SEMI-ANNUAL REPORT
President's Message
Dear Investor:
I am pleased to present the Semi-Annual Report for Federated ARMs Fund. The
report covers the six-month reporting period ended February 28, 1999 and
includes an investment review by the portfolio manager, a complete list of
holdings, and the financial statements for the fund's two classes of shares:
Institutional Shares and Institutional Service Shares.
Federated ARMs Fund offers the potential for monthly income at a level beyond
what is available through money market securities. 1 In addition, its portfolio
of adjustable rate and floating rate mortgage securities can help investors keep
pace with fluctuating interest rates. The prompt payment of principal and
interest on these securities is guaranteed by the U.S. government. Of course,
fund shares are not guaranteed.
Over the six-month reporting period, the fund's Institutional Shares paid
dividends totaling $0.26 per share and produced a total return of 2.11%. 1 The
Institutional Service Shares paid dividends totaling $0.25 per share and
produced a total return of 1.98%.1 On February 28, 1999, net assets in the fund
totaled $424 million.
Thank you for your participation in Federated ARMs Fund. We welcome your
questions and comments.
Sincerely,
[Graphic]
Glen R. Johnson
President
April 15, 1999
1 Performance quoted represents past performance and is not indicative of future
results. Unlike money market funds, which strive to maintain a stable $1.00
share price, investment return and principal value of the fund will fluctuate,
so that an investor's shares, when redeemed, may be worth more or less than
their original cost.
Investment Review
Federated ARMs Fund invests at least 65% of its total assets in U.S. government
adjustable and floating rate mortgage securities. The investment objective of
the fund is to provide current income consistent with minimal volatility of
principal. The fund is assigned a AAAf 1 credit rating by Standard & Poor's and
rated Aaa by Moody's.2 As of February 28, 1999 fund duration was 1.1 years.
Despite a robust economy displaying a rare combination of low inflation and
strong growth, the six-month reporting period ended February 1999 witnessed
significant volatility. The Russian government's default and concerns over
emerging market economies resulted in a financial market crisis. Consequently,
market volatility heightened as did the demand for liquidity during the first
part of the reporting period. The desire for liquidity manifested itself in a
strong bid for U.S. Treasury securities. Treasury yields experienced a roller
coaster-like ride. The liquidity driven bid drove yields down to historically
low levels in the first part of the reporting period before rising to end the
term above the initial levels.
The U.S. economy grew strongly during the third and fourth quarters of 1998,
registering gains of 3.7% and 6.1%, respectively. Early indicators point to
solid growth thus far in 1999 as well. While manufacturing reflected weakness,
consumer spending, which accounts for roughly two-thirds of the economy, was
robust. Impressive job growth and high consumer confidence fueled spending.
Strong GDP coupled with a 4.4% unemployment rate would typically dictate rising
inflationary concerns due to an overheating economy. Inflation, however, has
been remarkably well behaved. Falling import and commodity prices, rising
productivity and declining capacity utilization rates contributed to the low
inflation environment. Consumer prices rose at a 1.5% annual rate as of February
1999. While the U.S. economy performed admirably, conditions abroad deteriorated
significantly. The result was turbulence in the financial markets.
The Russian debt crisis, which began last August, touched off a ripple effect
which spread throughout the markets. Third world economic woes and the concern
over spreading such ills, ignited a rush for liquidity. As investors shunned
risk, a liquidity/credit crisis ensued. The result was a flight-to-quality bid
for U.S. Treasury securities. Acting to ease this situation and protect the U.S.
economy, the Federal Reserve Board (the "Fed") acted on three separate occasions
to reduce the federal funds rate a total of 75 basis points.
As investors shunned risk, all spread product (corporate, mortgage-backed,
asset-backed) suffered from reduced demand and spread widening as market
volatility increased along with the demand for liquidity. Falling market yields
reduced 30-year mortgage rates to levels last seen in the 1960s. The combination
of volatility, risk aversion and prepayment concerns drove mortgage-backed
security ("MBS") spreads to the widest levels of the past 10 years.
1 An AAAf rating indicates that the fund's portfolio holdings and counterparties
provide extremely strong protection against losses from credit defaults. Ratings
are subject to change and do not remove market risks.
2 Money market funds and bond funds rated Aaa by Moody's are judged to be of an
investment quality similar to Aaa-rated fixed income obligations, that is, they
are judged to be of the best quality. Ratings are subject to change, and do not
remove market risks.
At historically wide spread levels, MBS offered attractive yield and total
return potential. Taking advantage of this opportunity, the fund purchased
15-year MBS as well as new production GNMA ARMs. Par-priced 15-year MBS
option-adjusted spread (OAS) gapped nearly 30 basis points wider before closing
10 points tighter for the reporting period. Similarly, par-priced GNMA ARM OAS
widened dramatically before stability returned to the market. As order was
restored, Treasury yields rose significantly as the liquidity premium declined.
Rising yields acted to reduce prepayment concerns. Demand for mortgages
increased and spreads tightened.
By the end of the reporting period, mortgage spreads had recovered to their
pre-crisis levels. Treasury yields, which plunged through mid-October, finished
the reporting period higher. For example, the 2-year Treasury yield was 4.77% as
of month-end August, plunged to 3.81% in mid-October and finished the reporting
period at 5.13%.
The fund's net total return for the Institutional Shares and Institutional
Service Shares for the six-month reporting period ended February 28, 1999 was
2.11% 3 and 1.98%3, respectively, compared to 2.11%4 for the Merrill Lynch
1-Year Treasury Index and 1.69%5 for the Lipper ARM fund average.
3 Performance quoted represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
4 The Merrill Lynch 1-Year Treasury Index is an unmanaged index tracking 1- year
U.S. government securities. The index is produced by Merrill Lynch, Pierce,
Fenner & Smith, Inc. Investments cannot be made in this index.
5 Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
respective categories indicated. These figures do not reflect sales charges.
Portfolio of Investments
FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS - 95.9%
$ 131,495,893 FEDERAL HOME LOAN MORTGAGE CORP. PC ARM - 31.7%
7.088% - 7.422%, 2/1/2019 - 7/1/2030 $ 134,223,105
5,894,587 FEDERAL HOME LOAN MORTGAGE CORP. REMIC - 1.4%
Series 1544-E, 6.250%, 6/15/2008 5,908,616
53,566,755 FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM - 12.8%
5.940% - 7.478%, 9/1/2018 - 5/1/2036 54,398,263
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC - 4.5%
10,000,000 Series 98-36PA, 6.250%, 7/18/2013 10,013,569
8,908,900 Series 93-206E, 5.650%, 5/25/2017 8,867,830
TOTAL 18,881,399
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 14.3%
14,967 12.000%, 3/1/2013 17,147
1,872,516 11.500%, 8/1/2014 - 11/1/2015 2,107,161
2,922,143 11.000%, 12/1/2015 3,190,629
31,158,858 6.500%, 1/1/2013 - 2/1/2014 31,363,260
24,321,696 6.000%, 9/1/2013 - 1/1/2014 24,086,019
TOTAL 60,764,216
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM - 23.4%
26,666,700 6.875%, 3/20/2016 - 3/20/2023 27,188,210
24,146,240 6.625%, 8/20/2017 - 9/20/2024 24,677,154
28,480,727 6.125%, 12/20/2017 - 11/20/2023 28,992,671
6,850,177 5.500%, 5/20/2028 6,911,623
11,772,285 5.000%, 8/20/2028 - 2/20/2029 11,849,057
TOTAL 99,618,715
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 7.8%
2,308,160 12.000%, 9/15/2013 - 1/15/2014 2,666,104
16,341,874 11.500%, 10/15/2010 - 3/15/2020 18,595,896
10,446,643 11.000%, 12/15/2009 - 7/15/2020 11,703,950
TOTAL 32,965,950
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST
$407,433,904) 406,760,264
U.S. TREASURY NOTE - 1.7%
7,500,000 United States Treasury Note, 4.000%, 10/31/2000 (identified
cost $7,373,437) 7,363,800
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
REPURCHASE AGREEMENT - 1.1% 1
$ 4,505,000 ABN AMRO, Inc., 4.860%, dated 2/26/1999, due 3/1/1999 (at
amortized cost) $ 4,505,000
TOTAL INVESTMENTS (IDENTIFIED COST $419,312,341) 2 $ 418,629,064
</TABLE>
1 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.
2 The cost of investments for federal tax purposes amounts to $419,312,341. The
net unrealized depreciation of investments on a federal tax basis amounts to
$683,277 which is comprised of $1,580,001 appreciation and $2,263,278
depreciation at February 28, 1999.
Note: The categories of investments are shown as a percentage of net assets
($424,008,516) at February 28, 1999.
The following acronyms are used throughout this portfolio:
>
ARM -ADJUSTABLE RATE MORTGAGE
PC -PARTICIPATION CERTIFICATION
REMIC -REAL ESTATE MORTGAGE INVESTMENT CONDUIT
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and
tax cost $419,312,341) $ 418,629,064
Cash 518
Income receivable 6,458,947
Receivable for investments sold 861,179
TOTAL ASSETS 425,949,708
LIABILITIES:
Income distribution payable $ 1,910,775
Accrued expenses 30,417
TOTAL LIABILITIES 1,941,192
Net Assets for 44,117,594 shares outstanding $ 424,008,516
NET ASSETS CONSIST OF:
Paid in capital $ 504,892,495
Net unrealized depreciation of investments (683,277)
Accumulated net realized loss on investments (80,200,702)
TOTAL NET ASSETS $ 424,008,516
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER
SHARE
INSTITUTIONAL SHARES:
$388,514,443 / 40,424,506 shares outstanding $9.61
INSTITUTIONAL SERVICE SHARES:
$35,494,073 / 3,693,088 shares outstanding $9.61
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 13,322,806
EXPENSES:
Investment advisory fee $ 1,321,932
Administrative personnel and services fee 166,123
Custodian fees 29,580
Transfer and dividend disbursing agent fees and expenses 18,527
Directors'/Trustees' fees 8,697
Auditing fees 10,319
Legal fees 2,183
Portfolio accounting fees 60,434
Distribution services fee-Institutional Service Shares 48,043
Shareholder services fee-Institutional Shares 502,761
Shareholder services fee-Institutional Service Shares 48,043
Share registration costs 14,171
Printing and postage 9,117
Insurance premiums 2,948
Miscellaneous 5,694
TOTAL EXPENSES 2,248,572
Waivers-
Waiver of investment advisory fee $ (428,260)
Waiver of distribution services fee-Institutional Service
Shares (47,466)
Waiver of shareholder services fee-Institutional Shares (502,761)
Waiver of shareholder services fee-Institutional Service
Shares (577)
TOTAL WAIVERS (979,064)
Net expenses 1,269,508
Net investment income 12,053,298
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (534,894)
Net change in unrealized depreciation of investments (2,201,988)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (2,736,882)
Change in net assets resulting from operations $ 9,316,416
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(unaudited) YEAR ENDED
FEBRUARY 28, AUGUST 31,
1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 12,053,298 $ 31,752,906
Net realized gain (loss) on investments ($(495,034) and
$1,245,992, respectively, as computed for federal tax
purposes) (495,034) 1,245,992
Net change in unrealized depreciation (2,201,988) (5,409,340)
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 9,356,276 27,589,558
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
Institutional Shares (11,049,626) (26,468,625)
Institutional Service Shares (1,003,672) (5,231,032)
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS
TO SHAREHOLDERS (12,053,298) (31,699,657)
SHARE TRANSACTIONS:
Proceeds from sale of shares 9,836,823 85,623,659
Net asset value of shares issued to shareholders in payment
of distributions declared 2,697,628 9,463,263
Cost of shares redeemed (55,502,005) (206,845,928)
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS (42,967,554) (111,759,006)
Change in net assets (45,664,576) (115,869,105)
NET ASSETS:
Beginning of period 469,673,092 585,542,197
End of period (including undistributed net investment income
of
$49,788 for the year ended August 31, 1998) $ 424,008,516 $ 469,673,092
</TABLE>
See Notes which are an integral part of the Financial Statements
Financial Highlights - Institutional Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(unaudited)
FEBRUARY 28, YEAR ENDED AUGUST 31,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.26 0.56 0.59 0.58 0.56 0.45
Net realized and unrealized gain (loss)
on investments (0.06) (0.07) 0.10 (0.01) 0.02 (0.35)
TOTAL FROM INVESTMENT OPERATIONS 0.20 0.49 0.69 0.57 0.58 0.10
LESS DISTRIBUTIONS:
Distributions from net investment income (0.26) (0.56) (0.59) (0.58) (0.56) (0.45)
NET ASSET VALUE, END OF PERIOD $ 9.61 $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63
TOTAL RETURN 1 2.11% 5.13% 7.31% 6.02% 6.21% 0.99%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.55% 2 0.55% 0.55% 0.55% 0.55% 0.55%
Net investment income 5.49% 2 5.77% 6.03% 5.94% 5.74% 4.51%
Expense waiver/reimbursement 3 0.44% 2 0.44% 0.44% 0.44% 0.43% 0.14%
SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $388,514 $420,988 $498,220 $653,313 $856,500 $1,238,813
Portfolio turnover 31% 56% 84% 134% 124% 65%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 Computed on an annualized basis.
3 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
Financial Highlights - Institutional Service Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(unaudited)
FEBRUARY 28, YEAR ENDED AUGUST 31,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.25 0.53 0.56 0.55 0.54 0.42
Net realized and unrealized gain (loss)
on investments (0.06) (0.07) 0.10 (0.01) 0.02 (0.35)
TOTAL FROM INVESTMENT OPERATIONS 0.19 0.46 0.66 0.54 0.56 0.07
LESS DISTRIBUTIONS:
Distributions from net investment income (0.25) (0.53) (0.56) (0.55) (0.54) (0.42)
NET ASSET VALUE, END OF PERIOD $ 9.61 $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63
TOTAL RETURN 1 1.98% 4.87% 7.05% 5.75% 5.94% 0.74%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.80% 2 0.80% 0.80% 0.80% 0.80% 0.80%
Net investment income 5.24% 2 5.55% 5.78% 5.69% 5.44% 4.26%
Expense waiver/reimbursement 3 0.44% 2 0.44% 0.44% 0.44% 0.43% 0.23%
SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $35,494 $48,685 $87,322 $109,536 $135,689 $255,891
Portfolio turnover 31% 56% 84% 134% 124% 65%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 Computed on an annualized basis.
3 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
Notes to Financial Statements
FEBRUARY 28, 1999 (UNAUDITED)
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 Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary. 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, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $79,755,305, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2002 $13,884,955
2003 57,180,753
2004 8,689,597
</TABLE>
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.
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>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998
INSTITUTIONAL SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 758,669 $ 7,287,987 3,030,823 $ 29,442,519
Shares issued to shareholders in payment of distributions
declared 245,261 2,357,822 658,748 6,398,162
Shares redeemed (4,127,096) (39,669,023) (11,287,079) (109,644,658)
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS (3,123,166) $ (30,023,214) (7,597,508) $ (73,803,977)
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998
INSTITUTIONAL SERVICE SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 264,665 $ 2,548,836 5,771,167 $ 56,181,140
Shares issued to shareholders in payment of distributions
declared 35,318 339,806 315,591 3,065,101
Shares redeemed (1,643,179) (15,832,982) (10,014,646) (97,201,270)
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE
SHARE TRANSACTIONS (1,343,196) $ (12,944,340) (3,927,888) $ (37,955,029)
NET CHANGE RESULTING FROM SHARE TRANSACTIONS (4,466,362) $ (42,967,554) (11,525,396) $ (111,759,006)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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, Inc. 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 any 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 Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily
net assets of the Fund shares for the period. The fee paid to FSSC is used to
finance certain services for shareholders and to maintain shareholder accounts.
FSSC may voluntarily choose to waive any portion of its fee. FSSC 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, 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.
GENERAL
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
reporting period ended February 28, 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $ 136,001,615
Sales $ 177,615,519
</TABLE>
YEAR 2000
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
SUBSEQUENT EVENT
Effective March 31, 1999, Federated Management, Adviser to the Fund, merged
into Federated Investment Management Company (formerly Federated
Advisers).
Trustees
JOHN F. DONAHUE
THOMAS G. BIGLEY
JOHN T. CONROY, JR.
NICHOLAS P. CONSTANTAKIS
WILLIAM J. COPELAND
JOHN F. CUNNINGHAM
LAWRENCE D. ELLIS, M.D.
PETER E. MADDEN
JOHN E. MURRAY, JR., J.D., S.J.D.
MARJORIE P. SMUTS
Officers
JOHN F. DONAHUE
Chairman
GLEN R. JOHNSON
President
J. CHRISTOPHER DONAHUE
Executive Vice President
EDWARD C. GONZALES
Executive Vice President
JOHN W. MCGONIGLE
Executive Vice President, Treasurer, and Secretary
RICHARD B. FISHER
Vice President
RICHARD J. THOMAS
Treasurer
NICHOLAS J. SEITANAKIS
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.
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Federated
World-Class Investment Manager
SEMI-ANNUAL REPORT
Federated ARMs Fund
SEMI-ANNUAL REPORT TO SHAREHOLDERS
FEBRUARY 28, 1999
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Federated
Federated ARMs Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 314082108
Cusip 314082207
8040404 (4/99)
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