FEDERATED
ARMs FUND
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
FEBRUARY 28, 1997
[LOGO]
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 314082108
Cusip 314082207
8040404 (4/97) [REC LOGO]
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Investor:
I am pleased to present the Semi-Annual Report to Shareholders for Federated
ARMs Fund. The Report covers the six-month reporting period ended February 28,
1997, and includes an investment review by the portfolio manager, a complete
list of holdings, and the financial statements for the fund's two classes of
shares: Institutional Shares and Institutional Service Shares.
Federated ARMs Fund pursues monthly income from a portfolio primarily consisting
of adjustable rate and floating rate mortgage securities to help investors keep
pace with fluctuating interest rates. The prompt payment of principal and
interest on these securities is guaranteed by the U.S. government, its agencies
or instrumentalities. Of course, fund shares are not guaranteed by the U.S.
government.
Over the six-month reporting period, the fund's Institutional Shares achieved a
total return of 4.10%* through dividends totaling $0.29 per share and a $0.10
per share increase in net asset value. The Institutional Service Shares produced
a total return of 3.97%* through dividends totaling $0.28 per share and a $0.10
per share increase in net asset value. On February 28, 1997, total net assets in
the fund stood at $646.2 million.
Thank you for your participation in Federated ARMs Fund. We welcome your
questions and comments.
Sincerely,
LOGO
Glen R. Johnson
President
April 15, 1997
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
Federated ARMs Fund (the "Fund") provides shareholders with a professionally
managed portfolio of U.S. government adjustable rate securities. The Fund is
managed for a short effective duration of 1.0 to 1.5 years and is invested
primarily in adjustable rate mortgage-backed securities. Current investment
strategy emphasizes a diversified range of adjustable rate mortgage securities
with coupons averaging 7.6% and a weighted average effective duration of 1.3
years.
The U.S. Treasury market in 1996 offered lackluster returns to investors versus
1995's awesome returns and played second fiddle to the stellar gains in the
equity market. Short duration U.S. Treasuries posted slightly positive returns
while the long end of the yield curve produced negative returns. The theme
throughout 1996 was a trading range environment; however, there were times when
the market moved swiftly and sharply due to shifting Federal Reserve Board
expectations. Given this environment, the mortgage-backed securities sector was
the best performing fixed income sector during the fiscal year of the Fund.
During the six month reporting period ended February 28, 1997, the adjustable
rate mortgage sector turned in an excellent total rate of return performance.
The demand for short-duration spread product has been very strong by all
investor types. The portfolio mix is designed to perform well under various
market environments. The current asset allocation mix of adjustable and fixed
rate mortgages in combination with short U.S. Treasuries has offered investors
good solid performance, despite the volatility in interest rates. Despite this
environment, management continues to believe that the adjustable rate sector
offers excellent value for the investor with a 1-2 year time horizon.
As of February 28, 1997, the Fund recorded net assets of $646.2 million with an
average 30-day yield as calculated under SEC guidelines of 5.86%* for
Institutional Shares and 5.60%* for Institutional Service Shares, based upon a
net asset value of $9.74. The Fund's net total rate of return for the
semi-annual period ended February 28, 1997, was 4.10%* for the Institutional
Shares and 3.97%* for the Institutional Service Shares compared to 3.15% for the
Merrill Lynch 1-Year Treasury Index**, 3.43% for the Merrill Lynch 2-Year
Treasury Index**, and 3.62% for the Lipper ARM Fund Average.*** The Fund is
rated AAAf+ for credit quality by Standard & Poor's, and Aaa+ by Moody's, and
will continue to strive to provide monthly cash flow and daily liquidity while
seeking competitive yields.
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so
when shares are redeemed they may be worth more or less than their original
cost.
** Merrill Lynch 1-Year Treasury Index is comprised of the most recently issued
1-Year Treasury notes. Merrill Lynch 2-Year Treasury Index is comprised of
the most recently issued 2-year Treasury notes. Index returns are calculated
as total returns for periods of one, three, six and twelve months as well as
year-to-date. Indexes are unmanaged. Investments cannot be made in an index.
*** Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the respective categories indicated. These figures do not reflect sales
charges.
+ An AAAf rating means that the fund's portfolio holdings and counterparties
provide extremely strong protection against losses from credit defaults.
Bond funds rated Aaa by Moody's are judged to be of an investment quality
similar to Aaa-rated fixed income obligations, that is, they are judged to
be of the best quality. These ratings do not remove market risks and are
subject to change.
FEDERATED ARMS FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ --------------------------------------------------------------- ------------
<C> <C> <S> <C>
U.S. GOVERNMENT INSTRUMENTALITIES--91.1%
- -----------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--43.0%
---------------------------------------------------------------
$266,224,302 7.072%-7.946%, 2/1/2019-7/1/2030 $277,744,555
--------------------------------------------------------------- ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--18.5%
---------------------------------------------------------------
115,575,384 6.089%-8.051%, 9/1/2018-2/1/2031 119,251,759
--------------------------------------------------------------- ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.6%
---------------------------------------------------------------
17,957 12.000%, 3/1/2013 20,544
---------------------------------------------------------------
2,967,052 11.500%, 8/1/2014--11/1/2015 3,341,642
---------------------------------------------------------------
4,968,925 11.000%, 12/1/2015 5,495,332
---------------------------------------------------------------
7,082,294 9.500%, 7/1/2016 7,691,506
--------------------------------------------------------------- ------------
Total 16,549,024
--------------------------------------------------------------- ------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--17.6%
---------------------------------------------------------------
24,010,140 7.125%, 7/20/2023--9/20/2023 24,701,245
---------------------------------------------------------------
22,152,635 6.875%, 10/20/2025--11/20/2025 22,725,191
---------------------------------------------------------------
40,737,733 6.500%, 1/20/2022--10/20/2025 41,628,297
---------------------------------------------------------------
24,603,658 6.000%, 5/20/2026 24,938,760
--------------------------------------------------------------- ------------
Total 113,993,493
--------------------------------------------------------------- ------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--9.4%
---------------------------------------------------------------
3,924,168 12.000%, 9/15/2013--1/15/2014 4,545,139
---------------------------------------------------------------
31,101,570 11.500%, 10/15/2010--4/15/2020 35,519,792
---------------------------------------------------------------
18,668,137 11.000%, 12/15/2009--7/15/2020 21,002,512
--------------------------------------------------------------- ------------
Total 61,067,443
--------------------------------------------------------------- ------------
TOTAL U.S. GOVERNMENT INSTRUMENTALITIES (IDENTIFIED COST
$580,405,386) 588,606,274
--------------------------------------------------------------- ------------
</TABLE>
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ --------------------------------------------------------------- ------------
<C> <C> <S> <C>
U.S. TREASURY NOTES--7.2%
- -----------------------------------------------------------------------------------
$ 5,000,000 6.375%, 5/15/1999 $ 5,027,400
---------------------------------------------------------------
26,200,000 5.875%, 10/31/1998--3/31/1999 26,125,978
---------------------------------------------------------------
8,000,000 5.625%, 11/30/1998 7,951,120
---------------------------------------------------------------
7,400,000 5.125%, 12/31/1998 7,288,260
--------------------------------------------------------------- ------------
TOTAL U.S. TREASURY NOTES (IDENTIFIED COST $46,650,431) 46,392,758
--------------------------------------------------------------- ------------
(A) REPURCHASE AGREEMENT--0.7%
- -----------------------------------------------------------------------------------
4,455,000 BT Securities Corporation, 5.380%, dated 2/28/1997, due
3/3/1997 (AT AMORTIZED COST) 4,455,000
--------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $631,510,817)(B) $639,454,032
--------------------------------------------------------------- ------------
</TABLE>
(a) The repurchase agreement is fully collaterized by U.S. Government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $631,561,046.
The net unrealized appreciation of investments on a federal tax basis
amounts to $7,892,986 which is comprised of $8,730,159 appreciation and
$837,173 depreciation at February 28, 1997.
Note: The categories of investments are shown as a percentage of net assets
($646,186,680) at February 28, 1997.
The following acronyms are used throughout this portfolio:
<TABLE>
<S> <C>
ARM -- Adjustable Rate Mortgage
PC -- Participation Certificate
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Total investments in securities, at value
(identified cost $631,510,817 and tax cost $631,561,046) $639,454,032
- --------------------------------------------------------------------------------
Income receivable 10,104,109
- --------------------------------------------------------------------------------
Receivable for shares sold 134,238
- -------------------------------------------------------------------------------- ------------
Total assets 649,692,379
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for shares redeemed $ 119,592
- -------------------------------------------------------------------
Income distribution payable 3,191,168
- -------------------------------------------------------------------
Payable to Bank 118,326
- -------------------------------------------------------------------
Accrued expenses 76,613
- ------------------------------------------------------------------- ----------
Total liabilities 3,505,699
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 66,364,224 shares outstanding $646,186,680
- -------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid in capital $720,502,493
- --------------------------------------------------------------------------------
Net unrealized appreciation of investments 7,943,215
- --------------------------------------------------------------------------------
Accumulated net realized loss on investments (82,264,753)
- --------------------------------------------------------------------------------
Undistributed net investment income 5,725
- -------------------------------------------------------------------------------- ------------
Total Net Assets $646,186,680
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- --------------------------------------------------------------------------------
Institutional Shares:
($553,742,931 / 56,870,258 shares outstanding) $9.74
- -------------------------------------------------------------------------------- ------------
Institutional Service Shares:
($92,443,749 / 9,493,966 shares outstanding) $9.74
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------------------------
Interest $23,518,069
- -----------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------------------
Investment advisory fee $2,143,788
- -----------------------------------------------------------------------------------------
Administrative personnel and services fee 269,921
- -----------------------------------------------------------------------------------------
Custodian fees 88,114
- -----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 51,256
- -----------------------------------------------------------------------------------------
Directors'/Trustees' fees 7,536
- -----------------------------------------------------------------------------------------
Auditing fees 8,692
- -----------------------------------------------------------------------------------------
Legal fees 3,014
- -----------------------------------------------------------------------------------------
Portfolio accounting fees 67,473
- -----------------------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 126,287
- -----------------------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 766,958
- -----------------------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 126,287
- -----------------------------------------------------------------------------------------
Share registration costs 13,685
- -----------------------------------------------------------------------------------------
Printing and postage 9,943
- -----------------------------------------------------------------------------------------
Insurance premiums 4,686
- -----------------------------------------------------------------------------------------
Taxes 13,756
- -----------------------------------------------------------------------------------------
Miscellaneous 9,577
- ----------------------------------------------------------------------------------------- ---------
Total expenses 3,710,973
- -----------------------------------------------------------------------------------------
Waivers--
- -----------------------------------------------------------------------------------------
Waiver of investment advisory fee $(710,582)
- -----------------------------------------------------------------------------
Waiver of distribution services fee--Institutional Service Shares (124,772)
- -----------------------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (766,958)
- -----------------------------------------------------------------------------
Waiver of shareholder services fee--Institutional Service Shares (1,515)
- ----------------------------------------------------------------------------- --------
Total waivers (1,603,827)
- ----------------------------------------------------------------------------------------- ---------
Net expenses 2,107,146
- ----------------------------------------------------------------------------------------------------- ----------
Net investment income 21,410,923
- ----------------------------------------------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments 2,191,412
- -----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 4,933,329
- ----------------------------------------------------------------------------------------------------- ----------
Net realized and unrealized gain on investments 7,124,741
- ----------------------------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $28,535,664
- ----------------------------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(UNAUDITED) YEAR ENDED
FEBRUARY 28, 1997 AUGUST 31, 1996
----------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------
Net investment income $ 21,410,923 $ 51,489,990
- -------------------------------------------------------
Net realized gain (loss) on investments ($2,191,412 and
$(8,689,597), respectively, as computed for federal tax
purposes) 2,191,412 1,044,840
- -------------------------------------------------------
Net change in unrealized appreciation (depreciation) 4,933,329 (1,656,353)
- ------------------------------------------------------- ----------------- --------------
Change in net assets resulting from operations 28,535,664 50,878,477
- ------------------------------------------------------- ----------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------
Institutional Shares (18,522,774) (44,631,616)
- -------------------------------------------------------
Institutional Service Shares (2,922,134) (7,063,166)
- ------------------------------------------------------- ----------------- --------------
Change in net assets resulting from distributions
to shareholders (21,444,908) (51,694,782)
- ------------------------------------------------------- ----------------- --------------
SHARE TRANSACTIONS--
- -------------------------------------------------------
Proceeds from sales of shares 16,468,637 61,181,863
- -------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 4,367,025 11,612,765
- -------------------------------------------------------
Cost of shares redeemed (144,589,369) (301,318,243)
- ------------------------------------------------------- ----------------- --------------
Change in net assets resulting from share
transactions (123,753,707) (228,523,615)
- ------------------------------------------------------- ----------------- --------------
Change in net assets (116,662,951) (229,339,920)
- -------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------
Beginning of period 762,849,631 992,189,551
- ------------------------------------------------------- ----------------- --------------
End of period (including undistributed net investment
income of $5,725 and $39,710, respectively) $ 646,186,680 $ 762,849,631
- ------------------------------------------------------- ----------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28,
(UNAUDITED) YEAR ENDED AUGUST 31,
------------ ----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF PERIOD $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99
- -----------
INCOME FROM
INVESTMENT
OPERATIONS
- -----------
Net
investment
income 0.29 0.58 0.56 0.45 0.50 0.63 0.69 0.71 0.72 0.73
- -----------
Net
realized
and
unrealized
gain
(loss)
on
investments 0.10 (0.01) 0.02 (0.35) (0.03) 0.42 0.68 (0.48) 0.59 (0.11)
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from
investment
operations 0.39 0.57 0.58 0.10 0.47 1.05 1.37 0.23 1.31 0.62
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS
DISTRIBUTIONS
- -----------
Distributions
from net
investment
income (0.29) (0.58) (0.56) (0.45) (0.50) (0.63) (0.69) (0.71) (0.72) (0.73)
- -----------
Distributions
from net
realized
gain on
investments -- -- -- -- -- (0.08) -- -- -- --
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total
distributions (0.29) (0.58) (0.56) (0.45) (0.50) (0.71) (0.69) (0.71) (0.72) (0.73)
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET
VALUE, END
OF PERIOD $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL
RETURN(A) 4.10% 6.02% 6.21% 0.99% 4.82% 11.21% 15.73% 2.45% 15.25% 7.09%
- -----------
RATIOS TO
AVERAGE NET
ASSETS
- -----------
Expenses 0.55%* 0.55% 0.55% 0.55% 0.51% 0.51% 0.78% 0.78% 0.79% 0.75%
- -----------
Net
investment
income 6.03%* 5.94% 5.74% 4.51% 4.97% 5.95% 7.36% 7.62% 7.81% 8.10%
- -----------
Expense
waiver/
reimbursement(b) 0.45%* 0.44% 0.43% 0.14% 0.21% 0.32% 1.02% 1.02% 0.95% 1.18%
- -----------
SUPPLEMENTAL
DATA
- -----------
Net
assets,
end of
period
(000
omitted) $553,743 $653,313 $856,500 $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574 $16,753
- -----------
Portfolio
turnover 35% 134% 124% 65% 36% 38% 127% 170% 85% 125%
- -----------
</TABLE>
* Computed on an annualized basis.
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b)This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28,
(UNAUDITED) YEAR ENDED AUGUST 31,
------------- ---------------------------------------------------
1997 1996 1995 1994 1993 1992(A)
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.64 $ 9.65 $ 9.63 $ 9.98 $ 10.01 $ 9.98
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.28 0.55 0.54 0.42 0.48 0.18
- ----------------------------------------
Net realized and unrealized gain
(loss) on investments 0.10 (0.01) 0.02 (0.35) (0.03) 0.03
- ---------------------------------------- ------ ------- ------- ------- ------- -------
Total from investment operations 0.38 0.54 0.56 0.07 0.45 0.21
- ---------------------------------------- ------ ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
- ----------------------------------------
Distributions from net investment
income (0.28) (0.55) (0.54) (0.42) (0.48) (0.18)
- ---------------------------------------- ------ ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $ 10.01
- ---------------------------------------- ------ ------- ------- ------- ------- -------
TOTAL RETURN(B) 3.97% 5.75% 5.94% 0.74% 4.56% 2.11%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.80%* 0.80% 0.80% 0.80% 0.76% 0.76%*
- ----------------------------------------
Net investment income 5.78%* 5.69% 5.44% 4.26% 4.72% 5.46%*
- ----------------------------------------
Expense waiver/reimbursement(c) 0.45%* 0.44% 0.43% 0.23% 0.21% 0.32%*
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000
omitted) $92,444 $109,536 $135,689 $255,891 $499,418 $113,095
- ----------------------------------------
Portfolio turnover 35% 134% 124% 65% 36% 38%
- ----------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 4, 1992 (date of initial public
investment) to August 31, 1992.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
(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--U.S. government securities are generally valued at
the mean of the latest bid and asked prices as furnished by an independent
pricing service. Short-term securities are valued at the prices provided by
an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of 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.
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
At August 31, 1996, the Fund, for federal tax purposes, had a capital loss
carryforward of $84,405,481, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
---------------- --------------------
<S> <C>
2001 $ 1,799,433
2002 $16,735,698
2003 $57,180,753
2004 $ 8,689,597
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund the 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.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(3) 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 shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1997 AUGUST 31, 1996
---------------------------- ----------------------------
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 1,297,333 $ 12,601,783 5,202,156 $ 50,287,411
- ----------------------------------------------
Shares issued to shareholders in
payment of distributions declared 380,716 3,698,560 1,021,472 9,866,718
- ----------------------------------------------
Shares redeemed (12,550,056) (121,956,526) (27,194,052) (262,675,429)
- ---------------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional Share transactions (10,872,007) $(105,656,183) (20,970,424) $(202,521,300)
- ---------------------------------------------- ----------- ------------- ----------- -------------
</TABLE>
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1997 AUGUST 31, 1996
---------------------------- ----------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 398,055 $ 3,866,854 1,125,713 $ 10,894,452
- ----------------------------------------------
Shares issued to shareholders in
payment of distributions declared 68,803 668,465 180,764 1,746,047
- ----------------------------------------------
Shares redeemed (2,330,895) (22,632,843) (4,002,502) (38,642,814)
- ---------------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional Service Share transactions (1,864,037) $ (18,097,524) (2,696,025) $ (26,002,315)
- ---------------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
share transactions (12,736,044) $(123,753,707) (23,666,449) $(228,523,615)
- ---------------------------------------------- ----------- ------------- ----------- -------------
</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 0.60% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to 0.25% 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 0.25%
of average daily net assets of each class of shares for the period. The fee paid
to FSS is used to finance certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive any portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its sole
discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ, through its
subsidiary, Federated Shareholder Services Company ("FSSC"), serves as transfer
and dividend disbursing agent
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
for the Fund. The fee paid to FSSC is based on the size, type, and number of
accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ 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.
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
period ended February 28, 1997, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
PURCHASES $ 248,009,345
- ------------------------------------------------------------------------- --------------
SALES $ 299,776,362
- ------------------------------------------------------------------------- --------------
</TABLE>
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Glen R. Johnson
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Executive Vice President
Gregor F. Meyer John W. McGonigle
John E. Murray, Jr. Executive Vice President, Treasurer
Wesley W. Posvar and Secretary
Marjorie P. Smuts Richard B. Fisher
Vice President
J. Crilley Kelly
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.
