N-CSRS 1 fctform.txt United States Securities and Exchange Commission Washington, D.C. 20549 Form N-CSR Certified Shareholder Report of Registered Management Investment Companies 811-8519 (Investment Company Act File Number) Federated Core Trust --------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) Federated Investors Funds 5800 Corporate Drive Pittsburgh, Pennsylvania 15237-7000 (412) 288-1900 (Registrant's Telephone Number) John W. McGonigle, Esquire Federated Investors Tower 1001 Liberty Avenue Pittsburgh, Pennsylvania 15222-3779 (Name and Address of Agent for Service) (Notices should be sent to the Agent for Service) Date of Fiscal Year End: 12/31/05 Date of Reporting Period: Six months ended 6/30/05 ------------------------ Item 1. Reports to Stockholders FEDERATED MORTGAGE CORE PORTFOLIO SEMI-ANNUAL SHAREHOLDER REPORT June 30, 2005 FINANCIAL HIGHLIGHTS SHAREHOLDER EXPENSE EXAMPLE PORTFOLIO OF INVESTMENTS SUMMARY TABLE PORTFOLIO OF INVESTMENTS STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS STATEMENT OF CHANGES IN NET ASSETS NOTES TO FINANCIAL STATEMENTS BOARD REVIEW OF ADVISORY CONTRACT VOTING PROXIES ON FUND PORTFOLIO SECURITIES QUARTERLY PORTFOLIO SCHEDULE Financial Highlights (For a Share Outstanding Throughout Each Period)
Six Months Ended (unaudited) Year Ended December 31, 6/30/2005 2004 2003 2002 2001 2000 Net Asset Value, Beginning of Period $10.18 $10.19 $10.32 $10.04 $9.89 $9.55 Income From Investment Operations: Net investment income 0.26 0.50 0.48 0.61 0.66 0.68 Net realized and unrealized gain (loss) on investments (0.05) (0.01) (0.13) 0.31 0.15 0.34 TOTAL FROM INVESTMENT OPERATIONS 0.21 0.49 0.35 0.92 0.81 1.02 Less Distributions: Distributions from net investment income (0.26) (0.50) (0.48) (0.61) (0.66) (0.68) Distributions from net realized gain on investments -- -- (0.00)1 (0.03) -- -- TOTAL DISTRIBUTIONS (0.26) (0.50) (0.48) (0.64) (0.66) (0.68) Net Asset Value, End of Period $10.13 $10.18 $10.19 $10.32 $10.04 $9.89 Total Return2 2.06% 4.95% 3.52% 9.43% 8.37% 11.15% Ratios to Average Net Assets: Expenses 0.03%3 0.03% 0.03% 0.04% 0.04% 0.05% Net investment income 5.14%3 4.93% 4.67% 6.00% 6.56% 7.09% Expense waiver/reimbursement4 0.08%3 0.08% 0.08% 0.08% 0.08% 0.08% Supplemental Data: Net assets, end of period (000 omitted) $882,246 $790,927 $767,012 $601,217 $453,784 $371,659 Portfolio turnover 37% 47% 90% 84% 93% 81%
1 Represents less than $0.01. 2 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized. 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 SHAREHOLDER EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management fees; to the extent applicable, distribution (12b-1) fees and/or shareholder services fees; and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from January 1, 2005 to June 30, 2005. ACTUAL EXPENSES The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled "Expenses Paid During Period" to estimate the expenses attributable to your investment during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are provided to enable you to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Beginning Ending Account Value Account Value Expenses Paid 1/1/2005 6/30/2005 During Period1 Actual $1,000 $1,020.60 $0.15 Hypothetical (assuming a 5% return before expenses) $1,000 $1,024.65 $0.15 1 Expenses are equal to the Fund's annualized expense ratio of 0.03%, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). Portfolio of Investments Summary Table At June 30, 2005, the Fund's portfolio composition1 was as follows: Percentage of Sector Total Net Assets Federal National Mortgage Association (FNMA) MBS 58.4% Federal Home Loan Mortgage Corporation (FHLMC) MBS 35.4% Government National Mortgage Association (GNMA) MBS 5.6% Repurchase Agreements - Cash 2.7% Repurchase Agreements - Collateral2 16.7% Other Assets and Liabilities - Net3 (18.8)% Total 100.0% 1 See the Fund's Prospectus for a description of the principal types of securities in which the Fund invests. 2 Includes repurchase agreements purchased with cash collateral or proceeds received in dollar roll transactions, as well as cash covering when issued and delayed delivery transactions. 3 See Statement of Assets and Liabilities.
Portfolio of Investments June 30, 2005 (unaudited) Principal Amount Value MORTGAGE-BACKED SECURITIES--99.4% Federal Home Loan Mortgage Corporation--35.4% $ 71,883,823 1 4.500%, 1/1/2019 - 7/1/2035 $ 71,456,590 92,799,414 5.000%, 7/1/2019 - 4/1/2034 93,142,086 104,908,038 1 5.500%, 4/1/2014 - 7/1/2035 106,649,754 19,008,950 6.000%, 5/1/2014 - 4/1/2035 19,569,670 14,085,773 6.500%, 7/1/2014 - 11/1/2032 14,603,686 2,975,594 7.000%, 12/1/2011 - 4/1/2032 3,136,481 1,595,753 7.500%, 12/1/2022 - 7/1/2031 1,712,835 1,325,766 8.000%, 11/1/2009 - 3/1/2031 1,433,316 42,456 8.500%, 9/1/2025 46,238 85,218 9.000%, 5/1/2017 95,084 3,306 9.500%, 4/1/2021 3,750 Total 311,849,490 Federal National Mortgage Association--58.4% 25,928,719 1 4.500%, 9/1/2010 - 7/1/2020 25,804,377 136,051,647 1 5.000%, 4/1/2018 - 8/1/2035 136,960,502 206,563,429 1 5.500%, 2/1/2009 - 7/1/2035 210,014,590 97,687,945 6.000%, 7/1/2006 - 4/1/2035 100,313,128 23,885,853 6.500%, 5/1/2006 - 11/1/2032 24,768,354 13,281,862 7.000%, 2/1/2008 - 8/1/2032 14,016,026 2,721,934 7.500%, 6/1/2011 - 6/1/2033 2,897,392 694,779 8.000%, 7/1/2023 - 3/1/2031 754,536 4,212 8.500%, 3/1/2030 4,589 46,539 9.000%, 11/1/2021 - 6/1/2025 51,231 Total 515,584,725 Government National Mortgage Association--5.6% 16,831,044 5.000%, 12/20/2032 - 6/20/2034 16,985,786 7,485,275 5.500%, 5/20/2035 7,637,319 11,379,668 6.000%, 10/15/2028 - 1/15/2033 11,769,725 3,728,145 6.500%, 10/15/2028 - 2/15/2032 3,911,898 3,878,496 7.000%, 11/15/2027 - 2/15/2032 4,123,198 1,549,047 7.500%, 6/20/2007 - 1/15/2031 1,668,869 1,818,502 8.000%, 2/15/2010 - 11/15/2030 1,966,707 775,373 8.500%, 3/15/2022 - 11/15/2030 843,052 34,478 9.000%, 10/15/2016 - 6/15/2025 37,803 4,893 9.500%, 10/15/2020 5,429 459,285 12.000%, 4/15/2015 - 6/15/2015 545,201 Total 49,494,987 Total Mortgage-Backed Securities (identified cost $865,947,582) 876,929,202 REPURCHASE AGREEMENTS--19.4% 23,526,000 Interest in $1,593,000,000 joint repurchase agreement with BNP Paribas Securities Corp., 3.450%, dated 6/30/2005 to be repurchased at $23,528,255 on 7/1/2005, collateralized by U.S. Government Agency Obligations with various maturities to 11/1/2035, collateral market value $1,633,156,051 23,526,000 118,250,000 2,3 Interest in $289,000,000 joint repurchase agreement with CS First Boston Corp., 3.145%, dated 6/13/2005 to be repurchased at $118,570,244 on 7/14/2005, collateralized by U.S. Government Agency Obligations with various maturities to 6/1/2035, collateral market value $300,741,469 118,250,000 29,000,000 2,3 Interest in $68,000,000 joint repurchase agreement with UBS Securities LLC, 3.170%, dated 6/16/2005 to be repurchased at $29,084,269 on 7/19/2005, collateralized by U.S. Government Agency Obligations with various maturities to 3/25/2030, collateral market value $70,044,413 29,000,000 Total repurchase agreements (at amortized cost) 170,776,000 Total Investments---118.8% (identified cost $1,036,723,582)4 1,047,705,202 other assets and liabilities--net--(18.8)% (165,458,897) total net assets---100% $ 882,246,305 1 All or a portion of these securities may be subject to dollar roll transactions. 2 Although final maturity falls beyond seven days at date of purchase, a liquidity feature is included in each transaction to permit termination of the repurchase agreement within seven days. 3 Security held as collateral for dollar roll transactions. 4 The cost of investments for federal tax purposes amounts to $1,036,723,582. Note: The categories of investments are shown as a percentage of total net assets at June 30, 2005. See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities June 30, 2005 (unaudited) Assets: Investments in repurchase agreements $ 170,776,000 Investments in securities 876,929,202 Total investments in securities, at value (identified cost $1,036,723,582) $ 1,047,705,202 Cash 856 Income receivable 3,457,922 Receivable for investments sold 35,039,606 Total assets 1,086,203,586 Liabilities: Payable for investments purchased $ 55,082,958 Income distribution payable 270,209 Payable for dollar roll transactions 148,562,057 Accrued expenses 42,057 Total liabilities 203,957,281 Net assets for 87,082,918 shares outstanding $ 882,246,305 Net Assets Consist of: Paid in capital $ 879,334,935 Net unrealized appreciation of investments 10,981,620 Accumulated net realized loss on investments (8,160,448) Undistributed net investment income 90,198 Total Net Assets $ 882,246,305 Net Asset Value, Offering Price and Redemption Proceeds Per Share: $882,246,305 / 87,082,918 shares outstanding, no par value, unlimited shares authorized $10.13 See Notes which are an integral part of the Financial Statements Statement of Operations Six Months Ended June 30, 2005 (unaudited) Investment Income: Interest (net of dollar roll expense of $1,271,983) $ 21,905,011 Expenses: Administrative personnel and services fee (Note 5) $ 340,602 Custodian fees 26,222 Transfer and dividend disbursing agent fees and expenses 8,069 Directors'/Trustees' fees 4,981 Auditing fees 8,191 Legal fees 3,127 Portfolio accounting fees 63,225 Insurance premiums 7,258 Miscellaneous 922 Total expenseS 462,597 Waiver of administrative personnel and services fee (Note 5) (340,602) Net expenses 121,995 Net investment income 21,783,016 Realized and Unrealized Loss on Investments: Net realized loss on investments (2,045,070) Net change in unrealized appreciation of investments (1,576,459) Net realized and unrealized loss on investments (3,621,529) Change in net assets resulting from operations $ 18,161,487 See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets Six Months Ended (unaudited) Year Ended 6/30/2005 12/31/2004 Increase (Decrease) in Net Assets Operations: Net investment income $ 21,783,016 $ 37,960,115 Net realized loss on investments (2,045,070) (5,221,974) Net change in unrealized appreciation/depreciation of investments (1,576,459) 4,349,401 Change in net assets resulting from operations 18,161,487 37,087,542 Distributions to Shareholders: Distributions from net investment income (21,747,017) (38,059,343) Share Transactions: Proceeds from sale of shares 151,060,952 82,966,155 Net asset value of shares issued to shareholders in payment of distributions declared 20,241,002 36,061,020 Cost of shares redeemed (76,397,000) (94,140,417) Change in net assets resulting from share transactions 94,904,954 24,886,758 Change in net assets 91,319,424 23,914,957 Net Assets: Beginning of period 790,926,881 767,011,924 End of period (including undistributed net investment income of $90,198 and $54,199, respectively) $ 882,246,305 $ 790,926,881 See Notes which are an integral part of the Financial Statements
NOTES TO FINANCIAL STATEMENTS June 30, 2005 (unaudited) 1. 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 those of 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 the other Federated funds that invest some of their assets in mortgage-backed securities. Currently, the Fund is only available for purchase by other Federated funds and their affiliates, or insurance company separate accounts, common or commingled trust funds or similar organizations or entities that are "accredited investors" within the meaning of Regulation D of the Securities Act of 1933. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP) in the United States of America. Investment Valuation Mortgage-backed security values furnished by an independent pricing service are based on the aggregate investment value of the projected cash flows to be generated by the security. U.S. government securities, listed corporate bonds, other fixed income and asset-backed securities, 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 accordance with procedures established by and under general supervision of 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 the 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. Premium and Discount Amortization / Paydown Gains and Losses All premiums and discounts on fixed income securities are amortized/accreted. Gains and losses realized on principal payment of mortgage backed securities (paydown gains and losses) are classified as part of investment income. Federal Taxes It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the "Code") and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. 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. The Fund may transact in To Be Announced Securities (TBAs). As with other delayed delivery transactions, a seller agrees to issue a TBA security at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Fund agrees to accept any security that meets specified terms such as issuer, interest rate and terms of underlying mortgages. The Fund records TBA securities on the trade date utilizing information associated with the specified terms of the transaction as opposed to the specific mortgages. TBAs are marked to market daily and begin earning interest on the settlement date. Losses may occur due to the fact that the actual underlying mortgages received may be less favorable than those anticipated by the Fund. Dollar Roll Transactions The Fund enters into dollar roll transactions with respect to mortgage securities issued by Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, in which the Fund sells mortgage securities to financial institutions and simultaneously agrees to accept substantially similar (same type, coupon and maturity) securities at a later date at an agreed-upon price. Dollar roll transactions are treated as short-term financing arrangements which will not exceed 12 months. The Fund will use the proceeds generated from the transaction to invest in short-term investments or mortgage-backed securities which may enhance the Fund's current yield and total return. Information regarding dollar roll transactions for the Fund for the six months ended June 30, 2005 was as follows: Maximum amount outstanding during the period $165,984,119 Average amount outstanding during the period1 $91,585,951 Average shares outstanding during the period 84,637,149 Average debt per shares outstanding during the $1.08 period 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 six months ended June 30, 2005. 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. Realized gains and losses from investment transactions are recorded on an identified cost basis. 3. SHARES OF BENEFICIAL INTEREST The following table summarizes share activity: Six Months Ended (unaudited) Year Ended 6/30/2005 12/31/2004 Shares sold 14,895,735 8,190,273 Shares issued to shareholders in payment of distributions declared 2,001,162 3,551,293 Shares redeemed (7,534,241) (9,309,587) NET CHANGE RESULTING FROM SHARE TRANSACTIONS 9,362,656 2,431,979 4. FEDERAL TAX INFORMATION At June 30, 2005, the cost of investments for federal tax purposes was $1,036,723,582. The net unrealized appreciation of investments for federal tax purposes was $10,981,620. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $12,421,434 and net unrealized depreciation from investments for those securities having an excess of cost over value of $1,439,814. At December 31, 2004, the Fund had a capital loss carryforward of $6,069,029 which will reduce the Fund's taxable income arising from future net realized gains 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 2012. 5. 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 Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of all Federated funds as specified below: Average Aggregate Daily Net Assets Maximum Administrative Fee of the Federated Funds 0.150% on the first $5 billion 0.125% on the next $5 billion 0.100% on the next $10 billion 0.075% on assets in excess of $20 billion The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. FAS may voluntarily choose to waive any portion of its fee. FAS can modify or terminate this voluntary waiver at any time at its sole discretion. General Certain of the Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies. 6. LEGAL PROCEEDINGS Beginning in October 2003, Federated Investors, Inc. and various subsidiaries thereof (including the advisers and distributor for various investment companies, collectively, "Federated"), along with various investment companies sponsored by Federated ("Funds") were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees. The Board of the Funds has retained the law firm of Dickstein Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys' fees and expenses, and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds. BOARD REVIEW OF ADVISORY CONTRACT As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment advisory contract. The Board's decision to approve the contract reflects the exercise of its business judgment on whether to continue the existing arrangements. During its review of the contract, the Board considers many factors, among the most material of which are: the Fund's investment objectives; the Adviser's management philosophy, personnel, processes, and investment and operating strategies; long term performance; the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry; the range of comparable fees for similar funds in the mutual fund industry; the range and quality of services provided to the Fund and its shareholders by the Federated organization in addition to investment advisory services; and the Fund's relationship to the Federated family of funds. In its decision to appoint or renew an Adviser, the Board is mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognizes that most shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and in the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's "selection" or approval of the Adviser must reflect the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund. The Board also considers the compensation and benefits received by the Adviser. This includes fees received for services provided to the Fund by other entities in the Federated organization and research services received by the Adviser from brokers that execute fund trades, as well as advisory fees. In this regard, the Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the Fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize "economies of scale" as the Fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with the Fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the Adviser's service and fee. The Fund's Board is aware of these factors and is guided by them in its review of the Fund's advisory contract to the extent they are appropriate and relevant, as discussed further below. The Board considers and weighs these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and is assisted in its deliberations by the advice of independent legal counsel. In this regard, the Board requests and receives substantial and detailed information about the Fund and the Federated organization. Federated provides much of this information at each regular meeting of the Board, and furnishes additional reports in connection with the particular meeting at which the Board's formal review of the advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board's evaluation of an advisory contract is informed by reports covering such matters as: the Adviser's investment philosophy, personnel, and processes; operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or "peer group" funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The evaluation process is evolutionary, reflecting continually developing considerations. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace. With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be particularly useful, given the high degree of competition in the mutual fund business. The Board focuses on comparisons with other similar mutual funds (rather than non-mutual fund products or services) because, simply put, they are more relevant. For example, other mutual funds are the products most like the Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle already chosen by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group may be a useful indicator of how the Adviser is executing on the Fund's investment program, which would in turn assist the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services are such as to warrant continuation of the advisory contract. The Board also receives financial information about Federated, including reports on the compensation and benefits Federated derives from its relationships with the Federated funds. These reports cover not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The reports also discuss any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades as well as waivers of fees and/or reimbursements of expenses. In order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waive fees and/or reimburse expenses. Although the Board considers the profitability of the Federated organization as a whole, it does not evaluate, on a fund-by-fund basis, Federated's "profitability" and/or "costs" (which would include an assessment as to whether "economies of scale" would be realized if the fund were to grow to some sufficient size). In the Board's view, the cost of performing advisory services on a fund-specific basis is both difficult to estimate satisfactorily and a relatively minor consideration in its overall evaluation. Analyzing isolated funds would require constructed allocations of the costs of shared resources and operations based on artificial assumptions that are inconsistent with the existing relationships within a large and diversified family of funds that receive advisory and other services from the same organization. Although the Board is always eager to discover any genuine "economies of scale," its experience has been that such "economies" are likely to arise only when a fund grows dramatically, and becomes and remains very large in size. Even in these instances, purchase and redemption activity, as well as the presence of expense limitations (if any), may offset any perceived economies. As suggested above, the Board considers the information it receives about the Fund's performance and expenses as compared to an appropriate set of similar competing funds to be more relevant. The Board bases its decision to approve an advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above are relevant to every Federated fund, nor does the Board consider any one of them to be determinative. With respect to the factors that are relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provide a satisfactory basis to support the decision to continue the existing arrangements. VOTING PROXIES ON FUND PORTFOLIO SECURITIES A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on "Form N-PX" of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from the EDGAR database on the SEC's website at www.sec.gov. QUARTERLY PORTFOLIO SCHEDULE The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on "Form N-Q." These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) Mutual funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. Investment in mutual funds involves investment risk, including the possible loss of principal. This report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's prospectus, which contains facts concerning its objective and policies, management fees, expenses, and other information. IMPORTANT NOTICE ABOUT FUND DOCUMENT DELIVERY In an effort to reduce costs and avoid duplicate mailings, the Fund(s) intend to deliver a single copy of certain documents to each household in which more than one shareholder of the Fund(s) resides (so-called "householding"), as permitted by applicable rules. The Fund's "householding" program covers its/their Prospectus and Statement of Additional Information, and supplements to each, as well as Semi-Annual and Annual Shareholder Reports and any Proxies or information statements. Shareholders must give their written consent to participate in the "householding" program. The Fund is also permitted to treat a shareholder as having given consent ("implied consent") if (i) shareholders with the same last name, or believed to be members of the same family, reside at the same street address or receive mail at the same post office box, (ii) the Fund gives notice of its intent to "household" at least sixty (60) days before it begins "householding" and (iii) none of the shareholders in the household have notified the Fund(s) or their agent of the desire to "opt out" of "householding." Shareholders who have granted written consent, or have been deemed to have granted implied consent, can revoke that consent and opt out of "householding" at any time: shareholders who purchased shares through an intermediary should contact their representative; other shareholders may call the Fund at 1-800-341-7400. Cusip 31409N200 31866 (8/05) HIGH-YIELD BOND PORTFOLIO SEMI-ANNUAL SHAREHOLDER REPORT June 30, 2005 FINANCIAL HIGHLIGHTS SHAREHOLDER EXPENSE EXAMPLE PORTFOLIO OF INVESTMENTS SUMMARY TABLES PORTFOLIO OF INVESTMENTS STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS STATEMENT OF CHANGES IN NET ASSETS NOTES TO FINANCIAL STATEMENTS BOARD REVIEW OF ADVISORY CONTRACT VOTING PROXIES ON FUND PORTFOLIO SECURITIES QUARTERLY PORTFOLIO SCHEDULE
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout Each Period) Six Months Ended (unaudited) Year Ended December 31, 6/30/2005 2004 2003 2002 2001 2000 Net Asset Value, Beginning of Period $7.08 $6.93 $6.11 $6.51 $7.14 $8.72 Income From Investment Operations: Net investment income 0.29 0.58 0.60 0.63 0.77 1 0.91 Net realized and unrealized gain (loss) on investments (0.27) 0.17 0.82 (0.39) (0.61)1 (1.57) Total from investment operations 0.02 0.75 1.42 0.24 0.16 (0.66) Less Distributions: Distributions from net investment income (0.30) (0.60) (0.60) (0.64) (0.79) (0.92) Net Asset Value, End of Period $6.80 $7.08 $6.93 $6.11 $6.51 $7.14 Total Return2 0.29% 11.40% 24.32% 3.90% 2.16% (8.04% Ratios to Average Net Assets: Expenses 0.03%3 0.03% 0.03% 0.03% 0.04% 0.04% Net investment income 8.33%3 8.39% 8.95% 10.03% 11.13%1 11.38% Expense waiver/reimbursement4 0.08%3 0.08% 0.08% 0.08% 0.08% 0.08% Supplemental Data: Net assets, end of period (000 omitted) $968,310 $1,127,462 $1,198,678 $797,496 $665,747 $532,820 Portfolio turnover 14% 43% 38% 39% 33% 16%
1 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. 2 Based on net asset value, which does not reflect the sales charge, redemption fee, or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized. 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 SHAREHOLDER EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management fees; to the extent applicable, distribution (12b-1) fees and/or shareholder services fees; and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from January 1, 2005 to June 30, 2005. ACTUAL EXPENSES The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled "Expenses Paid During Period" to estimate the expenses attributable to your investment during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are provided to enable you to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Beginning Ending Expenses Paid Account Value Account Value During Period 1 1/1/2005 6/30/2005 Actual $1,000 $1,002.90 $0.15 Hypothetical (assuming a 5% return before expenses) $1,000 $1,024.65 $0.15 1 Expenses are equal to the Fund's annualized expense ratio of 0.03%, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). PORTFOLIO OF INVESTMENTS SUMMARY TABLES At June 30, 2005, the Fund's credit quality ratings composition1 was as follows: S&P Long-Term Ratings as Moody's Long-Term Ratings as Percentage of Total Net Assets Percentage of Total Net Assets BBB 0.5% Baa 1.9% BB 28.1% Ba 24.8% B 55.2% B 48.3% CCC 10.9% Caa 19.3% CC 0.1% Ca 0.4% Not rated by S&P 1.4% Not rated by Moody's 1.5% Other Securities2 1.0% Other Securities2 1.0% Cash Equivalents3 1.4% Cash Equivalents3 1.4% Other Assets and 1.4% Other Assets and 1.4% Liabilities - Net 4 Liabilities - Net 4 TOTAL 100.0% TOTAL 100.0% At June 30, 2005, the Fund's index classification5 was as follows: ----------------------------------------------------------------------------- Percentage of Total Net Index Classification Assets Media - Non-cable 10.2% Healthcare 6.9% Food & Beverage 6.4% Industrial - Other 6.0% Chemicals 5.5% Wireline Communications 5.2% Gaming 4.6% Utility - Natural Gas 4.4% Consumer Products 4.3% Automotive 4.2% Paper 3.9% Utility - Electric 3.8% Technology 3.5% Building Materials 3.0% Media - Cable 2.9% Retailers 2.8% Entertainment 2.6% Other6 17.0% Cash Equivalents3 1.4% Other Assets and Liabilities - 1.4% Net 4 TOTAL 100.0% ----------------------------------------------------------------------------- 1 These tables depict the long-term credit-quality ratings assigned to the Fund's portfolio holdings by Standard & Poor's (S&P) and Moody's Investors Service (Moody's), each of which is a Nationally Recognized Statistical Rating Organization (NRSRO). These credit quality ratings are shown without regard to gradations within a given rating category. For example, securities rated "B-" have been included in the "B" rated category. Holdings that are rated only by a different NRSRO than the one identified have been included in the "Not rated by..." category. Rated securities include a security with an obligor and/or credit enhancer that has received a rating from an NRSRO with respect to a class of debt obligations that is comparable in priority and security with the security held by the Fund. Credit-quality ratings are an assessment of the risk that a security will default in payment and do not address other risks presented by the security. Please see the descriptions of credit-quality ratings in the Fund's Statement of Additional Information. 2 Other Securities include common stock, warrants and preferred stock that do not qualify for credit ratings from an NRSRO. 3 Cash Equivalents includes any investments in money market mutual funds and/or overnight repurchase agreements. 4 See Statement of Assets and Liabilities. 5 Index classifications are based upon, and individual portfolio securities are assigned to, the classifications and sub-classifications of the Lehman Brothers High Yield Composite Bond Index (LHYCBI). Individual portfolio securities that are not included in the LHYCBI are assigned to an index classification by the Fund's adviser. 6 For purposes of this table, index classifications which constitute less than 2.5% of the Fund's total net assets have been aggregated under the designation "Other."
PORTFOLIO OF INVESTMENTS June 30, 2005 (unaudited) Principal Amount Value ASSET-BACKED SECURITIES--0.5% Diversified--0.5% Trains HY-2004-1, Class A, 8.2105%, 8/1/2015 $ 4,586,045 1,2 (IDENTIFIED COST $4,848,451) $ 4,852,347 CORPORATE BONDS--95.8% Aerospace / Defense--1.7% Alliant Techsystems, Inc., Sr. Sub. Note, 2,800,000 8.50%, 5/15/2011 3,003,000 2,175,000 Argo Tech Corp., Sr. Note, 9.25%, 6/1/2011 2,370,750 Condor Systems, Inc., Sr. Sub. Note, Series 500,000 4 B, 11.875%, 5/1/2009 350 K&F Acquisition, Inc., Sr. Sub. Note, 7.75%, 1,000,000 11/15/2014 1,027,500 K&F Industries, Inc., Sr. Note, 11.50%, 1,100,000 1,2 2/1/2015 1,168,750 L-3 Communications Corp., Sr. Sub. Note, 1,125,000 6.125%, 1/15/2014 1,130,625 L-3 Communications Corp., Sr. Sub. Note, 3,400,000 6.125%, 7/15/2013 3,434,000 L-3 Communications Holdings, Inc., Sr. Sub. 875,000 Note, 5.875%, 1/15/2015 853,125 Standard Aero Holdings, Inc., Sr. Sub. Note, 1,275,000 1,2 8.25%, 9/1/2014 1,351,500 TransDigm, Inc., Sr. Sub. Note, 8.375%, 2,175,000 7/15/2011 2,316,375 Total 16,655,975 Automotive--4.2% Advanced Accessory Systems LLC, Sr. Note, 2,775,000 10.75%, 6/15/2011 2,247,750 Cooper-Standard Automotive, Inc., Sr. Sub. 3,450,000 Note, 8.375%, 12/15/2014 2,742,750 General Motors Acceptance Corp., 6.875%, 6,150,000 9/15/2011 5,683,934 General Motors Acceptance Corp., 8.00%, 7,125,000 11/1/2031 6,374,110 2,175,000 General Motors Corp., Note, 7.125%, 7/15/2013 1,957,500 5,275,000 General Motors Corp., Note, 8.375%, 7/15/2033 4,431,000 Stanadyne Corp., Sr. Sub. Note, 10.00%, 2,875,000 8/15/2014 2,731,250 Stanadyne Holdings, Inc., Sr. Disc. Note, 1,675,000 2/15/2015 912,875 Stoneridge, Inc., Company Guarantee, 11.50%, 2,300,000 5/1/2012 2,357,500 TRW Automotive, Inc., Sr. Note, 9.375%, 775,000 2/15/2013 862,187 TRW Automotive, Inc., Sr. Sub. Note, 11.00%, 3,566,000 2/15/2013 4,118,730 Tenneco Automotive, Inc., Sr. Sub. Note, 3,075,000 8.625%, 11/15/2014 3,105,750 United Components, Inc., Sr. Sub. Note, 2,725,000 9.375%, 6/15/2013 2,759,063 Total 40,284,399 Building Materials--3.0% AMH Holdings, Inc., Sr. Disc. Note, 0/11.25%, 2,900,000 3 3/1/2014 1,856,000 Associated Materials, Inc., Company 1,950,000 Guarantee, 9.75%, 4/15/2012 2,028,000 Builders Firstsource, Inc., Floating Rate 2,875,000 1,2 Note - Sr. Secured Note, 7.51813%, 2/15/2012 2,875,000 Collins & Aikman Floorcoverings, Inc., 2,425,000 Company Guarantee, 9.75%, 2/15/2010 2,522,000 ERICO International Corp., Sr. Sub. Note, 3,400,000 8.875%, 3/1/2012 3,468,000 Goodman Global Holdings, Inc., Floating Rate 1,225,000 1,2 Note, 6.62125%, 6/15/2012 1,212,750 Goodman Global Holdings, Inc., Sr. Sub. Note, 3,100,000 1,2 7.875%, 12/15/2012 2,883,000 1,600,000 Legrand SA, Sr. Note, 10.50%, 2/15/2013 1,832,000 Norcraft Cos. LLC, Sr. Sub. Note, Series WI, 1,125,000 9.00%, 11/1/2011 1,164,375 Norcraft Holdings LP, Sr. Disc. Note, 6,250,000 3 0/9.75%, 9/1/2012 4,343,750 1,2,3 Nortek Holdings, Inc., Sr. Disc. Note, 3,125,000 0/10.75%, 3/1/2014 1,484,375 Nortek Holdings, Inc., Sr. Sub. Note, 8.50%, 1,550,000 9/1/2014 1,449,250 Texas Industries, Inc., Sr. Note, 7.25%, 575,000 1,2 7/15/2013 592,250 U.S. Concrete, Inc., Sr. Sub. Note, 8.375%, 1,675,000 4/1/2014 1,582,875 Total 29,293,625 Chemicals--5.5% Aventine Renewable Energy Holdings, Inc., Floating Rate Note - Sr. Secured Note, 9.41%, 1,550,000 1,2 12/15/2011 1,495,750 Borden U.S. Finance Corp., Sr. Secd. Note, 3,500,000 1,2 9.00%, 7/15/2014 3,578,750 Compass Minerals Group, Inc., Sr. Sub. Note, 2,425,000 10.00%, 8/15/2011 2,655,375 Compass Minerals International, Inc., Sr. 3,950,000 3 Disc. Note, 0/12.00%, 6/1/2013 3,318,000 Principal Amount Value Compass Minerals International, Inc., Sr. 2,050,000 3 Disc. Note, 0/12.75%, 12/15/2012 1,804,000 4,984,000 Crystal US Holdings, Sr. Disc. Note, 10/1/2014 3,488,800 Crystal US Holdings, Sr. Sub. Note, 9.625%, 2,697,000 6/15/2014 3,034,125 Equistar Chemicals LP, Sr. Note, 10.125%, 3,450,000 9/1/2008 3,751,875 Huntsman Advanced Materials, Inc., Sr. Secd. 1,275,000 Note, 11.00%, 7/15/2010 1,447,125 Huntsman ICI Chemicals LLC, Sr. Sub. Note, 3,583,000 10.125%, 7/1/2009 3,703,926 3,225,000 1,2 Invista, Unit, 9.25%, 5/1/2012 3,543,469 Koppers, Inc., Sr. Secd. Note, 9.875%, 1,750,000 10/15/2013 1,898,750 Lyondell Chemical Co., Sr. Secd. Note, 9.50%, 2,300,000 12/15/2008 2,458,125 Lyondell Chemical Co., Sr. Sub. Note, 5,675,000 10.875%, 5/1/2009 5,916,188 1,660,000 3 Nalco Co., Sr. Disc. Note, 0/9.00%, 2/1/2014 1,234,625 950,000 Nalco Co., Sr. Note, 7.75%, 11/15/2011 1,016,500 2,250,000 Nalco Co., Sr. Sub. Note, 8.875%, 11/15/2013 2,424,375 1,450,000 1,2 PQ Corp., Sr. Sub. Note, 7.50%, 2/15/2013 1,431,875 Polypore, Inc., Sr. Sub. Note, 8.75%, 2,500,000 5/15/2012 2,350,000 Rockwood Specialties Group, Inc., Sr. Sub. 1,125,000 1,2 Note, 7.50%, 11/15/2014 1,122,188 925,000 Union Carbide Corp., Deb., 7.50%, 6/1/2025 1,024,417 Union Carbide Corp., Sr. Deb., 7.875%, 350,000 4/1/2023 397,183 Total 53,095,421 Construction Machinery--1.1% 3,575,000 1,2 Case New Holland, Sr. Note, 9.25%, 8/1/2011 3,771,625 Clark Material Handling Corp., Sr. Note, 1,775,000 4 10.75%, 11/15/2006 0 Columbus McKinnon Corp., Sr. Secd. Note, 525,000 10.00%, 8/1/2010 572,250 NationsRent Cos., Inc., Sr. Secd. Note, 1,750,000 9.50%, 10/15/2010 1,916,250 1,925,000 1,2 NationsRent, Inc., Sr. Note, 9.50%, 5/1/2015 1,915,375 United Rentals, Inc., Sr. Note, 6.50%, 1,950,000 2/15/2012 1,928,063 Total 10,103,563 Consumer Products--4.3% 1,2,3 AAC Group Holding Corp., Sr. Disc. Note, 3,250,000 0/10.25%, 10/1/2012 2,210,000 2,475,000 Alltrista Corp., Unsecd. Note, 9.75%, 5/1/2012 2,620,406 American Achievement Corp., Sr. Sub. Note, 1,025,000 8.25%, 4/1/2012 1,035,250 Ames True Temper, Inc., Sr. Sub. Note, 3,425,000 10.00%, 7/15/2012 2,774,250 Church and Dwight, Inc., Sr. Sub. Note, 1,500,000 6.00%, 12/15/2012 1,522,500 Diamond Brands Operating Corp., Sr. Sub. 325,000 4 Note, 10.125%, 4/15/2008 4,680 Diamond Brands, Inc., Sr. Disc. Deb., 925,000 4 12.875%, 4/15/2009 4,902 Jostens Holding Corp., Discount Bond, 5,600,000 3 0/10.25%, 12/1/2013 3,976,000 Jostens IH Corp., Sr. Sub. Note, 7.625%, 3,250,000 10/1/2012 3,225,625 500,000 K2, Inc., Sr. Note, 7.375%, 7/1/2014 528,750 Leiner Health Products, Unsecd. Note, 11.00%, 2,525,000 6/1/2012 2,487,125 Playtex Products, Inc., Company Guarantee, 3,450,000 9.375%, 6/1/2011 3,648,375 4,775,000 1,2 Rayovac Corp., Sr. Sub. Note, 7.375%, 2/1/2015 4,643,688 Sealy Mattress Co., Sr. Sub. Note, 8.25%, 3,225,000 6/15/2014 3,273,375 1,2,3 Simmons Co., Sr. Disc. Note, 0/10.00%, 3,500,000 12/15/2014 1,592,500 1,750,000 Simmons Co., Sr. Sub. Note, 7.875%, 1/15/2014 1,513,750 2,405,000 Tempur World, Sr. Sub. Note, 10.25%, 8/15/2010 2,657,525 True Temper Sports, Inc., Sr. Sub. Note, 2,825,000 8.375%, 9/15/2011 2,634,313 1,370,000 WH Holdings Ltd., Sr. Note, 9.50%, 4/1/2011 1,472,750 Total 41,825,764 Energy--1.4% Compton Petroleum Corp., Sr. Note, 9.90%, 3,350,000 5/15/2009 3,601,250 Lone Star Technologies, Inc., Company 925,000 Guarantee, Series B, 9.00%, 6/1/2011 977,031 Petroleum Helicopters, Inc., Company 2,250,000 Guarantee, Series B, 9.375%, 5/1/2009 2,379,375 Pogo Producing Co., Sr. Sub. Note, 6.625%, 1,000,000 1,2 3/15/2015 1,037,500 Range Resources Corp., Sr. Sub. Note, 7.375%, 1,150,000 7/15/2013 1,230,500 Swift Energy Co., Sr. Sub. Note, 9.375%, 3,775,000 5/1/2012 4,086,438 Total 13,312,094 Principal Amount Value Entertainment--2.6% AMC Entertainment, Inc., Sr. Sub. Note, 2,500,000 8.00%, 3/1/2014 2,231,250 AMC Entertainment, Inc., Sr. Sub. Note, 2,125,000 9.875%, 2/1/2012 2,119,687 1,875,000 Cinemark USA, Sr. Sub. Note, 9.00%, 2/1/2013 1,935,937 Cinemark, Inc., Sr. Disc. Note, 0/9.75%, 7,275,000 3 3/15/2014 4,874,250 2,575,000 Intrawest Corp., Sr. Note, 7.50%, 10/15/2013 2,655,469 Loews Cineplex Entertainment Corp., Sr. Sub. 4,000,000 1,2 Note, 9.00%, 8/1/2014 3,890,000 Universal City Development Partners Ltd., Sr. 5,850,000 Note, 11.75%, 4/1/2010 6,742,125 Universal City Florida Holding Co., Floating 1,000,000 Rate Note, 7.96%, 5/1/2010 1,042,500 Total 25,491,218 Environmental--1.0% Allied Waste North America, Inc., Company 2,875,000 Guarantee, Series B, 8.50%, 12/1/2008 3,029,531 Allied Waste North America, Inc., Company 2,533,000 Guarantee, Series B, 9.25%, 9/1/2012 2,748,305 Browning-Ferris Industries, Inc., Deb., 1,500,000 9.25%, 5/1/2021 1,526,250 Clean Harbors, Inc., Sr. Secd. Note, 11.25%, 2,475,000 1,2 7/15/2012 2,759,625 Total 10,063,711 Financial Institutions--0.3% American Real Estate Partners LP Finance, Sr. 2,725,000 1,2 Note, 7.125%, 2/15/2013 2,684,125 Food & Beverage--6.3% ASG Consolidated LLC, Sr. Disc. Note, 6,000,000 3 0/11.50%, 11/1/2011 4,335,000 Agrilink Foods, Inc., Company Guarantee, 1,144,000 11.875%, 11/1/2008 1,188,330 American Seafoods Group LLC, Company 2,925,000 Guarantee, 10.125%, 4/15/2010 3,137,062 B&G Foods Holdings Corp., Sr. Note, 8.00%, 2,000,000 10/1/2011 2,077,500 Constellation Brands, Inc., Company 2,300,000 Guarantee, Series B, 8.00%, 2/15/2008 2,461,000 Constellation Brands, Inc., Sr. Sub. Note, 1,000,000 8.125%, 1/15/2012 1,075,000 Cott Beverages, Inc., Company Guarantee, 3,525,000 8.00%, 12/15/2011 3,798,188 Del Monte Corp., Sr. Sub. Note, 6.75%, 3,375,000 1,2 2/15/2015 3,459,375 Del Monte Corp., Sr. Sub. Note, 8.625%, 1,950,000 12/15/2012 2,154,750 4,200,000 Dole Food, Inc., Sr. Note, 8.625%, 5/1/2009 4,494,000 Eagle Family Foods, Inc., Sr. Sub. Note, 1,425,000 8.75%, 1/15/2008 1,147,125 1,365,000 Gold Kist, Inc., Sr. Note, 10.25%, 3/15/2014 1,549,275 Michael Foods, Inc., Sr. Sub. Note, 8.00%, 2,825,000 11/15/2013 2,888,562 National Beef Packaging Co. LLC, Sr. Note, 2,150,000 10.50%, 8/1/2011 2,058,625 Pierre Foods, Inc., Sr. Sub. Note, 9.875%, 3,125,000 7/15/2012 3,242,188 Pilgrim's Pride Corp., Sr. Note, 9.625%, 1,525,000 9/15/2011 1,673,688 Pilgrim's Pride Corp., Sr. Sub. Note, 9.25%, 1,675,000 11/15/2013 1,867,625 1,2,3 Reddy Ice Group, Inc., Sr. Disc. Note, 4,300,000 0/10.50%, 11/1/2012 3,117,500 Reddy Ice Group, Inc., Sr. Sub. Note, 8.875%, 1,700,000 8/1/2011 1,895,500 2,950,000 Smithfield Foods, Inc., Note, 7.75%, 5/15/2013 3,230,250 Smithfield Foods, Inc., Sr. Note, Series B, 3,400,000 8.00%, 10/15/2009 3,689,000 1,700,000 Swift & Co., Sr. Note, 10.125%, 10/1/2009 1,861,500 1,625,000 Swift & Co., Sr. Sub. Note, 12.50%, 1/1/2010 1,822,031 UAP Holding Corp., Sr. Disc. Note, 0/10.75%, 2,950,000 7/15/2012 2,433,750 Total 60,656,824 Gaming--4.7% 155 East Tropicana LLC, Sr. Secd. Note, 1,950,000 1,2 8.75%, 4/1/2012 1,906,125 Boyd Gaming Corp., Sr. Sub. Note, 8.75%, 2,875,000 4/15/2012 3,137,344 Herbst Gaming, Inc., Sr. Sub. Note, 7.00%, 1,000,000 11/15/2014 1,012,500 Isle of Capri Casinos, Inc., Company 2,250,000 Guarantee, 9.00%, 3/15/2012 2,458,125 1,000,000 MGM Mirage, Sr. Note, 5.875%, 2/27/2014 976,250 2,000,000 MGM Mirage, Sr. Note, 6.00%, 10/1/2009 2,020,000 4,000,000 MGM Mirage, Sr. Note, 8.50%, 9/15/2010 4,460,000 525,000 MGM Mirage, Sr. Sub. Note, 9.75%, 6/1/2007 571,594 MTR Gaming Group, Inc., Company Guarantee, 3,025,000 Series B, 9.75%, 4/1/2010 3,297,250 Magna Entertainment Corp., Conv. Note, 7.25%, 1,350,000 12/15/2009 1,309,500 Majestic Star Casino LLC, Company Guarantee, 1,375,000 9.50%, 10/15/2010 1,423,125 Principal Amount Value Mandalay Resort Group, Sr. Sub. Note, 10.25%, 6,100,000 8/1/2007 6,740,500 Mandalay Resort Group, Sr. Sub. Note, 9.375%, 58,139 2/15/2010 65,262 Park Place Entertainment Corp., Sr. Sub. 4,225,000 Note, 7.875%, 3/15/2010 4,753,125 Park Place Entertainment Corp., Sr. Sub. 3,150,000 Note, 8.125%, 5/15/2011 3,638,250 Penn National Gaming, Inc., Company 1,775,000 Guarantee, 8.875%, 3/15/2010 1,908,125 Penn National Gaming, Inc., Sr. Sub. Note, 575,000 1,2 6.75%, 3/1/2015 573,563 Station Casinos, Inc., Sr. Note, 6.00%, 600,000 4/1/2012 612,000 Station Casinos, Inc., Sr. Sub. Note, 6.50%, 2,525,000 2/1/2014 2,588,125 Sun International Hotels Ltd., Sr. Sub. Note, 1,500,000 8.875%, 8/15/2011 1,612,500 Total 45,063,263 Healthcare--7.0% AMR Holding Co./Emcare Holding Co., Sr. Sub. 1,200,000 1,2 Note, 10.00%, 2/15/2015 1,284,000 AmeriPath, Inc., Company Guarantee, 10.50%, 4,450,000 4/1/2013 4,527,875 Ardent Health Services, Sr. Sub. Note, 3,100,000 10.00%, 8/15/2013 3,762,625 Bio Rad Laboratories, Inc., Sr. Sub. Note, 1,450,000 6.125%, 12/15/2014 1,471,750 1,2,3 CDRV Investors, Inc., Sr. Disc. Note, 8,200,000 0/9.625%, 1/1/2015 4,059,000 Concentra Operating Corp., Sr. Sub. Note, 850,000 9.125%, 6/1/2012 905,250 Concentra Operating Corp., Sr. Sub. Note, 2,500,000 9.50%, 8/15/2010 2,675,000 1,000,000 1,2 DaVita, Inc., Sr. Sub. Note, 7.25%, 3/15/2015 1,032,500 Fisher Scientific International, Inc., Sr. 3,000,000 1,2 Sub. Note, 6.125%, 7/1/2015 3,018,750 Fisher Scientific International, Inc., Sr. 1,600,000 Sub. Note, 6.75%, 8/15/2014 1,680,000 Fisher Scientific International, Inc., Sr. 3,750,000 Sub. Note, 8.00%, 9/1/2013 4,303,125 6,800,000 HCA, Inc., Note, 8.75%, 9/1/2010 7,762,268 450,000 HCA, Inc., Sr. Note, 6.375%, 1/15/2015 468,048 2,350,000 HCA, Inc., Sr. Note, 7.50%, 11/6/2033 2,539,259 4,850,000 HCA, Inc., Sr. Note, 7.875%, 2/1/2011 5,348,527 Hanger Orthopedic Group, Inc., Company 1,525,000 Guarantee, 10.375%, 2/15/2009 1,414,437 Magellan Health Services, Inc., Sr. Note, 1,491,172 Series A, 9.375%, 11/15/2008 1,595,554 Medical Device Manufacturing, Inc., Sr. Sub. 3,525,000 Note, 10.00%, 7/15/2012 3,807,000 National Mentor, Inc., Sr. Sub. Note, 9.625%, 2,300,000 1,2 12/1/2012 2,432,250 Psychiatric Solutions, Inc., Sr. Sub. Note, 1,275,000 1,2 7.75%, 7/15/2015 1,275,000 Sybron Dental Specialties, Inc., Company 2,125,000 Guarantee, 8.125%, 6/15/2012 2,284,375 2,100,000 Tenet Healthcare Corp., Note, 9.875%, 7/1/2014 2,262,750 Tenet Healthcare Corp., Sr. Note, 9.25%, 2,050,000 1,2 2/1/2015 2,137,125 VWR International, Inc., Sr. Sub. Note, 1,025,000 8.00%, 4/15/2014 981,437 Vanguard Health Holdings II, Sr. Sub. Note, 1,550,000 9.00%, 10/1/2014 1,681,750 2,475,000 Ventas Realty LP, Sr. Note, 6.625%, 10/15/2014 2,499,750 450,000 1,2 Ventas Realty LP, Sr. Note, 7.125%, 6/1/2015 470,250 Total 67,679,655 Industrial - Other--5.9% ALH Finance LLC/ALH Finance Corp., Sr. Sub. 3,650,000 Note, 8.50%, 1/15/2013 3,362,562 2,500,000 Aearo Co. I, Sr. Sub. Note, 8.25%, 4/15/2012 2,512,500 American Tire Distributors, Inc., Sr. Note, 1,925,000 1,2 10.75%, 4/1/2013 1,848,000 Amsted Industries, Inc., Sr. Note, 10.25%, 4,200,000 1,2 10/15/2011 4,557,000 Brand Services, Inc., Company Guarantee, 3,675,000 12.00%, 10/15/2012 3,950,625 Coleman Cable, Inc., Sr. Note, 9.875%, 2,225,000 1,2 10/1/2012 1,991,375 Da-Lite Screen Co., Inc., Sr. Note, 9.50%, 2,200,000 5/15/2011 2,354,000 2,850,000 Hawk Corp., Sr. Note, 8.75%, 11/1/2014 2,907,000 Interline Brands, Inc., Sr. Sub. Note, 2,129,000 11.50%, 5/15/2011 2,352,545 Knowledge Learning Corp., Sr. Sub. Note, 3,550,000 1,2 7.75%, 2/1/2015 3,408,000 Mueller Group, Inc., Sr. Sub. Note, 10.00%, 2,475,000 5/1/2012 2,611,125 2,050,000 NSP Holdings LLC, Sr. Note, 11.75%, 1/1/2012 2,244,750 2,703,900 1,2 Neenah Corp., Sr. Sub. Note, 13.00%, 9/30/2013 2,690,381 Neenah Corp., Sr. Secd. Note, 11.00%, 3,545,000 9/30/2010 3,864,050 Norcross Safety Products, Sr. Sub. Note, 4,200,000 Series B, 9.875%, 8/15/2011 4,410,000 Rexnord Corp., Company Guarantee, 10.125%, 3,525,000 12/15/2012 3,877,500 Principal Amount Value Safety Products Holdings, Inc., Sr. Note, 475,000 1,2 11.75%, 1/1/2012 450,063 Sensus Metering Systems, Inc., Sr. Sub. Note, 2,875,000 8.625%, 12/15/2013 2,688,125 Superior Essex Communications LLC, Sr. Note, 3,525,000 9.00%, 4/15/2012 3,507,375 Valmont Industries, Inc., Sr. Sub. Note, 1,350,000 6.875%, 5/1/2014 1,356,750 Total 56,943,726 Lodging--1.7% Gaylord Entertainment Co., Sr. Note, 6.75%, 2,000,000 11/15/2014 1,965,000 HMH Properties, Inc., Sr. Note, Series B, 487,000 7.875%, 8/1/2008 496,740 Host Marriott LP, Unsecd. Note, 7.125%, 3,100,000 11/1/2013 3,247,250 Lodgenet Entertainment, Sr. Sub. Note, 9.50%, 1,900,000 6/15/2013 2,080,500 Royal Caribbean Cruises Ltd., Sr. Note, 1,925,000 8.00%, 5/15/2010 2,141,563 Starwood Hotels & Resorts Worldwide, Inc., 2,700,000 Company Guarantee, 7.875%, 5/1/2012 3,057,750 Starwood Hotels & Resorts Worldwide, Inc., 2,975,000 Note, 7.375%, 5/1/2007 3,123,750 Total 16,112,553 Media - Cable--2.8% CSC Holdings, Inc., Sr. Deb., 8.125%, 2,150,000 8/15/2009 2,187,625 1,775,000 1,2 CSC Holdings, Inc., Sr. Note, 6.75%, 4/15/2012 1,677,375 CSC Holdings, Inc., Sr. Note, 7.875%, 2,910,000 12/15/2007 3,019,125 Cablevision Systems Corp., Sr. Note, Series 2,200,000 WI, 8.00%, 4/15/2012 2,167,000 Charter Communications Holdings Capital 5,125,000 Corp., Sr. Disc. Note, 9.92%, 4/1/2011 3,766,875 Charter Communications Holdings II, Sr. Note, 5,900,000 10.25%, 9/15/2010 5,995,875 Kabel Deutschland GMBH, Sr. Note, 10.625%, 5,850,000 1,2 7/1/2014 6,376,500 Rogers Cablesystems Ltd., Sr. Sub. Gtd. Note, 1,400,000 11.00%, 12/1/2015 1,519,000 Total 26,709,375 Media - Non-Cable--9.8% Advanstar Communications, Company Guarantee, 2,700,000 Series B, 12.00%, 2/15/2011 2,895,750 Advanstar Communications, Sr. Secd. Note, 1,700,000 10.75%, 8/15/2010 1,865,750 Advanstar, Inc., Company Guarantee, Series B, 2,100,000 3 0/15.00%, 10/15/2011 2,092,125 Affinity Group Holding, Inc., Sr. Note, 1,750,000 10.875%, 2/15/2012 1,701,875 Affinity Group, Inc., Sr. Sub. Note, 9.00%, 1,700,000 2/15/2012 1,729,750 American Media Operations, Inc., Company 2,700,000 Guarantee, Series B, 10.25%, 5/1/2009 2,713,500 American Media Operations, Inc., Sr. Sub. 1,850,000 Note, 8.875%, 1/15/2011 1,762,125 3,200,000 CBD Media Holdings, Sr. Note, 9.25%, 7/15/2012 3,256,000 675,000 CBD Media LLC, Sr. Sub. Note, 8.625%, 6/1/2011 698,625 DIRECTV Holdings LLC, Sr. Note, 6.375%, 600,000 1,2 6/15/2015 600,000 DIRECTV Holdings LLC, Sr. Note, 8.375%, 2,974,000 3/15/2013 3,308,575 Dex Media East LLC, Company Guarantee, 3,421,000 12.125%, 11/15/2012 4,113,752 Dex Media West LLC, Sr. Sub. Note, Series B, 6,739,000 9.875%, 8/15/2013 7,716,155 Dex Media, Inc., Discount Bond, 0/9.00%, 4,125,000 3 11/15/2013 3,341,250 Echostar DBS Corp., Sr. Note, 6.625%, 6,100,000 10/1/2014 6,054,250 Emmis Communications, Corp., Floating Rate 1,500,000 1,2 Note - Sr. Note, 9.31438%, 6/15/2012 1,533,750 Houghton Mifflin Co., Sr. Disc. Note, 4,525,000 3 0/11.50%, 10/15/2013 3,325,875 Intelsat Bermuda Ltd., Floating Rate Note - 2,625,000 1,2 Sr. Note, 7.805%, 1/15/2012 2,684,062 Intelsat Bermuda Ltd., Sr. Note, 8.625%, 1,775,000 1,2 1/15/2015 1,881,500 Lamar Media Corp., Sr. Sub. Note, 7.25%, 1,825,000 1/1/2013 1,934,500 NBC Acqusition Corp., Sr. Disc. Note, 2,600,000 3 0/11.00%, 3/15/2013 1,872,000 Nebraska Book Co., Inc., Sr. Sub. Note, 1,300,000 8.625%, 3/15/2012 1,218,750 1,570,000 PanAmSat Corp., Sr. Note, 9.00%, 8/15/2014 1,721,113 PanAmSat Holding Corp., Discount Bond, 7,500,000 11/1/2014 5,193,750 Quebecor Media Inc., Sr. Note, 11.125%, 2,950,000 7/15/2011 3,292,938 R. H. Donnelly Finance Corp., Sr. Sub. Note, 3,600,000 10.875%, 12/15/2012 4,203,000 Rainbow National Services LLC, Sr. Sub. Note, 4,075,000 1,2 10.375%, 9/1/2014 4,706,625 Readers Digest Association, Inc., Sr. Note, 2,300,000 Series 144A, 6.50%, 3/1/2011 2,346,000 Sinclair Broadcast Group, Inc., Company 1,875,000 Guarantee, 8.75%, 12/15/2011 1,978,125 Vertis, Inc., Sr. Note, Series B, 10.875%, 7,050,000 6/15/2009 6,768,000 Vertis, Inc., Sr. Secd. 2nd Priority Note, 675,000 9.75%, 4/1/2009 705,375 Principal Amount Value WDAC Subsidiary Corp., Sr. Note, 8.375%, 4,000,000 1,2 12/1/2014 3,840,000 1,365,000 Yell Finance BV, Sr. Note, 10.75%, 8/1/2011 1,511,738 Ziff Davis Media, Inc., Company Guarantee, 413,537 Series, 13.00%, 8/12/2009 444,552 Total 95,011,135 Metals & Mining--1.3% Aleris International, Inc., Sr. Note, 9.00%, 1,300,000 11/15/2014 1,352,000 Imco Recycling, Inc., Sr. Secd. Note, 3,350,000 10.375%, 10/15/2010 3,693,375 2,450,000 1,2 Novelis, Inc., Sr. Note, 7.25%, 2/15/2015 2,471,438 Republic Technologies International, Inc., 2,000,000 4 Company Guarantee, 13.75%, 7/15/2009 0 Ryerson Tull, Inc., Sr. Note, 9.125%, 2,675,000 7/15/2006 2,741,875 United States Steel Corp., Sr. Note, 9.75%, 2,456,000 5/15/2010 2,664,760 Total 12,923,448 Packaging--1.7% Berry Plastics Corp., Company Guarantee, 3,450,000 10.75%, 7/15/2012 3,782,063 Graham Packaging Co., Sub. Note, 8.50%, 1,575,000 1,2 10/15/2012 1,598,625 Greif Brothers Corp., Sr. Sub. Note, 8.875%, 2,400,000 8/1/2012 2,592,000 Huntsman Packaging Corp., Company Guarantee, 2,325,000 13.00%, 6/1/2010 1,894,875 Owens-Brockway Glass Container, Inc., Company 2,600,000 Guarantee, 8.25%, 5/15/2013 2,837,250 Owens-Illinois, Inc., Sr. Note, 8.10%, 3,425,000 5/15/2007 3,579,125 400,000 Pliant Corp., Sr. Sub. Note, 13.00%, 6/1/2010 326,000 Russell Stanley Holdings, Inc., Sr. Sub. 520,679 1 Note, 9.00%, 11/30/2008 214,520 Total 16,824,458 Paper--3.9% Abitibi-Consolidated, Inc., Sr. Note, 8.375%, 2,900,000 4/1/2015 2,972,500 Boise Cascade LLC, Floating Rate Note - Sr. 1,025,000 1,2 Note, 6.01563%, 10/15/2012 1,040,375 Boise Cascade LLC, Sr. Sub. Note, 7.125%, 1,450,000 1,2 10/15/2014 1,431,875 Georgia-Pacific Corp., Sr. Note, 8.125%, 6,150,000 5/15/2011 6,964,875 Georgia-Pacific Corp., Sr. Note, 9.375%, 5,600,000 2/1/2013 6,363,000 Graphic Packaging International Corp., Sr. 3,425,000 Sub. Note, 9.50%, 8/15/2013 3,467,812 Jefferson Smurfit Corp., Company Guarantee, 3,000,000 8.25%, 10/1/2012 3,030,000 3,550,000 MDP Acquisitions PLC, 9.625%, 10/1/2012 3,567,750 3,100,000 Mercer International, Inc., 9.25%, 2/15/2013 2,495,500 3,125,000 1,2 NewPage Corp., Sr. Sub. Note, 12.00%, 5/1/2013 3,109,375 Stone Container Corp., Sr. Note, 9.75%, 1,500,000 2/1/2011 1,593,750 2,625,000 Tembec Industries, Inc., 8.50%, 2/1/2011 2,040,937 Total 38,077,749 Restaurants--0.6% Buffets, Inc., Sr. Sub. Note, 11.25%, 825,000 7/15/2010 835,312 1,725,000 1,2 Carrols Corp., Sr. Sub. Note, 9.00%, 1/15/2013 1,755,187 Landry's Seafood Restaurants, Inc., Sr. Note, 2,875,000 Series B, 7.50%, 12/15/2014 2,795,936 Total 5,386,435 Retailers--2.6% Couche-Tard Financing Corp., Sr. Sub. Note, 3,350,000 7.50%, 12/15/2013 3,534,250 2,406,000 FTD, Inc., Sr. Sub. Note, 7.75%, 2/15/2014 2,369,910 General Nutrition Center, Sr. Sub. Note, 1,100,000 8.50%, 12/1/2010 885,500 Hines Nurseries, Inc., Company Guarantee, 2,150,000 10.25%, 10/1/2011 2,225,250 Jean Coutu Group (PLC), Inc., Sr. Sub. Note, 2,700,000 8.50%, 8/1/2014 2,679,750 6,176,000 Penney (J.C.) Co., Inc., Note, 9.00%, 8/1/2012 7,334,000 Rite Aid Corp., Sr. Secd. Note, 8.125%, 2,150,000 5/1/2010 2,225,250 Rite Aid Corp., Sr. Secd. Note, 9.50%, 2,550,000 2/15/2011 2,728,500 United Auto Group, Inc., Company Guarantee, 725,000 9.625%, 3/15/2012 777,563 Total 24,759,973 Services--1.4% CB Richard Ellis Services, Sr. Note, 9.75%, 1,007,000 5/15/2010 1,122,805 Global Cash Access LLC, Sr. Sub. Note, 8.75%, 3,450,000 3/15/2012 3,769,125 HydroChem Industrial Services, Sr. Sub. Note, 2,450,000 1,2 9.25%, 2/15/2013 2,278,500 Principal Amount Value Insurance Automotive Auctions, Inc., Sr. 1,875,000 1,2 Unsecd. Note, 11.00%, 4/1/2013 1,939,924 2,475,000 SITEL Corp., Sr. Sub. Note, 9.25%, 3/15/2006 2,462,625 The Brickman Group Ltd., Sr. Sub. Note, 2,100,000 Series B, 11.75%, 12/15/2009 2,388,750 Total 13,961,729 Technology--3.5% Activant Solutions, Inc., Floating Rate Note, 675,000 1,2 9.09%, 4/1/2010 702,000 Activant Solutions, Inc., Sr. Note, 10.50%, 2,350,000 6/15/2011 2,561,500 Danka Business Systems PLC, Sr. Note, 11.00%, 2,100,000 6/15/2010 1,690,500 Freescale Semiconductor, Inc., Sr. Note, 1,850,000 7.125%, 7/15/2014 1,998,000 Ingram Micro, Inc., Sr. Sub. Note, 9.875%, 3,875,000 8/15/2008 4,097,812 MagnaChip Semiconductor S.A., Sr. Sub. Note, 1,250,000 1,2 8.00%, 12/15/2014 1,206,250 Seagate Technology HDD Holdings, Sr. Note, 3,300,000 8.00%, 5/15/2009 3,526,875 Smart Modular Technologies, Inc., Sr. Note, 1,950,000 1,2 8.35%, 4/1/2012 1,930,500 Telex Communications, Inc., Sr. Secd. Note, 2,075,000 11.50%, 10/15/2008 2,230,625 5,300,000 UGS Corp., Sr. Sub. Note, 10.00%, 6/1/2012 5,909,500 2,275,000 Unisys Corp., Sr. Note, 6.875%, 3/15/2010 2,246,562 4,925,000 Xerox Corp., Sr. Note, 9.75%, 1/15/2009 5,620,656 Total 33,720,780 Textile--0.8% 800,000 GFSI, Inc., Sr. Sub. Note, 9.625%, 3/1/2007 732,000 Phillips Van Heusen Corp., Sr. Note, 8.125%, 1,550,000 5/1/2013 1,685,625 Warnaco Group, Inc., Sr. Note, 8.875%, 2,600,000 6/15/2013 2,886,000 William Carter Co., Sr. Sub. Note, Series B, 2,145,000 10.875%, 8/15/2011 2,413,468 Total 7,717,093 Tobacco--0.4% Commonwealth Brands, Inc., Sr. Sub. Secd. 3,350,000 1,2 Note, 10.625%, 9/1/2008 3,542,625 Transportation--0.6% Allied Holdings, Inc., Sr. Note, 8.625%, 2,100,000 10/1/2007 1,008,000 AmeriTruck Distribution Corp., Sr. Sub. Note, 1,025,000 4 12.25%, 11/15/2005 0 4,650,000 Stena AB, Sr. Note, 9.625%, 12/1/2012 5,091,750 The Holt Group, Inc., Company Guarantee, 1,050,000 4 9.75%, 1/15/2006 0 Total 6,099,750 Utility - Electric--3.8% Caithness Coso Funding Corp., Sr. Secd. Note, 3,536,819 Series B, 9.05%, 12/15/2009 3,810,922 Edison Mission Holding Co., Sr. Note, 9.875%, 4,200,000 4/15/2011 4,940,250 FPL Energy National Wind, Note, 6.125%, 1,150,000 1,2 3/25/2019 1,118,644 NRG Energy, Inc., Sr. Secd. Note, 8.00%, 2,269,000 1,2 12/15/2013 2,405,140 350,000 Nevada Power Co., 6.50%, 4/15/2012 367,500 625,000 1,2 Nevada Power Co., Mtg. Note, 5.875%, 1/15/2015 631,250 Nevada Power Co., Second Mortgage Notes, 5,350,000 9.00%, 8/15/2013 6,045,500 PSEG Energy Holdings, Sr. Note, 10.00%, 4,225,000 10/1/2009 4,763,688 Reliant Energy, Inc., Sr. Secd. Note, 6.75%, 1,025,000 12/15/2014 1,007,063 Reliant Resources, Inc., Sr. Secd. Note, 1,850,000 9.25%, 7/15/2010 2,025,750 Reliant Resources, Inc., Sr. Secd. Note, 2,950,000 9.50%, 7/15/2013 3,289,250 850,000 1,2 TECO Energy, Inc., Sr. Note, 6.75%, 5/1/2015 905,250 4,675,000 1,2 Texas Genco LLC, Sr. Note, 6.875%, 12/15/2014 4,943,813 Vineyard National Bancorp Co., Sr. Secd. 875,000 1,2 Note, 5.875%, 11/1/2014 901,250 Total 37,155,270 Utility - Natural Gas--4.4% 750,000 ANR Pipeline Co., Sr. Note, 8.875%, 3/15/2010 826,446 AmeriGas Partners LP, Sr. Unsecd. Note, 2,150,000 1,2 7.25%, 5/20/2015 2,246,750 800,000 El Paso Corp., 6.75%, 5/15/2009 804,000 2,500,000 El Paso Corp., Note, 6.95%, 12/15/2007 2,540,625 1,800,000 El Paso Corp., Sr. Note, 7.80%, 8/1/2031 1,759,500 5,125,000 El Paso Corp., Sr. Note, 8.05%, 10/15/2030 5,099,375 El Paso Production Holding Co., Company 4,250,000 Guarantee, 7.75%, 6/1/2013 4,558,125 Principal Amount Value Holly Energy Partners LP, Sr. Note, 6.25%, 2,900,000 1,2 3/1/2015 2,842,000 1,500,000 1,2 Inergy LP, Sr. Note, 6.875%, 12/15/2014 1,466,250 MarkWest Energy Partners LP, Sr. Note, 775,000 1,2 6.875%, 11/1/2014 775,000 Pacific Energy Partners LP, Sr. Note, 7.125%, 2,250,000 6/15/2014 2,354,063 Semco Energy, Inc., Sr. Note, 7.125%, 1,750,000 5/15/2008 1,790,399 Tennessee Gas Pipeline, Bond, 8.375%, 2,225,000 6/15/2032 2,629,265 Tennessee Gas Pipeline, Sr. Deb., 7.50%, 1,100,000 4/1/2017 1,223,919 Transcontinental Gas Pipe Corp., Sr. Note, 2,275,000 8.875%, 7/15/2012 2,718,625 4,775,000 Williams Cos., Inc., Note, 7.625%, 7/15/2019 5,395,750 3,425,000 Williams Cos., Inc., Note, 7.875%, 9/1/2021 3,913,063 Total 42,943,155 Wireless Communications--2.3% Inmarsat Finance PLC, Sr. Disc. Note, 1,500,000 3 0/10.375%, 11/15/2012 1,185,000 Inmarsat Finance PLC, Sr. Note, 7.625%, 550,000 6/30/2012 583,000 New Skies Satellites NV, Sr. Sub. Note, 1,425,000 1,2 9.125%, 11/1/2012 1,421,438 Nextel Communications, Inc., Sr. Note, 7,600,000 7.375%, 8/1/2015 8,246,000 3,200,000 Rogers Wireless, Inc., 6.375%, 3/1/2014 3,272,000 Rogers Wireless, Inc., Floating Rate Note - 1,200,000 Sr. Secured Note, 6.535%, 12/15/2010 1,257,000 Rogers Wireless, Inc., Sr. Secd. Note, 7.50%, 550,000 3/15/2015 600,875 Rogers Wireless, Inc., Sr. Sub. Note, 8.00%, 2,250,000 12/15/2012 2,435,625 US Unwired, Inc., Sr. Secd. Note, 10.00%, 2,725,000 6/15/2012 3,045,188 Total 22,046,126 Wireline Communications--5.2% 10,175,000 AT&T Corp., Sr. Note, 9.75%, 11/15/2031 13,291,094 Alaska Communications Systems Holdings, Inc., 2,204,000 Sr. Note, 9.875%, 8/15/2011 2,347,260 Cincinnati Bell, Inc., Company Guarantee, 3,275,000 7.25%, 7/15/2013 3,455,125 Cincinnati Bell, Inc., Sr. Sub. Note, 8.375%, 825,000 1/15/2014 849,750 2,750,000 Citizens Communications Co., 9.00%, 8/15/2031 2,832,500 Citizens Communications Co., Unsecd. Note, 1,025,000 9.25%, 5/15/2011 1,149,281 4,300,000 MCI, Inc., Sr. Note, 8.735%, 5/1/2014 4,832,125 10,350,000 1,2 Qwest Corp., Note, 9.125%, 3/15/2012 11,307,375 Qwest Services Corp., Sr. Sub. Note, 13.50%, 6,750,000 12/15/2010 7,830,000 Valor Telecommunications Enterprises, Sr. 2,400,000 1,2 Note, 7.75%, 2/15/2015 2,370,000 Total 50,264,510 Total Corporate Bonds (identified cost $903,114,639) 926,409,527 COMMON STOCKS & WARRANTS--0.3% Chemicals--0.0% 704 4 General Chemical Industrial Products, Inc. 135,886 General Chemical Industrial Products, Inc., 302 4 Warrants 0 General Chemical Industrial Products, Inc., 407 4 Warrants 0 Total 135,886 Consumer Products--0.0% 1,003 1,4 Sleepmaster LLC 286,737 Food & Beverage--0.1% 80,670 B&G Foods, Inc. 1,181,009 Industrial - Other--0.1% 458,151 1,4 ACP Holdings Corp., Warrants 859,033 Media - Cable--0.1% 11,970 4 NTL, Inc. 818,987 Media - Non-Cable--0.0% 1,000 1,4 Advanstar, Inc., Warrants 20 1,800 4 XM Satellite Radio, Inc., Warrants 118,800 19,800 4 Ziff Davis Media, Inc., Warrants 1,980 Total 120,800 Principal Amount Value Metals & Mining--0.0% Republic Technologies International, Inc., 2,000 1,4 Warrants 0 57,533 4 Royal Oak Mines, Inc. 86 Total 86 Other--0.0% 171 1,4 CVC Claims Litigation LLC 0 Packaging--0.0% 1,000 1,4 Pliant Corp., Warrants 10 57,000 1,4 Russell Stanley Holdings, Inc. 0 Total 10 Paper--0.0% 1,600 1,4 MDP Acquisitions PLC, Warrants 32,800 Wireline Communications--0.0% 17,646 4 Viatel Holding (Bermuda) Ltd. 1,235 Total Common Stocks & Warrants (identified cost $12,397,667) 3,436,583 PREFERRED STOCKS--0.6% Media - Non-Cable--0.4% Primedia, Inc., Exchangeable Pfd. Stock, 38,300 Series G, $8.62 Annual Dividend 3,782,125 108 Ziff Davis Media, Inc., PIK Pfd., Series E-1 74,790 Total 3,856,915 Retailers--0.2% General Nutrition Centers Holding Co., 3,125 Exchangeable Pfd. Stock, Series A 2,101,563 Total Preferred Stocks (identified cost $6,922,625) 5,958,478 REPURCHASE AGREEMENT--1.4% Interest in $1,593,000,000 joint repurchase agreement with BNP Paribas Securities Corp., 3.45%, dated 6/30/2005 to be purchased at $13,926,334 on 7/1/2005, collateralized by U.S. Government Agency Obligations with various maturities to 11/1/2035, collateral market value 13,925,000 $1,633,156,051 (at amortized cost) 13,925,000 Total Investments - 98.6% (identified cost $941,208,382)5 954,581,935 other assets and liabilities - net - 1.4% 13,727,707 total net assets - 100% $ 968,309,642
1 Denotes a restricted security, including securities purchased under Rule 144A of the Securities Act of 1933. These securities, unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. At June 30, 2005, these securities amounted to $172,840,465 which represents 17.8% of total net assets. 2 Denotes a restricted security, including securities purchased under Rule144A that have been deemed liquid by criteria approved by the Fund's Board of Trustees. At June 30, 2005, these securities amounted to $171,447,345 which represents 17.7% of total net assets. 3 Denotes a Zero Coupon bond with effective rate at time of purchase. 4 Non-income producing security. 5 The cost of investments for federal tax purposes amounts to $943,236,802. Note: The categories of investments are shown as a percentage of total net assets at June 30, 2005. The following acronyms are used throughout this portfolio: GTD -- Guaranteed PIK -- Payment in Kind See Notes which are an integral part of the Financial Statements
STATEMENT OF ASSETS AND LIABILITIES June 30, 2005 (unaudited) Assets: Total investments in securities, at value (identified cost $941,208,382) $954,581,935 Cash 327 Income receivable 19,399,841 Receivable for investments sold 488,950 Total assets 974,471,053 Liabilities: Payable for investments purchased $5,318,872 Income distribution payable 809,413 Accrued expenses 33,126 Total liabilities 6,161,411 Net assets for 142,468,356 shares outstanding $968,309,642 Net Assets Consist of: Paid-in capital $1,149,437,253 Net unrealized appreciation of investments 13,373,553 Accumulated net realized loss on investments (192,106,332) Distributions in excess of net investment income (2,394,832) Total Net Assets $968,309,642 Net Asset Value, Offering Price and Redemption Proceeds Per Share: $968,309,642 / 142,468,356 shares outstanding, no par value, unlimited shares authorized $6.80 See Notes which are an integral part of the Financial Statements STATEMENT OF OPERATIONS Six Months Ended June 30, 2005 (unaudited) Investment Income: Dividends $256,326 Interest 41,199,073 Total income 41,455,399 Expenses: Administrative personnel and services fee (Note 5) $398,128 Custodian fees 25,504 Transfer and dividend disbursing agent fees and expenses 8,777 Directors'/Trustees' fees 7,123 Auditing fees 9,634 Legal fees 6,232 Portfolio accounting fees 76,892 Insurance premiums 8,903 Miscellaneous 2,439 Total expenseS 543,632 Waiver of administrative personnel and services fee(Note 5) (398,128) Net expenses 145,504 Net investment income 41,309,895 Realized and Unrealized Gain (Loss) on Investments: Net realized gain on investments 1,866,033 Net change in unrealized appreciation of investments (39,762,044) Net realized and unrealized loss on investments (37,896,011) Change in net assets resulting from operations $3,413,884 See Notes which are an integral part of the Financial Statements
STATEMENT OF CHANGES IN NET ASSETS Six Months Ended (unaudited) Year Ended 6/30/2005 12/31/2004 Increase (Decrease) in Net Assets Operations: Net investment income $41,309,895 $97,405,640 Net realized gain on investments 1,866,033 26,670,940 Net change in unrealized appreciation/depreciation of investments (39,762,044) 1,822,206 Change in net assets resulting from operations 3,413,884 125,898,786 Distributions to Shareholders: Distributions from net investment income (43,181,720) (100,935,028) Share Transactions: Proceeds from sale of shares 27,521,751 49,204,600 Net asset value of shares issued to shareholders in payment of distributions declared 38,165,305 91,824,539 Cost of shares redeemed (185,072,041) (237,208,797) Change in net assets resulting from share transactions (119,384,985) (96,179,658) Change in net assets (159,152,821) (71,215,900) Net Assets: Beginning of period 1,127,462,463 1,198,678,363 End of period (including distributions in excess of net investment income of $(2,394,832) and $(523,007), respectively) $ 968,309,642 $1,127,462,463 See Notes which are an integral part of the Financial Statements
NOTES TO FINANCIAL STATEMENTS June 30, 2005 (unaudited) 1. 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, or insurance company separate accounts, common or commingled trust funds or similar organizations or parties that are accredited investors within the meaning of Regulation D of the Securities Act of 1933. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP) in the United States of America. Investment Valuation Listed corporate bonds, other fixed income, 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 accordance with procedures established by and under general supervision of 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 the 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. 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. Premium and Discount Amortization/ Paydown Gains and Losses All premiums and discounts on fixed income securities are amortized/accreted for financial statement purposes. Gains and losses realized on principal payment of mortgage backed securities (paydown gains and losses) are classified as part of investment income. Federal Taxes It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the "Code") and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. 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 accordance with procedures established by and under general supervision of the Trustees. Additional information on restricted securities, excluding securities purchased under Rule 144A that have been deemed liquid by the Trustees, held at June 30, 2005, is as follows:
Security Acquisition Date Acquisition Cost ACP Holdings Corp., Warrants 9/24/2003 $ 0 Advanstar, Inc., Warrants 2/14/2001 $ 82,172 CVC Claims Litigation LLC 3/26/1997-5/20/1998 $ 1,676,091 MDP Acquisitions PLC, Warrants 9/23/2002 $ 0 Pliant Corp., Warrants 10/5/2000 $ 37,681 Republic Technologies International, 8/6/1999 $ 0 Inc., Warrants Russell Stanley Holdings, Inc. 11/9/2001 $ 0 Russell Stanley Holdings, Inc., Sr. Sub. 2/5/1999-5/15/2005 $ 2,969,265 Note, 9.00%, 11/30/2008 Sleepmaster LLC 5/12/1999-12/13/1999 $ 926,114 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. Realized gains and losses from investment transactions are recorded on an identified cost basis. 3.....SHARES OF BENEFICIAL INTEREST The following table summarizes share activity: Six Months Ended Year Ended 6/30/2005 12/31/2004 Shares sold 4,021,786 7,111,840 Shares issued to shareholders in payment of 5,557,724 13,250,561 distributions declared Shares redeemed (26,376,907) (34,151,872) NET CHANGE RESULTING FROM SHARE TRANSACTIONS (16,797,397) (13,789,471) ------------------------------------------------------------------------------------------
4. FEDERAL TAX INFORMATION At June 30, 2005, the cost of investments for federal tax purposes was $943,236,802. The net unrealized appreciation of investments for federal tax purposes was $11,345,133. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $49,152,538 and net unrealized depreciation from investments for those securities having an excess of cost over value of $37,807,405. At December 31, 2004, the Fund had a capital loss carryforward of $187,095,650 which will reduce the Fund's taxable income arising from future net realized gains 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 as follows: Expiration Year Expiration Amount ---------------------------------------------------------------------- ---------------------------------------------------------------------- 2009 $52,994,308 ---------------------------------------------------------------------- ---------------------------------------------------------------------- 2010 $88,455,746 ---------------------------------------------------------------------- ---------------------------------------------------------------------- 2011 $45,645,596 ---------------------------------------------------------------------- 5.....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 Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of all Federated funds as specified below: Maximum Administrative Fee of Average Aggregate Daily Net Assets the Federated Funds ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- 0.150% on the first $5 billion ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- 0.125% on the next $5 billion ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- 0.100% on the next $10 billion ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- 0.075% on assets in excess of $20 billion ------------------------------------------------------------------------------- The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. FAS may voluntarily choose to waive any portion of its fee. FAS can modify or terminate this voluntary waiver at any time at its sole discretion. General Certain of the Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies. 6.....INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations (and in-kind contributions), for the six months ended June 30, 2005, were as follows: Purchases $134,887,740 Sales $257,135,939 7.....LEGAL PROCEEDINGS ------------------------------------------------------------------------------- Beginning in October 2003, Federated Investors, Inc. and various subsidiaries thereof (including the advisers and distributor for various investment companies, collectively, "Federated"), along with various investment companies sponsored by Federated (Funds) were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees. The Board of the Funds has retained the law firm of Dickstein Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys' fees and expenses, and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds. BOARD REVIEW OF ADVISORY CONTRACT As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment advisory contract. The Board's decision to approve the contract reflects the exercise of its business judgment on whether to continue the existing arrangements. During its review of the contract, the Board considers many factors, among the most material of which are: the Fund's investment objectives; the Adviser's management philosophy, personnel, processes, and investment and operating strategies; long term performance; the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry; the range of comparable fees for similar funds in the mutual fund industry; the range and quality of services provided to the Fund and its shareholders by the Federated organization in addition to investment advisory services; and the Fund's relationship to the Federated family of funds. In its decision to appoint or renew an Adviser, the Board is mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognizes that most shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and in the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's "selection" or approval of the Adviser must reflect the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund. The Board also considers the compensation and benefits received by the Adviser. This includes fees received for services provided to the Fund by other entities in the Federated organization and research services received by the Adviser from brokers that execute fund trades, as well as advisory fees. In this regard, the Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the Fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize "economies of scale" as the Fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with the Fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the Adviser's service and fee. The Fund's Board is aware of these factors and is guided by them in its review of the Fund's advisory contract to the extent they are appropriate and relevant, as discussed further below. The Board considers and weighs these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and is assisted in its deliberations by the advice of independent legal counsel. In this regard, the Board requests and receives substantial and detailed information about the Fund and the Federated organization. Federated provides much of this information at each regular meeting of the Board, and furnishes additional reports in connection with the particular meeting at which the Board's formal review of the advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board's evaluation of an advisory contract is informed by reports covering such matters as: the Adviser's investment philosophy, personnel, and processes; operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or "peer group" funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The evaluation process is evolutionary, reflecting continually developing considerations. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace. With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be particularly useful, given the high degree of competition in the mutual fund business. The Board focuses on comparisons with other similar mutual funds (rather than non-mutual fund products or services) because, simply put, they are more relevant. For example, other mutual funds are the products most like the Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle already chosen by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group may be a useful indicator of how the Adviser is executing on the Fund's investment program, which would in turn assist the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services are such as to warrant continuation of the advisory contract. The Board also receives financial information about Federated, including reports on the compensation and benefits Federated derives from its relationships with the Federated funds. These reports cover not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The reports also discuss any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades as well as waivers of fees and/or reimbursements of expenses. In order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waive fees and/or reimburse expenses. Although the Board considers the profitability of the Federated organization as a whole, it does not evaluate, on a fund-by-fund basis, Federated's "profitability" and/or "costs" (which would include an assessment as to whether "economies of scale" would be realized if the fund were to grow to some sufficient size). In the Board's view, the cost of performing advisory services on a fund-specific basis is both difficult to estimate satisfactorily and a relatively minor consideration in its overall evaluation. Analyzing isolated funds would require constructed allocations of the costs of shared resources and operations based on artificial assumptions that are inconsistent with the existing relationships within a large and diversified family of funds that receive advisory and other services from the same organization. Although the Board is always eager to discover any genuine "economies of scale," its experience has been that such "economies" are likely to arise only when a fund grows dramatically, and becomes and remains very large in size. Even in these instances, purchase and redemption activity, as well as the presence of expense limitations (if any), may offset any perceived economies. As suggested above, the Board considers the information it receives about the Fund's performance and expenses as compared to an appropriate set of similar competing funds to be more relevant. The Board bases its decision to approve an advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above are relevant to every Federated fund, nor does the Board consider any one of them to be determinative. With respect to the factors that are relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provide a satisfactory basis to support the decision to continue the existing arrangements. VOTING PROXIES ON FUND PORTFOLIO SECURITIES A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on "Form N-PX" of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from the EDGAR database on the SEC's website at www.sec.gov. QUARTERLY PORTFOLIO SCHEDULE The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on "Form N-Q." These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) Mutual funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. Investment in mutual funds involves investment risk, including the possible loss of principal. This report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's prospectus, which contains facts concerning its objective and policies, management fees, expenses, and other information. IMPORTANT NOTICE ABOUT FUND DOCUMENT DELIVERY In an effort to reduce costs and avoid duplicate mailings, the Fund(s) intend to deliver a single copy of certain documents to each household in which more than one shareholder of the Fund(s) resides (so-called "householding"), as permitted by applicable rules. The Fund's "householding" program covers its/their Prospectus and Statement of Additional Information, and supplements to each, as well as Semi-Annual and Annual Shareholder Reports and any Proxies or information statements. Shareholders must give their written consent to participate in the "householding" program. The Fund is also permitted to treat a shareholder as having given consent ("implied consent") if (i) shareholders with the same last name, or believed to be members of the same family, reside at the same street address or receive mail at the same post office box, (ii) the Fund gives notice of its intent to "household" at least sixty (60) days before it begins "householding" and (iii) none of the shareholders in the household have notified the Fund(s) or their agent of the desire to "opt out" of "householding." Shareholders who have granted written consent, or have been deemed to have granted implied consent, can revoke that consent and opt out of "householding" at any time: shareholders who purchased shares through an intermediary should contact their representative; other shareholders may call the Fund at 1-800-341-7400. Cusip 31409N101 31867 (8/05) Item 2. Code of Ethics Not Applicable Item 3. Audit Committee Financial Expert Not Applicable Item 4. Principal Accountant Fees and Services Not Applicable Item 5. Audit Committee of Listed Registrants Not Applicable Item 6. Schedule of Investments Not Applicable Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies Not Applicable Item 8. Portfolio Managers of Closed-End Management Investment Companies Not Applicable Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers Not Applicable Item 10. Submission of Matters to a Vote of Security Holders Not Applicable Item 11. Controls and Procedures (a) The registrant's President and Treasurer have concluded that the registrant's disclosure controls and procedures (as defined in rule 30a-3(c) under the Act) are effective in design and operation and are sufficient to form the basis of the certifications required by Rule 30a-(2) under the Act, based on their evaluation of these disclosure controls and procedures within 90 days of the filing date of this report on Form N-CSR. (b) There were no changes in the registrant's internal control over financial reporting (as defined in rule 30a-3(d) under the Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Registrant Federated Core Trust By /S/ Richard J. Thomas Richard J. Thomas, Principal Financial Officer Date August 15, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/ John B. Fisher John B. Fisher, Principal Executive Officer Date August 15, 2005 By /S/ Richard J. Thomas Richard J. Thomas, Principal Financial Officer Date August 15, 2005