[Graphic]
Federated Investors
Federated Equity Income Fund, Inc.
12TH SEMI-ANNUAL REPORT
SEPTEMBER 30, 1998
ESTABLISHED 1986
PRESIDENT'S MESSAGE
Dear Fellow Shareholder:
Federated Equity Income Fund, Inc. was created in 1986, and I am pleased to
present its 12th Semi-Annual Report. As of September 30, 1998, this fund's
assets of $2.1 billion were invested as follows: 79% in high-quality,
historically good dividend-paying stocks, 17% in convertible securities, and a
4% cash position. As of September 30, 1998, over 136,000 shareholders owned an
interest in 76 stocks and 20 convertible issues. These issues were selected for
income and for their future growth opportunities.
This report covers the first half of the fund's fiscal year which is the
six-month period from April 1, 1998 through September 30, 1998. It begins with a
discussion with the fund's portfolio manager, Linda A. Duessel, Vice President
of Federated Advisers. Following her discussion are three additional items of
shareholder interest. First is a series of graphs showing the fund's long-term
investment performance. Second is a listing of the fund's high dividend-paying
holdings, and third is the publication of the fund's financial statements.
On September 30, 1998, the fund's diversified holdings included 96 stocks and
convertible securities across 12 major industry sectors. They included such
well-known names as: Bristol-Myers Squibb, Chase Manhattan, DuPont, Ford Motors,
General Electric, H.J. Heinz, General Mills, Intel and Xerox.
After an unprecedented period of strong returns, the U.S. stock market recorded
negative performance during the six-month reporting period that resulted from
investor concern over foreign economic and political turmoil. During the
reporting period, share net asset value declined although the impact was
tempered by the fund's strong dividend orientation. In the fund's history, there
have been other periods of share price declines (i.e., in calendar year 1987,
the fund's investment results decreased 9.07%, followed by a 36.09% increase in
share value in 1988. Again, in calandar year 1990, the fund's share value
experienced a decline of 12.45% followed in 1991 by a 42.20% increase).
Owning good dividend-paying stocks, for the long-term, has been positive,
however, there are always times that remind us of risk as well as reward. In
managing your fund's assets, we keep to our simple disciplines and work harder
in the portfolio selections. The fund's strategy of focusing on stocks with
historically reliable and consistent earnings, and defensive investments such as
higher yielding convertible securities, has been successful as the fund has
outperformed the Standard and Poor's ("S&P") 500 Index* in 35 of the 37 market
corrections of 2.00% or more since 1990.
* The S&P 500 Index is an unmanaged index of common stocks in industry,
transportation, and financial and public utility companies. Investments
cannot be made in an index.
Individual share class total return performance for the six-month period,
including income dividends and capital gains, follows.**
TOTAL INCOME CAPITAL NET ASSET
RETURN DISTRIBUTIONS GAINS VALUE CHANGE
Class A Shares (7.65%) $0.15 $0.29 $19.14 to $17.27 = (10%)
Class B Shares (8.00%) $0.08 $0.29 $19.15 to $17.28 = (10%)
Class C Shares (8.00%) $0.08 $0.29 $19.15 to $17.28 = (10%)
Class F Shares (7.77%) $0.12 $0.29 $19.15 to $17.28 = (10%)
I recommend that you add to your account on a regular basis. Please take a few
moments to review the fund's broad array of holdings. I believe you will be
rewarded in the ownership of these great corporations.
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.
Thank you for your continued support of Federated Equity Income Fund, Inc. and,
as always, we welcome your comments and suggestions.
Very sincerely yours,
[Graphic]
Richard B. Fisher
President
November 15, 1998
** Performance quoted is based on net asset value, reflects past performance,
and is not indicative of future results. Investment return and principal value
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Total returns for the period, based on
offering price, for Class A, B, C, and F Shares were (12.72%), (13.06%),
(8.91%), and (9.57%), respectively.
+ Systematic investing does not ensure a profit or protect against loss in
declining markets.
INVESTMENT REVIEW
[Graphic]
Linda A. Duessel
Vice President
Federated Advisers
[Graphic]
LINDA, THERE HAS BEEN A MARKET CORRECTION, STOCK PRICES ARE DOWN,
AND INVESTORS ARE CAUTIOUS. WHAT DO YOU SEE?
Indeed, after completing one of the strongest first quarters in 50 years, the
market traded down in a choppy pattern for much of the second quarter of 1998.
In the period between April 1, 1998 and September 30, 1998, New York Stock
Exchange issues declined in value on average 30%-40%. That is a correction, and
that is
the bad news.
The good news is that the stock market is made up of individual stocks with good
and bad earnings outlooks, and prices really just reflect investors' views of
future corporate earnings. The third quarter of 1998 was among the most
unsettling in recent times, as the market peaked in mid-July. As we predicted in
previous reports, this market is indeed showing the extent to which the
financial crises around the world are affecting U.S. companies. There are not
many industries whose earnings growth have not been negatively affected by
international events, and it is certainly true in the financial sector.
To help calm investors' fears, the Federal Reserve Board (the "Fed") has
signaled its intent to aid the markets by its two recent 25 basis points
reductions in short-term interest rates. This may be just the beginning of a
series of Fed easings. The unanswered question is whether this effort will
strengthen the U.S. economy, which shows signs of slowing.
If not, our economy may face a recession.
[Graphic]
HOW DID FEDERATED EQUITY INCOME FUND, INC. PERFORM FOR ITS
SHAREHOLDERS IN THIS DIFFICULT ENVIRONMENT?
The fund's total returns for the six-month period ended September 30, 1998 were
consistent with the (6.93%) total return of the market as represented by the S&P
500 Index, but less negative than the average equity income fund. For the
six-month reporting period, the fund's Class A, B, C, and F Shares produced
total returns of (7.65%), (8.00%), (8.00%), and (7.77%), respectively, based on
net asset value.* These returns compared favorably to the more negative (11.16%)
total return of the average equity income fund as tracked by Lipper Analytical
Services, Inc.+
* Performance quoted is based on net asset value, reflects past performance and
is not indicative of future results. Investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Total returns for the period, based on offering price,
for Class A, B, C, and F Shares were (12.72%), (13.06%), (8.91%), and (9.57%),
respectively.
+ Lipper figures represent the average of the total returns reported by all
mutual funds designated by Lipper Analytical Services, Inc. as falling into the
category indicated. These figures do not reflect sales charges.
[Graphic]
WHAT ARE YOUR STRATEGIES IN THIS ENVIRONMENT?
We believe ownership of high-quality, good dividend-paying stocks are a key
component of total return for stocks, and that dividends do provide a measure of
support in market corrections. Additionally, the fund's utility holdings, which
amount to 13.50% of the fund's assets, actually increased in value during the
reporting period. Naturally other sector holdings declined, however, it is an
example that ownership in high-quality, good dividend-paying stocks does work
and has provided downside protection.
In managing Federated Equity Income Fund, Inc., we do not time the market, we do
not create a cash position, and we do not overweight market sectors. We just do
our homework in security selections for the fund.
[Graphic]
COULD YOU CITE A FEW EXAMPLES OF WHAT YOU HAVE BEEN BUYING AND SELLING RECENTLY
IN THE FUND?
In the Consumer Non-Durables sector, we sold Avon Products, Inc., and we bought
RJR NABISCO HOLDINGS CORP. (0.69% of net assets) at recent low prices, because
of the 8% dividend yield and the exceedingly low value placed on the company's
tobacco business.
In the Energy sector, we sold Unocal Corp. Conv. Pfd. as well as the
Diamond Offshore Conv. Bond. We purchased BRITISH PETROLEUM (1.15% of
net assets), a financially strong, leading international integrated oil
company as well as USEC, INC. (1.25% of net assets), a high-yielding
stock that provides enriched uranium services to commercial nuclear
power plants.
In the Finance sector, we sold General RE Corp., and we purchased LINCOLN
NATIONAL CORP. PRIDES (0.82% of net assets), a mandatory convertible preferred
security, with a 7.25% current yield. This company is a leading life insurance
company with a growing market share in the annuity business.
In the Health Care sector, we sold Bausch and Lomb, Inc. and purchased
AMERICAN HOME PRODUCTS (1.92% of net assets) and BERGEN BRUNSWIG CORP.
(1.33% of net assets), leading drug and drug distribution companies,
respectively, which appear to be undervalued.
In the Technology sector, we sold AMP, Inc. after the stock price rose
dramatically with a hostile takeover offer from Allied Signal. We
purchased MOTOROLA, INC. (0.90% of net assets), a leading provider of
wireless communications, semiconductors, and electronic systems
components and services. We also sold Solectron Corp. Cvt. Bonds and
Xilinx Cvt. Sub Notes. We purchased a basket of leading technology
companies covering the major industries within the sector including:
CISCO SYSTEMS (0.51% of net assets), INTEL CORP. (0.75% of net assets),
MICROSOFT CORP. CONVERTIBLE PREFERRED STOCK (2.05% of net assets),
TELLABS (0.45% of net assets), and WESTERN DIGITAL CORP. COMMON STOCK
(0.74% of net assets).
In the Utilities sector, we sold Ameritech Corp., and purchased GTE CORP. (1.47%
of net assets), at a much more reasonable price.
[Graphic]
WHAT WERE THE FUND'S TOP 10 HOLDINGS AS OF SEPTEMBER 30, 1998, AND WHAT WERE THE
FUND'S INDUSTRY WEIGHTINGS?
The fund's top holdings and sector weightings were as follows:
PERCENTAGE OF
NAME NET ASSETS
Texas Utilities Co., PRIDES 2.20%
Microsoft Corp., Conv. Pfd., Series A 2.10%
Bristol-Myers Squibb Co. 2.00%
Baxter International, Inc. 2.00%
General Mills, Inc. 2.00%
American Home
Products Corp. 1.90%
Abbott Laboratories 1.90%
Enron Corp. 1.80%
Merck & Co., Inc. 1.80%
IBM 1.70%
TOTAL 19.40%
PERCENTAGE
PERCENTAGE OF OF S&P 500
SECTOR NET ASSETS INDEX
Technology 14.60% 16.90%
Finance 13.80% 15.60%
Utilities 13.50% 11.50%
Health Care 12.20% 13.60%
Consumer Non-durables 10.90% 9.60%
Energy/Minerals 7.20% 7.50%
Producer Manufacturing 6.60% 7.00%
Services 4.90% 4.90%
Retail Trade 4.60% 5.50%
Basic Industry 3.70% 4.10%
Consumer Durables 3.00% 2.90%
Transportation 1.00% 1.10%
Other 4.70% 0.00%
[Graphic}
AS WE APPROACH THE END OF 1998, WHAT IS YOUR PERSPECTIVE?
We believe that the most important attribute for individual stock performance in
the current environment will be corporate earnings' reliability and consistency.
Our search for companies that can deliver earnings leads to the high-quality
market leaders, which has been the fund's core holdings. Additionally, higher
yielding convertible securities and common stocks (in groups such as utilities
and real estate investment trusts) have served as defensive holdings in periods
of market declines. This strategy has worked, as Federated Equity Income Fund,
Inc. has outperformed the S&P 500 Index in 35 of the 37 corrections of 2.00% or
more since 1990.
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 $12,000 IN THE CLASS A SHARES OF
FEDERATED EQUITY INCOME FUND, INC. ON 12/31/86, REINVESTED DIVIDENDS AND CAPITAL
GAINS, AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD HAVE BEEN WORTH $48,910
ON 9/30/98. YOU WOULD HAVE EARNED A 12.71%* AVERAGE ANNUAL TOTAL RETURN FOR THE
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 9/30/98, the Class A Shares' average annual 1-year, 5-year, and 10-year
total returns were (6.02%), 13.32%, and 13.98%, respectively. Class B Shares'
average annual 1-year and since inception (9/28/94) total returns were (6.72%)
and 17.20%, respectively. Class C Shares' average annual 1-year, 5-year, and
since inception (5/4/93) total returns were (2.20%), 13.77%, and 14.57%,
respectively. Class F Shares' average annual 1-year and since inception
(11/13/93) total returns were (2.73%) and 14.18%, respectively.**
Please Appendix A.1.
* 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 1.00%
contingent deferred sales charge for Class C Shares, and the 1.00% sales charge
and 1.00% contingent deferred sales charge for Class F Shares.
FEDERATED EQUITY INCOME FUND, INC.
ONE STEP AT A TIME:
$1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR
FOR ELEVEN YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO
$30,397.
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 12/31/86, reinvested your dividends and capital
gains, and did not redeem any shares, you would have invested only $12,000, but
your account would have reached a total value of $30,397* by 9/30/98. You would
have earned an average annual total return of 14.15%.
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. An investment plan works for you
when you invest only $1,000 annually. You can take it one step at a time. Put
time, money, and compounding to work.
Please see Appendix A.2.
* 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
September 30, 1988, 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 has grown to
$55,540. This represents a 13.99%** average annual total return, less the
applicable sales charge. For the Barnes, that meant good performance from
dividend-paying stocks in 12 industry sectors that helped their money grow.
Please see Appendix A.3.
* 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, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--78.7%
BASIC INDUSTRY--3.2%
1,177,000 Barrick Gold Corp. $ 23,540,000
945,400 Crown Cork & Seal Co., Inc. 25,289,450
357,800 Du Pont (E.I.) de Nemours & Co. 20,081,525
Total 68,910,975
CONSUMER DURABLES--1.9%
910,000 Cooper Tire & Rubber Co. 16,380,000
435,000 Ford Motor Co. 20,417,813
60,400 Magna International, Inc., Class A 3,510,750
Total 40,308,563
CONSUMER NON-DURABLES--9.3%
559,440 Diageo PLC, ADR 20,279,700
18,400 Dial Corp. 379,500
603,400 General Mills, Inc. 42,238,000
673,250 Heinz (H.J.) Co. 34,419,906
556,100 Kimberly-Clark Corp. 22,522,050
679,300 Philip Morris Cos., Inc. 31,290,256
586,200 RJR Nabisco Holdings Corp. 14,764,913
145,100(a)Suiza Foods Corp. 4,534,375
931,700 UST, Inc. 27,543,381
Total 197,972,081
ENERGY MINERALS--7.2%
280,000 British Petroleum Co. PLC, ADR 24,430,000
594,000 Burlington Resources, Inc. 22,200,750
453,100 Exxon Corp. 31,801,956
429,800 Mobil Corp. 32,637,938
1,730,000 USEC, Inc. 26,706,875
670,000 Ultramar Diamond Shamrock Corp. 15,242,500
Total 153,020,019
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
FINANCE--10.3%
114,006 Associates First Capital Corp., Class A $ 7,438,892
737,070 Banc One Corp. 31,417,609
481,300 Chase Manhattan Corp. 20,816,225
312,000 Colonial Properties Trust 8,833,500
364,700 Duke Realty Investments, Inc. 8,456,481
272,850 Equity Residential Properties Trust 11,510,859
563,700 First Union Corp. 28,854,394
320,200 Liberty Property Trust 7,624,763
355,500 Marsh & McLennan Cos., Inc. 17,686,125
301,700 Mellon Bank Corp. 16,612,356
464,000 Morgan Stanley, Dean Witter & Co. 19,981,000
359,062 NationsBank Corp. 19,209,817
345,000 New Plan Excel Realty Trust 8,042,813
333,200 Post Properties, Inc. 12,849,025
Total 219,333,859
HEALTH CARE--11.0%
935,400 Abbott Laboratories 40,631,438
779,200 American Home Products Corp. 40,810,600
723,000 Baxter International, Inc. 43,018,500
561,300 Bergen Brunswig Corp., Class A 28,380,731
415,500 Bristol-Myers Squibb Co. 43,160,063
296,445 Merck & Co., Inc. 38,408,155
Total 234,409,487
PRODUCER MANUFACTURING--5.6%
820,500 Dresser Industries, Inc. 25,127,813
381,400 General Electric Co. 30,345,138
386,600 Textron, Inc. 23,437,625
264,100 Xerox Corp. 22,382,475
526,300 York International Corp. 17,565,263
Total 118,858,314
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
RETAIL TRADE--3.0%
1,950,000 Food Lion, Inc., Class A $ 20,718,750
1,096,300 Food Lion, Inc., Class B 10,688,925
726,700 Penney (J.C.) Co., Inc. 32,656,081
Total 64,063,756
SERVICES--4.1%
741,000 Block (H&R), Inc. 30,658,875
636,300 Browning-Ferris Industries, Inc. 19,248,075
1,898,096 Hollinger International Publishing, Inc. 27,285,130
412,400 Wendy's International, Inc. 9,150,125
Total 86,342,205
TECHNOLOGY--11.2%
526,900 Avnet, Inc. 19,396,506
175,050(a)Cisco Systems, Inc. 10,820,278
948,300 Electronic Data Systems Corp. 31,471,706
511,600 General Dynamics Corp. 25,675,925
437,200 Hewlett-Packard Co. 23,144,275
187,600 Intel Corp. 16,086,700
283,000 International Business Machines Corp. 36,224,000
246,500 Lockheed Martin Corp. 24,850,281
450,500 Motorola, Inc. 19,230,719
145,700(a)Sun Microsystems, Inc. 7,257,681
238,900(a)Tellabs, Inc. 9,511,206
1,465,400(a)Western Digital Corp. 15,753,050
Total 239,422,327
TRANSPORTATION--1.0%
740,300 CNF Transportation, Inc. 21,561,238
UTILITIES--10.9%
541,500 CMS Energy Corp. 23,589,094
308,000 El Paso Energy Corp. 9,990,750
740,712 Enron Corp. 39,118,853
571,000 GTE Corp. 31,405,000
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
UTILITIES--CONTINUED
507,511 MCI Worldcom, Inc. $ 24,804,600
1,105,500 Pacificorp 21,211,781
696,400 Sonat, Inc. 20,804,950
285,300 Sprint Corp. 20,541,600
896,500 TECO Energy, Inc. 25,606,281
532,500 Williams Cos., Inc. (The) 15,309,375
Total 232,382,284
TOTAL COMMON STOCKS (IDENTIFIED COST $1,589,396,941) 1,676,585,108
CONVERTIBLE PREFERRED STOCKS--13.3%
BASIC INDUSTRY--0.5%
445,000 Merrill Lynch & Co., Inc., STRYPES, Series IML 10,290,625
CONSUMER NON-DURABLES--1.6%
326,200 Ralston Purina Co., SAILS, $1.08, Series Interstate Bakeries 19,898,200
440,000(b)Suiza Foods Corp., Conv. Pfd., $2.75 15,011,480
Total 34,909,680
FINANCE--3.5%
613,800 Conseco, Inc., Cumulative PRIDES, Series F, $3.50 24,206,738
169,500 Jefferson-Pilot Corp., Conv. Pfd., $5.26 16,102,500
705,300 Lincoln National Corp., Cumulative PRIDES, $1.94 17,368,013
93,800 SunAmerica, Inc., PERCS, Series E, $3.10 17,822,000
Total 75,499,251
HEALTH CARE--1.2%
167,700(b)McKesson Corp., Conv. Pfd., $2.50 20,981,450
45,000 McKesson Corp., Conv. Pfd., $2.50 5,630,085
Total 26,611,535
PRODUCER MANUFACTURING--1.0%
999,300 Ingersoll-Rand Co., DECS, Series 6.75% 20,985,300
SERVICES--0.8%
330,500 Wendy's International, Inc., Cumulative Conv. Pfd., Series
A, $2.50 17,330,594
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL
AMOUNT
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS--CONTINUED
TECHNOLOGY--2.1%
453,500 Microsoft Corp., Cumulative Conv. Pfd., Series A, $2.20 $ 43,706,067
UTILITIES--2.6%
828,000 Texas Utilities Co., Cumulative PRIDES, $4.63 46,575,000
62,000 Williams Cos., Inc. (The), Conv. Pfd., $3.50 8,387,360
Total 54,962,360
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST
$279,996,521) 284,295,412
CONVERTIBLE CORPORATE BONDS--4.0%
CONSUMER DURABLES--1.1%
$ 9,540,000(b)Magna International, Inc., Conv. Bond, 4.875%, 2/15/2005 9,587,700
13,200,000 Magna International, Inc., Conv. Bond, 5.00%, 10/15/2002 14,367,540
Total 23,955,240
RETAIL TRADE--1.6%
19,260,000 Home Depot, Inc., Sub. Note, 3.25%, 10/1/2001 33,693,059
TECHNOLOGY--1.3%
3,675,000 EMC Corp. Mass, Conv. Bond, 3.25%, 3/15/2002 9,472,423
4,520,000(b)EMC Corp. Mass, Sub. Note, 3.25%, 3/15/2002 11,650,436
29,000,000(b)Western Digital Corp., Sub. Deb., 5.307% accrual, 2/18/2018 6,509,050
Total 27,631,909
TOTAL CONVERTIBLE CORPORATE BONDS (IDENTIFIED COST
$77,682,944) 85,280,208
(C)REPURCHASE AGREEMENT--4.7%
99,930,000 Credit Suisse First Boston, Inc., 5.50%, dated 9/30/1998,
DUE 10/1/1998 (AT AMORTIZED COST) 99,930,000
TOTAL INVESTMENTS (IDENTIFIED COST $2,047,006,406)(D) $ 2,146,090,728
</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, 1998, these securities amounted
to $63,740,116, which represents 3.0% 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 $2,047,006,406.
The net unrealized appreciation of investments on a federal tax basis amounts to
$99,084,322 which is comprised of $268,740,046 appreciation and $169,655,724
depreciation at September 30, 1998.
Note: The categories of investments are shown as a percentage of net assets
($2,130,816,304) at September 30, 1998. The following acronyms are used
throughout this portfolio: ADR --American Depositary Receipt DECS --Dividend
Enhanced Convertible Stock PERCS --Preferred Equity Redemption Cumulative Stock
PLC --Public Limited Company PRIDES --Preferred Redeemable Increased Dividend
Equity Securities 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, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost
$2,047,006,406) $2,146,090,728
Cash 32,591
Income receivable 4,742,789
Receivable for investments sold 16,228,417
Receivable for shares sold 4,338,340
Total assets 2,171,432,865
LIABILITIES:
Payable for investments purchased $38,140,315
Payable for shares redeemed 1,066,885
Income distribution payable 578,888
Payable for taxes withheld 32,680
Accrued expenses 797,793
Total liabilities 40,616,561
NET ASSETS for 123,323,255 shares outstanding $2,130,816,304
NET ASSETS CONSIST OF:
Paid in capital $1,944,372,365
Net unrealized appreciation of investments and translation of
assets and liabilities in foreign currency 99,084,217
Accumulated net realized gain on investments and foreign currency
transactions 85,908,933
Undistributed net investment income 1,450,789
Total Net Assets $2,130,816,304
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($806,875,476 / 46,711,761 shares
outstanding) $17.27
Offering price per share (100/94.50 of 17.27)* $18.28
Redemption proceeds per share $17.27
CLASS B SHARES:
Net Asset Value Per Share ($1,042,114,471 / 60,304,033 shares
outstanding) $17.28
Offering per share $17.28
Redemption proceeds per share (94.50/100 of $17.28)** $16.33
CLASS C SHARES:
Net Asset Value Per Share ($168,607,443 / 9,756,240 shares
outstanding) $17.28
offering per share $17.28
redemption proceeds per share (99.00/100 of $17.28)** $17.11
CLASS F SHARES:
Net Asset Value Per Share ($113,218,914 / 6,551,221 shares
outstanding) $17.28
Offering per share (100/99.00 of $17.28)* $17.45
Redemption proceeds per share (99.00/100 of $17.28)** $17.11
</TABLE>
* See "Investing in the Fund" in the Prospectus.
** See "Contigent Deferred Sales Charge" 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, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $33,809) $ 27,272,275
Interest 3,390,393
Total income 30,662,668
EXPENSES:
Investment advisory fee $ 6,623,805
Administrative personnel and services fee 832,392
Custodian fees 45,182
Transfer and dividend disbursing agent fees and expenses 1,153,096
Directors'/Trustees' fees 11,586
Auditing fees 8,274
Legal fees 6,624
Portfolio accounting fees 88,306
Distribution services fee--Class B Shares 4,026,849
Distribution services fee--Class C Shares 667,654
Distribution services fee--Class F Shares 154,221
Shareholder services fee--Class A Shares 1,040,863
Shareholder services fee--Class B Shares 1,342,283
Shareholder services fee--Class C Shares 222,551
Shareholder services fee--Class F Shares 154,221
Share registration costs 129,014
Printing and postage 175,054
Insurance premiums 5,520
Taxes 29,703
Miscellaneous 13,793
Total expenses 16,730,991
Net investment income 13,931,677
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY:
Net realized gain on investments 86,872,562
Net change in unrealized appreciation of investments and
translation of assets and liabilities in foreign currency (281,028,583)
Net realized and unrealized loss on investments (194,156,021)
Change in net assets resulting from operations $(180,224,344)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
SIX MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
1998 MARCH 31,
(unaudited) 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 13,931,677 $ 28,927,322
Net realized gain on investments and foreign currency transactions
($86,872,562 and $74,636,492, respectively, as computed for federal
tax purposes) 86,872,562 74,063,229
Net change in unrealized appreciation of investments and
translation of assets and liabilities in foreign currency (281,028,583) 298,409,164
Change in net assets resulting from operations (180,224,344) 401,399,715
NET EQUALIZATION CREDITS-- -- 139,007
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (6,565,595) (13,769,552)
Class B Shares (4,373,851) (10,269,214)
Class C Shares (722,527) (1,956,444)
Class F Shares (809,208) (2,122,295)
Distributions from net realized gains on investments and foreign
currency transactions
Class A Shares (12,992,147) (29,798,530)
Class B Shares (16,710,218) (33,144,518)
Class C Shares (2,757,315) (6,381,098)
Class F Shares (1,909,332) (5,258,251)
Change in net assets resulting from distributions to
shareholders (46,840,193) (102,699,902)
SHARE TRANSACTIONS (EXCLUSIVE OF AMOUNTS ALLOCATED TO NET
investment income)--
Proceeds from sale of shares 457,917,338 981,235,447
Net asset value of shares issued to shareholders in payment of
distributions declared 39,743,137 86,200,577
Cost of shares redeemed (263,710,349) (282,342,329)
Change in net assets resulting from share transactions 233,950,126 785,093,695
Change in net assets 6,885,589 1,083,932,515
NET ASSETS:
Beginning of period 2,123,930,715 1,039,998,200
End of period (including undistributed net investment income of
$1,450,789) $ 2,130,816,304 $ 2,123,930,715
</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>
SIX MONTHS
ENDED
SEPTEMBER 30,
1998 YEAR ENDED MARCH 31,
(UNAUDITED) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.14 $15.59 $14.26 $11.50 $11.06 $10.91
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.16 0.41 0.42 0.46 0.49 0.43
Net realized and unrealized gain (loss) on investments (1.59 ) 4.41 2.16 2.96 0.40 0.15
Total from investment operations (1.43 ) 4.82 2.58 3.42 0.89 0.58
LESS DISTRIBUTIONS
Distributions from net investment income (0.15 ) (0.40 ) (0.41 ) (0.41 ) (0.45 ) (0.43 )
Distributions from net realized gain on investments (0.29 ) (0.87 ) (0.84 ) (0.25 ) -- --
Total distributions (0.44 ) (1.27 ) (1.25 ) (0.66 ) (0.45 ) (0.43 )
NET ASSET VALUE, END OF PERIOD $17.27 $19.14 $15.59 $14.26 $11.50 $11.06
TOTAL RETURN(A) (7.65%) 31.80% 18.82% 30.37% 8.31% 5.29%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.08%* 1.09% 1.08% 1.03% 1.00% 1.00 %
Net investment income 1.70%* 2.25% 2.68% 3.19% 4.01% 3.82 %
Expense waiver/reimbursement(b) -- -- 0.04% 0.20% 0.36% 0.89 %
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $806,875 $809,103 $431,281 $220,268 $108,683 $84,665
Portfolio turnover 34% 69% 75% 96% 91% 43%
</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.
(See Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
FEDERATED EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS
ENDED
SEPTEMBER 30,
1998 YEAR ENDED MARCH 31,
(UNAUDITED) 1998 1997 1996 1995(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.15 $15.59 $14.26 $11.50 $11.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.09 0.27 0.34 0.32(d) 0.19
Net realized and unrealized gain (loss) on investments (1.59 ) 4.42 2.13 3.01 0.26
Total from investment operations (1.50 ) 4.69 2.47 3.33 0.45
LESS DISTRIBUTIONS
Distributions from net investment income (0.08 ) (0.26 ) (0.30 ) (0.32 ) (0.19 )
Distributions from net realized gain on investments (0.29 ) (0.87 ) (0.84 ) (0.25 ) ---
Total distributions (0.37 ) (1.13 ) (1.14 ) (0.57 ) (0.19 )
NET ASSET VALUE, END OF PERIOD $17.28 $19.15 $15.59 $14.26 $11.50
TOTAL RETURN(B) (8.00%) 30.90% 17.92% 29.40% 4.14%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.83%* 1.84% 1.87% 1.83% 1.80%*
Net investment income 0.95%* 1.50% 1.85% 2.31% 3.42%*
Expense waiver/reimbursement(c) -- -- -- 0.16% 0.47%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $1,042,114 $1,015,339 $418,675 $71,019 $6,072
Portfolio turnover 34% 69% 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. (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>
SIX MONTHS
ENDED
SEPTEMBER 30,
1998 YEAR ENDED MARCH 31,
(UNAUDITED) 1998 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.15 $15.59 $14.26 $11.50 $11.06 $10.76
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.09 0.27 0.30 0.32 0.37 0.34
Net realized and unrealized gain (loss) on investments (1.59 ) 4.42 2.16 3.00 0.44 0.28
Total from investment operations (1.50 ) 4.69 2.46 3.32 0.81 0.62
LESS DISTRIBUTIONS
Distributions from net investment income (0.08 ) (0.26 ) (0.29 ) (0.31 ) (0.37 ) (0.32 )
Distributions from net realized gain on investments (0.29 ) (0.87 ) (0.84 ) (0.25 ) -- --
Total distributions (0.37 ) (1.13 ) (1.13 ) (0.56 ) (0.37 ) (0.32 )
NET ASSET VALUE, END OF PERIOD $17.28 $19.15 $15.59 $14.26 $11.50 $11.06
TOTAL RETURN(B) (8.00%) 30.90% 17.90% 29.39% 7.52% 5.66 %
RATIOS TO AVERAGE NET ASSETS
Expenses 1.83%* 1.84% 1.87% 1.80% 1.76% 1.79%*
Net investment income 0.95%* 1.50% 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) $168,607 $173,900 $101,588 $48,161 $30,189 $24,632
Portfolio turnover 34% 69% 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.
(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>
SIX MONTHS
ENDED
SEPTEMBER 30,
1998 YEAR ENDED MARCH 31,
(UNAUDITED) 1998 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.15 $15.59 $14.26 $11.51 $11.06 $11.74
Income from investment operations
Net investment income 0.13 0.36 0.38 0.39 0.42 0.17
Net realized and unrealized gain (loss) on investments (1.59 ) 4.42 2.16 2.99 0.46 (0.68 )
Total from investment operations (1.46 ) 4.78 2.54 3.38 0.88 (0.51 )
LESS DISTRIBUTIONS
Distributions from net investment income (0.12 ) (0.35 ) (0.37 ) (0.38 ) (0.43 ) (0.17 )
Distributions from net realized gain on investments (0.29 ) (0.87 ) (0.84 ) (0.25 ) -- --
Total distributions (0.41 ) (1.22 ) (1.21 ) (0.63 ) (0.43 ) (0.17 )
NET ASSET VALUE, END OF PERIOD $17.28 $19.15 $15.59 $14.26 $11.51 $11.06
TOTAL RETURN(B) (7.77%) 31.54% 18.50% 30.06% 8.05% (4.43 %)
RATIOS TO AVERAGE NET ASSETS
Expenses 1.33%* 1.34% 1.36% 1.30% 1.24% 1.29%*
Net investment income 1.45%* 2.00% 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) $113,219 $125,588 $88,454 $51,707 $34,886 $21,010
Portfolio turnover 34% 69% 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.
(See Notes which are an integral part of the Financial Statements)
FEDERATED EQUITY INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (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 VALUATION--U.S. government securities and 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--Effective April 1, 1998, the Fund discontinued its use of
equalization. Equalization is an accounting practice whereby a portion of the
proceeds of sales and costs of redemptions of Fund shares is credited or charged
to undistributed net investment income on a per share basis, as determined on
the date of the transaction. This change in accounting policy does not effect
the Fund's net assets, net asset value per share, or net investment income.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when- issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
FUTURES CONTRACTS--The Fund purchases stock index futures contracts to manage
cashflows, enhance yield, and to potentially reduce transaction costs. Upon
entering into a stock index futures contract with a broker, the Fund is required
to deposit in a segregated account a specified amount of cash or U.S. government
securities. Futures contracts are valued daily and unrealized gains or losses
are recorded in a "variation margin" account. Daily, the Fund receives from or
pays to the broker a specified amount of cash based upon changes in the
variation margin account. When a contract is closed, the Fund recognizes a
realized gain or loss. Futures contracts have market risks, including the risk
that the change in the value of the contract may not correlate with changes in
the value of the underlying securities. For the period ended September 30, 1998,
the Fund had realized gains on future contracts of $455,817. At September 30,
1998, the Fund had no outstanding futures contracts.
RESTRICTED SECURITIES--Restricted securities are securities that may only be
resold upon registration under federal securities laws or in transactions exempt
from such registration. In some cases, the issuer of restricted securities has
agreed to register such securities for resale, at the issuer's expense either
upon demand by the Fund or in connection with another registered offering of the
securities. Many restricted securities may be resold in the secondary market in
transactions exempt from registration. Such restricted securities may be
determined to be liquid under criteria established by the Board of Directors.
The Fund will not incur any registration costs upon such resales. The Fund's
restricted securities are valued at the price provided by dealers in the
secondary market or, if no market prices are available, at the fair value as
determined by the Fund's pricing committee.
Additional information on each restricted security held at September 30,
1998 is as follows:
SECURITY ACQUISITION DATES ACQUISITION COST
EMC Corp. Mass, Sub. Note 3-6-1997 - 7-17-1997 $ 4,520,000
Magna International, Inc., Conv. Bond 2-10-1998 - 2-18-1998 9,547,350
McKesson Corp., Conv. Pfd. 2-9-1998 - 2-13-1998 12,866,442
Suiza Foods Corp., Conv. Pfd. 3-19-1998 22,000,000
Western Digital Corp. Sub. Deb. 4-30-1998 - 5-4-1998 11,163,297
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, 1998, 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 30,1998 MARCH 31,1998
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 12,026,741 $ 223,651,491 21,665,520 $ 384,363,042
Shares issued to shareholders in payment of distributions
declared 797,403 14,984,416 1,835,156 32,252,065
Shares redeemed (8,389,458) (155,738,117) (8,880,080) (158,399,975)
Net change resulting from Class A Share transactions 4,434,686 $ 82,897,790 14,620,596 $ 258,215,132
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30,1998 MARCH 31,1998
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 10,693,138 $ 200,770,395 28,472,174 $ 506,949,254
Shares issued to shareholders in payment of distributions
declared 1,022,837 19,284,576 2,276,373 39,954,264
Shares redeemed (4,438,983) (81,995,418) (4,569,309) (81,531,106)
Net change resulting from Class B Share transactions 7,276,992 $ 138,059,553 26,179,238 $ 465,372,412
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30,1998 MARCH 31,1998
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,456,294 $ 27,339,432 3,775,445 $ 67,504,456
Shares issued to shareholders in payment of distributions
declared 163,151 3,078,253 421,985 7,403,711
Shares redeemed (945,604) (17,404,485) (1,629,464) (29,184,516)
Net change resulting from Class C Share transactions 673,841 $ 13,013,200 2,567,966 $ 45,723,651
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30,1998 MARCH 31,1998
CLASS F SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 326,778 $ 6,156,020 1,262,627 $ 22,418,695
Shares issued to shareholders in payment of distributions
declared 127,133 2,395,892 375,370 6,590,537
Shares redeemed (461,249) (8,572,329) (751,681) (13,226,732)
Net change resulting from Class F Share transactions (7,338) $ (20,417) 886,316 $ 15,782,500
Net change resulting from Share transactions 12,378,181 $ 233,950,126 44,254,116 $ 785,093,695
</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, Inc. 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
SHARE CLASS DAILY NET ASSETS 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, 1998, 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. YEAR 2000
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1998, were as follows:
PURCHASES $929,283,016
SALES $719,378,080
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
Nicholas P. Constantakis
William J. Copeland
J. Christopher Donahue
James E. Dowd, Esq.
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr., Esq.
Peter E. Madden
John E. Murray, Jr., J.D., S.J.D.
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 prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 313915100
Cusip 313915209
Cusip 313915308
Cusip 313915407
8110102 (11/98)
[Graphic]
APPENDIX
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 12/31/86
to 9/30/98. The "y" axis is measured in increments of $10,000 ranging from $0 to
$60,000 and indicates that the ending value of hypothetical initial investment
of $12,000 (1,125 Shares) in the fund's Class A Shares, assuming the
reinvestment of capital gains and dividends, would have grown to $48,910 (2,832
Shares) on 9/30/98.
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 12/31/86
to 9/30/98. The "y" axis is measured in increments of $5,000 ranging from $0 to
$35,000 and indicates that the ending value of hypothetical yearly investments
of $1,000 over 11 years in the fund's Class A Shares, assuming the reinvestment
of capital gains and dividends, would have grown to $30,397 (1,760 Shares) on
9/30/98.
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 9/30/88
to 9/30/98. The "y" axis is measured in increments of $10,000 ranging from $0 to
$70,000 and indicates that the ending value of hypothetical initial investment
of $15,000 (1,491 Shares) in the fund's Class A Shares, assuming the
reinvestment of capital gains and dividends, would have grown to $55,540 (3,216
Shares) on 9/30/98.
