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FEDERATED ARMS FUND
INSTITUTIONAL SHARES
PROSPECTUS
The Institutional Shares offered by this prospectus represent
interests in a diversified portfolio of securities (the "Fund") of
Federated ARMs Fund (the "Trust"). The Trust is an open-end management
investment company (a mutual fund).
The investment objective of the Fund is to provide current income
consistent with minimal volatility of principal. The Fund concentrates
at least 65% of the value of its total assets in adjustable and
floating rate mortgage securities ("ARMs") which are issued or
guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Institutional Shares of the Fund. Keep this
prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information
for Institutional Shares and Institutional Service Shares dated
October 31, 1994, with the Securities and Exchange Commission. The
information contained in the Combined Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Combined Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information
or to make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
- --------------------------------------------------
FINANCIAL HIGHLIGHTS 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Investment Limitations 8
TRUST INFORMATION 9
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Management of the Trust 9
Distribution of Institutional Shares 10
Administration of the Fund 10
Expenses of the Fund and
Institutional Shares 11
NET ASSET VALUE 12
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INVESTING IN INSTITUTIONAL SHARES 12
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Share Purchases 12
Minimum Investment Required 12
What Shares Cost 13
Exchanging Securities for
Institutional Shares 13
Subaccounting Services 13
Certificates and Confirmations 13
Dividends 13
Capital Gains 14
REDEEMING INSTITUTIONAL SHARES 14
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Telephone Redemption 14
Written Requests 14
Accounts with Low Balances 15
SHAREHOLDER INFORMATION 15
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Voting Rights 15
Massachusetts Partnership Law 15
TAX INFORMATION 16
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Federal Income Tax 16
Pennsylvania Corporate and Personal
Property Taxes 16
PERFORMANCE INFORMATION 16
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OTHER CLASSES OF SHARES 17
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FINANCIAL STATEMENTS 18
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 29
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ADDRESSES 30
- --------------------------------------------------
I
SUMMARY OF FUND EXPENSES
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<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable)........................................................................ None
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL INSTITUTIONAL SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (1)................................................................. 0.46%
12b-1 Fee......................................................................................... None
Total Other Expenses.............................................................................. 0.09%
Shareholder Services Fee (2)......................................................... 0.00%
Total Institutional Shares Operating Expenses (3)......................................... 0.55%
<FN>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.60%.
(2) The maximum shareholder services fee is 0.25%.
(3) The Total Institutional Shares Operating Expenses would have been 0.69%
absent the voluntary waiver of a portion of the management fee.
</TABLE>
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SHARES OF THE
FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF
THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SHARES" AND
"TRUST INFORMATION." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period............................................... $6 $18 $31 $69
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only to
Institutional Shares of the Fund. The Fund also offers another class of shares
called Institutional Service Shares. Institutional Shares and Institutional
Service Shares are subject to certain of the same expenses; however,
Institutional Service Shares are subject to a 12b-1 fee of up to 0.25%. See
"Other Classes of Shares."
1
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986*
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD $ 9.98 $ 10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99 $ 9.98 $ 10.00
- ------------
INCOME FROM
INVESTMENT
OPERATIONS
- ------------
Net
investment
income 0.45 0.50 0.63 0.69 0.71 0.72 0.73 0.78 0.62
- ------------
Net
realized
and
unrealized
gain
(loss) on
investments (0.35) (0.03) 0.42 0.68 (0.48) 0.59 (0.11) (0.99) (0.02)
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total from
investment
operations 0.10 0.47 1.05 1.37 0.23 1.31 0.62 (0.21) 0.60
- ------------
LESS
DISTRIBUTIONS
- ------------
Dividends
to
shareholders
from net
investment
income (0.45) (0.50) (0.63) (0.69) (0.71) (0.72) (0.73) (0.78) (0.62)
- ------------
Distributions
to
shareholders
from net
realized
gain on
investment
transactions -- -- (0.08) -- -- -- -- -- --
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
distributions (0.45) (0.50) (0.71) (0.69) (0.71) (0.72) (0.73) (0.78) (0.62)
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSET
VALUE, END
OF PERIOD $ 9.63 $ 9.98 $ 10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99 $ 9.98
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL
RETURN+ .99% 4.82% 11.21% 15.73% 2.45% 15.25% 7.09% (2.33)% 6.16%
- ------------
RATIOS TO
AVERAGE NET
ASSETS
- ------------
Expenses 0.55% 0.51% 0.51% 0.78% 0.78% 0.79% 0.75% 0.81%
0.96%(a)
- ------------
Net
investment
income 4.51% 4.97% 5.95% 7.36% 7.62% 7.81% 8.10% 7.88%
9.84%(a)
- ------------
Expenses
waiver/reimbursement
(b) 0.14% 0.21% 0.32% 1.02% 1.02% 0.95% 1.18% 0.75%
1.50%(a)
- ------------
SUPPLEMENTAL
DATA
- ------------
Net
assets,
end of
period
(000
omitted) $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574 $16,753 $7,405 $5,433
- ------------
Porfolio
turnover
rate 65% 36% 38% 127% 170% 85% 125% 228% 89%
- ------------
<FN>
* Reflects operations for the period from December 3, 1985 to August 31, 1986.
For the period from the start of business, November 18, 1985, to December 2,
1985, net investment income aggregating $0.030 per share ($300) was
distributed to the Fund's investment adviser. Such distribution represented
the net investment income of the Fund prior to the initial public offering of
Fund shares, which commenced December 3, 1985.
+ Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year-ended August 31, 1994, which can be obtained
free of charge.
2
GENERAL INFORMATION
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated May 24, 1985. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date of this
prospectus, the Board of Trustees (the "Trustees") have established two classes
of shares, Institutional Service Shares and Institutional Shares. This
prospectus relates only to Institutional Shares (the "Shares") of the Fund.
Shares are sold primarily to accounts for which financial institutions act in a
fiduciary or agency capacity, and other accounts where a financial institution
maintains master accounts with an aggregate investment of at least $400 million
in certain mutual funds which are advised or distributed by affiliates of
Federated Investors. Shares are also made available to financial intermediaries,
public, and private organizations. In addition, Shares are designed to provide
an appropriate investment for particular financial institutions that are subject
to government agency regulations, including credit unions, savings associations,
and national banks. An investment in the Fund serves as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio
which invests at least 65% of the value of its total assets in U.S. government
securities, all of which government securities will be adjustable and floating
rate mortgage securities which are issued or guaranteed as to payment of
principal and interest by the U.S. government, its agencies or
instrumentalities. A minimum initial investment of $25,000 over a 90-day period
is required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with minimal volatility of principal. Current income includes, in general,
discount earned on U.S. Treasury bills and agency discount notes, interest
earned on mortgage related securities and other U.S. government securities, and
short-term capital gains. The investment objective cannot be changed without
approval of shareholders. The Fund anticipates that it will experience minimal
volatility of principal due to the frequent adjustments to interest rates on
adjustable and floating rate mortgage securities which comprise the portfolio.
Of course, there can be no assurance that the Fund will be able to maintain
minimal volatility of principal or that it will achieve its investment
objective. The Fund endeavors to achieve its investment objective, however, by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
Except as otherwise noted, the investment policies described below may not be
changed by the Trustees without shareholder approval.
3
The Fund will limit its investments to those that are permitted for purchase by
federal savings associations pursuant to applicable rules, regulations, or
interpretations of the Office of Thrift Supervision and by federal credit unions
under the Federal Credit Union Act and the rules, regulations, and
interpretations of the National Credit Union Administration (the "NCUA"). Should
additional permitted investments be allowed as a result of future changes in
applicable regulations or federal laws, the Fund reserves the right, without
shareholder approval, to make such investments consistent with the Fund's
investment objective, policies, and limitations. Further, should existing
statutes or regulations change so as to cause any securities held by the Fund to
become ineligible for purchase by federal savings associations or federal credit
unions, the Fund will dispose of those securities at times advantageous to the
Fund.
As operated within the above limitations, and pursuant to the Fund's investment
policy, which may be changed without shareholder approval, to limit its
investment to securities that are appropriate direct investments for national
banks, the Fund will also serve as an appropriate vehicle for a national bank as
an investment for its own account.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
at least 65% of the value of its total assets in a professionally managed
portfolio of U.S. government securities. As a matter of investment policy, which
may be changed without shareholder approval, all of these U.S. government
securities will be adjustable and floating rate mortgage securities which are
issued or guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities.
The types of mortgage securities in which the Fund may invest include the
following:
- adjustable rate mortgage securities;
- collateralized mortgage obligations;
- real estate mortgage investment conduits; and
- other securities collateralized by or representing interests in real
estate mortgages whose interest rates reset at periodic intervals and are
issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
In addition to the securities described above, the Fund may also invest in
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes, and
bonds, as well as obligations of U.S. government agencies or instrumentalities
which are not collateralized by or represent interests in real estate mortgages,
as described above.
The Fund may also invest in mortgage related securities, as defined in section
3(a)(41) of the Securities Exchange Act of 1934, which are issued by private
entities such as investment banking firms and companies related to the
construction industry. The privately issued mortgage related securities in which
the Fund may invest include:
- privately issued securities which are collateralized by pools of mortgages
in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government;
4
- privately issued securities which are collateralized by pools of mortgages
in which payment of principal and interest are guaranteed by the issuer
and such guarantee is collateralized by U.S. government securities; and
- other privately issued securities in which the proceeds of the issuance
are invested in mortgage backed securities and payment of the principal
and interest are supported by the credit of any agency or instrumentality
of the U.S. government.
The privately issued mortgage related securities provide for a periodic payment
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage
securities with adjustable rather than fixed interest rates. The ARMS in which
the Fund invests are issued by Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA"), and Federal Home Loan
Mortgage Corporation ("FHLMC") and are actively traded. The underlying mortgages
which collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would
receive monthly scheduled payments of principal and interest and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. government securities.
Not unlike other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally rises
when interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g. investments with comparable maturities) because,
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
5
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related to
the construction industry. CMOs purchased by the Fund may be:
- collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
- collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized
by U.S. government securities; or
- securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.
The Fund will only purchase CMO's which are investment grade, as rated by a
nationally recognized statistical rating organization.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings of
multiple class real estate mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code. Issuers of
REMICs may take several forms, such as trusts, partnerships, corporations,
associations or a segregated pool of mortgages. Once REMIC status is elected and
obtained, the entity is not subject to federal income taxation. Instead, income
is passed through the entity and is taxed to the person or persons who hold
interests in the REMIC. A REMIC interest must consist of one or more classes of
"regular interests," some of which may offer adjustable rates (the type in which
the Fund primarily invests), and a single class of "residual interests." To
qualify as a REMIC, substantially all of the assets of the entity must be in
assets directly or indirectly secured principally by real property.
REGULATORY COMPLIANCE. In accordance with the Rules and Regulations of the
NCUA, unless the purchase is made solely to reduce interest-rate risk, the Fund
will not invest in any CMO or REMIC security that meets any of the following
three tests: (1) the CMO or REMIC has an expected average life greater than 10
years; (2) the average life of the CMO or REMIC extends by more than 4 years
assuming an immediate and sustained parallel shift in the yield curve of plus
300 basis points, or shortens by more than 6 years assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis points; or (3)
the estimated change in the price of the CMO or REMIC is more than 17%, due to
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points.
Neither test (1) nor (2) above apply to floating or adjustable rate CMOs or
REMICs with all of the following characteristics: (a) the interest rate of the
instrument is reset at least annually; (b) the interest rate is below the
contractual cap of the instrument; (c) the instrument is tied to a widely-used
market rate; and (d) the instrument varies directly (not inversely) and is reset
in proportion with the index's changes.
The Fund may not purchase a residual interest in a CMO or REMIC. In addition,
the Fund will not purchase zero coupon securities with maturities greater than
10 years.
6
RESETS. The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund
invests generally are readjusted or reset at intervals of one year or less to an
increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs,
and REMICs in which the Fund invests will frequently have caps and floors which
limit the maximum amount by which the loan rate to the residential borrower may
change up or down: (1) per reset or adjustment interval and (2) over the life of
the loan. Some residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. An example of the effect of
caps and floors on a residential mortgage loan may be found in the Combined
Statement of Additional Information. Additionally, even though the interest
rates on the underlying residential mortgages are adjustable, amortization and
prepayments may occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities stated in
the underlying mortgages.
TEMPORARY INVESTMENTS. For defensive purposes only, the Fund may also invest
temporarily in cash and money market instruments during times of unusual market
conditions and to maintain liquidity. Money market instruments may include
obligations such as:
- obligations of the U.S. government or its agencies or instrumentalities;
and
- repurchase agreements.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. To the extent that the original seller does not
repurchase the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Fund's Board of Trustees and will
7
receive collateral in the form of cash or U.S. government securities equal to at
least 100% of the value of the securities loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER. The Fund does not intend to invest for the purpose of
seeking short-term profits, however securities in its portfolio will be sold
whenever the Fund's investment adviser believes it is appropriate to do so in
light of the Fund's investment objective, without regard to the length of time a
particular security may have been held.
INVESTMENT LIMITATIONS
The Fund will not:
- invest in stripped mortgage securities, including securities which
represent a share of only the interest payments or only the principal
payments from underlying mortgage related securities;
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its net assets and pledge up to
10% of the value of its total assets to secure such borrowings;
- lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
- invest more than 5% of the value of its total assets in securities of
issuers which have records of less than three years of continuous
operations, including the operation of any predecessor. With respect to
the asset-backed securities, the Fund will treat the originator of the
asset pool as the company issuing the securities for purposes of
determining compliance with this limitation.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
8
The Fund will not:
- invest more than 15% of its net assets in securities which are illiquid,
including repurchase agreements providing for settlement in more than
seven days after notice.
TRUST INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to
.60 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse the Fund for certain operating
expenses. This does not include reimbursement to the Fund of any expenses
incurred by shareholders who use the transfer agent's subaccounting facilities.
The Adviser can terminate this voluntary waiver of its advisory fee at any time
in its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust organized
on April 11, 1989, is a registered investment adviser under the Investment
Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the
Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. Total assets under management or administration by these
and other subsidiaries of Federated Investors are approximately $70 billion.
Federated Investors, which was founded in 1956 as Federated Investors, Inc.,
develops and manages mutual funds primarily for the financial industry.
Federated Investors' track record of competitive performance and its
disciplined, risk averse investment philosophy serve approximately 3,500 client
institutions nationwide. Through these same client institutions, individual
shareholders also have access to this same level of investment expertise.
9
Gary J. Madich and Susan M. Nason are the Fund's co-portfolio managers. Gary J.
Madich has been the Fund's co-portfolio manager since January 1992. Mr. Madich
joined Federated Investors in 1984 and has been a Senior Vice President of the
Fund's investment adviser since 1993. Mr. Madich served as a Vice President of
the Fund's investment adviser from 1988 until 1993. Mr. Madich is a Chartered
Financial Analyst and received his M.B.A. in Public Finance from the University
of Pittsburgh.
Susan M. Nason has been the Fund's co-portfolio manager since December 1993. Ms.
Nason joined Federated Investors in 1987 and has been a Vice President of the
Fund's investment adviser since 1993. Ms. Nason served as an Assistant Vice
President of the investment adviser from 1990 until 1992, and from 1987 until
1990 she acted as an investment analyst. Ms. Nason is a Chartered Financial
Analyst and received her M.B.A. in Finance from Carnegie-Mellon University.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors (the "Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
-------------------- ------------------------------------
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the Shares to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
10
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Shareholder Services Plan, certain financial
institutions may be compensated by the adviser or its affiliates for the
continuing investment of customers' assets in certain funds, including the Fund,
advised by those entities. These payments will be made directly by the
distributor or adviser from their assets, and will not be made from the assets
of the Fund or by the assessment of a sales charge on Shares.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is the transfer agent for the Shares of the Fund, and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND INSTITUTIONAL SHARES
The Fund pays all of its own expenses. Holders of Shares pay their allocable
portion of Fund and Trust expenses. The Trust expenses for which holders of
Shares pay their allocable portion include, but are not limited to: the cost of
organizing the Trust and continuing its existence, registering the Trust with
federal and state securities authorities, Trustees' fees, the cost of meetings
of Trustees, legal fees of the Trust, association membership dues, and such
non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund,
investment advisory services, taxes and commissions, custodian fees, insurance
premiums, auditors' fees, and such non-recurring and extraordinary items as may
arise.
At present, no expenses are allocated to the Shares as a class. However, the
Trustees reserve the right to allocate certain expenses to holders of Shares as
they deem appropriate (the "Class Expenses"). In any case, the Class Expenses
would be limited to: transfer agent fees as identified by the transfer agent as
attributable to holders of Shares; printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses,
and proxies to current shareholders; registration fees paid to the Securities
and Exchange Commission and registration fees paid to state securities
commissions; expenses related to administrative personnel and services as
required to support holders of Shares; legal fees relating solely to Shares; and
Trustees' fees incurred as a result of issues relating solely to Shares.
11
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Shares will exceed that of Institutional Service Shares due to the variance in
daily net income realized by each class as a result of different distribution
charges incurred by the classes. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
INVESTING IN INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: State Street Bank and Trust Company, Boston,
Massachusetts; Attention: EDGEWIRE; For Credit to: Federated ARMs
Fund--Institutional Shares; Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee or
Institution Name; ABA Number 011000028. Shares cannot be purchased on days on
which the New York Stock Exchange is closed and on federal holidays restricting
wire transfers.
BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Federated ARMs Fund--Institutional Shares to the Fund's transfer agent,
Federated Services Company, c/o State Street Bank and Trust Company, P.O. Box
8604, Boston, Massachusetts 02266-8604. Orders by mail are considered received
after payment by check is converted by the transfer agent's bank, State Street
Bank, into federal funds. This is normally the next business day after State
Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee, if applicable. However, an account may be opened with a
smaller amount as long as the $25,000 minimum is reached within 90 days. An
institutional investor's minimum investment will be calculated by combining all
accounts it maintains with the Fund. Accounts established through a non-
affiliated bank or broker may be subject to a smaller minimum investment.
12
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days on which no Shares are tendered for redemption
and no orders to purchase Shares are received; and (iii) the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR INSTITUTIONAL SHARES
Investors may exchange certain U.S. government securities or a combination of
securities and cash for Shares. The securities and any cash must have a market
value of at least $25,000. The Fund reserves the right to determine the
acceptability of securities to be exchanged. Securities accepted by the Fund are
valued in the same manner as the Fund values its assets. Shareholders wishing to
exchange securities should first contact Federated Securities Corp.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions holding
Shares in a fiduciary, agency, custodial, or similar capacity may charge or pass
through subaccounting fees as part of or in addition to normal trust or agency
account fees. They may also charge fees for other services provided which may be
related to the ownership of Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted, upon instruction of
the transfer agent, into federal funds. Dividends are
13
automatically reinvested on payment dates in additional Shares of the Fund
unless cash payments are requested by contacting the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every twelve months.
REDEEMING INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event longer than seven days later, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, the shareholders may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption, such as that discussed in "Written Requests,"
should be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his name, the Fund name, the class of Shares,
his account number, and the share or dollar amount requested. If Share
certificates have been issued, they must be properly endorsed and should be sent
by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
14
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund and its transfer agent reserve
the right to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights except that, in matters affecting only a
particular Fund or class, only shares of that particular Fund or class are
entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the Fund shall be called by the Trustees upon the written
request of shareholders owning at least 10% of the Trust's outstanding shares of
all portfolios entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect its shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of its shareholders for acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
15
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from its assets.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses related by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
- the Fund is not subject to the Pennsylvania corporate or personal property
tax; and
- Shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that
the Fund's portfolio securities would be subject to such taxes if owned
directly by residents of those jurisdictions.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield for
Institutional Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Shares after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Institutional Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Institutional Shares over a thirty-day period by the offering price per share
of Institutional Shares on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
16
income actually earned by Institutional Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.
The Institutional Shares are sold without any sales load or other similar
non-recurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares. Because Institutional Service Shares are
subject to 12b-1 fees, total return and yield of Institutional Shares, for the
same period, will exceed that of Institutional Service Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Institutional Service Shares are sold to banks and other institutions that hold
assets in an agency capacity and rely upon the distribution services provided by
the distributor for the marketing of these shares, as well as to retail
customers of such institutions, and are subject to a minimum initial investment
of $25,000. Institutional Service Shares are sold at net asset value and are
distributed pursuant to a Rule 12b-1 Plan adopted by the Trust whereby the
distributor is paid a fee of .25 of 1% of the Institutional Service Shares'
average net assets.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares than from
another class of shares.
The amount of dividends payable to holders of Institutional Shares will exceed
that of Institutional Service Shares by the difference between class expenses
and distribution and shareholder service expenses borne by shares of each
respective class.
The stated advisory fee is the same for both classes of shares.
17
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1994 1993 1992*
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.98 $ 10.01 $ 9.98
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income 0.42 0.48 0.18
- ------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.35) (0.03) 0.03
- ------------------------------------------------------------ --------- --------- ---------
Total from investment operations 0.07 0.45 0.21
- ------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Dividends to shareholders from net investment income (0.42) (0.48) (0.18)
- ------------------------------------------------------------ --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.63 $ 9.98 $ 10.01
- ------------------------------------------------------------ --------- --------- ---------
TOTAL RETURN+ 0.74% 4.56% 2.11%
- ------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------
Expenses 0.80% 0.76% 0.76% (a)
- ------------------------------------------------------------
Net investment income 4.26% 4.72% 5.46% (a)
- ------------------------------------------------------------
Expense waiver/reimbursement (b) 0.23% 0.21% 0.32% (a)
- ------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets, end of period (000 omitted) $255,891 $499,418 $113,095
- ------------------------------------------------------------
Portfolio turnover rate 65% 36% 38%
- ------------------------------------------------------------
<FN>
* Reflects operations for the period from May 4, 1992 (date of initial public
investment of Institutional Service Shares) to August 31, 1992.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
+ Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year-ended August 31, 1994, which can be obtained
free of charge.
18
FEDERATED ARMS FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------- --------------
<C> <S> <C>
GOVERNMENT AGENCY OBLIGATIONS--82.3%
- -------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ADJUSTABLE
RATE MORTGAGE--42.7%
-------------------------------------------------
$624,668,640 4.352%-7.667%, 5/1/2016-9/1/2032 $ 638,350,567
------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ADJUSTABLE
RATE MORTGAGE--29.0%
-------------------------------------------------
423,871,989 4.021%-11.50%, 3/1/2016-1/1/2029 433,441,829
------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGE--2.7%
-------------------------------------------------
39,811,058 6.50%-6.75%, 6/20/2022-7/20/2024 40,004,848**
------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--2.2%
-------------------------------------------------
1,914,926 5.325%, Series 4-4A, 5/15/2019 1,921,819
-------------------------------------------------
18,876,700 6.45%, Series 1578-FE, 7/15/2022 18,522,762
-------------------------------------------------
12,057,750 10.15%, Series MH1-A, 4/15/2006 12,540,421
------------------------------------------------- --------------
Total 32,985,002
------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP.--0.3%
-------------------------------------------------
4,459,053 11.50%, 5/1/2019 4,903,531
------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--1.3%
-------------------------------------------------
6,724,849 5.262%, Series G91-15F, 6/25/2021 6,697,815
-------------------------------------------------
5,906,659 5.412%, Series G92-16F, 3/25/2022 5,906,541
-------------------------------------------------
6,446,578 5.412%, Series G92-21F, 4/25/2022 6,443,935
------------------------------------------------- --------------
Total 19,048,291
------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--0.5%
-------------------------------------------------
6,220,900 11.50%, 2/1/2020 6,905,199
------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--3.6%
-------------------------------------------------
48,520,008 11.00%-12.00%, 12/15/2009-7/15/2020 54,509,624
------------------------------------------------- --------------
TOTAL GOVERNMENT AGENCY OBLIGATIONS
(IDENTIFIED COST, $1,238,530,140) 1,230,148,891
------------------------------------------------- --------------
</TABLE>
19
FEDERATED ARMS FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------- --------------
<C> <S> <C>
TREASURY OBLIGATIONS--10.9%
- -------------------------------------------------------------------
U.S. TREASURY BILLS--3.2%
-------------------------------------------------
$ 50,000,000 8/24/95 $ 47,413,000
------------------------------------------------- --------------
U.S. TREASURY NOTES--7.7%
-------------------------------------------------
115,000,000 5.875%-6.125%, 5/31/96-7/31/96 114,924,350
------------------------------------------------- --------------
TOTAL TREASURY OBLIGATIONS
(IDENTIFIED COST, $162,220,547) 162,337,350
------------------------------------------------- --------------
*REPURCHASE AGREEMENTS--7.2%
- -------------------------------------------------------------------
20,000,000(a) Goldman Sachs & Co., 4.71%, dated 8/23/94, due
9/26/94 20,000,000
------------------------------------------------- --------------
7,640,000 J.P. Morgan Securities, Inc., 4.85%, dated
8/31/94, due 9/1/94 7,640,000
------------------------------------------------- --------------
80,000,000 Kidder, Peabody & Co., Inc., 4.80%, dated
8/31/94, due 9/1/94 80,000,000
------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS
(AMORTIZED COST) 107,640,000
------------------------------------------------- --------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $1,508,390,687) $1,500,126,241+
------------------------------------------------- --------------
</TABLE>
<TABLE>
<C> <S>
<FN>
(a) Although final maturity falls beyond seven days a liquidity feature is included in
each transaction to permit termination of the repurchase agreement within seven days.
* The repurchase agreements are 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 agreements are through participation in joint accounts with other
Federated funds.
** Includes security with a market value of $20,025,000, subject to Dollar Roll
transactions.
+ The cost of investments for federal tax purposes amounts to $1,508,390,687. The net
unrealized depreciation of investments on a federal tax cost basis amounts to
$8,264,446, which is comprised of $2,611,483 appreciation and $10,875,929
depreciation at August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($1,494,704,025) at August 31, 1994.
</TABLE>
<TABLE>
<S> <C>
The following abbreviations are used in this portfolio:
PC --Participation Certificate
REMIC --Real Estate Mortgage Investment Conduit
</TABLE>
(See Notes which are integral part of the Financial Statements)
20
FEDERATED ARMS FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- -----------------------------------------------------------------
Investments, at value (identified and tax cost; $1,508,390,687) $1,500,126,241
- -----------------------------------------------------------------
Cash 129,432
- -----------------------------------------------------------------
Interest receivable 10,977,347
- -----------------------------------------------------------------
Receivable for investments sold 12,363,951
- -----------------------------------------------------------------
Receivable for Fund shares sold 29,238
- ----------------------------------------------------------------- --------------
Total assets 1,523,626,209
- -----------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Payable for Dollar Roll transactions $19,950,919
- -----------------------------------------------------
Dividends payable 5,479,538
- -----------------------------------------------------
Payable for Fund shares redeemed 3,304,855
- -----------------------------------------------------
Accrued expenses 186,872
- ----------------------------------------------------- -----------
</TABLE>
<TABLE>
<S> <C>
Total liabilities 28,922,184
- ----------------------------------------------------------------- --------------
NET ASSETS for 155,173,964 shares of beneficial interest
outstanding $1,494,704,025
- ----------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------
Paid-in capital $1,573,572,622
- -----------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (8,264,446)
- -----------------------------------------------------------------
Accumulated net realized gain (loss) on investments (70,604,151)
- ----------------------------------------------------------------- --------------
Total Net Assets $1,494,704,025
- ----------------------------------------------------------------- --------------
NET ASSET VALUE, Offering Price and Redemption Proceeds per
Share:
- -----------------------------------------------------------------
Institutional Shares (net assets of
$1,238,812,594 DIVIDED BY 128,609,253 shares of beneficial
interest outstanding) $ 9.63
- ----------------------------------------------------------------- --------------
Institutional Service Shares (net assets of
$255,891,431 DIVIDED BY 26,564,711 shares of beneficial interest
outstanding) $ 9.63
- ----------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
21
FEDERATED ARMS FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------
Interest income (net of interest expense of $89,107) $123,828,567
- ----------------------------------------------------------------------------------------
EXPENSES--
- ----------------------------------------------------------------------------------------
Investment advisory fee $14,679,639
- -------------------------------------------------------------------------
Trustees' fees 24,136
- -------------------------------------------------------------------------
Administrative personnel and services 1,429,050
- -------------------------------------------------------------------------
Custodian and portfolio accounting fees 458,202
- -------------------------------------------------------------------------
Distribution services fees 1,097,576
- -------------------------------------------------------------------------
Shareholder services fees--Institutional Service Shares 395,231
- -------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 87,603
- -------------------------------------------------------------------------
Fund share registration costs 67,813
- -------------------------------------------------------------------------
Auditing fees 19,913
- -------------------------------------------------------------------------
Legal fees 41,667
- -------------------------------------------------------------------------
Insurance premiums 47,118
- -------------------------------------------------------------------------
Printing and postage 20,903
- -------------------------------------------------------------------------
Taxes 19,359
- -------------------------------------------------------------------------
Miscellaneous 20,211
- ------------------------------------------------------------------------- -----------
Total expenses 18,408,421
- -------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------
Waiver of investment advisory fees $3,459,009
- ------------------------------------------------------------
Waiver of distribution services fees 395,231 3,854,240
- ------------------------------------------------------------ ---------- -----------
Net expenses 14,554,181
- ---------------------------------------------------------------------------------------- ------------
Net investment income 109,274,386
- ---------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (55,879,989)
- ----------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (24,269,803)
- ---------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments (80,149,792)
- ---------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 29,124,594
- ---------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
22
FEDERATED ARMS FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------
Net investment income $ 109,274,386 $ 102,966,928
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments ($16,735,698 net loss, and $1,799,433
net loss, respectively, as computed for federal tax purposes) (55,879,989) (14,483,096)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (24,269,803) 12,316,539
- -------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 29,124,594 100,800,371
- -------------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- --------------------------------------------------------------------------------
Institutional Shares (90,585,086) (90,280,942)
- --------------------------------------------------------------------------------
Institutional Service Shares (18,689,300) (12,685,986)
- -------------------------------------------------------------------------------- --------------- ---------------
Change in net assets from distributions to shareholders (109,274,386) (102,966,928)
- -------------------------------------------------------------------------------- --------------- ---------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- --------------------------------------------------------------------------------
Proceeds from sales of shares 1,886,076,982 3,939,613,668
- --------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 34,585,437 33,745,129
- --------------------------------------------------------------------------------
Cost of shares redeemed (3,515,114,267) (2,005,925,557)
- -------------------------------------------------------------------------------- --------------- ---------------
Change in net assets from Fund share transactions (1,594,451,848) 1,967,433,240
- -------------------------------------------------------------------------------- --------------- ---------------
Change in net assets (1,674,601,640) 1,965,266,683
- --------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------
Beginning of period 3,169,305,665 1,204,038,982
- -------------------------------------------------------------------------------- --------------- ---------------
End of period $ 1,494,704,025 $ 3,169,305,665
- -------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
23
FEDERATED ARMS FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated ARMs Fund (the "Fund") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as a diversified, open-end, no-load management
investment company. The Fund provides two classes of shares: Institutional
Shares and Institutional Service Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
B. 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 in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued
interest.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines established
by the Board of Trustees (the "Trustees"). Risks may arise from the
potential inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the repurchase
price on the sale of collateral securities.
C. 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").
Distributions to shareholders are recorded on the ex-dividend date.
D. 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 taxable income. Accordingly,
no provisions for federal tax are necessary. At August 31, 1994, the Fund,
for federal tax purposes, had a capital loss carryforward of $18,535,131,
which will reduce the Fund's taxable income arising from future net realized
gains on investments, if any, to the
24
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve
the Fund of any liability for federal tax. Pursuant to the Code, such
capital loss carryforward will expire in 2001, $1,799,433 and 2002,
$16,735,698. Additionally, net capital losses of $52,068,567, attributable
to security transactions incurred after October 31, 1993, are treated as
arising on September 1, 1994, the first day of the Fund's next taxable year.
E. 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.
F. OTHER--Investment transactions are accounted for on the trade date.
G. DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, and FHLMC, in
which the Fund loans mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon,
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments that may enhance the Fund's
current yield and total return.
25
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------
1994 1993
------------------------------ -----------------------------
INSTITUTIONAL SHARES: SHARES DOLLARS SHARES DOLLARS
- -------------------------------------------------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold 141,739,864 $ 1,407,584,109 320,888,500 $3,198,878,233
- --------------------------------------------------
Shares issued to shareholders in payment of
dividends declared 2,487,150 24,495,269 2,708,639 26,990,753
- --------------------------------------------------
Shares redeemed (283,203,693) (2,797,587,573) (165,001,133) (1,644,713,651)
- -------------------------------------------------- ------------ --------------- ------------ --------------
Net change resulting from Institutional Shares
transactions (138,976,679) ($1,365,508,195) 158,596,006 $1,581,155,335
- -------------------------------------------------- ------------ --------------- ------------ --------------
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------
1994 1993
------------------------------ -----------------------------
INSTITUTIONAL SERVICE SHARES: SHARES DOLLARS SHARES DOLLARS
- -------------------------------------------------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold 48,183,748 $ 478,492,873 74,332,361 $ 740,735,435
- --------------------------------------------------
Shares issued to shareholders in payment of
dividends declared 1,024,374 10,090,168 677,755 6,754,376
- --------------------------------------------------
Shares redeemed (72,696,731) (717,526,694) (36,255,451) (361,211,906)
- -------------------------------------------------- ------------ --------------- ------------ --------------
Net change resulting from Institutional Service
Shares transactions (23,488,609) (228,943,653) 38,754,665 386,277,905
- -------------------------------------------------- ------------ --------------- ------------ --------------
Net change resulting from Fund share
transactions (162,465,288) ($1,594,451,848) 197,350,671 $1,967,433,240
- -------------------------------------------------- ------------ --------------- ------------ --------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .60 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
26
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of the 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 AND SHAREHOLDER 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 Institutional Service Shares. The Plan provides
that the Fund may incur distribution expenses up to .25 of 1% of the average
daily net assets of the Institutional Service Shares, annually, to compensate
FSC. The distributor may voluntarily choose to waive its fee. The distributor
can modify or terminate this voluntary waiver at any time at its sole
discretion.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average daily net
assets of each class of shares for the period. This fee is to obtain certain
personal services for shareholders and to maintain shareholder accounts.
For the fiscal year ended August 31, 1994, Institutional Shares did not incur a
shareholder services fee.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type, and number of accounts and transactions
made by shareholders.
INTERFUND TRANSACTIONS--During the period ended August 31, 1994, the Fund
engaged in purchase and sale transactions with other affiliated funds pursuant
to Rule 17a-7 under the Act, amounting to $588,256,901 and $703,344,890,
respectively. These purchases and sales were conducted on an arms length basis
and transacted for cash consideration only, at independent current market
prices, and without brokerage commissions, fees, or other remuneration.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
27
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
PURCHASES--
- --------------------------------------------------
U.S. government obligations $1,551,633,178
- -------------------------------------------------- --------------
SALES AND MATURITIES
- --------------------------------------------------
U.S. government obligations $2,609,061,586
- -------------------------------------------------- --------------
</TABLE>
28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- ---------------------------------------------------------
To the Trustees and Shareholders of
FEDERATED ARMs FUND:
We have audited the accompanying statement of assets and liabilities of
Federated ARMs Fund, including the portfolio of investments, as of August 31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods presented therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated ARMs Fund at August 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for the periods presented
therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
October 6, 1994
29
ADDRESSES
- --------------------------------------------------------------------------------
Federated ARMs Fund
Institutional Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------
Custodian
State Street Bank and
Trust Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- --------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing
Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------
Legal Counsel
Houston, Houston &
Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- --------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro &
Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- --------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- --------------------------------------------------------------------------------
30
- --------------------------------------------------------------------------------
FEDERATED ARMS FUND
INSTITUTIONAL SHARES
PROSPECTUS
A Diversification Portfolio of
Federated ARMs Fund,
an Open-End Management
Investment Company
October 31, 1994
[LOGO]
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
[LOGO]
RECYCLED
314082108 PAPER
8100309A-IS (10/94)
- --------------------------------------------------------------------------------
FEDERATED ARMS FUND
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
The Institutional Service Shares offered by this prospectus represent
interests in a diversified portfolio of securities (the "Fund") of
Federated ARMs Fund (the "Trust"). The Trust is an open-end management
investment company (a mutual fund).
The investment objective of the Fund is to provide current income
consistent with minimal volatility of principal. The Fund concentrates
at least 65% of the value of its total assets in adjustable and
floating rate mortgage securities ("ARMs") which are issued or
guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Institutional Service Shares of the Fund. Keep
this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information
for Institutional Service Shares and Institutional Shares dated
October 31, 1994, with the Securities and Exchange Commission. The
information contained in the Combined Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Combined Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information
or to make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- --------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- --------------------------------------------------
GENERAL INFORMATION 3
- --------------------------------------------------
INVESTMENT INFORMATION 3
- --------------------------------------------------
Investment Objective 3
Investment Policies 3
Investment Limitations 8
TRUST INFORMATION 9
- --------------------------------------------------
Management of the Trust 9
Distribution of Institutional Service
Shares 10
Administration of the Fund 11
Expenses of the Fund and
Institutional Service Shares 11
NET ASSET VALUE 12
- --------------------------------------------------
INVESTING IN INSTITUTIONAL SERVICE
SHARES 12
- --------------------------------------------------
Share Purchases 12
Minimum Investment Required 13
What Shares Cost 13
Exchanging Securities for
Institutional Service Shares 13
Subaccounting Services 13
Certificates and Confirmations 13
Dividends 14
Capital Gains 14
REDEEMING INSTITUTIONAL SERVICE SHARES 14
- --------------------------------------------------
Telephone Redemption 14
Written Requests 14
Accounts with Low Balances 15
SHAREHOLDER INFORMATION 15
- --------------------------------------------------
Voting Rights 15
Massachusetts Partnership Law 16
TAX INFORMATION 16
- --------------------------------------------------
Federal Income Tax 16
Pennsylvania Corporate and Personal
Property Taxes 16
PERFORMANCE INFORMATION 17
- --------------------------------------------------
OTHER CLASSES OF SHARES 17
- --------------------------------------------------
FINANCIAL STATEMENTS 18
- --------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 29
- --------------------------------------------------
ADDRESSES 30
- --------------------------------------------------
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)............................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL INSTITUTIONAL SERVICE SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (1)................................................................. 0.46%
12b-1 Fee (after waiver) (2)...................................................................... 0.01%
Total Other Expenses.............................................................................. 0.33%
Shareholder Services Fee (3)......................................................... 0.24%
Total Institutional Service Shares Operating Expenses (4)..................................... 0.80%
<FN>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.60%.
(2) The maximum 12b-1 fee is 0.25%.
(3) The maximum shareholder services fee is 0.25%.
(4) The Total Institutional Service Shares Operating Expenses in the table
above are based on expenses expected during the fiscal year ending August
31, 1995. The Total Institutional Service Shares Operating Expenses were
0.80% for the fiscal year ended August 31, 1994, and would have been 1.03%
absent the voluntary waivers of a portion of the management fee and a
portion of the 12b-1 fee.
</TABLE>
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SERVICE SHARES OF
THE FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE
DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL
SERVICE SHARES" AND "TRUST INFORMATION." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period............................................ $8 $26 $44 $99
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only to
Institutional Service Shares of the Fund. The Fund also offers another class of
shares called Institutional Shares. Institutional Service Shares and
Institutional Shares are subject to certain of the same expenses; however,
Institutional Shares are not subject to a 12b-1 fee. See "Other Classes of
Shares."
1
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1994 1993 1992*
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.98 $ 10.01 $ 9.98
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income 0.42 0.48 0.18
- ------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.35) (0.03) 0.03
- ------------------------------------------------------------ --------- --------- ---------
Total from investment operations 0.07 0.45 0.21
- ------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Dividends to shareholders from net investment income (0.42) (0.48) (0.18)
- ------------------------------------------------------------ --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.63 $ 9.98 $ 10.01
- ------------------------------------------------------------ --------- --------- ---------
TOTAL RETURN+ 0.74% 4.56% 2.11%
- ------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------
Expenses 0.80% 0.76% 0.76% (a)
- ------------------------------------------------------------
Net investment income 4.26% 4.72% 5.46% (a)
- ------------------------------------------------------------
Expense waiver/reimbursement (b) 0.23% 0.21% 0.32% (a)
- ------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets, end of period (000 omitted) $255,891 $499,418 $113,095
- ------------------------------------------------------------
Portfolio turnover rate 65% 36% 38%
- ------------------------------------------------------------
<FN>
* Reflects operations for the period from May 4, 1992 (date of initial public
investment of Institutional Service Shares) to August 31, 1992.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
+ Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year-ended August 31, 1994, which can be obtained
free of charge.
2
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated May 24, 1985. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date of this
prospectus, the Board of Trustees (the "Trustees") have established two classes
of shares, Institutional Service Shares and Institutional Shares. This
prospectus relates only to Institutional Service Shares (the "Shares") of the
Fund.
Shares of the Fund are designed to give banks and other institutions that hold
assets in an agency capacity and rely upon the distribution services provided by
the distributor for the marketing of these Shares, as well as to retail
customers of such institutions, a convenient means of accumulating an interest
in a professionally managed, diversified portfolio which invests at least 65% of
the value of its total assets in U.S. government securities, all of which
government securities will be adjustable and floating rate mortgage securities
which are issued or guaranteed as to payment of principal and interest by the
U.S. government, its agencies or instrumentalities. In addition, the Fund is
designed to provide an appropriate investment for particular financial
institutions which are subject to government agency regulations, including
credit unions, savings associations, and national banks. A minimum initial
investment of $25,000 over a 90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with minimal volatility of principal. Current income includes, in general,
discount earned on U.S. Treasury bills and agency discount notes, interest
earned on mortgage related securities and other U.S. government securities, and
short-term capital gains. The investment objective cannot be changed without
approval of shareholders. The Fund anticipates that it will experience minimal
volatility of principal due to the frequent adjustments to interest rates on
adjustable and floating rate mortgage securities which comprise the portfolio.
Of course, there can be no assurance that the Fund will be able to maintain
minimal volatility of principal or that it will achieve its investment
objective. The Fund endeavors to achieve its investment objective, however, by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
Except as otherwise noted, the investment policies described below may not be
changed by the Trustees without shareholder approval.
The Fund will limit its investments to those that are permitted for purchase by
federal savings associations pursuant to applicable rules, regulations, or
interpretations of the Office of Thrift
3
Supervision and by federal credit unions under the Federal Credit Union Act and
the rules, regulations, and interpretations of the National Credit Union
Administration (the "NCUA"). Should additional permitted investments be allowed
as a result of future changes in applicable regulations or federal laws, the
Fund reserves the right, without shareholder approval, to make such investments
consistent with the Fund's investment objective, policies, and limitations.
Further, should existing statutes or regulations change so as to cause any
securities held by the Fund to become ineligible for purchase by federal savings
associations or federal credit unions, the Fund will dispose of those securities
at times advantageous to the Fund.
As operated within the above limitations, and pursuant to the Fund's investment
policy, which may be changed without shareholder approval, to limit its
investments to securities that are appropriate direct investments for national
banks, the Fund will also serve as an appropriate vehicle for a national bank as
an investment for its own account.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
at least 65% of the value of its total assets in a professionally managed
portfolio of U.S. government securities. As a matter of investment policy, which
may be changed without shareholder approval, all of these U.S. government
securities will be adjustable and floating rate mortgage securities which are
issued or guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities.
The types of mortgage securities in which the Fund may invest include the
following:
- adjustable rate mortgage securities;
- collateralized mortgage obligations;
- real estate mortgage investment conduits; and
- other securities collateralized by or representing interests in real
estate mortgages whose interest rates reset at periodic intervals and are
issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
In addition to the securities described above, the Fund may also invest in
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes, and
bonds, as well as obligations of U.S. government agencies or instrumentalities
which are not collateralized by or represent interests in real estate mortgages,
as described above.
The Fund may also invest in mortgage related securities, as defined in section
3(a)(41) of the Securities Exchange Act of 1934, which are issued by private
entities such as investment banking firms and companies related to the
construction industry. The privately issued mortgage related securities in which
the Fund may invest include:
- privately issued securities which are collateralized by pools of mortgages
in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government;
4
- privately issued securities which are collateralized by pools of mortgages
in which payment of principal and interest are guaranteed by the issuer
and such guarantee is collateralized by U.S. government securities; and
- other privately issued securities in which the proceeds of the issuance
are invested in mortgage-backed securities and payment of the principal
and interest are supported by the credit of any agency or instrumentality
of the U.S. government.
The privately issued mortgage related securities provide for a periodic payment
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage
securities with adjustable rather than fixed interest rates. The ARMS in which
the Fund invests are issued by Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA"), and Federal Home Loan
Mortgage Corporation ("FHLMC") and are actively traded. The underlying mortgages
which collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would
receive monthly scheduled payments of principal and interest and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. government securities.
Not unlike other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally rises
when interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g. investments with comparable maturities) because,
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related to
the construction industry. CMOs purchased by the Fund may be:
5
- collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
- collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized
by U.S. government securities; or
- securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.
The Fund will only purchase CMO's which are investment grade, as rated by a
nationally recognized statistical rating organization.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings of
multiple class real estate mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code. Issuers of
REMICs may take several forms, such as trusts, partnerships, corporations,
associations or a segregated pool of mortgages. Once REMIC status is elected and
obtained, the entity is not subject to federal income taxation. Instead, income
is passed through the entity and is taxed to the person or persons who hold
interests in the REMIC. A REMIC interest must consist of one or more classes of
"regular interests," some of which may offer adjustable rates (the type in which
the Fund primarily invests), and a single class of "residual interests." To
qualify as a REMIC, substantially all of the assets of the entity must be in
assets directly or indirectly secured principally by real property.
REGULATORY COMPLIANCE. In accordance with the Rules and Regulations of the
NCUA, unless the purchase is made solely to reduce interest-rate risk, the Fund
will not invest in any CMO or REMIC security that meets any of the following
three tests: (1) the CMO or REMIC has an expected average life greater than 10
years; (2) the average life of the CMO or REMIC extends by more than 4 years
assuming an immediate and sustained parallel shift in the yield curve of plus
300 basis points, or shortens by more than 6 years assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis points; or (3)
the estimated change in the price of the CMO or REMIC is more than 17%, due to
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points.
Neither test (1) nor (2) above apply to floating or adjustable rate CMOs or
REMICs with all of the following characteristics: (a) the interest rate of the
instrument is reset at least annually; (b) the interest rate is below the
contractual cap of the instrument; (c) the instrument is tied to a widely-used
market rate; and (d) the instrument varies directly (not inversely) and is reset
in proportion with the index's changes.
The Fund may not purchase a residual interest in a CMO or REMIC. In addition,
the Fund will not purchase zero coupon securities with maturities greater than
10 years.
RESETS. The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund
invests generally are readjusted or reset at intervals of one year or less to an
increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a
6
moving average of mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-month Treasury
Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the National Median Cost of Funds, the one-month or three-month
London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others tend to lag changes in market rate levels and tend to be somewhat less
volatile.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs,
and REMICs in which the Fund invests will frequently have caps and floors which
limit the maximum amount by which the loan rate to the residential borrower may
change up or down: (1) per reset or adjustment interval and (2) over the life of
the loan. Some residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. An example of the effect of
caps and floors on a residential mortgage loan may be found in the Combined
Statement of Additional Information. Additionally, even though the interest
rates on the underlying residential mortgages are adjustable, amortization and
prepayments may occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities stated in
the underlying mortgages.
TEMPORARY INVESTMENTS. For defensive purposes only, the Fund may also invest
temporarily in cash and money market instruments during times of unusual market
conditions and to maintain liquidity. Money market instruments may include
obligations such as:
- obligations of the U.S. government or its agencies or instrumentalities;
and
- repurchase agreements.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. To the extent that the original seller does not
repurchase the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Fund's Board of Trustees and will receive collateral in the form of cash
or U.S. government securities equal to at least 100% of the value of the
securities loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases
7
securities with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a price or
yield considered to be advantageous. Settlement dates may be a month or more
after entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay
more/less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER. The Fund does not intend to invest for the purpose of
seeking short-term profits, however securities in its portfolio will be sold
whenever the Fund's investment adviser believes it is appropriate to do so in
light of the Fund's investment objective, without regard to the length of time a
particular security may have been held.
INVESTMENT LIMITATIONS
The Fund will not:
- invest in stripped mortgage securities, including securities which
represent a share of only the interest payments or only the principal
payments from underlying mortgage related securities;
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its net assets and pledge up to
10% of the value of its total assets to secure such borrowings;
- lend any of its assets except portfolio securities up to one-third of the
value of its total assets; or
- invest more than 5% of the value of its total assets in securities of
issuers which have records of less than three years of continuous
operations, including the operation of any predecessor. With respect to
the asset-backed securities, the Fund will treat the originator of the
asset pool as the company issuing the securities for purposes of
determining compliance with this limitation.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 15% of its net assets in securities which are illiquid,
including repurchase agreements providing for settlement in more than
seven days after notice.
8
TRUST INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to
.60 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse the Fund for certain operating
expenses. This does not include reimbursement to the Fund of any expenses
incurred by shareholders who use the transfer agent's subaccounting facilities.
The Adviser can terminate this voluntary waiver of its advisory fee at any time
in its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust organized
on April 11, 1989, is a registered investment adviser under the Investment
Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the
Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. Total assets under management or administration by these
and other subsidiaries of Federated Investors are approximately $70 billion.
Federated Investors, which was founded in 1956 as Federated Investors, Inc.,
develops and manages mutual funds primarily for the financial industry.
Federated Investors' track record of competitive performance and its
disciplined, risk averse investment philosophy serve approximately 3,500 client
institutions nationwide. Through these same client institutions, individual
shareholders also have access to this same level of investment expertise.
Gary J. Madich and Susan M. Nason are the Fund's co-portfolio managers. Gary J.
Madich has been the Fund's co-portfolio manager since January 1992. Mr. Madich
joined Federated Investors in 1984 and has been a Senior Vice President of the
Fund's investment adviser since 1993. Mr. Madich served as a Vice President of
the Fund's investment adviser from 1988 until 1993. Mr. Madich is a Chartered
Financial Analyst and received his M.B.A. in Public Finance from the University
of Pittsburgh.
Susan M. Nason has been the Fund's co-portfolio manager since December 1993. Ms.
Nason joined Federated Investors in 1987 and has been a Vice President of the
Fund's investment adviser since
9
1993. Ms. Nason served as an Assistant Vice President of the investment adviser
from 1990 until 1992, and from 1987 until 1990 she acted as an investment
analyst. Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in
Finance from Carnegie-Mellon University.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund will pay to the distributor an amount, computed at an annual rate of up
to .25 of 1% of the average daily net asset value of the Shares, to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of the Shares to obtain certain personal services for
shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Distribution and Shareholder Services Plans,
certain financial institutions may
10
be compensated by the adviser or its affiliates for the continuing investment of
customers' assets in certain funds, including the Fund, advised by those
entities. These payments will be made directly by the distributor or Adviser
from their assets, and will not be made from the assets of the Fund or by the
assessment of a sales charge on Shares.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors (the "Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
-------------------- ------------------------------------
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is the transfer agent for the Shares of the Fund, and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND INSTITUTIONAL SERVICE SHARES
The Fund pays all of its own expenses. Holders of Shares pay their allocable
portion of Fund and Trust expenses. The Trust expenses for which holders of
Shares pay their allocable portion include, but are not limited to: the cost of
organizing the Trust and continuing its existence; registering the Trust with
federal and state securities authorities, Trustees' fees, the cost of meetings
of Trustees, legal fees of the Trust, association membership dues, and such
non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund,
investment advisory services, taxes and commissions, custodian fees, insurance
premiums, auditors' fees, and such non-recurring and extraordinary items as may
arise.
11
At present, the only expenses allocated to the Shares as a class are expenses
under the Fund's Rule 12b-1 Plan, which relates to the Shares. However, the
Trustees reserve the right to allocate certain expenses to holders of Shares as
they deem appropriate (the "Class Expenses"). In any case, the Class Expenses
would be limited to: transfer agent fees as identified by the transfer agent as
attributable to holders of Shares; printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses,
and proxies to current shareholders; registration fees paid to the Securities
and Exchange Commission and registration fees paid to state securities
commissions; expenses related to administrative personnel and services as
required to support holders of Shares; legal fees relating solely to Shares; and
Trustees' fees incurred as a result of issues relating solely to Shares.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Institutional Shares will exceed that of Shares due to the variance in daily net
income realized by each class as a result of different distribution charges
incurred by the classes. Such variance will reflect only accrued net income to
which the shareholders of a particular class are entitled.
INVESTING IN INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: State Street Bank and Trust Company, Boston,
Massachusetts; Attention: EDGEWIRE; For Credit to: Federated ARMs
Fund--Institutional Service Shares; Fund Number (this number can be found on the
account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased on
days on which the New York Stock Exchange is closed and on federal holidays
restricting wire transfers.
BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Federated ARMs Fund-Institutional Service Shares to the Fund's transfer agent,
Federated Services Company, c/o State Street Bank and Trust Company, P.O. Box
8604, Boston, Massachusetts 02266-8604. Orders by mail are
12
considered received after payment by check is converted by the transfer agent's
bank, State Street Bank, into federal funds. This is normally the next business
day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee, if applicable. However, an account may be opened with a
smaller amount as long as the $25,000 minimum is reached within 90 days. An
institutional investor's minimum investment will be calculated by combining all
accounts it maintains with the Fund. Accounts established through a non-
affiliated bank or broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days on which no Shares are tendered for redemption
and no orders to purchase Shares are received; and (iii) the following holidays:
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR INSTITUTIONAL SERVICE SHARES
Investors may exchange certain U.S. government securities or a combination of
securities and cash for Shares. The securities and any cash must have a market
value of at least $25,000. The Fund reserves the right to determine the
acceptability of securities to be exchanged. Securities accepted by the Fund are
valued in the same manner as the Fund values its assets. Shareholders wishing to
exchange securities should first contact Federated Securities Corp.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions holding
Shares in a fiduciary, agency, custodial, or similar capacity may charge or pass
through subaccounting fees as part of or in addition to normal trust or agency
account fees. They may also charge fees for other services provided which may be
related to the ownership of Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
13
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted, upon instruction of
the transfer agent, into federal funds. Dividends are automatically reinvested
on payment dates in additional Shares of the Fund unless cash payments are
requested by contacting the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every twelve months.
REDEEMING INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event longer than seven days later, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, the shareholders may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption, such as that discussed in "Written Requests,"
should be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his name, the Fund name, the class of Shares,
his account number, and the share or dollar amount
14
requested. If Share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with the written
request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund and its transfer agent reserve
the right to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights except that, in matters affecting only a
particular Fund or class, only shares of that particular Fund or class are
entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
15
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the Fund shall be called by the Trustees upon the written
request of shareholders owning at least 10% of the Trust's outstanding shares of
all portfolios entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect its shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of its shareholders for acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from its assets.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses related by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
- the Fund is not subject to the Pennsylvania corporate or personal property
tax; and
- Shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that
the Fund's portfolio securities would be subject to such taxes if owned
directly by residents of those jurisdictions.
16
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield for
Institutional Service Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Service Shares after reinvesting all
income and capital gain distributions. It is calculated by dividing that change
by the initial investment and is expressed as a percentage.
The yield of Institutional Service Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by Institutional Service Shares over a thirty-day period by
the offering price per share of Institutional Service Shares on the last day of
the period. This number is then annualized using semi-annual compounding. The
yield does not necessarily reflect income actually earned by Institutional
Service Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The Institutional Service Shares are sold without any sales load or other
similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares. Because Institutional Service Shares are
subject to 12b-1 fees, total return and yield of Institutional Shares, for the
same period, will exceed that of Institutional Service Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Institutional Shares are sold primarily to accounts for which financial
institutions act in a fiduciary or agency capacity, and other accounts where a
financial institution maintains master accounts with an aggregate investment of
at least $400 million in certain mutual funds which are advised or distributed
by affiliates of Federated Investors. Shares are also made available to
financial intermediaries, public, and private organizations. A minimum initial
investment of $25,000 over a 90-day period is required. Institutional Shares are
sold at net asset value and are distributed without a Rule 12b-1 Plan.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares than from
another class of shares.
The amount of dividends payable to holders of Institutional Shares will exceed
that of Institutional Service Shares by the difference between class expenses
and distribution and shareholder service expenses borne by shares of each
respective class.
The stated advisory fee is the same for both classes of shares.
17
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986*
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD $ 9.98 $ 10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99 $ 9.98 $ 10.00
- ------------
INCOME FROM
INVESTMENT
OPERATIONS
- ------------
Net
investment
income 0.45 0.50 0.63 0.69 0.71 0.72 0.73 0.78 0.62
- ------------
Net
realized
and
unrealized
gain
(loss) on
investments (0.35) (0.03) 0.42 0.68 (0.48) 0.59 (0.11) (0.99) (0.02)
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total from
investment
operations 0.10 0.47 1.05 1.37 0.23 1.31 0.62 (0.21) 0.60
- ------------
LESS
DISTRIBUTIONS
- ------------
Dividends
to
shareholders
from net
investment
income (0.45) (0.50) (0.63) (0.69) (0.71) (0.72) (0.73) (0.78) (0.62)
- ------------
Distributions
to
shareholders
from net
realized
gain on
investment
transactions -- -- (0.08) -- -- -- -- -- --
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
distributions (0.45) (0.50) (0.71) (0.69) (0.71) (0.72) (0.73) (0.78) (0.62)
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSET
VALUE, END
OF PERIOD $ 9.63 $ 9.98 $ 10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99 $ 9.98
- ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL
RETURN+ .99% 4.82% 11.21% 15.73% 2.45% 15.25% 7.09% (2.33)% 6.16%
- ------------
RATIOS TO
AVERAGE NET
ASSETS
- ------------
Expenses 0.55% 0.51% 0.51% 0.78% 0.78% 0.79% 0.75% 0.81%
0.96%(a)
- ------------
Net
investment
income 4.51% 4.97% 5.95% 7.36% 7.62% 7.81% 8.10% 7.88%
9.84%(a)
- ------------
Expenses
waiver/reim-
bursement (b) 0.14% 0.21% 0.32% 1.02% 1.02% 0.95% 1.18% 0.75%
1.50%(a)
- ------------
SUPPLEMENTAL
DATA
- ------------
Net
assets,
end of
period
(000
omitted) $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574 $16,753 $7,405 $5,433
- ------------
Porfolio
turnover
rate 65% 36% 38% 127% 170% 85% 125% 228% 89%
- ------------
<FN>
* Reflects operations for the period from December 3, 1985 to August 31, 1986.
For the period from the start of business, November 18, 1985, to December 2,
1985, net investment income aggregating $0.030 per share ($300) was
distributed to the Fund's investment adviser. Such distribution represented
the net investment income of the Fund prior to the initial public offering of
Fund shares, which commenced December 3, 1985.
+ Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year-ended August 31, 1994, which can be obtained
free of charge.
18
FEDERATED ARMS FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------- --------------
<C> <S> <C>
GOVERNMENT AGENCY OBLIGATIONS--82.3%
- -------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ADJUSTABLE
RATE MORTGAGE--42.7%
-------------------------------------------------
$624,668,640 4.352%-7.667%, 5/1/2016-9/1/2032 $ 638,350,567
------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ADJUSTABLE
RATE MORTGAGE--29.0%
-------------------------------------------------
423,871,989 4.021%-11.50%, 3/1/2016-1/1/2029 433,441,829
------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGE--2.7%
-------------------------------------------------
39,811,058 6.50%-6.75%, 6/20/2022-7/20/2024 40,004,848**
------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--2.2%
-------------------------------------------------
1,914,926 5.325%, Series 4-4A, 5/15/2019 1,921,819
-------------------------------------------------
18,876,700 6.45%, Series 1578-FE, 7/15/2022 18,522,762
-------------------------------------------------
12,057,750 10.15%, Series MH1-A, 4/15/2006 12,540,421
------------------------------------------------- --------------
Total 32,985,002
------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP.--0.3%
-------------------------------------------------
4,459,053 11.50%, 5/1/2019 4,903,531
------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--1.3%
-------------------------------------------------
6,724,849 5.262%, Series G91-15F, 6/25/2021 6,697,815
-------------------------------------------------
5,906,659 5.412%, Series G92-16F, 3/25/2022 5,906,541
-------------------------------------------------
6,446,578 5.412%, Series G92-21F, 4/25/2022 6,443,935
------------------------------------------------- --------------
Total 19,048,291
------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--0.5%
-------------------------------------------------
6,220,900 11.50%, 2/1/2020 6,905,199
------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--3.6%
-------------------------------------------------
48,520,008 11.00%-12.00%, 12/15/2009-7/15/2020 54,509,624
------------------------------------------------- --------------
TOTAL GOVERNMENT AGENCY OBLIGATIONS
(IDENTIFIED COST, $1,238,530,140) 1,230,148,891
------------------------------------------------- --------------
</TABLE>
19
FEDERATED ARMS FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------- --------------
<C> <S> <C>
TREASURY OBLIGATIONS--10.9%
- -------------------------------------------------------------------
U.S. TREASURY BILLS--3.2%
-------------------------------------------------
$ 50,000,000 8/24/95 $ 47,413,000
------------------------------------------------- --------------
U.S. TREASURY NOTES--7.7%
-------------------------------------------------
115,000,000 5.875%-6.125%, 5/31/96-7/31/96 114,924,350
------------------------------------------------- --------------
TOTAL TREASURY OBLIGATIONS
(IDENTIFIED COST, $162,220,547) 162,337,350
------------------------------------------------- --------------
*REPURCHASE AGREEMENTS--7.2%
- -------------------------------------------------------------------
20,000,000(a) Goldman Sachs & Co., 4.71%, dated 8/23/94, due
9/26/94 20,000,000
------------------------------------------------- --------------
7,640,000 J.P. Morgan Securities, Inc., 4.85%, dated
8/31/94, due 9/1/94 7,640,000
------------------------------------------------- --------------
80,000,000 Kidder, Peabody & Co., Inc., 4.80%, dated
8/31/94, due 9/1/94 80,000,000
------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS
(AMORTIZED COST) 107,640,000
------------------------------------------------- --------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $1,508,390,687) $1,500,126,241+
------------------------------------------------- --------------
</TABLE>
<TABLE>
<C> <S>
<FN>
(a) Although final maturity falls beyond seven days a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days.
* The repurchase agreements are 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 agreements are through
participation in joint accounts with other Federated funds.
** Includes security with a market value of $20,025,000, subject to Dollar
Roll transactions.
+ The cost of investments for federal tax purposes amounts to
$1,508,390,687. The net unrealized depreciation of investments on a
federal tax cost basis amounts to $8,264,446 which is comprised of
$2,611,483 appreciation and $10,875,929 depreciation at August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($1,494,704,025) at August 31, 1994.
</TABLE>
<TABLE>
<S> <C>
The following abbreviations are used in this portfolio:
PC --Participation Certificate
REMIC --Real Estate Mortgage Investment Conduit
</TABLE>
(See Notes which are integral part of the Financial Statements)
20
FEDERATED ARMS FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments, at value (identified and tax cost; $1,508,390,687) $1,500,126,241
- --------------------------------------------------------------------------------
Cash 129,432
- --------------------------------------------------------------------------------
Interest receivable 10,977,347
- --------------------------------------------------------------------------------
Receivable for investments sold 12,363,951
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 29,238
- -------------------------------------------------------------------------------- --------------
Total assets 1,523,626,209
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Payable for Dollar Roll transactions $19,950,919
- ----------------------------------------------------------------------
Dividends payable 5,479,538
- ----------------------------------------------------------------------
Payable for Fund shares redeemed 3,304,855
- ----------------------------------------------------------------------
Accrued expenses 186,872
- ---------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<S> <C>
Total liabilities 28,922,184
- -------------------------------------------------------------------------------- --------------
NET ASSETS for 155,173,964 shares of beneficial interest outstanding $1,494,704,025
- -------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $1,573,572,622
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (8,264,446)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (70,604,151)
- -------------------------------------------------------------------------------- --------------
Total Net Assets $1,494,704,025
- -------------------------------------------------------------------------------- --------------
NET ASSET VALUE, Offering Price and Redemption Proceeds per Share:
- --------------------------------------------------------------------------------
Institutional Shares (net assets of $1,238,812,594 DIVIDED BY 128,609,253 shares
of beneficial interest outstanding) $ 9.63
- -------------------------------------------------------------------------------- --------------
Institutional Service Shares (net assets of $255,891,431 DIVIDED BY 26,564,711
shares of beneficial interest outstanding) $ 9.63
- -------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
21
FEDERATED ARMS FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------------
Interest income (net of interest expense of $89,107) $ 123,828,567
- ------------------------------------------------------------------------------------------
EXPENSES--
- ------------------------------------------------------------------------------------------
Investment advisory fee $ 14,679,639
- --------------------------------------------------------------------------
Trustees' fees 24,136
- --------------------------------------------------------------------------
Administrative personnel and services 1,429,050
- --------------------------------------------------------------------------
Custodian and portfolio accounting fees 458,202
- --------------------------------------------------------------------------
Distribution services fees 1,097,576
- --------------------------------------------------------------------------
Shareholder services fees--Institutional Service Shares 395,231
- --------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 87,603
- --------------------------------------------------------------------------
Fund share registration costs 67,813
- --------------------------------------------------------------------------
Auditing fees 19,913
- --------------------------------------------------------------------------
Legal fees 41,667
- --------------------------------------------------------------------------
Insurance premiums 47,118
- --------------------------------------------------------------------------
Printing and postage 20,903
- --------------------------------------------------------------------------
Taxes 19,359
- --------------------------------------------------------------------------
Miscellaneous 20,211
- -------------------------------------------------------------------------- ------------
Total expenses 18,408,421
- --------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------
Waiver of investment advisory fees $ 3,459,009
- ------------------------------------------------------------
Waiver of distribution services fees 395,231 3,854,240
- ------------------------------------------------------------ ----------- ------------
Net expenses 14,554,181
- ------------------------------------------------------------------------------------------ -------------
Net investment income 109,274,386
- ------------------------------------------------------------------------------------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (55,879,989)
- ------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (24,269,803)
- ------------------------------------------------------------------------------------------ -------------
Net realized and unrealized gain (loss) on investments (80,149,792)
- ------------------------------------------------------------------------------------------ -------------
Change in net assets resulting from operations $ 29,124,594
- ------------------------------------------------------------------------------------------ -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
22
FEDERATED ARMS FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------
Net investment income $ 109,274,386 $ 102,966,928
- ---------------------------------------------------------------------------
Net realized gain (loss) on investments ($16,735,698 net loss, and
$1,799,433 net loss, respectively, as computed for federal tax purposes) (55,879,989) (14,483,096)
- ---------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (24,269,803) 12,316,539
- --------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 29,124,594 100,800,371
- --------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ---------------------------------------------------------------------------
Institutional Shares (90,585,086) (90,280,942)
- ---------------------------------------------------------------------------
Institutional Service Shares (18,689,300) (12,685,986)
- --------------------------------------------------------------------------- --------------- ---------------
Change in net assets from distributions to shareholders (109,274,386) (102,966,928)
- --------------------------------------------------------------------------- --------------- ---------------
FUND SHARE (PRINCIPAL) TRANSACTIONS
- ---------------------------------------------------------------------------
Proceeds from sales of shares-- 1,886,076,982 3,939,613,668
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 34,585,437 33,745,129
- ---------------------------------------------------------------------------
Cost of shares redeemed (3,515,114,267) (2,005,925,557)
- --------------------------------------------------------------------------- --------------- ---------------
Change in net assets from Fund share transactions (1,594,451,848) 1,967,433,240
- --------------------------------------------------------------------------- --------------- ---------------
Change in net assets (1,674,601,640) 1,965,266,683
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period 3,169,305,665 1,204,038,982
- --------------------------------------------------------------------------- --------------- ---------------
End of period $ 1,494,704,025 $ 3,169,305,665
- --------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
23
FEDERATED ARMS FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated ARMs Fund (the "Fund") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as a diversified, open-end, no-load management
investment company. The Fund provides two classes of shares: Institutional
Shares and Institutional Service Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
B. 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 in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued
interest.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines established
by the Board of Trustees (the "Trustees"). Risks may arise from the
potential inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the repurchase
price on the sale of collateral securities.
C. 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").
Distributions to shareholders are recorded on the ex-dividend date.
D. 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 taxable income. Accordingly,
no provisions for federal tax are necessary. At August 31, 1994, the Fund,
for federal tax purposes, had a capital loss carryforward of $18,535,131,
which will reduce the Fund's taxable income arising from future net realized
gains on investments, if any, to the
24
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve
the Fund of any liability for federal tax. Pursuant to the Code, such
capital loss carryforward will expire in 2001, $1,799,433 and 2002,
$16,735,698. Additionally, net capital losses of $52,068,567, attributable
to security transactions incurred after October 31, 1993, are treated as
arising on September 1, 1994, the first day of the Fund's next taxable year.
E. 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.
F. OTHER--Investment transactions are accounted for on the trade date.
G. DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, and FHLMC, in
which the Fund loans mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon,
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments that may enhance the Fund's
current yield and total return.
25
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------
1994 1993
----------------------------- -----------------------------
INSTITUTIONAL SHARES: SHARES DOLLARS SHARES DOLLARS
- --------------------------------------------- ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 141,739,864 $ 1,407,584,109 320,888,500 $ 3,198,878,233
- ---------------------------------------------
Shares issued to shareholders in payment of
dividends declared 2,487,150 24,495,269 2,708,639 26,990,753
- ---------------------------------------------
Shares redeemed (283,203,693) (2,797,587,573) (165,001,133) (1,644,713,651)
- --------------------------------------------- ------------ --------------- ------------ ---------------
Net change resulting from Institutional
Shares transactions (138,976,679) ($1,365,508,195) 158,596,006 $ 1,581,155,335
- --------------------------------------------- ------------ --------------- ------------ ---------------
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------
1994 1993
----------------------------- -----------------------------
INSTITUTIONAL SERVICE SHARES SHARES DOLLARS SHARES DOLLARS
- --------------------------------------------- ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 48,183,748 $ 478,492,873 74,332,361 $ 740,735,435
- ---------------------------------------------
Shares issued to shareholders in payment of
dividends declared 1,024,374 10,090,168 677,755 6,754,376
- ---------------------------------------------
Shares redeemed (72,696,731) (717,526,694) (36,255,451) (361,211,906)
- --------------------------------------------- ------------ --------------- ------------ ---------------
Net change resulting from Institutional
Service Shares transactions (23,488,609) (228,943,653) 38,754,665 386,277,905
- --------------------------------------------- ------------ --------------- ------------ ---------------
Net change resulting from Fund share
transactions (162,465,288) ($1,594,451,848) 197,350,671 $ 1,967,433,240
- --------------------------------------------- ------------ --------------- ------------ ---------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .60 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
26
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of the 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 AND SHAREHOLDER 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 Institutional Service Shares. The Plan provides
that the Fund may incur distribution expenses up to .25 of 1% of the average
daily net assets of the Institutional Service Shares, annually, to compensate
FSC. The distributor may voluntarily choose to waive its fee. The distributor
can modify or terminate this voluntary waiver at any time at its sole
discretion.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average daily net
assets of each class of shares for the period. This fee is to obtain certain
personal services for shareholders and to maintain shareholder accounts.
For the fiscal year ended August 31, 1994, Institutional Shares did not incur a
shareholder services fee.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type, and number of accounts and transactions
made by shareholders.
INTERFUND TRANSACTIONS--During the period ended August 31, 1994, the Fund
engaged in purchase and sale transactions with other affiliated funds pursuant
to Rule 17a-7 under the Act, amounting to $588,256,901 and $703,344,890,
respectively. These purchases and sales were conducted on an arms length basis
and transacted for cash consideration only, at independent current market
prices, and without brokerage commissions, fees, or other remuneration.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
27
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
PURCHASES--
- --------------------------------------------------
U.S. government obligations $1,551,633,178
- -------------------------------------------------- --------------
SALES AND MATURITIES
- --------------------------------------------------
U.S. government obligations $2,609,061,586
- -------------------------------------------------- --------------
</TABLE>
28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- ---------------------------------------------------------
To the Trustees and Shareholders of
FEDERATED ARMs FUND:
We have audited the accompanying statement of assets and liabilities of
Federated ARMs Fund, including the portfolio of investments, as of August 31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods presented therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated ARMs Fund at August 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for the periods presented
therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
October 6, 1994
29
ADDRESSES
- --------------------------------------------------------------------------------
Federated ARMs Fund
Institutional Service
Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------
Distributor
Federated Securities
Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------
Custodian
State Street Bank and
Trust Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- --------------------------------------------------------------------------------
Transfer Agent and Dividend
Disbursing Agent
Federated Services
Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------
Legal Counsel
Houston, Houston &
Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- --------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro &
Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- --------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
30
- --------------------------------------------------------------------------------
FEDERATED ARMS FUND
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
A Diversification Portfolio of
Federated ARMs Fund,
an Open-End Management
Investment Company
October 31, 1994
[LOGO]
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
[LOGO]
RECYCLED
314082207 PAPER
8100309A-SS (10/94)
FEDERATED ARMS FUND
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus for Institutional Shares or Institutional
Service Shares of Federated ARMs Fund (the "Fund") dated October 31,
1994. This Combined Statement is not a prospectus itself. To receive
a copy of either prospectus, write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated October 31, 1994
[LOGO]
Distributor
A Subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------
Types of Investments 1
When-Issued and Delayed Delivery
Transactions 2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Portfolio Turnover 2
INVESTMENT LIMITATIONS 3
- ---------------------------------------------------------
Stripped Mortgage Securities 3
Buying on Margin 3
Issuing Senior Securities and Borrowing
Money 3
Pledging Assets 3
Diversification of Investments 3
Investing in Real Estate 3
Investing in Commodities 3
Underwriting 3
Lending Cash or Securities 3
Selling Short 3
Investing in Illiquid Securities 3
Investing in Securities of Other Investment
Companies 4
Investing in New Issuers 4
FEDERATED ARMS FUND MANAGEMENT 4
- ---------------------------------------------------------
THE FUNDS 7
- ---------------------------------------------------------
Fund Ownership 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
State Expense Limitations 8
Other Related Services 8
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------
Brokerage Transactions 9
PURCHASING SHARES 9
- ---------------------------------------------------------
Distribution Plan (Institutional Service
Shares
only) and Shareholder Services Plan 9
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------
Determining Value of Securities 10
REDEEMING SHARES 10
- ---------------------------------------------------------
EXCHANGING SECURITIES FOR FUND SHARES 10
- ---------------------------------------------------------
Tax Consequences 11
TAX STATUS 11
- ---------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------
YIELD 11
- ---------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------
I
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
Federated ARMs Fund (the "Fund") was established as a Massachusetts business
trust under a Declaration of Trust dated May 24, 1985. The Declaration of Trust
permits the Fund to offer separate series and classes of shares.
Shares of the Fund are offered in two classes, Institutional Service Shares and
Institutional Shares (individually and collectively referred to as "Shares").
This Combined Statement of Additional Information relates to the above-mentioned
Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income consistent with
minimal volatility of principal. Current income includes, in general, discount
earned on U.S. Treasury bills and agency discount notes, interest earned on
mortgage-related securities and other U.S. government securities, and short-term
capital gains. The investment objective cannot be changed without approval of
shareholders. The Fund anticipates that it will experience minimal volatility of
principal due to the frequent adjustments to interest rates on adjustable and
floating rate mortgage securities which comprise the portfolio. Of course, there
can be no assurance that the Fund will be able to maintain minimal volatility of
principal or that it will achieve its investment objective. The Fund endeavors
to achieve its investment objective, however, by following the investment
policies described in the prospectus and this Combined Statement of Additional
Information.
TYPES OF INVESTMENTS
The Fund will invest at least 65% of the value of its total assets in adjustable
and floating rate mortgage securities which are issued or guaranteed as to
payment of principal and interest by the U.S. government, its agencies or
instrumentalities. These securities and other U.S. government or agency
obligations are backed by:
- the full faith and credit of the U.S. Treasury;
- the issuer's right to borrow from the U.S. Treasury;
- the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
- the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
- Federal Farm Credit Banks;
- Federal Home Loan Banks;
- Federal National Mortgage Association;
- Student Loan Marketing Association; and
- Federal Home Loan Mortgage Corporation.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an
ownership interest in federal agency mortgage pass-through securities,
such as those issued by Government National Mortgage Association. The
terms and characteristics of the mortgage instruments may vary among
pass-through mortgage loan pools.
The market for such mortgage-related securities has expanded considerably
since its inception. The size of the primary issuance market and the
active participation in the secondary market by securities dealers and
other investors make government-related pools highly liquid.
CAPS AND FLOORS
The value of mortgage-related securities in which the Fund invests may be
affected if interest rates rise or fall faster and farther than the
allowable caps on the underlying residential mortgage loans. For example,
consider a residential mortgage loan with a rate which adjusts annually,
an initial interest rate of 10%, a 2% per annum interest rate cap, and a
5% life of loan interest rate cap. If the index against which the
underlying interest rate on the residential mortgage loan is
compared--such as the one-year Treasury-- moves up by 3%, the residential
mortgage loan rate may not increase by more than 2% to 12% the first year.
As one of the underlying residential mortgages for the securities in which
the Fund invests, the
1
- --------------------------------------------------------------------------------
residential mortgage would depress the value of the securities and,
therefore, the net asset value of the Fund. If the index against which the
interest rate on the underlying residential mortgage loan is compared
moves up no faster or farther than the cap on the underlying mortgage loan
allows, or if the index moves down as fast or faster than the floor on the
underlying mortgage loan allows, the mortgage would maintain or improve
the value of the securities in which the Fund invests and, therefore, the
net asset value of the Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees").
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These assets are marked to market daily and
are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. For the fiscal years ended August 31, 1994, and
1993, the portfolio turnover rates were 65%, and 36%, respectively.
2
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
STRIPPED MORTGAGE SECURITIES
The Fund will not invest in stripped mortgage securities, including securities
which represent a share of only the interest payments or only the principal
payments from underlying mortgage related securities.
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of the
value of its net assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities is deemed
to be inconvenient or disadvantageous. The Fund will not purchase any securities
while any such borrowings are outstanding.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, it may pledge assets having a market value
not exceeding the lesser of the dollar amounts borrowed or 10% of the value of
total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets, the
Fund will not purchase securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements collateralized by
U.S. government securities) if, as a result, more than 5% of the value of its
total assets would be invested in securities of that issuer.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be deemed
to be an underwriter under the Securities Act of 1933 in connection with the
sale of securities in accordance with its investment objective, policies, and
limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up to
one-third of the value of its total assets.
SELLING SHORT
The Fund will not sell securities short.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities which are
illiquid, including repurchase agreements providing for settlement in more than
seven days after notice.
3
- --------------------------------------------------------------------------------
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 5% of the value of its total assets would be
invested in such securities, or except as part of a merger, consolidation, or
other acquisition.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of continuous
operations, including the operation of any predecessor. With respect to the
asset-backed securities, the Fund will treat the originator of the asset pool as
the company issuing the securities for purposes of determining compliance with
this limitation.
The above investment limitations cannot be changed without shareholder approval.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund did not engage in reverse repurchase agreements, purchase securities of
other investment companies, borrow money, or invest in illiquid securities in
excess of 5% of the value of its total assets during the last fiscal year and
has no present intent to do so in the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
having capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."
FEDERATED ARMS FUND MANAGEMENT
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, principal occupations,
and present positions.
- --------------------------------------------------------------------------------
John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee of the Trust
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue,
Chairman and Trustee of the Trust.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee of the Trust
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
4
- --------------------------------------------------------------------------------
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee of the Trust
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee of the Trust
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee of the Trust
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA
Trustee of the Trust
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park Restaurants,
Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee of the Trust
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
5
- --------------------------------------------------------------------------------
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Trustee of the Trust
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee of the Trust
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, RAND Corporation, Online Computer Library Center, Inc.,
and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee of the Trust
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
President of the Trust
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp. and Federated Administrative Services.
- --------------------------------------------------------------------------------
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President of the Trust
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Trustee of the Trust.
6
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President of the Trust
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer of the Trust
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary of the Trust
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Secretary and Trustee, Federated Shareholder Services; Executive Vice
President and Director, Federated Securities Corp.; Vice President and Secretary
of the Funds.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940, as amended.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
THE FUNDS
- --------------------------------------------------------------------------------
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated
Intermediate Government Trust; Federated Master Trust; Federated Municipal
Trust; Federated Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated
U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond
7
- --------------------------------------------------------------------------------
Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government
Money Market Trust; Liberty Term Trust, Inc. -- 1999; Liberty Utility Fund,
Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain Funds; The Medalist
Funds; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; New York Municipal Cash Trust;
111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations;
World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of October 5, 1994, the following shareholders of record owned 5% or more of
the Institutional Service Shares of the Fund: Bellco First FCU, Greenwood
Village, Colorado, owned approximately 1,467,074 shares (6.0%); Eagle National
Bank, Miami, Florida, owned approximately 1,644,674 shares (6.7%); and Hilton
Hotels Corp., Beverly Hills, California, owned approximately 2,510,040 shares
(10.2%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
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ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the fiscal years ended August 31,
1994, 1993, and 1992, the Fund's Adviser earned $14,679,639, $12,533,139, and
$2,278,514, respectively, of which $3,459,009, $4,249,470, and $1,218,007,
respectively, were voluntarily waived because of undertakings to limit the
Fund's expenses.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2 1/2% per year of the first $30 million of average net assets, 2% per
year of the next $70 million of average net assets, and 1 1/2% per year of
the remaining average net assets, the Adviser will reimburse the Fund for
its expenses over the limitation. If the Fund's monthly projected
operating expenses exceed this limitation, the investment advisory fee
paid will be reduced by the amount of the excess, subject to an annual
adjustment. If the expense limitation is exceeded, the amount to be
reimbursed by the Adviser will be limited, in any single fiscal year, by
the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
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OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
ADMINISTRATIVE SERVICES
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Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. Prior to March 1, 1994, Federated Administrative Services, Inc.,
also a subsidiary of Federated Investors, served as the Fund's administrator.
(For purposes of this Statement of Additional Information, Federated
Administrative Services and Federated Administrative Services, Inc., may
hereinafter collectively be referred to as the "Administrators".) For the fiscal
year ended August 31, 1994, the Administrators collectively earned $1,429,050,
none of which was waived. For the fiscal years ended August 31, 1993 and 1992,
Federated Administrative Services, Inc. earned $989,451 and $283,048,
respectively. Dr. Henry J. Gailliot, an officer of Federated Management, the
adviser to the Fund, holds approximately 20% of the outstanding common stock and
serves as a director of Commercial Data Services, Inc., a company which provides
computer processing services to Federated Administrative Services, Inc. and
Federated Administrative Services.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Board of Trustees.
The Adviser may select brokers who offer brokerage and research services. These
services may be furnished directly to the Fund or to the Adviser and may
include:
- advice as to the advisability of investing in securities;
- security analysis and reports;
- economic studies;
- industry studies;
- receipt of quotations for portfolio evaluations; and
- similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising The Funds and other accounts. To
the extent that receipt of these services may supplant services for which the
Adviser or its affiliates might otherwise have paid, it would tend to reduce
their expenses.
For the fiscal years ended August 31, 1994, 1993, and 1992, the Fund paid no
brokerage commissions on brokerage transactions.
PURCHASING SHARES
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Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares of
the Fund is explained in the respective prospectuses under "Investing in
Institutional Shares," or "Investing in Institutional Service Shares."
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER SERVICES
PLAN
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish
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and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses.
With respect to the Institutional Service Shares, by adopting the Distribution
Plan, the Board of Trustees expects that the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet redemptions. This
will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; and (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal period ending August 31, 1994, payments in the amount of
$1,097,576 were made pursuant to the Distribution Plan (Insitutional Service
Shares only), of which $395,231 was voluntarily waived. In addition, for this
period, payments in the amount of $395,231 were made pursuant to the Shareholder
Services Plan (Institutional Service Shares).
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
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Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
- as provided by an independent pricing service;
- for short-term obligations, according to the mean between bid and asked
prices, as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost unless the Trustees determines this is not
fair value; or
- at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
- yield;
- quality;
- coupon rate;
- maturity;
- type of issue;
- trading characteristics; and
- other market data.
REDEEMING SHARES
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The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
respective prospectuses under "Redeeming Institutional Shares," or "Redeeming
Institutional Service Shares." Although State Street Bank does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
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EXCHANGING SECURITIES FOR FUND SHARES
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Investors may exchange U.S. government securities they already own for Shares,
or they may exchange a combination of U.S. government securities and cash for
Shares. An investor should forward the securities in negotiable form with an
authorized letter of transmittal to Federated Securities Corp. The Fund will
notify the investor of its acceptance and valuation of the securities within
five business days of their receipt by State Street Bank.
The Fund values securities in the same manner as the Fund values its assets. The
basis of the exchange will depend upon the net asset value of Shares on the day
the securities are valued. One Share will be issued for each equivalent amount
of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
TAX STATUS
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THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
- derive less than 30% of its gross income from the sale of securities held
less than three months;
- invest in securities within certain statutory limits; and
- distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction or exclusion available
to corporations. These dividends, and any short-term capital gains, are taxable
as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Shares.
TOTAL RETURN
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The average annual total return for both classes of shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the offering price per share at the end of the period. The
number of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional shares, assuming the monthly reinvestment of all dividends and
distributions.
The Fund's average annual total return for Institutional Shares for the one-year
and five-year periods ended August 31, 1994, and for the period from December 3,
1985 (effective date of the Trust's registration statement) to August 31, 1994,
were .99%, 6.90%, and 6.86%, respectively. The Fund's average annual total
return for Institutional Service Shares for the one year period ended August 31,
1994 and for the period from May 4, 1992 (date of initial public investment) to
August 31, 1994, were .74% and 3.19%, respectively.
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YIELD
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The yield for both classes of shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of shares over a thirty-day period by the
offering price per share by either class of shares on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by either
class because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, performance will be reduced for those shareholders paying those
fees.
The Fund's yield for Institutional Shares for the thirty-day period ended August
31, 1994, was 4.12%. The Fund's yield for Institutional Service Shares was 3.87%
for the same period.
PERFORMANCE COMPARISONS
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The performance of both classes of shares depends upon such variables as:
- portfolio quality;
- average portfolio maturity;
- types of instruments in which the portfolio is invested;
- changes in interest rates and market value of portfolio securities;
- changes in the Fund's or either class of Share's expenses; and
- various other factors.
Either class of Share's performance fluctuates on a daily basis largely because
net earnings and offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
- LEHMAN BROTHERS ADJUSTABLE RATE MORTGAGE FUNDS AVERAGE is comprised of all
agency guaranteed securities with coupons that periodically adjust over a
spread of a published index.
- LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX is comprised of all publicly
issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation. The index also includes
corporate debt guaranteed by the U.S. government. Only notes and bonds
with a minimum maturity of one year and maximum maturity of 2.9 years are
included.
- LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in net asset value over a
specific period of time. From time to time, the Fund will quote its Lipper
ranking in the "U.S. Mortgage Funds" category in advertising and sales
literature.
- MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for both classes of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
either class of shares based on monthly reinvestment of dividends over a
specified period of time.
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