[LOGO] Federated Investors
Fortress
Adjustable Rate
U. S. Government
Fund, Inc.
5th Semi-Annual Report
August 31, 1995
Established 1991
FIXED INCOME
President's Message
[INSERT PHOTO HERE]
Dear Fellow Shareholder:
I am pleased to present the Semi-Annual Report for Fortress Adjustable Rate
U.S. Government Fund for the 6-month period ended August 31, 1995. This Report
contains a discussion with the fund's portfolio manager, Kathy Foody-Malus,
Vice President of Federated Advisers. Following the discussion, you will find
the fund's financial statements and a complete listing of the fund's
investments in U.S. government Agencies, and adjustable rate mortgage
securities. This investment is considered a high quality investment as rated
AAAf by Standard & Poor's Ratings Group.*
The fund seeks to pay shareholders current income and accepts the modest
fluctuation in share prices by investing exclusively in U.S. government
adjustable-rate mortgage issues. Since the fund's inception in July 1991, fund
share prices and income distributions have reflected short-term interest rate
changes. This adjustable rate fund offers relative safety and income payments.
The fund's managers are conservative in their selection and management of
adjustable rate mortgage-backed securities. They do not use speculative U.S.
government derivative securities such as inverse floaters and interest-only
STRIPS. They do not employ leverage. Also, the fund's portfolio is reset
against the one-year Constant Maturity Treasury Index, as well as the London
Interbank offered Rate (LIBOR).
The breakdown of the fund's portfolio as of August 31, 1995 was:
Federal Home Loan Mortgage Corporation 40.8%
Federal National Mortgage Association 29.5%
Government National Mortgage Association 11.6%
U.S. Treasury Notes 5.3%
Repurchase Agreements 12.8%
On August 31, 1995, the fund's net assets stood at $354.3 million, and the net
asset value per share was $9.51. Shareholders received income dividends of
$11.0 million, or $0.27 per share for the 6-month period ended August 31,
1995. During the 6-month reporting period, the share price of your fund rose
from $9.46 to $9.51, adding back the fund's distributions of $0.27 per share
to the 8/31/95 net asset value, the fund's total return was 3.44% for the
report period. (Including the 1% contingent deferred sales charge, the fund's
total return was 2.46%.)
*Ratings are subject to change.
The fund's average annualized total returns for one-year and since inception
(7/25/91) were 4.57% and 4.16%, respectively.**
On July 6, 1995, Alan Greenspan, Chairman of the Federal Reserve Board,
lowered short-term interest rates by 0.25% to 5.75%. This occurred after 7
interest rate boosts over the past 12 months. Just as the previous interest
rate increases depressed bond prices, this modest interest rate reduction
caused bond prices to increase across the bond market, including the
adjustable-rate securities.
Currently, the fund's portfolio has a modified duration of 1.75 years and an
average coupon of 7.45%. Furthermore, in an adjustable fund such as this, it
is important to know the average months to reset is 6 months.
We are optimistic about the continued price action and income payments of
adjustable rate mortgage securities.
I urge you to read the comments by Kathy Foody-Malus and recommend that you
add to your account.
Thank you for your continued support of Fortress Adjustable Rate U.S.
Government Fund. If you have any questions concerning your account, please do
not hesitate to write.
Very sincerely yours,
Richard B. Fisher
President
October 16, 1995
** Performance quoted represents past performance. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. The above figures are as
of 8/31/95 and include the 1% contingent deferred sales charge that applies to
shares redeemed within four years.
Investment Review
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Kathy Foody-Malus
Vice President,
Federated Advisers
Q Kathy, what are the benefits of investing in U.S. Government Agency
adjustable rate securities?
A Adjustable rate mortgage-backed securities (ARMs) differ from
conventional ones in that their interest rates change, not in lockstep
with the general level of rates, but-depending on the
mortgages semi-annually or annually. This feature allows ARMs to offer
-
investors many advantages:
. coupon rates that adjust periodically toward the current level of
interest rates;
. less interest rate risk-particularly in terms of price volatility and
reinvestment risk;
. less vulnerability to sharp shifts in prepayment rate patterns caused
by changes in interest rates;*
. relatively short average lives, along with short duration-which help
to reduce exposure to market value changes.
Q What is your view of the interest rate environment during the
semi-annual reporting period?
A Over the semi-annual reporting period, the economic data has been
mixed. The industrial sector data continues to be weak via new factory
orders and the purchasing manager's index. Offsetting the weakness in
the industrial sector, the employment picture is much stronger as shown
through monthly employment data as well as weekly initial claims.
While consumer spending remains the critical question, a pickup in
employment should provide impetus by increasing income. Other
fundamentals such as housing are also appearing brighter.
The bond market during this time period has definitely viewed the glass as
half full, choosing to focus on the economic data which has shown signs of a
weakening economy. During this time, the one-year and two-year U.S. Treasury
notes declined in yields by 78 and 92 basis points (less than 1%),
respectively. During this reporting period, the fund's net asset value
increased from $9.46 to $9.51.
* You should be aware that investing in mortgage-backed securities
involves prepayment risk, which is the possibility that some securities
may receive unscheduled principal payments. This may lower the fund's
total return.
Q How do you see this impacting the ARMs market?
A After enjoying good performance in the first half of 1995, the ARMs
sector came under some pressure as concerns over potential increasing
prepayments impacted the market. The U.S. Treasury market rally
created a flat yield curve which resulted in homeowners of adjustable
rate mortgages witnessing mortgage rate increases above where they
could obtain a fixed-rate mortgage. This historically rare occurrence
has given adjustable rate homeowners the incentive to refinance,
increasing forecasted prepayment rates on ARM securities.
Q What are your current investment strategies in response to this environment?
A This environment requires careful management of prepayment exposure. In
order to mitigate prepayment risk, securities exhibiting high refinance
potential were sold and replaced with U.S. Treasurys and GNMA ARMs.
GNMA ARMs feature lower periodic caps and margins which will serve to
reduce prepayment risk relative to conventional ARMs. In addition, if
interest rate volatility decreases, GNMA ARMs will benefit due to
reduced cap values. On the whole, the GNMA ARM sector should
outperform other ARMs sectors should the yield curve either flatten
with the long-end rallying, or interest rates remain in a trading
range.
Q In the adjustable rate mortgage fund universe, Fortress Adjustable Rate
U.S. Government Fund, Inc. has been described as a "pure government
fund." Has this changed due to market conditions?
A No. The fund has continued to emphasize U.S. government agencies with
adjustable rate features and a yield curve target of one to two years.
(The fund will, under normal circumstances invest at least 65% of its
assets in adjustable and floating rate mortgage securities which are
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. Fund shares are not guaranteed.) The fund during the
semi-annual reporting period, maintained a neutral portfolio strategy
stressing market responsive indices. Over 80% of the ARMs within the
fund reset off the one-year CMT Index.* This portfolio structure
resulted in good relative performance versus similar duration U.S.
Treasurys as well as ARMs indices. The fund's net total return for the
six months ended 8/31/95 was 3.44%** compared to 3.65% for the Merrill
Lynch 1-Year Treasury Note Index, 4.81% for the Merrill Lynch 2-year
Treasury Note Index, and 2.02% for the Lipper ARMs Fund Average.*
Q You mention the term "reset" as an important factor in fund management.
What is it and why is it important?
A Rate "reset" frequency and time to next rate "reset" are important
factors in determining the value of an adjustable rate mortgage
security. The impact of the periodic caps becomes more pronounced the
longer the time between coupon resets, because the likelihood of rates
exceeding the cap levels increases.
Q What U.S. government issues are the fund's assets invested in?
A The fund's assets are primarily invested in adjustable rate mortgage
issues as follows:
Federal Home Loan Mortgage Corporation 40.8%
Federal National Mortgage Association 29.5%
Government National Mortgage Association 11.6%
* This index is unmanaged.
** This figure does not include the 1% contingent deferred sales charge
that applies to shares redeemed within four years. Performance quoted
represents past performance. Investment return and value will
fluctuate, so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Two Ways You May Seek to Invest for Success in
Fortress Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
Initial Investment:
If you made an initial investment of $5,000 in the fund, on July 25, 1991,
reinvested dividends and capital gains, and did not redeem any shares, your
account would have been worth $5,909 on August 31, 1995. You would have earned
a 4.16%* average annual total return for the 5-year investment life span.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends,
and you gain the benefit of compounding.
As of September 30, 1995, the fund's average annual one-year, and since
inception (7/25/91) total returns were 5.19%, and 4.19%, respectively.
[INSERT CHART HERE]
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 1%
contingent deferred sales charge prior to 48 months.
Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so an investor's shares,
when redeemed, may be worth more or less than their original cost.
Fortress Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
One Step at a Time:
$1,000 invested each year for 5 years (reinvesting all dividends and capital
gains) grew to $5,419.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the fund on July 25, 1991,
reinvested your dividends and capital gains, and didn't redeem any shares, you
would have invested only $5,000, but your account would have reached a total
value of $5,419* by August 31, 1995. You would have earned an average annual
total return of 3.86%.
A practical investment plan helps you pursue long-term performance from U.S.
government securities. Through systematic investing, you buy shares on a
regular basis and reinvest all earnings. This investment plan works for you
even if you invest only $1,000 annually. You can take it one step at a time.
Put time and compounding to work!
[INSERT CHART HERE]
* No method of investing can guarantee a profit or protect against loss
in down markets. However, by investing regularly over time and buying
shares at various prices, investors can purchase more shares at lower
prices, and all accumulated shares have the ability to pay income to
the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
Fortress Adjustable Rate U.S. Government Fund, Inc.
Portfolio of Investments
- --------------------------------------------------------------------------------
August 31, 1995
(unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- --------------
U.S. GOVERNMENT OBLIGATIONS--88.2%
- -----------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC,
ADJUSTABLE RATE MORTGAGES--43.9%
-------------------------------------------------------------------------------
$ 151,829,602 5.479%-8.371%, 9/1/2017-8/1/2025 $ 155,703,076
------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--1.8%
-------------------------------------------------------------------------------
5,764,704 11.50%-12.25%, 12/1/2010-11/1/2015 6,436,634
------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION,
ADJUSTABLE RATE MORTGAGES--30.0%
-------------------------------------------------------------------------------
104,080,824 5.408%-7.972%, 3/1/2016-3/1/2033 106,267,044
------------------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION,
ADJUSTABLE RATE MORTGAGES--8.4%
-------------------------------------------------------------------------------
30,000,000 5.50%-6.00%, 9/20/2025-10/20/2025 29,890,600
------------------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--4.1%
-------------------------------------------------------------------------------
12,689,284 11.50%-12.00%, 11/15/2012-7/15/2019 14,335,173
------------------------------------------------------------------------------- --------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $309,641,945) 312,632,527
------------------------------------------------------------------------------- --------------
U.S. TREASURY OBLIGATIONS--5.6%
- -----------------------------------------------------------------------------------------------
U.S. TREASURY NOTES--5.6%
-------------------------------------------------------------------------------
20,000,000 5.625%-6.125%, 5/31/1997-6/30/1997 20,014,600
------------------------------------------------------------------------------- --------------
TOTAL U.S. TREASURY OBLIGATIONS
(IDENTIFIED COST $19,940,858) 20,014,600
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(A)REPURCHASE AGREEMENTS--13.8%
- -----------------------------------------------------------------------------------------------
10,000,000 (b)CS First Boston Corp., 5.75%, dated 8/24/1995, due 9/21/1995 10,000,000
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20,000,000 (b)CS First Boston Corp., 5.76%, dated 8/18/1995, due 9/21/1995 20,000,000
------------------------------------------------------------------------------- --------------
10,000,000 Harris, Nesbitt, Thomson Securities, Inc., 5.80%, dated 8/31/1995, due 9/1/1995 10,000,000
------------------------------------------------------------------------------- --------------
</TABLE>
Fortress Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- --------------
(A)REPURCHASE AGREEMENTS--CONTINUED
- -----------------------------------------------------------------------------------------------
$ 8,900,000 J.P. Morgan Securities, Inc., 5.83%, dated 8/31/1995, due 9/1/1995 $ 8,900,000
------------------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 48,900,000
------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $378,482,803)(C) $ 381,547,127
------------------------------------------------------------------------------- --------------
</TABLE>
(a) Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investments in the repurchase agreements are through participation in joint
accounts with other Federated funds.
(b) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days if the creditworthiness of the issuer is
downgraded.
(c) The cost of investments for federal tax purposes amounts to $378,482,803.
The net unrealized appreciation on a federal tax cost basis amounts to
$3,064,324 and is comprised of $3,758,573 appreciation and $694,249
depreciation at August 31, 1995.
Note: The categories of investments are shown as a percentage of net assets
($354,282,433) at August 31, 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
- --------------------------------------------------------------------------------
August 31, 1995
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------
Investments in repurchase agreements $ 48,900,000
- --------------------------------------------------------------------------------
Investments in securities 332,647,127
- -------------------------------------------------------------------------------- --------------
Total investments in securities, at value (identified and tax cost $378,482,803) $ 381,547,127
- ------------------------------------------------------------------------------------------------
Cash 4,797
- ------------------------------------------------------------------------------------------------
Income receivable 6,670,027
- ------------------------------------------------------------------------------------------------
Receivable for investments sold 19,983,307
- ------------------------------------------------------------------------------------------------
Receivable for shares sold 975
- ------------------------------------------------------------------------------------------------
Deferred expenses 156,752
- ------------------------------------------------------------------------------------------------ ---------------
Total assets 408,362,985
- ------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------
Payable for investments purchased $ 52,399,967
- --------------------------------------------------------------------------------
Payable for shares redeemed 823,536
- --------------------------------------------------------------------------------
Income distribution payable 696,408
- --------------------------------------------------------------------------------
Accrued expenses 160,641
- -------------------------------------------------------------------------------- --------------
Total liabilities 54,080,552
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS for 37,251,300 shares outstanding $ 354,282,433
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------
Paid in capital $ 396,909,122
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,064,324
- ------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (45,158,246)
- ------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (532,767)
- ------------------------------------------------------------------------------------------------ ---------------
Total Net Assets $ 354,282,433
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE: ($354,282,433 / 37,251,300 shares outstanding) $9.51
- ------------------------------------------------------------------------------------------------ ---------------
OFFERING PRICE PER SHARE: $9.51
- ------------------------------------------------------------------------------------------------ ---------------
REDEMPTION PROCEEDS PER SHARE: (99/100 of 9.51)* $9.41
- ------------------------------------------------------------------------------------------------ ---------------
</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
- --------------------------------------------------------------------------------
August 31, 1995
(unaudited)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $182,430) $ 12,923,708
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee $ 1,165,900
- ------------------------------------------------------------------------------------
Administrative personnel and services fee 147,098
- ------------------------------------------------------------------------------------
Custodian fees 36,887
- ------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 123,615
- ------------------------------------------------------------------------------------
Directors'/Trustees' fees 6,072
- ------------------------------------------------------------------------------------
Auditing fees 7,176
- ------------------------------------------------------------------------------------
Legal fees 5,152
- ------------------------------------------------------------------------------------
Portfolio accounting fees 46,409
- ------------------------------------------------------------------------------------
Distribution services fee 485,792
- ------------------------------------------------------------------------------------
Shareholder services fee 485,792
- ------------------------------------------------------------------------------------
Share registration costs 50,416
- ------------------------------------------------------------------------------------
Printing and postage 27,600
- ------------------------------------------------------------------------------------
Insurance premiums 4,968
- ------------------------------------------------------------------------------------
Taxes 52,808
- ------------------------------------------------------------------------------------
Miscellaneous 6,624
- ------------------------------------------------------------------------------------ ------------
Total expenses 2,652,309
- ------------------------------------------------------------------------------------
Waivers--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee $ (180,424)
- -----------------------------------------------------------------------
Waiver of distribution services fee (456,160)
- -----------------------------------------------------------------------
Waiver of shareholder services fee (29,631)
- ----------------------------------------------------------------------- -----------
Total waivers (666,215)
- ------------------------------------------------------------------------------------ ------------
Net expenses 1,986,094
- -------------------------------------------------------------------------------------------------- --------------
Net investment income 10,937,614
- -------------------------------------------------------------------------------------------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain on investments 885,422
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 2,249,810
- -------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain on investments 3,135,232
- -------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ 14,072,846
- -------------------------------------------------------------------------------------------------- --------------
</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>
SIX MONTHS ENDED
(UNAUDITED) YEAR ENDED
AUGUST 31, 1995 FEBRUARY 28, 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------
Net investment income $ 10,937,614 $ 27,225,124
- -------------------------------------------------------------------
Net realized gain (loss) on investments ($885,422 net gain and
$21,867,392 net loss, respectively, as computed for federal tax
purposes) 885,422 (24,587,433)
- -------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 1,471,656 1,918,498
- ------------------------------------------------------------------- ---------------------- ---------------------
Change in net assets resulting from operations 13,294,692 4,556,189
- ------------------------------------------------------------------- ---------------------- ---------------------
NET EQUALIZATION CREDITS (DEBITS)-- (44,937) (520,115)
- ------------------------------------------------------------------- ---------------------- ---------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------
Distributions from net investment income (10,892,677) (26,705,009)
- -------------------------------------------------------------------
Distributions in excess of net investment income (66,814)(a) (353,704)(a)
- ------------------------------------------------------------------- ---------------------- ---------------------
Change in net assets resulting from distributions to
shareholders (10,959,491) (27,058,713)
- ------------------------------------------------------------------- ---------------------- ---------------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------
Proceeds from sale of shares 8,502,945 44,883,593
- -------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 4,783,113 12,180,724
- -------------------------------------------------------------------
Cost of shares redeemed (80,388,711) (413,160,135)
- ------------------------------------------------------------------- ---------------------- ---------------------
Change in net assets resulting from share
transactions (67,102,653) (356,095,818)
- ------------------------------------------------------------------- ---------------------- ---------------------
Change in net assets (64,812,389) (379,118,457)
- -------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------
Beginning of period 419,094,822 798,213,279
- ------------------------------------------------------------------- ---------------------- ---------------------
End of period $ 354,282,433 $ 419,094,822
- ------------------------------------------------------------------- ---------------------- ---------------------
</TABLE>
(a) Distributions in excess of net investment income were a result of certain
book and tax timing differences. These distributions do not represent a
return of capital for federal income tax purposes.
(See Notes which are an integral part of the Financial Statements)
Fortress Adjustable Rate U.S. Government Fund, Inc.
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1995 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.46 $ 9.79 $ 9.90 $ 9.98 $ 10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.26 0.47 0.43 0.53 0.47
- -------------------------------------
Net realized and unrealized gain
(loss) on investments 0.06 (0.32) (0.11) (0.08) (0.06)
- ------------------------------------- ------------- --------- --------- --------- -----------
Total from investment operations 0.32 0.15 0.32 0.45 0.41
- ------------------------------------- ------------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
- -------------------------------------
Distributions from net investment
income (0.26 ) (0.47) (0.43) (0.53) (0.42)
- -------------------------------------
Distributions in excess of net
investment income (0.01 )(b) (0.01)(b) -- -- (0.01)(b)
- ------------------------------------- ------------- --------- --------- --------- -----------
Total distributions (0.27 ) (0.48) (0.43) (0.53) (0.43)
- ------------------------------------- ------------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.51 $ 9.46 $ 9.79 $ 9.90 $ 9.98
- ------------------------------------- ------------- --------- --------- --------- -----------
TOTAL RETURN (C) 3.44% 1.58% 3.27% 4.58% 4.14%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 1.02%* 1.02% 1.02% 1.01% 0.63%*
- -------------------------------------
Net investment income 5.61%* 4.76% 4.38% 5.29% 6.79%*
- -------------------------------------
Expense waiver/ reimbursement (d) 0.34%* 0.30% 0.24% 0.01% 0.37%*
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000
omitted) $354,282 $419,095 $798,213 $1,136,198 $965,289
- -------------------------------------
Portfolio turnover 83 % 170% 40% 56% 22 %
- -------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from July 25, 1991 (date of initial
public investment) to February 29, 1992.
(b) Distributions in excess of net investment income were the result of certain
book and tax timing differences. These distributions do not represent a
return of capital for federal income tax purposes.
(c) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(d) 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)
Fortress Adjustable Rate U.S. Government Fund, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
August 31, 1995
(unaudited)
(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 the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided 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 repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of 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.
Fortress Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
At August 31, 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 as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2000 $ 135,570
2001 $ 6,101,688
2002 $ 12,916,149
2003 $ 21,867,393
</TABLE>
Additionally, net capital losses of $5,022,868 attributable to security
transactions incurred after October 31, 1994 are treated as arising on the
first day of the Fund's next taxable year.
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, 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 on the date of the transaction)
is credited or charged to undistributed net investment income.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA and FHLMC, in
which the Fund loans mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments, which may enhance the
Fund's current yield and total return.
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.
Fortress Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
At August 31, 1995, there were 5,000,000,000 shares of $.001 par value capital
stock authorized. Transactions in shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28,
AUGUST 31, 1995 1995
<S> <C> <C>
Shares sold 894,322 4,668,005
- -----------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 503,533 1,282,617
- -----------------------------------------------------------
Shares redeemed (8,445,411) (43,186,417)
- ----------------------------------------------------------- ------------ -----------------------
Net change resulting from share transactions (7,047,556) (37,235,795)
- ----------------------------------------------------------- ------------ -----------------------
</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 under the Act. Under the terms of the Plan,
the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended
to result in the sale of 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 services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive a portion of this
fee. FSS can modify or terminate this voluntary waiver at any time at its
sole discretion.
Fortress Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
TRANSFER AGENT FEES--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.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting
records for which it receives a fee. The fee is based on the level of the
Fund's average daily net assets for the period, plus out-of-pocket
expenses.
GENERAL--Certain of the Officers and 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
August 31, 1995, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
Purchases $ 312,217,116
- -------------------------------------------------------------------------------------------------- --------------
Sales $ 300,138,355
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
Directors Officers
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Richard B. Fisher
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Richard B. Fisher Edward C. Gonzales
Edward L. Flaherty, Jr. Executive Vice President
Peter E. Madden John W. McGonigle
Gregor F. Meyer Executive Vice President and Secretary
John E. Murray, Jr. David M. Taylor
Wesley W. Posvar Treasurer
Marjorie P. Smuts Charles H. Field
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses and other information.
[LOGO]
Federated Securities Corp.
- --------------------------------------------------------------------------------
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
Cusip 349554105
