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
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Pre-Effective Amendment No. ......................
Post-Effective Amendment No. 22 __ ...................... X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 21__ ........................................ X
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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 1997 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.
Copies to:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037
<PAGE>
CROSS REFERENCE SHEET
This Amendment to the Registration Statement of FEDERATED ARMs FUND,
(the "Trust"), consists of one investment portfolio with two classes of shares,
(a) Institutional Shares and (b) Institutional Service Shares, is comprised of
the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS
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<S> <C> <C>
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page..................(a)(b)Cover Page.
Item 2. Synopsis....................(a)(b)General Information.
Item 3. Condensed Financial
Information................(a)(b)Financial Highlights; (a)(b)Summary of Fund Expenses
Item 4. General Description of
Registrant.................(a)(b)Performance Information; (a)(b)Investment Information; (a)(b)Investment
Objective; (a)(b)Investment Policies; (a)(b)Investment Limitations.
Item 5. Management of the Fund......(a)(b)Trust Information; (a)(b)Management of the Trust; (a) Distribution of
Institutional Shares; (b) Distribution of Institutional Service
Shares; (a)(b)Administration of the Fund.
Item 6. Capital Stock and Other
Securities.................(a)(b)Dividends; (a)(b)Capital Gains; (a)(b)Shareholder Information;
(a)(b)Voting Rights; (a)(b)Tax Information; (a)(b)Federal Income Tax;
(a)(b) State and Local Taxes; (a)(b)Other Classes of Shares.
Item 7. Purchase of Securities
Being
Offered..............................(a)(b)Net
Asset Value;
(a)Investing in
Institutional
Shares, (b)
Investing in
Institutional
Service Shares;
(a)(b)Share
Purchases; (b)
Exchange
Priviledge;
(a)(b)Minimum
Investment
Required;
(a)(b)What Shares
Cost; (a)
Exchanging
Securities for
Institutional
Shares, (b)
Exchanging
Securities for
Institutional
Service Shares;
(a)(b)
Confirmations and
Account
Statements.
Item 8. Redemption or Repurchase....(a) Redeeming Institutional Shares, (b) Redeeming Institutional Service
Shares; (a)(b)Telephone Redemption; (a)(b)Written Requests;
(a)(b)Accounts with Low Balances.
Item 9. Legal Proceedings None.
<PAGE>
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; Trustee Compensation; Trustee
Liability.
Item 15. Control Persons and
Principal Holders of
Securities Fund Ownership.
Item 16. Investment Advisory and
Other Services..............Investment Advisory Services; Other Services.
Item 17. Brokerage Allocation.........Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Massachusetts Partnership Law.
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
</TABLE>
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 Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated October 31, 1997,
with the Securities and Exchange Commission ("SEC"). The information contained
in the Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Statement of Additional
Information or a paper copy of this prospectus if you have received your
prospectus electronically, free of charge by calling 1-800-341-7400. To obtain
other information or to make inquiries about the Fund, contact the Fund at the
address listed in the back of this prospectus. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Fund are maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1 Financial Highlights--Institutional Shares 2 General
Information 3 Investment Information 3 Investment Objective 3 Investment
Policies 3 Investment Limitations 6 Trust Information 7 Management of the Trust
7 Distribution of Institutional Shares 8 Administration of the Fund 8 Net Asset
Value 8 Investing in Institutional Shares 9 Share Purchases 9 Minimum
Investment Required 9 What Shares Cost 9 Exchanging Securities for
Institutional Shares 9 Confirmations and Account Statements 9 Dividends 10
Capital Gains 10 Redeeming Institutional Shares 10 Telephone Redemption 10
Written Requests 10 Accounts with Low Balances 11 Shareholder Information 11
Voting Rights 11 Tax Information 11 Federal Income Tax 11 State and Local Taxes
11 Performance Information 11 Other Classes of Shares 12 Financial
Highlights--Institutional Service Shares 13 Financial Statements 14 Report of
Ernst & Young LLP, Independent Auditors 22
SUMMARY OF FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL SHARES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or None
redemption proceeds, as applicable)
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) 0.41%
12b-1 Fee None
Total Other Expenses 0.14%
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 shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder services provider can
terminate this voluntary waiver at any time at its sole discretion. The maximum
shareholder services fee is 0.25%.
(3) The total operating expenses would have been 0.99% absent 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 Institutional Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Institutional Shares" and "Trust
Information." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
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EXAMPLE
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.
<S> <C>
1 year $ 6
3 years $18
5 years $31
10 years $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.
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 22.
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<CAPTION>
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, $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99
BEGINNING OF PERIOD
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.59 0.58 0.56 0.45 0.50 0.63 0.69 0.71 0.72 0.73
Net realized and 0.10 (0.01) 0.02 (0.35) (0.03) 0.42 0.68 (0.48) 0.59 (0.11)
unrealized gain (loss)
on investments
Total from investment 0.69 0.57 0.58 0.10 0.47 1.05 1.37 0.23 1.31 0.62
operations
LESS DISTRIBUTIONS
Distributions from net (0.59) (0.58) (0.56) (0.45) (0.50) (0.63) (0.69) (0.71) (0.72) (0.73)
investment income
Distributions from net -- -- -- -- -- (0.08) -- -- -- --
realized gain on
investments
Total distributions (0.59) (0.58) (0.56) (0.45) (0.50) (0.71) (0.69) (0.71) (0.72) (0.73)
NET ASSET VALUE, END OF $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88
PERIOD
TOTAL RETURN(A) 7.31% 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 0.44% 0.44% 0.43% 0.14% 0.21% 0.32% 1.02% 1.02% 0.95% 1.18%
waiver/
reimbursement(b)
SUPPLEMENTAL DATA
Net assets, end of $498,220 $653,313 $856,500 $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574 $16,753
period (000 omitted)
Portfolio turnover 84% 134% 124% 65% 36% 38% 127% 170% 85% 125%
</TABLE>
(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)
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 charge
imposed by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with minimal volatility of principal. Current income includes, in general,
discount earned on U.S. Treasury bills and agency discount notes, interest
earned on mortgage related securities and other U.S. government securities, and
short-term capital gains. The investment objective cannot be changed without
approval of shareholders. The Fund anticipates that it will experience minimal
volatility of principal due to the frequent adjustments to interest rates on
adjustable and floating rate mortgage securities which comprise the portfolio.
Of course, there can be no assurance that the Fund will be able to maintain
minimal volatility of principal or that it will achieve its investment
objective. The Fund endeavors to achieve its investment objective, however, by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
Except as otherwise noted, the investment policies described below may not be
changed by the Trustees without shareholder approval. The Fund will limit its
investments to those that are permitted for purchase by federal savings
associations pursuant to applicable rules, regulations, or interpretations of
the Office of Thrift 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;
* 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.
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.
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 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 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; 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.
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
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 0.60% 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.
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 $110 billion invested
across more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1996, Federated Investors is one of the largest
mutual fund investment managers in the United States. With more than 2,000
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through 4,500
financial institutions nationwide.
Todd A. Abraham, Kathleen M. Foody-Malus, and Robert E. Cauley are the
Fund's portfolio managers. Mr. Abraham has been the Fund's portfolio manager
since August 1995. Mr. Abraham joined Federated Investors in 1993 as an
Investment Analyst and has been a Vice President of the Fund's investment
adviser since 1997. Mr Abraham served as an Assistant Vice President of the
investment adviser from 1995 until 1997. 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 is a Chartered Financial Analyst and received his M.B.A. in Finance
from Loyola College.
Ms. Foody-Malus has been the Fund's 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.
Robert E. Cauley has been the Fund's portfolio manager since October 1997.
Mr. Cauley joined Federated Investors in 1996 as an Assistant Vice President
of the Fund's adviser. Mr. Cauley served as an Associate in the Asset-Backed
Securities Group at Lehman Brothers Holding, Inc. from 1994 to 1996. From
1992 to 1994, Mr. Cauley served as a Senior Associate/Corporate Finance at
Barclays Bank, PLC. Mr. Cauley earned his M.S.I.A., concentrating in Finance
and Economics, from Carnegie Mellon University.
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 0.25% of the average daily net asset value of its
Shares, computed at an annual rate, to obtain certain personal services for
shareholders and to maintain 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. 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 made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may 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 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 investment adviser or
its affiliates. ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
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 Services Company may choose voluntarily to waive a portion of its fee.
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 Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated ARMs Fund--Institutional Shares; Fund Number (this number can be found
on the account statement or by contacting the Fund); Group Number or Order
Number; Nominee or Institution Name; ABA Number 011000028. Shares cannot be
purchased on days on which the New York Stock Exchange is closed and on federal
holidays restricting wire transfers. Questions on wire purchases should be
directed to your shareholder services representative at the telephone number
listed on your account statement.
BY MAIL
To purchase Shares of the Fund by mail, send a check made payable to Federated
ARMs Fund--Institutional Shares to: Federated Shareholder 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 financial
intermediary'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. The
minimum investment for an institutional investor will be calculated by combining
all accounts it maintains with the Fund. Accounts established through a
financial intermediary 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 financial intermediary may be charged an additional service fee
by that financial intermediary.
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, Martin Luther King 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.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.
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. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event longer than seven days later, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, the shareholders may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption, such as that discussed in "Written Requests,"
should be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to Federated
Shareholder Services Company, P.O. Box 8600, Boston Massachusetts 02266-8600.
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 unendorsed with the
written request by registered or certified mail to the address above noted.
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 their signatures 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 association whose deposits are insured by the
Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund and its transfer agent reserve
the right to amend these standards at any time without notice.
RECEIVING PAYMENT
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights except that, in matters affecting only a
particular Fund or class, only shares of that particular Fund or class are
entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the Fund shall be called by the Trustees upon the written
request of shareholders owning at least 10% of the Trust's outstanding shares of
all portfolios entitled to vote.
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.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly & Meck, counsel to the Fund, Fund 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 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 charge or other similar
nonrecurring 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 Plan adopted by the Trust whereby
the distributor is paid a fee of 0.25% 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 1-800-341-7400.
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 22.
<TABLE>
<CAPTION>
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 0.56 0.55 0.54 0.42 0.48 0.18
Net realized and unrealized gain (loss) on 0.10 (0.01) 0.02 (0.35) (0.03) 0.03
investments
Total from investment operations 0.66 0.54 0.56 0.07 0.45 0.21
LESS DISTRIBUTIONS
Distributions from net investment income (0.56) (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) 7.05% 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) 0.44% 0.44% 0.43% 0.23% 0.21% 0.32%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $87,322 $109,536 $135,689 $255,891 $499,418 $113,095
Portfolio turnover 84% 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)
PORTFOLIO OF INVESTMENTS
FEDERATED ARMS FUND
AUGUST 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT INSTRUMENTALITIES--88.4%
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--38.4%
$ 213,654,994 7.705% - 7.961%, 2/1/2019 - 7/1/2030 $ 224,348,715
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--17.6%
99,263,367 6.077% - 8.298%, 2/1/2019 - 3/1/2029 103,270,401
FEDERAL NATIONAL MORTGAGE ASSOCIATION--3.1%
15,481 12.000%, 3/1/2013 17,750
2,682,660 11.500%, 8/1/2014 - 11/1/2015 3,031,406
4,482,588 11.000%, 12/1/2015 4,950,481
6,216,311 9.500%, 7/1/2016 6,713,734
3,268,431 8.500%, 4/1/2018 3,449,208
TOTAL 18,162,579
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--15.2%
7,714,862 7.375%, 6/20/2021 - 4/20/2022 7,931,993
27,651,438 7.125%, 8/20/2017 - 9/20/2024 28,426,779
30,896,239 7.000%, 3/20/2016 - 5/20/2026 31,702,756
20,484,958 6.875%, 12/20/2017 - 12/20/2022 21,003,825
TOTAL 89,065,353
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--14.1%
3,466,669 12.000%, 9/15/2013 - 1/15/2014 4,011,892
27,072,935 11.500%, 10/15/2010 - 4/15/2020 30,880,610
16,183,149 11.000%, 12/15/2009 - 7/15/2020 18,192,276
27,053,636 9.500%, 12/15/2021 29,387,012
TOTAL 82,471,790
TOTAL U.S. GOVERNMENT 517,318,838
INSTRUMENTALITIES (IDENTIFIED COST $510,556,075)
U.S. TREASURY NOTES--9.8%
28,500,000 6.250%, 3/31/1999 28,649,910
29,000,000 5.875%, 11/15/1999 28,924,890
TOTAL U.S. TREASURY NOTES 57,574,800
(IDENTIFIED COST $57,409,512)
</TABLE>
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)REPURCHASE AGREEMENT--0.3%
$ 1,900,000 BT Securities Corp., 5.580%, dated 8/29/1997, due 9/2/1997 $ 1,900,000
(at amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $ 576,793,638
$569,865,587)(B)
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. Government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $569,872,198.
The net unrealized appreciation of investments on a federal tax basis amounts to
$6,921,440 which is comprised of $7,706,388 appreciation and $784,948
depreciation at August 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($585,542,197) at August 31, 1997.
The following acronyms are used throughout this portfolio:
ARM -- Adjustable Rate Mortgage
PC -- Participation Certification
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED ARMS FUND
AUGUST 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $ 576,793,638
$569,865,587 and tax cost $569,872,198)
Cash 787
Income receivable 9,880,278
Receivable for investments sold 4,675,735
Receivable for shares sold 32,153
Total assets 591,382,591
LIABILITIES:
Payable for investments purchased $ 3,221,935
Payable for shares redeemed 414,260
Income distribution payable 2,131,619
Accrued expenses 72,580
Total liabilities 5,840,394
Net Assets for 60,109,352 shares outstanding $ 585,542,197
NET ASSETS CONSIST OF:
Paid in capital $ 659,619,055
Net unrealized appreciation of investments 6,928,051
Accumulated net realized loss on investments (81,001,448)
Distributions in excess of net investment income (3,461)
Total Net Assets $ 585,542,197
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$498,219,987 / 51,145,180 shares outstanding $9.74
INSTITUTIONAL SERVICE SHARES:
$87,322,210 / 8,964,172 shares outstanding $9.74
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED ARMS FUND
YEAR ENDED AUGUST 31, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 43,662,366
EXPENSES:
Investment advisory fee $ 3,977,723
Administrative personnel and services fee 500,691
Custodian fees 108,363
Transfer and dividend disbursing agent fees and 91,071
expenses
Directors'/Trustees' fees 22,035
Auditing fees 17,688
Legal fees 6,872
Portfolio accounting fees 130,542
Distribution services fee--Institutional Service 241,075
Shares
Shareholder services fee--Institutional Shares 1,416,310
Shareholder services fee--Institutional Service 241,075
Shares
Share registration costs 27,136
Printing and postage 27,699
Insurance premiums 8,972
Taxes 17,358
Miscellaneous 9,666
Total expenses 6,844,276
Waivers and reimbursements--
Waiver of investment advisory fee $ (1,270,395)
Waiver of distribution services fee--Institutional (238,182)
Service Shares
Waiver of shareholder services fee--Institutional (1,416,310)
Shares
Waiver of shareholder services fee--Institutional (2,893)
Service Shares
Total waivers (2,927,780)
Net expenses 3,916,496
Net investment income 39,745,870
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 3,454,717
Net change in unrealized appreciation of investments 3,918,165
Net realized and unrealized gain on investments 7,372,882
Change in net assets resulting from operations $ 47,118,752
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 39,745,870 $ 51,489,990
Net realized gain (loss) on investments ($3,411,098 net gain 3,454,717 1,044,840
and $8,689,597 net loss, respectively, as computed for federal
tax purposes)
Net change in unrealized appreciation/depreciation 3,918,165 (1,656,353)
Change in net assets resulting from operations 47,118,752 50,878,477
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (34,210,612) (44,631,616)
Institutional Service Shares (5,578,429) (7,063,166)
Change in net assets resulting from distributions to (39,789,041) (51,694,782)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 56,479,068 61,181,863
Net asset value of shares issued to shareholders in payment of 9,827,175 11,612,765
distributions declared
Cost of shares redeemed (250,943,388) (301,318,243)
Change in net assets resulting from share transactions (184,637,145) (228,523,615)
Change in net assets (177,307,434) (229,339,920)
NET ASSETS:
Beginning of period 762,849,631 992,189,551
End of period (including undistributed net investment income of $ 585,542,197 $ 762,849,631
$0 and $39,710, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED ARMS FUND
AUGUST 31, 1997
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. The investment objective of the Fund is to
provide current income consistent with minimal volatility of principal.
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 and agency securities are generally valued at the mean of the
latest bid and asked price 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 Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). 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. Distributions in excess of net investment income were the result of
certain book and tax timing differences. These distributions do not represent a
return of capital for federal income tax purposes.
At August 31, 1997, the Fund for federal tax purposes, had a capital loss
carryforward of $80,994,383, 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:
EXPIRATION YEAR EXPIRATION AMOUNT
2002 $15,124,033
2003 57,180,753
2004 8,689,597
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. During the year ended August
31, 1997, the fund did not enter into dollar roll transactions. 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.
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>
YEAR ENDED AUGUST 31,
1997 1996
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 4,079,073 $ 39,681,438 5,202,156 $ 50,287,411
Shares issued to shareholders in 841,597 8,186,144 1,021,472 9,866,718
payment of distributions declared
Shares redeemed (21,517,755) (209,231,332) (27,194,052) (262,675,429)
Net change resulting from (16,597,085) $(161,363,750) (20,970,424) $(202,521,300)
Institutional Share transactions
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,728,054 $ 16,797,630 1,125,713 $ 10,894,452
Shares issued to shareholders in 168,679 1,641,031 180,764 1,746,047
payment of distributions declared
Shares redeemed (4,290,564) (41,712,056) (4,002,502) (38,642,814)
Net change resulting from (2,393,831) $ (23,273,395) (2,696,025) $ (26,002,315)
Institutional Service Share
transactions
Net change resulting from share (18,990,916) $(184,637,145) (23,666,449) $(228,523,615)
transactions
</TABLE>
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 the Fund shares for the period. The fee paid to FSS is used to finance
certain services for shareholders and to maintain shareholder accounts.
Federated Shareholder Services may voluntarily choose to waive any portion of
its fee. Federated Shareholder Services can modify or terminate this voluntary
waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
INTERFUND TRANSACTIONS
During the period ended August 31, 1997, 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
$20,577,451 and $4,187,880, respectively. GENERAL
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1997, were as follows:
PURCHASES $545,011,770
SALES $706,267,122
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,
1997, and the related statement of operations for the year then ended, the
statements 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, 1997, by correspondence with the custodian or other appropriate
auditing procedures where replies from brokers were not received. 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, 1997, 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 7, 1997
NOTES
NOTES
[Graphic]
Federated ARMs Fund
Institutional Shares
PROSPECTUS
OCTOBER 31, 1997
A Diversified Portfolio of Federated ARMs Fund, an Open-End Management
Investment Company
FEDERATED ARMS FUND
INSTITUTIONAL SHARES
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600 INDEPENDENT AUDITORS Ernst & Young LLP One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-245-7400
www.federatedinvestors.com
Cusip 314082108
8100309A-IS (10/97)
[Graphic]
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 Statement of Additional
Information for Institutional Shares and Institutional Service Shares dated
October 31, 1997, with the Securities and Exchange Commission ("SEC"). The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed in the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund are maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1997
TABLE OF CONTENTS
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 6 Trust Information 7 Management
of the Trust 7 Distribution of Institutional Service Shares 8 Administration of
the Fund 8 Net Asset Value 9 Investing in Institutional Service Shares 9 Share
Purchases 9 Exchange Privilege 9 Minimum Investment Required 9 What Shares Cost
9 Exchanging Securities for Institutional Service Shares 10 Confirmations and
Account Statements 10 Dividends 10 Capital Gains 10 Redeeming Institutional
Service Shares 10 Telephone Redemption 10 Written Requests 10 Accounts with Low
Balances 11 Shareholder Information 11 Voting Rights 11 Tax Information 11
Federal Income Tax 11 State and Local Taxes 12 Performance Information 12 Other
Classes of Shares 12 Financial Highlights--Institutional Shares 13 Financial
Statements 14 Report of Ernst & Young LLP, Independent Auditors 22
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL SERVICE SHARES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or None
redemption proceeds, as applicable)
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) 0.41%
12b-1 Fee (after waiver)(2) 0.00%
Total Other Expenses 0.39%
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 12b-1 fee has been reduced to reflect the voluntary waiver of the 12b-1
fee. The distributor can terminate this voluntary waiver at any time at its sole
discretion. The maximum 12b-1 fee is 0.25%
(3) The total operating expenses would have been 1.24% absent the voluntary
waivers of a portion of the management fee and the 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.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE
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.
<S> <C>
1 year $ 8
3 years $26
5 years $44
10 years $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.
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 22.
<TABLE>
<CAPTION>
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 0.56 0.55 0.54 0.42 0.48 0.18
Net realized and unrealized gain (loss) on 0.10 (0.01) 0.02 (0.35) (0.03) 0.03
investments
Total from investment operations 0.66 0.54 0.56 0.07 0.45 0.21
LESS DISTRIBUTIONS
Distributions from net investment income (0.56) (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) 7.05% 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) 0.44% 0.44% 0.43% 0.23% 0.21% 0.32%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $87,322 $109,536 $135,689 $255,891 $499,418 $113,095
Portfolio turnover 84% 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)
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 charge
imposed by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with minimal volatility of principal. Current income includes, in general,
discount earned on U.S. Treasury bills and agency discount notes, interest
earned on mortgage related securities and other U.S. government securities, and
short-term capital gains. The investment objective cannot be changed without
approval of shareholders. The Fund anticipates that it will experience minimal
volatility of principal due to the frequent adjustments to interest rates on
adjustable and floating rate mortgage securities which comprise the portfolio.
Of course, there can be no assurance that the Fund will be able to maintain
minimal volatility of principal or that it will achieve its investment
objective. The Fund endeavors to achieve its investment objective, however, by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
Except as otherwise noted, the investment policies described below may not be
changed by the Trustees without shareholder approval.
The Fund will limit its investments to those that are permitted for purchase by
federal savings associations pursuant to applicable rules, regulations, or
interpretations of the Office of Thrift Supervision and by federal credit unions
under the Federal Credit Union Act and the rules, regulations, and
interpretations of the National Credit Union Administration (the "NCUA"). Should
additional permitted investments be allowed as a result of future changes in
applicable regulations or federal laws, the Fund reserves the right, without
shareholder approval, to make such investments consistent with the Fund's
investment objective, policies, and limitations. Further, should existing
statutes or regulations change so as to cause any securities held by the Fund to
become ineligible for purchase by federal savings associations or federal credit
unions, the Fund will dispose of those securities at times advantageous to the
Fund.
As operated within the above limitations, and pursuant to the Fund's investment
policy, which may be changed without shareholder approval, to limit its
investments to securities that are appropriate direct investments for national
banks, the Fund will also serve as an appropriate vehicle for a national bank as
an investment for its own account.
ACCEPTABLE INVESTMENTS
The Fund pursues its investment objective by investing at least 65% of the value
of its total assets in a professionally managed portfolio of U.S. government
securities. As a matter of investment policy, which may be changed without
shareholder approval, all of these U.S. government securities will be adjustable
and floating rate mortgage securities which are issued or guaranteed as to
payment of principal and interest by the U.S.
government, its agencies, or instrumentalities.
The types of mortgage securities in which the Fund may invest include the
following:
* adjustable rate mortgage securities; * collateralized mortgage obligations;
* real estate mortgage investment conduits; and
* other securities collateralized by or representing interests in real estate
mortgages whose interest rates reset at periodic intervals and are issued
or guaranteed by the U.S. government, its agencies, or instrumentalities.
In addition to the securities described above, the Fund may also invest in
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes, and
bonds, as well as obligations of U.S. government agencies or instrumentalities
which are not collateralized by or represent interests in real estate mortgages,
as described above.
The Fund may also invest in mortgage related securities, as defined in section
3(a)(41) of the Securities Exchange Act of 1934, 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.
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
* 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 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 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 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; 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.
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
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 0.60% 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. 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 $110 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Todd A. Abraham, Kathleen M. Foody-Malus, and Robert E. Cauley are the
Fund's portfolio managers. Mr. Abraham has been the Fund's portfolio manager
since August 1995. Mr. Abraham joined Federated Investors in 1993 as an
Investment Analyst and has been a Vice President of the Fund's investment
adviser since 1997. Mr Abraham served as an Assistant Vice President of the
investment adviser from 1995 until 1997. 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 is a Chartered Financial Analyst and received his M.B.A. in Finance
from Loyola College.
Ms. Foody-Malus has been the Fund's 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.
Robert E. Cauley has been the Fund's portfolio manager since October 1997.
Mr. Cauley joined Federated Investors in 1996 as an Assistant Vice President
of the Fund's adviser. Mr. Cauley served as an Associate in the Asset-Backed
Securities Group at Lehman Brothers Holding, Inc. from 1994 to 1996. From
1992 to 1994, Mr. Cauley served as a Senior Associate/Corporate Finance at
Barclays Bank, PLC. Mr. Cauley earned his M.S.I.A., concentrating in Finance
and Economics, from Carnegie Mellon University.
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 60 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 Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), the distributor may be paid a fee
by the Trust in an amount computed at an annual rate of up to 0.25% of the
average daily net asset value of the Shares. 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 Plan is a compensation-type plan. As such, the Trust makes no payments
to the distributor except as described above. Therefore, the Trust does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Trust, 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 amounts or may earn a profit from future payments made by the Trust
under the 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 0.25% of the average daily net asset value of
its shares to obtain certain personal services for shareholders and to maintain
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. Financial institutions will
receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which 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 made pursuant to the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may 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 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 investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
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 Services Company may choose voluntarily to waive a portion of its fee.
NET ASSET VALUE
The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Institutional Shares will exceed that of Shares due to the variance in daily net
income realized by each class as a result of different distribution charges
incurred by the classes. Such variance will reflect only accrued net income to
which the shareholders of a particular class are entitled.
INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares of the Fund by Federal Reserve wire, call the Fund before
4:00 p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder 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. Questions on wire purchases should
be directed to your shareholder services representative at the telephone number
listed on your account statement.
BY MAIL
To purchase Shares of the Fund by mail, send a check made payable to Federated
ARMs Fund--Institutional Service Shares to: Federated Shareholder 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.
EXCHANGE PRIVILEGE
Financial institutions that maintain master accounts with an aggregate
investment of at least $400 million in certain funds which are advised or
distributed by affiliates of Federated Investors may exchange their Shares for
Institutional Shares of the Trust.
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, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. EXCHANGING SECURITIES FOR INSTITUTIONAL SERVICE SHARES
Investors may exchange certain U.S. government securities or a combination
of securities and cash for Shares. The securities and any cash must have a
market value of at least $25,000. The Fund reserves the right to determine
the acceptability of securities to be exchanged. Securities accepted by the
Fund are valued in the same manner as the Fund values its assets.
Shareholders wishing to exchange securities should first contact Federated
Securities Corp.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.
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 12 months.
REDEEMING INSTITUTIONAL SERVICE SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event longer than seven days later, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, the shareholders may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption, such as that discussed in "Written Requests,"
should be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
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 unendorsed with the
written request by registered or certified mail to the address above noted.
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 their signatures 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 association whose deposits are insured by the
Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund and its transfer agent reserve
the right to amend these standards at any time without notice.
RECEIVING PAYMENT
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights except that, in matters affecting only a
particular Fund or class, only shares of that particular Fund or class are
entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the Fund shall be called by the Trustees upon the written
request of shareholders owning at least 10% of the Trust's outstanding shares of
all portfolios entitled to vote.
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.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly & Meck, counsel to the Fund, Fund 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 30-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 charge or other
similar nonrecurring charges.
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 1-800-341-7400.
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 22.
<TABLE>
<CAPTION>
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, $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99
BEGINNING OF PERIOD
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.59 0.58 0.56 0.45 0.50 0.63 0.69 0.71 0.72 0.73
Net realized and 0.10 (0.01) 0.02 (0.35) (0.03) 0.42 0.68 (0.48) 0.59 (0.11)
unrealized gain (loss)
on investments
Total from investment 0.69 0.57 0.58 0.10 0.47 1.05 1.37 0.23 1.31 0.62
operations
LESS DISTRIBUTIONS
Distributions from net (0.59) (0.58) (0.56) (0.45) (0.50) (0.63) (0.69) (0.71) (0.72) (0.73)
investment income
Distributions from net -- -- -- -- -- (0.08) -- -- -- --
realized gain on
investments
Total distributions (0.59) (0.58) (0.56) (0.45) (0.50) (0.71) (0.69) (0.71) (0.72) (0.73)
NET ASSET VALUE, END OF $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88
PERIOD
TOTAL RETURN(A) 7.31% 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 0.44% 0.44% 0.43% 0.14% 0.21% 0.32% 1.02% 1.02% 0.95% 1.18%
waiver/
reimbursement(b)
SUPPLEMENTAL DATA
Net assets, end of $498,220 $653,313 $856,500 $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574 $16,753
period (000 omitted)
Portfolio turnover 84% 134% 124% 65% 36% 38% 127% 170% 85% 125%
</TABLE>
(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)
PORTFOLIO OF INVESTMENTS
FEDERATED ARMS FUND
AUGUST 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT INSTRUMENTALITIES--88.4%
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--38.4%
$ 213,654,994 7.705% - 7.961%, 2/1/2019 - 7/1/2030 $ 224,348,715
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--17.6%
99,263,367 6.077% - 8.298%, 2/1/2019 - 3/1/2029 103,270,401
FEDERAL NATIONAL MORTGAGE ASSOCIATION--3.1%
15,481 12.000%, 3/1/2013 17,750
2,682,660 11.500%, 8/1/2014 - 11/1/2015 3,031,406
4,482,588 11.000%, 12/1/2015 4,950,481
6,216,311 9.500%, 7/1/2016 6,713,734
3,268,431 8.500%, 4/1/2018 3,449,208
TOTAL 18,162,579
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--15.2%
7,714,862 7.375%, 6/20/2021 - 4/20/2022 7,931,993
27,651,438 7.125%, 8/20/2017 - 9/20/2024 28,426,779
30,896,239 7.000%, 3/20/2016 - 5/20/2026 31,702,756
20,484,958 6.875%, 12/20/2017 - 12/20/2022 21,003,825
TOTAL 89,065,353
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--14.1%
3,466,669 12.000%, 9/15/2013 - 1/15/2014 4,011,892
27,072,935 11.500%, 10/15/2010 - 4/15/2020 30,880,610
16,183,149 11.000%, 12/15/2009 - 7/15/2020 18,192,276
27,053,636 9.500%, 12/15/2021 29,387,012
TOTAL 82,471,790
TOTAL U.S. GOVERNMENT 517,318,838
INSTRUMENTALITIES (IDENTIFIED COST $510,556,075)
U.S. TREASURY NOTES--9.8%
28,500,000 6.250%, 3/31/1999 28,649,910
29,000,000 5.875%, 11/15/1999 28,924,890
TOTAL U.S. TREASURY NOTES 57,574,800
(IDENTIFIED COST $57,409,512)
</TABLE>
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)REPURCHASE AGREEMENT--0.3%
$ 1,900,000 BT Securities Corp., 5.580%, dated 8/29/1997, due 9/2/1997 $ 1,900,000
(at amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $ 576,793,638
$569,865,587)(B)
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. Government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $569,872,198.
The net unrealized appreciation of investments on a federal tax basis amounts to
$6,921,440 which is comprised of $7,706,388 appreciation and $784,948
depreciation at August 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($585,542,197) at August 31, 1997.
The following acronyms are used throughout this portfolio:
ARM -- Adjustable Rate Mortgage
PC -- Participation Certification
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED ARMS FUND
AUGUST 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $ 576,793,638
$569,865,587 and tax cost $569,872,198)
Cash 787
Income receivable 9,880,278
Receivable for investments sold 4,675,735
Receivable for shares sold 32,153
Total assets 591,382,591
LIABILITIES:
Payable for investments purchased $ 3,221,935
Payable for shares redeemed 414,260
Income distribution payable 2,131,619
Accrued expenses 72,580
Total liabilities 5,840,394
Net Assets for 60,109,352 shares outstanding $ 585,542,197
NET ASSETS CONSIST OF:
Paid in capital $ 659,619,055
Net unrealized appreciation of investments 6,928,051
Accumulated net realized loss on investments (81,001,448)
Distributions in excess of net investment income (3,461)
Total Net Assets $ 585,542,197
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$498,219,987 / 51,145,180 shares outstanding $9.74
INSTITUTIONAL SERVICE SHARES:
$87,322,210 / 8,964,172 shares outstanding $9.74
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED ARMS FUND
YEAR ENDED AUGUST 31, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 43,662,366
EXPENSES:
Investment advisory fee $ 3,977,723
Administrative personnel and services fee 500,691
Custodian fees 108,363
Transfer and dividend disbursing agent fees and 91,071
expenses
Directors'/Trustees' fees 22,035
Auditing fees 17,688
Legal fees 6,872
Portfolio accounting fees 130,542
Distribution services fee--Institutional Service 241,075
Shares
Shareholder services fee--Institutional Shares 1,416,310
Shareholder services fee--Institutional Service 241,075
Shares
Share registration costs 27,136
Printing and postage 27,699
Insurance premiums 8,972
Taxes 17,358
Miscellaneous 9,666
Total expenses 6,844,276
Waivers and reimbursements--
Waiver of investment advisory fee $ (1,270,395)
Waiver of distribution services fee--Institutional (238,182)
Service Shares
Waiver of shareholder services fee--Institutional (1,416,310)
Shares
Waiver of shareholder services fee--Institutional (2,893)
Service Shares
Total waivers (2,927,780)
Net expenses 3,916,496
Net investment income 39,745,870
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 3,454,717
Net change in unrealized appreciation of investments 3,918,165
Net realized and unrealized gain on investments 7,372,882
Change in net assets resulting from operations $ 47,118,752
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 39,745,870 $ 51,489,990
Net realized gain (loss) on investments ($3,411,098 net gain 3,454,717 1,044,840
and $8,689,597 net loss, respectively, as computed for federal
tax purposes)
Net change in unrealized appreciation/depreciation 3,918,165 (1,656,353)
Change in net assets resulting from operations 47,118,752 50,878,477
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (34,210,612) (44,631,616)
Institutional Service Shares (5,578,429) (7,063,166)
Change in net assets resulting from distributions to (39,789,041) (51,694,782)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 56,479,068 61,181,863
Net asset value of shares issued to shareholders in payment of 9,827,175 11,612,765
distributions declared
Cost of shares redeemed (250,943,388) (301,318,243)
Change in net assets resulting from share transactions (184,637,145) (228,523,615)
Change in net assets (177,307,434) (229,339,920)
NET ASSETS:
Beginning of period 762,849,631 992,189,551
End of period (including undistributed net investment income of $ 585,542,197 $ 762,849,631
$0 and $39,710, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED ARMS FUND
AUGUST 31, 1997
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. The investment objective of the Fund is to
provide current income consistent with minimal volatility of principal.
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 and agency securities are generally valued at the mean of the
latest bid and asked price 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 Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). 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. Distributions in excess of net investment income were the result of
certain book and tax timing differences. These distributions do not represent a
return of capital for federal income tax purposes.
At August 31, 1997, the Fund for federal tax purposes, had a capital loss
carryforward of $80,994,383, 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:
EXPIRATION YEAR EXPIRATION AMOUNT
2002 $15,124,033
2003 57,180,753
2004 8,689,597
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. During the year ended August
31, 1997, the fund did not enter into dollar roll transactions. 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.
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>
YEAR ENDED AUGUST 31,
1997 1996
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 4,079,073 $ 39,681,438 5,202,156 $ 50,287,411
Shares issued to shareholders in 841,597 8,186,144 1,021,472 9,866,718
payment of distributions declared
Shares redeemed (21,517,755) (209,231,332) (27,194,052) (262,675,429)
Net change resulting from (16,597,085) $(161,363,750) (20,970,424) $(202,521,300)
Institutional Share transactions
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,728,054 $ 16,797,630 1,125,713 $ 10,894,452
Shares issued to shareholders in 168,679 1,641,031 180,764 1,746,047
payment of distributions declared
Shares redeemed (4,290,564) (41,712,056) (4,002,502) (38,642,814)
Net change resulting from (2,393,831) $ (23,273,395) (2,696,025) $ (26,002,315)
Institutional Service Share
transactions
Net change resulting from share (18,990,916) $(184,637,145) (23,666,449) $(228,523,615)
transactions
</TABLE>
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 the Fund shares for the period. The fee paid to FSS is used to finance
certain services for shareholders and to maintain shareholder accounts.
Federated Shareholder Services may voluntarily choose to waive any portion of
its fee. Federated Shareholder Services can modify or terminate this voluntary
waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
INTERFUND TRANSACTIONS
During the period ended August 31, 1997, 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
$20,577,451 and $4,187,880, respectively. GENERAL
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1997, were as follows:
PURCHASES $545,011,770
SALES $706,267,122
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,
1997, and the related statement of operations for the year then ended, the
statements 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, 1997, by correspondence with the custodian or other appropriate
auditing procedures where replies from brokers were not received. 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, 1997, 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 7, 1997
NOTES
NOTES
[Graphic]
Federated ARMs Fund
Institutional Service Shares
PROSPECTUS
OCTOBER 31, 1997
A Diversified Portfolio of Federated ARMs Fund, an Open-End Management
Investment Company
FEDERATED ARMS FUND INSTITUTIONAL SERVICE SHARES
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-245-7400
www.federatedinvestors.com
Cusip 314082207
8100309A-SS (10/97)
[Graphic]
FEDERATED ARMS FUND
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the respective
prospectus for Institutional Shares or Institutional Service Shares of Federated
ARMs Fund (the "Fund") dated October 31, 1997. This Statement is not a
prospectus. You may request a copy of a prospectus or a paper copy of this
Statement, if you have received it electronically, free of charge by calling
1-800-341-7400. FEDERATED INVESTORS TOWER PITTSBURGH, PENNSYLVANIA
15222-3779 Statement dated October 31, 1997
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-245-7400
www.federatedinvestors.com
Cusip 314082108
Cusip 314082207
8100309B (10/97)
[Graphic]
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Portfolio Turnover 2
INVESTMENT LIMITATIONS 3
Stripped Mortgage Securities 3
Buying on Margin 3
Issuing Senior Securities and Borrowing Money 3
Pledging Assets 3
Diversification of Investments 3
Investing in Real Estate 3
Investing in Commodities 3
Underwriting 3
Lending Cash or Securities 3
Selling Short 3
Investing in Illiquid Securities 3
Investing in Securities of Other Investment Companies 4
Investing in New Issuers 4
FEDERATED ARMS FUND MANAGEMENT 4
Fund Ownership 8
Trustee Compensation 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
Adviser to the Fund 9
Advisory Fees 10
Other Related Services 10
BROKERAGE TRANSACTIONS 10
OTHER SERVICES 10
Fund Administration 10
Custodian and Portfolio Accountant 10
Transfer Agent 10
Independent Auditors 11
PURCHASING SHARES 11
Distribution Plan (Institutional Service Shares only) and Shareholder
Services 11
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
Determining Value of Securities 11
REDEEMING SHARES 12
Exchanging Securities for Fund Shares 12
TAX CONSEQUENCES 12
MASSACHUSETTS PARTNERSHIP LAW 12
TAX STATUS 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
Capital Gains 13
TOTAL RETURN 13
YIELD 13
PERFORMANCE COMPARISONS 13
Economic and Market Information 14
ABOUT FEDERATED INVESTORS 14
Mutual Fund Market 15
APPENDIX 16
GENERAL INFORMATION ABOUT THE FUND
Federated ARMs Fund (the "Fund") was established as a Massachusetts business
trust under a Declaration of Trust dated May 24, 1985. The Declaration of Trust
permits the Fund to offer separate series and classes of shares.
Shares of the Fund are offered in two classes, Institutional Shares and
Institutional Service Shares (individually and collectively referred to as the
"Shares"). This Statement of Additional Information relates to both of the
above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income consistent with
minimal volatility of principal. Current income includes, in general, discount
earned on U.S. Treasury bills and agency discount notes, interest earned on
mortgage-related securities and other U.S. government securities, and short-term
capital gains. The investment objective cannot be changed without approval of
shareholders. The Fund anticipates that it will experience minimal volatility of
principal due to the frequent adjustments to interest rates on adjustable and
floating rate mortgage securities which comprise the portfolio. Of course, there
can be no assurance that the Fund will be able to maintain minimal volatility of
principal or that it will achieve its investment objective. The Fund endeavors
to achieve its investment objective, however, by following the investment
policies described in each prospectus and this Statement of Additional
Information.
TYPES OF INVESTMENTS
The Fund will invest at least 65% of the value of its total assets in adjustable
and floating rate mortgage securities which are issued or guaranteed as to
payment of principal and interest by the U.S. government, its agencies or
instrumentalities. These securities and other U.S.
government or agency obligations are backed by:
* the full faith and credit of the U.S. Treasury;
* the issuer's right to borrow from the U.S. Treasury;
* the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
* the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
* Federal Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
* Federal Home Loan Banks; * Federal National Mortgage Association; * Student
Loan Marketing Association; and * Federal Home Loan Mortgage Corporation.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities, such as those
issued by Government National Mortgage Association. The terms and
characteristics of the mortgage instruments may vary among pass-through mortgage
loan pools.
The market for such mortgage-related securities has expanded considerably since
its inception. The size of the primary issuance market and the active
participation in the secondary market by securities dealers and other investors
make government-related pools highly liquid.
CAPS AND FLOORS
The value of mortgage-related securities in which the Fund invests may be
affected if interest rates rise or fall faster and farther than the allowable
caps on the underlying residential mortgage loans. For example, consider a
residential mortgage loan with a rate which adjusts annually, an initial
interest rate of 10%, a 2% per annum interest rate cap, and a 5% life of loan
interest rate cap. If the index against which the underlying interest rate on
the residential mortgage loan is compared--such as the one-year Treasury--moves
up by 3%, the residential mortgage loan rate may not increase by more than 2% to
12% the first year. As one of the underlying residential mortgages for the
securities in which the Fund invests, the residential mortgage would depress the
value of the securities and, therefore, the net asset value of the Fund. If the
index against which the interest rate on the underlying residential mortgage
loan is compared moves up no faster or farther than the cap on the underlying
mortgage loan allows, or if the index moves down as fast or faster than the
floor on the underlying mortgage loan allows, the mortgage would maintain or
improve the value of the securities in which the Fund invests and, therefore,
the net asset value of the Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20% of
the total value of its assets.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees").
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. The se assets are marked to market daily and
are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. For the fiscal years ended August 31, 1997, and
1996, the portfolio turnover rates were 84% and 134%, respectively.
INVESTMENT LIMITATIONS
STRIPPED MORTGAGE SECURITIES
The Fund will not invest in stripped mortgage securities, including securities
which represent a share of only the interest payments or only the principal
payments from underlying mortgage related securities.
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of the
value of its net assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities is deemed
to be inconvenient or disadvantageous. The Fund will not purchase any securities
while any such borrowings are outstanding.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, it may pledge assets having a market value
not exceeding the lesser of the dollar amounts borrowed or 10% of the value of
total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets, the
Fund will not purchase securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements collateralized by
U.S. government securities) if, as a result, more than 5% of the value of its
total assets would be invested in securities of that issuer.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be deemed
to be an underwriter under the Securities Act of 1933 in connection with the
sale of securities in accordance with its investment objective, policies, and
limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up to
one-third of the value of its total assets.
SELLING SHORT
The Fund will not sell securities short.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities which are
illiquid, including repurchase agreements providing for settlement in more than
seven days after notice.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 5% of the value of its total assets would be
invested in such securities, or except as part of a merger, consolidation, or
other acquisition.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of continuous
operations, including the operation of any predecessor. With respect to the
asset-backed securities, the Fund will treat the originator of the asset pool as
the company issuing the securities for purposes of determining compliance with
this limitation.
The above investment limitations cannot be changed without shareholder approval.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund did not engage in reverse repurchase agreements, purchase securities of
other investment companies, borrow money, or invest in illiquid securities in
excess of 5% of the value of its total assets during the last fiscal year and
has no present intent to do so in the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
having capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."
FEDERATED ARMS FUND MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated ARMs Fund, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member
of Executive Committee, University of Pittsburgh; Director or Trustee of the
Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
203 Kensington Ct.
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Chairman, Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Retired
from the law firm of Miller, Ament, Henny & Kochuba; Director or Trustee of
the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation;
President Emeritus, University of Pittsburgh; Founding Chairman, National
Advisory Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center, Prague; Director or
Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public Relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary, and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board. As used in the table above, "The Funds" and "Funds" mean the
following investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc.--1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares. As of
October 3, 1997, the following shareholders of record owned 5% or more of the
Institutional Service Shares of the Fund: Hawaii Federal & State Employee
Federal Credit Union, Hilo, Hawaii, owned approximately 962,095 shares (11.60%);
Bellco First FCU, Greenwood Village, Colorado, owned approximately 1,267,075
shares (15.28%); First National Bank Shelby, Shelby, North Carolina, owned
approximately 489,007 shares (5.90%); Durand Glass Manufacturing Co., Millville,
New Jersey owned approximately 939,197 shares (11.33%); and Prudential
Securities Inc. for the benefit of Cato Corporation, Charlotte, North Carolina,
owned approximately 516,388 shares (6.23%).
As of October 3, 1997, the following shareholder of record owned 5% or more of
the Institutional Shares of the Fund: APCO Employees Credit Union, Birmingham,
Alabama, owned approximately 6,008,538 shares (11.83%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX
<S> <C> <S>
John F. Donahue, $0 $0 for the Trust and
Chairman and Trustee 56 other investment companies in the Fund Complex
Thomas G. Bigley, $1,607 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John T. Conroy, Jr., $1,768 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
William J. Copeland, $1,768 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
James E. Dowd, $1,768 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Lawrence D. Ellis,
M.D., $1,607 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., $1,768 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Peter E. Madden, $1,607 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Gregor F. Meyer, $1,607 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John E. Murray, Jr., $1,607 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Wesley W. Posvar, $1,607 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Marjorie P. Smuts, $1,607 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended August 31, 1997.
# The aggregate compensation is provided for the Trust which is comprised of
one portfolio.
+ The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). It is
a subsidiary of Federated Investors. All of the voting securities of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, his wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the fiscal years ended August 31,
1997, 1996, and 1995, the Fund's Adviser earned $3,977,723, $5,228,816, and
$7,041,965, respectively, of which $1,270,395, $1,618,615, and $2,149,890,
respectively, were voluntarily waived because of undertakings to limit the
Fund's expenses. OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees. The adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During the fiscal
year(s) ended August 31, 1997, 1996, and 1995, the Trust paid no brokerage
commissions. Although investment decisions for the Fund are made
independently from those of the other accounts managed by the adviser,
investments of the type the Fund may make may also be made by those other
accounts. When the Fund and one or more other accounts managed by the adviser
are prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed by
the adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund. In other cases, however, it is believed
that coordination and the ability to participate in volume transactions will be
to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. From March 1, 1994 to March 1, 1996, Federated Administrative
Services, a subsidiary of Federated Investors, served as the Fund's
Administrator. For purposes of this Statement of Additional Information,
Federated Services Company and Federated Administrative Services may hereinafter
collectively be referred to as the "Administrators." For the fiscal years ended
August 31, 1997, 1996, and 1995, the Administrators earned $500,691, $659,077,
and $888,461, respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
Pennsylvania, provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments. The fee paid for this service is
based upon the level of the Fund's average net assets for the period plus
out-of-pocket expenses. TRANSFER AGENT
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on size, type, number of
accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares is
explained in the respective prospectuses under "Investing in Institutional
Shares" or "Investing in Institutional Service Shares."
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER
SERVICES
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. The se activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
With respect to the Institutional Service Shares, by adopting the Distribution
Plan, the Board of Trustees expects that the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet redemptions. This
will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, the Fund may be able to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal period ended August 31, 1997, payments in the amount of $241,075
were made pursuant to the Distribution Plan (Institutional Service Shares only),
of which $238,182 was voluntarily waived. In addition, for this period, the Fund
paid shareholder services fees in the amount of $241,075 (Institutional Service
Shares) and $1,416,310 (Institutional Shares), of which $2,893 (Institutional
Service Shares) and $1,416,310 (Institutional Shares) was voluntarily waived.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in each prospectus.
DETERMINING VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* as provided by an independent pricing service;
* for short-term obligations, according to the mean between bid and asked
prices, as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost unless the Trustees determines this is not fair
value; or
* at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
* yield;
* quality;
* coupon rate;
* maturity;
* type of issue;
* trading characteristics; and
* other market data.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
respective prospectus under "Redeeming Institutional Shares," or "Redeeming
Institutional Service Shares." Although State Street Bank does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange U.S. government securities they already own for Shares,
or they may exchange a combination of U.S. government securities and cash for
Shares. An investor should forward the securities in negotiable form with an
authorized letter of transmittal to Federated Securities Corp. The Fund will
notify the investor of its acceptance and valuation of the securities within
five business days of their receipt by State Street Bank.
The Fund values securities in the same manner as the Fund values its assets. The
basis of the exchange will depend upon the net asset value of Shares on the day
the securities are valued. One Share will be issued for each equivalent amount
of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
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 regulated investment companies and to receive
the special tax treatment afforded to such companies. To qualify for this
treatment, the Fund must, among other requirements:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* derive less than 30% of its gross income from the sale of securities held
less than three months;
* invest in securities within certain statutory limits; and * distribute to
its shareholders at least 90% of its net income earned
during the year.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* invest in securities within certain statutory limits; and * distribute to
its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction or exclusion available
to corporations. These dividends, and any short-term capital gains, are taxable
as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term capital
gains distributed to them regardless of how long they have held the Shares.
TOTAL RETURN
The Fund's average annual total return for Institutional Shares for the
one-year, five-year, and ten-year periods ended August 31, 1997, were 7.31%,
5.05%, and 7.61%, respectively. The Fund's average annual total return for
Institutional Service Shares for the one-year and five-year periods ended August
31, 1997 and for the period from May 4, 1992 (date of initial public investment)
to August 31, 1997, were 7.05%, 4.78%, and 4.90%, respectively.
The average annual total return for both classes of shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the net asset value per share at the end of the period. The
number of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional shares, assuming the monthly reinvestment of all dividends and
distributions.
YIELD
The Fund's yield for Institutional Shares for the thirty-day period ended
August 31, 1997, was 5.87%. The Fund's yield for Institutional Service
Shares was 5.61% for the same period.
The yield for both classes of shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of shares over a thirty-day period by the
maximum offering price per share by either class of shares on the last day of
the period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by either class because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services provided
in conjunction with an investment in either class of shares, performance will be
reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance of both classes of shares depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
* types of instruments in which the portfolio is invested; * changes in
interest rates and market value of portfolio securities; * changes in the
Fund's or either class of Share's expenses; and * various other factors.
Either class of Share's performance fluctuates on a daily basis largely because
net earnings and offering price per share fluctuate daily. Both net earnings and
maximum offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute maximum offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
* LEHMAN BROTHERS ADJUSTABLE RATE MORTGAGE FUNDS AVERAGE is comprised of all
agency guaranteed securities with coupons that periodically adjust over a
spread of a published index.
* LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX is comprised of all publicly
issued, non-convertible domestic debt of the U.S. government, or any agency
thereof, or any quasi-federal corporation. The index also includes
corporate debt guaranteed by the U.S. government. Only notes and bonds with
a minimum maturity of one year and maximum maturity of 2.9 years are
included.
* LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specific period
of time. From time to time, the Fund will quote its Lipper ranking in the
"U.S. Mortgage Funds" category in advertising and sales literature.
* MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deffered compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other invstments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by the Fund portfolio managers and their views and anaylsis on how
such developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making--structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. In the government sector, as of
December 31, 1996, Federated Investors managed 9 mortgage-backed, 5
government/agency and 17 government money market mutual funds, with assets
approximating $6.3 billion, $1.7 billion, and $23.6 billion, respectively.
Federated trades approximately $309 million in U.S. government and
mortgage-backed securities daily and places approximately $17 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages nearly $30 billion in government funds within these
maturity ranges.
J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investor's international and global portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of more than 4,000 institutional clients nationwide by
managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.
* Source: Investment Company Institute
APPENDIX
STANDARD & POOR'S RATINGS GROUP LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" rating.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Aa--Bonds which are rated
"Aa" are judged to be of high quality by all standards. Together with the "Aaa"
group, they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities. A Bonds which
are rated "A" possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated "Baa" are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
FITCH INVESTORS SERVICE, INC., INVESTMENT GRADE BOND RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
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 theDeclaration 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) (i)Conformed copy of Custodian Contract of the
Registrant (16);
(ii)Copy of Fee Schedule associated with Custodian Contract of the
Registrant +;
......... + 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)
(9) (i) Conformed copy of Agreement for Fund Accounting Services,
Administrative Services, Transfer Agency Services and Custody
Services Procurement of the Registrant
(17);
(ii) The responses described in Item 24(b)(6) are hereby
incorporated by reference;
(iii) The Registrant hereby incorporates by
reference the conformed copy of the
Shareholder Services Sub-Contract between
Fidelity and Federated Shareholder Services
from Item 24 (b)(9)(iii) of the Federated
GNMA Trust Registration Statement on Form
N-1A, filed with the Commission on March 25,
1996. (File No. 2-75670 and 811-3375)
(10) Conformed copy of Opinion and Consent of Counsel as to legality of
shares being registered (16);
(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 Schedules +;
(18) The Registrant hereby incorporates the
conformed copy of the specimen Multiple
Class Plan from Item 24(b)(18) of the World
Investment Series, Inc. Registration
Statement on Form N-1A, filed with the
Commission on January 26, 1996. (File Nos.
33-52149 and 811-07141)
(19) Conformed copy of Power of Attorney +
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
+ 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)
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
and 2-98491)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed October 24, 1996. (File Nos. 811-4539
and 2-98491)
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of October 3, 1997
-------------- ---------------------
Shares of Beneficial Interest
(no par value)
Institutional Shares 1,666
Shares of Beneficial Interest
(no par value)
Institutional Service Shares 327
Item 27. Indemnification: (12)
Item 28. Business and Other Connections of Investment Adviser:
(a) 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
four 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:
Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
Senior Vice Presidents: Peter R. Anderson
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
J. Alan Minteer
Susan M. Nason
Mary Jo Ochson
Vice Presidents: J. Scott Albrecht
Joseph M. Balestrino
Randall S. Bauer
David F. Belton
David A. Briggs
Kenneth J. Cody
Alexandre de Bethmann
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
+ All exhibits are being filed electronically.
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed December 26, 1991.
Edward C. Gonzales
James E. Grefenstette
Susan R. Hill
Stephen A. Keen
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Marian R. Marinack
Sandra L. McInerney
Robert J. Ostrowski
Charles A. Ritter
Scott B. Schermerhorn
Frank Semack
Aash M. Shah
William F. Stotz
Tracy P. Stouffer
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka
Assistant Vice Presidents: Todd A. Abraham
Stefanie L. Bachhuber
Arthur J. Barry
Micheal W. Casey
Robert E. Cauley
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
Robert M. Marsh
Joseph M. Natoli
Keith J. Sabol
Michael W. Sirianni
Gregg S. Tenser
Secretary: Stephen A. Keen
Treasurer: Thomas R. Donahue
Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher
Christine I. McGonigle
Assistant Treasurer: Richard B. Fisher
The business address of each of the Officers of the investment
adviser is Federated Investors Tower, Pittsburgh, Pennsylvania
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, acts as principal underwriter for the following open-end investment
companies, including the Registrant:
111 Corcoran Funds; Arrow Funds; Automated Government Money Trust; Blanchard
Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.;
Federated GNMA Trust; Federated Government Income Securities, Inc.; Federated
Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated Insurance Series;
Federated Investment Portfolios; Federated Investment Trust; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; 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: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Independence One Mutual Funds; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds; Star Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The Virtus
Funds; The Wachovia Funds; The Wachovia Municipal Funds; 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;
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.
<TABLE>
<CAPTION>
<S> <C> <C>
(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 Vice Executive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Assistant Secretary
Federated Investors Tower and Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
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
Laura M. Deger 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
Teresa M. Antoszyk 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
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
R. Leonard Corton, 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 Securities Corp.
Pittsburgh, PA 15222-3779
William C. Doyle 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
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John K. Goettlicher 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian G. Kelly Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy 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
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas A. Peters III 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
Richard A. Recker 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
George D. Riedel 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward L. Smith 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
John A. Staley 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
Richard Suder 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
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John F. Wallin 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
Edward J. Wojnarowski 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant 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
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
</TABLE>
(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, Pennsylvani
15222-3779
Federated Shareholder...... Federated Investors Tower
Services Company........... Pittsburgh, Pennsylvania
("Transfer Agent and Dividend 15222-3779
Disbursing Agent")
Federated Services Company. Federated Investors Tower
("Administrator").......... Pittsburgh, Pennsylvania
15222-3779
Federated Management....... Federated Investors Tower
("Adviser")................ Pittsburgh, Pennsylvania
15222-3779
State Street Bank and Trust Company c/o Federated Shareholder
("Custodian").............. Services Company
.................. P.O. Box 8600
.................. 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
Trustees 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.
<PAGE>
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 21st day of October, 1997.
FEDERATED ARMs FUND
BY: /s/S. Elliott Cohan
S. Elliott Cohan, Assistant Secretary
Attorney in Fact for John F. Donahue
October 21, 1997
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/S. Elliott Cohan
S. Elliott Cohan Attorney In Fact October 21, 1997
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Glen R. Johnson* President
John W. McGonigle* Executive Vice President
Secretary/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, Jr.* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
* By Power of Attorney
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 to the use of our report dated October 7, 1997, in
Post-Effective Amendment Number 22 to the Registration Statement (Form N-1A No.
2-98491) and the related Prospectuses of FEDERATED ARMs FUND, dated October 31,
1997.
By: ERNST & YOUNG LLP
Ernst & Young LLP
Pittsburgh, Pennsylvania
October 20, 1997
Exhibit 19 under Form N-1A
Exhibit 24 under Item 601/Reg. S-K
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 Services Company, 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.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURES TITLE DATE
/s/ John F. Donahue Chairman October 2, 1997
John F. Donahue and Trustee
(Chief Executive Officer)
/s/Glen R. Johnson President October 2, 1997
Glen R. Johnson
/s/John W. McGonigle Treasurer, Executive October 2, 1997
- ----------------------------------------
John W. McGonigle Vice President and Secretary
(Principal Financial and
Accounting Officer)
/s/ Thomas G. Bigley Trustee October 2, 1997
- ----------------------------------------
Thomas G. Bigley
/s/ John T. Conroy, Jr. Trustee October 2, 1997
- ----------------------------------------
John T. Conroy, Jr.
/s/ William J. Copeland Trustee October 2, 1997
- ----------------------------------------
William J. Copeland
/s/ James E. Dowd Trustee October 2, 1997
- ----------------------------------------
James E. Dowd
/s/ Lawrence D. Ellis, M.D. Trustee October 2, 1997
Lawrence D. Ellis, M.D.
/s/ Edward L. Flaherty, Jr. Trustee October 2, 1997
- ----------------------------------------
Edward L. Flaherty, Jr.
/s/ Peter E. Madden Trustee October 2, 1997
- ----------------------------------------
Peter E. Madden
/s/ Gregor F. Meyer Trustee October 2, 1997
- ----------------------------------------
Gregor F. Meyer
/s/ John E. Murray, Jr. Trustee October 2, 1997
- ----------------------------------------
John E. Murray, Jr.
/s/ Wesley W. Posvar Trustee October 2, 1997
- ----------------------------------------
Wesley W. Posvar
/s/ Marjorie P. Smuts Trustee October 2, 1997
- ----------------------------------------
Marjorie P. Smuts
</TABLE>
Sworn to and subscribed before me this 2nd day of October, 1997.
/s/ Marie M. Hamm
Notary Public
State Street
Domestic Custody
Federated Funds
Page 2
5/22/97
4/8/97
Exhibit 8(ii) under Form N-1A
Exhibit 10 under Item 601/Reg S-K
STATE STREET
DOMESTIC CUSTODY
FEE SCHEDULE
Federated Funds
I. Custody Services
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make
cash disbursements and report cash transactions. Monitor corporate actions.
ANNUAL FEES
ASSET
Per Fund .25 Basis Points
Wire Fees $3.00 per wire
Settlements:
oEach DTC Transaction $5.00
oEach Federal Reserve Book Entry Transaction $3.75
oEach Repo Transaction (All Repo) $3.75
oEach Physical Transaction (NY/Boston, Private Placement) $15.00
oEach Option Written/Exercised/Expired $18.75
Each Book Entry Muni (Sub-custody) Transaction $15.00
oGovernment Paydowns $5.00
oMaturity Collections $8.00
oPTC Transactions $6.00
II. Special Services
Fees for activities of a non-recurring nature such as fund consolidation
or reorganization, extraordinary security shipments and the preparation of
special reports will be subject to negotiation.
III. Balance Credit
Municipal Funds
A balance credit equal to 75% of the average demand deposit account balance
in the custodian account for the month billed times the 30 day T-Bill Rate
on the last Monday of the month billed, will be applied against the month's
custodian bill.
Transfer Agent
A balance credit equal to 100% of the average balance in the transfer
agent demand deposit accounts, less the reserve requirement and applicable
related expenses, times 75% of the 30 average Fed Funds Rate.
IV. Payment
The above fees will be charged against the funds' custodian checking
account thirty (30) days after the invoice is mailed to the funds' offices.
V. Term of Contract
The parties agree that this fee schedule shall become effective January
1, 1997.
FEDERATED SERVICES COMPANY STATE STREET
BY: /s/ Douglas L. Hein BY: /s/ Michael E. Hagerty
TITLE: Senior Vice President TITLE: Vice President
DATE: April 15, 1997 DATE: April 8, 1997
----------------------------- -------------
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Federated ARMs Fund
Institutional Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Aug-31-1997
<PERIOD-END> Aug-31-1997
<INVESTMENTS-AT-COST> 569,865,587
<INVESTMENTS-AT-VALUE> 576,793,638
<RECEIVABLES> 14,588,166
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 591,382,591
<PAYABLE-FOR-SECURITIES> 3,221,935
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,618,459
<TOTAL-LIABILITIES> 5,840,394
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 659,619,055
<SHARES-COMMON-STOCK> 51,145,180
<SHARES-COMMON-PRIOR> 56,870,258
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (3,461)
<ACCUMULATED-NET-GAINS> (81,001,448)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,928,051
<NET-ASSETS> 498,219,987
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,662,366
<OTHER-INCOME> 0
<EXPENSES-NET> 3,916,496
<NET-INVESTMENT-INCOME> 39,745,870
<REALIZED-GAINS-CURRENT> 3,454,717
<APPREC-INCREASE-CURRENT> 3,918,165
<NET-CHANGE-FROM-OPS> 47,118,752
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 34,210,612
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,079,073
<NUMBER-OF-SHARES-REDEEMED> 21,517,755
<SHARES-REINVESTED> 841,597
<NET-CHANGE-IN-ASSETS> (177,307,434)
<ACCUMULATED-NII-PRIOR> 5,725
<ACCUMULATED-GAINS-PRIOR> (82,264,753)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,977,723
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,844,276
<AVERAGE-NET-ASSETS> 653,999,642
<PER-SHARE-NAV-BEGIN> 9.640
<PER-SHARE-NII> 0.590
<PER-SHARE-GAIN-APPREC> 0.100
<PER-SHARE-DIVIDEND> 0.590
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.740
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</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-31-1997
<PERIOD-END> Aug-31-1997
<INVESTMENTS-AT-COST> 569,865,587
<INVESTMENTS-AT-VALUE> 576,793,638
<RECEIVABLES> 14,588,166
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 591,382,591
<PAYABLE-FOR-SECURITIES> 3,221,935
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,618,459
<TOTAL-LIABILITIES> 5,840,394
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 659,619,055
<SHARES-COMMON-STOCK> 8,964,172
<SHARES-COMMON-PRIOR> 9,493,966
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (3,461)
<ACCUMULATED-NET-GAINS> (81,001,448)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,928,051
<NET-ASSETS> 87,322,210
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,662,366
<OTHER-INCOME> 0
<EXPENSES-NET> 3,916,496
<NET-INVESTMENT-INCOME> 39,745,870
<REALIZED-GAINS-CURRENT> 3,454,717
<APPREC-INCREASE-CURRENT> 3,918,165
<NET-CHANGE-FROM-OPS> 47,118,752
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,578,429
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,728,054
<NUMBER-OF-SHARES-REDEEMED> 4,290,564
<SHARES-REINVESTED> 168,679
<NET-CHANGE-IN-ASSETS> (177,307,434)
<ACCUMULATED-NII-PRIOR> 5,725
<ACCUMULATED-GAINS-PRIOR> (82,264,753)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,977,723
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,844,276
<AVERAGE-NET-ASSETS> 653,999,642
<PER-SHARE-NAV-BEGIN> 9.640
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> 0.100
<PER-SHARE-DIVIDEND> 0.560
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.740
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
