1933 Act File No. 2-98491
1940 Act File No. 811-4539
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ..........
Post-Effective Amendment No. 19 .......... X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 19 ......................... X
FEDERATED ARMs FUND
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(412) 288-1900
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
X on October, 31 1995 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a declaration
pursuant to Rule 24f-2 under the Investment Company Act of 1940, and:
filed the Notice required by that Rule on ; or
-----------------
intends to file the Notice required by that Rule on or about ;
------------
or
X during the most recent fiscal year did not sell any securities pursuant to
Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.
Copies to:
Charles H. Morin, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
CROSS REFERENCE SHEET
This Amendment to the Registration Statement of FEDERATED ARMs FUND,
containing two classes of shares, (a) Institutional Shares and (b) Institutional
Service Shares, is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page...............Cover Page.
Item 2. Synopsis.................Summary of Fund Expenses.
Item 3. Condensed Financial
Information.............Financial Highlights; Performance Information.
Item 4. General Description of
Registrant..............General Information; Investment Information;
Investment Objective; Investment Policies;
Investment Limitations.
Item 5. Management of the Fund...Trust Information; Management of the Trust;
Administration of the Fund; (a) Distribution of
Institutional Shares; Expenses of the Fund and
Institutional Shares; (b) Distribution of
Institutional Service Shares; Expenses of the
Fund and Institutional Service Shares.
Item 6. Capital Stock and Other
Securities..............Dividends; Capital Gains; Shareholder
Information; Voting Rights; Massachusetts
Partnership Law; Tax Information; Federal
Income Tax; Pennsylvania Corporate and
Personal Property
Taxes; Other Classes of Shares.
Item 7. Purchase of Securities
Being Offered...........Net Asset Value; (a)Investing in
Institutional
Shares, (b) Investing in Institutional
Service
Shares; Share Purchases; Minimum Investment
Required; What Shares Cost; (a) Exchanging
Securities for Institutional Shares, (b)
Exchanging Securities for Institutional
Service Shares; Subaccounting Services;
Certificates and Confirmations.
Item 8. Redemption or Repurchase.(a) Redeeming Institutional Shares,
(b) Redeeming
Institutional Service Shares; Telephone
Redemption; Written Requests; Accounts
with Low Balances.
Item 9. Legal Proceedings........None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page...............Cover Page.
Item 11. Table of Contents........Table of Contents.
Item 12. General Information and
History.................General Information About the Fund; About
Federated Investors.
Item 13. Investment Objective and
Policies................Investment Objective and Policies; Investment
Limitations.
Item 14. Management of the Fund...Federated ARMs Fund Management.
Item 15. Control Persons and
Principal Holders of
Securities..............Fund Ownership.
Item 16. Investment Advisory and
Other Services..........Investment Advisory Services; Administrative
Services.
Item 17. Brokerage Allocation.....Brokerage Transactions.
Item 18. Capital Stock and Other
Securities..............Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered...........Purchasing Shares; Determining Net Asset Value;
Redeeming Shares; Exchanging Securities for Fund
Shares.
Item 20. Tax Status...............Tax Status.
Item 21. Underwriters.............Not applicable.
Item 22. Calculation of Performance
Data....................Total Return; Yield; Performance Comparisons.
Item 23. Financial Statements.....Filed in Part A.
- --------------------------------------------------------------------------------
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, 1995, 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,
which is in paper form only, or a paper copy of this prospectus if you
have received your prospectus electronically, 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
- --------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL
SHARES 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 Shares 10
Administration of the Fund 11
Expenses of the Fund and
Institutional Shares 11
NET ASSET VALUE 12
- --------------------------------------------------
INVESTING IN INSTITUTIONAL SHARES 12
- --------------------------------------------------
Share Purchases 12
Minimum Investment Required 13
What Shares Cost 13
Exchanging Securities for
Institutional Shares 13
Subaccounting Services 13
Certificates and Confirmations 14
Dividends 14
Capital Gains 14
REDEEMING INSTITUTIONAL SHARES 14
- --------------------------------------------------
Telephone Redemption 14
Written Requests 15
Accounts with Low Balances 15
SHAREHOLDER INFORMATION 16
- --------------------------------------------------
Voting Rights 16
Massachusetts Partnership Law 16
TAX INFORMATION 16
- --------------------------------------------------
Federal Income Tax 16
Pennsylvania Corporate and Personal
Property Taxes 17
PERFORMANCE INFORMATION 17
- --------------------------------------------------
OTHER CLASSES OF SHARES 17
- --------------------------------------------------
FINANCIAL STATEMENTS 19
- --------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 28
- --------------------------------------------------
ADDRESSES 29
- --------------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<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 OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (1)....................................................... 0.42%
12b-1 Fee............................................................................... None
Total Other Expenses.................................................................... 0.13%
Shareholder Services Fee (after waiver) (2)................................ 0.00%
Total Operating Expenses (3).................................................... 0.55%
</TABLE>
(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 operating expenses would have been 0.98% absent for the voluntary
waivers of a portion of the management fee and the shareholder services fee.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of 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.
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 28.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------ -------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income 0.56 0.45 0.50 0.63 0.69
- ------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.02 (0.35) (0.03) 0.42 0.68
- ------------------------------------------------------------ -------- ----- ---------- ---------- -------
Total from investment operations 0.58 0.10 0.47 1.05 1.37
- ------------------------------------------------------------ -------- ----- ---------- ---------- -------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Distributions from net investment income (0.56) (0.45) (0.50) (0.63) (0.69)
- ------------------------------------------------------------
Distributions from net realized gain on investment
transactions -- -- -- (0.08) --
- ------------------------------------------------------------ -------- ----- ---------- ---------- -------
Total distributions (0.56) (0.45) (0.50) (0.71) (0.69)
- ------------------------------------------------------------ -------- ----- ---------- ---------- -------
NET ASSET VALUE, END OF PERIOD $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67
- ------------------------------------------------------------ -------- ----- ---------- ---------- -------
-------- ----- ---------- ---------- -------
TOTAL RETURN (b) 6.21% 0.99% 4.82% 11.21% 15.73%
- ------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------
Expenses 0.55% 0.55% 0.51% 0.51% 0.78%
- ------------------------------------------------------------
Net investment income 5.74% 4.51% 4.97% 5.95% 7.36%
- ------------------------------------------------------------
Expense waiver/ reimbursement (d) 0.43% 0.14% 0.21% 0.32% 1.02%
- ------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets, end of period (000 omitted) $856,500 $1,238,813 $2,669,888 $1,090,944 $30,330
- ------------------------------------------------------------
Portfolio turnover 124% 65% 36% 38% 127%
- ------------------------------------------------------------
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
1990 1989 1988 1987 1986(a)
- ------------------------------------------------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.47 $ 8.88 $ 8.99 $ 9.98 $10.00
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income 0.71 0.72 0.73 0.78 0.62
- ------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.48) 0.59 (0.11) (0.99) (0.02)
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Total from investment operations 0.23 1.31 0.62 (0.21) 0.60
- ------------------------------------------------------------ ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Distributions from net investment income (0.71) (0.72) (0.73) (0.78) (0.62)
- ------------------------------------------------------------
Distributions from net realized gain on investment
transactions -- -- -- -- --
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Total distributions (0.71) (0.72) (0.73) (0.78) (0.62)
- ------------------------------------------------------------ ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.99 $ 9.47 $ 8.88 $ 8.99 $ 9.98
- ------------------------------------------------------------ ------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (b) 2.45% 15.25% 7.09% (2.33)% 6.16%
- ------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------
Expenses 0.78% 0.79% 0.75% 0.81% 0.96%(c)
- ------------------------------------------------------------
Net investment income 7.62% 7.81% 8.10% 7.88% 9.84%(c)
- ------------------------------------------------------------
Expense waiver/ reimbursement (d) 1.02% 0.95% 1.18% 0.75% 1.50%(c)
- ------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets, end of period (000 omitted) $26,261 $25,574 $16,753 $7,405 $5,433
- ------------------------------------------------------------
Portfolio turnover 170% 85% 125% 228% 89%
- ------------------------------------------------------------
</TABLE>
(a) 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.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
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") has established two classes
of shares, Institutional Shares and Institutional Service Shares. This
prospectus relates only to Institutional Shares (the "Shares") of the Fund.
Shares of the Fund 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 load
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, as amended, 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.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
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 CMOs 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 four years
assuming an immediate and sustained parallel shift in the yield curve of plus
300 basis points, or shortens by more than six 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.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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.
8
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.
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. With over $72 billion invested across more
than 260 funds under management and/or administration by its subsidiaries,
as of December 31, 1994, Federated Investors is one of the largest mutual
fund investment managers in the United States. With more than 1,750
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and
9
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Kathleen M. Foody-Malus, Susan M. Nason, and Todd Abraham are the Fund's
co-portfolio managers. Ms. Foody-Malus has been the Fund's co-portfolio
manager since January 1992. Ms. Foody-Malus joined Federated Investors in
1983 and has been a Vice President of the Fund's investment adviser since
1993. Ms. Foody-Malus served as an Assistant Vice President of the
investment adviser from 1990 until 1992. Ms. Foody-Malus received her M.B.A.
in Accounting/Finance from the University of Pittsburgh.
Susan M. Nason has been the Fund's co-portfolio manager since July 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. Ms. Nason is
a Chartered Financial Analyst and received her M.B.A. in Finance from
Carnegie-Mellon University.
Todd A. Abraham has been the Fund's co-portfolio manager since August 1995.
Mr. Abraham joined Federated Investors in 1993 as an Investment Analyst and
has been an Assistant Vice President of the Fund's investment adviser since
1995. Mr. Abraham served as a Portfolio Analyst at Ryland Mortgage Company
from 1992 to 1993 and as a Bond Administrator at Ryland Asset Management
Company from 1990 to 1992. Mr. Abraham received his M.B.A. in Finance from
Loyola College.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
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.
SHAREHOLDER SERVICES. The Trust has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Trust may make payments up to .25 of 1% of the
average daily net asset value of the Trust, computed at an annual rate, to
obtain certain personal services for shareholders and provide maintenance of
shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily.
Under the Shareholder Services Agreement, Federated Shareholder Services will
either perform shareholder services directly or will select financial
institutions to perform shareholder services.
10
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 Trust and
Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments to
financial institutions under the Shareholder Services Agreement, Federated
Securities Corp. and Federated Shareholder Services, from their own assets, may
also pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars at recreational-type facilities for their employees, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Trust. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Trust's Adviser or
it's affiliates.
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
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
-------------------- ------------------------------------
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.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,
Boston, Massachusetts, is the transfer agent for the Shares of the Fund, and
dividend disbursing agent for the Fund.
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
11
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.
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: Federated Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated ARMs
12
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: Federated Services Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600. 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.
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 as of the close of trading ( normally 4:00
p.m., Eastern time) on the New York Stock Exchange, 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
13
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 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.
14
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 should be sent by insured mail with the
written request to: Federated Services Company, 500 Victory Road-2nd Floor,
North Quincy, Massachusetts 02171.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption payable other
than to the shareholder of record must have 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.
15
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.
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.
16
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
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 Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Institutional Service
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
17
Plan adopted by the Trust whereby the distributor is paid a fee of .25 of 1% of
the Institutional Service Shares' average net assets.
Shares and Institutional Service Shares are subject to certain of the same
expenses. Expense differences between Shares and Institutional Service Shares
may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-235-4669.
18
FEDERATED ARMS FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ -------------------------------------------------- --------------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS--88.1%
- ----------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--0.9%
--------------------------------------------------
$ 8,221,340 10.15%, Series MH1-A, 4/15/2006 $ 8,387,328
-------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--49.3%
--------------------------------------------------
477,343,424 5.261%-8.25%, 11/1/2017-4/1/2029 489,417,687
-------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--1.2%
--------------------------------------------------
20,303 12.00%, 3/1/2013 22,809
--------------------------------------------------
4,136,004 11.50%, 8/1/2014-11/1/2015 4,612,885
--------------------------------------------------
6,908,461 11.00%, 12/1/2015 7,655,334
-------------------------------------------------- --------------
Total 12,291,028
-------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--24.5%
--------------------------------------------------
237,424,907 5.50%-8.302%, 8/1/2018-3/1/2033 242,721,636
-------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--4.2%
--------------------------------------------------
5,985,111 12.00%, 9/15/2013-1/15/2014 6,791,126
--------------------------------------------------
16,071,037 11.50%, 10/15/2010-4/15/2020 18,059,668
--------------------------------------------------
15,231,109 11.00%, 12/15/2009-7/15/2020 16,934,860
-------------------------------------------------- --------------
Total 41,785,654
-------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--8.0%
--------------------------------------------------
55,000,000 6.00%, 10/20/2025 55,034,375
--------------------------------------------------
25,000,000 5.50%, 9/20/2025 24,695,250
-------------------------------------------------- --------------
Total 79,729,625
-------------------------------------------------- --------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED
COST $869,862,536) 874,332,958
-------------------------------------------------- --------------
U.S. TREASURY OBLIGATIONS--5.0%
- ----------------------------------------------------------------
U.S. TREASURY NOTES--5.0%
--------------------------------------------------
50,000,000 5.625%-6.125%, 5/31/1997-6/30/1997 49,997,200
-------------------------------------------------- --------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST
$49,801,383) 49,997,200
-------------------------------------------------- --------------
</TABLE>
19
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ -------------------------------------------------- --------------
<C> <S> <C>
(A) REPURCHASE AGREEMENTS--14.5%
- ----------------------------------------------------------------
$ 40,000,000 Harris, Nesbitt, Thomson Securities, Inc., 5.80%,
dated 8/31/1995, due 9/1/1995 $ 40,000,000
--------------------------------------------------
3,445,000 J.P. Morgan Securities, Inc., 5.83%, dated
8/31/1995, due 9/1/1995 3,445,000
--------------------------------------------------
50,000,000 (b) CS First Boston Corp., 5.76%, dated 8/18/1995,
due 9/21/1995 50,000,000
--------------------------------------------------
50,000,000 (b) CS First Boston Corp., 5.75%, dated 8/24/1995,
due 9/21/1995 50,000,000
-------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 143,445,000
-------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST
$1,063,108,919)(C) $1,067,775,158
-------------------------------------------------- --------------
--------------
</TABLE>
(a) 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 is through participation in joint
accounts with other Federated funds.
(b) Although final maturity falls beyond seven days, a liquidity feature is
included in the transaction to permit termination of the repurchase
agreement.
(c) The cost of investments for federal tax purposes amounts to $1,063,171,419.
The unrealized appreciation of investments on a federal tax basis amounts to
$4,603,739 which is comprised of $7,985,978 appreciation and $3,382,239
depreciation at August 31, 1995.
Note: The categories of investments are shown as a percentage of net assets
($992,189,551) at August 31, 1995.
The following acronyms are used throughout this portfolio:
<TABLE>
<S> <C>
ARM --Adjustable Rate Mortgage
PC --Participation Certificate
REMIC --Real Estate Mortgage Investment Conduit
</TABLE>
(See Notes which are an integral part of the Financial Statements)
20
FEDERATED ARMS FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------
Investments in repurchase agreements $143,445,000
- --------------------------------------------------
Investments in securities 924,330,158
- -------------------------------------------------- ------------
Total investments, at value (identified cost $1,063,108,919, and
tax
cost $1,063,171,419) $1,067,775,158
- ----------------------------------------------------------------
Cash 2,093
- ----------------------------------------------------------------
Income receivable 18,725,347
- ----------------------------------------------------------------
Receivable for investments sold 64,983,932
- ----------------------------------------------------------------
Receivable for shares sold 21,893
- ---------------------------------------------------------------- --------------
Total assets 1,151,508,423
- ----------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------
Payable for investments purchased $154,694,653
- --------------------------------------------------
Payable for shares redeemed 513,244
- --------------------------------------------------
Income distribution payable 3,940,725
- --------------------------------------------------
Accrued expenses 170,250
- -------------------------------------------------- ------------
Total liabilities 159,318,872
- ---------------------------------------------------------------- --------------
NET ASSETS for 102,766,717 shares outstanding $ 992,189,551
- ---------------------------------------------------------------- --------------
--------------
NET ASSETS CONSIST OF:
- ----------------------------------------------------------------
Paid in capital $1,072,779,815
- ----------------------------------------------------------------
Net unrealized appreciation of investments 4,666,239
- ----------------------------------------------------------------
Accumulated net realized loss on investments (85,501,005)
- ----------------------------------------------------------------
Undistributed net investment income 244,502
- ---------------------------------------------------------------- --------------
Total Net Assets $ 992,189,551
- ---------------------------------------------------------------- --------------
--------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER
SHARE:
- ----------------------------------------------------------------
INSTITUTIONAL SHARES:
- ----------------------------------------------------------------
$856,500,205 DIVIDED BY 88,712,689 shares
outstanding $ 9.65
- ---------------------------------------------------------------- --------------
--------------
INSTITUTIONAL SERVICE SHARES:
- ----------------------------------------------------------------
$135,689,346 DIVIDED BY 14,054,028 shares
outstanding $ 9.65
- ---------------------------------------------------------------- --------------
--------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
21
FEDERATED ARMS FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $512,518) $ 73,723,992
- ----------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------
Investment advisory fee $ 7,041,965
- --------------------------------------------------------------------------
Administrative personnel and services fee 888,461
- --------------------------------------------------------------------------
Custodian fees 220,349
- --------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 125,626
- --------------------------------------------------------------------------
Directors'/Trustees' fees 16,925
- --------------------------------------------------------------------------
Auditing fees 17,701
- --------------------------------------------------------------------------
Legal fees 12,866
- --------------------------------------------------------------------------
Portfolio accounting fees 167,714
- --------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 451,765
- --------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 2,482,387
- --------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 451,765
- --------------------------------------------------------------------------
Share registration costs 40,841
- --------------------------------------------------------------------------
Printing and postage 16,583
- --------------------------------------------------------------------------
Insurance premiums 30,336
- --------------------------------------------------------------------------
Taxes 16,945
- --------------------------------------------------------------------------
Miscellaneous 20,002
- -------------------------------------------------------------------------- -----------
Total expenses 12,002,231
- --------------------------------------------------------------------------
Waivers and reimbursements--
- --------------------------------------------------------------------------
Waiver of investment advisory fee $(2,149,890)
- ------------------------------------------------------------
Waiver of distribution services fee--Institutional Service
Shares (446,344)
- ------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (2,482,387)
- ------------------------------------------------------------
Waiver of shareholder services fee--Institutional Service
Shares (5,421)
- ------------------------------------------------------------ -----------
Total waivers (5,084,042)
- -------------------------------------------------------------------------- -----------
Net expenses 6,918,189
- ---------------------------------------------------------------------------------------- ------------
Net investment income 66,805,803
- ---------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------
Net realized loss on investments (14,896,854)
- ----------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 12,930,685
- ---------------------------------------------------------------------------------------- ------------
Net realized and unrealized loss on investments (1,966,169)
- ---------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 64,839,634
- ---------------------------------------------------------------------------------------- ------------
------------
</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,
----------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------
Net investment income $ 66,805,803 $ 109,274,386
- -------------------------------------------------------------------------
Net realized gain (loss) on investments ($57,180,753 net loss and
$16,735,698 net loss, respectively, as computed for federal tax purposes) (14,896,854) (55,879,989)
- -------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 12,930,685 (24,269,803)
- ------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 64,839,634 29,124,594
- ------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------------
Institutional Shares (56,778,571) (90,585,086)
- -------------------------------------------------------------------------
Institutional Service Shares (9,782,730) (18,689,300)
- ------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from distributions to shareholders (66,561,301) (109,274,386)
- ------------------------------------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------------
Proceeds from sale of shares 53,202,918 1,886,076,982
- -------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 16,413,082 34,585,437
- -------------------------------------------------------------------------
Cost of shares redeemed (570,408,807) (3,515,114,267)
- ------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from share transactions (500,792,807) (1,594,451,848)
- ------------------------------------------------------------------------- --------------- ---------------
Change in net assets (502,514,474) (1,674,601,640)
- -------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------
Beginning of period 1,494,704,025 3,169,305,665
- ------------------------------------------------------------------------- --------------- ---------------
End of period (including undistributed net investment income of $244,502
and $0, respectively) $ 992,189,551 $ 1,494,704,025
- ------------------------------------------------------------------------- --------------- ---------------
--------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
23
FEDERATED ARMS FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
(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 management
investment company. The Fund offers 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.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of 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.
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.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary. At August 31, 1995, the Fund, for
federal tax purposes, had a capital loss carryforward of $75,715,884, which
will reduce the Fund's taxable income arising from future net realized gain
on investments, if any, to the extent
24
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
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 as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C>
2001 $1,799,433
2002 $16,735,698
2003 $57,180,753
</TABLE>
Additionally, net capital losses of $9,722,167 attributable to security
transactions incurred after October 31, 1994 are treated as arising on the
first day of the Fund's next taxable year.
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.
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 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, which may enhance the
Fund's current yield and total return.
OTHER--Investment transactions are accounted for on the trade date.
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, YEAR ENDED AUGUST 31,
-------------------------- -----------------------------
FEDERATED ARMS FUND 1995 1994
- -------------------------------------------------- -------------------------- -----------------------------
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 4,182,411 $ 40,047,848 141,739,864 $ 1,407,584,109
- --------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 1,395,941 13,381,363 2,487,150 24,495,269
- --------------------------------------------------
Shares redeemed (45,474,917) (434,478,884) (283,203,693) (2,797,587,573)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
Net change resulting from Institutional Share
transactions (39,896,565) $(381,049,673) (138,976,679) $(1,365,508,195)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
----------- ------------- ------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
-------------------------- -----------------------------
FEDERATED ARMS FUND 1995 1994
- -------------------------------------------------- -------------------------- -----------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 1,373,723 $ 13,155,070 48,183,748 $ 478,492,873
- --------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 316,407 3,031,719 1,024,374 10,090,168
- --------------------------------------------------
Shares redeemed (14,200,812) (135,929,923) (72,696,731) (717,526,694)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
Net change resulting from Institutional Service
Share transactions (12,510,682) $(119,743,134) (23,488,609) $ (228,943,653)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
----------- ------------- ------------ ---------------
Net change resulting from Fund share
transactions (52,407,247) $(500,792,807) (162,465,288) $(1,594,451,848)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
----------- ------------- ------------ ---------------
</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.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated
Inves-
26
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
tors for the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's 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. FSC may
voluntarily choose to waive a portion of its fee. FSC can modify or terminate
this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE--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 services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive a portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The fee is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
INTERFUND TRANSACTIONS--During the year ended August 31, 1995, the Fund engaged
in purchase and sale transactions with funds that have a common investment
adviser, common Directors/Trustees, and/or common officers. These transactions
were made at current market value pursuant to Rule 17a-7 under the Act amounting
to $150,485,148 and $139,930,230, respectively.
GENERAL--Certain of the Officers and Trustees of the Fund are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended August 31, 1995, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------
PURCHASES $1,397,819,370
- -------------------------------------------------- --------------
SALES $1,689,872,419
- -------------------------------------------------- --------------
</TABLE>
27
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,
1995, 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, 1995, 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, 1995, 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, 1995
28
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 8600
Boston, Massachusetts 02266-8600
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- -------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- -------------------------------------------------------------------------------------------
</TABLE>
29
- --------------------------------------------------------------------------------
FEDERATED ARMS FUND
INSTITUTIONAL SHARES
PROSPECTUS
A Diversified Portfolio of
Federated ARMs Fund,
an Open-End Management
Investment Company
October 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Cusip 314082108
8100309A-IS (10/95) [RECYCLED PAPER LOGO]
- --------------------------------------------------------------------------------
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, 1995, 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,
which is in paper form only, or a paper copy of this prospectus if you
have received your prospectus electronically, 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL
SERVICE SHARES 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 12
NET ASSET VALUE 12
- ---------------------------------------------------
INVESTING IN INSTITUTIONAL SERVICE
SHARES 13
- ---------------------------------------------------
Share Purchases 13
Minimum Investment Required 13
What Shares Cost 13
Exchanging Securities For
Institutional Service Shares 14
Subaccounting Services 14
Certificates and Confirmations 14
Dividends 14
Capital Gains 14
REDEEMING INSTITUTIONAL SERVICE SHARES 14
- ---------------------------------------------------
Telephone Redemption 15
Written Requests 15
Accounts with Low Balances 16
SHAREHOLDER INFORMATION 16
- ---------------------------------------------------
Voting Rights 16
Massachusetts Partnership Law 16
TAX INFORMATION 17
- ---------------------------------------------------
Federal Income Tax 17
Pennsylvania Corporate and Personal
Property Taxes 17
PERFORMANCE INFORMATION 17
- ---------------------------------------------------
OTHER CLASSES OF SHARES 18
- ---------------------------------------------------
FINANCIAL STATEMENTS 19
- ---------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS 28
- ---------------------------------------------------
ADDRESSES 29
- ---------------------------------------------------
</TABLE>
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 OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (1)....................................................... 0.42%
12b-1 Fee (after waiver) (2)............................................................ 0.00%
Total Other Expenses.................................................................... 0.38%
Shareholder Services Fee................................................... 0.25%
Total Operating Expenses (3).................................................... 0.80%
</TABLE>
(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 total operating expenses in the table above are based on expenses
expected during the fiscal year ending August 31, 1996. The total operating
expenses were 0.80% for the fiscal year ended August 31, 1995, and would
have been 1.23% absent the voluntary waivers of a portion of the management
fee and 12b-1 fee.
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.
<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.
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 28.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
1995 1994 1993 1992(a)
- -------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.63 $ 9.98 $10.01 $ 9.98
- --------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------
Net investment income 0.54 0.42 0.48 0.18
- --------------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.02 (0.35) (0.03) 0.03
- -------------------------------------------------- -------- -------- -------- --------
Total from investment operations 0.56 0.07 0.45 0.21
- --------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------
Distributions from net investment income (0.54) (0.42) (0.48) (0.18)
- -------------------------------------------------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.65 $ 9.63 $ 9.98 $10.01
- -------------------------------------------------- -------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN (b) 5.94% 0.74% 4.56% 2.11%
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------
Expenses 0.80% 0.80% 0.76% 0.76%(c)
- --------------------------------------------------
Net investment income 5.44% 4.26% 4.72% 5.46%(c)
- --------------------------------------------------
Expense waiver/reimbursement (d) 0.43% 0.23% 0.21% 0.32%(c)
- --------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------
Net assets, end of period (000 omitted) $135,689 $255,891 $499,418 $113,095
- --------------------------------------------------
Portfolio turnover 124% 65% 36% 38%
- --------------------------------------------------
</TABLE>
(a) Reflects operations for the period from May 4, 1992 (date of initial public
investment of Institutional Service Shares) to August 31, 1992.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
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") has 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 load
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 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
3
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;
- 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, as amended, 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;
- 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.
4
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.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
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:
- 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
5
- 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 CMOs 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 four years
assuming an immediate and sustained parallel shift in the yield curve of plus
300 basis points, or shortens by more than six 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 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
6
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.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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. With over $72 billion invested across more
than 260 funds under management and/or administration by its subsidiaries,
as of December 31, 1994, Federated Investors is one of the largest mutual
fund investment managers in the United States. With more than 1,750
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through 4,000
financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.
Kathleen M. Foody-Malus, Susan M. Nason, and Todd Abraham are the Fund's
co-portfolio managers. Ms. Foody-Malus has been the Fund's co-portfolio
manager since January 1992. Ms. Foody-Malus joined Federated Investors in
1983 and has been a Vice President of the Fund's investment adviser since
1993. Ms. Foody-Malus served as an Assistant Vice President of the
investment adviser from 1990 until 1992. Ms. Foody-Malus received her M.B.A.
in Accounting/ Finance from the University of Pittsburgh.
9
Susan M. Nason has been the Fund's co-portfolio manager since July 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. Ms. Nason is
a Chartered Financial Analyst and received her M.B.A. in Finance from
Carnegie-Mellon University.
Todd A. Abraham has been the Fund's co-portfolio manager since August 1995.
Mr. Abraham joined Federated Investors in 1993 as an Investment Analyst and
has been an Assistant Vice President of the Fund's investment adviser since
1995. Mr. Abraham served as a Portfolio Analyst at Ryland Mortgage Company
from 1992 to 1993 and as a Bond Administrator at Ryland Asset Management
Company from 1990 to 1992. Mr. Abraham received his M.B.A. in Finance from
Loyola College.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
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 PLAN AND SHAREHOLDER SERVICES. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund will pay to the distributor an amount, computed at an annual rate of 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 services or distribution-related support
services as agents for their clients or customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Trust may make payments up to .25 on 1% of the average daily net asset value
of the Trust, computed at an annual rate, to obtain certain personal services
for shareholders and provide maintenance of shareholder accounts. From time to
10
time and for such periods as deemed appropriate, the amount stated above may be
reduced voluntarily.
Under the Shareholder Services Agreement, Federated Shareholder Services will
either perform shareholder services directly or will select financial
institutions to perform shareholder services. Financial institutions will
receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Trust 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.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic
payments to financial institutions under the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may also pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution-related support services, or shareholder services. The support may
include sponsoring sales, educational and training seminars at recreational-type
facilities for their employees, providing sales literature, and engineering
computer software programs that emphasize the attributes of the Trust. Such
assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Trust's Adviser or it's affiliates.
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>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
11
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,
Boston Massachusetts, is the transfer agent for the Shares of the Fund, and
dividend disbursing agent for the Fund.
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.
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.
12
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: Federated Services Company, c/o 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: Federated Services Company,
P.O. Box 8600, Boston, Massachusetts 02266-8600. 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.
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 as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, 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.
13
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.
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
14
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 should be sent by insured mail with the
written request to: Federated Services Company, 500 Victory Road-2nd Floor,
North Quincy, MA 02171.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption payable other
than to the shareholder of record must have 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.
15
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.
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.
16
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.
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.
17
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Institutional 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.
Shares and Institutional Shares are subject to certain of the same expenses.
Expense differences between Shares and Institutional Shares may affect the
performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-235-4669.
18
FEDERATED ARMS FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------- -------------------------------------------------- --------------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS--88.1%
- --------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--0.9%
--------------------------------------------------
$ 8,221,340 10.15%, Series MH1-A, 4/15/2006 $ 8,387,328
-------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--49.3%
--------------------------------------------------
477,343,424 5.261%-8.25%, 11/1/2017-4/1/2029 489,417,687
-------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--1.2%
--------------------------------------------------
20,303 12.00%, 3/1/2013 22,809
--------------------------------------------------
4,136,004 11.50%, 8/1/2014-11/1/2015 4,612,885
--------------------------------------------------
6,908,461 11.00%, 12/1/2015 7,655,334
-------------------------------------------------- --------------
Total 12,291,028
-------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--24.5%
--------------------------------------------------
237,424,907 5.50%-8.302%, 8/1/2018-3/1/2033 242,721,636
-------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--4.2%
--------------------------------------------------
5,985,111 12.00%, 9/15/2013-1/15/2014 6,791,126
--------------------------------------------------
16,071,037 11.50%, 10/15/2010-4/15/2020 18,059,668
--------------------------------------------------
15,231,109 11.00%, 12/15/2009-7/15/2020 16,934,860
-------------------------------------------------- --------------
Total 41,785,654
-------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--8.0%
--------------------------------------------------
55,000,000 6.00%, 10/20/2025 55,034,375
--------------------------------------------------
25,000,000 5.50%, 9/20/2025 24,695,250
-------------------------------------------------- --------------
Total 79,729,625
-------------------------------------------------- --------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED
COST $869,862,536) 874,332,958
-------------------------------------------------- --------------
U.S. TREASURY OBLIGATIONS--5.0%
- --------------------------------------------------------------------
U.S. TREASURY NOTES--5.0%
--------------------------------------------------
50,000,000 5.625%-6.125%, 5/31/1997-6/30/1997 49,997,200
-------------------------------------------------- --------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST
$49,801,383) 49,997,200
-------------------------------------------------- --------------
</TABLE>
19
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------- -------------------------------------------------- --------------
<C> <S> <C>
(a) REPURCHASE AGREEMENTS--14.5%
- --------------------------------------------------------------------
$ 40,000,000 Harris, Nesbitt, Thomson Securities, Inc., 5.80%,
dated 8/31/1995, due 9/1/1995 $ 40,000,000
--------------------------------------------------
3,445,000 J.P. Morgan Securities, Inc., 5.83%, dated
8/31/1995, due 9/1/1995 3,445,000
--------------------------------------------------
50,000,000 (b) CS First Boston Corp., 5.76%, dated 8/18/1995, due
9/21/1995 50,000,000
--------------------------------------------------
50,000,000 (b) CS First Boston Corp., 5.75%, dated 8/24/1995, due
9/21/1995 50,000,000
-------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 143,445,000
-------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST
$1,063,108,919)(C) $1,067,775,158
-------------------------------------------------- --------------
--------------
</TABLE>
(a) 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 is through participation in joint
accounts with other Federated funds.
(b) Although final maturity falls beyond seven days, a liquidity feature is
included in the transaction to permit termination of the repurchase
agreement.
(c) The cost of investments for federal tax purposes amounts to $1,063,171,419.
The unrealized appreciation of investments on a federal tax basis amounts to
$4,603,739 which is comprised of $7,985,978 appreciation and $3,382,239
depreciation at August 31, 1995.
Note: The categories of investments are shown as a percentage of net assets
($992,189,551) at August 31, 1995.
The following acronyms are used throughout this portfolio:
<TABLE>
<S> <C> <C>
ARM -- Adjustable Rate Mortgage
PC -- Participation Certificate
REMIC -- Real Estate Mortgage Investment Conduit
</TABLE>
(See Notes which are an integral part of the Financial Statements)
20
FEDERATED ARMS FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------
Investments in repurchase agreements $143,445,000
- --------------------------------------------------
Investments in securities 924,330,158
- -------------------------------------------------- ------------
Total investments, at value (identified cost $1,063,108,919,
and tax cost $1,063,171,419) $1,067,775,158
- ----------------------------------------------------------------
Cash 2,093
- ----------------------------------------------------------------
Income receivable 18,725,347
- ----------------------------------------------------------------
Receivable for investments sold 64,983,932
- ----------------------------------------------------------------
Receivable for shares sold 21,893
- ---------------------------------------------------------------- --------------
Total assets 1,151,508,423
- ----------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------
Payable for investments purchased $154,694,653
- --------------------------------------------------
Payable for shares redeemed 513,244
- --------------------------------------------------
Income distribution payable 3,940,725
- --------------------------------------------------
Accrued expenses 170,250
- -------------------------------------------------- ------------
Total liabilities 159,318,872
- ---------------------------------------------------------------- --------------
NET ASSETS for 102,766,717 shares outstanding $ 992,189,551
- ---------------------------------------------------------------- --------------
--------------
NET ASSETS CONSIST OF:
- ----------------------------------------------------------------
Paid in capital $1,072,779,815
- ----------------------------------------------------------------
Net unrealized appreciation of investments 4,666,239
- ----------------------------------------------------------------
Accumulated net realized loss on investments (85,501,005)
- ----------------------------------------------------------------
Undistributed net investment income 244,502
- ---------------------------------------------------------------- --------------
Total Net Assets $ 992,189,551
- ---------------------------------------------------------------- --------------
--------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER
SHARE:
- ----------------------------------------------------------------
INSTITUTIONAL SHARES:
- ----------------------------------------------------------------
$856,500,205 DIVIDED BY 88,712,689 shares
outstanding $ 9.65
- ---------------------------------------------------------------- --------------
--------------
INSTITUTIONAL SERVICE SHARES:
- ----------------------------------------------------------------
$135,689,346 DIVIDED BY 14,054,028 shares
outstanding $ 9.65
- ---------------------------------------------------------------- --------------
--------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
21
FEDERATED ARMS FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $512,518) $ 73,723,992
- ------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------------
Investment advisory fee $ 7,041,965
- --------------------------------------------------------------------------
Administrative personnel and services fee 888,461
- --------------------------------------------------------------------------
Custodian fees 220,349
- --------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 125,626
- --------------------------------------------------------------------------
Directors'/Trustees' fees 16,925
- --------------------------------------------------------------------------
Auditing fees 17,701
- --------------------------------------------------------------------------
Legal fees 12,866
- --------------------------------------------------------------------------
Portfolio accounting fees 167,714
- --------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 451,765
- --------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 2,482,387
- --------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 451,765
- --------------------------------------------------------------------------
Share registration costs 40,841
- --------------------------------------------------------------------------
Printing and postage 16,583
- --------------------------------------------------------------------------
Insurance premiums 30,336
- --------------------------------------------------------------------------
Taxes 16,945
- --------------------------------------------------------------------------
Miscellaneous 20,002
- -------------------------------------------------------------------------- ------------
Total expenses 12,002,231
- --------------------------------------------------------------------------
Waivers and reimbursements--
- --------------------------------------------------------------------------
Waiver of investment advisory fee $(2,149,890)
- ------------------------------------------------------------
Waiver of distribution services fee--Institutional Service
Shares (446,344)
- ------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (2,482,387)
- ------------------------------------------------------------
Waiver of shareholder services fee--Institutional Service
Shares (5,421)
- ------------------------------------------------------------ -----------
Total waivers (5,084,042)
- -------------------------------------------------------------------------- ------------
Net expenses 6,918,189
- ------------------------------------------------------------------------------------------ ------------
Net investment income 66,805,803
- ------------------------------------------------------------------------------------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------------
Net realized loss on investments (14,896,854)
- ------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 12,930,685
- ------------------------------------------------------------------------------------------ ------------
Net realized and unrealized loss on investments (1,966,169)
- ------------------------------------------------------------------------------------------ ------------
Change in net assets resulting from operations $ 64,839,634
- ------------------------------------------------------------------------------------------ ------------
------------
</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,
----------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------
Net investment income $ 66,805,803 $ 109,274,386
- -------------------------------------------------------------------------
Net realized gain (loss) on investments ($57,180,753 net loss and
$16,735,698 net loss, respectively, as computed for federal tax purposes) (14,896,854) (55,879,989)
- -------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 12,930,685 (24,269,803)
- ------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 64,839,634 29,124,594
- ------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------------
Institutional Shares (56,778,571) (90,585,086)
- -------------------------------------------------------------------------
Institutional Service Shares (9,782,730) (18,689,300)
- ------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from distributions to shareholders (66,561,301) (109,274,386)
- ------------------------------------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------------
Proceeds from sale of shares 53,202,918 1,886,076,982
- -------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 16,413,082 34,585,437
- -------------------------------------------------------------------------
Cost of shares redeemed (570,408,807) (3,515,114,267)
- ------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from share transactions (500,792,807) (1,594,451,848)
- ------------------------------------------------------------------------- --------------- ---------------
Change in net assets (502,514,474) (1,674,601,640)
- -------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------
Beginning of period 1,494,704,025 3,169,305,665
- ------------------------------------------------------------------------- --------------- ---------------
End of period (including undistributed net investment income of $244,502
and $0, respectively) $ 992,189,551 $ 1,494,704,025
- ------------------------------------------------------------------------- --------------- ---------------
--------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
23
FEDERATED ARMS FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
(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 management
investment company. The Fund offers 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.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of 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.
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.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary. At August 31, 1995, the Fund, for
federal tax purposes, had a capital loss carryforward of $75,715,884, which
will reduce the Fund's taxable income arising from future net realized gain
on investments, if any, to the extent
24
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
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 as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C>
2001 1,799,4$33
2002 16,735,6$98
2003 57,180,7$53
</TABLE>
Additionally, net capital losses of $9,722,167 attributable to security
transactions incurred after October 31, 1994 are treated as arising on the
first day of the Fund's next taxable year.
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.
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 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, which may enhance the
Fund's current yield and total return.
OTHER--Investment transactions are accounted for on the trade date.
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, YEAR ENDED AUGUST 31,
-------------------------- -----------------------------
FEDERATED ARMS FUND 1995 1994
- -------------------------------------------------- -------------------------- -----------------------------
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 4,182,411 $ 40,047,848 141,739,864 $ 1,407,584,109
- --------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 1,395,941 13,381,363 2,487,150 24,495,269
- --------------------------------------------------
Shares redeemed (45,474,917) (434,478,884) (283,203,693) (2,797,587,573)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
Net change resulting from Institutional Share
transactions (39,896,565) $(381,049,673) (138,976,679) $(1,365,508,195)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
----------- ------------- ------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
-------------------------- -----------------------------
FEDERATED ARMS FUND 1995 1994
- -------------------------------------------------- -------------------------- -----------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 1,373,723 $ 13,155,070 48,183,748 $ 478,492,873
- --------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 316,407 3,031,719 1,024,374 10,090,168
- --------------------------------------------------
Shares redeemed (14,200,812) (135,929,923) (72,696,731) (717,526,694)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
Net change resulting from Institutional Service
Share transactions (12,510,682) $(119,743,134) (23,488,609) $ (228,943,653)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
----------- ------------- ------------ ---------------
Net change resulting from Fund share
transactions (52,407,247) $(500,792,807) (162,465,288) $(1,594,451,848)
- -------------------------------------------------- ----------- ------------- ------------ ---------------
----------- ------------- ------------ ---------------
</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.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated
Inves-
26
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
tors for the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's 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. FSC may
voluntarily choose to waive a portion of its fee. FSC can modify or terminate
this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE--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 services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive a portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The fee is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
INTERFUND TRANSACTIONS--During the year ended August 31, 1995, the Fund engaged
in purchase and sale transactions with funds that have a common investment
adviser, common Directors/Trustees, and/ or common officers. These transactions
were made at current market value pursuant to Rule 17a-7 under the Act amounting
to $150,485,148 and $139,930,230, respectively.
GENERAL--Certain of the Officers and Trustees of the Fund are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended August 31, 1995, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------
PURCHASES $1,397,819,370
- -------------------------------------------------- --------------
SALES $1,689,872,419
- -------------------------------------------------- --------------
</TABLE>
27
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,
1995, 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, 1995, 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, 1995, 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, 1995
28
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 8600
Boston, Massachusetts 02266-8600
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- -------------------------------------------------------------------------------------------
Independent Public Accountants
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- -------------------------------------------------------------------------------------------
</TABLE>
29
- --------------------------------------------------------------------------------
FEDERATED ARMS FUND
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
A Diversified Portfolio of
Federated ARMs Fund,
an Open-End Management
Investment Company
October 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Cusip 314082207
8100309A-SS (10/95) [RECYCLED PAPER LOGO]
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) Financial Statements (Filed in Part A);
(b) Exhibits:
(1) Conformed copy of Declaration of Trust of the Registrant (16);
(i) Conformed copy of Amendment No. 1 to the
Declaration of Trust (16);
(ii) Conformed copy of Amendment No. 2 to the
Declaration of Trust (16);
(iii) Conformed copy of Amended and Restated Declaration of
Trust (14);
(2) Copy of By-Laws of the Registrant as Restated and Amended (16);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial Interest
of the Registrant (15);
(5) Conformed copy of Investment Advisory Contract of the
Registrant (9);
(6) Copy of Distributor's Contract of the Registrant (14);
(i) Conformed copy of Exhibit A to Distributor's Contract (16);
(ii) The Registrant hereby incorporates the conformed copy of
the specimen Mutual Funds Sales and Service Agreement; Mutual
Funds Service Agreement; and Plan Trustee/ Mutual Funds Service
Agreement from Item 24(b)(6) of the Cash Trust Series II
Registration Statement on Form N-1A filed with the Commission on
July 24, 1995. (File Nos. 33-38550 and 811-6269);
(7) Not applicable;
(8) Conformed copy of Custodian Contract of the
Registrant (16);
(9) (i) Conformed copy of Fund Accounting, Shareholder
Recordkeeping, and Custody Services Procurement Agreement of the
Registrant +;
(ii) The responses described in Item 24(b)(6) are hereby
incorporated by reference;
(iii)..........Conformed copy of Administrative Services
Agreement (16);
(iv) Conformed copy of Shareholder Services Agreement (16);
(10) Conformed copy of Opinion and Consent of Counsel as to
legality of shares being registered (16);
+ All exhibits are being filed electronically.
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed August 24, 1989.
(File Nos. 811-4539 and 2-98491)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed October 22, 1992.
(File Nos. 811-4539 and 2-98491)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed October 25, 1993.
(File Nos. 811-4539 and 2-98491)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed October 26, 1994.
(File Nos. 811-4539 and 2-98491)
(11) Conformed copy of Consent of Independent Auditors +;
(12) Not applicable;
(13) Conformed copy of Initial Capital
Understanding (16);
(14) Not applicable;
(15) (i) Conformed Copy of Rule 12b-1 Distribution Plan of the
Registrant (14);
(ii) The responses described in Item 24(b)(6) are hereby
incorporated by reference.
(16) Copy of Schedule for Computation of Fund Performance Data
(8);
(17) Copy of Financial Data Schedule +;
(18) Not Applicable
(19) Conformed copy of Power of Attorney +;
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of October 5, 1995
Shares of Beneficial Interest 5,263
(no par value)
Institutional Shares
Shares of Beneficial Interest 839
(no par value)
Institutional Service Shares
Item 27. Indemnification: (12)
+ All exhibits are being filed electronically.
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed October 24, 1988.
(File Nos. 811-4539 2-98491)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed December 26, 1991.
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed October 22, 1992.
(File Nos. 811-4539 and 2-98491)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed October 26, 1994.
(File Nos. 811-4539 2-98491)
Item 28. Business and Other Connections of Investment Adviser:
For a description of the other business of the investment adviser, see the
section entitled "Trust Information - Management of the Trust" in Part A.
The affiliations with the Registrant of three of the Trustees and one of
the Officers of the investment adviser are included in Part B of this
Registration Statement under "Federated ARMs Fund Management." The
remaining Trustee of the investment adviser, his position with the
investment adviser, and, in parentheses, his principal occupation is:
Mark D. Olson, Partner, Wilson, Halbrook & Bayard, 107 W. Market Street,
Georgetown, Delaware 19947.
The remaining Officers of the investment adviser are: William D. Dawson,
III, Henry A. Frantzen, J. Thomas Madden, and Mark L. Mallon, Executive
Vice Presidents; Henry J. Gailliot, Senior Vice President-Economist;
Peter R. Anderson, Drew J. Collins, Johnathan C. Conley, and J. Alan
Minteer, Senior Vice Presidents; J. Scott Albrecht, Joseph M. Balestrino,
Randall A. Bauer, David A. Briggs, Kenneth J. Cody, Deborah A. Cunningham,
Michael P. Donnelly, Mark E. Durbiano, Kathleen M. Foody-Malus, Thomas M.
Franks, Edward C. Gonzales, Stephen A.Keen, Mark S. Kopinski, Jeff A.
Kozemchak, Marian R. Marinack, Susan M. Nason, Mary Jo Ochson, Robert J.
Ostrowski, Frederick L. Plautz, Jr., Charles A. Ritter, James D. Roberge,
Frank Semack, Sandra L. Webber, and Christopher H. Wiles, Vice Presidents;
Thomas R. Donahue, Treasurer; and Stephen A. Keen, Secretary. The
business address of each of the Officers of the investment adviser is
Federated Investors Tower, Pittsburgh, PA 15222-3779. These individuals
are also officers of a majority of the investment advisers to the Funds
listed in Part B of this Registration Statement.
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor for shares of the Registrant,
also acts as principal underwriter for the following open-end investment
companies: Alexander Hamilton Funds; American Leaders Fund, Inc.; Annuity
Management Series; Arrow Funds; Automated Government Money Trust;
BayFunds; The Biltmore Funds; The Biltmore Municipal Funds; Blanchard
Funds; Blanchard Precious Metals, Inc.; Cash Trust Series, Inc.; Cash
Trust Series II; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated Equity Funds; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated Master
Trust; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3
Years; Federated U.S. Government Securities Fund: 3-5 Years;First Priority
Funds; First Union Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fountain Square Funds; Fund for
U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Independence One Mutual Funds; 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 Fund, Inc.; Liberty Municipal
Securities Fund, Inc.; Liberty U.S. Government Money Market Trust; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Marshall
Funds, Inc.; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; The Monitor Funds; Municipal Securities Income
Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; SouthTrust Vulcan Funds;
Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; Tower Mutual Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities;
Trust for U.S. Treasury Obligations; The Virtus Funds; Vision Fiduciary
Funds, Inc.; Vision Group of Funds, Inc.; and World Investment Series,
Inc.
Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief Vice President Federated
Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President and
Pittsburgh, PA 15222-3779 Secretary
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas R. Donahue Asst. Secretary, Asst. --
Federated Investors Tower Treasurer, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Assistant Secretary, Treasurer
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Federated ARMs Fund Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Federated Services Company P.O. Box 8600
("Transfer Agent, Dividend Boston, Massachusetts Disbursing Agent
and Portfolio 02266-8600
Recordkeeper")
Federated Administrative Services Federated Investors Tower
("Administrator") Pittsburgh, Pennsylvania
15222-3779
Federated Management Federated Investors Tower
("Adviser") Pittsburgh, Pennsylvania
15222-3779
State Street Bank and Trust Company P.O. Box 8600
("Custodian") Boston, Massachusetts
02266-8600
Item 31. Management Services: Not applicable
Item 32. Undertakings: Registrant hereby undertakes to comply with the
provisions of Section 16(c) of the 1940 Act with respect to the
removal of Directors and the calling of special shareholder
meetings by shareholders.
Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered, a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED ARMs FUND, certifies
that it meets all of the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of
Pittsburgh and Commonwealth of Pennsylvania, on the 23rd day of October, 1995.
FEDERATED ARMs FUND
BY: /s/Robert C. Rosselot
Robert C. Rosselot, Assistant Secretary
Attorney in Fact for John F. Donahue
October 23, 1995
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
NAME TITLE DATE
By:/s/Robert C. Rosselot
Robert C. Rosselot Attorney In Fact October 24, 1995
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Glen R. Johnson* President
David M. Taylor* Treasurer
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
John E. Murray* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
Exhibit (11) under N-1A
Exhibit 23 under Item 601/Reg SK
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
October 6, 1995, in Post-Effective Amendment Number 19 to the Registration
Statement (Form N-1A No. 2-98491) and the related Prospectuses of Federated ARMs
Fund, dated October 31, 1995.
/s/Ernst & Young LLP
Pittsburgh, Pennsylvania
Exhibit 9 (i) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AGREEMENT
FOR
FUND ACCOUNTING,
SHAREHOLDER RECORDKEEPING,
AND
CUSTODY SERVICES PROCUREMENT
AGREEMENT made as of the 1st day of December, 1994, by and between those
investment companies listed on Exhibit 1 as may be amended from time to time,
having their principal office and place of business at Federated Investors
Tower, Pittsburgh, PA 15222-3779 (the "Trust"), on behalf of the portfolios
(individually referred to herein as a "Fund" and collectively as "Funds") of
the Trust, and FEDERATED SERVICES COMPANY, a Delaware business trust, having
its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 (the "Company").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
with authorized and issued shares of capital stock or beneficial interest
("Shares"); and
WHEREAS, the Trust may desire to retain the Company to provide certain
pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes") if so indicated
on Exhibit 1, and the Company is willing to furnish such services; and
WHEREAS, the Trust may desire to appoint the Company as its transfer agent,
dividend disbursing agent if so indicated on Exhibit 1, and agent in
connection with certain other activities, and the Company desires to accept
such appointment; and
WHEREAS, the Trust may desire to appoint the Company as its agent to
select, negotiate and subcontract for custodian services from an approved list
of qualified banks if so indicated on Exhibit 1, and the Company desires to
accept such appointment; and
WHEREAS, from time to time the Trust may desire and may instruct the
Company to subcontract for the performance of certain of its duties and
responsibilities hereunder to State Street Bank and Trust Company or another
agent (the "Agent"); and
WHEREAS, the words Trust and Fund may be used interchangeably for those
investment companies consisting of only one portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree
as follows:
SECTION ONE: FUND ACCOUNTING.
ARTICLE 1. APPOINTMENT.
The Trust hereby appoints the Company to provide certain pricing and
accounting services to the Funds, and/or the Classes, for the period and on
the terms set forth in this Agreement. The Company accepts such appointment
and agrees to furnish the services herein set forth in return for the
compensation as provided in Article 3 of this Section.
ARTICLE 2. THE COMPANY'S DUTIES.
Subject to the supervision and control of the Trust's Board of Trustees or
Directors ("Board"), the Company will assist the Trust with regard to fund
accounting for the Trust, and/or the Funds, and/or the Classes, and in
connection therewith undertakes to perform the following specific services;
A. Value the assets of the Funds using: primarily, market quotations,
including the use of matrix pricing, supplied by the independent pricing
services selected by the Company in consultation with the adviser, or
sources selected by the adviser, and reviewed by the board; secondarily,
if a designated pricing service does not provide a price for a security
-2-
which the Company believes should be available by market quotation, the
Company may obtain a price by calling brokers designated by the
investment adviser of the fund holding the security, or if the adviser
does not supply the names of such brokers, the Company will attempt on
its own to find brokers to price those securities; thirdly, for
securities for which no market price is available, the Pricing Committee
of the Board will determine a fair value in good faith. Consistent with
Rule 2a-4 of the 40 Act, estimates may be used where necessary or
appropriate. The Company's obligations with regard to the prices
received from outside pricing services and designated brokers or other
outside sources, is to exercise reasonable care in the supervision of
the pricing agent. The Company is not the guarantor of the securities
prices received from such agents and the Company is not liable to the
Fund for potential errors in valuing a Fund's assets or calculating the
net asset value per share of such Fund or Class when the calculations
are based upon such prices. All of the above sources of prices used as
described are deemed by the Company to be authorized sources of security
prices. The Company provides daily to the adviser the securities prices
used in calculating the net asset value of the fund, for its use in
preparing exception reports for those prices on which the adviser has
comment. Further, upon receipt of the exception reports generated by
the adviser, the Company diligently pursues communication regarding
exception reports with the designated pricing agents.
B. Determine the net asset value per share of each Fund and/or Class, at
the time and in the manner from time to time determined by the Board and
as set forth in the Prospectus and Statement of Additional Information
("Prospectus") of each Fund;
C. Calculate the net income of each of the Funds, if any;
-3-
D. Calculate capital gains or losses of each of the Funds resulting from
sale or disposition of assets, if any;
E. Maintain the general ledger and other accounts, books and financial
records of the Trust, including for each Fund, and/or Class, as required
under Section 31(a) of the 1940 Act and the Rules thereunder in
connection with the services provided by the Company;
F. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records to be maintained by Rule 31a-1 under the 1940 Act in connection
with the services provided by the Company. The Company further agrees
that all such records it maintains for the Trust are the property of the
Trust and further agrees to surrender promptly to the Trust such records
upon the Trust's request;
G. At the request of the Trust, prepare various reports or other financial
documents required by federal, state and other applicable laws and
regulations; and
H. Such other similar services as may be reasonably requested by the Trust.
ARTICLE 3. COMPENSATION AND ALLOCATION OF EXPENSES.
A. The Funds will compensate the Company for its services rendered pursuant
to Section One of this Agreement in accordance with the fees agreed upon
from time to time between the parties hereto. Such fees do not include
out-of-pocket disbursements of the Company for which the Funds shall
reimburse the Company upon receipt of a separate invoice. Out-of-pocket
disbursements shall include, but shall not be limited to, the items
agreed upon between the parties from time to time.
B. The Fund and/or the Class, and not the Company, shall bear the cost of:
custodial expenses; membership dues in the Investment Company Institute
or any similar organization; transfer agency expenses; investment
advisory expenses; costs of printing and mailing stock certificates,
Prospectuses, reports and notices; administrative expenses; interest on
borrowed money; brokerage commissions; taxes and fees payable to
-4-
federal, state and other governmental agencies; fees of Trustees or
Directors of the Trust; independent auditors expenses; Federated
Administrative Services and/or Federated Administrative Services, Inc.
legal and audit department expenses billed to Federated Services Company
for work performed related to the Trust, the Funds, or the Classes; law
firm expenses; or other expenses not specified in this Article 3 which
may be properly payable by the Funds and/or classes.
C. The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
E. The fee for the period from the effective date of this Agreement with
respect to a Fund or a Class to the end of the initial month shall be
prorated according to the proportion that such period bears to the full
month period. Upon any termination of this Agreement before the end of
any month, the fee for such period shall be prorated according to the
proportion which such period bears to the full month period. For
purposes of determining fees payable to the Company, the value of the
Fund's net assets shall be computed at the time and in the manner
specified in the Fund's Prospectus.
F. The Company, in its sole discretion, may from time to time subcontract
to, employ or associate with itself such person or persons as the
Company may believe to be particularly suited to assist it in performing
services under this Section One. Such person or persons may be third-
party service providers, or they may be officers and employees who are
-5-
employed by both the Company and the Funds. The compensation of such
person or persons shall be paid by the Company and no obligation shall
be incurred on behalf of the Trust, the Funds, or the Classes in such
respect.
SECTION TWO: SHAREHOLDER RECORDKEEPING.
ARTICLE 4. TERMS OF APPOINTMENT.
Subject to the terms and conditions set forth in this Agreement, the Trust
hereby appoints the Company to act as, and the Company agrees to act as,
transfer agent and dividend disbursing agent for each Fund's Shares, and agent
in connection with any accumulation, open-account or similar plans provided to
the shareholders of any Fund ("Shareholder(s)"), including without limitation
any periodic investment plan or periodic withdrawal program.
As used throughout this Agreement, a "Proper Instruction" means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will be deemed
to be Proper Instructions if (a) the Company reasonably believes them to have
been given by a person previously authorized in Proper Instructions to give
such instructions with respect to the transaction involved, and (b) the Trust,
or the Fund, and the Company promptly cause such oral instructions to be
confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Trust, or the Fund, and the Company are satisfied that such procedures afford
adequate safeguards for the Fund's assets. Proper Instructions may only be
amended in writing.
ARTICLE 5. DUTIES OF THE COMPANY.
The Company shall perform the following services in accordance with Proper
Instructions as may be provided from time to time by the Trust as to any Fund:
A. Purchases
-6-
(1) The Company shall receive orders and payment for the purchase of
shares and promptly deliver payment and appropriate documentation
therefore to the custodian of the relevant Fund, (the "Custodian").
The Company shall notify the Fund and the Custodian on a daily
basis of the total amount of orders and payments so delivered.
(2) Pursuant to purchase orders and in accordance with the Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and hold
such Shares in the appropriate Shareholder accounts.
(3) For certificated Funds and/or Classes, if a Shareholder or its
agent requests a certificate, the Company, as Transfer Agent, shall
countersign and mail by first class mail, a certificate to the
Shareholder at its address as set forth on the transfer books of
the Funds, and/or Classes, subject to any Proper Instructions
regarding the delivery of certificates.
(4) In the event that any check or other order for the purchase of
Shares of the Fund and/or Class is returned unpaid for any reason,
the Company shall debit the Share account of the Shareholder by the
number of Shares that had been credited to its account upon receipt
of the check or other order, promptly mail a debit advice to the
Shareholder, and notify the Fund and/or Class of its action. In
the event that the amount paid for such Shares exceeds proceeds of
the redemption of such Shares plus the amount of any dividends paid
with respect to such Shares, the Fund and/the Class or its
distributor will reimburse the Company on the amount of such
excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as Dividend
Disbursing Agent for the Funds in accordance with the provisions of
-7-
its governing document and the then-current Prospectus of the Fund.
The Company shall prepare and mail or credit income, capital gain,
or any other payments to Shareholders. As the Dividend Disbursing
Agent, the Company shall, on or before the payment date of any such
distribution, notify the Custodian of the estimated amount required
to pay any portion of said distribution which is payable in cash
and request the Custodian to make available sufficient funds for
the cash amount to be paid out. The Company shall reconcile the
amounts so requested and the amounts actually received with the
Custodian on a daily basis. If a Shareholder is entitled to
receive additional Shares by virtue of any such distribution or
dividend, appropriate credits shall be made to the Shareholder's
account, for certificated Funds and/or Classes, delivered where
requested; and
(2) The Company shall maintain records of account for each Fund and
Class and advise the Trust, each Fund and Class and its
Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or set forth
in Proper Instructions, deliver the appropriate instructions
therefor to the Custodian. The Company shall notify the Funds on a
daily basis of the total amount of redemption requests processed
and monies paid to the Company by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds from the
Custodian with respect to any redemption, the Company shall pay or
cause to be paid the redemption proceeds in the manner instructed
by the redeeming Shareholders, pursuant to procedures described in
the then-current Prospectus of the Fund.
-8-
(3) If any certificate returned for redemption or other request for
redemption does not comply with the procedures for redemption
approved by the Fund, the Company shall promptly notify the
Shareholder of such fact, together with the reason therefor, and
shall effect such redemption at the price applicable to the date
and time of receipt of documents complying with said procedures.
(4) The Company shall effect transfers of Shares by the registered
owners thereof.
(5) The Company shall identify and process abandoned accounts and
uncashed checks for state escheat requirements on an annual basis
and report such actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares of each Fund,
and/or Class, and maintain pursuant to applicable rules of the
Securities and Exchange Commission ("SEC") a record of the total
number of Shares of the Fund and/or Class which are authorized,
based upon data provided to it by the Fund, and issued and
outstanding. The Company shall also provide the Fund on a regular
basis or upon reasonable request with the total number of Shares
which are authorized and issued and outstanding, but shall have no
obligation when recording the issuance of Shares, except as
otherwise set forth herein, to monitor the issuance of such Shares
or to take cognizance of any laws relating to the issue or sale of
such Shares, which functions shall be the sole responsibility of
the Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by the
Trust or the Fund to include a record for each Shareholder's
account of the following:
-9-
(a) Name, address and tax identification number (and whether such
number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account, including
dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholding in the case of a
foreign account or an account for which withholding is
required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application, dividend
address and correspondence relating to the current maintenance
of the account;
(g) Certificate numbers and denominations for any Shareholder
holding certificates;
(h) Any information required in order for the Company to perform
the calculations contemplated or required by this Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such record
retention shall be at the expense of the Company, and such records
may be inspected by the Fund at reasonable times. The Company may,
at its option at any time, and shall forthwith upon the Fund's
demand, turn over to the Fund and cease to retain in the Company's
files, records and documents created and maintained by the Company
pursuant to this Agreement, which are no longer needed by the
Company in performance of its services or for its protection. If
not so turned over to the Fund, such records and documents will be
retained by the Company for six years from the year of creation,
during the first two of which such documents will be in readily
accessible form. At the end of the six year period, such records
-10-
and documents will either be turned over to the Fund or destroyed
in accordance with Proper Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund periodically the following
information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the Fund to
the Company;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution agreements,
allocations of sales loads, redemption fees, or other
transaction- or sales-related payments;
(f) Such other information as may be agreed upon from time to
time.
(2) The Company shall prepare in the appropriate form, file with the
Internal Revenue Service and appropriate state agencies, and, if
required, mail to Shareholders, such notices for reporting
dividends and distributions paid as are required to be so filed and
mailed and shall withhold such sums as are required to be withheld
under applicable federal and state income tax laws, rules and
regulations.
(3) In addition to and not in lieu of the services set forth above, the
Company shall:
(a) Perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, agent in
connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or
-11-
periodic withdrawal program), including but not limited to:
maintaining all Shareholder accounts, mailing Shareholder
reports and Prospectuses to current Shareholders, withholding
taxes on accounts subject to back-up or other withholding
(including non-resident alien accounts), preparing and filing
reports on U.S. Treasury Department Form 1099 and other
appropriate forms required with respect to dividends and
distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of
account to Shareholders for all purchases and redemptions of
Shares and other conformable transactions in Shareholder
accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account information;
and
(b) provide a system which will enable the Fund to monitor the
total number of Shares of each Fund and/or Class sold in each
state ("blue sky reporting"). The Fund shall by Proper
Instructions (i) identify to the Company those transactions
and assets to be treated as exempt from the blue sky reporting
for each state and (ii) verify the classification of
transactions for each state on the system prior to activation
and thereafter monitor the daily activity for each state. The
responsibility of the Company for each Fund's and/or Class's
state blue sky registration status is limited solely to the
recording of the initial classification of transactions or
accounts with regard to blue sky compliance and the reporting
of such transactions and accounts to the Fund as provided
above.
F. Other Duties
-12-
(1) The Company shall answer correspondence from Shareholders relating
to their Share accounts and such other correspondence as may from
time to time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting lists, mail proxy
cards and other material supplied to it by the Fund in connection
with Shareholder Meetings of each Fund; receive, examine and
tabulate returned proxies, and certify the vote of the
Shareholders;
(3) The Company shall establish and maintain facilities and procedures
for safekeeping of stock certificates, check forms and facsimile
signature imprinting devices, if any; and for the preparation or
use, and for keeping account of, such certificates, forms and
devices.
ARTICLE 6. DUTIES OF THE TRUST.
A. Compliance
The Trust or Fund assume full responsibility for the preparation,
contents and distribution of their own and/or their classes' Prospectus
and for complying with all applicable requirements of the Securities Act
of 1933, as amended (the "1933 Act"), the 1940 Act and any laws, rules
and regulations of government authorities having jurisdiction.
B. Share Certificates
The Trust shall supply the Company with a sufficient supply of blank
Share certificates and from time to time shall renew such supply upon
request of the Company. Such blank Share certificates shall be properly
signed, manually or by facsimile, if authorized by the Trust and shall
bear the seal of the Trust or facsimile thereof; and notwithstanding the
death, resignation or removal of any officer of the Trust authorized to
sign certificates, the Company may continue to countersign certificates
which bear the manual or facsimile signature of such officer until
otherwise directed by the Trust.
-13-
C. Distributions
The Fund shall promptly inform the Company of the declaration of any
dividend or distribution on account of any Fund's shares.
ARTICLE 7. COMPENSATION AND EXPENSES.
A. Annual Fee
For performance by the Company pursuant to Section Two of this
Agreement, the Trust and/or the Fund agree to pay the Company an annual
maintenance fee for each Shareholder account as agreed upon between the
parties and as may be added to or amended from time to time. Such fees
may be changed from time to time subject to written agreement between
the Trust and the Company. Pursuant to information in the Fund
Prospectus or other information or instructions from the Fund, the
Company may sub-divide any Fund into Classes or other sub-components for
recordkeeping purposes. The Company will charge the Fund the same fees
for each such Class or sub-component the same as if each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Trust and/or
Fund agree to reimburse the Company for out-of-pocket expenses or
advances incurred by the Company for the items agreed upon between the
parties, as may be added to or amended from time to time. In addition,
any other expenses incurred by the Company at the request or with the
consent of the Trust and/or the Fund, will be reimbursed by the
appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
-14-
maintain detailed information about the compensation and out-of-pocket
expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
ARTICLE 8. ASSIGNMENT OF SHAREHOLDER RECORDKEEPING.
Except as provided below, no right or obligation under this Section Two may
be assigned by either party without the written consent of the other party.
A. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
B. The Company may without further consent on the part of the Trust
subcontract for the performance hereof with (A) State Street Bank and
its subsidiary, Boston Financial Data Services, Inc., a Massachusetts
Trust ("BFDS"), which is duly registered as a transfer agent pursuant to
Section 17A(c)(1) of the Securities Exchange Act of 1934, as amended, or
any succeeding statute ("Section 17A(c)(1)"), or (B) a BFDS subsidiary
duly registered as a transfer agent pursuant to Section 17A(c)(1), or
(C) a BFDS affiliate, or (D) such other provider of services duly
registered as a transfer agent under Section 17A(c)(1) as Company shall
select; provided, however, that the Company shall be as fully
responsible to the Trust for the acts and omissions of any subcontractor
as it is for its own acts and omissions; or
C. The Company shall upon instruction from the Trust subcontract for the
performance hereof with an Agent selected by the Trust, other than BFDS
or a provider of services selected by Company, as described in (2)
above; provided, however, that the Company shall in no way be
responsible to the Trust for the acts and omissions of the Agent.
SECTION THREE: CUSTODY SERVICES PROCUREMENT
-15-
ARTICLE 9. APPOINTMENT.
The Trust hereby appoints Company as its agent to evaluate and obtain
custody services from a financial institution that (i) meets the criteria
established in Section 17(f) of the 1940 Act and (ii) has been approved by the
Board as eligible for selection by the Company as a custodian (the "Eligible
Custodian"). The Company accepts such appointment.
ARTICLE 10. THE COMPANY AND ITS DUTIES.
Subject to the review, supervision and control of the Board, the Company
shall:
A. evaluate the nature and the quality of the custodial services provided
by the Eligible Custodian;
B. employ the Eligible Custodian to serve on behalf of the Trust as
Custodian of the Trust's assets substantially on the terms set forth as
the form of agreement in Exhibit 2;
C. negotiate and enter into agreements with the Custodians for the benefit
of the Trust, with the Trust as a party to each such agreement. The
Company shall not be a party to any agreement with any such Custodian;
D. establish procedures to monitor the nature and the quality of the
services provided by the Custodians;
E. continuously monitor the nature and the quality of services provided by
the Custodians; and
F. periodically provide to the Trust (i) written reports on the activities
and services of the Custodians; (ii) the nature and amount of
disbursement made on account of the Trust with respect to each custodial
agreement; and (iii) such other information as the Board shall
reasonably request to enable it to fulfill its duties and obligations
under Sections 17(f) and 36(b) of the 1940 Act and other duties and
obligations thereof.
ARTICLE 11. FEES AND EXPENSES.
A. Annual Fee
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For the performance by the Company pursuant to Section Three of this
Agreement, the Trust and/or the Fund agree to pay the Company an annual
fee as agreed upon between the parties.
B. Reimbursements
In addition to the fee paid under Section 11A above, the Trust and/or
Fund agree to reimburse the Company for out-of-pocket expenses or
advances incurred by the Company for the items agreed upon between the
parties, as may be added to or amended from time to time. In addition,
any other expenses incurred by the Company at the request or with the
consent of the Trust and/or the Fund, will be reimbursed by the
appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
ARTICLE 12. REPRESENTATIONS.
The Company represents and warrants that it has obtained all required
approvals from all government or regulatory authorities necessary to enter
into this arrangement and to provide the services contemplated in Section
Three of this Agreement.
SECTION FOUR: GENERAL PROVISIONS.
ARTICLE 13. DOCUMENTS.
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A. In connection with the appointment of the Company under this Agreement,
the Trust shall file with the Company the following documents:
(1) A copy of the Charter and By-Laws of the Trust and all amendments
thereto;
(2) A copy of the resolution of the Board of the Trust authorizing this
Agreement;
(3) Specimens of all forms of outstanding Share certificates of the
Trust or the Funds in the forms approved by the Board of the Trust
with a certificate of the Secretary of the Trust as to such
approval;
(4) All account application forms and other documents relating to
Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following documents:
(1) Each resolution of the Board of the Trust authorizing the original
issuance of each Fund's, and/or Class's Shares;
(2) Each Registration Statement filed with the SEC and amendments
thereof and orders relating thereto in effect with respect to the
sale of Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the governing document and
the By-Laws of the Trust;
(4) Certified copies of each vote of the Board authorizing officers to
give Proper Instructions to the Custodian and agents for fund
accountant, custody services procurement, and shareholder
recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates representing Shares of any
Fund, accompanied by Board resolutions approving such forms;
(6) Such other certificates, documents or opinions which the Company
may, in its discretion, deem necessary or appropriate in the proper
performance of its duties; and
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(7) Revisions to the Prospectus of each Fund.
ARTICLE 14. REPRESENTATIONS AND WARRANTIES.
A. Representations and Warranties of the Company
The Company represents and warrants to the Trust that:
(1) It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
(2) It is duly qualified to carry on its business in the State of
Delaware.
(3) It is empowered under applicable laws and by its charter and by-
laws to enter into and perform this Agreement.
(4) All requisite corporate proceedings have been taken to authorize it
to enter into and perform its obligations under this Agreement.
(5) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
(6) It is in compliance with federal securities law requirements and in
good standing as a transfer agent.
B. Representations and Warranties of the Trust
The Trust represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and in good
standing under the laws of its state of organization;
(2) It is empowered under applicable laws and by its Charter and By-
Laws to enter into and perform its obligations under this
Agreement;
(3) All corporate proceedings required by said Charter and By-Laws have
been taken to authorize it to enter into and perform its
obligations under this Agreement;
(4) The Trust is an open-end investment company registered under the
1940 Act; and
-19-
(5) A registration statement under the 1933 Act will be effective, and
appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares of each Fund being
offered for sale.
ARTICLE 15. STANDARD OF CARE AND INDEMNIFICATION.
A. Standard of Care
The Company shall be held to a standard of reasonable care in carrying
out the provisions of this Contract. The Company shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the
Trust) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice, provided that such
action is not in violation of applicable federal or state laws or
regulations, and is in good faith and without negligence.
B. Indemnification by Trust
The Company shall not be responsible for and the Trust or Fund shall
indemnify and hold the Company, including its officers, directors,
shareholders and their agents employees and affiliates, harmless against
any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liabilities arising out of or attributable to:
(1) The acts or omissions of any Custodian, Adviser, Sub-adviser or
other party contracted by or approved by the Trust or Fund,
(2) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in proper form
which
(a) are received by the Company or its agents or subcontractors
and furnished to it by or on behalf of the Fund, its
Shareholders or investors regarding the purchase, redemption
or transfer of Shares and Shareholder account information;
-20-
(b) are received by the Company from independent pricing services
or sources for use in valuing the assets of the Funds; or
(c) are received by the Company or its agents or subcontractors
from Advisers, Sub-advisers or other third parties contracted
by or approved by the Trust of Fund for use in the performance
of services under this Agreement;
(d) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the Trust.
(3) The reliance on, or the carrying out by the Company or its agents
or subcontractors of Proper Instructions of the Trust or the Fund.
(4) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws
or regulations of any state that such Shares be registered in such
state or in violation of any stop order or other determination or
ruling by any federal agency or any state with respect to the offer
or sale of such Shares in such state.
Provided, however, that the Company shall not be protected by this
Article 15.A. from liability for any act or omission resulting from
the Company's willful misfeasance, bad faith, negligence or
reckless disregard of its duties of failure to meet the standard of
care set forth in 15.A. above.
C. Reliance
At any time the Company may apply to any officer of the Trust or Fund
for instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the
Company under this Agreement, and the Company and its agents or
subcontractors shall not be liable and shall be indemnified by the Trust
or the appropriate Fund for any action reasonably taken or omitted by it
in reliance upon such instructions or upon the opinion of such counsel
provided such action is not in violation of applicable federal or state
-21-
laws or regulations. The Company, its agents and subcontractors shall
be protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signatures of
the officers of the Trust or the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
D. Notification
In order that the indemnification provisions contained in this
Article 15 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such assertion,
and shall keep the other party advised with respect to all developments
concerning such claim. The party who may be required to indemnify shall
have the option to participate with the party seeking indemnification in
the defense of such claim. The party seeking indemnification shall in
no case confess any claim or make any compromise in any case in which
the other party may be required to indemnify it except with the other
party's prior written consent.
ARTICLE 16. TERMINATION OF AGREEMENT.
This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other. Should the Trust exercise its rights
to terminate, all out-of-pocket expenses associated with the movement of
records and materials will be borne by the Trust or the appropriate Fund.
Additionally, the Company reserves the right to charge for any other
reasonable expenses associated with such termination. The provisions of
Article 15 shall survive the termination of this Agreement.
ARTICLE 17. AMENDMENT.
This Agreement may be amended or modified by a written agreement executed
by both parties.
-22-
ARTICLE 18. INTERPRETIVE AND ADDITIONAL PROVISIONS.
In connection with the operation of this Agreement, the Company and the
Trust may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall
be annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the Charter. No interpretive or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
ARTICLE 19. GOVERNING LAW.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the Commonwealth of Massachusetts
ARTICLE 20. NOTICES.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Company at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to such
other address as the Trust or the Company may hereafter specify, shall be
deemed to have been properly delivered or given hereunder to the respective
address.
ARTICLE 21. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original.
ARTICLE 22. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE TRUST.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Trust and signed by an authorized officer of the Trust, acting
as such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, and the
-23-
obligations of this Agreement are not binding upon any of the Trustees or
Shareholders of the Trust, but bind only the appropriate property of the
Fund, or Class, as provided in the Declaration of Trust.
ARTICLE 23. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF
THE COMPANY.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Company and signed by an authorized officer of the Company,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally,
and the obligations of this Agreement are not binding upon any of the Trustees
or Shareholders of the Company, but bind only the property of the Company as
provided in the Declaration of Trust.
ARTICLE 24. ASSIGNMENT.
This Agreement and the rights and duties hereunder shall not be assignable
with respect to the Trust or the Funds by either of the parties hereto except
by the specific written consent of the other party.
ARTICLE 25. MERGER OF AGREEMENT.
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
ARTICLE 26. SUCCESSOR AGENT.
If a successor agent for the Trust shall be appointed by the Trust, the
Company shall upon termination of this Agreement deliver to such successor
agent at the office of the Company all properties of the Trust held by it
hereunder. If no such successor agent shall be appointed, the Company shall
at its office upon receipt of Proper Instructions deliver such properties in
accordance with such instructions.
In the event that no written order designating a successor agent or Proper
Instructions shall have been delivered to the Company on or before the date
-24-
when such termination shall become effective, then the Company shall have the
right to deliver to a bank or trust company, which is a "bank" as defined in
the 1940 Act, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$2,000,000, all properties held by the Company under this Agreement.
Thereafter, such bank or trust company shall be the successor of the Company
under this Agreement.
ARTICLE 27. FORCE MAJEURE.
The Company shall have no liability for cessation of services hereunder or
any damages resulting therefrom to the Fund as a result of work stoppage,
power or other mechanical failure, natural disaster, governmental action,
communication disruption or other impossibility of performance.
ARTICLE 28. ASSIGNMENT; SUCCESSORS.
This Agreement shall not be assigned by either party without the prior
written consent of the other party, except that either party may assign to a
successor all of or a substantial portion of its business, or to a party
controlling, controlled by, or under common control with such party. Nothing
in this Article 28 shall prevent the Company from delegating its
responsibilities to another entity to the extent provided herein.
ARTICLE 29. SEVERABILITY.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
ATTEST: INVESTMENT COMPANIES (LISTED ON EXHIBIT 1)
-25-
/s/ John W. McGonigle By: /s/ John F. Donahue
------- -- ---
John W. McGonigle John F. Donahue
Secretary Chairman
ATTEST: FEDERATED SERVICES COMPANY
/s/ Jeannette Fisher-Garber By: /s/ James J. Dolan
- -----
Jeannette Fisher-Garber James J. Dolan
Secretary President
EXHIBIT 1
Federated ARMs Fund
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
the Secretary and Assistant Secretary of FEDERATED ARMS FUND and the Deputy
General Counsel of Federated Investors, and each of them, their true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution
for them and in their names, place and stead, in any and all capacities, to sign
any and all documents to be filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, by means of the Securities and Exchange
Commission's electronic disclosure system known as EDGAR; and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to sign and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as each of them might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
SIGNATURES TITLE DATE
/s/ John F. Donahue Chairman, Trustee October 3, 1995
John F. Donahue (Chief Executive Officer)
/s/ Glen R. Johnson President October 3, 1995
Glen R. Johnson
/s/ David M. Taylor Treasurer October 3, 1995
David M. Taylor (Principal Financial and
Accounting Officer)
/s/ Thomas G. Bigley Trustee October 3, 1995
Thomas G. Bigley
/s/ John T. Conroy, Jr Trustee October 3, 1995
John T. Conroy, Jr.
SIGNATURES TITLE DATE
/s/ William J. Copeland Trustee October 3, 1995
William J. Copeland
/s/ James E. Dowd Trustee October 3, 1995
James E. Dowd
/s/ Lawrence D. Ellis, M.D. Trustee October 3, 1995
Lawrence D. Ellis, M.D.
/s/ Edward L. Flaherty, Jr Trustee October 3, 1995
Edward L. Flaherty, Jr.
/s/ Peter E. Madden Trustee October 3, 1995
Peter E. Madden
/s/ Gregor F. Meyer Trustee October 3, 1995
Gregor F. Meyer
/s/ John E. Murray, Jr Trustee October 3, 1995
John E. Murray, Jr.
/s/ Wesley W. Posvar Trustee October 3, 1995
Wesley W. Posvar
/s/ Marjorie P. Smuts Trustee October 3, 1995
Marjorie P. Smuts
Sworn to and subscribed before me this 3rd day of October, 1995
Marie M. Hamm
Notarial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
<TABLE> <S> <C>
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<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Federated ARMs Fund
Institutional Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1995
<PERIOD-END> Aug-31-1995
<INVESTMENTS-AT-COST> 1,063,108,919
<INVESTMENTS-AT-VALUE> 1,067,775,158
<RECEIVABLES> 83,731,172
<ASSETS-OTHER> 2,093
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<TOTAL-ASSETS> 1,151,508,423
<PAYABLE-FOR-SECURITIES> 154,694,653
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,624,219
<TOTAL-LIABILITIES> 159,318,872
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<PAID-IN-CAPITAL-COMMON> 1,072,779,815
<SHARES-COMMON-STOCK> 88,712,689
<SHARES-COMMON-PRIOR> 128,609,253
<ACCUMULATED-NII-CURRENT> 244,502
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (85,501,005)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,666,239
<NET-ASSETS> 992,189,551
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 73,723,992
<OTHER-INCOME> 0
<EXPENSES-NET> 6,918,189
<NET-INVESTMENT-INCOME> 66,805,803
<REALIZED-GAINS-CURRENT> (14,896,854)
<APPREC-INCREASE-CURRENT> 12,930,685
<NET-CHANGE-FROM-OPS> 64,839,634
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 56,778,571
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,182,411
<NUMBER-OF-SHARES-REDEEMED> 45,474,917
<SHARES-REINVESTED> 1,395,941
<NET-CHANGE-IN-ASSETS> (502,514,474)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (70,604,151)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,041,965
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,002,231
<AVERAGE-NET-ASSETS> 1,179,015,259
<PER-SHARE-NAV-BEGIN> 9.630
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> 0.020
<PER-SHARE-DIVIDEND> 0.560
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.650
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 8,402,992
<AVG-DEBT-PER-SHARE> 0.070
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> Federated ARMs Fund
Institutional Service Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1995
<PERIOD-END> Aug-31-1995
<INVESTMENTS-AT-COST> 1,063,108,919
<INVESTMENTS-AT-VALUE> 1,067,775,158
<RECEIVABLES> 83,731,172
<ASSETS-OTHER> 2,093
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,151,508,423
<PAYABLE-FOR-SECURITIES> 154,694,653
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,624,219
<TOTAL-LIABILITIES> 159,318,872
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,072,779,815
<SHARES-COMMON-STOCK> 14,054,028
<SHARES-COMMON-PRIOR> 26,564,711
<ACCUMULATED-NII-CURRENT> 244,502
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (85,501,005)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,666,239
<NET-ASSETS> 135,689,346
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 73,723,992
<OTHER-INCOME> 0
<EXPENSES-NET> 6,918,189
<NET-INVESTMENT-INCOME> 66,805,803
<REALIZED-GAINS-CURRENT> (14,896,854)
<APPREC-INCREASE-CURRENT> 12,930,685
<NET-CHANGE-FROM-OPS> 64,839,634
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,782,730
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,373,723
<NUMBER-OF-SHARES-REDEEMED> 14,200,812
<SHARES-REINVESTED> 316,407
<NET-CHANGE-IN-ASSETS> (502,514,474)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (70,604,151)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,041,965
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,002,231
<AVERAGE-NET-ASSETS> 1,179,015,259
<PER-SHARE-NAV-BEGIN> 9.630
<PER-SHARE-NII> 0.540
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<PER-SHARE-DIVIDEND> 0.540
<PER-SHARE-DISTRIBUTIONS> 0.000
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<EXPENSE-RATIO> 0.80
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<AVG-DEBT-PER-SHARE> 0.070
</TABLE>
