FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
(FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.)
PROSPECTUS
Federated 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,
1996, 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 or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-235-4669. To obtain other
information, or make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus.
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, 1996
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TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Financial Highlights...........................................................2
General Information............................................................3
Investment Information.........................................................3
Investment Objectives........................................................3
Investment Policies..........................................................3
Investment Limitations.......................................................8
Net Asset Value................................................................9
Investing in the Fund..........................................................9
Share Purchases..............................................................9
Minimum Investment Required.................................................10
What Shares Cost............................................................10
Systematic Investment Program...............................................10
Exchange Privileges.........................................................11
Certificates and Confirmations..............................................11
Dividends and Distributions.................................................11
Retirement Plans............................................................11
Redeeming Shares..............................................................12
Through a Financial Institution.............................................12
Contingent Deferred Sales Charge............................................12
Systematic Withdrawal Program...............................................13
Accounts with Low Balances..................................................14
Fund Information..............................................................14
Management of the Fund......................................................14
Distribution of Fund Shares.................................................15
Administration of the Fund..................................................16
Shareholder Information.......................................................17
Voting Rights...............................................................17
Tax Information...............................................................18
Federal Income Tax..........................................................18
State and Local Taxes.......................................................18
Performance Information.......................................................18
Addresses.....................................................................19
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SUMMARY OF FUND EXPENSES
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
(FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.)
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................ None
Maximum Sales Charge 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
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2)............................................................................. 0.51%
12b-1 Fee (after waiver)(3).................................................................................. 0.01%
Total Other Expenses......................................................................................... 0.50%
Shareholder Services Fee (after waiver)(4).................................................... 0.24%
Total 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 operating expenses would have been 1.36% absent the voluntary
waivers of portions of the management fee, the 12b-1 fee and the
shareholder services 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," "Redeeming Shares" and "Fund
Information." 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 charge 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.
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FINANCIAL HIGHLIGHTS
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
(FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent public accountants. Their report, dated April 18, 1996, on the
Fund's financial statements for the year ended February 29, 1996, and on the
following table for the periods presented, is included in the Annual Report,
which is herein incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained free of charge.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.46 $ 9.79 $ 9.90 $ 9.98 $ 10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.54 0.47 0.43 0.53 0.47
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Net realized and unrealized gain (loss) on investments 0.08 (0.32) (0.11) (0.08) (0.06)
- ------------------------------------------------------------------ --------- --------- --------- --------- -----------
Total from investment operations 0.62 0.15 0.32 0.45 0.41
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LESS DISTRIBUTIONS
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Distributions from net investment income (0.53) (0.47) (0.43) (0.53) (0.42)
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Distributions in excess of net investment income (b) -- (0.01) -- -- (0.01)
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Total distributions (0.53) (0.48) (0.43) (0.53) (0.43)
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NET ASSET VALUE, END OF PERIOD $ 9.55 $ 9.46 $ 9.79 $ 9.90 $ 9.98
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TOTAL RETURN (C) 6.77% 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% 1.02% 1.01% 0.63%*
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Net investment income 5.67% 4.76% 4.38% 5.29% 6.79%*
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Expense waiver/reimbursement (d) 0.34% 0.30% 0.24% 0.01% 0.37%*
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $304,191 $419,095 $798,213 $1,136,198 $965,289
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Portfolio turnover 144% 170% 40% 56% 22 %
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</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 charge 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.
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended February 29, 1996, which can be obtained
free of charge.
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GENERAL INFORMATION
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.
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INVESTMENT INFORMATION
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 (the
"NCUA"). 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 ("CMOs") are debt obligations collateralized
by mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, FNMA, or FHLMC 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 Board"). 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
purchased 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 does not attempt to set or meet any specific portfolio turnover rate,
since turnover is incidental to transactions undertaken in an attempt to achieve
the Trust's investment objective. The turnover rates for the fiscal years ended
February 29, 1996 and February 28, 1995 were 144% and 170%, respectively. Such
high turnover rates may result in higher brokerage commissions and capital
gains. See "Tax Information" in this prospectus.
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; or
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.
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NET ASSET VALUE
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.
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INVESTING IN THE FUND
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) which 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. 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 "Supplemental 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 Federated Adjustable Rate U.S. Government Fund,
Inc.; and
send both to the Fund's transfer agent, Federated Shareholder Services Company,
c/o State Street Bank and Trust Company, P.O. Box 8600, Boston, MA 02266-8600.
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. Shares cannot be purchased by wire on holidays when wire
transfers are restricted. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.
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 as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Trust'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; or (iii) the following holidays: New
Year's Day, President's 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 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 Federated 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
Federated Funds are available by calling Federated Securities Corp.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder 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 "Redeeming Shares by Mail," should
be considered.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share certificates
have been issued, they should be sent unendorsed with the written request by
registered or certified mail to the address noted above.
The written request should state: the Fund name; the account name as registered
with the Fund; the account number; and the number of shares to be redeemed or
the dollar amount requested. All owners of the account must sign the request
exactly as the shares are registered. Normally, a check for the proceeds is
mailed within one business day, but in no event more than seven days, after the
receipt of a proper written redemption request. Dividends are paid up to and
including the day that a redemption request is processed.
Shareholders requesting 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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; 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.
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
AMOUNT OF DEFERRED
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 Federated 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 Federated 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 "Supplemental 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
deplete, 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 Board". 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 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 Management 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. With over $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.
Kathleen M. Foody-Malus has been the Fund's 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. 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 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. Ms. Nason is a
Chartered Financial Analyst and received her M.S. in Industrial Administration
from Carnegie Mellon University.
Todd A. Abraham has been the Fund's portfolio manager since October 1995. Mr.
Abraham joined Federated Investors in 1993 as an Investment Analyst and has been
an Assistant Vice President of the Fund's investment adviser since 1995. Mr.
Abraham served as a Portfolio Analyst at Ryland Mortgage Co. from 1992 to 1993
and as a Bond Administrator at Ryland Asset Management Company from 1990 to
1992. Mr. Abraham received his M.B.A. in finance from Loyola College.
Both the Fund and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Directors,
and could result in severe penalties.
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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Plan"), the distributor may be paid a fee by the Fund in an amount,
computed at an annual rate of 0.25 of 1% of the average daily net asset value of
the Fund. The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services and distribution-related support
services as agents for their clients or customers.
The 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 Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to .25% of 1% of the average daily net asset value
of its shares to obtain certain personal services for shareholders and to
maintain shareholder accounts.
Under the Shareholder Services Agreement, 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.
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's investment adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to
the average aggregate daily net assets of all Federated Funds as specified
below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
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 Services Company may choose voluntarily to waive a portion of its fee.
- --------------------------------------------------------------------------------
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.
STATE AND LOCAL TAXES
Company 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.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Adjustable Rate
U.S. Government Fund, Inc. Federated Investors Tower
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 8600
Boston, Massachusetts 02266-8600
- -----------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Federated Investors Tower
Services Company Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, PA 15222-5401
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
FEDERATED ADJUSTABLE
RATE U.S. GOVERNMENT
FUND, INC.
(FORMERLY, FORTRESS ADJUSTABLE RATE
U.S. GOVERNMENT FUND, INC.)
PROSPECTUS
April 30, 1996
Cusip 349554105
1071005A (4/96)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
(FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Federated Adjustable Rate U.S. Government Fund, Inc. (the
"Fund"), dated April 30, 1996. This Statement is not a prospectus itself.
You may request a copy of the Fund's prospectus or a paper copy of this
Statement, if you have received it electronically, free of charge by
calling 1-800-235-4669.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated April 30, 1996
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
FEDERATED 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
OTHER SERVICES 10
Fund Administration 10
Custodian and Portfolio Recordkeeper 10
Transfer Agent 10
Independent Public Auditors 10
BROKERAGE TRANSACTIONS 10
PURCHASING SHARES 11
Distribution Plans and Shareholder Services 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
ABOUT FEDERATED INVESTORS 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. Effective March 31, 1996, the Fund changed its name to
Federated Adjustable Rate U.S. Government Fund, Inc.
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 becomes 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 "the Board".
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 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. The Board 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 29, 1996, and February 28, 1995 the portfolio turnover rates were
144% and 170%, 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:
oduring 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
onot 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."
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Adjustable Rate U.S. Government Fund, Inc., and
principal occupations including those with its affiliates, and the "Funds"
described in the Statement of Additional Information.
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. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds. Mr. Donahue is
the father of
J. Christopher Donahue, Executive 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 or Trustee 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 or Trustee 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
or Trustee 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 or
Trustee of the Funds.
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 or Trustee 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; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director
or Trustee of the Funds; formerly, Counsel, Horizon Financial, F.A., Western
Region.
Peter E. Madden
Seacliff
562 Bellevue Avenue
Newport, RI
Birthdate: March 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director or
Trustee of the Funds; formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee
of the Funds.
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 or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management
Center; Director or Trustee of the Funds; President Emeritus, University of
Pittsburgh; founding Chairman, National Advisory Council for Environmental
Policy and Technology and Federal Emergency Management Advisory Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director or Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee 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
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated Services
Company; President and Trustee, Federated Shareholder Services; Director,
Federated Securities Corp.; Executive Vice President and Secretary of the
Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President and Trustee, Federated Investors; Vice President,
Federated Shareholder Services; Executive Vice President, Federated
Securities Corp.; Treasurer of some of the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Directors handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income
Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated
GNMA Trust; Federated Government Income Securities, Inc.; Federated
Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund,
Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust; Insurance
Management Series; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term Trust,
Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash Trust;
Managed Series Trust; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds;
Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Planters Funds; The Starburst Funds; The Starburst
Funds II; The Virtus Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities;
Trust for U.S. Treasury Obligations; 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 March 29, 1996, Merrill Lynch Pierce Fenner & Smith, (as record owner
holding shares for its clients) owned 9,237,222.7890 shares (29.50%) 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 54 other investment companies in the Fund
Complex
Thomas G. Bigley,++ $1,377.88 $86,331 for the Fund and
Director 54 other investment companies in the Fund Complex
John T. Conroy, Jr., $1,493.06 $115,760 for the Fund and
Director 54 other investment companies in the Fund Complex
William J. Copeland, $1,493.06 $115,760 for the Fund and
Director 54 other investment companies in the Fund Complex
James E. Dowd, $1,493.06 $115,760 for the Fund and
Director 54 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $1,377.88 $104,898 for the Fund and
Director 54 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $1,493.06 $115,760 for the Fund and
Director 54 other investment companies in the Fund Complex
Peter E. Madden $1,377.88 $104,898 for the Fund and
Director 54 other investment companies in the Fund Complex
Gregor F. Meyer $1,377.88 $104,898 for the Fund and
Director 54 other investment companies in the Fund Complex
John E. Murray, Jr. $1,377.88 $104,898 for the Fund and
Director 54 other investment companies in the Fund Complex
Wesley W. Posvar $1,377.88 $104,898 for the Fund and
Director 54 other investment companies in the Fund Complex
Marjorie P. Smuts$1,377.88 $104,898 for the Fund and
Director 54 other investment companies in the Fund Complex
*Information is furnished for the fiscal year ended February 29, 1996.
+The information is provided for the last calendar year.
++Mr. Bigley served on 39 investment companies in the Federated Funds Complex
from January 1 through
September 30, 1995. On October 1, 1995, he was appointed a Trustee on
15 additional Federated Funds.
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 year ended February 29, 1996, and fiscal years ended February
28, 1995, and 1994, the Fund's adviser earned $2,154,062, $3,435,227, and
$5,767,213, respectively, of which $332,589, $369,853, and $117,096,
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.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative Services, and Federated
Administrative Services, Inc. may hereinafter collectively be referred to as
the "Administrators." For the fiscal year ended February 29, 1996, and
fiscal years ended February 28, 1995, and 1994, Federated Administrative
Services earned $271,695, $436,750 and $765,738, respectively.
Dr. Henry J. Gailliot, an officer of Federated Management, the adviser to the
Fund, holds approximately 20% of the outstanding common stock and serves as a
director of Commercial Data Services, Inc., a company which provides computer
processing services to Federated Services Company.
CUSTODIAN AND PORTFOLIO RECORDKEEPER
State Street Bank and Trust Company, Boston, MA, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh, PA,
provides certain accounting and recordkeeping services with respect to the
Fund's portfolio investments. 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.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records and
receives a fee based on the size, type and number of accounts and
transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
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 guidelines established by the 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: advice as to the advisability of investing in securities; security
analysis and reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the adviser or its affiliates
in advising the Fund 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. 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. During the fiscal year ended February 29, 1996, and fiscal
years ended February 28, 1995, and 1994, the Fund paid no brokerage
commissions.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one
or more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained
or disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.
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 PLAN AND SHAREHOLDER SERVICES
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 29, 1996, the Fund paid $897,526 pursuant
to the Fund's Rule 12b-1 plan, $851,425 of which was waived. For the same
period, the Fund paid $897,526 in shareholder services fees, $46,101 of which
was waived.
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 Federated.
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 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
29, 1996, and for the period from July 25, 1991 (date of initial public
investment) to February 29, 1996 were 5.76% and 4.41%, 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 29, 1996, was
5.72%.
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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes 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.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is reflected
in its investment decision making-structured, straightforward, and
consistent. This has resulted in a history of competitive performance with a
range of competitive investment products that have gained the confidence of
thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
J. Thomas Madden, Executive Vice President, oversees Federated Investors'
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed income
management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $2 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional
clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by
John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
*Source: Investment Company Institute
CUSIP 349554105
