily available market quotations on foreign companies; differences
in government regulation and supervision of foreign stock exchanges,
brokers, listed companies, and banks; generally lower foreign stock
market value; the likelihood that foreign securities may be less
liquid or more volatile; foreign brokerage commissions may be higher;
unreliable mail service between countries; and political or financial
changes which adversely affect investments in some countries.
Securities prices in developing countries can be significantly more
volatile than in developed countries, reflecting the greater
uncertainties of investing in lesser developed markets and economies.
In particular, developing countries may have relatively unstable
governments, and may present the risk of nationalization of
businesses, expropriation, confiscatory taxation or, in certain
instances, reversion to closed markets, centrally planned economies.
Such countries may also have restrictions on foreign ownership or
prohibitions on the repatriation of assets, and may have less
protection of property rights than developed countries. The economies
of developing countries may be predominantly based on a few industries
or dependent on revenues from particular commodities or on
international aid or development assistance, may be highly vulnerable
to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. In addition,
securities markets in developing countries may trade a small number of
securities and may be unable to respond effectively to increased
trading volume, potentially resulting in a lack of liquidity and in
volatility in the price of securities traded on those markets. Also,
securities markets in developing countries typically offer less
regulatory protection for investors. In the past, U.S. government
policies have discouraged or restricted certain investments abroad by
investors such as the Fund. Although the Fund is unaware of any
current restrictions, investors are advised that these policies could
be reinstituted.
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 securities or
are not rated but are determined by the Adviser to be of comparable
quality and may include bonds in default. 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 this Prospectus. There is no lower limit
with respect to rating categories for securities in which the Fund may
invest.
Corporate debt obligations that are not determined to be
investment-grade are high-yield, high-risk securities (i.e., `junk
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 securities, lower rated
securities 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 securities may be more difficult to
dispose of or to value than high-rated, lower-yielding securities. The
Fund does not intend to invest more than 5% of its assets in corporate
debt obligations that are not investment-grade securities (excluding
securities convertible into equity securities) during the current
fiscal year.
The prices of fixed income securities generally fluctuate inversely to
the direction of interest rates. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to
make principal and interest payments with respect to these securities
than for higher rated securities. The Adviser attempts to reduce the
risks described above through diversification of the portfolio and by
credit analysis of each issuer as well as by monitoring broad economic
trends and corporate and legislative developments.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Adviser
believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security
may have been held. The Adviser to the Fund does not anticipate that
portfolio turnover will result in adverse tax consequences. Any such
trading will increase the Fund's portfolio turnover rate and
transaction costs.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a
set date) or pledge securities except that under certain
circumstances the Fund may borrow up to one-third of the value of
its total assets and pledge assets to secure such borrowings; sell
securities short except, under strict limitations, it may maintain
open short positions so long as not more than 10% of the value of
its net assets is held as collateral for those positions; or
* 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.
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
The Fund's net asset value ("NAV") per Share fluctuates and is based
on the market value of all securities and other assets of the Fund.
The NAV for each class of Shares may differ due to the variance in
daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular
class are entitled.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund.
The NAV is determined as of the close of trading on the New York Stock
Exchange (normally 4:00 p.m., Eastern time) every day the New York
Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers three classes of Shares each with the
characteristics described below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Minimum and Subsequent
Investment Amounts $500/$100 $1500/$100 $1500/$100
Minimum and Subsequent $50 $50 $50
Investment Amount
for Retirement Plans
Maximum Sales Charge 5.50%* None None
Maximum Contingent None 5.50+ 1.00%#
Deferred Sales
Charge**
Conversion Feature No Yes++ No
</TABLE>
* Class A Shares are sold at NAV, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE DEALER
AS A PERCENTAGE CONCESSION AS
PUBLIC NET A PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
$50,000 but less
than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%
</TABLE>
** Computed on the lesser of the NAV of the redeemed Shares at the
time of purchase or the NAV of the redeemed Shares at the time of
redemption.
+ The following contingent deferred sales charge schedule applies to
Class B Shares:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
++ Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase. See "Conversion of Class
B Shares."
# The contingent deferred sales charge is assessed on Shares redeemed
within one year of their purchase date.
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock
Exchange is open. Shares of the Fund may be purchased as described
below, either through a financial intermediary (such as a bank or
broker/dealer) or by sending a wire or check directly to the Fund.
Financial intermediaries may impose different minimum investment
requirements on their customers. An account must be established with a
financial intermediary or by completing, signing, and returning the
new account form available from the Fund before Shares can be
purchased. Shareholders in certain other funds advised and distributed
by affiliates of Federated Investors ("Federated Funds") may exchange
their Shares for Shares of the corresponding class of the Fund. The
Fund reserves the right to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time
to time, offer certain items of nominal value to any shareholder or
investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received
when the Fund is notified of the purchase order or when payment is
converted into federal funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary and transmitted to the Fund
before 4:00 p.m. (Eastern time) in order for Shares to be purchased at
that day's price. It is the financial intermediary's responsibility to
transmit orders promptly. Financial intermediaries may charge fees for
their services.
The financial intermediary which maintains investor accounts in Class
B Shares or Class C Shares with the Fund must do so on a fully
disclosed basis unless it accounts for share ownership periods used in
calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to
financial intermediaries may be subject to reclaim by the distributor
for accounts transferred to financial intermediaries which do not
maintain investor accounts on a fully disclosed basis and do not
account for share ownership periods.
PURCHASING SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling 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 Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston, MA;
Attention; EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund
Number -- this number can be found on the account statement or by
contacting the Fund); Account Number; Trade Date and Order Number;
Group Number or Dealer Number; Nominee or Institution Name; and ABA
Number 011000028. Shares cannot be purchased by wire on holidays when
wire transfers are restricted.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of
the Fund (designate class of Shares and account number) to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600.
Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the
check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds may be automatically withdrawn periodically
from the shareholder's checking account at an Automated Clearing House
("ACH") member and invested in the Fund. Shareholders should contact
their financial intermediary or the Fund to participate in this
program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or
IRA accounts. For further details, contact the Fund and consult a tax
adviser.
CLASS A SHARES
Class A Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS A SHARES PURCHASED:
* through financial intermediaries that do not receive sales charge dealer
concessions;
* by Federated Life Members who maintain a $500 minimum balance in at least
one of the Federated Funds; or
* through "wrap accounts" or similar programs under which clients pay
a fee for services.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
* purchasing in quantity and accumulating purchases at the levels in the
table noted above;
* combining concurrent purchases of two or more funds; or
* signing a letter of intent to purchase a specific quantity of shares
within 13 months.
Consult a financial intermediary or Federated Securities Corp. for
details on these programs. In order to eliminate the sales charge or
receive sales charge reductions, Federated Securities Corp. must be
notified by the shareholder in writing or by a financial intermediary
at the time of purchase.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90%
of the applicable sales charge. Any portion of the sales charge which
is not paid to a dealer will be retained by the distributor. However,
the distributor may offer to pay dealers up to 100% of the sales
charge retained by it. Such payments may take the form of cash or
promotional incentives, such as reimbursement of certain expenses of
qualified employees and their spouses to attend informational meetings
about the Fund or other special events at recreational-type
facilities, or items of material value. In some instances, these
incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1
million or more, the investor pays no sales charge; however, the
distributor will make twelve monthly payments to the dealer totaling
0.25% of the public offering price over the first year following the
purchase. Such payments are based on the original purchase price of
Shares outstanding at each month end.
Federated Securities Corp. may pay fees to banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the establishment of customer accounts
and purchases of Shares.
CLASS B SHARES
Class B Shares are sold at NAV. Under certain circumstances, a
contingent deferred sales charge will be assessed at the time of a
redemption within the first seven years after purchase. Orders for
$250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares after
eight full years from the purchase date. Such conversion will be on
the basis of the relative NAVs per Share, without the imposition of
any charges. Class B Shares acquired by exchange from Class B Shares
of another Federated Fund will convert into Class A Shares based on
the time of the initial purchase.
CLASS C SHARES
Class C Shares are sold at NAV. A contingent deferred sales charge of
1.00% will be charged on assets redeemed within the first full 12
months following purchase.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Shares of the
same class of other Federated Funds on days on which the Fund computes its
NAV. Shares are redeemed at NAV less any applicable contingent deferred
sales charge. Exchanges are made at NAV. Depending upon the circumstances, a
capital gain or loss may be realized when Shares are redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your
financial intermediary before 4:00 p.m. (Eastern time). In order for
these transactions to be processed at that day's NAV, financial
intermediaries (other than broker/dealers) must transmit the request
to the Fund before 4:00 p.m. (Eastern time), while broker/dealers must
transmit the request to the Fund before 5:00 p.m. (Eastern time). The
financial intermediary is responsible for promptly submitting
transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial
intermediary for this service. Appropriate authorization forms for
these transactions must be on file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount,
or exchanged, by calling 1-800-341-7400. Appropriate authorization
forms for these transactions must be on file with the Fund. Shares
held in certificate form must first be returned to the Fund as
described in the instructions under "Redeeming or Exchanging Shares by
Mail." Redemption proceeds will either be mailed in the form of a
check 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. The minimum amount for a wire
transfer is $1,000.
Telephone instructions will be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If this occurs, "Redeeming or
Exchanging Shares By Mail" should be considered. The telephone
transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a
written request to: Federated Shareholder Services Company, Fund Name,
Fund Class, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they must accompany the written
request. It is recommended that certificates be sent unendorsed by
registered or certified mail.
All written requests should state: Fund Name and the Share Class name;
the account name as registered with the Fund; the account number; and
the number of Shares to be redeemed or the dollar amount of the
transaction. An exchange request should also state the name of the
Fund into which the exchange is to be made. All owners of the account
must sign the request exactly as the Shares are registered. A check
for redemption proceeds is normally mailed within one business day,
but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the
day that a redemption or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption
payable other than to the shareholder of record, must have their
signatures guaranteed by a commercial or savings bank, trust company
or savings association whose deposits are insured by an organization
which is administered by the Federal Deposit Insurance Corporation; a
member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of
1934. The Fund does not accept signatures guaranteed by a notary
public.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having a NAV equal to the minimum
investment requirements of the fund into which the exchange is being
made. Contact your financial intermediary directly or the Fund for
free information on and prospectuses for the Federated Funds into
which your Shares may be exchanged. Before the exchange, the
shareholder must receive a prospectus of the fund for which the
exchange is being made.
Upon receipt of proper instructions and required supporting documents,
Shares submitted for exchange are redeemed and proceeds invested in
the same class of shares of the other fund. Signature guarantees will
be required to exchange between fund accounts not having identical
shareholder registrations. The exchange privilege may be modified or
terminated at any time. Shareholders will be notified of the
modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic
withdrawal payments in an amount directed by the shareholder. To be
eligible to participate in this program, a shareholder must have an
account value of at least $10,000, other than retirement accounts
subject to required minimum distributions. A shareholder may apply for
participation in this program through his financial intermediary or by
calling the Fund.
Because participation in this program may reduce, and eventually
deplete the shareholder's investment in the Fund, payments under this
program should not be considered as yield or income. It is not
advisable for shareholders to continue to purchase Class A Shares
subject to a sales charge while participating in this program. A
contingent deferred sales charge may be imposed on Class B and C
Shares.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will be
retained by the distributor. 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. The contingent deferred
sales charge will not be imposed with respect to Shares acquired
through the reinvestment of dividends or distributions of long-term
capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares
received through an exchange will include the period for which your
original Shares were held.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon written notification to Federated Securities Corp. or the transfer
agent, no contingent deferred sales charge will be imposed on redemptions:
* following the death or disability, as defined in Section 72(m)(7) of
the Internal Revenue Code of 1986, of the last surviving
shareholder;
* representing minimum required distributions from an Individual
Retirement Account or other retirement plan to a shareholder who has
attained the age of 70 1/2;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
* of Shares held by Directors, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or distributor,
and their immediate family members; 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; and
* by the Fund of Shares originally purchased through a bank trust
department, an investment adviser registered under the Investment
Advisers Act of 1940 or retirement plans where the third party
administrator has entered into certain arrangements with Federated
Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for
purchases made through such entities.
For more information regarding the elimination of the contingent
deferred sales charge through a Systematic Withdrawal Program, or any
of the above provisions, contact your financial intermediary or the
Fund. The Fund reserves the right to discontinue or modify these
provisions. Shareholders will be notified of such action.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND CERTIFICATES
Shareholders will receive detailed confirmations of all transactions
and monthly confirmations reporting any dividends paid. Share
certificates are not issued unless requested in writing to Federated
Shareholder Services Company.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested
in the Fund on the record date. Net long-term capital gains realized
by the Fund, if any, will be distributed at least once every twelve
months. Dividends and distributions are automatically reinvested in
additional Shares of the Fund on payment dates at the ex-dividend date
without a sales charge, unless shareholders request cash payments on
the new account form or by contacting the transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the
Fund may close an account by redeeming all Shares and paying the
proceeds to the shareholder if the account balance falls below the
applicable minimum investment amount. Retirement plan accounts and
accounts where the balance falls below the minimum due to NAV changes
will not be closed in this manner. Before an account is closed, the
shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
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.
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 Adviser receives an annual investment advisory fee equal to 0.60%
of the Fund's average daily net assets. The Adviser may voluntarily
waive a portion of its fee or reimburse the Fund for certain operating
expenses.
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.
With over $110 billion invested across more than 300 funds under
management and/or administration by its subsidiaries, as of December
31, 1996, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 2,000
employees, Federated continues to be led by the management who founded
the company in 1955. Federated funds are presently at work in and
through 4,500 financial institutions nationwide.
Linda A. Duessel has been the Fund's portfolio manager since February 1997.
Ms. Duessel joined Federated Investors in 1991 and has been a Vice President
of the Fund's investment adviser since 1995. Ms. Duessel was an Assistant
Vice President of the Fund's investment adviser from 1991 until 1995. Ms.
Duessel is a Chartered Financial Analyst and received her M.S. in Industrial
Administration from Carnegie Mellon University.
Steven J. Lehman will be named an additional portfolio manager of the Fund,
pending completion of his registration as an Investment Adviser
Representative with the Commonwealth of Pennsylvania. Mr. Lehman joined the
Fund's adviser in May 1997 as a Vice President. From 1985 to May 1997, Mr.
Lehman served as a Portfolio Manager, then Vice President/Senior Portfolio
Manager, at First Chicago NBD Investment Management Company. Mr. Lehman is a
Chartered Financial Analyst; he received his M.A. from the University of
Michigan.
Both the Fund and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its
portfolio securities. These codes recognize that such persons owe a
fiduciary duty to the Fund's shareholders and must place the interests
of shareholders ahead of the employees' own interest. Among other
things, the codes: require preclearance and periodic reporting of
personal securities transactions; prohibit personal transactions in
securities being purchased or sold, or being considered for purchase
or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less
than sixty days. Violations of the codes are subject to review by the
Directors, and could result in severe penalties.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
The distributor may offer to pay financial institutions an amount
equal to 1% of the net asset value of Class C Shares purchased by
their clients or customers at the time of purchase. These payments
will be made directly by the distributor from its assets, and will not
be made from assets of the Fund. Financial institutions may elect to
waive the initial payment described above; such waiver will result in
the waiver by the Fund of the otherwise applicable contingent deferred
sales charge.
The distributor will pay dealers an amount equal to 5.5% of the net
asset value of Class B Shares purchased by their clients or customers.
These payments will be made directly by the distributor from its
assets, and will not be made from the assets of the Fund. Dealers may
voluntarily waive receipt of all or any portion of these payments. The
distributor may pay a portion of the distribution fee discussed below
to financial institutions that waive all or any portion of the advance
payments.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment
Company Act Rule 12b-1 (the "Distribution Plan"), Class B Shares and
Class C Shares will pay a fee to the distributor in an amount computed
at an annual rate of 0.75% of the average daily net assets of each
class of Shares to finance any activity which is principally intended
to result in the sale of Shares subject to the Distribution Plan.
Class A Shares may pay to the distributor an amount, computed at an
annual rate of 0.50% of the average daily net asset value of Class A
Shares to finance any activity which is principally intended to result
in the sale of shares subject to the Distribution Plan. For Class A
and Class C Shares, the distributor may select financial institutions
such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers to provide sales services or
distribution-related support services as agents for their clients or
customers. With respect to Class B Shares, because distribution fees
to be paid by the Fund to the distributor may not exceed an annual
rate of 0.75% of each class of Shares' average daily net assets, it
will take the distributor a number of years to recoup the expenses it
has incurred for its sales services, distribution and
distribution-related support services pursuant to the Distribution
Plan. Class A Shares are not currently making payments under the
Distribution Plan, nor does it anticipate doing so in the immediate
future.
The Distribution Plan is a compensation-type plan. As such, the Fund
makes no payments to the distributor except as described above.
Therefore, the Fund does not pay for unreimbursed expenses of the
distributor, including amounts expended by the distributor in excess
of amounts received by it from the Fund, interest, carrying or other
financing charges in connection with excess amounts expended, or the
distributor's overhead expenses. However, the distributor may be able
to recover such amounts or may earn a profit from future payments made
by Shares under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services
Agreement with Federated Shareholders Services, a subsidiary of
Federated Investors, under which the Fund may make payments up to
0.25% of the average daily net asset value of Class A Shares, Class B
Shares, and Class C Shares to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts. Under
the Shareholder Services Agreement, Federated Shareholder Services,
will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their
clients or customers. The schedules of such fees and the basis upon
which such fees will be paid will be determined from time to time by
the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the
time of purchase of Class A Shares, an amount equal to 0.50% of the
net asset value of Class A Shares purchased by their clients or by
certain qualified plans as approved by Federated Securities Corp.
(Such payments are subject to a reclaim from the financial institution
should the assets leave the program within 12 months after purchase.)
Furthermore, with respect to Class A Shares, Class B Shares, and Class
C Shares in addition to payments made pursuant to the Distribution
Plan and Shareholder Services Agreement, Federated Securities Corp.
and Federated Shareholder Services, from their own assets, may pay
financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize
the attributes of the Fund. Such assistance will be predicated upon
the amount of Shares the financial institution sells or may sell,
and/or upon the type and nature of sales or marketing support
furnished by the financial institution. Any payments made by the
distributor may be reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services (including certain
legal and financial reporting services) necessary to operate the Fund.
Federated Services Company provides these at an annual rate which
relates to the average aggregate daily net assets of all funds advised
by affiliates of Federated Investors as specified below: <TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
<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 Services Company may choose voluntarily to waive a
portion of its fee.
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 utilize those who are recognized dealers in specific
portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. In selecting among firms believed to
meet these criteria, the Adviser may give consideration to those firms
which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions
on portfolio transactions and selects brokers and dealers subject to
review by the Directors.
SHAREHOLDER INFORMATION
Each Share of the Fund 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.
Directors may be removed by the Directors or 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.
As of July 7, 1997, the following shareholder of record owned 25% or
more of the outstanding Class C Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class C Shares for its
clients), Jacksonville, Florida, owned approximately 3,046,357 Class C
Shares (43.89%) and, therefore, may, for certain purposes, be deemed
to control the Fund and be able to affect the outcome of certain
matters presented for a vote of shareholders.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code, 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.
STATE AND LOCAL TAXES
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
each class of Shares including Class F Shares described under "Other
Classes of Shares."
Total return represents the change, over a specific period of time, in
the value of an investment in each class of Shares after reinvesting
all income and capital gains distributions. It is calculated by
dividing that change by the initial investment and is expressed as a
percentage. The yield of each class of Shares is calculated by
dividing the net investment income per share (as defined by the
Securities and Exchange Commission) earned by each class of Shares
over a thirty-day period by the maximum offering price per share of
each class on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not
necessarily reflect income actually earned by each class of Shares
and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of non-recurring
charges, such as the maximum sales charge or contingent deferred sales
charges, which, if excluded, would increase the total return and
yield.
Total return and yield will be calculated separately for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares. Expense
differences between Class A Shares, Class B Shares, and Class C Shares
may affect the performance of each class.
From time to time, advertisements for Class A Shares, Class B Shares,
Class C Shares, and Class F Shares of the Fund may refer to ratings,
rankings, and other information in certain financial publications
and/or compare the performance of Class A Shares, Class B Shares,
Class C Shares, and Class F Shares to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class F Shares.
Class F Shares are sold primarily to customers of financial
institutions. Class F Shares are subject to a front-end sales charge,
a 12b-1 Plan, a contingent deferred sales charge and a Shareholder
Service Agreement. Class F Shares has a minimum initial investment of
$1,500, unless the investment is in a retirement account in which the
minimum investment is $50.
Class A Shares, Class B Shares, Class C Shares, and Class F Shares are
subject to certain of the same expenses, however, the front-end sales
charge for Class F Shares is 1.00%, which is lower than that for Class
A Shares. Expense differences, however, between Class A Shares, Class
B Shares, Class C Shares, and Class F Shares may affect the
performance of each class.
To obtain more information and a prospectus for Class F Shares,
investors may call 1-800-341-7400 or contact their financial
institution.
APPENDIX
DESCRIPTION OF BOND RATINGS
A rating by a rating service represents the service's opinion as to
the credit quality of the security being rated. However, the ratings
are general and are not absolute standards of quality or guarantees as
to the creditworthiness of an issuer.
Consequently, the Adviser believes that the quality of fixed income
securities in which the Fund invests should be continuously reviewed
and that individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a recommendation
to purchase, sell, or hold a security, because it does not take into
account market value or suitability for a particular investor. When a
security has received a rating from more than one service, each rating
is evaluated independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of
such information, or for other reasons.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA -- Debt rated "AAA" has the highest rating assigned by Standard &
Poor's Corporation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small
degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category than in
higher rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The "BB" rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The "B" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
CC -- The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt rating.
C -- The rating "C" typically is applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating.
The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI -- The rating "CI" is reserved for income bonds on which no
interest is being paid.
D -- Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A -- Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B -- Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time. C -- Bonds are in imminent
default in payment or 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.
FEDERATED EQUITY INCOME
FUND, INC.
CLASS A SHARES, CLASS B
SHARES, AND CLASS C SHARES
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA
15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
FEDERATED EQUITY
INCOME FUND, INC.
Class A Shares, Class B Shares,
Class C Shares
PROSPECTUS
JULY 31, 1997
An Open-End, Diversified
Management Investment Company
Federated Securities Corp., Distributor
[Graphic]
Cusip 313915100
Cusip 313915209
Cusip 313915308
G00492-01 (7/97)
FEDERATED EQUITY INCOME FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES
STATEMENT OF ADDITIONAL INFORMATION This Statement
of Additional Information should be read with the prospectus for Class
A Shares, Class B Shares, and Class C Shares, and the prospectus for
Class F Shares of Federated Equity Income Fund, Inc. (the `Fund"),
dated July 31, 1997. This Statement is not a prospectus itself. You
may request a copy of either prospectus or a paper copy of this
Statement, if you received it electronically, free of charge by
calling 1- 800-341-7400. FEDERATED INVESTORS TOWER PITTSBURGH,
PENNSYLVANIA 15222-3779
Statement dated July 31, 1997 Cusip 313915100 Cusip
313915209 Cusip 313915308 Cusip 313915407 8062806B(7/97
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVES AND POLICIES 3
Convertible Securities 3
Temporary Investments 4
Warrants 5
When-Issued and Delayed Delivery Transactions6
Repurchase Agreements 6
Futures and Options Transactions 6
Restricted and Illiquid Securities 10
Lending of Portfolio Securities 10
Reverse Repurchase Agreements 11
Portfolio Turnover 11
INVESTMENT LIMITATIONS 12
FEDERATED EQUITY INCOME FUND, INC. MANAGEMENT16
Fund Ownership 13
Directors Compensation 24
Director Liability 13
INVESTMENT ADVISORY SERVICES 26
Adviser to the Fund 26
Advisory Fees 26
BROKERAGE TRANSACTIONS 27
OTHER SERVICES 28
Fund Administration 28
Custodian and Portfolio Accountant 29
Transfer Agent 29
Independent Auditors 29
PURCHASING SHARES 29
Distribution Plan and Shareholder
Services 29
Conversion to Federal Funds 30
Purchases by Sales Representatives, Fund
Directors, and Employees 31
Exchanging Securities For Fund Shares 31
Determining Net Asset Value 32
Determining Market Value of Securities 32
REDEEMING SHARES 35
Redemption in Kind 35
Contingent Deferred Sales Charge 35
TAX STATUS 35
The Fund's Tax Status 35
Shareholders' Tax Status 36
TOTAL RETURN 36
YIELD 38
CURRENT DISTRIBUTIONS 38
PERFORMANCE COMPARISONS 39
Economic and Market Information 21
ABOUT FEDERATED INVESTORS 41
Mutual Fund Market 42
Institutional Clients 42
Bank Marketing 43
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 43
FINANCIAL STATEMENTS 43
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 February 26, 1996, the Board of Directors approved
an amendment to the Articles of Incorporation of the Fund to change
the name of the Fund from Liberty Equity Income Fund, Inc. to
Federated Equity Income Fund, Inc. 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 Class F Shares
(individually and collectively referred to as `Shares," as the context
may require). This Statement of Additional Information relates to all
classes of Shares of the Fund. INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to provide above average income and
capital appreciation. The investment objective cannot be changed
without approval of shareholders. CONVERTIBLE SECURITIES DECS, or
similar instruments marketed under different names, offer a
substantial dividend advantage with the possiblility of unlimited
upside potential if the price of the underlying common stock exceeds a
certain level. DECS convert to common stock at maturity. The amount
received is dependent on the price of the common at the time of
maturity. DECS contain two call options at different strike prices.
The DECS participate with the common up to the first call price. They
are effectively capped at that point unless the common rises above a
second price point, at which time they participate with unlimited
upside potential. PERCS, or similar instruments marketed under
different names, offer a substantial dividend advantage, but capital
appreciation potential is limited to a predetermined level. PERCS are
less risky and less volatile than the underlying common stock because
their superior income mitigates declines when the common falls, while
the cap price limits gains when the common rises. TEMPORARY
INVESTMENTS The temporary investments in which the Fund may invest
include, but are not limited to:
o commercial paper rated A-1 or A-2 by Standard & Poor's Ratings
Group, Prime-1 or Prime-2 by Moody's Investors Service, Inc., or
F-1 or F-2 by Fitch Investors Service, Inc., and Europaper rated
A-1, A-2, Prime-1, or Prime-2. In the case where commercial paper
or Europaper has received different ratings from different rating
services, such commercial paper or Europaper is an acceptable
temporary investment so long as at least one rating is one of the
preceding high-quality ratings and provided the Fund's investment
Adviser, Federated Advisers (the "Adviser'), has determined that
such investment presents minimal credit risks;
o instruments of domestic and foreign banks and savings associations
if they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
insured by the Federal Deposit Insurance Corporation. These
instruments may include Eurodollar Certificates of Deposits
("ECDs'), Yankee Certificates of Deposit ("Yankee CDs'), and
Eurodollar Time Deposits ("ETDs");
o obligations of the U.S. government or its agencies or
instrumentalities;
o repurchase agreements; and
o other short-term instruments which are not rated but are determined
by the Adviser to be of comparable quality to the other temporary
obligations in which the Fund may invest.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, and Europaper are subject to different
risks than domestic obligations of domestic banks or
corporations. Examples of these risks include international
economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal
or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against
the issuing entity, and the possible impact of interruptions in
the flow of international currency transactions. Different risks
may also exist for ECDs, ETDs, and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches,
are not necessarily subject to the same regulatory requirements
that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, recordkeeping,
and the public availability of information. These factors will be
carefully considered by the Adviser in selecting investments for
the Fund.
WARRANTS
Warrants basically are options to purchase common stock at a specific
price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years
or may be perpetual. However, warrants have expiration dates after
which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during the
life of the warrant, the warrant will expire as worthless. Warrants
have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. The percentage
increase or decrease in the market price of the warrant may tend to be
greater than the percentage increase or decrease in the market price
of the optioned common stock. WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS These transactions are made to secure what is considered
to be an advantageous price or yield for the Fund. No fees or other
expenses, other than normal transaction costs, are incurred. However,
liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained
until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value
of its assets. REPURCHASE AGREEMENTS The Fund or its custodian will
take possession of the securities subject to repurchase agreements,
and these securities will be marked to market daily. To the extent
that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller
filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund
believes that under the regular procedures normally in effect for
custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The
Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are
deemed by the Adviser to be creditworthy pursuant to guidelines
established by the Board of 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. The Fund would purchase put
options on futures contracts to protect portfolio securities
against decreases in value resulting from an anticipated increase
in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If
the hedge is successful, the proceeds received by the Fund upon
the sale of the second option will be large enough to offset both
the premium paid by the Fund for the original option plus the
decrease in value of the hedged securities. Alternatively, the
Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of
the option) and exercise the option. The Fund would then deliver
the futures contract in return for payment of the strike price.
If the Fund neither closes out nor exercises an option, the
option will expire on the date provided in the option contract,
and the premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may
write listed call options on futures contracts to hedge its
portfolio against an increase in market interest rates. When the
Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures position
(selling a futures contract) at the fixed strike price at any
time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go
down, the Fund's obligation under a call option on a future (to
sell a futures contract) costs less to fulfill, causing the value
of the Fund's call option position to increase. In other words,
as the underlying futures price goes down below the strike price,
the buyer of the option has no reason to exercise the call, so
that the Fund keeps the premium received for the option. This
premium can offset the drop in value of the Fund's fixed-income
portfolio which is occurring as interest rates rise. Prior to the
expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the
second option will be less than the premium received by the Fund
for the initial option. The net premium income of the Fund will
then offset the decrease in value of the hedged securities. The
Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in
the aggregate, the value of the open positions (marked to market)
exceeds the current market value of its securities portfolio plus
or minus the unrealized gain or loss on those open positions,
adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close
out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay
or receive money upon the purchase or sale of a futures contract.
Rather, the Fund is required to deposit an amount of `initial
margin" in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in
securities transactions in that futures contract initial margin
does not involve the borrowing of funds by the Fund to finance
the transactions. Initial margin is in the nature of a
performance bond or good-faith deposit on the contract which is
returned to the Fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied. A
futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called `variation margin," equal
to the daily change in value of the futures contract. This
process is known as `marking to market." Variation margin does
not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one
would owe the other if the futures contract expired. In computing
its daily net asset value, the Fund will mark to market its open
futures positions. The Fund is also required to deposit and
maintain margin when it writes call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to
protect against price movements in particular securities in its
portfolio. A put option gives the Fund, in return for a premium,
the right to sell the underlying security to the writer (seller)
at a specified price during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES The Fund may
also write covered call options to generate income. As writer of
a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying
security upon payment of the exercise price. The Fund may only
sell call options either on securities held in its portfolio or
on securities which it has the right to obtain without payment of
further consideration (or has segregated cash in the amount of
any additional consideration).
RESTRICTED AND ILLIQUID SECURITIES
The Fund expects that any restricted securities would be acquired
either from institutional investors who originally acquired the
securities in private placements or directly from the issuers of the
securities in private placements. Restricted securities and securities
that are not readily marketable may sell at a discount from the price
they would bring if freely marketable. The Directors may 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 Adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a
particular security may have been held. The Adviser does not
anticipate that portfolio turnover will result in adverse tax
consequences. Any such trading will increase the Fund's portfolio
turnover rate and transaction costs. For the fiscal years ended March
31, 1997 and 1996, the portfolio turnover rates were 75% and 96%,
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.
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 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 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.
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 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. 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 current 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
association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be `cash items."
FEDERATED EQUITY INCOME FUND, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates,
present positions with Federated Equity Income Fund, Inc., and
principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly,
Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.;
Director, Member of Executive Committee, University of Pittsburgh;
Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank
Corp.; Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of
Massachusetts; formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation; Director or Trustee of
the Funds.
Gregor F. Meyer
Boca Grande Club
Boca Grande, FL
Birthdate: October 6, 1926
Director
Attorney, Retired Member of Miller, Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director or
Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online
Computer Library Center, Inc., National Defense University, U.S. Space
Foundation and Czech Management Center; President Emeritus, University
of Pittsburgh; Founding Chairman, National Advisory Council for
Environmental Policy and Technology, Federal Emergency Management
Advisory Board and Czech Management Center; Director or Trustee of the
Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; Chairman
and Director, Federated Securities Corp.; President or Vice President
of some of the Funds; Director or Trustee of some of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Director of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice
President, Federated Advisers, Federated Management, Federated
Research, Federated Research Corp., Federated Global Research Corp.
and Passport Research, Ltd.; Executive Vice President and Director,
Federated Securities Corp.; Trustee, Federated Shareholder Services
Company; Trustee or Director of some of the Funds; President,
Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer Executive Vice
President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder Services Company; Director,
Federated Services Company; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; Executive
Vice President and Secretary of the Funds; Treasurer of some of the
Funds.
* This Director is deemed to be an `interested person" as defined in
the Investment Company Act of 1940. @ Member of the Executive
Committee. The Executive Committee of the Board of Directors handles
the responsibilities of the Board between meetings of the Board.
As used in the table above, `The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals
Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated
American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S.
Government Securities, Inc.; Federated GNMA Trust; Federated
Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust;
Federated Master Trust; Federated Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund:
2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; High Yield Cash Trust; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government
Money Market Trust; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Obligations Trust II; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Starburst Funds; The Starburst Funds II; The Virtus Funds; Trust for
Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; Wesmark Funds; and World Investment Series, Inc.
FUND OWNERSHIP
As of July 7, 1997, the following shareholder of record owned 5% or
more of the outstanding Class A Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class A Shares for its
clients), Jacksonville, Florida, owned approximately 1,859,539 Class A
Shares
(5.84%).
As of July 7, 1997, the following shareholder of record owned 5% or
more of the outstanding Class A Shares of the Fund: Sheldon & Co.,
National City Bank, Cleveland, Ohio, owned approximately 2,413,236
Class A Shares (7.57%). As of July 7, 1997, the following shareholder
of record owned 5% or more of the outstanding Class B Shares of the
Fund: Merrill Lynch Pierce Fenner & Smith (as record owner holding
Class B Shares for its clients), Jacksonville, Florida, owned
approximately 2,701,139 Class B Shares (8.11%). As of July 7, 1997,
the following shareholder of record owned 5% or more of the
outstanding Class C Shares of the Fund: Merrill Lynch Pierce Fenner &
Smith (as record owner holding Class C Shares for its clients),
Jacksonville, Florida, owned approximately 3,046,357 Class C Shares
(43.88%). As of July 7, 1997, the following shareholder of record
owned 5% or more of the outstanding Class F Shares of the Fund:
Merrill Lynch Pierce Fenner & Smith (as record owner holding Class F
shares for its clients), Jacksonville, Florida, owned approximately
1,331,590 Class F Shares(22.36%).
DIRECTORS COMPENSATION
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID FUND FUND*# FROM FUND
COMPLEX+ John F. Donahue, $0 $0 for the Fund and Chairman and Director
56 other investment companies in the Fund Complex J. Christopher
Donahue,$0 $0 for the Fund and Executive Vice President 18 other
investment companies in the Fund Complex and Director Thomas G.
Bigley, $1,426.98 $108,725 for the Fund and Director 56 other
investment companies in the Fund Complex John T. Conroy, Jr.,$1,569.91
$119,615 for the Fund and Director 56 other investment companies in
the Fund Complex William J. Copeland,$1,569.91 $119,615 for the Fund
and Director 56 other investment companies in the Fund Complex James
E. Dowd, $1,569.91 $119,615 for the Fund and Director 56 other
investment companies in the Fund Complex Lawrence D. Ellis,
M.D.,$1,426.98 $108,725 for the Fund and Director 56 other investment
companies in the Fund Complex Edward L. Flaherty, Jr.,$1,569.91
$119,615 for the Fund and Director 56 other investment companies in
the Fund Complex Peter E. Madden, $1,426.98 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex Gregor F.
Meyer, $1,426.98 $108,725 for the Fund and Director 56 other
investment companies in the Fund Complex John E. Murray, Jr.,$1,426.98
$108,725 for the Fund and Director 56 other investment companies in
the Fund Complex Wesley W. Posvar, $1,426.98 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex Marjorie P.
Smuts,$1,426.98 $108,725 for the Fund and Director 56 other investment
companies in the Fund Complex *Information is furnished for the fiscal
year ended March 31, 1997.
# The aggregate compensation is provided for the Corporation which was
comprised of one portfolio, as of
March 31, 1997.
+ The information is provided for the last calendar year. DIRECTOR
LIABILITY The Articles of Incorporation provide that the Directors
will not be liable for errors of judgment or mistakes of fact or law.
However, they are not protected against any liability to which they
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved
in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment Adviser is Federated 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, the Adviser
receives an annual investment advisory fee as described in the
respective prospectuses. During the fiscal years ended March 31, 1997,
1996, and 1995, the Fund's Adviser earned $4,100,883, $1,573,643, and
$960,072, respectively, of which $0, $ 418,318 , and $570,904,
respectively, were voluntarily waived because of undertakings to limit
the Fund's expenses. BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the
Fund or to the Adviser and may include: 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. Research services provided by
brokers and dealers may be used by the Adviser or its affiliates in
advising the Fund and 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. 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. During the fiscal years ended March 31, 1997, 1996, and
1995, the Fund paid total brokerage commissions of $1,109,630,
$611,535, and $363,114, respectively. Although investment decisions
for the Fund are made independently from those of the other accounts
managed by the Adviser, investments of the type the Fund may make may
also be made by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or
desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
Adviser to be equitable to each. In some cases, this procedure may
adversely affect the price paid or received by the Fund or the size of
the position obtained or disposed of by the Fund. In other cases,
however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee
as described in the respective prospectuses. From March 1, 1994, to
March 1, 1996, Federated Administrative Services, a subsidiary of
Federated Investors, served as the Fund's Administrator. For purposes
of this Statement of Additional Information, Federated Services
Company and Federated Administrative Services may hereinafter
collectively be referred to as the `Administrators". For the fiscal
years ended March 31, 1997, 1996, and 1995, the Administrators earned
$516,371, $214,999, and $200,945, respectively. CUSTODIAN AND
PORTFOLIO ACCOUNTANT State Street Bank and Trust Company, Boston, MA,
is custodian for the securities and cash of the Fund. Federated
Services Company, Pittsburgh, PA, provides certain accounting and
recordkeeping services with respect to the Fund's portfolio
investments. The fee paid for this service is based upon the level of
the Fund's average net assets for the period plus out-of-pocket
expenses. TRANSFER AGENT Federated Services Company, through it
registered transfer agent, Federated Shareholder Services Company,
maintains all necessary shareholder records. For its services, the
transfer agent receives a fee based on the size, type and number of
accounts and transactions made by shareholders. INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP,
Pittsburgh, PA. PURCHASING SHARES
Except under certain circumstances described in the respective
prospectuses, Shares are sold at their net asset value (plus a sales
charge on Class A Shares and Class F Shares only) on days the New York
Stock Exchange is open for business. The procedure for purchasing
Shares is explained in the respective prospectuses under `Investing in
the Fund" and `Purchasing Shares."
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As described in the
prospectuses, larger purchases reduce the sales charge paid. The Fund
will combine purchases of Class A Shares and Class F Shares made on
the same day by the investor, the investor's spouse, and the
investor's children under age 21 when it calculates the sales charge.
In addition, the sales charge, if applicable, is reduced for purchases
made at one time by a trustee or fiduciary for a single trust estate
or a single fiduciary account.
If an additional purchase of Class A Shares and Class F Shares is
made, the Fund will consider the previous purchases still invested in
the Fund. For example, if a shareholder already owns Class A Shares
having a current value at the public offering price of $90,000 and he
purchases $10,000 more at the current public offering price, the sales
charge on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%. To receive the sales charge
reduction, Federated Securities Corp. must be notified by the
shareholder in writing or by his financial institution at the time the
purchase is made that Class A Shares or Class F Shares are already
owned or that purchases are being combined. The Fund will reduce the
sales charge after it confirms the purchases.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
reduction, a shareholder has the privilege of combining concurrent
purchases of Class A Shares or Class F Shares of two or more funds for
which affiliates of Federated Investors serve as investment adviser
and principal underwriter (the `Federated Funds"), the purchase price
of which includes a sales charge. For example, if a shareholder
concurrently invested $30,000 in the Class A Shares of one of the
other Federated Funds with a sales charge, and $20,000 in this Fund,
the sales charge would be reduced.
To receive this sales charge reduction, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial
institution at the time the concurrent purchases are made. The Fund
will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least
$50,000 of Class A Shares or at least $1 million of Class F Shares of
Federated Funds (excluding money market funds) over the next 13
months, the sales charge may be reduced by signing a letter of intent
to that effect. This letter of intent includes a provision for a sales
charge adjustment depending on the amount actually purchased within
the 13-month period and a provision for the custodian to hold up to
5.50% (in the case of Class A Shares) or 1.00% (in the case of Class F
Shares) of the total amount intended to be purchased in escrow (in
shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be
released upon fulfillment of the letter of intent or the end of the
13-month period, whichever comes first. If the amount specified in the
letter of intent is not purchased, an appropriate number of escrowed
Shares may be redeemed in order to realize the difference in the sales
charge. While this letter of intent will not obligate the shareholder
to purchase Class A Shares or Class F Shares, each purchase during the
period will be at the sales charge applicable to the total amount
intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares or
Class F Shares of any Federated Funds, excluding money market
accounts, will be aggregated to provide a purchase credit towards
fulfillment of the letter of intent. Prior trade prices will not be
adjusted.
REINVESTMENT PRIVILEGE. If Class A Shares or Class F Shares in the
Fund have been redeemed, the shareholder has the privilege, within 120
days, to reinvest the redemption proceeds at the next-determined net
asset value without any sales charge. Federated Securities Corp. must
be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales charge.
If the shareholder redeems his Class A Shares or Class F Shares in the
Fund, there may be tax consequences.
CONVERSION OF CLASS B SHARES. Class B Shares will automatically
convert into Class A Shares after eight full years from the purchase
date. For purposes of conversion to Class A Shares, Shares purchased
through the reinvestment of dividends and distributions paid on Class
B Shares will be considered to be held in a separate sub-account. Each
time any Class B Shares in the shareholder's account (other than those
in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account will also convert to
Class A Shares. The conversion of Class B Shares to Class A Shares is
subject to the continuing availability of a ruling from the Internal
Revenue Service or an opinion of counsel that such conversions will
not constitute taxable events for federal tax purposes. There can be
no assurance that such ruling or opinion will be available, and the
conversion of Class B Shares to Class A Shares will not occur if such
a 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.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
With respect to all classes of Shares, the Fund has adopted a
Distribution Plan in accordance with Investment Company Act Rule
12b-1. Additionally, the Fund has adopted a Shareholder Services
Agreement with respect to all classes of Shares. 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 expects
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 objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing
these accounts, it may be possible to curb sharp fluctuations in rates
of redemptions and sales. Other benefits, which may be realized under
either arrangement, may include: (1) providing personal services to
shareholders; (2) investing shareholder assets with a minimum of delay
and administrative detail; (3) enhancing shareholder recordkeeping
systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts. For the fiscal year ended March
31, 1997, payment in the amounts of $1,645,601 (Class B Shares),
$556,995 (Class C Shares) and $176,501 (Class F Shares), were made
pursuant to the Distribution Plans. The Fund is not currently making
payments under the Distribution Plan for Class A Shares, nor does it
anticipate doing so in the immediate future. In addition, for the
fiscal year ended March 31, 1997, payment in the amounts of $798,002
(Class A Shares), $548,534 (Class B Shares), $185,665 (Class C
Shares), and $176,501 (Class F Shares), was made pursuant to the
Shareholder Services Agreement, of which $127,680 (Class A Shares), $0
(Class B Shares), $0 (Class C Shares), and $7,703 (Class F Shares) was
waived. 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 Shareholders Services acts as the shareholder's
agent in depositing checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES The
following individuals and their immediate family members may buy Class
A Shares at net asset value without a sales charge:
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
Federated Life Members; and
any associated pereson of an investment dealer who has a sales
agreement with Federated Securities Corp. Shares may also be sold
without a sales charge to trusts, pensions, or profit-sharing plans
for these individuals.
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, 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
The Fund's net asset value per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The net
asset value for each class of Shares may differ due to the variance in
daily net income realized by each class.
Net asset value is not determined on (i) days on which there are not
sufficient changes in the value of the Fund's portfolio securities
that its net asset value might be materially affected; (ii) days
during which no Shares are tendered for redemption and no orders to
purchase Shares are received; or (iii) the following holidays: New
Year's Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as
follows:
oaccording to the last sale price on a national securities exchange, if
available;
oin the absence of recorded sales for equity securities, according to
the mean between the last closing bid and asked prices and for bonds
and other fixed income securities, as determined by an independent
pricing service; or
ofor short-term obligations, according to the prices as furnished by
an independent pricing service or 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
Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemption procedures
are explained in the respective prospectuses under `Redeeming and
Exchanging 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.
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 SEC
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 the
Fund's 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.
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 seven full
years from the date of purchase with respect to Class B Shares and one
full year from the date of purchase with respect to Class C Shares;
(3) Shares held for fewer than seven years with respect to Class B
Shares and for less than one full year from the date of purchase with
respect to Class C Shares on a first-in, first-out basis.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE. To qualify for
elimination of the contingent deferred sales charge through a
Systematic Withdrawal Program, the redemptions of Class B Shares must
be from an account that is at least 12 months old, has all Fund
distributions reinvested in Fund Shares, and has an account value of
at least $10,000 when the Systematic Withdrawal Program is
established. Qualifying redemptions may not exceed 1.00% monthly of
the account value as periodically determined by the Fund. The amounts
that a shareholder may withdraw under a Systematic Withdrawal Program
that qualify for elimination of the Contingent Deferred Sales Charge
may not exceed 12% annually with reference initially to the value of
the Class B Shares upon establishment of the Systematic Withdrawal
Program and then as calculated at the annual valuation date.
Redemptions on a qualifying Systematic Withdrawal Program can be made
at a rate of 1.00% monthly, 3.00% quarterly, or 6.00% semi-annually
with reference to the applicable account valuation amount. Amounts
that exceed the 12.00% annual limit for redemption, as described, may
be subject to the Contingent Deferred Sales Charge. To the extent that
a shareholder exchanges Shares for Class B Shares of other Federated
Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for
purposes of satisfying the 12-month holding requirement. However, for
purposes of meeting the $10,000 minimum account value requirement,
Class B Share accounts will be not be aggregated. Any Shares purchased
prior to the termination of this program would have the contingent
deferred sales charge eliminated as provided in the Fund's prospectus
at the time of the purchase of the Shares. 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 applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment,
the Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and
capital gains received as cash or additional Shares. The dividends
received deduction for corporations will apply to ordinary income
distributions to the extent the distribution represents amounts that
would qualify for the dividends received deduction to the Fund if the
Fund were a regular corporation and to the extent designated by the
Fund as so qualifying. These dividends, and any short-term capital
gains, are taxable as ordinary income.
CAPITAL GAINS
Capital gains or losses may be realized on the sale of portfolio
securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made
because of:
othe availability of higher relative yields; odifferentials in
market values; onew investment opportunities; ochanges in
creditworthiness of an issuer; or oan attempt to preserve gains
or limit losses.
Distributions of long-term capital gains are taxed as such,
whether they are taken in cash or reinvested, and regardless of
the length of time the shareholder has owned the Shares. Any loss
by a shareholder on Shares held for less than six months and sold
after a capital gains distribution will be treated as a long-term
capital loss to the extent of the capital gains distribution.
TOTAL RETURN
The Fund's average annual total returns for the following periods
ended March 31, 1997 were:
DATE OF
INITIAL
SHARE CLASS PUBLIC ONE-YEAR FIVE-YEARS TEN-YEARS SINCE
INCEPTION
INVESTMENT
Class A 12/30/86 12.28% 14.72% 12.17% 12.53% Class B 9/27/94 12.02% -
- - 18.88% Class C 5/3/93 16.84% - - 15.11% Class F 11/12/93 16.29% - -
14.12% 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 charge, 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 Class B Shares' total
performance over a specific period of time. This total return assumes
and is reduced by the payment of the maximum sales charge and
contingent deferred sales charge, if applicable. The Class B Shares'
total return is representative of only six months of investment
activity since the date of initial public offering. YIELD
The Fund's yields for the thirty-day period ended March 31, 1997 were:
SHARE CLASS YIELD
Class A 2.28%
Class B 1.60%
Class C 1.60%
Class F 2.10%
The yield for all classes of Shares of the Fund is determined by
dividing the net investment income per Share (as defined by the
Securities and Exchange Commission) earned by any class of Shares over
a thirty-day period by the maximum offering price per Share of any
class of Shares on the last day of the period. This value is then
annualized using semi-annual compounding. This means that the amount
of income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is reinvested
every six months. The yield does not necessarily reflect income
actually earned by any class of Shares because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may
not correlate to the dividends or other distributions paid to
shareholders. To the extent that financial institutions and
broker/dealers charge fees in connection with services provided in
conjunction with an investment in any class of Shares, the performance
will be reduced for those shareholders paying those fees. CURRENT
DISTRIBUTIONS
Class A Shares', Class B Shares', Class C Shares', and Class F Shares
average net annualized current distributions rate for the thirty days
ended March 31, 1997, were 4.36%, 3.86%, 3.84% and 4.32%,
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 Adviser believes a shortened period would be more
representative in light of current market conditions. PERFORMANCE
COMPARISONS
The Fund's performance of each class of Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested; o changes
in interest rates and market value of portfolio securities; o changes
in the Fund's or a class of Shares' expenses; and o various other
factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net
earnings and offering price per Share are factors in the computation
of yield and total return. The Fund may compare the performance of
equity income funds to other types of stock funds and indices.
Investors may use financial publications and/or indices to obtain a
more complete view of the Fund's performance. When comparing
performance, investors should consider all relevant factors such as
the composition of any index used, prevailing market conditions,
portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may
include:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in net asset value over a 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.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA') represents share prices of
selected blue-chip industrial corporations as well as public
utility and transportation companies. The DJIA indicates daily
changes in the average price of stocks in any of its categories. It
also reports total sales for each group of industries. Because it
represents the top corporations of America, the DJIA index is a
leading economic indicator for the stock market as a whole.
o STANDARD & POOR'S RATINGS GROUP DAILY STOCK PRICE INDEX OF 500
COMMON STOCKS 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 the index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated, in the
Standard & Poor's figures.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk- adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
o LEHMAN BROTHERS HIGH YIELD INDEX covers the universe of fixed rate,
publicly issued, noninvestment grade debt registered with the SEC.
All bonds included in the High Yield Index must be
dollar-denominated and nonconvertible and have at least one year
remaining to maturity and an outstanding par value of at least $100
million. Generally securities must be rated Ba1 or lower by Moody's
Investors Service, including defaulted issues. If no Moody's rating
is available, bonds must be rated BB+ or lower by S&P; and if no
S&P rating is available, bonds must be rated below investment grade
by Fitch Investor's Service. A small number of unrated bonds is
included in the index; to be eligible they must have previously
held a high yield rating or have been asociated with a high yield
issuer, and must trade accordingly.
In addition, the Fund will, from time to time, use the following
standard convertible securities indices against which it will compare
its performance: Goldman Sachs Convertible 100; Kidder Peabody
Convertible Bond Index; Value Line Convertible Bond Index; and Dow
Jones Utility Index. 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 charge or contingent deferred sales
charge, as applicable. Advertising and other promotional literature
may include charts, graphs and other illustrations using the Fund's
returns, or returns in general, that demonstrate basic investment
concepts such as tax-deferred compounding, dollar-cost averaging and
systematic investment. In addition, the Fund can compare its
performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills. ECONOMIC AND
MARKET INFORMATION Advertising and sales literature for the Fund may
include discussions of economic, financial and political developments
and their effect on the securities market. Such discussions may take
the form of commentary on these developments by Fund portfolio
managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may
quote statistics and give general information about the mutual fund
industry, including the growth of the industry, from sources such as
the Investment Company Institute. ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making-structured,
straightforward, and consistent. This has resulted in a history of
competitive performance with a range of competitive investment
products that have gained the confidence of thousands of clients and
their customers. The company's disciplined security selection process
is firmly rooted in sound methodologies backed by fundamental and
technical research. Investment decisions are made and executed by
teams of portfolio managers, analysts, and traders dedicated to
specific market sectors. These traders handle trillions of dollars in
annual trading volume. I In the equity sector, Federated Investors has
more than 25 years' experience. As of December 31, 1996, Federated
Investors managed 31 equity funds totaling approximately $7.6 billion
in assets across growth, value, equity income, international, index
and sector (i.e. utility) styles. Federated's value-oriented
management style combines quantitative and qualitative analysis and
features a structured, computer-assisted composite modeling system
that was developed in the 1970s. In the corporate bond sector, as of
December 31, 1996, Federated Investors managed 10 money market funds,
and 14 bond funds with assets approximating $17.2 billion, and $4.0
billion, respectively. Federated's corporate bond decision
making-based on intensive, diligent credit analysis-is backed by over
21 years of experience in the corporate bond sector. In 1972,
Federated Investors introduced one of the first high-yield bond funds
in the industry. In 1983, Federated Investors was one of the first
fund managers to participate in the asset-backed securities market, a
market totaling more than $200 billion. J. Thomas Madden, Executive
Vice President, oversees Federated Investors' equity and high yield
corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income
management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' international and global
portfolios. MUTUAL FUND MARKET Thirty-seven percent of American
households are pursuing their financial goals through mutual funds.
These investors, as well as businesses and institutions, have
entrusted over $3.5 trillion to the more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual
funds for a variety of investment applications. Specific markets
include: INSTITUTIONAL CLIENTS Federated Investors meets the needs of
more than 4,000 institutional clients nationwide by managing and
servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment
and financial advisors. The marketing effort to these institutional
clients is headed by John B. Fisher, President, Institutional Sales
Division. BANK MARKETING Other institutional clients include close
relationships with more than 1,600 banks and trust organizations.
Virtually all of the trust divisions of the top 100 bank holding
companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Mark R. Gensheimer,
Executive Vice President, Bank Marketing & Sales. BROKER/DEALERS AND
BANK BROKER/DEALER SUBSIDIARIES Federated funds are available to
consumers through major brokerage firms nationwide--we have over 2,200
broker/dealer and bank/broker dealer relationships across the
country-supported by more wholesalers than any other mutual fund
distributor. Federated Investor's service to financial professionals
and institutions has earned it high rankings in several surveys
performed by DALBAR, Inc. DALBAR is recognized as the industry
benchmark for service quality measurement.. The marketing effort to
these firms is headed by James F. Getz, President, Federated
Securities Corp..
* source: Investment Company Institute
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended March 31, 1997, are
incorporated herein by reference to the Annual Report of the Fund
dated March 31, 1997 (File Nos. 33-6901 and 811-4743). A copy of this
Report may be obtained without charge by contacting the Fund.
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements. (Incorporated by reference to the
Annual Report of the Registrant dated March 3l, l997
pursuant to Rule 411 under the Securities Act of 1933.)
(File Nos. 33-6901 and 811-4743);
(b) Exhibits:
(1) Copy of Articles of Incorporation of the Registrant, as
amended; (2)
(2) (i)Copy of By-Laws of the Registrant as Restated and
Amended; (3)
(ii)Copy of Amendment to By-Laws effective August 28,
1987; (4)
(iii)Copy of Amendment to By-Laws effective
November 19, 1987; (4)
(3) Not applicable;
(4) Copies of Specimen Certificates for Shares of Capital
Stock for Class A Shares, Class B Shares, Class C
Shares, and Class F Shares of the Registrant; (12)
(5) Conformed copy of Investment Advisory Contract of the
Registrant; (5)
(6) (i)Conformed copy of Distributor's Contract through
and including Exhibit C; (11)
(ii)Conformed copy of Exhibit D to the Distributor's
Contract; (12)
(iii)iii) The Registrant hereby incorporates the
conformed copy of the specimen Mutual Funds
Sales and Service Agreement; Mutual Funds
Service Agreement from Item 4(b)(6) of the
Cash Trust Series II Registration Statement
on Form N-1A, filed with the Commission on
July 24, 1995. (File Numbers 33-38550 and
811-6269)
(7) Not applicable;
(8) Conformed copy of Custodian Contract of the Registrant
(9);
(9) (i) Conformed copy of Agreement for Fund Accounting,
Shareholder Recordkeeping, and Custody Services
Procurement of the Registrant; (11)
(ii) The responses described in Item 24(b)(6) are
hereby incorporated by reference.
(iii) The Registrant hereby incorporates the conformed
copy of the Shareholder services Sub-Contract between
National Pensions Alliance, Ltd. and Federated
Shareholder Services from Item 24(b)(9)(ii) of the
Federated GNMA Trust Registration Statement on Form N-
1A, filed with the Commission on March 26, 1996. (File
Nos. 2-75670 and 811-3375).
+ All exhibits have been filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 2 on Form N-1A filed December 15, 1986 (File Nos.
33-6901 and 811-4743).
3. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 on Form N-1A filed May 18, 1988 (File Nos. 33-6901 and
811-4743).
4. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed July 19, 1988 (File Nos. 33-6901
and 811-4743).
5. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 6 on Form N-1A filed July 28, 1989 (File Nos. 33-6901
and 811-4743).
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed May 29, 1996 (File Nos. 33-6901
and 811-4743).
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed May 30, 1997 (File Nos. 33-6901
and 811-4743).
(iv) The Registrant hereby incorporates the
conformed copy of the Shareholder Services
Sub-Contract between Fidelity and Federated
Shareholder Services from Item 24(b)(9)(iii) of
the Federated GNMA Trust Registration statement on
Form N-1A, filed with the Commission on March 26,
1996. (File Nos. 2-75670 and 811-3375).
(10) Not applicable;
(11) Conformed Copy of Independent Auditors; (12)
(12) Not applicable;
(13) Copy of Initial Capital Understanding; (2)
(14) Not applicable;
(15) (i)Copy of Dealer Agreement; (3)
(ii)Copy of Rule 12b-1 Plan of the Registrant,
through and including Exhibit B; (11)
(iii)Conformed Copy of Exhibit C to the Rule 12b-1
Plan; (12)
(16) Schedule for Computation of Performance Data; (4)
(17) Copy of Financial Data Schedules; + (18) The
Registrant hereby incorporates the conformed copy
of the specimen Multiple Class Plan from Item 24(b)(18)
of the World Investment series, Inc. Registration
Statement on Form N-1A, filed with the Commission on
January 26, 1996. (File Nos. 33-52149 and 811-07141);
(19) Conformed copy of Power of Attorney;(12)
+ All exhibits have been filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 2 on Form N-1A filed December 15, 1986 (File Nos.
33-6901 and 811-4743).
3. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 on Form N-1A filed May 18, 1988 (File Nos. 33-6901 and
811-4743).
4. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed July 19, 1988 (File Nos. 33-6901
and 811-4743).
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed May 29, 1996 (File Nos. 33-6901
and 811-4743).
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed May 30, 1997 (File Nos. 33-6901
and 811-4743).
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of July 7, 1997
Shares of capital stock
($0.001 per Share par value)
Class A Shares 25,067
Class B Shares 36,648
Class C Shares 5,182
Class F Shares 4,928
Item 27. Indemnification: (5.)
Item 28. Business and Other Connections of Investment Adviser:
For a description of the other business of the investment
adviser, see the section entitled "Fund Information - Management
of the Fund" in Part A. The affiliations with the Registrant of
four of the Trustees and one of the Officers of the investment
adviser are included in Part A of this Registration Statement
under "Management of the Fund - Officers and Directors." The
remaining Trustee of the investment adviser, his position with
the investment adviser, and, in parentheses, his principal
occupation is: Mark D. Olson, Partner, Halbrook & Bayard, 107
West Market Street, Georgetown, Delaware 19947.
The remaining Officers of the investment adviser are: William D.
Dawson, III, Henry A. Frantzen, and J. Thomas Madden, Executive
Vice Presidents; Peter R. Anderson, Drew J. Collins, Jonathan C.
Conley, Deborah A. Cunningham, Mark Durbiano, J. Alan Minteer,
Susan Nason, and Mary Jo Ochson, Senior Vice Presidents; J. Scott
Albrecht, Joseph M. Balestrino, Randall S. Bauer, David F.
Belton, Christine A. Bosio, David A. Briggs, Kenneth J. Cody,
Alexandre de Bethmann, Michael P. Donnelly, Michael J. Donnelly,
Linda A. Duessel, Kathleen M. Foody-Malus, Thomas M. Franks,
Edward C. Gonzales, James E. Grefenstette, Susan R. Hill, Stephen
A. Keen, Robert M. Kowit, Jeff A. Kozemchek, Marian R. Marinack,
Sandra L. McInerney, Robert J. Ostrowski, Charles A. Ritter,
Scott B. Schermerhorn, Frank Semack, William F. Stotz, Edward J.
Tiedge, Paige M. Wilhelm, Jolanta M. Wysocka, Vice Presidents;
Thomas R. Donahue, Treasurer, and Stephen A. Keen, Secretary.
The business address of each of the Officers of the investment
adviser is Federated Investors Tower, Pittsburgh, PA 15222-3779.
These individuals are also officers of a majority of the
investment advisers to the Funds listed in Part B of this
Registration Statement.
+ All exhibits have been filed electronically.
5. Response is incorporated by reference to Registrant's Post-effective
Amendment No. 6 on Form N-1A filed July 28, 1989 (File Nos. 33-6901
and 811-4743).
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor for shares of
the Registrant, also acts as principal underwriter for the following
open-end investment companies: 111 Corcoran Funds; Arrow Funds;
Automated Government Money Trust; BayFunds; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated
American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S.
Government Securities, Inc.; Federated GNMA Trust; Federated
Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust;
Federated Master Trust; Federated Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund:
2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; High Yield Cash Trust; Independence One Mutual
Funds; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty U.S.
Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds;
Peachtree Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds; Star
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Biltmore Funds; The Biltmore Municipal Funds; The Monitor Funds; The
Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Tower Mutual Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Vision
Group of Funds, Inc.; Wesmark Funds; and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice
Federated Investors Tower President, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Asst. Secretary, --
Federated Investors Tower Asst. Treasurer, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dale R. Browne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard Suder Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and
Rules 31a-1 through 31a-3 promulgated thereunder are
maintained at one of the following locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Shareholder
Services Company P.O. Box 8600
("Transfer Agent, Dividend Boston, MA 02266-8600
Disbursing Agent and Portfolio
Recordkeeper")
Federated Administrative Federated Investors Tower
Services Pittsburgh, PA 15222-3779
("Administrator")
Federated Advisers Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and Trust P.O. Box 8600
Company Boston, MA 02266-8600
("Custodian")
Item 31. Management Services: Not applicable.
Item 32. Undertakings:
Registrant hereby undertakes to comply with the provisions
of Section 16(c) of the 1940 Act with respect to the removal
of Directors and the calling of special shareholder meetings
by shareholders.
Registrant hereby undertakes to furnish each person to whom
a prospectus is delivered with a copy of the Registrant's
latest annual report to shareholders, upon request and
without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED EQUITY
INCOME FUND, INC., has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 18th day of July, 1997.
FEDERATED EQUITY INCOME FUND, INC.
BY: /s/Matthew S. Hardin
Matthew S. Hardin, Assistant Secretary
Attorney in Fact for John F. Donahue
July 18, 1997
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:
NAME TITLE DATE
By:/s/Matthew S. Hardin
Matthew S. Hardin Attorney In Fact July 18,1997
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Director
(Chief Executive Officer)
Richard B. Fisher* President
J. Christopher Donahue* Executive Vice President and Director
John W. McGonigle* Treasurer, Executive Vice President
and Secretary
(Principal Financial and Accounting
Officer)
Thomas G. Bigley* Director
John T. Conroy, Jr.* Director
William J. Copeland* Director
James E. Dowd* Director
Lawrence D. Ellis, M.D.* Director
Edward L. Flaherty, Jr.* Director
Peter E. Madden* Director
Gregor F. Meyer* Director
John E. Murray, Jr. Director
Wesley W. Posvar* Director
Marjorie P. Smuts* Director
* By Power of Attorney
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Federated Equity Income Fund, Inc.
Class A Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-END> Mar-31-1997
<INVESTMENTS-AT-COST> 950,275,019
<INVESTMENTS-AT-VALUE> 1,031,978,655
<RECEIVABLES> 13,835,221
<ASSETS-OTHER> 10,781
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,045,824,657
<PAYABLE-FOR-SECURITIES> 2,067,233
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,759,224
<TOTAL-LIABILITIES> 5,826,457
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 925,189,537
<SHARES-COMMON-STOCK> 27,656,479
<SHARES-COMMON-PRIOR> 15,450,868
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (819,524)
<ACCUMULATED-NET-GAINS> 33,924,551
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,703,636
<NET-ASSETS> 431,280,796
<DIVIDEND-INCOME> 20,671,620
<INTEREST-INCOME> 4,960,286
<OTHER-INCOME> 0
<EXPENSES-NET> 9,900,846
<NET-INVESTMENT-INCOME> 15,731,060
<REALIZED-GAINS-CURRENT> 50,872,590
<APPREC-INCREASE-CURRENT> 42,343,319
<NET-CHANGE-FROM-OPS> 108,946,969
<EQUALIZATION> 480,911
<DISTRIBUTIONS-OF-INCOME> 8,786,457
<DISTRIBUTIONS-OF-GAINS> 16,098,902
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,344,330
<NUMBER-OF-SHARES-REDEEMED> 5,333,044
<SHARES-REINVESTED> 1,194,325
<NET-CHANGE-IN-ASSETS> 648,843,263
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 16,113,883
<OVERDISTRIB-NII-PRIOR> (212,388)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,100,883
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,036,229
<AVERAGE-NET-ASSETS> 686,448,890
<PER-SHARE-NAV-BEGIN> 14.260
<PER-SHARE-NII> 0.420
<PER-SHARE-GAIN-APPREC> 2.160
<PER-SHARE-DIVIDEND> 0.410
<PER-SHARE-DISTRIBUTIONS> 0.840
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.590
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> Federated Equity Income Fund, Inc.
Class B Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-END> Mar-31-1997
<INVESTMENTS-AT-COST> 950,275,019
<INVESTMENTS-AT-VALUE> 1,031,978,655
<RECEIVABLES> 13,835,221
<ASSETS-OTHER> 10,781
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,045,824,657
<PAYABLE-FOR-SECURITIES> 2,067,233
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,759,224
<TOTAL-LIABILITIES> 5,826,457
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 925,189,537
<SHARES-COMMON-STOCK> 26,847,803
<SHARES-COMMON-PRIOR> 4,981,062
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (819,524)
<ACCUMULATED-NET-GAINS> 33,924,551
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,703,636
<NET-ASSETS> 418,675,410
<DIVIDEND-INCOME> 20,671,620
<INTEREST-INCOME> 4,960,286
<OTHER-INCOME> 0
<EXPENSES-NET> 9,900,846
<NET-INVESTMENT-INCOME> 15,731,060
<REALIZED-GAINS-CURRENT> 50,872,590
<APPREC-INCREASE-CURRENT> 42,343,319
<NET-CHANGE-FROM-OPS> 108,946,969
<EQUALIZATION> 480,911
<DISTRIBUTIONS-OF-INCOME> 4,349,221
<DISTRIBUTIONS-OF-GAINS> 9,615,580
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,544,007
<NUMBER-OF-SHARES-REDEEMED> 1,529,865
<SHARES-REINVESTED> 852,599
<NET-CHANGE-IN-ASSETS> 648,843,263
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 16,113,883
<OVERDISTRIB-NII-PRIOR> (212,388)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,100,883
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,036,229
<AVERAGE-NET-ASSETS> 686,448,890
<PER-SHARE-NAV-BEGIN> 14.260
<PER-SHARE-NII> 0.340
<PER-SHARE-GAIN-APPREC> 2.130
<PER-SHARE-DIVIDEND> 0.300
<PER-SHARE-DISTRIBUTIONS> 0.840
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.590
<EXPENSE-RATIO> 1.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> Federated Equity Income Fund, Inc.
Class C Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-END> Mar-31-1997
<INVESTMENTS-AT-COST> 950,275,019
<INVESTMENTS-AT-VALUE> 1,031,978,655
<RECEIVABLES> 13,835,221
<ASSETS-OTHER> 10,781
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,045,824,657
<PAYABLE-FOR-SECURITIES> 2,067,233
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,759,224
<TOTAL-LIABILITIES> 5,826,457
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 925,189,537
<SHARES-COMMON-STOCK> 6,514,433
<SHARES-COMMON-PRIOR> 3,378,290
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (819,524)
<ACCUMULATED-NET-GAINS> 33,924,551
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,703,636
<NET-ASSETS> 101,587,640
<DIVIDEND-INCOME> 20,671,620
<INTEREST-INCOME> 4,960,286
<OTHER-INCOME> 0
<EXPENSES-NET> 9,900,846
<NET-INVESTMENT-INCOME> 15,731,060
<REALIZED-GAINS-CURRENT> 50,872,590
<APPREC-INCREASE-CURRENT> 42,343,319
<NET-CHANGE-FROM-OPS> 108,946,969
<EQUALIZATION> 480,911
<DISTRIBUTIONS-OF-INCOME> 1,455,111
<DISTRIBUTIONS-OF-GAINS> 3,712,059
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,514,431
<NUMBER-OF-SHARES-REDEEMED> 687,088
<SHARES-REINVESTED> 308,800
<NET-CHANGE-IN-ASSETS> 648,843,263
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 16,113,883
<OVERDISTRIB-NII-PRIOR> (212,388)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,100,883
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,036,229
<AVERAGE-NET-ASSETS> 686,448,890
<PER-SHARE-NAV-BEGIN> 14.260
<PER-SHARE-NII> 0.300
<PER-SHARE-GAIN-APPREC> 2.160
<PER-SHARE-DIVIDEND> 0.290
<PER-SHARE-DISTRIBUTIONS> 0.840
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.590
<EXPENSE-RATIO> 1.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> Federated Equity Income Fund, Inc.
Class F Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-END> Mar-31-1997
<INVESTMENTS-AT-COST> 950,275,019
<INVESTMENTS-AT-VALUE> 1,031,978,655
<RECEIVABLES> 13,835,221
<ASSETS-OTHER> 10,781
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,045,824,657
<PAYABLE-FOR-SECURITIES> 2,067,233
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,759,224
<TOTAL-LIABILITIES> 5,826,457
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 925,189,537
<SHARES-COMMON-STOCK> 5,672,243
<SHARES-COMMON-PRIOR> 3,626,979
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (819,524)
<ACCUMULATED-NET-GAINS> 33,924,551
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,703,636
<NET-ASSETS> 88,454,354
<DIVIDEND-INCOME> 20,671,620
<INTEREST-INCOME> 4,960,286
<OTHER-INCOME> 0
<EXPENSES-NET> 9,900,846
<NET-INVESTMENT-INCOME> 15,731,060
<REALIZED-GAINS-CURRENT> 50,872,590
<APPREC-INCREASE-CURRENT> 42,343,319
<NET-CHANGE-FROM-OPS> 108,946,969
<EQUALIZATION> 480,911
<DISTRIBUTIONS-OF-INCOME> 1,747,407
<DISTRIBUTIONS-OF-GAINS> 3,635,381
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,247,501
<NUMBER-OF-SHARES-REDEEMED> 523,006
<SHARES-REINVESTED> 320,769
<NET-CHANGE-IN-ASSETS> 648,843,263
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 16,113,883
<OVERDISTRIB-NII-PRIOR> (212,388)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,100,883
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,036,229
<AVERAGE-NET-ASSETS> 686,448,890
<PER-SHARE-NAV-BEGIN> 14.260
<PER-SHARE-NII> 0.380
<PER-SHARE-GAIN-APPREC> 2.160
<PER-SHARE-DIVIDEND> 0.370
<PER-SHARE-DISTRIBUTIONS> 0.840
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.590
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
