- --------------------------------------------------------------------------------
FEDERATED
- --------------------------------------------------------------------------------
ARMs FUND
- --------------------------------------------------------------------------------
Semi-Annual Report
To Shareholders
FEBRUARY 28, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
8040404 (4/94)
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Investor:
I am pleased to present the Semi-Annual Report to Shareholders for Federated
ARMs Fund (the "Fund"). The Report covers the six-month period ended February
28, 1994 and includes the Fund's Investment Review, Portfolio of Investments,
and Financial Statements. In addition, Financial Highlights have been included
for Institutional Shares and Institutional Service Shares.
To help you keep pace with fluctuating interest rates, the Fund pursues monthly
income from a portfolio consisting primarily of adjustable rate and floating
rate mortgage securities. The prompt payment of principal and interest on these
securities are guaranteed by the U.S. government. Of course, Fund shares are not
guaranteed.
At the end of the report period, nearly 50% of the Fund's total assets were
invested in Federal Home Loan Mortgage Corp. adjustable rate mortgage
securities. More than 30% of assets were invested in Federal National Mortgage
Association adjustable rate mortgage securities. The balance of the Fund's
assets were invested in other mortgage securities and repurchase agreements
issued by J.P. Morgan Securities, Inc. and Kidder Peabody & Co.
During the period, the Fund paid dividends of $0.22 per share, or $54,207,502,
to shareholders of Institutional Shares and $0.20 per share, or $11,269,637, to
shareholders of Institutional Service Shares. At the end of the reporting
period, the Fund's net assets stood at $2.6 billion.
Thank you for your participation in Federated ARMs Fund. We welcome your
questions and comments.
Sincerely,
Glen R. Johnson
President
April 15, 1994
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
Federated ARMs Fund remains a pure all government adjustable rate mortgage
product that carries a AAA credit rating by both Standard & Poor's Corporation
and Moody's Investor Services, Inc. rating agencies. The Fund's decision to
limit the use of mortgage-backed security derivatives by prospectus has served
its shareholders well as such strategies proved disastrous for many adjustable
rate mortgage ("ARM") funds over the course of 1993 and early 1994.
During the current semi-annual reporting period, the ARMs market had to operate
in a pressure-filled market characterized by rising interest rates, higher cap
costs, and increased volatility. The Federal Reserve (the "Fed") raised
short-term rates by 50 basis points ( 1/2 percent) and adjustable rate security
prices declined in tandem with the Treasury market. The one-year bill rate and
the two-year Treasury rose in yield by 62 and 80 basis points, respectively, in
the last six months.
Not surprisingly, the Fund's use of fully-indexed ARMs outperformed equal
duration Treasuries as well as other longer duration sectors of the government
ARMs market.
Despite the increases in interest rates and volatility levels, Federated ARMs
Fund's recommendation for a defensive approach has been rewarded with low net
asset volatility and positive returns. During the six month period the Fund's
net asset value range was a low of $9.88 and a high of $9.98 with an average of
$9.94. This period produced a cumulative semi-annual return of 1.16%* for
Institutional Shares and 1.04% for Institutional Service Shares and a 12-month
return of 3.73%* for Institutional Shares and 3.47% for Institutional Service
Shares on an asset base of $2.6 billion as of February 28, 1994.
Looking forward, the ARMs market should get support as investors look to short
duration alternatives to reduce market exposure and shorten duration. On a
relative value basis, ARMs have cheapened versus other short duration mortgage
securities that have tightened in spread to Treasuries since rates have risen.
In addition, as the refinancing cycle fades and slows to manageable levels,
issuance should decline in coming months improving market technicals.
However, the ARMs market will remain somewhat tenuous until it gets confirmation
of some degree of Treasury market stabilization and investor support. With the
probability remaining high of further Fed tightening, a flatter yield curve, and
higher than average volatility, a defensive strategy will continue to be
emphasized. The Fund will continue to employ low duration fully indexed ARMs and
cash positions with limited exposure to lower coupon ARMs. The Fund's higher
weighted average life and periodic caps along with responsive market indices,
should limit price swings versus lower coupon ARMs with restrictive cap levels
and higher resulting durations.
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
FEDERATED ARMS FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- ------------- -------------------------------------------------------------------------- --------------
GOVERNMENT OBLIGATIONS--91.4%
- -----------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC
ADJUSTABLE RATE MORTGAGE--47.7%
--------------------------------------------------------------------------
$1,211,095,048 3.70%-6.913%, 1/1/99-4/1/2029 $1,251,757,781
-------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGE--30.5%
--------------------------------------------------------------------------
776,509,587 3.724%-7.492%, 3/1/2016-9/1/2029 800,144,643
-------------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGE--7.2%
--------------------------------------------------------------------------
181,874,598 5.00%-6.00%, 8/20/2021-2/20/2024 189,570,718
-------------------------------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--1.4%
--------------------------------------------------------------------------
2,442,908 4.138%, Series 4-A, 5/15/2019 2,455,122
--------------------------------------------------------------------------
18,876,700 5.10%, Series 1578-FE, 7/15/2022 18,841,212
--------------------------------------------------------------------------
14,066,460 10.15%, Series MH1-A, 4/15/2006 14,979,795
-------------------------------------------------------------------------- --------------
Total 36,276,129
-------------------------------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP.--0.2%
--------------------------------------------------------------------------
5,710,625 11.50%, 5/1/2019 6,397,670
-------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--1.3%
--------------------------------------------------------------------------
8,980,989 3.888%, Series G91-15F, 6/25/2021 8,976,768
--------------------------------------------------------------------------
7,766,147 4.038%, Series G92-16F, 3/25/2022 7,764,594
--------------------------------------------------------------------------
8,207,115 4.038%, Series G92-21F, 4/25/2022 8,205,474
--------------------------------------------------------------------------
8,251,842 4.423%, Series G90-145A, 12/25/2020 8,262,157
-------------------------------------------------------------------------- --------------
Total 33,208,993
-------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--0.3%
--------------------------------------------------------------------------
7,372,354 11.50%, 2/1/2020 8,362,977
-------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- ------------- -------------------------------------------------------------------------- --------------
GOVERNMENT OBLIGATIONS--CONTINUED
- -------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--2.8%
--------------------------------------------------------------------------
$ 63,081,419 11.00%-12.00%, 12/15/2009-7/15/2020 $ 72,515,898
-------------------------------------------------------------------------- --------------
TOTAL GOVERNMENT OBLIGATIONS (IDENTIFIED COST,
$2,398,808,575) 2,398,234,809
-------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENTS--8.1%
- -------------------------------------------------------------------------------------------
112,900,000 J. P. Morgan Securities, Inc., 3.49%, dated 2/28/94, due 3/1/94 112,900,000
- -------------------------------------------------------------------------------------------
100,000,000 Kidder, Peabody & Co., 3.45%, dated 2/28/94, due 3/1/94 100,000,000
-------------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) (NOTE 2B) 212,900,000
-------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $2,611,708,575) $2,611,134,809+
-------------------------------------------------------------------------- --------------
</TABLE>
* 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
investments in the repurchase agreements are through participation in joint
accounts with other Federated Funds.
+ The cost of investments for federal tax purposes amounts to $2,611,708,575.
The net unrealized depreciation of investments on a federal tax cost basis
amounts to $573,766, which is comprised of $9,609,120 appreciation and
$10,182,886 depreciation at February 28, 1994.
Note: The categories of investments are shown as a percentage of net assets
($2,626,295,665) at February 28, 1994.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
PC --Participation Certificate
REMIC --Real Estate Mortgage Investment Conduit
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------
Investments in securities at value (Notes 2A and 2B)--
(identified and tax cost; $2,611,708,575) $2,611,134,809
- ------------------------------------------------------------------------------
Cash 2,299,729
- ------------------------------------------------------------------------------
Interest receivable 48,192,121
- ------------------------------------------------------------------------------
Receivable for Fund shares sold 4,274,169
- ------------------------------------------------------------------------------ --------------
Total assets 2,665,900,828
- ------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------
Payable for Fund shares redeemed $30,000,510
- ----------------------------------------------------------------
Dividends payable 6,276,382
- ----------------------------------------------------------------
Payable for investments purchased 3,041,294
- ----------------------------------------------------------------
Accrued expenses 286,977
- ---------------------------------------------------------------- -----------
Total liabilities 39,605,163
- ------------------------------------------------------------------------------ --------------
NET ASSETS for 265,825,360 shares of beneficial interest outstanding $2,626,295,665
- ------------------------------------------------------------------------------ --------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------
Paid in capital $2,655,064,069
- ------------------------------------------------------------------------------
Unrealized depreciation of investments (573,766)
- ------------------------------------------------------------------------------
Accumulated net realized loss on investments (28,194,638)
- ------------------------------------------------------------------------------ --------------
Total $2,626,295,665
- ------------------------------------------------------------------------------ --------------
NET ASSET VALUE, Offering Price and Redemption Price Per Share
Institutional Shares ($2,135,481,215 / 216,147,060 shares of beneficial
interest outstanding) $9.88
- ------------------------------------------------------------------------------ --------------
Institutional Service Shares ($490,814,450 / 49,678,300 shares of beneficial
interest outstanding) $9.88
- ------------------------------------------------------------------------------ --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------
Interest income (Note 2C) (net of interest expense of ($19,242)) $ 74,514,956
- --------------------------------------------------------------------------------
EXPENSES--
- --------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 9,111,207
- ------------------------------------------------------------------
Trustees' fees 17,416
- ------------------------------------------------------------------
Custodian and record keeping fees and expenses 196,531
- ------------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and expenses 34,053
- ------------------------------------------------------------------
Fund share registration costs 46,500
- ------------------------------------------------------------------
Administrative personnel and services (Note 5) 785,815
- ------------------------------------------------------------------
Auditing fees 19,815
- ------------------------------------------------------------------
Legal fees 32,800
- ------------------------------------------------------------------
Insurance premiums 47,559
- ------------------------------------------------------------------
Printing and postage 15,750
- ------------------------------------------------------------------
Distribution services fees (Note 5) 685,876
- ------------------------------------------------------------------
Taxes 3,930
- ------------------------------------------------------------------
Miscellaneous 14,659
- ------------------------------------------------------------------ -----------
Total expenses 11,011,911
- ------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 5) 1,974,094
- ------------------------------------------------------------------ -----------
Net expenses 9,037,817
- -------------------------------------------------------------------------------- ------------
NET INVESTMENT INCOME 65,477,139
- -------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------
Net realized loss on investments (identified cost basis) (13,470,476)
- --------------------------------------------------------------------------------
Net change in unrealized depreciation on investments (16,579,122)
- -------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments (30,049,598)
- -------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 35,427,541
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
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 $ 65,477,139 $ 102,966,928
- --------------------------------------------------------
Net realized gain (loss) from investment transactions
($26,394,753 net loss, and $1,799,433 net loss,
respectively, as computed for federal tax purposes)
(Note 2D)-- (13,470,476) (14,483,096)
- --------------------------------------------------------
Change in unrealized appreciation (depreciation) of
investments (16,579,122) 12,316,539
- -------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 35,427,541 100,800,371
- -------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- --------------------------------------------------------
Dividends to shareholders from net investment income:
Institutional Shares (54,207,502) (90,280,942)
- --------------------------------------------------------
Institutional Service Shares (11,269,637) (12,685,986)
- -------------------------------------------------------- --------------- ---------------
Change in net assets from distributions to shareholders (65,477,139) (102,966,928)
- -------------------------------------------------------- --------------- ---------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- --------------------------------------------------------
Proceeds from sales of shares 1,689,660,988 3,939,613,668
- --------------------------------------------------------
Net asset value of shares issued to shareholders
electing to receive payment of dividends in Fund
shares 22,538,556 33,745,129
- --------------------------------------------------------
Cost of shares redeemed (2,225,159,946) (2,005,925,557)
- -------------------------------------------------------- --------------- ---------------
Change in net assets from Fund share transactions (512,960,402) 1,967,433,240
- -------------------------------------------------------- --------------- ---------------
Change in net assets (543,010,000) 1,965,266,683
- --------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------
Beginning of period 3,169,305,665 1,204,038,982
- -------------------------------------------------------- --------------- ---------------
End of period $ 2,626,295,665 $ 3,169,305,665
- -------------------------------------------------------- --------------- ---------------
</TABLE>
* Six months ended February 28, 1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS
INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<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
- ----------------------------
INCOME FROM INVESTMENT
OPERATIONS $9.98 $10.01 $ 9.67 $8.99 $9.47 $8.88 $8.99 $9.98 $10.00
- ----------------------------
Net investment income 0.22 0.50 0.63 0.69 0.71 0.72 0.73 0.78 0.62
- ----------------------------
Net realized and unrealized
gain (loss) on investments (0.10) (0.03) 0.42 0.68 (0.48) 0.59 (0.11) (0.99) (0.02)
- ---------------------------- ---- ----- ----- ---- ---- ---- ---- ---- -----
Total from investment
operations 0.12 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 (0.22) (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 (0.22) (0.50) (0.71) (0.69) (0.71) (0.72) (0.73) (0.78) (0.62)
- ---------------------------- ---- ----- ----- ---- ---- ---- ---- ---- -----
NET ASSET VALUE, END OF
PERIOD $9.88 $ 9.98 $10.01 $9.67 $8.99 $9.47 $8.88 $8.99 $ 9.98
- ---------------------------- ---- ----- ----- ---- ---- ---- ---- ---- -----
TOTAL RETURN+ 1.16% 4.82% 11.21% 15.73% 2.45% 15.25% 7.09% (2.33%) 6.16%
- ----------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------
Expenses 0.55%(a) 0.51% 0.51% 0.78% 0.78% 0.79% 0.75% 0.81% 0.96%(a)
- ----------------------------
Net investment income 4.36%(a) 4.97% 5.95% 7.36% 7.62% 7.81% 8.10% 7.88% 9.84%(a)
- ----------------------------
Expense waiver/
reimbursement(b) 0.13%(a) 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) $2,135,481 $2,669,888 $1,090,944 $30,330 $26,261 $25,574 $16,753 $7,405 $5,433
- ----------------------------
Portfolio turnover rate 25% 36% 38% 127% 170% 85% 125% 228% 89%
- ----------------------------
</TABLE>
* For the six months ended February 28, 1994 (unaudited).
** 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 due 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 (Note 5).
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS
INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<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 0.20 0.48 0.18
- --------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.10) (0.03) 0.03
- -------------------------------------------------------- ------ ------ ------
Total from investment operations 0.10 0.45 0.21
- --------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------
Dividends to shareholders from net investment income (0.20) (0.48) (0.18)
- -------------------------------------------------------- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.88 $ 9.98 $10.01
- -------------------------------------------------------- ------ ------ ------
TOTAL RETURN+ 1.04% 4.56% 2.11%
- --------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------
Expenses 0.80%(a) 0.76% 0.76%(a)
- --------------------------------------------------------
Net investment income 4.11%(a) 4.72% 5.46%(a)
- --------------------------------------------------------
Expense waiver/reimbursement(b) 0.38%(a) 0.21% 0.32%(a)
- --------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------
Net assets, end of period (000 omitted) $490,815 $499,418 $113,095
- --------------------------------------------------------
Portfolio turnover rate 25% 36% 38%
- --------------------------------------------------------
</TABLE>
* For the six months ended February 28, 1994 (unaudited).
** 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 (Note 5).
+ Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Trust is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end, management investment company. Effective April 23,
1992, the shareholders approved a change in the name of the Trust to Federated
ARMs Fund, the adoption of the Trust's ability to offer separate classes of
shares representing interests in separate portfolios of securities, and the
designation of the name of the present portfolio (the "Fund") to be the same as
that of the Trust. In addition, the shareholders approved a change in the
objective of the Fund to pursue current income consistent with minimal
volatility of principal. In anticipation of the adoption of this change in
investment objective, effective January 31, 1992, the Fund began emphasizing
investment in adjustable and floating rate mortgage securities which are issued
or guaranteed as to the payment of principal and interest by the U.S.
government, its agencies or instrumentalities.
The Fund provides two classes of shares ("Institutional Service Shares" and
"Institutional Shares"). Institutional Service Shares are in all respects
identical to Institutional Shares, except that Institutional Service Shares are
sold pursuant to a distribution plan (the "Plan") adopted in accordance with
Investment Company Act Rule 12b-1.
(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. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--U.S. government obligations are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing service.
U.S. government obligations maturing in sixty days or less are valued at amortized cost,
which approximates value.
During the year ended August 31, 1992, the Fund changed its method of accounting for
costing securities and calculating gains and losses for financial reporting purposes from
the average cost method to the specific identification method. This accounting change
resulted only in reclassifications between unrealized and realized gains and losses, and
therefore had no effect on the net results from operations, net assets, or net asset
value per share. The specific identification method is the preferred method used in the
investment company industry and it more closely agrees with the costing method used for
federal tax purposes. Certain reclassifications of prior year balances have been made to
conform to current year presentation.
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 securities to ensure the existence of a proper level of
collateral.
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") of the Trust. 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. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium) on short-term obligations, and interest
earned on all other debt securities including original issue discount as required by the
Internal Revenue Code, as amended.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Internal
Revenue Code (the "Code"), as amended, applicable to regulated investment companies and
to distribute to shareholders each year all of its taxable income, including any net
realized gain on investments. Accordingly, no provision for federal tax is necessary. At
August 31, 1993, the Fund, for federal tax purposes, had a capital loss carryforward of
$1,799,433 which will reduce the Fund's taxable income arising from future net realized
gains on investments, if any, to the 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. Additionally, net capital losses of $12,924,276
attributable to
</TABLE>
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
security transactions incurred after October 31, 1992, are treated as arising on the
first day (September 1, 1993) 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. To the extent that the Fund engages in such transactions,
it will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. The Trust will record a when-issued security and the
related liability on the trade date. Until the securities are received and paid for, the
Trust will maintain 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 date of the transaction.
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 sells mortgage
securities to financial institutions and simultaneously agrees to repurchase
substantially similar (same type, coupon, and maturity) securities at a later date at an
agreed upon price. During the period between the sale and repurchase, the Fund forgoes
principal and interest paid on the mortgage securities sold. The Fund is compensated by
the interest earned on the cash proceeds of the initial sale and any additional fee
income received on the sale.
</TABLE>
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
(3) DIVIDENDS AND DISTRIBUTIONS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends,
excluding capital gains, to shareholders of record, with respect to shares for
which payment in federal funds has been received. Payment of dividends is made
monthly in cash, or in additional shares at the net asset value on the payable
date. Capital gains realized by the Fund are distributed at least once every
twelve months and are recorded on the ex-dividend date.
(4) 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).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1994 AUGUST 31, 1993
------------------------------- -------------------------------
SHARES DOLLARS SHARES DOLLARS
- ------------------------------------ ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES:
- ------------------------------------
Shares outstanding, beginning of
period 267,585,932 $ 2,668,652,705 108,989,926 $ 1,087,497,370
- ------------------------------------
Shares sold 125,997,322 1,253,557,934 320,888,500 3,198,878,233
- ------------------------------------
Shares issued to shareholders in
payment of dividends declared 1,609,993 15,984,759 2,708,639 26,990,753
- ------------------------------------
Shares redeemed (179,046,187) (1,779,466,395) (165,001,133) (1,644,713,651)
- ------------------------------------ ------------ --------------- ------------ ---------------
Shares outstanding, end of period 216,147,060 $ 2,158,729,003 267,585,932 $ 2,668,652,705
- ------------------------------------ ------------ --------------- ------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1994 AUGUST 31, 1993
------------------------------- -------------------------------
SHARES DOLLARS SHARES DOLLARS
- ------------------------------------ ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES:
- ------------------------------------
Shares outstanding, beginning of
period 50,053,320 $ 499,371,766 11,298,655 $ 113,093,861
- ------------------------------------
Shares sold 43,848,811 436,103,054 74,332,361 740,735,435
- ------------------------------------
Shares issued to shareholders in
payment of dividends declared 660,378 6,553,797 677,755 6,754,376
- ------------------------------------
Shares redeemed (44,884,209) (445,693,551) (36,255,451) (361,211,906)
- ------------------------------------ ------------ --------------- ------------ ---------------
Shares outstanding, end of period 49,678,300 $ 496,335,066 50,053,320 $ 499,371,766
- ------------------------------------ ------------ --------------- ------------ ---------------
</TABLE>
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Management (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 has voluntarily agreed to waive a portion of its fee. The
Adviser can modify or terminate this voluntary waiver at any time at its sole
discretion. During the six months ended February 28, 1994, the investment
advisory fee amounted to $9,111,207 which $1,974,094 was waived.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended. The Trust will compensate
Federated Securities Corp. ("FSC"), the Fund's principal distributor, from the
assets of the Fund, for fees it paid which relate to the distribution and
administration 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 pay
commissions, and maintenance fees and to compensate the distributor. FSC may
voluntarily waive a portion of its fee. During the six months ended February 28,
1994, FSC earned $685,876 in distribution service fees, none of which was
voluntarily waived.
During the six months ended February 28, 1994, the Trust engaged in purchase and
sales transactions with other funds advised by the Adviser pursuant to Rule
17a-7 of the Investment Company Act of 1940, as amended, amounting to
$118,886,754 and $116,823,991 respectively. These purchases and sales were
conducted on an arms-length basis insofar as they were transacted for cash
consideration only, at independent current market prices and without brokerage
commission, fee, or other remuneration.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Effective March 1, 1994, Federated
Administrative Services ("FAS") will provide administrative personnel and
services based on the level of average aggregate net assets of the total
Federated Funds for the period. The administrative fee received during any
fiscal year shall be at least $125,000 per investment portfolio and $30,000 per
each additional class of shares.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above corporations.
(6) INVESTMENT TRANSACTIONS
Purchases and sales and maturities of investments, excluding securities subject
to repurchase agreements, for the six months ended February 28, 1994, were as
follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
PURCHASES--
- -------------------------------------------------------------------------
U.S. government obligations $ 732,963,605
- ------------------------------------------------------------------------- --------------
SALES AND MATURITIES--
- -------------------------------------------------------------------------
U.S. government obligations $1,434,857,081
- ------------------------------------------------------------------------- --------------
</TABLE>
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Glen R. Johnson
James E. Dowd President
Lawrence D. Ellis, M.D. J. Christopher Donahue
Edward L. Flaherty, Jr. Vice President
Peter E. Madden Richard B. Fisher
Gregor F. Meyer Vice President
Wesley W. Posvar Edward C. Gonzales
Marjorie P. Smuts Vice President and Treasurer
John A. Staley, IV John W. McGonigle
Vice President and Secretary
John A. Staley, IV
Vice President
David M. Taylor
Assistant Treasurer
Robert C. Rosselot
Assistant Secretary
Mutual funds are not obligations of or insured by any bank nor are they insured
by the federal government or any of its agencies. Investment in these shares
involves risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses,
and other information.
