-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LbCwkh8ZvAt5lcU0D/9r71qaH45q0GjFaWDpHsCIeqRRYj+fs9yD9hpo8wz0zdzg QfxeYjts2Gkxo2Ej9hrugQ== 0001056288-02-000122.txt : 20020414 0001056288-02-000122.hdr.sgml : 20020414 ACCESSION NUMBER: 0001056288-02-000122 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED CORE TRUST/PA CENTRAL INDEX KEY: 0001034106 IRS NUMBER: 232934777 STATE OF INCORPORATION: MA FISCAL YEAR END: 1212 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-08519 FILM NUMBER: 02559421 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWER CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 BUSINESS PHONE: 8003417400 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TOWER CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 N-30D 1 form.txt The following is the Annual Report for Federated Mortgage Core Portfolio, a portfolio of Federated Core Trust, covering the period from December 31, 2000 to December 21, 2001. If you have any questions or comments, please contact your investment representative. FEDERATED MORTGAGE CORE PORTFOLIO FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout Each Period) Period Ended December 31, Year Ended December --------- 31, 19991 2001 2000 Net Asset Value, Beginning of Period $9.89 $9.55 $10.00 Income From Investment Operations: Net investment income 0.66 0.68 0.55 Net realized and unrealized gain (loss) on investments 0.15 0.34 (0.45 ) Total from investment operations 0.81 1.02 0.10 Less Distributions: Distributions from net investment income (0.66 ) (0.68 ) (0.55 ) Net Asset Value, End of Period $10.04 $9.89 $9.55 Total Return2 8.37 % 11.15 % 1.07 % Ratios to Average Net Assets: Expenses 0.04 % 0.05 % 0.05 %3 Net investment income 6.56 % 7.09 % 6.66 %3 Expense waiver/reimbursement4 0.08 % 0.08 % 0.08 %3 Supplemental Data: Net assets, end of period (000 omitted) $453,784 $371,659 $258,304 Portfolio turnover 93 % 81 % 153 % 1 Reflects operations for the period from February 22, 1999 (date of initial public investment) to December 31, 1999. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 This voluntary expense decrease is reflected in both the expense and the net investment income ratios shown above. See Notes which are an integral part of the Financial Statements Federated Mortgage Core Portfolio Notes to Financial Statements December 31, 2001 - ----------------------------------------------------------------------------- Organization Federated Core Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act"), as an open-end management investment company. The Trust consists of two diversified portfolios, the Federated Mortgage Core Portfolio (the "Fund") and the High Yield Bond Portfolio. The financial statements included herein are only for the Fund. The financial statements of the other portfolio are presented separately. The Fund's investment objective is to provide total return by investing in U.S. Treasury Bills, Notes, Bonds, Discount Notes and Mortgage Backed Securities issued or guaranteed by the U.S. government. The Fund is an investment vehicle used by other Federated Funds that invest some portion of their assets in mortgage backed securities. Currently, the Fund is only available for purchase by other Federated Funds and their affiliates. 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 Valuation Listed corporate bonds, other fixed income and asset-backed securities, and unlisted securities and private placement 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 60 days or less at the time of purchase may be valued at amortized cost, which approximates fair market value. Investments in other open-end regulated investment companies are valued at net asset value. Securities for which no quotations are readily available are valued at fair value as determined in good faith using methods approved by the Board of Trustees (the "Trustees"). 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. 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 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. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements. Investment Income, Expenses and Distributions Interest income and expenses are accrued daily. Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for book and tax entries. The following reclassifications have been made to the financial statements. ----------------------------------------------------------------------- --------------------------------- Accumulated Net Realized Gain (Loss) Paid In Capital ----------------------------------------------------------------------- ----------------------------------------------------------------------- $(31,222) $31,222 ----------------------------------------------------------------------- Net investment income, net realized gains (losses), and net assets were not affected by this reclassification. The tax composition of dividends was as follows: Ordinary income $26,888,712 Long-term capital gains --- As of December 31, 2001, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income $54,355 Undistributed long-term gains --- Unrealized appreciation $6,935,001 At year end, there were no significant differences between the book basis and tax basis of components of net assets, other than differences in the net unrealized appreciation (depreciation) in value of investments attributable to the tax deferral of losses on wash sales. Federal Taxes It is the Fund's policy to comply with the provisions of the Internal Revenue Code, as amended (the "Code") applicable to regulated investment companies and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal tax is necessary. At December 31, 2001, the Fund for federal tax purposes, had a capital loss carryforward of $72,744, which will reduce 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 distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal tax. Pursuant to the Code, such capital loss carryforward will expire in 2008. 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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract. Dollar Roll Transactions The Fund may engage in dollar roll transactions, with respect to mortgage securities issued by GNMA, FNMA, and FHLMC, in which the Fund sells the 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 involve "to be announced" securities and are treated as 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 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 a trade date basis. Shares of Beneficial Interest The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in shares were as follows: - ------------------------------------------------------------------------------- Year Ended December 31, 2001 2000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Shares sold 14,765,272 16,787,336 - ---------------------------------------- - ---------------------------------------- Shares issued to shareholders in 2,677,775 2,320,094 payment of distributions declared - ---------------------------------------- - ---------------------------------------- Shares redeemed (9,802,507) (8,577,136) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NET CHANGE RESULTING FROM SHARE 7,640,540 10,530,294 TRANSACTIONS - ------------------------------------------------------------------------------- Investment Adviser Fee and Other Transactions with Affiliates Investment Adviser Fee Federated Investment Management Co., is the Fund's investment adviser (the "Adviser") subject to direction of the Trustees. The Adviser provides investment adviser services at no fee. Administrative Fee Federated Services Company ("FServ"), a subsidiary of Federated Investors, Inc., provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. FServ provides these services at an annual rate that ranges from 0.150% to 0.075% of the average aggregate daily net assets of all funds advised by affiliates of Federated Investors, Inc. Fserv may voluntarily choose to waive any portion of its fee. Fserv may terminate this voluntary waiver at anytime at its 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. General Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. Investment Transactions Purchases and sales of investments in long-term U.S. government securities, for the year ended December 31, 2001, were as follows: - ------------------------------------------------------------------------------ Purchases $456,381,904 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Sales $383,505,712 - ------------------------------------------------------------------------------ FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the year ended December 31, 2001, the Fund did not designate any long-term capital gain dividends. FEDERATED MORTGAGE CORE PORTFOLIO PORTFOLIO OF INVESTMENTS December 31, 2001 Principal Value Amount Mortgage Backed Securities--98.7% Federal Home Loan Mortgage Corporation--21.1% $ 9,781,485(1)6.000%, 5/1/2014 - 2/1/2032 $ 9,662,701 37,847,956(1)6.500%, 7/1/2014 - 2/1/2032 38,123,143 13,918,134 7.000%, 12/1/2011 - 10/1/2031 14,199,505 21,504,784 7.500%, 12/1/2022 - 7/1/2031 22,215,275 10,531,922 8.000%, 5/1/2006 - 3/1/2031 11,026,829 144,385 8.500%, 9/1/2025 - 1/1/2026 154,030 216,391 9.000%, 5/1/2017 236,001 28,186 9.500%, 4/1/2021 31,163 Total 95,648,647 Federal National Mortgage Association--56.6% 6,934,033(1)5.500%, 4/1/2016 - 2/1/2032 6,736,381 67,152,456(1)6.000%, 7/1/2006 - 2/1/2032 66,649,869 93,114,298(1)6.500%, 5/1/2006 - 2/1/2032 93,479,002 64,300,441 7.000%, 2/1/2008 - 12/1/2031 65,711,556 18,113,824(1)7.500%, 6/1/2011 - 2/1/2032 18,767,536 5,116,199 8.000%, 7/1/2023 - 3/1/2031 5,376,193 66,000 8.500%, 3/1/2030 70,001 248,210 9.000%, 11/1/2021 - 6/1/2025 269,347 Total 257,059,885 Government National Mortgage Association--21.0% 8,432,803 6.000%, 10/15/2028 - 12/15/2031 8,272,919 27,748,471 6.500%, 10/15/2028 - 12/15/2031 27,841,366 20,223,171 7.000%, 11/15/2027 - 6/15/2031 20,666,740 17,589,801 7.500%, 6/20/2007 - 1/15/2031 18,196,415 12,157,767 8.000%, 2/15/2010 - 11/15/2030 12,739,575 5,376,191 8.500%, 11/15/2021 - 11/15/2030 5,700,835 145,100 9.000%, 10/15/2016 - 6/15/2025 155,683 141,310 9.500%, 10/15/2020 - 12/15/2025 153,798 1,222,215 12.000%, 4/15/2015 - 6/15/2015 1,409,391 Total 95,136,722 Total Mortgage Backed Securities (identified 47,845,254 cost $440,872,753) 4 Repurchase Agreements (2)--19.9% 9,800,000(3) (4) Goldman Sachs & Co., 1.750%, dated 12/11/2001, due 1/14/2002 9,800,000 14,400,000(3) (4) Goldman Sachs & Co., 1.800%, dated 4,400,000 11/30/2001, due 1/14/2002 1 13,787,000(3) (4) Goldman Sachs & Co., 1.820%, dated 3,787,000 12/6/2001, due 1/14/2002 1 16,463,000(3) (4) Goldman Sachs & Co., 2.000%, dated 6,463,000 11/26/2001, due 1/14/2002 1 25,255,000(3) (4) Morgan Stanley and Co., Inc., 1.850%, dated 5,255,000 11/28/2001, due 1/14/2002 2 10,615,000 Salomon Brothers, Inc., 1.820%, dated 12/31/2001, 0,615,000 due 1/2/2002 1 Total Repurchase Agreements (at amortized cost) 90,320,000 Total Investments (identified cost $531,192,753)(4) $538,165,254 =============================================================================== (1) All or a portion of these securities may be subject to dollar roll transactions. (2) The repurchase agreements are fully collateralized by U.S government and/or agency obligations based on market prices at the date of the portfolio. The investments in the repurchase agreements are through participation in joint accounts with other Federated funds. (3) Although final maturity falls beyond seven days, a liquidity feature is included in each transaction to permit termination of the repurchase agreement within seven days if the creditworthiness of the issuer is downgraded. (4) Security held as collateral for dollar roll transactions. (5) The cost of investments for federal tax purposes amounts to $531,230,253. The net unrealized appreciation of investments on a federal tax basis amounts to $6,935,001 which is comprised of $8,117,629 appreciation and $1,182,628 depreciation at December 31, 2001. Note: The categories of investments are shown as a percentage of net assets ($453,783,780) at December 31, 2001. See Notes which are an integral part of the Financial Statements FEDERATED MORTGAGE CORE PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 2001 Assets: Investments in repurchase agreements $ 90,320,000 Investments in securities $ 447,845,254 Total investments in securities, at value (identified cost $531,192,753) 538,165,254 Cash 4,582 Income receivable 2,131,346 Total assets 540,301,182 Liabilities: Payable for investments purchased $ 6,064,948 Payable for shares redeemed 740,000 Payable for dollar roll transactions 79,687,176 Accrued expenses 25,278 Total liabilities $ 86,517,402 Net assets for 45,212,193 shares outstanding 453,783,780 Net Assets Consist of: Paid in capital $ 446,867,166 Net unrealized appreciation of investments 6,972,501 Accumulated net realized loss on investments (110,242 ) Undistributed net investment income 54,355 Total Net Assets $ 453,783,780 Net Asset Value, Offering Price and Redemption Proceeds Per Share $453,783,780 / 45,212,193 shares outstanding $10.04 - ------------------------------------------------------------------------------- See Notes which are an integral part of the Financial Statements FEDERATED MORTGAGE CORE PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS Year Ended December 31, 2001 2000 Increase (Decrease) in Net Assets Operations: Net investment income $ 26,941,129 $ 22,239,543 Net realized gain (loss) on investments 6,414,834 (2,278,819 ) Net change in unrealized appreciation/depreciation (1,039,982 ) 14,436,707 Change in net assets resulting from operations 32,315,981 34,397,431 Distributions to Shareholders: Distributions from net investment income (26,888,712 ) (22,280,312 ) Share Transactions: Proceeds from sale of shares 147,962,500 161,233,755 Net asset value of shares issued to shareholders in payment of distributions declared 26,888,712 22,277,653 Cost of shares redeemed (98,153,700 ) (82,273,527 ) Change in net assets resulting from share transactions 76,697,512 101,237,881 Change in net assets 82,124,781 113,355,000 Net Assets: Beginning of period 371,658,999 258,303,999 End of period (including undistributed net investment income of $54,355 and $1,938, respectively) 453,783,780 371,658,999 =============================================================================== See Notes which are an integral part of the Financial Statements FEDERATED MORTGAGE CORE PORTFOLIO STATEMENT OF OPERATIONS Year Ended December 31, 2001 Investment Income: Interest (net of dollar roll $ expense of $2,888,314) 27,113,002 Expenses: Administrative personnel and $ services fee 308,966 Custodian fees 31,042 Transfer and dividend disbursing agent fees and expenses 13,318 Directors'/Trustees' fees 8,494 Auditing fees 14,268 Legal fees 3,507 Portfolio accounting fees 97,327 Insurance premiums 1,736 Miscellaneous 2,181 Total expenseS 480,839 Waiver of administrative $ personnel and service fee (308,966) Net Expenses 171,873 Net investment income 26,941,129 Realized and Unrealized Gain (Loss) on Investments: Net realized gain on investments 6,414,834 Net change in unrealized appreciation of investments (1,039,982 ) Net realized and unrealized gain on investments 5,374,852 Change in net assets $ resulting from operations 32,315,981 See Notes which are an integral part of the Financial Statements ============================================================================= REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Trustees of Federated Core Trust and Shareholders of Federated Mortgage Core Portfolio: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Federated Mortgage Core Portfolio (the "Fund") (one of the portfolios constituting the Federated Core Trust) as of December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, the statement of cash flows for the year then ended and the financial highlights for each of 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 auditing standards generally accepted in the United States. 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 December 31, 2001, by correspondence with the custodian and brokers 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 Mortgage Core Portfolio of Federated Core Trust at December 31, 2001, 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, its cash flows for the year then ended and the financial highlights for each of the periods presented therein, in conformity with accounting principles generally accepted in the United States. [GRAPHIC OMITTED] Boston, Massachusetts February 8, 2002 Federated Mortgage Core Portfolio Statement of Cash Flows For the Year Ended December 31, 2001 Increase (Decrease) in Cash - ------------------------------------------------------------- Cash Flows From Operating Activities: Net increase in net assets from $32,315,981 operations Purchases of investment securities (1,391,033,838) Paydown on investments 70,577,561 Realized gain on paydowns (295,900) Proceeds from sale of investments 1,247,580,433 Net increase of short term investments (46,690,000) Increase in interest and fees (110,984) receivable Decrease in payable for accrued (3,769) expenses Increase in payable for investments 3,644,395 purchased Net realized gain on investments (6,414,780) Net amortization/accretion of (82,897) premium/discount Net unrealized appreciation on 1,039,981 investments ---------------------- Net increase from operating (89,473,817) activities: Cash Flows From Financing Activities: Cash received from dollar roll 38,929,551 transactions, net Increase in payable for fund shares 740,000 repurchased Decrease in receivable for fund 48 shares sold Proceeds from shares sold 147,962,500 Payment of shares redeemed (98,153,700) ---------------------- ---------------------- Net increase provided from financing 89,478,399 activities ---------------------- Net Increase in Cash 4,582 Cash: Beginning of the period 0 ---------------------- ---------------------- End of the period $4,582 ---------------------- The following is the Annual Report for High Yield Bond Portfolio, a portfolio of Federated Core Trust, covering the period from December 31, 2000 to December 31, 2001. If you have any questions or comments, please contact your investment representative. HIGH YIELD BOND PORTFOLIO FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout Each Period) Year Ended December 31, 2001 2000 1999 1998 1 Net Asset Value, Beginning of Period $7.14 $8.72 $9.30 $10.00 Income From Investment Operations: Net investment income 0.77 2 0.91 0.91 0.84 Net realized and unrealized loss on ) investments (0.61 2 (1.57 ) (0.56 ) (0.65 ) Total from investment operations 0.16 (0.66 ) 0.35 0.19 Less Distributions: Distributions from net investment income (0.79 ) (0.92 ) (0.91 ) (0.84 ) Distributions from net realized gain on investments --- --- (0.02 ) (0.05 ) TOTAL DISTRIBUTIONS (0.79 ) (0.92 ) (0.93 ) (0.89 ) Net Asset Value, End of Period $6.51 $7.14 $8.72 $9.30 Total Return2 2.16 % (8.04 )% 3.83 % 1.96 % Ratios to Average Net Assets: Expenses 0.04 % 0.04 % 0.03 % 0.04 %4 Net investment income 11.13 %2 11.38 % 10.07 % 9.60 %4 Expense waiver/reimbursement3 0.08 % 0.08 % 0.08 % 0.08 %4 Supplemental Data: Net assets, end of period (000 omitted) $665,747 $532,820 $699,088 $561,806 Portfolio turnover 33 % 16 % 49 % 55 % - ----------------------------------------------------------------------- - ------------------------------------------------------------------------ 1 Reflects operations for the period from February 2, 1998 (date of initial public investment) to December 31, 1998. 2 As required effective April 1, 2001, the Fund adopted the provisions of the American Institute of Certified Public Accountants ("AICPA") Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. For the year ended December 31, 2001, this change had no effect on the net investment income per share or net realized loss per share, but increased the ratio of net investment income to average net assets from 10.98% to 11.13%. Per share, ratios and supplemental data for the periods prior to December 31, 2001, have not been restated to reflect this change in presentation. 3 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 4 This voluntary expense decrease is reflected in both the expense and the net investment income ratios shown above. 5 Computed on an annualized basis. See Notes which are an integral part of the Financial Statements High Yield Bond Portfolio Notes to Financial Statements December 31, 2001 - ------------------------------------------------------------------------ Organization Federated Core Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Trust consists of two diversified portfolios, the High Yield Bond Portfolio (the "Fund") and the Federated Mortgage Core Portfolio. The financial statements included herein are only those of the Fund. The financial statements of the other portfolio are presented separately. The Fund's investment objective is to seek high current income by investing primarily in a professionally managed, diversified portfolio of fixed income securities. The Fund's portfolio of investments consists primarily of lower rated corporate debt obligations. These lower rated debt obligations may be more susceptible to real or perceived adverse economic conditions than investment grade bonds. These lower rated debt obligations are regarded as predominantly speculative with respect to each issuer's continuing ability to make interest and principal payments (i.e., the obligations are subject to the risk of default). Currently, the Fund is only available for purchase by other Federated Funds and their affiliates. 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 Valuation Listed corporate bonds, other fixed income and asset-backed securities, and unlisted securities and private placement 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 60 days or less at the time of purchase may be valued at amortized cost, which approximates fair market value. Investments in other open-ended regulated investment companies are valued at net asset value. Securities for which no quotations are readily available are valued at fair value as determined in good faith using methods approved by the Board of Trustees (the "Trustees"). 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. 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 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. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements. Investment Income, Expenses and Distributions Interest income and expenses are accrued daily. Bond premium and discount are amortized/accreted for financial reporting purposes (see "Change in Accounting Principle" note) Dividend income and distributions to shareholders are recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at fair value. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for amortization of discount and book and tax differences. The following reclassifications have been made to the financial statements. Increase (Decrease) ----------------------------------------------------------- ---------------- Accumulated Net Undistributed Net Realized Gain (Loss) Investment Income Paid-In Capital $395,781 $515,972 $(911,753) - ----------------------------------------------------------------------------- Net investment income, net realized gains (losses), and net assets were not affected by this reclassification. The tax composition of dividends was as follows: Ordinary income $69,097,451 Long-term capital gains --- As of December 31, 2001, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income --- Undistributed long-term gains --- Unrealized depreciation $141,455,478 At year end, there were no significant differences between the book basis and tax basis of components of net assets, other than differences in the net unrealized appreciation (depreciation) in value of investments attributable to the tax deferral of losses on wash sales and the tax treatment for amortization of discount. Change in Accounting Principle Effective January 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing long-term discounts and premiums on debt securities. Prior to January 1, 2001, the Fund did not amortize long-term premiums or discounts on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in a $145,613 increase in cost of securities and a corresponding $145,613 increase in net unrealized depreciation, and an increase to undistributed net investment income of $145,613 based on securities held by the Fund at January 1, 2001. The effect of this change for the year ended December 31, 2001 was to increase net investment income by $947,762, increase net realized losses by $14,792 and increase net unrealized depreciation by $932,970. The Statement of Changes in Net Assets and Financial Highlights for prior periods have not been restated to reflect this change in presentation. Federal Taxes It is the Fund's policy to comply with the provisions of the Internal Revenue Code, as amended (the "Code") applicable to regulated investment companies and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal tax is necessary. At December 31, 2001, the Fund, for federal tax purposes, had a capital loss carryforward of $77,193,341, 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 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 2007 $1,148,442 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 2008 $14,429,102 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 2009 $61,615,797 - ------------------------------------------------------------------------- Additionally, the Fund's net capital losses of $16,038,847 attributable to security transactions incurred after October 31, 2001, were treated as arising on January 1, 2002, the first day of the Fund's next taxable year. When-Issued and Delayed Delivery Transactions The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract. Restricted Securities Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. In some cases, the issuer of restricted securities has agreed to register such securities for resale, at the issuer's expense either upon demand by the Fund or in connection with another registered offering of the securities. Many restricted securities may be resold in the secondary market in transactions exempt from registration. Such restricted securities may be determined to be liquid under criteria established by the Trustees. The Fund will not incur any registration costs upon such resales. The Fund's restricted securities are valued at the price provided by dealers in the secondary market or, if no market prices are available, at the fair value as determined in good faith using methods approved by the Trustees. Additional information on each restricted security held at December 31, 2001 is as follows: Security Acquisition Date Acquisition Cost - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- AEI Holding Co., Inc. 12/14/1998-3/10/1999 $3,173,493 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- AEI Resources, Inc. 12/7/1998 3,300,000 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- AmeriTruck Distribution 11/10/1995-10/22/1997 1,054,078 Corp. - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- AMF Group, Inc. 3/7/1996-4/6/1999 2,530,755 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Clark Material Handling 11/22/1996-11/12/1997 1,843,830 Corp. - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Condor Systems Inc. 4/8/1999 500,000 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Dyersburg Corp. 11/3/1997-9/15/1997 683,438 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Electronic Retailing Systems International Inc. 6/17/1997 26,018 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Glenoit Corp. 3/26/1997-5/20/1998 1,676,091 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Pillowtex Corp. 11/6/1996-7/8/1999 4,155,788 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Royal Oak Mines, Inc. 2/24/1999 6,392 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Russell Stanley Holdings, 11/9/2001 2,828,568 Inc. - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- The Holt Group, Inc. 1/14/1998-3/13/1998 1,067,313 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- U.S. Office Products Co. 6/5/1998-10/27/1999 4,414,855 - ------------------------------------------------------------------------- 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 a trade date basis. Shares of Beneficial Interest The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in shares were as follows: Year Ended December 31, 2001 2000 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Shares sold 42,102,998 9,883,085 - ------------------------------ - ------------------------------ Shares issued to shareholders in payment of 10,027,844 8,845,388 distributions declared - ------------------------------ - ------------------------------ Shares redeemed (24,522,124) (24,290,098) - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- NET CHANGE RESULTING FROM SHARE 27,608,718 (5,561,625) TRANSACTIONS - ------------------------------------------------------------------------- Investment Adviser Fee and Other Transactions with Affiliates Investment Adviser Fee Federated Investment Management Co., is the Fund's investment adviser (the "Adviser") subject to direction of the Trustees. The Adviser provides investment adviser services at no fee. Administrative Fee Federated Services Company ("FServ"), a subsidiary of Federated Investors, Inc., provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Fserv provides these services at an annual rate that ranges from 0.150% to 0.075% of the average aggregate net assets of all funds advised by affiliates of Federated Investors, Inc. Fserv may voluntarily choose to waive any portion of its fee. Fserv may 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. General Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. Investment Transactions Purchases and sales of investments, excluding short-term securities (and in-kind contributions), for the period year December 31, 2001, were as follows: - ------------------------------------------------------------------------- Purchases $326,889,236 - ------------------------------------------------------------------------- Sales $181,158,795 - ------------------------------------------------------------------------- FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the year ended December 31, 2001, the Fund did not designate any long-term capital gain dividends. HIGH YIELD BOND PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 2001 Assets: Total investments in securities, at value $ (identified cost of $794,751,672) 652,221,941 Income receivable 13,711,743 Receivable for investments sold 283,586 Total assets 666,217,270 Liabilities: Payable to bank 283,313 Payable for shares redeemed 140,000 Accrued expenses 47,396 Total liabilities 470,709 Net assets for 102,230,567 shares outstanding 665,746,561 Net Assets Consist of: Paid in capital 902,793,366 Net unrealized depreciation of investments (142,529,731 ) Accumulated net realized loss on investments (92,011,453 ) Distributions in excess of net investment income (2,505,621 ) Total Net Assets 665,746,561 Net Asset Value, Offering Price and Redemption Proceeds Per Share: $665,746,561 / 102,230,567 shares outstanding $6.51 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ See Notes which are an integral part of the Financial Statements HIGH YIELD BOND PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS Year Ended December 31, 2001 2000 Increase (Decrease) in Net Assets Operations: Net investment income 67,831,727 69,303,077 Net realized loss on investments (71,740,382 ) (18,237,378 ) Net change in unrealized depreciation 14,173,897 (100,796,413 ) Change in net assets resulting from operations 10,265,242 (49,730,714 ) Distributions to Shareholders: Distributions from net investment income (69,279,073 ) (69,910,231 ) Share Transactions: Proceeds from sale of shares 291,362,313 76,533,597 Net asset value of shares issued to shareholders in payment of distributions declared 69,259,001 69,894,492 Cost of shares redeemed (168,681,080 ) (193,055,136 ) Change in net assets resulting from share ===================================== transactions 191,940,234 (46,627,047 ) CHANGE IN NET ASSETS 132,926,403 (166,267,992 ) Net Assets: Beginning of period 532,820,158 699,088,150 End of period 665,746,561 532,820,158 ============================================================================== See Notes which are an integral part of the Financial Statements HIGH YIELD BOND PORTFOLIO STATEMENT OF OPERATIONS Year Ended December 31, 2001 Investment Income: Dividends 1,489,136 Interest 66,574,085 Total income 68,063,221 Expenses: Administrative personnel and services fee 458,419 Custodian fees 50,310 Transfer and dividend disbursing agent fees and expenses 19,011 Directors'/Trustees' fees 10,948 Auditing fees 12,368 Legal fees 9,644 Portfolio accounting fees 110,874 Share registration costs 609 Printing and postage 673 Insurance premiums 6,092 Miscellaneous 10,965 Total expenseS 689,913 Waiver of administrative personnel and service fee (458,419) Net Expenses 231,494 Net investment income 67,831,727 Realized and Unrealized Gain (Loss) on Investments: Net realized loss on investments (71,740,382 ) Net change in unrealized depreciation of investments 14,173,897 Net realized and unrealized loss on investments (57,566,485 ) Change in net assets resulting from operations 10,265,242 See Notes which are an integral part of the Financial Statements - ------------------------------------------------------------------------------- REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Trustees of Federated Core Trust and Shareholders of High Yield Bond Portfolio: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of High Yield Bond Portfolio (the "Fund") (one of the portfolios constituting the Federated Core Trust) as of December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of 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 auditing standards generally accepted in the United States. 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 and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers 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 High Yield Bond Portfolio of Federated Core Trust at December 31, 2001, 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 each of the periods presented therein, in conformity with accounting principles generally accepted in the United States. [GRAPHIC OMITTED] Boston, Massachusetts February 8, 2002 -----END PRIVACY-ENHANCED MESSAGE-----