FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
PROSPECTUS
Fortress Adjustable Rate U.S. Government, Inc. (the "Fund") is an open-end,
diversified management investment company (a mutual fund) that seeks to provide
current income consistent with lower volatility of principal by investing
primarily in a professionally managed, diversified portfolio of adjustable and
floating rate mortgage securities which are issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated April 30,
1995, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact your financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated April 30, 1995
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS 2
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GENERAL INFORMATION 3
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FORTRESS INVESTMENT PROGRAM 3
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INVESTMENT INFORMATION 4
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Investment Objective 4
Investment Policies 4
Acceptable Investments 5
Adjustable Rate Mortgage Securities 5
Collateralized Mortgage Obligations 6
Real Estate Mortgage Investment
Conduits 7
Regulatory Compliance 7
Resets of Interest 8
Caps and Floors 8
Temporary Investments 8
Repurchase Agreements 8
Lending of Portfolio Securities 8
When-Issued and Delayed Delivery
Transactions 9
Portfolio Turnover 9
Investment Limitations 9
NET ASSET VALUE 10
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INVESTING IN THE FUND 10
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Share Purchases 10
Through a Financial Institution 10
Directly by Mail 10
Directly by Wire 10
Minimum Investment Required 11
What Shares Cost 11
Systematic Investment Program 11
Exchange Privilege 11
Certificates and Confirmations 12
Dividends and Distributions 12
Retirement Plans 12
REDEEMING SHARES 12
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Through a Financial Institution 12
Directly By Mail 13
Signatures 13
Receiving Payment 13
Contingent Deferred Sales Charge 13
Systematic Withdrawal Program 15
Accounts with Low Balances 15
FUND INFORMATION 15
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Management of the Fund 15
Board of Directors 15
Investment Adviser 15
Advisory Fees 15
Advisor's Background 16
Distribution of Fund Shares 16
Distribution and Shareholder
Services Plan 16
Other Payments to Financial
Institutions 17
Administration of the Fund 18
Administrative Services 18
Custodian 18
Transfer Agent and Dividend
Disbursing Agent 18
Independent Auditors 18
SHAREHOLDER INFORMATION 18
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Voting Rights 18
TAX INFORMATION 19
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Federal Income Tax 19
Pennsylvania Personal Property Tax 19
PERFORMANCE INFORMATION 19
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FINANCIAL STATEMENTS 20
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INDEPENDENT AUDITORS' REPORT 29
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ADDRESSES 30
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SUMMARY OF FUND EXPENSES
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................... None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable)(1).......................................................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None
Exchange Fee.............................................................................................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(2).......................................................................... 0.53%
12b-1 Fee (after waiver)(3)............................................................................... 0.02%
Total Other Expenses...................................................................................... 0.47%
Shareholder Services Fee (after waiver)(4)................................................. 0.23%
Total Fund Operating Expenses (5)................................................................ 1.02%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of shares redeemed within
four years of their purchase date. For a more complete description, see
"Contingent Deferred Sales Charge."
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.60%.
(3) The maximum 12b-1 fee is 0.25%.
(4) The maximum shareholder services fee is 0.25%.
(5) The total Fund operating expenses would have been 1.32% absent the voluntary
waivers of a portion of the management fee and a portion of the 12b-1 fee.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Investing in the Fund" and "Redeeming Shares". Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales load permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period....... $ 21 $ 44 $ 56 $ 125
You would pay the following expenses on the same investment, assuming no
redemption............................................................... $ 10 $ 32 $ 56 $ 125
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 29.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
<S> <C> <C> <C> <C>
1995 1994 1993 1992*
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.79 $ 9.90 $ 9.98 $ 10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.47 0.43 0.53 0.47
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Net realized and unrealized gain (loss) on investments (0.32) (0.11) (0.08) (0.06)
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Total from investment operations 0.15 0.32 0.45 0.41
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.47) (0.43) (0.53) (0.42)
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Distributions in excess of net investment income (0.01)(a) -- -- (0.01)(a)
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Total distributions (0.48) (0.43) (0.53) (0.43)
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NET ASSET VALUE, END OF PERIOD $ 9.46 $ 9.79 $ 9.90 $ 9.98
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TOTAL RETURN** 1.58% 3.27% 4.58% 4.14%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.02% 1.02% 1.01% 0.63%(b)
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Net investment income 4.76% 4.38% 5.29% 6.79%(b)
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Expense waiver/reimbursement(c) 0.30% 0.24% 0.01% 0.37%(b)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $419,095 $798,213 $1,136,198 $965,289
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Portfolio turnover rate 170% 40% 56% 22%
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</TABLE>
* Reflects operations for the period from July 25, 1991 (date of initial
public investment) to February 29, 1992.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions in excess of net investment income for the year ended
February 28, 1995, and for the period ended February 29, 1992 were the
result of certain book and tax timing differences. These distributions do
not represent a return of capital for federal income tax purposes.
(b) Computed on an annualized basis.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended February 28, 1995, which can be obtained
free of charge.
GENERAL INFORMATION
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The Fund was incorporated under the laws of the State of Maryland on March 20,
1991. The Fund is designed primarily for individuals seeking current income
consistent with lower volatility of principal through a professionally managed,
diversified portfolio of adjustable and floating rate mortgage securities which
are issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
Volatility of principal is a measure of the degree to which the Fund's net asset
value fluctuates. A fund that invests primarily in adjustable rate securities
would tend to have a lower degree of volatility in its net asset value than a
fund that invests primarily in fixed-rate securities. This is because the value
of adjustable rate securities does not fluctuate as much as the value of
fixed-rate securities when interest rates rise or fall. By investing primarily
in mortgage securities whose interest rates adjust periodically, the Fund will
attempt to maintain a net asset value that would be less volatile than that of a
fund which invested primarily in fixed-rate mortgage securities.
A minimum initial investment of $1,500 is required, except for an IRA account,
which requires a $50 minimum initial investment. The minimum subsequent
investment is $100, except for an IRA account, which requires a minimum
subsequent investment of $50.
Fund shares are sold and redeemed at net asset value. However, a contingent
deferred sales charge is imposed on shares, other than shares purchased through
reinvestment of dividends, which are redeemed within one to four years of their
purchase dates. Fund assets may be used in connection with the distribution of
Fund shares.
FORTRESS INVESTMENT PROGRAM
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This Fund is a class of Fortress Shares ("Fortress Shares"). It is a member of a
family of funds ("Fortress Funds"), collectively known as the Fortress
Investment Program. The Program also includes the Fortress Shares of the
following funds:
AMERICAN LEADERS FUND, INC., providing growth of capital and income
through high-quality stocks;
CALIFORNIA MUNICIPAL INCOME FUND, providing current income exempt from
federal regular income tax and California personal income taxes;
FORTRESS BOND FUND, providing current income primarily through
high-quality corporate debt;
FORTRESS MUNICIPAL INCOME FUND, providing a high level of current income
generally exempt from federal regular income tax by investing primarily
in a diversified portfolio of municipal bonds;
FORTRESS UTILITY FUND, providing high current income and moderate
appreciation primarily through equity and debt securities of utility
companies;
GOVERNMENT INCOME SECURITIES, INC., providing current income through
intermediate-term U.S. government securities;
LIBERTY EQUITY INCOME FUND, INC., an equity fund investing primarily in
stocks which have a history of regular dividends;
LIMITED TERM FUND, providing a high level of current income consistent
with minimum fluctuation in principal value;
LIMITED TERM MUNICIPAL FUND, providing a high level of current income
which is exempt from federal regular income tax consistent with the
preservation of capital;
MONEY MARKET MANAGEMENT, INC., providing current income consistent with
stability of principal through high-quality money market instruments;
NEW YORK MUNICIPAL INCOME FUND, providing current income exempt from
federal regular income tax, New York personal income taxes, and New York
City income taxes;
OHIO MUNICIPAL INCOME FUND, providing current income exempt from federal
regular income tax and Ohio personal taxes;
STRATEGIC INCOME FUND, providing high current income through investing in
domestic corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations; and
WORLD UTILITY FUND, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus. Prospectuses for these funds are available
by writing to Federated Securities Corp.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles, and by providing
the investment services of proven, professional investment advisers.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income with
volatility of principal which is lower than investment companies investing
primarily in fixed-rate mortgage securities. The investment objective cannot be
changed without approval of shareholders. While there is no assurance that the
Fund will achieve its investment objective, it endeavors to do so by following
the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund's assets will be managed so that the Fund is a permissible investment
for federal credit unions under the Federal Credit Union Act and rules and
regulations established by the National Credit Union Administration. To the
extent that any investment or investment practice under the Fund's investment
policies listed below are not permissible for federal credit unions, the Fund
shall refrain from purchasing such investment or engaging in such practices. The
Fund will notify shareholders 60 days before making any change to this policy.
The investment policies described below cannot be changed without shareholder
approval.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
primarily in adjustable and floating rate mortgage securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in adjustable and floating rate mortgage securities which are issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The types
of mortgage securities in which the Fund may invest include the following:
adjustable rate mortgage securities;
collateralized mortgage obligations;
real estate mortgage investment conduits; and
other securities collateralized by or representing an interest in real
estate mortgages whose interest rates reset at periodic intervals and are
issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
In addition to the securities described above, the Fund may also invest in the
following:
direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government National Mortgage Association; and Student Loan
Marketing Association.
The government securities in which the Fund may invest are backed in a variety
of ways by the U.S. government or its agencies or instrumentalities. Some of
these securities, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
government. Other securities, such as obligations of the Federal National
Mortgage Association or Federal Home Loan Mortgage Corporation, are backed by
the credit of the agency or instrumentality issuing the obligations but not the
full faith and credit of the U.S. government.
The Fund will not invest in stripped mortgage securities.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage
securities with adjustable rather than fixed interest rates. The ARMS in which
the Fund invests are issued by Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA"), and Federal Home Loan
Mortgage Corporation ("FHLMC") and are actively traded. The underlying mortgages
which collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would
receive monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing pre-payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. government securities.
Not unlike other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally rises
when interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g. investments with comparable maturities) because
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations are
debt obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by Government National Mortgage
Association, Federal National Mortgage Association, or Federal Home Loan
Mortgage Corporation Certificates, but also may be collateralized by whole loans
or Private Pass-Throughs (such collateral collectively hereinafter referred to
as "Mortgage Assets"). Multiclass pass-through securities are equity interests
in a trust composed of Mortgage Assets. Unless the context indicates otherwise,
all references herein to CMOs include multiclass pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
in which the Fund invests are issued by agencies or instrumentalities of the
U.S. government. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit , which has certain special tax
attributes.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
Because the mortgages underlying mortgage-backed securities often may be prepaid
without penalty or premium, mortgage-backed securities are generally subject to
higher prepayment risks than
most other types of debt instruments. Prepayment risks on mortgage securities
tend to increase during periods of declining mortgage interest rates because
many borrowers refinance their mortgages to take advantage of the more favorable
rates. Depending upon market conditions, the yield that the Fund receives from
the reinvestment of such prepayments, or any scheduled principal payments, may
be lower than the yield on the original mortgage security. As a consequence,
mortgage securities may be a less effective means of "locking in" interest rates
than other types of debt securities having the same stated maturity and may also
have less potential for capital appreciation. For certain types of asset pools,
such as collateralized mortgage obligations, prepayments may be allocated to one
tranche of securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
principal amount. Conversely, the prepayment of mortgage securities purchased at
a market discount from their stated principal amount will accelerate the
recognition of interest income by the Fund, which would be taxed as ordinary
income when distributed to the shareholders.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings of
multiple class real estate mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code. Issuers of
REMICs may take several forms, such as trusts, partnerships, corporations,
associations, or a segregated pool of mortgages. Once REMIC status is elected
and obtained, the entity is not subject to federal income taxation. Instead,
income is passed through the entity and is taxed to the person or persons who
hold interests in the REMIC. A REMIC interest must consist of one or more
classes of "regular interests," some of which may offer adjustable rates (the
type in which the Fund primarily invests), and a single class of "residual
interests." To qualify as a REMIC, substantially all the assets of the entity
must be in assets directly or indirectly secured principally by real property.
REGULATORY COMPLIANCE. In accordance with the Rules and Regulations of the NCUA,
unless the purchase is made solely to reduce interest-rate risk, the Fund will
not invest in any CMO or REMIC security that meets any of the following three
tests: (1) the CMO or REMIC has an expected average life greater than 10 years;
(2) the average life of the CMO or REMIC extends by more than 4 years assuming
an immediate and sustained parallel shift in the yield curve of plus 300 basis
points, or shortens by more than 6 years assuming an immediate and sustained
parallel shift in the yield curve of minus 300 basis points; or (3) the
estimated change in the price of the CMO or REMIC is more than 17%, due to an
immediate and sustained parallel shift in the yield curve of plus or minus 300
basis points.
Neither test (1) nor (2) above apply to floating or adjustable rate CMOs or
REMICs with all of the following characteristics: (a) the interest rate of the
instrument is reset at least annually; (b) the interest rate is below the
contractual cap of the instrument; (c) the instrument is tied to a widely-used
market rate; and (d) the instrument varies directly (not inversely) and is reset
in proportion with the index's changes.
The Fund may not purchase a residual interest in a CMO or REMIC. In addition,
the Fund will not purchase zero coupon securities with maturities greater than
10 years.
RESETS OF INTEREST. The interest rates paid on the ARMS, CMOs, and REMICs in
which the Fund invests generally are readjusted or reset at intervals of one
year or less to an increment over some predetermined interest rate index. There
are two main categories of indices: those based on U.S. Treasury securities and
those derived from a calculated measure, such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-month Treasury
Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the National Median Cost of Funds, the one-month or three-month
London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others tend to lag changes in market rate levels and tend to be somewhat less
volatile.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs,
and REMICs in which the Fund invests will frequently have caps and floors which
limit the maximum amount by which the loan rate to the residential borrower may
change up or down: (1) per reset or adjustment interval and (2) over the life of
the loan. Some residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. An example of the effect of
caps and floors on a residential mortgage loan may be found in the Statement of
Additional Information. Additionally, even though the interest rates on the
underlying residential mortgages are adjustable, amortization and prepayments
may occur, thereby causing the effective maturities of the mortgage securities
in which the Fund invests to be shorter than the maturities stated in the
underlying mortgages.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and cash items
during times of unusual market conditions for defensive purposes and to maintain
liquidity. Cash items may include short-term obligations such as:
obligations of the U.S. government or its agencies or instrumentalities;
and
repurchase agreements.
To the extent that investments in temporary investments are not for defensive
purposes, the Fund intends to limit its investment in these securities to 20% of
its total assets.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/ dealers, and other recognized financial institutions sell U.S.
government securities or other securities to the Fund and agree at the time of
sale to repurchase them at a mutually agreed upon time and price. To the extent
that the original seller does not repurchase the securities from the Fund, the
Fund could receive less than the repurchase price on any sale of such
securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Fund's Board of Directors. The Fund will receive collateral in the form
of cash or U.S. government securities equal to at least 100% of the value of the
securities loaned. There is the risk that when lending portfolio securities, the
securities may not be available to the Fund on a timely basis and the Fund may,
therefore, lose the opportunity to sell the securities at a desirable price. In
addition, in the event that a borrower of securities would file for bankruptcy
or become insolvent, disposition of the securities may be delayed pending court
action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. Delivery of the security is to be made within 30 days from the
trade date and the period from the trade date to the settlement date will not
exceed 120 days. The seller's failure to complete these transactions may cause
the Fund to miss a price or yield considered to be advantageous. Settlement
dates may be a month or more after entering into these transactions, and the
market values of the securities purchase may vary from the purchase prices.
Accordingly, the Fund may pay more or less than the market value of the
securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER. The Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 10% of the value of those assets to secure such borrowings;
invest more than 10% of the value of its net assets in securities subject
to restrictions on resale under the Securities Act of 1933 except for
certain restricted securities which meet the criteria for liquidity as
established by the Directors;
invest more than 10% of the value of its net assets in securities which
are not readily marketable or which are otherwise considered illiquid,
including repurchase agreements providing for settlement in more than
seven days after notice; or
NET ASSET VALUE
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The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and all other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
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SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange is open.
Shares of the Fund may be purchased through a financial institution (such as a
bank or an investment dealer) who has a sales agreement with the distributor,
Federated Securities Corp., or directly from Federated Securities Corp. either
by mail or wire. The Fund reserves the right to reject any purchase request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
to place an order to purchase shares of the Fund. Purchase orders through a
financial institution are considered received when the Fund is notified of the
purchase order. Purchase orders through a registered broker/dealer must be
received by the broker before 4:00 p.m. (Eastern time) and must be transmitted
by the broker to the Fund before 5:00 p.m. (Eastern time) in order for shares to
be purchased at that day's price. Purchase orders through other financial
institutions must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for shares to be purchased at
that day's price. It is the financial institution's responsibility to transmit
orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods (see
"Other Payments to Financial Institutions").
DIRECTLY BY MAIL. To purchase shares of the Fund by mail directly from Federated
Securities Corp.:
complete and sign the new account application available from the Fund;
enclose a check made payable to Fortress Adjustable Rate U.S. Government
Fund, Inc.; and
send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, MA
02266-8604.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after State
Street Bank receives the check.
DIRECTLY BY WIRE. To purchase shares of the Fund directly from Federated
Securities Corp. by Federal Reserve wire, call the Fund. All information needed
will be taken over the telephone, and the order is considered received when the
Fund receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,500 unless the investment is in
an IRA account, which requires a minimum initial investment of $50. Subsequent
investments must be in amounts of at least $100, except for an IRA account,
which must be in amounts of at least $50.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received. Unaffiliated institutions through whom shares are purchased may charge
fees for services provided which may be related to the ownership of Fund shares.
This prospectus should, therefore, be read together with any agreement between
the customer and institution with regard to services provided, the fees charged
for these services, and any restrictions and limitations imposed.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Shares," shareholders may
be charged a contingent deferred sales charge by the distributor at the time
shares are redeemed.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
monthly from the shareholder's checking account and invested in Fund shares at
the net asset value next determined after an order is received by the Fund. A
shareholder may apply for participation in this program through Federated
Securities Corp.
EXCHANGE PRIVILEGE
Fund shareholders may use the exchange privilege to invest in other Fortress
Funds and Federated Funds which are advised by subsidiaries or affiliates of
Federated Investors at net asset value. However, such exchanges may be subject
to a contingent deferred sales charge and possibly a sales load. This privilege
is available to shareholders resident in any state in which the fund shares
being acquired may be sold.
Shareholders in existing Fortress Funds may exchange their fund shares for
shares of the Fund at net asset value without a sales load or a contingent
deferred sales charge. Shareholders using this privilege must exchange shares
having a net asset value equal to the minimum investment requirement of the fund
into which the exchange is being made.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Fund shares at net
asset value.
Further information on the exchange privilege and prospectuses for other
Fortress Funds and Federated Funds are available by calling Federated Securities
Corp.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Unless shareholders request cash
payments on the application or by writing to Federated Securities Corp.,
dividends and distributions are automatically reinvested in additional shares of
the Fund on payment dates at the ex-dividend date net asset value.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details contact Federated Securities Corp. and consult
a tax adviser.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made through a financial institution or directly from the
Fund by written request.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem shares of the Fund by calling his financial institution
(such as a bank or an investment dealer) to request the redemption. Shares will
be redeemed at the net asset value next determined after the Fund receives the
redemption request from the financial institution. Redemption requests through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for shares to be redeemed at that day's net asset
value. Redemption requests through other financial institutions must be received
by the financial institution and transmitted to the Fund before 4:00 p.m.
(Eastern time) in order for shares to be redeemed at that day's net asset value.
The financial institution is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to the Fund. The
financial institution may charge customary fees and commissions for this
service.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming through his financial institution. If such a case should
occur, another method of redemption, such as "Directly by Mail," should be
considered.
DIRECTLY BY MAIL
Shareholders may also redeem shares by sending a written request to Federated
Services Company, c/o State Street Bank and Trust Company, P.O. Box 8604,
Boston, MA 02266-8604. This written request must include the shareholder's name,
the Fund name, the Fund account number, and the share or dollar amount to be
redeemed. Shares will be redeemed at their net asset value next determined after
State Street Bank receives the redemption request.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from their Fund accounts within certain time
periods of the purchase date of those shares will be charged a contingent
deferred sales charge by the Fund's distributor of the lesser of the original
price or the net asset value of the shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
<S> <C> <C>
Up to $1,999,999 4 years or less 1.00%
$2,000,000 to $4,999,999 2 years or less 0.50%
$5,000,000 to $24,999,999 1 year or less 0.25%
$25,000,000 or more N/A None
</TABLE>
In instances in which Fund shares have been acquired in exchange for shares in
other Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The contingent deferred sales
charge will not be imposed on shares acquired through: (i) the reinvestment of
dividends or distributions of long-term capital gains; or (ii) the exchange of
shares of Government Income Securities, Inc., where those shares were purchased
during that fund's Charter Offering Period. In computing the amount of
contingent deferred sales charge for accounts with shares subject to a single
holding period, if any, redemptions are deemed to have occurred in the following
order: (1) shares acquired through the reinvestment of dividends and long-term
capital gains; (2) purchases of shares occurring prior to the number of years
necessary to satisfy the applicable holding period; and (3) purchases of shares
occurring within the current holding period. For accounts with shares subject to
multiple share holding periods, the redemption sequence will be determined
first, with reinvested dividends and long-term capital gains, and second, on a
first-in, first-out basis.
The contingent deferred sales charge will not be imposed when a redemption
results from a return under the following circumstances: (i) a total or partial
distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account after the beneficial owner
attains age 59-1/2; or (iii) from the death or total and permanent disability of
the beneficial owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account does not extend
to account transfers, rollovers, and other redemptions made for purposes of
reinvestment. Contingent deferred sales charges are not charged in connection
with exchanges of shares for shares in other Fortress Funds or in connection
with redemptions by the Fund of accounts with low balances. Shares of the Fund
originally purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, as amended, or retirement
plans where the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, are not subject to the
contingent deferred sales charge, to the extent that no payment was advanced for
purchases made by such entities. In addition, shares held in the Fund by a
financial institution for its own account which were originally purchased by the
financial institution directly from the Fund's distributor without a sales load
may be redeemed without a contingent deferred sales charge. For more
information, see "Other Payments to Financial Institutions."
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal Program.
Under this program, Fund shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to Fund shares, and the fluctuation of the net asset
value of Fund shares redeemed under this program, redemptions may reduce, and
eventually use up, the shareholder's investment in the Fund. For this reason,
payments under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have invested at least $10,000 in the Fund (at
current offering price). A shareholder may apply for participation in this
program through Federated Securities Corp.
Contingent deferred sales charges are charged for shares redeemed through this
program within one to four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below a required minimum value of
$1,000. This requirement does not apply, however, if the balance falls below
$1,000 because of changes in the Fund's net asset value.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Fund's business affairs and for exercising all
the Fund's powers except those reserved for the shareholders. An Executive
Committee of the Board of Directors handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser, subject to direction by the Directors.
The adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .60 of 1% of the Fund's average daily net assets. The adviser
may voluntarily choose to waive a portion of its fee or reimburse the Fund
for certain operating expenses. The adviser can terminate this voluntary
waiver of some or all of its advisory fee at any time at its sole
discretion. The adviser has also undertaken to reimburse the Fund for
operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the Trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk-averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Kathleen M. Foody-Malus has been the Fund's co-portfolio manager since
July, 1991. Ms. Foody-Malus joined Federated Investors in 1983 and has been
a Vice President of the Fund's investment adviser since 1993. Ms.
Foody-Malus served as an Assistant Vice President of the investment adviser
from 1990 until 1992, and from 1986 until 1989 she acted as an investment
analyst. Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the
University of Pittsburgh.
Ms. Susan M. Nason has been the Fund's co-portfolio manager since July,
1993. Ms Nason joined Federated Investors in 1987 and has been a Vice
President of the Fund's investment adviser since 1993. Ms. Nason served as
an Assistant Vice President of the investment adviser from 1990 until 1992,
and from 1987 until 1990 she acted as an investment analyst. Ms. Nason is a
Chartered Financial Analyst and received her M.B.A. in Finance from
Carnegie Mellon University.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund will pay to the distributor an amount, computed at an annual rate of
0.25 of 1% of the average daily net asset value of the Fund to finance any
activity which is principally intended to result in the sale of shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of the Fund to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Fund
has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Distribution and Shareholder Services Plans,
certain financial institutions may be compensated by the adviser or its
affiliates for the continuing investment of customers' assets in certain funds,
including the Fund, advised by those entities. These payments will be made
directly by the distributor or adviser from their assets, and will not be made
from the assets of the Fund or by the assessment of a sales load on shares.
Federated Securities Corp. will pay financial institutions an amount equal to
1.00% of the offering price of the shares acquired by their clients or customers
on purchases up to $1,999,999, 0.50% of the offering price on purchases of
$2,000,000 to $4,999,999, and 0.25% of the offering price on purchases of
$5,000,000 to $24,999,999. A financial institution may elect to receive amounts
less than those stated which would reduce the stated contingent deferred sales
charge and/or the holding period used to calculate the fee.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described in this
prospectus or should Congress relax current restrictions on depository
institutions, the distributor and adviser will consider appropriate changes in
the administrative services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Fund") as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET
MAXIMUM ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund, and
dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund is entitled to one vote at all meetings of shareholders.
As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Fund's outstanding
shares.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the shares. No federal income tax is due on any
distributions earned in an IRA or qualified retirement plan until distributed,
so long as such IRA or qualified retirement plan meets the applicable
requirements of the Internal Revenue Code.
PENNSYLVANIA PERSONAL PROPERTY TAXES
Fund shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the contingent deferred sales
charge, a non-recurring charge, which, if excluded, would increase the total
return and yield.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- --------------------------------------------------------------------------------- --------------
GOVERNMENT OBLIGATIONS--89.4%
- -------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC,
ADJUSTABLE RATE MORTGAGES--51.5%
---------------------------------------------------------------------------------
$ 211,700,492 5.885%-7.72%, 1/1/1999-9/1/2024 $ 215,746,976
--------------------------------------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--2.2%
---------------------------------------------------------------------------------
5,000,000 4.875%, Series 1608B, 11/15/2007 4,870,600
---------------------------------------------------------------------------------
3,865,357 6.775%, Series 1095D, 6/15/2021 3,872,662
---------------------------------------------------------------------------------
584,558 6.825%, Series 5, Class B, 5/15/2019 587,843
--------------------------------------------------------------------------------- --------------
Total 9,331,105
--------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.1%
---------------------------------------------------------------------------------
8,107,185 11.50%-12.25%, 12/1/2010-2/1/2020 8,888,311
--------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION,
ADJUSTABLE RATE MORTGAGES--25.1%
---------------------------------------------------------------------------------
102,810,522 5.502%-7.685%, 3/1/2016-10/1/2024 105,062,410
--------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION, REMIC--1.3%
---------------------------------------------------------------------------------
5,304,048 6.663%, Series 16-F, 3/25/2022 5,260,767
--------------------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--3.7%
---------------------------------------------------------------------------------
14,093,168 11.50%-12.00%, 11/15/2012-7/15/2019 15,658,298
--------------------------------------------------------------------------------- --------------
U.S. TREASURY NOTES--3.5%
---------------------------------------------------------------------------------
15,000,000 4.00%-5.875%, 1/31/1996-5/31/1996 14,746,450
--------------------------------------------------------------------------------- --------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST, $373,101,649) 374,694,317
--------------------------------------------------------------------------------- --------------
</TABLE>
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- --------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENTS--9.7%
- -------------------------------------------------------------------------------------------------
$ 1,000,000 Harris Trust & Savings Bank, 6.07%, dated 2/28/1995, due 3/1/1995 $ 1,000,000
---------------------------------------------------------------------------------
39,640,000 J.P. Morgan Securities, Inc., 6.13%, dated 2/28/1995, due 3/1/1995 39,640,000
--------------------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 40,640,000
--------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $413,741,649) $ 415,334,317+
--------------------------------------------------------------------------------- --------------
</TABLE>
* Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations. The investments in the repurchase agreements are through
participation in joint accounts with other Federated funds.
+ The cost of investments for federal tax purposes amounts to $413,741,649. The
net unrealized appreciation on a federal tax cost basis amounts to $1,592,668,
and is comprised of $3,108,677 appreciation and $1,516,009 depreciation at
February 28, 1995.
The following abbreviations are used in this portfolio:
PC--Participation Certificates
REMIC--Real Estate Mortgage Investment Conduit
Note: The categories of investments are shown as a percentage of net assets
($419,094,822) at February 28, 1995.
(See Notes which are an integral part of the Financial Statements)
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Total investments at value (identified and tax cost $413,741,649) $415,334,317
- -------------------------------------------------------------------------------------------------
Cash 1,428
- -------------------------------------------------------------------------------------------------
Interest receivable 5,798,242
- -------------------------------------------------------------------------------------------------
Receivable for shares sold 474,613
- -------------------------------------------------------------------------------------------------
Deferred expenses 203,267
- ------------------------------------------------------------------------------------------------- --------------
Total assets 421,811,867
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Dividends payable $1,276,245
- -----------------------------------------------------------------------------------
Payable for shares repurchased 1,271,925
- -----------------------------------------------------------------------------------
Accrued expenses 168,875
- ----------------------------------------------------------------------------------- ------------
Total liabilities 2,717,045
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 44,298,857 shares outstanding $419,094,822
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $464,011,777
- -------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of investments 1,592,668
- -------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (46,043,668)
- -------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (465,955)
- ------------------------------------------------------------------------------------------------- --------------
Total $419,094,822
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE AND OFFERING PRICE Per Share
($419,094,822 / 44,298,857 shares of shares outstanding) $9.46
- ------------------------------------------------------------------------------------------------- --------------
REDEMPTION PROCEEDS Per Share (99/100 of $9.46)* $9.37
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
* See "Redeeming Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest (net of dollar roll interest expense of $83,230) $ 33,065,010
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee $ 3,435,227
- ------------------------------------------------------------------------------------
Directors'/Trustees' fees 11,517
- ------------------------------------------------------------------------------------
Distribution services fee 1,431,342
- ------------------------------------------------------------------------------------
Shareholder service fee 1,338,801
- ------------------------------------------------------------------------------------
Administrative personnel and services fees 436,750
- ------------------------------------------------------------------------------------
Custodian and recordkeeping fees and expenses 219,705
- ------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 329,110
- ------------------------------------------------------------------------------------
Share registration costs 114,168
- ------------------------------------------------------------------------------------
Auditing fees 13,615
- ------------------------------------------------------------------------------------
Legal fees 10,054
- ------------------------------------------------------------------------------------
Printing and postage 48,306
- ------------------------------------------------------------------------------------
Taxes 105,521
- ------------------------------------------------------------------------------------
Insurance premiums 13,666
- ------------------------------------------------------------------------------------
Miscellaneous 40,756
- ------------------------------------------------------------------------------------ ------------
Total expenses 7,548,538
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 369,853
- ----------------------------------------------------------------------
Waiver of distribution services fee 1,338,799 1,708,652
- ---------------------------------------------------------------------- ------------ ------------
Net expenses 5,839,886
- -------------------------------------------------------------------------------------------------- --------------
Net investment income 27,225,124
- -------------------------------------------------------------------------------------------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (24,587,433)
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 1,918,498
- -------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain (loss) on investments (22,668,935)
- -------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ 4,556,189
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
<S> <C> <C>
1995 1994
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------
Net investment income $ 27,225,124 $ 42,111,457
- ------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions
($21,867,392 net loss and $12,916,149 net loss, respectively,
as computed for federal tax purposes) (24,587,433) (12,060,236)
- ------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments 1,918,498 1,386,612
- ------------------------------------------------------------------------------ --------------- ----------------
Change in net assets resulting from operations 4,556,189 31,437,833
- ------------------------------------------------------------------------------ --------------- ----------------
NET EQUALIZATION (DEBITS) CREDITS (520,115) (584,335)
- ------------------------------------------------------------------------------ --------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------------------
Dividends to shareholders from net investment income (26,705,009) (41,092,219)
- ------------------------------------------------------------------------------
Distributions in excess of net investment income (353,704) --
- ------------------------------------------------------------------------------ --------------- ----------------
Change in net assets resulting from distributions to shareholders (27,058,713) (41,092,219)
- ------------------------------------------------------------------------------ --------------- ----------------
SHARE TRANSACTIONS
(EXCLUSIVE OF AMOUNTS ALLOCATED TO NET INVESTMENT INCOME)
- ------------------------------------------------------------------------------
Proceeds from sales of shares 44,883,593 392,365,761
- ------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 12,180,724 19,232,330
- ------------------------------------------------------------------------------
Cost of shares redeemed (413,160,135) (739,344,309)
- ------------------------------------------------------------------------------ --------------- ----------------
Change in net assets resulting from share transactions (356,095,818) (327,746,218)
- ------------------------------------------------------------------------------ --------------- ----------------
Change in net assets (379,118,457) (337,984,939)
- ------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------
Beginning of period 798,213,279 1,136,198,218
- ------------------------------------------------------------------------------ --------------- ----------------
End of period $ 419,094,822 $ 798,213,279
- ------------------------------------------------------------------------------ --------------- ----------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fortress Adjustable Rate U.S. Government Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company.
(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.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at time of purchase may be valued at amortized cost,
which approximates fair market value. U.S. government securities are
generally valued at the mean between the over-the-counter bid and asked
prices as furnished by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At February 28, 1995, the Fund for federal tax purposes, had a capital loss
carryforward of $41,020,800, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire in 2000 ($135,570), 2001 ($6,101,688), 2002
($12,916,149) and 2003 ($21,867,393). Additionally, net capital losses of
$5,022,868 attributable to security transactions incurred after October 31,
1994 are treated as arising on March 1, 1995, the first day of the Fund's
next taxable year.
EQUALIZATION--The Fund follows the accounting practice known as
equalization, in which a portion of the proceeds from sales and costs of
redemptions of Fund shares equivalent, on a per share basis, to the amount
of undistributed net investment income on the date of the transaction, is
credited or charged to undistributed net investment income. As a result,
undistributed net investment income per share is unaffected by sales or
redemptions of Fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, FHLMC, in which
the Fund sells mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund may use the proceeds generated from the
transactions to invest in short-term investments, which may enhance the
Fund's current yield and total return.
DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight line method not to exceed a period of five
years from the Fund's commencement date.
OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At February 28, 1995, there were 5,000,000,000 shares of $.001 par value capital
stock authorized. Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
<S> <C> <C>
1995 1994
- ------------------------------------------------------------------------------------
Shares sold 4,668,005 39,767,211
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,282,617 1,954,128
- ------------------------------------------------------------------------------------
Shares redeemed (43,186,417) (74,951,362)
- ------------------------------------------------------------------------------------ ------------- -------------
Net change resulting from share transactions (37,235,795) (33,230,023)
- ------------------------------------------------------------------------------------ ------------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser, (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.60 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated Investors for
the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
DISTRIBUTIONS SERVICES FEE--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 of the Act. Under the terms of the Plan, the Fund
will compensate Federated Securities Corp. ("FSC"), the principal distributor,
from the net assets of the Fund to finance activities intended to result in the
sale of shares. The Plan provides that the Fund may incur distribution expenses
up to .25 of 1% of the average daily net assets of the Fund, annually, to
compensate FSC. The distributor may voluntarily choose to waive a portion of its
fee. The distributor can modify or terminate this voluntary waiver at any time
at its sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average daily net assets of the Fund for the period. This fee is to obtain
certain personal services for shareholders and to maintain the shareholder
accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. This fee is based on the size, type, and number of accounts and
transactions made by shareholders.
INTERFUND TRANSACTIONS--During the year ended February 28, 1995, the Fund
engaged in purchase and sale transactions with funds that have a common
investment adviser (or affiliated investment advisers), common
Directors/Trustees, and/or common officers. These transactions were made at
current market value pursuant to Rule 17a-7 under the Act amounting to
$574,366,268 and $568,853,974, respectively.
GENERAL--Certain of the Officers and Directors of the Fund are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended February 28, 1995, were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
PURCHASES-- $ 931,747,396
- ------------------------------------------------------------------------------------------------ ----------------
SALES-- $ 1,180,375,824
- ------------------------------------------------------------------------------------------------ ----------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Fortress Adjustable Rate U.S. Government Fund,
Inc. as of February 28, 1995, the related statement of operations for the year
then ended, the statement of changes in net assets for the years ended February
28, 1995 and 1994, and the financial highlights (see page 2 of the prospectus)
for each of the years in the four-year period ended February 28, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
February 28, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Fortress Adjustable
Rate U.S. Government Fund, Inc. as of February 28, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 11, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Fortress Adjustable Rate Federated Investors Tower
U.S. Government Fund, Inc. Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FORTRESS ADJUSTABLE
RATE U.S. GOVERNMENT
FUND, INC.
PROSPECTUS
April 30, 1995
[LOGO]
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
349554105
1071005A (4/95)
Fortress Adjustable Rate U.S. Government Fund, Inc.
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Fortress Adjustable Rate U.S. Government Fund, Inc.
(the "Fund"), dated April 30, 1995. This Statement is not a
prospectus itself. To receive a copy of the prospectus, write or
call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of
FEDERATED INVESTORS
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments 1
Caps and Floors 1
When-Issued and Delayed
Delivery Transactions 1
Lending of Portfolio Securities 1
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Restricted Securities 2
Portfolio Turnover 2
Investment Limitations 2
Fortress Adjustable Rate U.S.
Government Fund, Inc. Management 4
Fund Ownership 8
Directors' Compensation 9
Director Liability 9
Investment Advisory Services 9
Adviser to the Fund 9
Advisory Fees 10
Administrative Services 10
Purchasing Shares 11
Distribution and Shareholder
Services Plans 11
Conversion to Federal Funds 11
Determining Net Asset Value 11
Determining Market Value of
Securities 12
Exchange Privilege 12
Requirements For Exchange 12
Tax Consequences 12
Making an Exchange 12
Redeeming Shares 12
Redemption in Kind 13
Tax Status 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
Total Return 13
Yield 13
Performance Comparisons 14
General Information About the Fund
The Fund was incorporated under the laws of the State of Maryland on
March 20, 1991. It is qualified to do business as a foreign corporation
in Pennsylvania.
Investment Objective and Policies
The investment objective of the Fund is to provide current income with
volatility of principal which is lower than investment companies
investing primarily in fixed-rate mortgage securities. The investment
objective and policies of the Fund cannot be changed without approval of
shareholders.
Types of Investments
The Fund invests primarily in adjustable and floating rate mortgage
securities which are issued or guaranteed by the U.S. government, its
agencies and instrumentalities. These securities are backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
o Federal Home Loan Banks;
o Farmers Home Administration; and
o Federal National Mortgage Association.
Caps and Floors
The value of mortgage-related securities in which the Fund invests may
be affected if interest rates rise or fall faster and farther than the
allowable caps on the underlying residential mortgage loans. For
example, consider a residential mortgage loan with a rate which adjusts
annually, an initial interest rate of 10%, a 2% per annum interest rate
cap, and a 5% life of loan interest rate cap. If the index against which
the underlying interest rate on the residential mortgage loan is
compared--such as the one-year Treasury--moves up by 3%, the residential
mortgage loan rate may not increase by more than 2% to 12% the first
year. As one of the underlying residential mortgages for the securities
in which the Fund invests, the residential mortgage would depress the
value of the securities and, therefore, the net asset value of the Fund.
If the index against which the interest rate on the underlying
residential mortgage loan is compared moves up no faster or farther than
the cap on the underlying mortgage loan allows, or if the index moves
down as fast or faster than the floor on the underlying mortgage loan
allows, the mortgage would maintain or improve the value of the
securities in which the Fund invests and, therefore, the net asset value
of the Fund.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payments for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction is settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to
market daily. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such
a defaulting seller files for bankruptcy or became insolvent,
disposition of securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in
favor of the Fund and allow retention or disposition of such securities.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Board of Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse
repurchase transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker,
or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future, the Fund
will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not
ensure that the Fund will be able to avoid selling portfolio instruments
at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
Restricted Securities
The ability of the Board of Directors to determine the liquidity of
certain restricted securities is permitted under an SEC Staff position
set forth in the adopting release for Rule 144A under the Securities Act
of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides
an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to
further enhance the liquidity of the secondary market for securities
eligible for resale under Rule 144A. The Fund believes that the Staff of
the SEC has left the question of determining the liquidity of all
restricted securities (eligible for resale under Rule 144A) to the
Fund's Board of Directors. The Board of Directors considers the
following criteria in determining the liquidity of certain restricted
securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective. For the fiscal years
ended February 28, 1995, and 1994 the portfolio turnover rates were
170% and 40%, respectively. The increase in the portfolio turnover rate
was a result of the Fund's acquisition of securities that were more in
line with current market conditions relating to pre-payments, coupon
rates, and weighted average months to resets. This had no significant
impact on the tax liability of the Fund and its shareholders, and Fund
expenses were not a factor as the Fund incurred no brokerage
commissions.
Investment Limitations
Buying on Margin
The Fund will not purchase any securities on margin, but may
obtain such short-term credits as are necessary for clearance of
transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in
amounts up to one-third of the value of its total assets,
including the amounts borrowed. The Fund will not borrow money or
engage in reverse repurchase agreements for investment leverage,
but rather as a temporary, extraordinary, or emergency measure or
to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess
of 5% of its total assets are outstanding, but only to the extent
necessary to assure completion of the reverse repurchase
agreements, the Fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 10% of the value of total assets at
the time of the borrowing.
Diversification of Investments
With respect to securities comprising 75% of the value of its
total assets, the Fund will not purchase securities of any one
issuer (other than cash, cash items or securities issued or
guaranteed by the government of the United States or its agencies
or instrumentalities and repurchase agreements collateralized by
U.S. government securities) if as a result more than 5% of the
value of its total assets would be invested in the securities of
that issuer.
Investing in Real Estate
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest in
securities of companies whose business involves the purchase or
sale of real estate or in securities which are secured by real
estate or interests in real estate.
Investing in Commodities
The Fund will not purchase or sell commodities.
Investing in Restricted Securities
The Fund will not invest more than 10% of its net assets in
securities subject to restrictions on resale under the Securities
Act of 1933, including repurchase agreements providing for
settlement in more than seven days after notice.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of restricted securities which
the Fund may purchase pursuant to its investment objective,
policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets. This
shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable amount
demand master notes, bonds, debentures, notes, certificates of
indebtedness, or other securities, entering into repurchase
agreements, or engaging in other transactions where permitted by a
Fund's investment objective, policies and limitations.
Selling Short
The Fund will not sell securities short unless:
o during the time the short position is open, it owns an equal
amount of the securities sold or securities readily and freely
convertible into or exchangeable, without payment of additional
consideration, for securities of the same issue as, and equal
in amount to, the securities sold short; and
o not more than 10% of the Fund's net assets (taken at current
value) is held as collateral for such sales at any one time.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in securities of issuers which have records of less than
three years of operating history, including the operation of any
predecessor. (This limitation does not apply to issuers of CMOs or
REMICs which are collateralized by securities or mortgages issued
or guaranteed as to prompt payment of principal and interest by an
agency of the U.S. government.)
Investing in Minerals
The Fund will not purchase or sell oil, gas, or other mineral
exploration or development programs or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Fund
The Fund will not purchase or retain the securities of any issuer
if the officers and Directors of the Fund or its investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Investing in Securities of Other Investment Companies
The Fund may not own securities of open-end investment companies.
The Fund can acquire up to 3 per centum of the total outstanding
stock of closed-end investment companies. The Fund will not be
subject to any other limitations with regard to the acquisition of
securities of closed-end investment companies so long as the
public offering price of the Fund's shares does not include a
sales load exceeding 1 1/2 per cent. The Fund will purchase
securities of closed-end investment companies only in open-market
transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities
are acquired in a merger, consolidation, or acquisition of assets.
Investing in Stripped Mortgage Securities
The Fund will not invest its assets in stripped mortgage
securities.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund does not expect to pledge securities or invest in stock of
closed-end investment companies during the coming year.
The Fund has not borrowed money or sold any securities short in an
amount exceeding 5% of the value of its net assets during the last
fiscal year and has no present intent to do so in the coming fiscal
year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
Fortress Adjustable Rate U.S. Government Fund, Inc. Management
Officers and Directors are listed with their addresses, present
positions with Fortress Adjustable Rate U.S. Government Fund, Inc., and
principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President and Director
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Director
of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the
Board of Directors between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund,
Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities
Fund, Inc.; Liberty U.S. Government Money Market Trust; Liberty Term
Trust, Inc. - 1999; Liberty Utility Fund, Inc.; Liquid Cash Trust;
Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran
Funds; Peachtree Funds; The Planters Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for
U.S. Treasury Obligations; The Virtus Funds; and World Investment
Series, Inc.
Fund Ownership
Officers and Directors as a group own less than 1% of the Fund's
outstanding shares.
As of April 13, 1995, Merrill Lynch Pierce Fenner & Smith, (as record
owned holding shares for its clients) owned 12,767,376 shares (29.75%)
of the outstanding shares of the Fund.
Directors' Compensation
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM THE TOTAL COMPENSATION PAID
THE FUND FUND* FROM FUND COMPLEX +
John F. Donahue, $0 $0 for the Fund and
Chairman and Director 68 other investment companies in the Fund
Complex
Thomas G. Bigley, $788 $20,688 for the Fund and
Director 49 other investment companies in the Fund
Complex
John T. Conroy, Jr., $1,836 $117,202 for the Fund and
Director 64 other investment companies in the Fund
Complex
William J. Copeland, $1,836 $117,202 for the Fund and
Director 64 other investment companies in the Fund
Complex
James E. Dowd, $1,836 $117,202 for the Fund and
Director 64 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D., $1,667 $106,460 for the Fund and
Director 64 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr. $1,836 $117,202 for the Fund and
Director 64 other investment companies in the Fund
Complex
Peter E. Madden $1,422 $90,563 for the Fund and
Director 64 other investment companies in the Fund
Complex
Gregor F. Meyer $1,667 $106,460 for the Fund and
Director 64 other investment companies in the Fund
Complex
John E. Murray, Jr. $0 $0 for the Fund and
Director 64 other investment companies in the Fund
Complex
Wesley W. Posvar $1,667 $106,460 for the Fund and
Director 64 other investment companies in the Fund
Complex
Marjorie P. Smuts $1,667 $106,460 for the Fund and
Director 64 other investment companies in the Fund
Complex
*Information is furnished for the fiscal year ended February 28, 1995.
+The information is provided for the last calendar year.
Director Liability
The Fund's Articles of Incorporation provide that the Directors will not
be liable for errors of judgment or mistakes of fact or law. However,
they are not protected against any liability to which they would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct
of their office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Advisers. It is a subsidiary
of Federated Investors. All the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F.
Donahue, his wife and his son, J. Christopher Donahue.
The adviser shall not be liable to the Fund or any shareholder for any
losses that may be sustained in the purchase, holding, or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.
Advisory Fees
For its advisory services, Federated Advisers receives an annual
investment advisory fee as described in the prospectus.
For the fiscal years ended February 28, 1995, 1994, and 1993, the Fund's
adviser earned $3,435,227, $5,767,213, and $6,866,490, respectively, of
which $369,853, $117,096, and $155,350, respectively, were voluntarily
waived.
State Expense Limitations
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
expense limitation, the investment advisory fee paid will be
reduced by the amount of the excess, subject to an annual
adjustment. If the expense limitation is exceeded, the amount to
be reimbursed by the adviser will be limited, in any single fiscal
year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. Prior to March 1, 1994, Federated
Administrative Services, Inc., also a subsidiary of Federated Investors,
served as the Fund's administrator. (For purposes of this Statement of
Additional Information, Federated Administrative Services and Federated
Administrative Services, Inc., may hereinafter collectively be referred
to as, the "Administrators".) For the fiscal year ended February 28,
1995, the Administrators earned $436,750. For the fiscal years ended
February 28, 1994 and 1993, Federated Administrative Services, Inc.
earned $765,738 and $744,906, respectively. Dr. Henry J. Gailliot, an
officer of Federated Advisors, the adviser to the Fund, holds
approximately 20% of the outstanding common stock and serve as a
director of Commercial Data Services, Inc., a company which provides
computer processing services to Federated Administrative Services, Inc.,
and Federated Administrative Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to review by the
Board of Directors.
The adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
Purchasing Shares
Except under certain circumstances described in the prospectus, shares
are sold at their net asset value on days the New York Stock Exchange is
open for business. The procedure for purchasing shares of the Fund is
explained in the prospectus under "Investing in the Fund."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries, and assisting
clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, the Board of Directors expects that
the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist the Fund in pursuing its
investment objectives. By identifying potential investors whose needs
are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
(3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
For the fiscal year ended February 28, 1995, the Fund paid $1,431,342
pursuant to the Fund's Rule 12b-1 plan, $1,338,799 of which was waived.
For the same period, the Fund paid $1,338,801 in shareholder services
fees.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. State Street Bank acts as
the shareholder's agent in depositing checks and converting them to
federal funds.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus. Net
asset value will not be calculated on Good Friday and on the following
holidays: New Year's Day, Presidents' Day, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determining Market Value of Securities
Market values of the Fund's securities are determined as follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean between the bid
and asked prices, as furnished by an independent pricing service,
or for short-term obligations with remaining maturities of 60 days
or less at the time of purchase, at amortized cost unless the
Board of Directors determines this is not fair value; or
o at fair value as determined in good faith by the Fund's Board of
Directors.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices. Pricing services may
consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Exchange Privilege
Requirements For Exchange
Shareholders using this privilege must exchange shares having a net
asset value of at least $1,500. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made.
This privilege is available to shareholders residing in any state in
which the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund.
Further information on the exchange privilege and prospectuses for
Fortress Funds or certain Federated Funds are available by calling the
Fund.
Tax Consequences
Exercise of this exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the circumstances, a short or long-
term capital gain or loss may be realized.
Making an Exchange
Instructions for exchanges for Fortress Funds or certain Federated Funds
must be given in writing by the shareholder. Written instructions may
require a signature guarantee.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the
Fund receives the redemption request. Redemption procedures are
explained in the prospectus under "Redeeming Shares." Although the Fund
does not charge for telephone redemptions, it reserves the right to
charge a fee for the cost of wire-transferred redemptions of less than
$5,000.
Certain shares redeemed within one to four years of purchase may be
subject to a contingent deferred sales charge. The amount of the
contingent deferred sales charge is based upon the amount of the
administrative fee paid at the time of purchase by the distributor to
the financial institutions for services rendered, and the length of time
the investor remains a shareholder in the Fund. Should financial
institutions elect to receive an amount less than the administrative fee
that is stated in the prospectus for servicing a particular shareholder,
the contingent deferred sales charge and/or holding period for that
particular shareholder will be reduced accordingly.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Board of Directors determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received
deduction available to corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held the Fund shares.
Total Return
The Fund's average annual total return for the one-year period ended
February 28, 1995, and for the period from July 25, 1991 (date of
initial public investment) to February 28, 1995 were 0.61% and 3.49%,
respectively.
The average annual total return for the Fund is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned
at the end of the period by the offering price per share at the end of
the period. The number of shares owned at the end of the period is based
on the number of shares purchased at the beginning of the period with
$1,000, adjusted over the period by any additional shares, assuming the
monthly reinvestment of all dividends and distributions. Any applicable
redemption fee is deducted from the ending value of the investment based
on the lesser of the original purchase price or the offering price of
shares redeemed.
Yield
The Fund's yield for the thirty-day period ended February 28, 1995, was
5.32%.
The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering
price per share of the Fund on the last day of the period. This value is
then annualized using semi-annual compounding. This means that the
amount of income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is reinvested every
six months. The yield does not necessarily reflect income actually
earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in the Fund, performance will be reduced for those shareholders paying
those fees.
Performance Comparisons
The Fund's performance depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings
and offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lehman Brothers Adjustable Rate Mortgage Funds Average is
comprised of all agency guaranteed securities with coupons that
periodically adjust over a spread of a published index.
o Lehman Brothers Mutual Fund Short (1-3) U.S. Government Index is
an index comprised of mutual funds which invest in short-term (1-3
year) government securities.
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "U.S.
Mortgage Funds" category in advertising and sales literature.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an
investment in the Fund based on monthly reinvestment of dividends over a
specified period of time.
From time to time, the Fund may advertise its performance, using charts,
graphs, and descriptions, compared to federally insured bank products
including certificates of deposit and time deposits and to money market
funds using the Lipper Analytical Services, Inc., money market
instruments average.
Advertising and sales literature may show the Fund's net asset value
history in relation to certain political and economic events.
349554105
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