[Graphic]
Federated Equity Income Fund, Inc.
11TH SEMI-ANNUAL REPORT
SEPTEMBER 30, 1997
ESTABLISHED 1986
President's Message
[Graphic]
Dear Fellow Shareholder:
Federated Equity Income Fund, Inc. was established in 1986, and I am pleased
to present its 11th semi-annual report.
This report covers the first half of the fund's fiscal year, the six-month
reporting period from April 1, 1997, to September 30, 1997. It begins with an
investment discussion by portfolio manager Linda Duessel, Vice President,
Federated Advisers, followed by graphs showing the fund's long-term investment
performance, a list of the fund's 37 high dividend-paying common stocks, 19
convertible preferred stocks, and 14 convertible bond holdings, and the
financial statements.
The fund's diversified holdings in stocks and bonds responded well due to an
extremely strong stock market environment during the six-month reporting period.
The fund's six-month total return performance of more than 21% for each share
class reflects income dividends, realized gain, and capital appreciation. For
the six-month reporting period, the performance of the fund's share classes is
listed below.*
TOTAL CAPITAL NET ASSET
RETURN INCOME GAINS VALUE INCREASE
Class A Shares 22.39% $0.20 $0.46 $15.59 to $18.39 = 18%
Class B Shares 22.00% $0.13 $0.46 $15.59 to $18.40 = 18%
Class C Shares 21.93% $0.13 $0.46 $15.59 to $18.39 = 18%
Class F Shares 22.24% $0.18 $0.46 $15.59 to $18.39 = 18%
During the six-month reporting period, fund assets increased more than 60%--from
$1 billion on April 1, 1997, to more than $1.6 billion on September 30, 1997.
This continued robust growth reflects the increase in share value as well as the
confidence of present and new shareholders who purchased shares of this
attractive equity income fund.
On September 30, 1997, the fund held 70 stocks and convertible securities across
12 major industry sectors. Holdings include such well-known names as Avon
Products, Bristol-Myers Squibb, DuPont, Ford Motor, General Electric, General
Mills, H.J. Heinz, Mattel, and J.C. Penney.
* Performance quoted is based on net asset value and reflects past performance.
Performance is not indicative of future results. Investment return and principal
value will fluctuate, so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Total returns for the period (based on
offering price) for Class A, B, C, and F Shares were 15.64%, 16.30%, 20.87%, and
19.94%, respectively.
We trust you were pleased with the continued positive performance of your equity
income investment. Remember, reinvesting your Federated Equity Income Fund, Inc.
earnings is a convenient way to build the value of your account--and see the
number of shares increase each month. Reinvesting brings into play the benefit
of monthly compounding of shares.
Very sincerely yours,
[Graphic]
Richard B. Fisher
President
November 15, 1997
Investment Review
[Graphic]
Linda Duessel
Vice President
Federated Advisers
[Graphic]
WHAT ARE YOUR COMMENTS ON THE SEEMINGLY IDEAL ECONOMIC ENVIRONMENT FOR
EQUITIES AND THE MARKET'S CONTINUED STRENGTH DURING THE FIRST SIX MONTHS OF
THE FUND'S FISCAL YEAR?
The continued advance of the stock market is highly unusual. Historically, the
market has had a tough time after experiencing two back-to-back years of +20%
total returns like 1995 and 1996. Sentiment is described in terms such as "it
doesn't get any better than this," and that we are experiencing a "perfect
environment for equities." The environment is one of moderate Gross Domestic
Product growth, subdued inflation, rising profits and unprecedented cash
flows--and that says it all!
Federal Reserve Board Chairman Alan Greenspan recently described the strong
economy coupled with low inflation as "virtually unbelievable." Truly, the
statistics are impressive. The unemployment rate is the lowest in 24 years. And
yet, the Consumer Price Index core inflation rate is the lowest since the 1960s
and appears to be headed lower. Companies are unable to raise prices, and yet
Standard & Poor's 500 Index* ("S&P 500") earnings have been growing at a
double-digit pace for more than five years. This is because productivity
increases have resulted in high profit margins despite weak pricing, and
individuals and institutions are buying equities.
The S&P 500 finished an extremely strong second calendar quarter with a 17.46%
total return in its best advance since the second quarter of 1987.* The fund's
Class A Shares had a strong showing as well, up 15.37% (based on net asset
value) for the quarter, well ahead of the 12.85% return of the average equity
income fund.**
* The S&P 500 is an unmanaged index of common stocks in industry,
transportation, and financial and public utility companies. Investments
cannot be made in an index.
** The fund's total return for the second quarter (three-month period ended
6/30/97) for Class A Shares based on offering price was 9.01%. Total returns for
other share classes based on net asset value and offering price, respectively,
were: Class B Shares, 15.16% and 9.47%; Class C Shares, 15.16% and 14.10%; and
Class F Shares, 15.30% and 13.09%.
The average equity income fund is measured by the Lipper Equity Income Funds
Average which represents the average of the total returns reported by all of the
mutual funds designated by Lipper Analytical Services, Inc. as falling into the
equity income funds category. These figures do not reflect sales charges.
The third calendar quarter was another strong one for the equity markets.
Leadership changed dramatically as small and middle capitalization stocks
outperformed large capitalization stocks considerably. For the third quarter,
the 7.49% return of the S&P 500 was dwarfed by the huge returns posted by the
Standard & Poor's 400 Midcap Index ("S&P 400") and the Russell 2000 Small Stock
Index ("Russell 2000") of 16.04% and 14.49%, respectively.*** The fund's
performance was held back in the third quarter by its defensive posture, as well
as its exposure to large capitalization stocks, which took a back seat in
performance to the market's smaller stocks.
This investment style rotation/catch-up comes after a nearly four-year period in
which large company stocks were dominant. Part of the reason for this change was
the currency debacle in Southeast Asia, which negatively affected the many large
U.S. based firms with significant foreign sales. Additionally, many smaller U.S.
firms have seen improvements in their earnings growth rates, reaching the
double-digit growth rates enjoyed by large companies.
[Graphic]
HOW DID FEDERATED EQUITY INCOME FUND, INC. PERFORM FOR ITS SHAREHOLDERS IN
THIS ENVIRONMENT?
For the six-month reporting period ended on September 30, 1997, the fund's Class
A, B, C, and F Shares produced competitive total returns of 22.39%, 22.00%,
21.93%, and 22.24%, respectively, based on net asset value. By comparison, the
S&P 500 total return was 26.24% and the average equity income fund return, as
tracked by Lipper, was 22.46%.
*** The S&P 400 is an unmanaged capitalization weighted index of common stocks
representing all major industries in the mid-range of the U.S. stock market. The
Russell 2000 is an unmanaged capitalization weighted index consisting of 2,000
small capitalization common stocks. Actual investments may not be made in an
index.
[Graphic]
WHAT ARE YOUR STRATEGIES FOR SUCH A HIGHLY VALUED MARKET?
We believe that the market is "walking a tightrope" in which the perfect
environment for equity investing is already reflected in the prices of stocks.
Although the market is ignoring dividend yields, we believe dividends are a key
component of total return for stocks, and that dividends provide a measure of
support when the market corrects. We plan to maintain our defensive positioning
of the fund, including the use of relatively high dividend-yielding common
stocks and convertible securities along with a sector-neutral approach.
We don't market time, we don't create a cash position, and we don't overweight
market sectors. We just do our homework in stock selections.
[Graphic]
WHAT WERE YOU BUYING AND SELLING DURING THE PERIOD?
In the Basic Industry sector, we eliminated our position in Consolidated Papers,
Inc., owing to concerns about pricing and capacity additions in the industry. We
replaced it with IMPERIAL CHEMICAL INDUSTRIES PLC, a large United Kingdom
commodity chemical company whose recent purchase of Unilever's specialty
chemical division should provide a boost to the company's earnings and increase
its overall value.
In the Services sector, we sold the SFX Broadcasting convertible preferred for
the common stock of H & R BLOCK, INC., whose stock appears undervalued based on
its strong tax business and 80% ownership of Compuserve Corp. We sold Ikon
Office Solutions convertible preferred as the company is having some
difficulties in assimilating acquisitions that will slow its earnings growth
rate. We purchased convertible bonds of INTERPUBLIC GROUP, the third largest
advertising company in the world.
In the Health Care sector, we sold Glaxo Wellcome ADRs after a very strong
performance. In purchasing MEDPARTNERS, INC. convertible preferreds, we reduced
our emphasis on pharmaceutical stocks and invested in the nation's largest
physician practice management company.
In the Energy Minerals sector, we sold the Tosco convertible preferreds, which
were very successful investments, to purchase UNOCAL convertible preferreds. We
believe that Unocal is quite undervalued, while Tosco is fully priced.
In the Retail Trade sector, we eliminated our Saks convertible bonds due to
earnings concerns and replaced them with convertible bonds of COSTCO COMPANIES,
the leading membership warehouse club operator, which is currently experiencing
15% earnings growth rates.
In the Technology sector, we sold the extremely defensive Microsoft convertible
preferred, which was a very successful investment. We purchased convertible
bonds of QUANTUM CORP., a leader in the high-growth disk drive business.
[Graphic]
WHAT WERE THE FUND'S TOP 10 HOLDINGS AS OF SEPTEMBER 30, 1997, AND WHAT WERE
YOUR INDUSTRY WEIGHTINGS?
The top holdings and sector weightings were as follows:
TOP HOLDINGS PERCENTAGE
NAME OF NET ASSETS
International Business Machines Corp. 2.58%
Mellon Bank Corp. 2.57
First Union Corp. 2.49
General Mills, Inc. 2.48
Dresser Industries, Inc. 2.35
Tenet Healthcare Corp. 6% Convertible 2.28
Avnet, Inc. 2.20
Heinz (H.J.) Co. 2.19
Solectron Corp. 6% Convertible 2.10
Conseco, Inc. Convertible Preferred 2.06
Total Percent of Net Assets 23.30%
SECTOR WEIGHTINGS
PERCENTAGE S&P 500
SECTOR OF NET ASSETS WEIGHTING
Finance 15.85% 15.94%
Technology 15.59 16.11
Consumer Non-Durables 11.00 11.04
Health Care 10.91 10.82
Energy Minerals 9.13 9.03
Utilities 8.30 9.03
Producer Manufacturing 7.64 7.72
Basic Industry 5.30 5.66
Services 5.00 4.62
Retail Trade 4.46 4.67
Consumer Durables 3.23 3.36
Transportation 1.28 1.34
Miscellaneous/Cash 2.31 0.66
[Graphic]
AS WE APPROACH THE END OF 1997, WHAT IS YOUR PERSPECTIVE ON THIS BULL MARKET?
Against the economic backdrop, the S&P 500 appears overvalued by many measures,
including a high price/earnings ratio and historically low dividend yield. This
lofty valuation leaves no room for disappointment in interest rates, inflation,
or earnings growth, and therefore, appears highly vulnerable to disappointments.
Still, we're mindful of the notion that the most common failing of stock market
forecasters is not in not knowing, but in not knowing that they don't know.
Therefore, we will continue to avoid the temptation to time the market's peak by
remaining fully invested. Further, we will maintain our strategy of
sector-neutral portfolio weightings. We will take profits from time to time when
stocks appear very extended and when a superior replacement can be found.
Finally, as we discussed, we plan to continue to own convertible bonds and
preferred stocks, as well as higher dividend-yielding stocks. In our disciplined
investment philosophy, our strategy has worked for fund shareholders for over 10
years.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN FEDERATED EQUITY INCOME FUND,
INC.
INITIAL INVESTMENT:
IF YOU HAD MADE AN INITIAL INVESTMENT OF $11,000 IN THE CLASS A SHARES OF
FEDERATED EQUITY INCOME FUND, INC. ON 12/30/86, REINVESTED DIVIDENDS AND CAPITAL
GAINS, AND DIDN'T REDEEM ANY SHARES, YOUR ACCOUNT WOULD BE WORTH $45,477 ON
9/30/97. YOU WOULD HAVE EARNED A 14.03%* AVERAGE ANNUAL TOTAL RETURN FOR THE
TEN-YEAR INVESTMENT LIFE SPAN.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 9/30/97, the Class A Shares' average annual one-year, five-year, and
ten-year total returns were 27.39%, 18.26%, and 14.03%, respectively. Class B
Shares' average annual one-year and since inception (9/28/94) total returns were
28.04% and 23.85%, respectively. Class C Shares' average annual one-year and
since inception (5/4/93) total returns were 32.67% and 18.50%, respectively.
Class F Shares' average annual one-year and since inception (11/13/93) total
returns were 31.99% and 18.18%, respectively.**
Graphic presentation "A1" omitted. See appendix.
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 5.50% sales
charge applicable to an initial investment in Class A Shares.
Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so an investor's shares,
when redeemed, may be worth more or less than their original cost.
** The total return stated takes into account the 5.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge for Class B Shares, the 1%
contingent deferred sales charge for Class C Shares, and the 1% sales charge and
1% contingent deferred sales charge for Class F Shares.
FEDERATED EQUITY INCOME FUND, INC.
ONE STEP AT A TIME:
$1,000 INVESTED EACH YEAR FOR TEN YEARS (REINVESTING ALL DIVIDENDS AND
CAPITAL GAINS) GREW TO $29,637.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of Federated
Equity Income Fund, Inc. on 12/30/86, reinvested your dividends and capital
gains, and didn't redeem any shares, you would have invested only $11,000, but
your account would have reached a total value of $29,637* by 9/30/97. You would
have earned an average annual total return of 16.48%.
A practical investment plan helps you pursue growth and income through common
stocks and convertible securities. Through systematic investing, you buy shares
on a regular basis and reinvest all earnings. This investment plan works for you
even if you invest only $1,000 annually. You can take it one step at a time. Put
time, money, and compounding to work.
Graphic presentation "A2" omitted. See appendix.
* This chart assumes that the subsequent annual investments are made on the last
day of each anniversary month. No method of investing can guarantee a profit or
protect against loss in down markets. However, by investing regularly over time
and buying shares at various prices, investors can purchase more shares at lower
prices. All accumulated shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing price
levels, the investor should consider whether or not to continue purchases
through periods of low price levels.
FEDERATED EQUITY INCOME FUND, INC.
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR GROWTH
Eliot and Helen Barnes are a fictitious couple who share with many other
investors the goal of growth from good dividend-paying stocks.
Eliot is an engineer working for a major corporation. Helen teaches school. On
December 30, 1986, the Barnes invested $15,000 from maturing certificates of
deposit* in the Class A Shares of Federated Equity Income Fund, Inc.
As this chart shows, over 10 years, their original investment in the Class A
Shares has grown to $65,624. This represents a 14.71% average annual total
return,** minus any applicable sales charge and/or contingent deferred sales
charge. For the Barnes, that meant good performance from dividend-paying stocks
in 12 industry sectors that helped their money grow.
Graphic presentation "A3" omitted. See appendix.
* CDs, unlike mutual funds, are FDIC insured and offer fixed rates of return.
** This hypothetical scenario is provided for illustrative purposes only and
does not represent the result obtained by any particular shareholder. Past
performance does not guarantee future results.
FEDERATED EQUITY INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--57.1%
BASIC INDUSTRY--4.5%
739,400 Allegheny Teledyne, Inc. $ 21,165,325
282,600 Du Pont (E.I.) de Nemours & Co. 17,397,562
272,800 Eastman Chemical Co. 16,913,600
268,100 Imperial Chemical Industries, PLC, ADR 17,728,112
Total 73,204,599
CONSUMER DURABLES--1.2%
435,000 Ford Motor Co. 19,683,750
CONSUMER NON-DURABLES--9.2%
456,100 Avon Products, Inc. 28,278,200
585,400 General Mills, Inc. 40,356,012
518,000 Guinness PLC, ADR 24,454,780
769,800 Heinz (H.J.) Co. 35,555,137
488,800 Philip Morris Cos., Inc. 20,315,750
Total 148,959,879
ENERGY MINERALS--5.6%
452,400 Exxon Corp. 28,981,875
429,800 Mobil Corp. 31,805,200
830,700 YPF Sociedad Anonima, ADR 30,632,063
Total 91,419,138
FINANCE--6.4%
99,000 Barnett Banks, Inc. 7,004,250
808,000 First Union Corp. 40,450,500
762,300 Mellon Bank Corp. 41,735,925
241,500 NationsBank Corp. 14,942,813
Total 104,133,488
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
HEALTH CARE--5.2%
391,900 American Home Products Corp. $ 28,608,700
350,700 Bristol-Myers Squibb Co. 29,020,425
269,800 Merck & Co., Inc. 26,963,138
Total 84,592,263
PRODUCER MANUFACTURING--5.8%
889,400 Dresser Industries, Inc. 38,244,200
360,000 General Electric Co. 24,502,500
494,500 Textron, Inc. 32,142,500
Total 94,889,200
RETAIL TRADE--1.8%
506,500 Penney (J.C.) Co., Inc. 29,503,625
SERVICES--1.9%
194 (a)Advanstar Corp., Warrants 0
547,300 Block (H&R), Inc. 21,139,462
265,800 Browning-Ferris Industries, Inc. 10,117,012
Total 31,256,474
TECHNOLOGY--8.0%
562,200 Avnet, Inc. 35,734,837
301,000 General Dynamics Corp. 26,224,625
395,400 International Business Machines Corp. 41,887,688
246,500 Lockheed Martin Corp. 26,283,063
Total 130,130,213
TRANSPORTATION--1.3%
331,000 Union Pacific Corp. 20,728,875
UTILITIES--6.2%
391,023 Duke Power Co. 19,331,200
616,512 Enron Corp. 23,735,731
299,773 SBC Communications, Inc. 18,398,568
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
UTILITIES--CONTINUED
439,300 Sprint Corp. $ 21,965,000
354,000 Williams Cos., Inc. (The) 16,571,625
Total 100,002,124
TOTAL COMMON STOCKS (IDENTIFIED COST $712,952,226) 928,503,628
CONVERTIBLE PREFERRED STOCKS--22.7%
BASIC INDUSTRY--0.8%
335,000 Merrill Lynch & Co., Inc., STRYPES, Series IML, 6.25% 12,939,375
CONSUMER DURABLES--1.0%
1,118,100 Mattel, Inc., Conv. Pfd., Series C, $.41 15,373,875
CONSUMER NON-DURABLES--1.8%
442,200 Ralston Purina Co., SAILS, $1.08 29,793,225
ENERGY MINERALS--1.2%
321,900 Unocal Corp., Cumulative Conv. Pfd., $3.13 19,845,135
FINANCE--9.5%
195,300 Conseco, Inc., Cumulative Conv. Pfd., Series E, $4.27 33,396,300
320,000 Frontier Insurance Group, Inc., Conv. Pfd., $3.13 27,638,400
169,500 Jefferson-Pilot Corp., Conv. Pfd., $5.26 18,645,000
280,000 Merrill Lynch & Co., Inc., STRYPES, Series MGIC, $3.12 27,020,000
553,100 National Australia Bank, Ltd., Melbourne, Exchangeable Capital
Unit, $1.97 16,247,313
267,700 SunAmerica, Inc., PERCS, 8.50% 12,280,738
147,500 SunAmerica, Inc., PERCS, Series E, $3.10 18,142,500
Total 153,370,251
HEALTH CARE--2.4%
210,000 Aetna, Inc., Conv. Pfd., $4.76 16,340,625
1,092,900 MedPartners, Inc., Conv. Pfd., $1.44 23,429,044
Total 39,769,669
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS--CONTINUED
PRODUCER MANUFACTURING--1.8%
183,200 Case Corp., Cumulative Conv. Pfd., Series A, $4.50 $ 29,206,110
SERVICES--2.1%
199,600 Browning-Ferris Industries, Inc., ACES, $2.58 7,035,900
1,208,800 Hollinger International Publishing, Inc., Conv. Pfd., $.95 14,883,350
230,500 Wendy's International, Inc., Cumulative Conv. Pfd., Series A, $2.50 12,014,813
Total 33,934,063
UTILITIES--2.1%
572,300 (b)CalEnergy Co., Inc., Conv. Pfd., $3.25 27,917,366
62,000 Williams Cos., Inc. (The), Conv. Pfd., $3.50 6,880,698
Total 34,798,064
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $309,689,594)
369,029,767
CONVERTIBLE CORPORATE BONDS--17.8%
CONSUMER DURABLES--1.1%
$13,200,000 Magna International, Inc., Conv. Bond, 5.00%, 10/15/2002 17,473,500
ENERGY MINERALS--2.3%
30,900,000 Diamond Offshore Drilling, Inc., Conv. Bond, 3.125%, 9/15/2007 32,197,182
3,330,000 Diamond Offshore Drilling, Inc., Conv. Bond, 3.75%, 2/15/2007 4,883,245
Total 37,080,427
HEALTH CARE--3.2%
14,800,000 Dura Pharmaceuticals, Inc., Conv. Bond, 3.50%, 7/15/2002 15,871,372
30,530,000 Tenet Healthcare Corp., Conv. Bond, 6.00%, 12/1/2005 37,036,859
Total 52,908,231
RETAIL TRADE--2.6%
30,700,000 (b)Costco Cos., Inc., Conv. Bond, 0.00%, 8/19/2017 16,607,779
19,350,000 Federated Department Stores, Inc., Conv. Bond, 5.00%, 10/1/2003 26,359,150
Total 42,966,929
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CONVERTIBLE CORPORATE BONDS--CONTINUED
SERVICES--1.0%
$19,500,000 (b)Interpublic Group Cos., Inc., Conv. Sub. Deb., 1.80%, 9/16/2004 $ 16,050,840
TECHNOLOGY--7.6%
4,650,000 EMC Corp. Mass, Conv. Bond, 3.25%, 3/15/2002 6,637,596
14,250,000 (b)EMC Corp. Mass, Sub. Note, 3.25%, 3/15/2002 20,341,020
7,300,000 (b)Quantum Corp., Conv. Bond, 5.00%, 3/1/2003 25,134,119
7,000,000 (b)Quantum Corp., Conv. Bond, 7.00%, 8/1/2004 7,889,910
23,425,000 (b)Solectron Corp., Conv. Bond, 6.00%, 3/1/2006 34,066,743
25,050,000 (b)Xilinx, Inc., Conv. Sub. Note, 5.25%, 11/1/2002 29,165,715
Total 123,235,103
TOTAL CONVERTIBLE CORPORATE BONDS (IDENTIFIED COST $256,432,663) 289,715,030
(C)REPURCHASE AGREEMENT--1.5%
24,305,000 BT Securities Corp., 6.07%, dated 9/30/1997, due 10/1/1997
(AT AMORTIZED COST) 24,305,000
TOTAL INVESTMENTS (IDENTIFIED COST $1,303,379,483)(D) $ 1,611,553,425
</TABLE>
(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities amounted
to $177,173,492 which represents 10.9% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $1,303,379,483.
The net unrealized appreciation of investments on a federal tax basis amounts to
$308,173,942 which is comprised of $312,792,823 appreciation and $4,618,881
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($1,624,902,118) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ACES --Adjustable Convertible Extendable Securities ADR --American Depository
Receipt PERCS --Preferred Equity Redemption Cumulative Stock PLC --Public
Limited Company SAILS --Stock Appreciation Income Linked Security STRYPES
- --Structured Yield Product Exchangeable for Stock
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 1,611,553,425
$1,303,379,483)
Cash 116,132
Income receivable 4,165,260
Receivable for investments sold 22,967,815
Receivable for shares sold 7,591,753
Total assets 1,646,394,385
LIABILITIES:
Payable for investments purchased $ 19,497,392
Payable for shares redeemed 878,126
Income and capital gain distribution payable 457,532
Payable for taxes withheld 33,378
Accrued expenses 625,839
Total liabilities 21,492,267
NET ASSETS for 88,351,696 shares outstanding $ 1,624,902,118
NET ASSETS CONSIST OF:
Paid in capital $ 1,302,901,074
Net unrealized appreciation of investments 308,173,942
Accumulated net realized gain on investments 14,549,108
Distributions in excess of net investment income (722,006)
Total Net Assets $ 1,624,902,118
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($645,092,652 / 35,084,816 shares $18.39
outstanding)
Offering Price Per Share (100/94.50 of $18.39)* $19.46
Redemption Proceeds Per Share $18.39
CLASS B SHARES:
Net Asset Value Per Share ($728,905,943 / 39,620,705 shares $18.40
outstanding)
Offering Price Per Share $18.40
Redemption Proceeds Per Share (94.50/100 of $18.40)* $17.39
CLASS C SHARES:
Net Asset Value Per Share ($137,700,472 / 7,489,167 shares $18.39
outstanding)
Offering Price Per Share $18.39
Redemption Proceeds Per Share (99.00/100 of $18.39)* $18.21
CLASS F SHARES:
Net Asset Value Per Share ($113,203,051 / 6,157,008 shares $18.39
outstanding)
Offering Price Per Share (100/99.00 of $18.39)* $18.58
Redemption Proceeds Per Share (99.00/100 of $18.39)* $18.21
</TABLE>
* See "Investing in the Fund" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 17,415,274
Interest 4,798,089
Total income 22,213,363
EXPENSES:
Investment advisory fee $ 4,049,247
Administrative personnel and services fee 509,530
Custodian fees 35,343
Transfer and dividend disbursing agent fees and expenses 575,048
Directors'/Trustees' fees 9,962
Auditing fees 8,612
Legal fees 2,322
Portfolio accounting fees 82,474
Distribution services fee--Class B Shares 2,159,686
Distribution services fee--Class C Shares 453,782
Distribution services fee--Class F Shares 128,321
Shareholder services fee--Class A Shares 687,637
Shareholder services fee--Class B Shares 719,895
Shareholder services fee--Class C Shares 151,260
Shareholder services fee--Class F Shares 128,321
Share registration costs 122,666
Printing and postage 54,749
Insurance premiums 4,643
Taxes 24,864
Miscellaneous 2,322
Total expenses 9,910,684
Net investment income 12,302,679
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 14,916,777
Net change in unrealized appreciation of investments 226,470,306
Net realized and unrealized gain on investments 241,387,083
Change in net assets resulting from operations $ 253,689,762
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
SEPTEMBER 30, MARCH 31,
1997 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 12,302,679 $ 15,731,060
Net realized gain (loss) on investments ($14,916,777 and $51,113,225,
net gains, respectively, as computed for federal tax purposes) 14,916,777 50,872,590
Net change in unrealized appreciation 226,470,306 42,343,319
Change in net assets resulting from operations 253,689,762 108,946,969
NET EQUALIZATION CREDITS-- 31,796 480,911
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (6,261,233) (8,786,457)
Class B Shares (4,028,105) (4,349,221)
Class C Shares (910,664) (1,455,111)
Class F Shares (1,036,955) (1,747,407)
Distributions from net realized gains
Class A Shares (14,108,266) (16,098,902)
Class B Shares (14,502,703) (9,615,580)
Class C Shares (3,047,014) (3,712,059)
Class F Shares (2,634,237) (3,635,381)
Change in net assets resulting from distributions to shareholders (46,529,177) (49,400,118)
SHARE TRANSACTIONS (EXCLUSIVE OF AMOUNTS ALLOCATED TO NET
INVESTMENT INCOME)--
Proceeds from sale of shares 456,751,903 671,827,000
Net asset value of shares issued to shareholders in
payment of distributions declared 38,822,449 39,864,665
Cost of shares redeemed (117,862,815) (122,876,164)
Change in net assets resulting from share transactions 377,711,537 588,815,501
Change in net assets 584,903,918 648,843,263
NET ASSETS:
Beginning of period 1,039,998,200 391,154,937
End of period $1,624,902,118 $ 1,039,998,200
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
SEPTEMBER 30, YEAR ENDED MARCH 31,
1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.59 $14.26 $11.50 $11.06 $10.91 $ 9.67
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.20 0.42 0.46 0.49 0.43 0.55
Net realized and unrealized gain (loss)
on investments 3.26 2.16 2.96 0.40 0.15 1.22
Total from investment operations 3.46 2.58 3.42 0.89 0.58 1.77
LESS DISTRIBUTIONS
Distributions from net investment income (0.20) (0.41) (0.41) (0.45) (0.43) (0.53)
Distributions from net realized gain on
investments (0.46) (0.84) (0.25) -- -- --
Total distributions (0.66) (1.25) (0.66) (0.45) (0.43) (0.53)
NET ASSET VALUE, END OF PERIOD $18.39 $15.59 $14.26 $11.50 $10.06 $10.91
TOTAL RETURN(A) 22.39% 18.82% 30.37% 8.31% 5.29% 18.98%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.06%* 1.08% 1.03% 1.00% 1.00% 0.99%
Net investment income 2.23%* 2.68% 3.19% 4.01% 3.82% 5.45%
Expense waiver/reimbursement(b) -- 0.04% 0.20% 0.36% 0.89% 1.60%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $645,093 $431,281 $220,268 $108,683 $84,665 $30,616
Average commission rate paid(c) $0.0385 $0.0530 -- -- -- --
Portfolio turnover 26% 75% 96% 91% 43% 79%
</TABLE>
* Computed on an annualized basis.
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1, 1995.
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
SEPTEMBER 30, MARCH 31,
1997 1997 1996 1995(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.59 $14.26 $11.50 $11.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.14 0.34 0.32(d) 0.19
Net realized and unrealized gain (loss)
on investments 3.26 2.13 3.01 0.26
Total from investment operations 3.40 2.47 3.33 0.45
LESS DISTRIBUTIONS
Distributions from net investment income (0.13) (0.30) (0.32) (0.19)
Distributions from net realized gain
on investments (0.46) (0.84) (0.25) --
Total distributions (0.59) (1.14) (0.57) (0.19)
NET ASSET VALUE, END OF PERIOD $18.40 $15.59 $14.26 $11.50
TOTAL RETURN(B) 22.00% 17.92% 29.40% 4.14%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.81%* 1.87% 1.83% 1.80%*
Net investment income 1.48%* 1.85% 2.31% 3.42%*
Expense waiver/reimbursement(c) -- -- 0.16% 0.47%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $728,906 $418,675 $71,019 $6,072
Average commission rate paid(e) $0.0385 $0.0530 -- --
Portfolio turnover 26% 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.
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
SEPTEMBER 30, YEAR ENDED MARCH 31,
1997 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.59 $14.26 $11.50 $11.06 $10.76
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.13 0.30 0.32 0.37 0.34
Net realized and unrealized gain (loss)
on investments 3.26 2.16 3.00 0.44 0.28
Total from investment operations 3.39 2.46 3.32 0.81 0.62
LESS DISTRIBUTIONS
Distributions from net investment income (0.13) (0.29) (0.31) (0.37) (0.32)
Distributions from net realized gain on
investments (0.46) (0.84) (0.25) -- --
Total distributions (0.59) (1.13) (0.56) (0.37) (0.32)
NET ASSET VALUE, END OF PERIOD $18.39 $15.59 $14.26 $11.50 $11.06
TOTAL RETURN(B) 21.93% 17.90% 29.39% 7.52% 5.66%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.81%* 1.87% 1.80% 1.76% 1.79%*
Net investment income 1.49%* 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) $137,700 $101,588 $48,161 $30,189 $24,632
Average commission rate paid(d) $0.0385 $0.0530 -- -- --
Portfolio turnover 26% 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.
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS F SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
SEPTEMBER 30, YEAR ENDED MARCH 31,
1997 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.59 $14.26 $11.51 $11.06 $11.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.18 0.38 0.39 0.42 0.17
Net realized and unrealized gain (loss)
on investments 3.26 2.16 2.99 0.46 (0.68)
Total from investment operations 3.44 2.54 3.38 0.88 (0.51)
LESS DISTRIBUTIONS
Distributions from net investment income (0.18) (0.37) (0.38) (0.43) (0.17)
Distributions from net realized gain
on investments (0.46) (0.84) (0.25) -- --
Total distributions (0.64) (1.21) (0.63) (0.43) (0.17)
NET ASSET VALUE, END OF PERIOD $18.39 $15.59 $14.26 $11.51 $11.06
TOTAL RETURN(B) 22.24% 18.50% 30.06% 8.05% (4.43%)
RATIOS TO AVERAGE NET ASSETS
Expenses 1.31%* 1.36% 1.30% 1.24% 1.29%*
Net investment income 1.99%* 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) $113,203 $88,454 $51,707 $34,886 $21,010
Average commission rate paid(d) $0.0385 $0.0530 -- -- --
Portfolio turnover 26% 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.
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
1. ORGANIZATION
Federated Equity Income Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund offers four classes of shares:
Class A Shares, Class B Shares, Class C Shares, and Class F Shares. The
investment objective of the Fund is to provide above-average income and capital
appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS-- Listed corporate bonds are generally valued at the mean
of the latest bid and asked price as furnished by an independent pricing
service. Listed equity securities are valued at the last sale price reported on
a national securities exchange. Short-term securities are valued at the prices
provided by an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be valued
at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS-- It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS-- Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Dividend income
and distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES-- It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
EQUALIZATION-- The Fund follows the accounting practice known as equalization.
With equalization, a portion of the proceeds from sales and costs of redemptions
of Fund shares (equivalent, on a per share basis, to the amount of undistributed
net investment income on the date of the transaction) is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or redemptions of Fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS-- The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
RESTRICTED SECURITIES-- Restricted securities are securities that may only be
resold upon registration under federal securities laws or in transactions exempt
from such registration. In some cases, the issuer of restricted securities has
agreed to register such securities for resale, at the issuer's expense either
upon demand by the Fund or in connection with another registered offering of the
securities. Many restricted securities may be resold in the secondary market in
transactions exempt from registration. Such restricted securities may be
determined to be liquid under criteria established by the Directors. The Fund
will not incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary market
or, if no market prices are available, at the fair value as determined by the
Fund's pricing committee.
Additional information on each restricted security held at September 30, 1997 is
as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE(S) ACQUISITION COST
<S> <C> <C>
CalEnergy Co., Inc., Conv. Pfd. 8/7/1997 - 9/19/1997 $28,366,824
Costco Cos., Inc., Conv. Bond 8/17/1997 15,645,669
Interpublic Group Cos., Inc.,
Conv. Sub. Deb. 9/10/1997 - 9/15/1997 15,669,452
EMC Corp. Mass, Sub. Note 3/6/1997 - 5/20/1997 14,595,997
Quantum Corp., Conv. Bond 8/1/1997 - 9/4/1997 20,764,526
Quantum Corp., Conv. Bond 7/30/1997 - 9/3/1997 7,309,566
Solectron Corp., Conv. Bond 11/12/1996 - 7/17/1997 26,747,579
Xilinx, Inc., Conv. Sub. Note 9/11/1997 - 9/30/1997 28,944,808
</TABLE>
USE OF ESTIMATES-- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ from
those estimated.
OTHER-- Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
At September 30, 1997, par value shares ($0.01 per share) authorized were as
follows:
NUMBER OF
PAR VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
Class A Shares 500,000,000
Class B Shares 500,000,000
Class C Shares 500,000,000
Class F Shares 500,000,000
Total 2,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 10,196,913 $ 177,148,052 16,344,330 $ 246,303,152
Shares issued to shareholders in
payment of distributions declared 854,711 14,989,167 1,194,325 17,720,003
Shares redeemed (3,623,287) (63,091,743) (5,333,044) (81,159,165)
Net change resulting from
Class A Share transactions 7,428,337 $ 129,045,476 12,205,611 $ 182,863,990
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 13,638,297 $ 238,010,907 22,544,007 $ 339,570,016
Shares issued to shareholders in
payment of distributions declared 969,616 17,050,463 852,599 12,801,151
Shares redeemed (1,835,011) (31,984,128) (1,529,865) (23,434,206)
Net change resulting from
Class B Share transactions 12,772,902 $ 223,077,242 21,866,741 $ 328,936,961
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,664,517 $ 29,088,913 3,514,431 $ 52,478,856
Shares issued to shareholders in
payment of distributions declared 200,073 3,507,123 308,800 4,586,335
Shares redeemed (889,856) (15,582,790) (687,088) (10,415,521)
Net change resulting from
Class C Share transactions 974,734 $ 17,013,246 3,136,143 $ 46,649,670
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997
CLASS F SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 718,148 $ 12,504,031 2,247,501 $ 33,474,976
Shares issued to shareholders in
payment of distributions declared 186,889 3,275,696 320,769 4,757,176
Shares redeemed (420,272) (7,204,154) (523,006) (7,867,272)
Net change resulting from
Class F Share transactions 484,765 $ 8,575,573 2,045,264 $ 30,364,880
Net change resulting from
Fund Share transactions 21,660,738 $ 377,711,537 39,253,759 $ 588,815,501
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE-- Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.60% of the Fund's average daily net assets.
ADMINISTRATIVE FEE-- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE-- The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the
Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Class A Shares, Class B Shares, Class C Shares,
and Class F Shares. The Plan provides that the Fund may incur distribution
expenses according to the following schedule annually, to compensate FSC.
PERCENTAGE OF
AVERAGE DAILY
NET ASSETS
SHARE CLASS OF CLASS
Class A Shares 0.50%
Class B Shares 0.75%
Class C Shares 0.75%
Class F Shares 0.25%
For the six months ended September 30, 1997, Class A Shares did not incur a
distribution services fee.
SHAREHOLDER SERVICES FEE-- Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES-- FServ, through its
subsidiary, Federated Shareholder Services Company ("FSSC"), serves as transfer
and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES-- FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL-- Certain of the Officers and Directors of the Fund are Officers and
Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
PURCHASES $696,351,889
SALES $335,433,336
Directors
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
Officers
John F. Donahue
Chairman
Richard B. Fisher
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer,
and Secretary
Matthew S. Hardin
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectuses, which contain facts
concerning its objective and policies, management fees, expenses and other
information.
[Graphic]
Cusip 313915100
Cusip 313915209
Cusip 313915308
Cusip 313915407
8110102 (11/97)
[Graphic]
A1. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color-coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 12/30/86
to 9/30/97. The "y" axis is measured in increments of $10,000 ranging from $0 to
$50,000 and indicates that the ending value of a hypothetical initial investment
of $11,000 in the fund's Class A Shares, assuming the reinvestment of capital
gains and dividends, would have grown to $45,477 on 9/30/97.
A2. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color-coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 12/30/86
to 9/30/97. The "y" axis is measured in increments of $4,000 ranging from $0 to
$32,000 and indicates that the ending value of hypothetical yearly investments
of $1,000 in the fund's Class A Shares, assuming the reinvestment of capital
gains and dividends, would have grown to $29,637 on 9/30/97.
A3. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color-coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 12/30/86
to 9/30/97. The "y" axis is measured in increments of $10,000 ranging from $0 to
$70,000 and indicates that the ending value of a hypothetical initial investment
of $15,000 in the fund's Class A Shares would have grown to $65,624 on 9/30/97.
