N-30D 1 fctform.txt FEDERATED MORTGAGE CORE PORTFOLIO PORTFOLIO OF INVESTMENTS December 31, 2002 Principal Amount Value Mortgage Backed Securities--99.4% Federal Home Loan Mortgage Corporation--11.6% $12,177,075 6.000%, 5/1/2014 - 8/1/2032 $12,625,213 30,690,992 6.500%, 7/1/2014 - 9/1/2032 32,083,898 9,164,621 7.000%, 12/1/2011 - 4/1/2032 9,640,916 8,441,898 7.500%, 12/1/2022 - 7/1/2031 8,981,602 5,822,514 8.000%, 5/1/2006 - 3/1/2031 6,249,514 105,858 8.500%, 9/1/2025 - 1/1/2026 114,929 189,674 9.000%, 5/1/2017 209,294 15,968 9.500%, 4/1/2021 17,709 Total 69,923,075 Federal National Mortgage Association--75.3% 37,000,000(1)5.000%, 2/1/2017 37,867,280 50,704,473(1)5.500%, 1/1/2009 - 10/1/2032 51,985,706 130,921,50(1)6.000%, 7/1/2006 - 12/1/2032 135,840,455 137,076,03(1)6.500%, 5/1/2006 - 11/1/2032 142,868,893 63,075,075(1)7.000%, 2/1/2008 - 11/1/2032 66,395,900 13,063,118 7.500%, 6/1/2011 - 1/1/2032 13,896,175 3,135,929 8.000%, 7/1/2023 - 3/1/2031 3,387,611 31,746 8.500%, 3/1/2030 34,306 144,045 9.000%, 11/1/2021 - 6/1/2025 157,919 Total 452,434,245 Government National Mortgage Association--12.5% 7,310,064 6.000%, 10/15/2028 - 12/15/2031 7,622,905 24,519,583 6.500%, 10/15/2028 - 7/15/2032 25,753,582 17,891,316 7.000%, 11/15/2027 - 1/15/2032 18,979,683 10,127,567 7.500%, 6/20/2007 - 1/15/2031 10,815,037 7,207,648 8.000%, 2/15/2010 - 11/15/2030 7,790,420 2,903,811 8.500%, 11/15/2021 - 11/15/2030 3,157,479 97,350 9.000%, 10/15/2016 - 6/15/2025 107,501 73,479 9.500%, 10/15/2020 - 2/15/2025 81,522 910,750 12.000%, 4/15/2015 - 6/15/2015 1,041,953 Total 75,350,082 Total Mortgage Backed Securities (identified 597,707,402 cost $578,400,352) Repurchase Agreements--34.0% 50,000,000 2,3 Interest in $50,000,000 joint repurchase agreement 50,000,000 with Credit Suisse First Boston Corp., 1.30% dated 12/17/2002, to be repurchased at $50,063,194 on 1/21/2003 collateralized by U.S. government agencies with various maturities to 2032 50,000,000 2,3 Interest in $50,000,000 joint repurchase agreement 50,000,000 with Goldman Sachs & Co., 1.30% dated 12/11/2002, to be repurchased at $50,061,389 on 1/14/2003 collateralized by U.S. government agencies with various maturities to 2036 68,000,000 2,3 Interest in $68,000.000 joint repurchase agreement 68,000,000 with Salomon Smith Barney, Inc., 1.30% dated 12/11/2002, to be repurchased at $68,083,489 on 1/14/2003 collateralized by U.S. government agencies with various maturities to 2032 36,646,000 Interest in $36,646,000 joint repurchase agreement 36,646,000 with UBS Warburg LLC, 1.30% dated 12/31/2002, to be repurchased at $36,648,647 on 1/2/2003 collateralized by U.S. government agencies with various maturities to 2032 Total Repurchase Agreements (AT AMORTIZED COST) 204,646,000 Total Investments (identified cost $783,046,352)4 $802,353,402 =========================================================================== 1 All or a portion of these securities may be subject to dollar roll transactions. 2 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. 3 Security held as collateral for dollar roll transactions. 4 The cost of investments for federal tax purposes amounts to $783,066,762. The net unrealized appreciation of investments on a federal tax basis amounts to $19,286,640 which is comprised of $19,335,711 appreciation and $49,071 depreciation at December 31, 2002. Note: The categories of investments are shown as a percentage of net assets ($601,217,305) at December 31, 2002. See Notes which are an integral part of the Financial Statements FEDERATED MORTGAGE CORE PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 2002
Assets: Investments in repurchase agreements $ 204,646,000 Investments in securities 597,707,402 Total investments in securities, at value (identified cost $783,046,352) $ 802,353,402 Cash 921 Income receivable 2,314,968 Total assets 804,669,291 Liabilities: Payable for investments purchased $ 47,801,071 Payable for shares redeemed 467,462 Payable for dollar roll transactions 155,140,779 Accrued expenses 42,674 Total liabilities 203,451,986 Net assets for 58,279,479 shares outstanding $ 601,217,305 Net Assets Consist of: Paid in capital $ 581,453,906 Net unrealized appreciation of investments 19,307,050 Accumulated net realized gain on investments 436,008 Undistributed net investment income 20,341 Total Net Assets $ 601,217,305 Net Asset Value, Offering Price and Redemption Proceeds Per Share $601,217,305 / 58,279,479 shares outstanding $10.32
=========================================================================== See Notes which are an integral part of the Financial Statements FEDERATED MORTGAGE CORE PORTFOLIO STATEMENT OF OPERATIONS Year Ended December 31, 2002 Investment Income: Interest (net of dollar roll expense of $2,226,267) $ 29,155,979 Expenses: Administrative personnel and services fee 362,609 Custodian fees 36,122 Transfer and dividend disbursing agent fees and expenses 27,232 Directors'/Trustees' fees 7,723 Auditing fees 16,455 Legal fees 4,461 Portfolio accounting fees 103,479 Insurance premiums 1,086 Miscellaneous 7,691 TOTAL EXPENSES 566,858 Waiver of administrative personnel and services fee (362,609) Net expenses 204,249 Net investment income 28,951,730 Realized and Unrealized Gain on Investments: Net realized gain on investments 1,775,463 Net change in unrealized appreciation of investments 12,334,549 Net realized and unrealized gain on investments 14,110,012 Change in net assets resulting from operations $ 43,061,742 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, 2002 2001 Increase (Decrease) in Net Assets Operations: Net investment income $ 28,951,730 $ 26,941,129 Net realized gain on investments 1,775,463 6,414,834 Net change in unrealized appreciation 12,334,549 (1,039,982) Change in net assets resulting from operations 43,061,742 32,315,981 Distributions to Shareholders: Distributions from net investment income (28,985,744) (26,888,712) Distributions from net realized gains (1,229,213) --- Change in net assets resulting from distributions to shareholders (30,214,957) (26,888,712) Share Transactions: Proceeds from sale of shares 229,200,412 147,962,500 Net asset value of shares issued to shareholders in payment of distributions declared 30,214,957 26,888,712 Cost of shares redeemed (124,828,629) (98,153,700) Change in net assets resulting from share transactions 134,586,740 76,697,512 Change in net assets 147,433,525 82,124,781 Net Assets: Beginning of period 453,783,780 371,658,999 End of period (including undistributed net investment income of $20,341 and $54,355, respectively) $ 601,217,305 $ 453,783,780 =========================================================================== See Notes which are an integral part of the Financial Statements FEDERATED MORTGAGE CORE PORTFOLIO STATEMENT OF CASH FLOWS For the Year Ended December 31, 2002 Increase (Decrease) in Cash ------------------------------------------------------------------------------- Cash Flows From Operating Activities: ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Change in net assets resulting from operations $43,061,742 =============================================================================== =============================================================================== Adjustments to reconcile change in net assets resulting from operations to net cash used in operating activities: ------------------------------------------------------------------------------- Purchases of investment securities (1,804,641,153) ------------------------------------------------------------------------------- Paydowns on investment securities 117,766,167 ------------------------------------------------------------------------------- Realized loss on paydowns 34,026 ------------------------------------------------------------------------------- Proceeds from sale of investment securities 1,551,088,824 ------------------------------------------------------------------------------- Net purchases of short-term investment securities (114,326,000) ------------------------------------------------------------------------------- Increase in income receivable (183,622) ------------------------------------------------------------------------------- Increase in payable for accrued expenses 17,396 ------------------------------------------------------------------------------- Increase in payable for investments purchased 41,736,123 ------------------------------------------------------------------------------- Net realized gain on investments (1,775,463) ------------------------------------------------------------------------------- Net unrealized appreciation on investments (12,334,549) ------------------------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (179,556,509) =============================================================================== Cash Flows from Financing Activities: ------------------------------------------------------------------------------- Cash received from dollar roll transactions, net 75,453,603 ------------------------------------------------------------------------------- Proceeds from sale of shares 229,200,412 ------------------------------------------------------------------------------- Payment for shares redeemed (125,101,167) ------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 179,552,848 =============================================================================== NET DECREASE IN CASH (3,661) =============================================================================== Cash: ------------------------------------------------------------------------------- Cash at beginning of the period 4,582 ------------------------------------------------------------------------------- Cash at end of the period 921 ------------------------------------------------------------------------------- See Notes which are an integral part of the Financial Statements. FEDERATED MORTGAGE CORE PORTFOLIO FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout Each Period) Year Ended December 31, Period Ended December 31, Year Ended December 31 1999 1 2002 2001 2000 Net Asset Value, Beginning of Period $10.04 $9.89 $9.55 $10.00 Income From Investment Operations: Net investment income 0.61 0.66 0.68 0.55 Net realized and unrealized gain (loss) on investments 0.31 0.15 0.34 (0.45) TOTAL FROM INVESTMENT OPERATIONS 0.92 0.81 1.02 0.10 Less Distributions: Distributions from net investment income (0.61) (0.66) (0.68) (0.55) Distributions from net realized gain on investments (0.03) --- --- --- TOTAL DISTRIBUTIONS (0.64) (0.66) (0.68) (0.55) Net Asset Value, End of Period $10.32 $10.04 $9.89 $9.55 Total Return2 9.43% 8.37% 11.15% 1.07% Ratios to Average Net Assets: Expenses 0.04% 0.04% 0.05% 0.05 %3 Net investment income 6.00% 6.56% 7.09% 6.66 %3 Expense waiver/reimbursement 4 0.08% 0.08% 0.08% 0.08 %3 Supplemental Data: Net assets, end of period (000 omitted) $601,217 $453,784 $371,659 $258,304 Portfolio turnover 84% 93% 81% 153% ------------------------------------------------------------------------------- 1 Reflects operations for the period from February 22, 1999 (date of initial 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, 2002 --------------------------------------------------------------------------- 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, Federated Mortgage Core Portfolio (the "Fund") and 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 ("GAAP"). 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. All discounts/premiums are accreted/amortized for financial reporting purposes as required. 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 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. The tax composition of dividends was as follows: --------------------------------------------------------------------------- Ordinary income $30,214,957 Long-term capital gains --- --------------------------------------------------------------------------- As of December 31, 2002, the components of distributable earnings on a tax basis were as follows: --------------------------------------------------------------------------- Undistributed ordinary income $484,655 Undistributed long-term capital gains --- Unrealized appreciation $19,286,640 --------------------------------------------------------------------------- At year ended, there were no significant differences between the GAAP basis and tax basis of components of net assets, other than differences in the net unrealized appreciation in value of investments attributable to the tax deferral of losses on wash sales. Additionally, the Fund's net capital losses of $7,898 attributable to security transactions incurred after October 31, 2002, were treated as arising on January 1, 2003, 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. 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 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 Fund's current yield and total return. ------------------------------------------------------------------------- Maximum amount outstanding during the period $172,850,152 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average amount outstanding during the period1 $107,549,800 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average shares outstanding during the period 47,350,048 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average debt per share outstanding during the period 2.27 ------------------------------------------------------------------------- 1. The average amount outstanding during the period was calculated by adding the borrowings at the end of the day and dividing the sum by the number of days in the year ended December 31, 2002. Use of Estimates The preparation of financial statements in conformity with GAAP 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, 2002 2001 ---------------------------------------------------------------------- Shares sold 22,436,674 14,765,272 ------------------------- Shares issued to shareholders in payment 2,958,829 2,677,775 of distributions declared ------------------------- Shares redeemed (12,328,217) (9,802,507) ---------------------------------------------------------------------- NET CHANGE RESULTING FROM 13,067,286 7,640,540 SHARE TRANSACTIONS ---------------------------------------------------------------------- Investment Adviser Fee and Other Transactions with Affiliates Investment Adviser Fee Federated Investment Management Company 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 any time at its own 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, 2002, were as follows: -------------------------------------------------------------------------- Purchases $ 542,822,533 -------------------------------------------------------------------------- Sales $ 407,034,562 -------------------------------------------------------------------------- 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 Federated Core Trust) as of December 31, 2002, and the related statements of operations and cash flows 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, 2002, 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, 2002, the results of its operations and its cash flows 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. ERNST & YOUNG LLP Boston, Massachusetts February 12, 2003 HIGH YIELD BOND PORTFOLIO PORTFOLIO OF INVESTMENTS December 31, 2002 Principal Value Amount Corporate Bonds--93.6% Aerospace & Defense--0.5% $ 2,100,000 Alliant Techsystems, Inc., Sr. Sub. Note, 8.50%, 5/15/2011 $ 2,278,500 1,537,000 Anteon Corp., Sr. Sub. Note, 12.00%, 5/15/2009 1,683,015 500,000 1,3 Condor Systems, Inc., Sr. Sub. Note, (Series B), 11.875%, 5/1/2009 113,125 Total 4,074,640 Automotive--3.3% 950,000 Accuride Corp., Sr. Sub. Note, (Series B), 9.25%, 2/1/2008 555,750 3,000,000 American Axle & Manufacturing, Inc., Company Guarantee, 9.75%, 3/1/2009 3,240,000 1,625,000 Arvin Industries, Inc., Note, 6.75%, 3/15/2008 1,594,531 1,650,000 Arvin Industries, Inc., Note, 7.125%, 3/15/2009 1,612,875 1,650,000 Collins & Aikman Products Co., Sr. Note, 10.75%, 12/31/2011 1,575,750 2,050,000 Collins & Aikman Products Co., Sr. Sub. Note, 11.50%, 4/15/2006 1,732,250 1,100,000 Lear Corp., Company Guarantee, 7.96%, 5/15/2005 1,135,750 10,825,000 Lear Corp., Company Guarantee, 8.11%, 5/15/2009 11,501,562 3,275,000 Stoneridge, Inc., Company Guarantee, 11.50%, 5/1/2012 3,127,625 Total 26,076,093 Beverage & Tobacco--1.2% 2,300,000 Constellation Brands, Inc., Company Guarantee, (Series B), 8.00%, 2/15/2008 2,438,000 1,000,000 Constellation Brands, Inc., Sr. Sub. Note, 8.125%, 1/15/2012 1,040,000 3,525,000 Cott Beverages, Inc., Company Guarantee, 8.00%, 12/15/2011 3,727,687 700,000 Dimon, Inc., Sr. Note, 8.875%, 6/1/2006 714,000 1,075,000 Dimon, Inc., Sr. Note, (Series B), 9.625%, 10/15/2011 1,150,250 Total 9,069,937 Broadcast Radio & TV--3.5% 775,000 ACME Television LLC, Sr. Disc. Note, 10.875%, 9/30/2004 794,375 9,300,000 Chancellor Media Corp., Company Guarantee, 8.00%, 10,102,125 11/1/2008 2,850,000 Chancellor Media Corp., Sr. Sub. Note, 8.125%, 12/15/2007 3,006,750 2,350,000 1,2 Lamar Media Corp., Sr. Sub. Note, 7.25%, 1/1/2013 2,397,000 2,800,000 Liberty Media Corp., Sr. Note, 7.75%, 7/15/2009 3,046,008 1,300,000 Lin Television Corp., Company Guarantee, 8.00%, 1/15/2008 1,384,500 4,950,000 1,2 PanAmSat Corp., Sr. Note, 8.50%, 2/1/2012 4,826,250 1,450,000 Sinclair Broadcast Group, Inc., Company Guarantee, 8.75%, 12/15/2011 1,558,750 1,300,000 XM Satellite Radio, Inc., Sr. Note, 14.00%, 3/15/2010 890,500 Total 28,006,258 Building & Development--1.9% 1,375,000 American Builders & Contractors Supply Co. Inc., Sr. Sub. Note, 10.625%, 5/15/2007 1,450,625 1,950,000 Associated Materials, Inc., Company Guarantee, 9.75%, 4/15/2012 2,057,250 2,250,000 1,2 Brand Services, Inc., Sr. Sub. Note, 12.00%, 10/15/2012 2,362,500 2,425,000 Collins & Aikman Floorcoverings, Inc., Company Guarantee, 9.75%, 2/15/2010 2,437,125 3,650,000 NCI Building System, Inc., Sr. Sub. Note, (Series B), 9.25%, 5/1/2009 3,759,500 2,050,000 Nortek Holdings, Inc., Sr. Note, 9.125%, 9/1/2007 2,111,500 925,000 WCI Communities, Inc., Sr. Sub. Note, 10.625%, 2/15/2011 901,875 Total 15,080,375 Business Equipment & Services--1.7% 4,500,000 Buhrmann US, Inc., Company Guarantee, 12.25%, 11/1/2009 4,162,500 2,000,000 Global Imaging Systems, Inc., Sr. Sub. Note, 10.75%, 2/15/2007 2,010,000 1,075,000 Xerox CapEurope PLC, Company Guarantee, 5.875%, 5/15/2004 1,026,625 6,725,000 1,2 Xerox Corp., Sr. Note, 9.75%, 1/15/2009 6,489,625 Total 13,688,750 Cable Television--4.6% 4,150,000 CSC Holdings, Inc., Sr. Deb., 8.125%, 8/15/2009 4,025,500 Principal Amount Value $ 1,910,000 CSC Holdings, Inc., Sr. Note, 7.875%, 12/15/2007 $ 1,852,700 3,350,000 CSC Holdings, Inc., Sr. Sub. Deb., 9.875%, 2/15/2013 3,333,250 2,575,000 4Charter Communications Holdings Capital Corp., Discount Bond, 0/11.75%, 5/15/2011 630,875 9,000,000 4Charter Communications Holdings Capital Corp., Sr. Disc. Note, 0/12.125%, 1/15/2012 2,115,000 4,925,000 4Charter Communications Holdings Capital Corp., Sr. Disc. Note, 0/13.50%, 1/15/2011 1,206,625 8,875,000 4Charter Communications Holdings Capital Corp., Sr. Disc. Note, 0/9.92%, 4/1/2011 3,150,625 4,675,000 3Diamond Cable Communications PLC, Sr. Disc. Note, 10.75%, 2/15/2007 490,875 6,775,000 Echostar DBS Corp., Sr. Note, 9.375%, 2/1/2009 7,215,375 2,300,000 Echostar DBS Corp., Sr. Note, 10.375%, 10/1/2007 2,489,750 3,450,000 3International Cabletel, Inc., Sr. Defd. Cpn. Note, 11.50%, 2/1/2006 379,500 325,000 Lenfest Communications, Inc., Sr. Note, 8.375%, 11/1/2005 357,835 2,350,000 Lenfest Communications, Inc., Sr. Sub. Note, 8.25%, 2/15/2008 2,461,625 50,000 Lenfest Communications, Inc., Sr. Sub. Note, 10.50%, 6/15/2006 54,250 3,850,000 3,4 NTL, Inc., Sr. Disc. Note, 0/12.375%, 10/1/2008 404,250 5,000,000 3,4 NTL, Inc., Sr. Note, 0/9.75%, 4/1/2008 525,000 5,075,000 3 NTL, Inc., Sr. Note, 11.50%, 10/1/2008 558,250 2,300,000 4 Quebecor Media Inc., Sr. Disc. Note, 0/13.75%, 7/15/2011 1,299,500 2,950,000 Quebecor Media Inc., Sr. Note, 11.125%, 7/15/2011 2,728,750 1,400,000 Rogers Cablesystems Ltd., Sr. Sub. Gtd. Note, 11.00%, 12/1/2015 1,442,000 2,700,000 3 UIH Australia/Pacific, Sr. Disc. Note, 14.00%, 5/15/2006 13,500 Total 36,735,035 Chemicals & Plastics--3.0% 2,425,000 Compass Minerals Group, Inc., Sr. Sub. Note, 10.00%, 8/15/2011 2,667,500 3,350,000 Equistar Chemicals LP, Sr. Note, 10.125%, 9/1/2008 3,065,250 1,000,000 1,2 FMC Corp., Sr. Secd. Note, 10.25%, 11/1/2009 1,085,000 1,600,000 1,2 Foamex LP, Sr. Secd. Note, 10.75%, 4/1/2009 1,128,000 2,400,000 Foamex LP, Sr. Sub. Note, 9.875%, 6/15/2007 708,000 1,850,000 Foamex LP, Sr. Sub. Note, 13.50%, 8/15/2005 564,250 1,960,000 General Chemical Industrial Products, Inc., Sr. Sub. Note, 10.625%, 5/1/2009 1,205,400 4,375,000 Huntsman ICI Chemicals LLC, Sr. Sub. Note, 10.125%, 7/1/2009 3,653,125 2,100,000 Lyondell Chemical Co., Sr. Secd. Note, 9.50%, 12/15/2008 1,963,500 1,000,000 Lyondell Chemical Co., Sr. Secd. Note, 9.875%, 5/1/2007 962,500 4,675,000 Lyondell Chemical Co., Sr. Sub. Note, 10.875%, 5/1/2009 3,973,750 2,500,000 1,2,4 Salt Holdings Corp., Sr. Disc. Note, 0/12.75%, 12/15/2012 1,362,500 2,500,000 Texas Petrochemicals Corp., Sr. Sub. Note, 11.125%, 7/1/2006 1,537,500 Total 23,876,275 Clothing & Textiles--1.7% 675,000 1,3 Dyersburg Corp., Sr. Sub. Note, 9.75%, 9/1/2007 3,442 3,050,000 GFSI, Inc., Sr. Sub. Note, 9.625%, 3/1/2007 2,455,250 3,100,000 Levi Strauss & Co., Sr. Note, 11.625%, 1/15/2008 3,022,500 2,150,000 1,2 Levi Strauss & Co., Sr. Note, 12.25%, 12/15/2012 2,117,750 2,925,000 Russell Corp., Company Guarantee, 9.25%, 5/1/2010 3,166,313 2,575,000 William Carter Co., Sr. Sub. Note, Series B, 10.875%, 8/15/2011 2,819,625 Total 13,584,880 Conglomerates--0.5% 5,025,000 Eagle Picher Industries, Inc., Sr. Sub. Note, 9.375%, 3/1/2008 3,542,625 Consumer Products--6.0% 3,350,000 Albecca, Inc., Company Guarantee, 10.75%, 8/15/2008 3,613,812 1,775,000 Alltrista Corp., Unsecd. Note, 9.75%, 5/1/2012 1,819,375 4,300,000 American Achievement Corp., Sr. Note, Series W.I., 11.625%, 1/1/2007 4,579,500 3,375,000 American Greetings Corp., Sr. Sub. Note, 11.75%, 7/15/2008 3,695,625 600,000 American Safety Razor Co., Sr. Note, 9.875%, 8/1/2005 501,000 2,350,000 Amscan Holdings, Inc., Sr. Sub. Note, 9.875%, 12/15/2007 2,197,250 2,600,000 Armkel Finance, Inc., Sr. Sub. Note, 9.50%, 8/15/2009 2,827,500 2,450,000 Chattem, Inc., Sr. Sub. Note, 8.875%, 4/1/2008 2,535,750 925,000 3,4 Diamond Brands, Inc., Sr. Disc. Deb., 0/12.875%, 4/15/2009 93 --------------------------------------------------------------------------- Principal Amount Value $ 325,000 3 Diamond Brands Operating Corp., Sr. Sub. Note, 10.125%, 4/15/2008 $ 33 1,700,000 ICON Health & Fitness, Inc., Company Guarantee, 11.25%, 4/1/2012 1,487,500 3,425,000 Jostens, Inc., Sr. Sub. Note, 12.75%, 5/1/2010 3,904,500 1,600,000 NBTY, Inc., Sr. Sub. Note, 8.625%, 9/15/2007 1,624,000 2,825,000 1,3 PCA International, Inc., Sr. Note, 11.875%, 8/1/2009 2,810,875 3,950,000 Playtex Products, Inc., Company Guarantee, 9.375%, 6/1/2011 4,325,250 1,125,000 Sealy Mattress Co., Company Guarantee, 10.875%, 12/15/2007 1,096,875 925,000 Sealy Mattress Co., Sr. Sub. Note, 9.875%, 12/15/2007 901,875 950,000 1,3 Sleepmaster LLC, Company Guarantee, (Series B), 11.00%, 5/15/2009 156,750 800,000 The Boyds Collection, Ltd., Sr. Sub. Note, (Series B), 9.00%, 5/15/2008 804,000 2,970,000 True Temper Sports, Inc., Sr. Sub. Note, (Series B), 10.875%, 12/1/2008 3,073,950 4,025,000 United Industries Corp., Sr. Sub. Note, (Series B), 9.875%, 4/1/2009 4,085,375 2,100,000 Volume Services America, Inc., Sr. Sub. Note, 11.25%, 3/1/2009 2,005,500 Total 48,046,388 Container & Glass Products--3.6% 2,375,000 Berry Plastics Corp., Company Guarantee, 10.75%, 7/15/2012 2,517,500 1,700,000 Graham Packaging Co., Sr. Sub. Note, 8.75%, 1/15/2008 1,657,500 2,225,000 Graham Packaging Co., Sub. Note, 5.545%, 1/15/2008 1,880,125 2,100,000 Greif Brothers Corp., Sr. Sub. Note, 8.875%, 8/1/2012 2,236,500 3,900,000 Huntsman Packaging Corp., Company Guarantee, 13.00%, 6/1/2010 3,529,500 2,550,000 Owens-Illinois, Inc., Sr. Note, 7.15%, 5/15/2005 2,486,250 3,325,000 Owens-Illinois, Inc., Sr. Note, 7.35%, 5/15/2008 3,108,875 1,500,000 Owens-Illinois, Inc., Sr. Note, 7.85%, 5/15/2004 1,485,000 2,675,000 Owens-Illinois, Inc., Sr. Note, 8.10%, 5/15/2007 2,594,750 2,075,000 Pliant Corp., Sr. Sub. Note, 13.00%, 6/1/2010 1,877,875 416,813 1,2 Russell Stanley Holdings, Inc., Sr. Sub. Note, 9.00%, 11/30/2008 190,692 4,825,000 Tekni-Plex, Inc., Company Guarantee, (Series B), 12.75%, 6/15/2010 4,414,875 825,000 1,2 Tekni-Plex, Inc., Sr. Sub. Note, 12.75%, 6/15/2010 754,875 Total 28,734,317 Ecological Services & Equipment--2.7% 10,500,000 Allied Waste North America, Inc., Company 10,500,000 Guarantee, 7.875%, 1/1/2009 8,200,000 Allied Waste North America, Inc., Sr. Sub. Note, 10.00%, 8/1/2009 8,200,000 2,475,000 Synagro Technologies, Inc., Sr. Sub. Note, 9.50%, 4/1/2009 2,592,562 Total 21,292,562 Electronics--1.2% 2,875,000 Fairchild Semiconductor Corp., Sr. Sub. Note, 10.375%, 10/1/2007 3,033,125 3,725,000 Ingram Micro, Inc., Sr. Sub. Note, 9.875%, 8/15/2008 3,948,500 2,800,000 1,2 Seagate Technology HDD Holdings, Sr. Note, 8.00%, 5/15/2009 2,884,000 Total 9,865,625 Food & Drug Retailers--0.0% 425,000 Community Distributors, Inc., Sr. Note, 10.25%, 10/15/2004 274,125 Food Products--3.5% 3,075,000 Agrilink Foods, Inc., Company Guarantee, 11.875%, 11/1/2008 3,321,000 3,375,000 American Seafoods Group LLC, Company Guarantee, 10.125%, 4/15/2010 3,459,375 1,725,000 B&G Foods, Inc., Company Guarantee, Series D, 9.625%, 8/1/2007 1,785,375 3,525,000 Del Monte Corp., Company Guarantee, Series B, 9.25%, 5/15/2011 3,683,625 1,950,000 1,2 Del Monte Corp., Sr. Sub. Note, 8.625%, 12/15/2012 1,998,750 2,550,000 Eagle Family Foods, Inc., Sr. Sub. Note, 8.75%, 1/15/2008 1,746,750 2,350,000 Land O'Lakes, Inc., Sr. Note, 8.75%, 11/15/2011 1,327,750 2,600,000 Michael Foods, Inc., Sr. Sub. Note, Series B, 11.75%, 4/1/2011 2,925,000 3,075,000 New World Pasta Co., Sr. Sub. Note, 9.25%, 2/15/2009 1,552,875 1,350,000 Pilgrim's Pride Corp., Sr. Note, 9.625%, 9/15/2011 1,262,250 1,600,000 Smithfield Foods, Inc., Sr. Sub. Note, 7.625%, 2/15/2008 1,576,000 1,600,000 Smithfield Foods, Inc., Sr. Note, (Series B), 8.00%, 10/15/2009 1,640,000 1,650,000 1,2 Swift & Co., Sr. Note, 10.125%, 10/1/2009 1,567,500 Total 27,846,250 Principal Amount Value Food Services--0.9% $ 2,100,000 Advantica Restaurant Group, Sr. Note, 11.25%, 1/15/2008 $ 1,606,500 2,050,000 1,2 Buffets, Inc., Sr. Sub. Note, 11.25%, 7/15/2010 1,947,500 3,900,000 Carrols Corp., Company Guarantee, 9.50%, 12/1/2008 3,412,500 Total 6,966,500 Forest Products--3.5% 3,225,000 Georgia-Pacific Corp., Note, 7.50%, 5/15/2006 3,096,000 10,375,000 Georgia-Pacific Corp., Sr. Note, 8.125%, 5/15/2011 9,908,125 2,000,000 1,2 Jefferson Smurfit Corp., Sr. Note, 8.25%, 10/1/2012 2,060,000 2,150,000 1,2 MDP Acquisitions PLC, Sr. Note, 9.625%, 10/1/2012 2,257,500 1,600,000 1,2 MDP Acquisitions PLC, Unit, 15.50%, 10/1/2013 1,704,000 3,425,000 Riverwood International Corp., Company Guarantee, 10.625%, 8/1/2007 3,544,875 2,025,000 Riverwood International Corp., Sr. Sub. Note, 10.875%, 4/1/2008 2,055,375 3,275,000 Stone Container Corp., Sr. Note, 9.75%, 2/1/2011 3,537,000 Total 28,162,875 Gaming--6.7% 700,000 1,2 Boyd Gaming Corp., Sr. Sub. Note, 7.75%, 12/15/2012 696,500 2,875,000 Boyd Gaming Corp., Sr. Sub. Note, 8.75%, 4/15/2012 3,033,125 2,125,000 Coast Hotels & Casinos, Inc., Company Guarantee, 9.50%, 4/1/2009 2,268,437 2,100,000 Hard Rock Hotel, Inc., Sr. Sub. Note, 9.25%, 4/1/2005 2,142,000 3,300,000 Harrah's Operations, Inc., Company Guarantee, 7.875%, 12/15/2005 3,539,250 1,800,000 Isle of Capri Casinos, Inc., Company Guarantee, 9.00%, 3/15/2012 1,876,500 5,100,000 MGM Grand, Inc., Sr. Note, 8.50%, 9/15/2010 5,622,750 4,150,000 MGM Grand, Inc., Sr. Sub. Note, 9.75%, 6/1/2007 4,606,500 975,000 Mandalay Resort Group, Sr. Note, 9.50%, 8/1/2008 1,084,687 6,875,000 Mandalay Resort Group, Sr. Sub. Note, 10.25%, 8/1/2007 7,553,906 1,525,000 Mohegan Tribal Gaming Authority, Sr. Sub. Note, 8.00%, 4/1/2012 1,605,063 3,600,000 Park Place Entertainment Corp., Sr. Sub. Note, 7.875%, 3/15/2010 3,681,000 5,000,000 Park Place Entertainment Corp., Sr. Sub. Note, 8.125%, 5/15/2011 5,206,250 375,000 Penn National Gaming, Inc., Company Guarantee, 8.875%, 3/15/2010 386,250 2,025,000 Penn National Gaming, Inc., Company Guarantee, 11.125%, 3/1/2008 2,217,375 2,575,000 Sun International Hotels Ltd., Sr. Sub. Note, 8.875%, 8/15/2011 2,652,250 3,400,000 1,2 Venetian Casino/LV Sands, Mtg. Note, 11.00%, 6/15/2010 3,570,000 1,450,000 Wynn Las Vegas LLC, Second Mortgage Notes, 12.00%, 11/1/2010 1,464,500 Total 53,206,343 Health Care--8.0% 2,900,000 Advanced Medical Optics, Inc., Sr. Sub. Note, 9.25%, 7/15/2010 3,001,500 925,000 Alaris Medical Systems, Company Guarantee, 9.75%, 12/1/2006 938,875 2,250,000 Alaris Medical Systems, Sr. Secd. Note, (Series B), 11.625%, 12/1/2006 2,553,750 4,675,000 Alliance Imaging, Inc., Sr. Sub. Note, 10.375%, 4/15/2011 4,511,375 3,050,000 CONMED Corp., Sr. Sub. Note, 9.00%, 3/15/2008 3,187,250 2,950,000 Columbia/HCA Healthcare Corp., Sr. Note, 6.91%, 6/15/2005 3,116,321 2,700,000 1,2 Extendicare Health Services, Inc., Sr. Note, 9.50%, 7/1/2010 2,632,500 1,625,000 Fisher Scientific International, Inc., Sr. Sub. Note, 9.00%, 2/1/2008 1,706,250 2,125,000 Fisher Scientific International, Inc., Sr. Sub. Note, 9.00%, 2/1/2008 2,231,250 5,000,000 HCA - The Healthcare Corp., Note, 8.75%, 9/1/2010 5,741,700 3,000,000 HCA - The Healthcare Corp., Sr. Note, 7.875%, 2/1/2011 3,349,770 1,850,000 Hanger Orthopedic Group, Inc., Company Guarantee, 10.375%, 2/15/2009 1,933,250 4,050,000 Hanger Orthopedic Group, Inc., Sr. Sub. Note, 11.25%, 6/15/2009 4,191,750 1,350,000 Hudson Respiratory Care, Inc., Sr. Sub. Note, 9.125%, 4/15/2008 681,750 5,250,000 Kinetic Concepts, Inc., Company Guarantee, 9.625%, 11/1/2007 5,486,250 2,400,000 1 Magellan Health Services, Inc., Sr. Note, 9.375%, 11/15/2007 1,884,000 1,975,000 1 Magellan Health Services, Inc., Sr. Sub. Note, 9.00%, 2/15/2008 503,625 4,475,000 Manor Care, Inc., Sr. Note, 8.00%, 3/1/2008 4,726,719 2,125,000 Sybron Dental Specialties, Inc., Company Guarantee, 8.125%, 6/15/2012 2,156,875 1,450,000 Tenet Healthcare Corp., Sr. Note, 5.375%, 11/15/2006 1,343,063 --------------------------------------------------------------------------- Principal Amount Value $ 825,000 Tenet Healthcare Corp., Sr. Note, 6.375%, 12/1/2011 $ 742,500 1,250,000 Triad Hospitals, Inc., Company Guarantee, (Series B), 8.75%, 5/1/2009 1,343,750 2,000,000 US Oncology, Inc., Company Guarantee, 9.625%, 2/1/2012 2,050,000 3,800,000 Vanguard Health Systems, Company Guarantee, 9.75%, 8/1/2011 3,667,000 Total 63,681,073 Hotels, Motels & Inns--4.9% 2,325,000 Courtyard by Marriott II LP, Sr. Note, 10.75%, 2/1/2008 2,377,312 1,550,000 Felcor Lodging LP, Company Guarantee, 8.50%, 6/1/2011 1,519,000 950,000 Felcor Lodging LP, Company Guarantee, 9.50%, 9/15/2008 964,250 3,125,000 Florida Panthers Holdings, Inc., Company Guarantee, 9.875%, 4/15/2009 3,265,625 5,050,000 HMH Properties, Inc., Sr. Note, (Series B), 7.875%, 8/1/2008 4,898,500 3,175,000 HMH Properties, Inc., Sr. Note, (Series C), 8.45%, 12/1/2008 3,159,125 2,700,000 Hilton Hotels Corp., Note, 7.625%, 5/15/2008 2,730,375 3,200,000 Hilton Hotels Corp., Sr. Note, 8.25%, 2/15/2011 3,352,000 5,200,000 ITT Corp., Unsecd. Note, 6.75%, 11/15/2005 5,154,500 875,000 MeriStar Hospitality Corp., Company Guarantee, 9.00%, 1/15/2008 783,125 1,950,000 MeriStar Hospitality Corp., Company Guarantee, 9.125%, 1/15/2011 1,706,250 1,050,000 MeriStar Hospitality Corp., Company Guarantee, 10.50%, 6/15/2009 971,250 2,525,000 RFS Partnership LP, Company Guarantee, 9.75%, 3/1/2012 2,588,125 2,975,000 1,2 Starwood Hotels & Resorts Worldwide, Inc., Note, 7.375%, 5/1/2007 2,937,813 2,700,000 1,2 Starwood Hotels & Resorts Worldwide, Inc., Note, 7.875%, 5/1/2012 2,679,750 Total 39,087,000 Industrial Products & Equipment--3.6% 1,305,000 Amphenol Corp., Sr. Sub. Note, 9.875%, 5/15/2007 1,366,987 1,600,000 Cabot Safety Acquisition Corp., Sr. Sub. Note, 12.50%, 7/15/2005 1,608,000 825,000 Continental Global Group, Inc., Sr. Note, 11.00%, 4/1/2007 457,875 3,225,000 Euramax International Plc, Sr. Sub. Note, 11.25%, 10/1/2006 3,321,750 3,025,000 Hexcel Corp., Sr. Sub. Note, (Series B), 9.75%, 1/15/2009 2,556,125 4,150,000 MMI Products, Inc., Sr. Sub. Note, 11.25%, 4/15/2007 3,838,750 3,475,000 Neenah Corp., Sr. Sub. Note, 11.125%, 5/1/2007 1,112,000 650,000 Neenah Corp., Sr. Sub. Note, 11.125%, 5/1/2007 208,000 3,375,000 1,2 Rexnord Corp., Sr. Sub. Note, 10.125%, 12/15/2012 3,510,000 650,000 Tyco International Group, Company Guarantee, 6.375%, 2/15/2006 615,063 1,000,000 Tyco International Group, Note, 5.80%, 8/1/2006 936,250 4,000,000 Tyco International Group, Sr. Note, 6.375%, 6/15/2005 3,845,000 2,149,000 Unifrax Investment Corp., Sr. Note, 10.50%, 11/1/2003 2,159,745 1,700,000 WESCO Distribution, Inc., Company Guarantee, 9.125%, 6/1/2008 1,368,500 2,250,000 WESCO Distribution, Inc., Sr. Sub. Note, 9.125%, 6/1/2008 1,811,250 Total 28,715,295 Leisure & Entertainment--2.9% 1,450,000 AMC Entertainment, Inc., Sr. Sub. Note, 9.50%, 3/15/2009 1,435,500 2,575,000 AMC Entertainment, Inc., Sr. Sub. Note, 9.875%, 2/1/2012 2,549,250 3,050,000 1,2 AMF Bowling Worldwide, Inc., Sr. Sub. Note, 13.00%, 2/28/2008 3,141,500 1,750,000 1,2 Intrawest Corp., Sr. Note, 10.50%, 2/1/2010 1,828,750 8,975,000 4 Premier Parks, Inc., Sr. Disc. Note, 0/10.00%, 4/1/2008 8,660,875 2,000,000 Premier Parks, Inc., Sr. Note, 9.75%, 6/15/2007 1,960,000 3,375,000 Regal Cinemas, Inc., Company Guarantee, (Series B), 9.375%, 2/1/2012 3,602,813 Total 23,178,688 Machinery & Equipment--2.1% 3,050,000 AGCO Corp., Sr. Note, 9.50%, 5/1/2008 3,309,250 2,200,000 Briggs & Stratton Corp., Company Guarantee, 8.875%, 3/15/2011 2,387,000 1,775,000 1,3 Clark Material Handling Corp., Sr. Note, 10.75%, 11/15/2006 178 3,675,000 Columbus McKinnon Corp., Sr. Sub. Note, 8.50%, 4/1/2008 2,664,375 --------------------------------------------------------------------------- Principal Amount Value $ 2,700,000 1,3 Simonds Industries, Inc., Sr. Sub. Note, 10.25%, 7/1/2008 $ 823,500 1,825,000 United Rentals, Inc., Company Guarantee, (Series B), 9.00%, 4/1/2009 1,478,250 6,025,000 United Rentals, Inc., Company Guarantee, (Series B), 10.75%, 4/15/2008 5,994,875 Total 16,657,428 Metals & Mining--0.0% 500,000 3 Murrin Murrin Holdings Pty Ltd., Sr. Secd. Note, 9.375%, 8/31/2007 122,500 Oil & Gas--3.6% 1,700,000 BRL Universal Equipment, Sr. Secd. Note, 8.875%, 2/15/2008 1,759,500 1,950,000 Compton Petroleum Corp., Sr. Note, 9.90%, 5/15/2009 2,057,250 4,000,000 Continental Resources, Inc., Sr. Sub. Note, 10.25%, 8/1/2008 3,580,000 4,400,000 Dresser, Inc., Company Guarantee, 9.375%, 4/15/2011 4,466,000 1,525,000 Forest Oil Corp., Sr. Sub. Note, 10.50%, 1/15/2006 1,624,125 875,000 1,2 Grant Prideco, Inc., Sr. Note, 9.00%, 12/15/2009 914,375 2,725,000 Lone Star Technologies, Inc., Company Guarantee, (Series B), 9.00%, 6/1/2011 2,493,375 1,625,000 Magnum Hunter Resources, Inc., Sr. Note, 9.60%, 3/15/2012 1,730,625 2,450,000 Petroleum Helicopters, Inc., Company Guarantee, (Series B), 9.375%, 5/1/2009 2,584,750 2,400,000 Pogo Producing Co., Sr. Sub. Note, Series B, 10.375%, 2/15/2009 2,616,000 2,250,000 Swift Energy Co., Sr. Sub. Note, 9.375%, 5/1/2012 2,193,750 4,350,000 Tesoro Petroleum Corp., Company Guarantee, (Series B), 9.625%, 11/1/2008 2,805,750 Total 28,825,500 Printing & Publishing--4.0% 3,850,000 Advanstar Communications, Company Guarantee, (Series B), 12.00%, 2/15/2011 3,022,250 1,000,000 4 Advanstar, Inc., Company Guarantee, (Series B), 0/15.00%, 10/15/2011 322,500 2,550,000 American Media Operations, Inc., Company Guarantee, (Series B), 10.25%, 5/1/2009 2,652,000 2,425,000 Block Communications, Inc., Company Guarantee, 9.25%, 4/15/2009 2,497,750 5,475,000 1,2 Dex Media East LLC, Sr. Sub. Note, 12.125%, 11/15/2012 6,090,938 900,000 Hollinger International Publishing, Inc., Sr. Sub. Note, 9.25%, 3/15/2007 940,500 900,000 K-III Communications Corp., Company Guarantee, (Series B), 8.50%, 2/1/2006 846,000 1,350,000 Primedia, Inc., Sr. Note, 8.875%, 5/15/2011 1,231,875 2,200,000 1,2 R. H. Donnelly Finance Corp., Sr. Sub. Note, 10.875%, 12/15/2012 2,409,000 2,100,000 1,2 Vertis, Inc., Sr. Note, 10.875%, 6/15/2009 2,205,000 3,150,000 Vertis, Inc., Sr. Note, 10.875%, 6/15/2009 3,307,500 1,125,000 Von Hoffmann Corp., Company Guarantee, 10.25%, 3/15/2009 1,068,750 4,125,000 4 Yell Finance BV, Sr. Disc. Note, 0/13.50%, 8/1/2011 2,949,375 2,100,000 Yell Finance BV, Sr. Note, 10.75%, 8/1/2011 2,299,500 342,000 Ziff Davis Media, Inc., Company Guarantee, 12.00%, 8/12/2009 109,440 Total 31,952,378 Retailers--1.7% 1,200,000 Advance Stores Co., Inc., Company Guarantee, 10.25%, 4/15/2008 1,272,000 2,225,000 Michaels Stores, Inc., Sr. Note, 9.25%, 7/1/2009 2,352,938 1,850,000 Mothers Work, Inc., Sr. Note, 11.25%, 8/1/2010 1,979,500 3,450,000 Penney (J.C.) Co., Inc., Note, 7.60%, 4/1/2007 3,471,563 2,651,000 1,2 Penney (J.C.) Co., Inc., Note, 9.00%, 8/1/2012 2,710,648 2,050,000 1,2 United Auto Group, Inc., Sr. Sub. Note, 9.625%, 3/15/2012 1,998,750 Total 13,785,399 Services--0.8% 1,700,000 Coinmach Corp., Sr. Note, 9.00%, 2/1/2010 1,793,500 2,750,000 SITEL Corp., Sr. Sub. Note, 9.25%, 3/15/2006 2,516,250 2,100,000 1,2 The Brickman Group Ltd., Sr. Sub. Note, 11.75%, 12/15/2009 2,205,000 Total 6,514,750 --------------------------------------------------------------------------- Principal Amount Value Steel--0.3% $ 2,000,000 3 Republic Technologies International, Inc., Company Guarantee, 13.75%, 7/15/2009 $ 85,000 2,675,000 Ryerson Tull, Inc., Sr. Note, 9.125%, 7/15/2006 2,367,375 Total 2,452,375 Surface Transportation--1.4% 2,600,000 Allied Holdings, Inc., Sr. Note, 8.625%, 10/1/2007 2,015,000 1,025,000 1,3 AmeriTruck Distribution Corp., Sr. Sub. Note, 12.25%, 11/15/2005 0 1,675,000 Stena AB, Sr. Note, 8.75%, 6/15/2007 1,683,375 3,675,000 1,2 Stena AB, Sr. Note, 9.625%, 12/1/2012 3,803,625 3,575,000 Stena AB, Sr. Note, 10.50%, 12/15/2005 3,700,125 1,050,000 1,3 The Holt Group, Inc., Company Guarantee, 9.75%, 1/15/2006 32,813 Total 11,234,938 Telecommunications & Cellular--5.0% 575,000 AT&T Wireless Services, Inc., Note, 8.125%, 5/1/2012 576,437 2,400,000 AT&T Wireless Services, Inc., Sr. Note, 7.875%, 3/1/2011 2,406,000 4,825,000 4 AirGate PCS, Inc., Sr. Sub. Note, 0/13.50%, 10/1/2009 554,875 7,575,000 4 Alamosa PCS Holdings, Inc., Sr. Disc. Note, 0/12.875%, 2/15/2010 1,401,375 5,275,000 3 Global Crossing Holdings Ltd., Company Guarantee, 9.50%, 11/15/2009 178,031 2,350,000 Horizon PCS, Inc., Company Guarantee, 13.75%, 6/15/2011 458,250 2,575,000 Millicom International Cellular S. A., Sr. Disc. Note, 13.50%, 6/1/2006 1,261,750 7,775,000 4 NEXTEL Communications, Inc., Sr. Disc. Note, 0/9.95%, 2/15/2008 7,114,125 5,425,000 NEXTEL Communications, Inc., Sr. Disc. Note, 10.65%, 9/15/2007 5,235,125 8,050,000 NEXTEL Communications, Inc., Sr. Note, 9.375%, 11/15/2009 7,345,625 1,121,000 4 NEXTEL Partners, Inc., Sr. Disc. Note, 0/14.00%, 2/1/2009 846,355 1,450,000 NEXTEL Partners, Inc., Sr. Note, 12.50%, 11/15/2009 1,312,250 3,525,000 Rogers Cantel Mobile, Inc., Sr. Sub. Note, 8.80%, 10/1/2007 3,013,875 2,950,000 4 TeleCorp PCS, Inc., Sr. Sub. Note, 0/11.625%, 4/15/2009 2,750,875 1,479,000 4 Tritel PCS, Inc., Company Guarantee, 0/12.75%, 5/15/2009 1,386,563 2,600,000 4 Triton PCS, Inc., Sr. Disc. Note, 0/11.00%, 5/1/2008 2,249,000 1,900,000 4 VoiceStream Wireless Corp., Sr. Disc. Note, 0/11.875%, 11/15/2009 1,619,750 Total 39,710,261 Utilities--5.3% 2,350,000 CMS Energy Corp., Sr. Note, 7.50%, 1/15/2009 2,009,250 6,100,000 CMS Energy Corp., Sr. Note, 8.50%, 4/15/2011 5,215,500 2,000,000 CMS Energy Corp., Sr. Note, 8.90%, 7/15/2008 1,790,000 4,779,962 Caithness Coso Funding Corp., Sr. Secd. Note, Series B, 9.05%, 12/15/2009 4,708,263 9,250,000 Calpine Canada Energy Finance Corp., Company Guarantee, 8.50%, 5/1/2008 4,208,750 13,050,000 Calpine Corp., Note, 8.50%, 2/15/2011 5,872,500 1,700,000 El Paso Electric Co., 1st Mtg. Note, 9.40%, 5/1/2011 1,701,139 1,350,000 El Paso Energy Partners LP, Sr. Sub. Note, 8.50%, 6/1/2011 1,248,750 1,150,000 1, El Paso Energy Partners LP, Sr. Sub. Note, 10.625%, 12/1/2012 1,167,250 2,500,000 1, Illinois Power Co., Mtg. Bond, 11.50%, 12/15/2010 2,449,500 3,875,000 PSEG Energy Holdings, Sr. Note, 8.625%, 2/15/2008 3,143,594 3,325,000 PSEG Energy Holdings, Sr. Note, 10.00%, 10/1/2009 2,755,594 275,000 Transcontinental Gas Pipe Corp., Note, 7.00%, 8/15/2011 248,875 3,225,000 Williams Cos., Inc. (The), Note, 6.50%, 8/1/2006 2,241,375 2,875,000 Williams Cos., Inc. (The), Note, 7.625%, 7/15/2019 1,796,875 2,700,000 Williams Cos., Inc. (The), Note, 7.875%, 9/1/2021 1,687,500 Total 42,244,715 Total Corporate Bonds (identified cost 746,292,153 $823,760,826) --------------------------------------------------------------------------- Shares or Principal Amount Value Common Stocks--0.0% Container & Glass Products--0.0% 57,000 3 Russell Stanley Holdings, Inc. $ 17,100 Financial-Other--0.0% 171 1,3 CVC Claims Litigation LLC, Class B Units 0 Leisure & Entertainment--0.0% 4,320 3 AMF Bowling Worldwide, Inc. 81,043 Metals & Mining--0.0% 57,533 3 Royal Oak Mines, Inc. 403 Printing & Publishing--0.0% 500 3 Medianews Group, Inc. 46,312 Telecommunications & Cellular--0.0% 117,335 3 Call-Net Enterprises, Inc. 72,748 15,348 3 Viatel Holding (Bermuda) Ltd. 7,827 Total 80,575 Total Common Stocks (identified cost $11,279,422) 225,433 Preferred Stocks--1.1% Broadcast Radio & TV--0.4% 30,300 Sinclair Capital, Cumulative Pfd., $11.63 3,272,400 Health Care--0.0% 5,801 River Holding Corp., Sr. Exchangeable PIK 30,455 Printing & Publishing--0.7% 22,750 Primedia, Inc., Cumulative Pfd., (Series D), $10.00 1,473,062 39,650 Primedia, Inc., Exchangeable Pfd. Stock, (Series G), $2.16 2,448,387 17,450 Primedia, Inc., Pfd., $9.20 1,094,987 108 Ziff Davis Media, Inc., PIK Pfd., (Series E-1) 1 Total 5,016,437 Telecommunications & Cellular--0.0% 30,751 McLeodUSA, Inc., Conv. Pfd., Series A 126,079 Total Preferred Stocks (identified cost $19,840,000) 8,445,371 Warrants--0.0% Broadcast Radio & TV--0.0% 23,310 3 Loral Space & Communications Ltd., Warrants 2,331 1,800 3 XM Satellite Radio, Inc., Warrants 1,800 Total 4,131 Cable Television--0.0% 2,400 3 UIH Australia/Pacific, Warrants 24 Consumer Products--0.0% 2,000 3 Jostens, Inc., Warrants 68,500 Container & Glass Products--0.0% 1,000 3 Pliant Corp., Warrants 1,125 Leisure & Entertainment--0.0% 9,931 3 AMF Bowling Worldwide, Inc., Warrants 37,241 10,165 3 AMF Bowling Worldwide, Inc., Warrants 72,426 Total 109,667 Printing & Publishing--0.0% 1,000 3 Advanstar, Inc., Warrants 10 19,800 3 Ziff Davis Media, Inc., Warrants 198 Total 208 Steel--0.0% 2,000 3 Republic Technologies International, Inc., Warrants 20 Telecommunications & Cellular--0.0% 68,141 3 McLeodUSA, Inc., Warrants 23,849 Total WARRANTS (IDENTIFIED COST $1,078,174) 207,524 --------------------------------------------------------------------------- Principal Amount Value Repurchase Agreement--3.0% $24,109,000 Interest in $24,109,000 joint repurchase agreement with UBS Warburg LLC, 1.30% dated 12/31/2002, to be repurchased at $24,110,741 on 1/2/2003 collateralized by U.S. government agencies with various maturities to 2032. 24,109,000 Total Investments (identified cost $880,067,422) 5 $779,279,481 =========================================================================== 1 Denotes a restricted security which is subject to restrictions on resale under federal securities laws. At December 31, 2002, these securities amounted to $90,412,649 which represents 11.3% of net assets. Included in these amounts, securities which have been deemed liquid amounted to $86,895,216 which represents 10.9% of net assets. 2 Denotes a restricted security that has been deemed liquid by criteria approved by the fund's Board of Trustees. 3 Non-income producing security. 4 Denotes a Zero Coupon bond with effective rate at time of purchase. 5 Cost for federal tax purpose is $884,795,311. The net unrealized depreciation of investments on a federal tax basis amounts to $105,515,830 which is comprised of $25,015,499 appreciation and $130,533,329 depreciation at December 31, 2002. Note: The categories of investments are shown as a percentage of net assets ($797,496,464) at December 31, 2002. The following acronyms are used throughout this portfolio: GTD --Guaranteed PCA --Pollution Control Authority PIK --Payment in Kind See Notes which are an integral part of the Financial Statements HIGH YIELD BOND PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 2002 Assets: Total investments in securities, at value (identified cost of $880,067,422) $ 779,279,481 Cash 433,273 Income receivable 17,697,747 Receivable for investments sold 212,967 Total assets 797,623,468 Liabilities: Payable for shares redeemed $ 109,135 Accrued expenses 17,869 Total liabilities 127,004 Net assets for 130,565,471 shares outstanding $ 797,496,464 Net Assets Consist of: Paid in capital $ 1,090,640,681 Net unrealized depreciation of investments (100,787,941) Accumulated net realized loss on investments (190,867,294) Distributions in excess of net investment income (1,488,982) Total Net Assets $ 797,496,464 Net Asset Value, Offering Price and Redemption Proceeds Per Share $797,496,464 / 130,565,471 shares outstanding $6.11 ------------------------------------------------------------------------------- See Notes which are an integral part of the Financial Statements HIGH YIELD BOND PORTFOLIO STATEMENT OF OPERATIONS Year Ended December 31, 2002 Investment Income: Dividends $ 1,257,178 Interest 77,847,840 Total income 79,105,018 Expenses: Administrative personnel and services fee $ 591,597 Custodian fees 24,065 Transfer and dividend disbursing agent fees and expenses 20,259 Directors'/Trustees' fees 2,172 Auditing fees 16,033 Legal fees 8,452 Portfolio accounting fees 130,567 Share registration costs 547 Insurance premiums 975 Miscellaneous 373 TOTAL EXPENSES 795,040 Waiver of administrative personnel and services fee (591,597) Net expenses 203,443 Net investment income 78,901,575 Realized and Unrealized Gain (Loss) on Investments: Net realized loss on investments (97,325,493) Net change in unrealized depreciation of investments 41,741,790 Net realized and unrealized loss on investments (55,583,703) Change in net assets resulting from operations $ 23,317,872 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 2002 2001 Increase (Decrease) in Net Assets Operations: Net investment income $ 78,901,575 $ 67,831,727 Net realized loss on investments (97,325,493) (71,740,382) Net change in unrealized depreciation 41,741,790 14,173,897 Change in net assets resulting from operations 23,317,872 10,265,242 Distributions to Shareholders: Distributions from net investment income (79,992,687) (69,279,073) Share Transactions: Proceeds from sale of shares 363,389,131 291,362,313 Net asset value of shares issued to shareholders in payment of distributions declared 79,983,723 69,259,001 Cost of shares redeemed (254,948,136) (168,681,080) Change in net assets resulting from share transactions 188,424,718 191,940,234 Change in net assets 131,749,903 132,926,403 Net Assets: Beginning of period 665,746,561 532,820,158 End of period (including distributions in excess of net investment income of $1,488,982 and $2,505,621, respectively.) $ 797,496,464 $ 665,746,561 =========================================================================== See Notes which are an integral part of the Financial Statements HIGH YIELD BOND PORTFOLIO FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout Each Period) Year Ended December 31 2002 2001 2000 1999 1998 1 Net Asset Value, Beginning of Period $6.51 $7.14 $8.72 $9.30 $10.00 Income From Investment Operations: Net investment income 0.63 0.77 2 0.91 0.91 0.84 Net realized and unrealized loss on investments (0.39) (0.61) 2 (1.57) (0.56) (0.65) Total from investment operations 0.24 0.16 (0.66) 0.35 0.19 Less Distributions: Distributions from net investment income (0.64) (0.79) (0.92) (0.91) (0.84) Distributions from net realized gain on investments --- --- --- (0.02) (0.05) TOTAL DISTRIBUTIONS (0.64) (0.79) (0.92) (0.93) (0.89) Net Asset Value, End of Period $6.11 $6.51 $7.14 $8.72 $9.30 Total Return3 3.90% 2.16% (8.04)% 3.83% 1.96% Ratios to Average Net Assets: Expenses 0.03% 0.04% 0.04% 0.03% 0.04 %4 Net investment income 10.03% 11.13% 2 11.38% 10.07% 9.60 %4 Expense waiver/reimbursement5 0.08% 0.08% 0.08% 0.08% 0.08 %4 Supplemental Data: Net assets, end of period (000 omitted) $797,496 $665,747 $532,820 $699,088 $561,806 Portfolio turnover 39% 33% 16% 49 % 55 %
=============================================================================== 1 Reflects operations for the period from February 2, 1998 (date of initial investment) to December 31, 1998. 2 Effective January 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 Computed on an annualized basis. 5 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 --------------------------------------------------------------------------- High Yield Bond Portfolio Notes to Financial Statements December 31, 2002 --------------------------------------------------------------------------- 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, High Yield Bond Portfolio (the "Fund") and 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 ("GAAP"). 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. All discounts/premiums are accreted/amortized for financial reporting purposes as required. 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. Effective January 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in adjustments to the financial statements as follows: As of 1/1/2001 For the Year Ended 12/31/2001 ------------------------------------------------------------ ------------------------------------------------------------ Undistributed Net Net Net Unrealized Cost of Investment Investment Appreciation Net Investments Income Income (Depreciation) Realized Gain (Loss) ------------------------------------------------------------ ------------------------------------------------------------ Increase(Decrease) $145,613 $145,613 $947,762 $(932,970) $(14,792) 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. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from GAAP. These differences are primarily due to differing treatments for amortization adjustments and gain loss reclassifications on securities. The following reclassifications have been made to the financial statements. Increase (Decrease) ------------------------------------------------------------------------- Accumulated Net Undistributed Net Paid-In Capital Realized Gain (Loss) Investment Income ------------------------------------------------------------------------- ------------------------------------------------------------------------- $(577,403) $(1,530,348) $2,107,751 ------------------------------------------------------------------------- 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 $79,992,687 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Long-term capital gains --- --------------------------------------------------------------------------- As of December 31, 2002, the components of distributable earnings on a tax basis were as follows: --------------------------------------------------------------------------- Undistributed ordinary income $667,527 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Undistributed long-term capital gains --- --------------------------------------------------------------------------- --------------------------------------------------------------------------- Unrealized depreciation $105,515,830 --------------------------------------------------------------------------- At year ended, there were no significant differences between the GAAP 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 tax treatment for amortization of discount. At December 31, 2002, the Fund, for federal tax purposes, had a capital loss carryforward of $165,649,087, 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 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2010 $88,455,746 ------------------------------------------------------------------------- Additionally, the Fund's net capital losses of $22,646,826 attributable to security transactions incurred after October 31, 2002, were treated as arising on January 1, 2003, 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 by the using methods approved by the Trustees. Additional information on each restricted illiquid security held at December 31, 2002 is as follows: ------------------------------------------------------------------------- Security Acquisition Date Acquisition Cost ------------------------------------------------------------------------- ------------------------------------------------------------------------- AmeriTruck Distribution Corp., Sr. 11/10/1995-10/22/1997 $1,054,078 Sub. Note, 12.25%, 11/15/2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Clark Material Handling Corp., Sr. 11/12/1996-11/12/1997 1,843,830 Note, 10.75%, 11/15/2006 ------------------------------------------------------------------------- Condor Systems, Inc., Sr. Sub. Note, 4/8/1999 500,000 11.875%, 5/1/2009 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CVC Claims Litigation LLC, Class B 1,676,091 Units 3/26/1997-5/20/1998 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Dyersburg Corp., Sr. Sub. Note, 9.75%, 9/1/2007 9/3/1997-9/15/1997 683,438 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Magellan Health Services, Inc., Sr. Sub Note, 9.00%, 2/15/2008 7/30/2001-5/16/2002 1,685,469 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Magellan Health Services, Inc., Sr. Note, 9.375%, 11/15/2007 5/23/2001-2/15/2002 2,420,813 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Simonds Industries, Inc., Sr. Sub. Note, 10.25%, 7/1/2008 6/15/2000-9/25/2001 1,692,000 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Sleepmaster LLC, Company Guarantee, 11.00%, 5/15/2009 5/12/1999-12/13/1999 958,125 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Holt Group, Inc., Company 1/14/1998-3/13/1998 1,067,313 Guarantee, 9.75%, 1/15/2006 ------------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with GAAP 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, 2002 2001 ------------------------- -------------------------------------------------------------------------- Shares sold 57,741,036 42,102,998 ------------------------- ------------------------- Shares issued to shareholders in payment 12,855,850 10,027,844 of distributions declared ------------------------- ------------------------- Shares redeemed (42,261,982) (24,522,124) -------------------------------------------------------------------------- -------------------------------------------------------------------------- NET CHANGE RESULTING FROM 28,334,904 SHARE TRANSACTIONS 27,608,718 -------------------------------------------------------------------------- INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES Investment Adviser Fee Federated Investment Management Company, 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 year ended December 31, 2002, were as follows: -------------------------------------------------------------------------- Purchases $477,351,842 -------------------------------------------------------------------------- Sales $286,599,647 -------------------------------------------------------------------------- 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 Federated Core Trust) as of December 31, 2002, 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, 2002, 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, 2002, 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 12, 2003