[LOGO OF FEDERATED INVESTORS]
Federated
Adjustable Rate
U.S. Government
Fund, Inc.
(formerly, Fortress
Adjustable Rate U.S.
Government Fund, Inc.)
5th Annual Report
February 29, 1996
Established 1991
President's Message
- --------------------------------------------------------------------------------
Dear Fellow Shareholder:
I am pleased to present the 5th Annual Report for Federated Adjustable Rate
U.S. Government Fund, Inc., formerly known as Fortress Adjustable Rate U.S.
Government Fund, Inc. The fund's name now begins with ``Federated" to make it
easy for investors to locate all Federated Funds in newspapers and other
publications.
This Report covers the twelve-month period from March 1, 1995, through February
29, 1996. It begins with a discussion with the fund's portfolio manager, Kathy
Foody-Malus, Vice President of Federated Advisers. Following her discussion,
you will find a complete listing of the fund's holdings and its financial
statements.
This adjustable rate government fund offers income investors generous yield
from securities with short maturities. The average effective duration as of
February 29, 1996 was 1.2 yrs. The fund is rated AAAf by Standard & Poor's
Ratings Group, the highest quality rating available for a mutual fund.*
Share price rose from $9.46 on the first day to $9.55 on the last day of the
period. Over the period, the fund paid income distributions totaling $0.53 per
share. The fund's total return performance, based on net aset value, was
6.77%.**
Thank you for your confidence in Federated Adjustable Rate U.S. Government
Fund, Inc. Consider the advantage of adding to your account and reinvesting
your dividends. As always, we welcome your comments and questions.
Sincerely,
Richard B. Fisher
President
April 15, 1996
*An AAAf rating means that the fund's portfolio holdings and counterparties
provide extremely strong protection against losses from credit defaults. This
rating, however, does not remove market risks. Ratings are subject to change.
**Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than their original cost. The fund's total return
based on offering price was 5.76%.
Investment Review
- --------------------------------------------------------------------------------
Q
During 1995, the bond market generated very positive returns. Can you comment?
A
The phenomenal performance of the bond market in 1995 was one of the best years
in bond market history, and came on the heels of one of the worst. As 1995 came
to a close, the economic indicators showed that the unemployment rate remained
around 5.5%, GDP growth continued at a sustainable level of around 2.5%, and
inflation at 2.9% portrayed an economy in the best shape investors had
witnessed over the last 30 years.
As 1996 starts out, the U.S. economy is beginning its second year of slow
growth. Consumer installment debt is still on the increase, and eventually
consumption will reach a saturation point. The employment picture is quite
positive based on February's numbers, and corporate profits appear to be in
reasonable shape.
Q
In this environment, how did Federated Adjustable Rate U.S. Government Fund
perform for shareholders for the 12-month period ending February 29, 1996?
A
The fund provided a dividend stream of $0.53 per share over the last year which
amounted to $20 million. The net annual total return, based on net asset value,
for the one-year period ended February 29, 1996 was 6.77%.* This compares to a
total return of 6.72% for the Merrill Lynch 1-Year Treasury Note Index**, and
4.12% for the Lipper ARMs Fund Average
*Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than their original cost. The total return for the
period reflecting the fund's 1% contingent deferred sales charge (that applies
to shares redeemed within four years) was 5.76%.
**The Merrill Lynch 1-Year Treasury Index is comprised of the most recently
issued 1-Year Treasury notes. Index returns are calculated as total returns
for periods of one, three, six and twelve months as well as year-to-date. This
index is unmanaged and actual investments can not be made in an index..
- --------------------------------------------------------------------------------
Q
The fund offers a conservative approach to income with minimal principal
-
fluctuation by investing in adjustable rate mortgage securities with an average
-
effective duration of one to two years. What was the key influence on fund
performance?
A
Over the course of 1995, ARMS underperformed comparable duration Treasurys and
fixed-rate mortgage securities. The reason for this underperformance was the
200 plus basis point rally in the Treasury market and mortgage rates closing in
on levels witnessed in 1993. The combination of these two events brought a
larger percentage of the conventional ARM universe into refinanceable
territory.
As a result, investors are focusing greater attention on the seasoning
characteristics of adjustable rate securities. These securities have had prior
opportunities to refinance during the 1989 yield curve inversion and the 1993
lows in mortgage rates. As a result, these securities should offer good return
from cash flow with limited downside risk and a substantial cushion against a
backup in rates or a steepening of the yield curve.
Current strategy is to maintain core holdings of fully indexed, seasoned
securities while selling new production ARMs, predominantly 1992-94 vintage,
which have higher prepayment risk. The fund also focused on increased
allocation to GNMA ARMs. The GNMA sector offers attractive option-adjusted
spreads and a more reasonable degree of prepayment protection. In addition, the
longer duration aids in offsetting the duration drift experienced by seasoned
securities.
Q
How are the current assets of the fund invested?
A
The fund's assets are primarily invested in adjustable rate
mortgage issues as follows:
Federal Home Loan Mortgage Corporation (FHLMC) 42.0%
Federal National Mortgage Association (FNMA) 16.8%
Government National Mortgage Association (GNMA) 10.2%
Two Ways You May Seek to Invest for Success in
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
- --------------------------------------------------------------------------------
Initial Investment:
If you had made an initial investment of $5,000 in Federated Adjustable Rate
U.S. Government Fund, Inc. on 7/25/91, reinvested dividends and capital gains,
and didn't redeem any shares, your account would have been worth $6,099 on
2/29/96. You would have earned a 4.41%* average annual total return for the
5-year investment life span.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends,
and you gain the benefit of compounding.
As of 3/31/96, the Fund's average annual one-year and since inception (7/25/91)
total returns were 5.27% and 4.39%, respectively.
[GRAPHIC REPRESENTATION OMITTED SEE APPENDIX A}
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 1%
contingent deferred sales charge prior to 48 months.
Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
- --------------------------------------------------------------------------------
One Step at a Time:
$1,000 invested each year for 5 years (reinvesting all dividends and capital
gains) grew to $5,599.
With this approach, the key is consistency.
If you had started investing $1,000 annually in Federated Adjustable Rate U.S.
Government Fund, Inc. on 7/25/91, reinvested your dividends and capital gains
and didn't redeem any shares, you would have invested only $5,000, but your
account would have reached a total value of $5,599* by 2/29/96. You would have
earned an average annual total return of 4.35%.
A practical investment plan helps you pursue current income from U.S.
government securities. Through systematic investing, you buy shares on a
regular basis and reinvest all earnings. An investment plan works for you when
you invest only $1,000 annually. You can take it one step at a time. Put time
and compounding to work!
[GRAPHIC REPRESENTATION OMITTED SEE APPENDIX B}
* No method of investing can guarantee a profit or protect against loss in down
markets. However, by investing regularly over time and buying shares at
various prices, investors can purchase more shares at lower prices, and all
accumulated shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Hypothetical Investor Profile: Investing for Current Income
- --------------------------------------------------------------------------------
Five years ago, in July 1991, Anne and Denny Laughlin, an imaginary working
couple with no children, had to decide how to invest a $100,000 inheritance
from her late father's estate. They chose Federated Adjustable Rate U.S.
Government Fund, Inc. because it invests in government securities which
traditionally are some of the safest, most credit-worthy securities issued in
America.
They like the way they can use their account for an occasional
extravagance like the Caribbean cruise they took last August to celebrate their
-
10th anniversary without touching their original principal.
The Laughlin's account totaled $121,974 as of 2/29/96 for an average annual
total return of 4.41%.*
[GRAPHIC REPRESENTATION OMITTED SEE APPENDIX C}
*This hypothetical scenario is provided for illustrative purposes only and does
not represent the result obtained by any particular shareholder. Past
performance does not guarantee future results.
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Serving a Wide Range of Investors
- --------------------------------------------------------------------------------
Federated Adjustable Rate U.S. Government Fund, Inc. appeals to a broad range
of investors seeking attractive monthly income and relative safety.
The fund invests primarily in some of the most creditworthy securities issued
in America.
Fund shares are not guaranteed, but the securities comprising the portfolio are
guaranteed as to the timely payment of interest and principal by the U.S.
government, its agencies or instrumentalities.
Some of the Fund's Major Shareholder Groups
Individuals and Joint Tenants $47,937,144
IRAs $23,611,305
Corporations $18,214,949
Clubs/Fraternal Organizations $11,944,013
Trusts $10,216,857
Churches/Religious Organizations $ 5,470,393
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Portfolio Update
- --------------------------------------------------------------------------------
The chart shows the percentage of fund assets diversified across different
types of securities at the end of the reporting period.
[GRAPHIC REPRESENTATION OMITTED SEE APPENDIX D}
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Federated Adjustable Rate U.S. Government Fund,
Inc.
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Adjustable Rate U.S. Government Fund, Inc. (the ``Fund") from July
25, 1991 (start of performance) to February 29, 1996 compared to the Lehman
Brothers Mutual Fund Short (1-3) U.S. Government Index (LBMFS1-3USG)+, the
Lehman Brothers Adjustable Rate Mortgage Index (LBARM)+, and the Lipper
Adjustable Rate Mortgage Funds Average (LARMFA)++.
[GRAPHIC REPRESENTATION OMITTED SEE APPENDIX E}
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than original cost. Mutual funds are not obligations
of or guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 1% contingent deferred sales charge in any redemption
less than 4 years from the purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions. The LBMFS1-3USG, LBARM and
LARMFA have been adjusted to reflect reinvestment of dividends on securities
in the indices and average.
**Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
***For this illustration, the LBARM Index began performance on January 1, 1992.
The index was assigned a beginning value of $10,331, the value of the Fund on
December 31, 1991.
+ The LBMFS1-3USG Index and the LBARM Index are not adjusted to reflect sales
charges, contingent deferred sales charges, expenses, or other fees that the
Securities and Exchange Commission requires to be reflected in the fund's
performance. The indices are unmanaged.
++The LARMFA represents the average of the total returns reported by all of the
mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category, and is not adjusted to reflect any sales charges. However, these
total returns are reported net of expenses or other fees that the Securities
and Exchange Commission requires to be reflected in a fund's performance.
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Portfolio of Investments
- --------------------------------------------------------------------------------
February 29, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- --------------
U.S. GOVERNMENT OBLIGATIONS--87.3%
- ------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--46.4%
--------------------------------------------------------------------------------
$ 137,057,878 5.624%-8.229%, 4/1/2018-5/1/2027 $ 141,073,493
-------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--3.4%
--------------------------------------------------------------------------------
9,141,995 9.500-12.250%, 12/1/2010-11/1/2015 10,193,895
-------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--16.9%
--------------------------------------------------------------------------------
50,036,737 5.409%-7.987%, 3/1/2016-8/1/2027 51,541,609
-------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION MTN--1.6%
--------------------------------------------------------------------------------
5,000,000 6.000%, 11/25/2002 4,953,125
-------------------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--11.3%
--------------------------------------------------------------------------------
14,120,903 5.500%-6.000%, 10/20/2025-3/20/2026 14,234,736
--------------------------------------------------------------------------------
20,000,000 (d)5.500%-6.000%, 3/20/2026 20,064,050
-------------------------------------------------------------------------------- --------------
Total 34,298,786
-------------------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--7.7%
--------------------------------------------------------------------------------
21,175,596 9.500%-12.000%, 7/15/2007-7/15/2019 23,497,243
-------------------------------------------------------------------------------- --------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST $262,739,174) 265,558,151
-------------------------------------------------------------------------------- --------------
U.S. TREASURY OBLIGATIONS--11.4%
- ------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES--11.4%
--------------------------------------------------------------------------------
34,250,000 5.250%-7.250%, 10/31/1997-2/15/1998 34,668,169
-------------------------------------------------------------------------------- --------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $33,837,421) 34,668,169
-------------------------------------------------------------------------------- --------------
(A) REPURCHASE AGREEMENTS--11.8%
- ------------------------------------------------------------------------------------------------
5,855,000 B.T. Securities (Australia) Ltd., 5.450%, dated 2/29/1996, due
3/1/1996 5,855,000
--------------------------------------------------------------------------------
10,000,000 (b)Morgan Stanley & Co., Inc., 5.265%, dated 2/22/1996, due 3/21/1996 10,000,000
--------------------------------------------------------------------------------
</TABLE>
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- --------------
(A) REPURCHASE AGREEMENTS--CONTINUED
- ------------------------------------------------------------------------------------------------
$ 20,000,000 (b)UBS Securities, Inc., 5.360%, dated 2/22/1996, due 3/21/1996 $ 20,000,000
-------------------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 35,855,000
-------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $333,431,595)(C) $ 336,081,320
-------------------------------------------------------------------------------- --------------
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investments in the repurchase agreements are through
participation in joint accounts with other Federated funds.
(b) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days if the creditworthiness of the issuer is
downgraded.
(c) The cost of investments for federal tax purposes amounts to $333,431,595.
The net unrealized appreciation of investments on a federal tax basis
amounts to $2,649,725 which is comprised of $3,332,618 appreciation and
$682,893 depreciation at February 29, 1996.
(d) These securities are subject to Dollar Roll transactions.
Note: The categories of investments are shown as a percentage of net assets
($304,191,481) at February 29, 1996.
The following acronyms are used throughout this portfolio:
ARM--Adjustable Rate Mortgage
MTN--Medium Term Note
PC--Participation Certificate
(See Notes which are an integral part of the Financial Statements)
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
February 29, 1996
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $333,431,595) $ 336,081,320
- -------------------------------------------------------------------------------------------------
Cash 3,157
- -------------------------------------------------------------------------------------------------
Income receivable 5,364,896
- -------------------------------------------------------------------------------------------------
Receivable for investments sold 30,358,591
- -------------------------------------------------------------------------------------------------
Receivable for shares sold 15,146
- -------------------------------------------------------------------------------------------------
Deferred expenses 130,174
- ------------------------------------------------------------------------------------------------- --------------
Total assets 371,953,284
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Payable for investments purchased $ 35,741,662
- ----------------------------------------------------------------------------------
Payable for shares redeemed 1,134,797
- ----------------------------------------------------------------------------------
Income distribution payable 544,145
- ----------------------------------------------------------------------------------
Payable for dollar roll transactions 30,220,480
- ----------------------------------------------------------------------------------
Accrued expenses 120,719
- ---------------------------------------------------------------------------------- -------------
Total liabilities 67,761,803
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 31,854,143 shares outstanding $ 304,191,481
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $ 345,414,465
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,649,725
- -------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (43,759,748)
- -------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (112,961)
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 304,191,481
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE ($304,191,481 / 31,854,143 shares outstanding) $9.55
- ------------------------------------------------------------------------------------------------- --------------
REDEMPTION PROCEEDS PER SHARE (99/100 of $9.55)* $9.45
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
* See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
12
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended February 29, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $304,841) $ 24,079,177
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee $ 2,154,062
- -------------------------------------------------------------------------------------
Administrative personnel and services fee 271,695
- -------------------------------------------------------------------------------------
Custodian fees 83,239
- -------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 230,224
- -------------------------------------------------------------------------------------
Directors'/Trustees' fees 13,026
- -------------------------------------------------------------------------------------
Auditing fees 16,921
- -------------------------------------------------------------------------------------
Legal fees 6,084
- -------------------------------------------------------------------------------------
Portfolio accounting fees 86,998
- -------------------------------------------------------------------------------------
Distribution services fee 897,526
- -------------------------------------------------------------------------------------
Shareholder services fee 897,526
- -------------------------------------------------------------------------------------
Share registration costs 93,731
- -------------------------------------------------------------------------------------
Printing and postage 37,928
- -------------------------------------------------------------------------------------
Insurance premiums 7,664
- -------------------------------------------------------------------------------------
Taxes 90,731
- -------------------------------------------------------------------------------------
Miscellaneous 15,974
- ------------------------------------------------------------------------------------- ------------
Total expenses 4,903,329
- -------------------------------------------------------------------------------------
Waivers--
- -------------------------------------------------------------------------------------
Waiver of investment advisory fee $ (332,589)
- ------------------------------------------------------------------------
Waiver of distribution services fee (851,425)
- ------------------------------------------------------------------------
Waiver of shareholder services fee (46,101)
- ------------------------------------------------------------------------ -----------
Total waivers (1,230,115)
- ------------------------------------------------------------------------------------- ------------
Net expenses 3,673,214
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 20,405,963
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments 2,283,920
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 1,057,057
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain on investments 3,340,977
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations $ 23,746,940
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
13
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------
Net investment income $ 20,405,963 $ 27,225,124
- ----------------------------------------------------------------------------
Net realized gain (loss) on investments ($2,738,947 net loss
and $21,867,392 net loss, respectively, as computed for
federal tax purposes) 2,283,920 (24,587,433)
- ----------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 1,057,057 1,918,498
- ---------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 23,746,940 4,556,189
- ---------------------------------------------------------------------------- --------------- ---------------
NET EQUALIZATION CREDITS (DEBITS)-- (87,428) (520,115)
- ---------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ----------------------------------------------------------------------------
Distributions from net investment income (19,965,541) (26,705,009)
- ----------------------------------------------------------------------------
Distributions in excess of net investment income -- (353,704)
- ---------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from distributions
to shareholders (19,965,541) (27,058,713)
- ---------------------------------------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- ----------------------------------------------------------------------------
Proceeds from sale of shares 13,345,918 44,883,593
- ----------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 10,152,854 12,180,724
- ----------------------------------------------------------------------------
Cost of shares redeemed (142,096,084) (413,160,135)
- ---------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from share
transactions (118,597,312) (356,095,818)
- ---------------------------------------------------------------------------- --------------- ---------------
Change in net assets (114,903,341) (379,118,457)
- ----------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------
Beginning of period 419,094,822 798,213,279
- ---------------------------------------------------------------------------- --------------- ---------------
End of period $ 304,191,481 $ 419,094,822
- ---------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
14
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.46 $ 9.79 $ 9.90 $ 9.98 $ 10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.54 0.47 0.43 0.53 0.47
- -------------------------------------
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
- ------------------------------------- ------------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
- -------------------------------------
Distributions from net investment
income (0.53 ) (0.47) (0.43) (0.53) (0.42)
- -------------------------------------
Distributions in excess of net
investment income (b) -- (0.01) -- -- (0.01)
- ------------------------------------- ------------- --------- --------- --------- -----------
Total distributions (0.53 ) (0.48) (0.43) (0.53) (0.43)
- ------------------------------------- ------------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.55 $ 9.46 $ 9.79 $ 9.90 $ 9.98
- ------------------------------------- ------------- --------- --------- --------- -----------
TOTAL RETURN (C) 6.77 % 1.58% 3.27% 4.58% 4.14%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 1.02 % 1.02% 1.02% 1.01% 0.63%*
- -------------------------------------
Net investment income 5.67 % 4.76% 4.38% 5.29% 6.79%*
- -------------------------------------
Expense waiver/ reimbursement (d) 0.34 % 0.30% 0.24% 0.01% 0.37 %*
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000
omitted) $304,191 $419,095 $798,213 $1,136,198 $965,289
- -------------------------------------
Portfolio turnover 144 % 170% 40% 56% 22 %
- -------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from July 25, 1991 (date of initial
public investment) to February 29, 1992.
(b) Distributions in excess of net investment income were the result of certain
book and tax timing differences. These distributions do not represent a
return of capital for federal income tax purposes.
(c) Based on net asset value, which does not reflect the sales 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.
(See Notes which are an integral part of the Financial Statements)
15
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
Notes to Financial Statements
- --------------------------------------------------------------------------------
February 29, 1996
(1) ORGANIZATION
Federated Adjustable Rate U.S. Government Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. 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.
Effective March 31, 1996, the Fund changed its name from Fortress Adjustable
Rate U.S. Government Fund, Inc. to Federated Adjustable Rate U.S. Government
Fund, Inc.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government securities are generally valued at
the mean of the latest bid and asked price as furnished by an independent
pricing service. Short-term securities are valued at the prices provided by
an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS--It is the policy of the Fund
to require the custodian bank or broker to take possession, to have legally
segregated in the Federal Reserve Book Entry System, or to have segregated
within the custodian bank's vault, all securities held as collateral under
repurchase and reverse repurchase agreement transactions. Additionally,
procedures have been established by the Fund to monitor, on a daily basis,
the market value of each repurchase agreement's collateral to ensure that
the value of collateral at least equals the repurchase price to be paid
under the repurchase agreement transaction.
The Fund is also permitted to enter into reverse repurchase agreements, in
which the Fund sells U.S. government securities to financial institutions
and agrees to repurchase the securities at an agreed upon price and date.
The Fund will only enter into repurchase and reverse 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 and/or standards reviewed or established by the
Board of Directors (the "Directors"). Risks may arise from the potential
inability of counterparties to honor the terms of these agreements.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
16
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
- --------------------------------------------------------------------------------
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions 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.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At February 29, 1996, the Fund, for federal tax purposes, had a capital
loss carryforward of $43,759,747, which will reduce the Fund's taxable
income arising from future net realized gain on investments, if any, to the
extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve
the Fund of any liability for federal tax. Pursuant to the Code, such
capital loss carryforward will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2000 $ 135,570
2001 $ 6,101,688
2002 $ 12,916,149
2003 $ 21,867,393
2004 $ 2,738,947
</TABLE>
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (equivalent, on a per share basis, to
the amount of undistributed net investment income on the date of the
transaction) is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
the Fund's commencement date.
17
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
- --------------------------------------------------------------------------------
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA and FHLMC, in
which the Fund sells mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments, which may enhance the
Fund's current yield and total return.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At February 29, 1996, there were 5,000,000,000 shares of $0.001 par value
capital stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended
February 28 or 29,
1996 1995
<S> <C> <C>
Shares sold 1,402,242 4,668,005
- ---------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 1,067,460 1,282,617
- ---------------------------------------------------------------------------------
Shares redeemed (14,914,416) (43,186,417)
- --------------------------------------------------------------------------------- ------------- -------------
Net change resulting from share transactions (12,444,714) (37,235,795)
- --------------------------------------------------------------------------------- ------------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser,
(the "Adviser"), receives for its services an annual investment advisory
fee equal to 0.60% of the Fund's average daily net assets.
The Adviser may voluntarily choose to waive any portion of its fee. The
Adviser can modify or terminate this voluntary waiver at any time at its
sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during
18
Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
- --------------------------------------------------------------------------------
the period of the Administrative Services Agreement shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended
to result in the sale of the Fund's shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets
of the Fund shares, annually, to compensate FSC.
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at
its sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will pay
FSS up to 0.25% of daily average net assets of the Fund shares for the
period. The fee paid to FSS is used to finance certain services for
shareholders and to maintain shareholder accounts. FSS may voluntarily
choose to waive any portion of its fee. FSS can modify or terminate this
voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--FServ, through its
registered transfer and dividend disbursing 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.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's
average daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Directors of the Corporation are
Officers and Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended February 29, 1996, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
Purchases $ 490,042,288
- -------------------------------------------------------------------------------------------------- --------------
Sales $ 542,256,122
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
19
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Adjustable Rate U.S. Government Fund,
Inc. (formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.) as of
February 29, 1996, and the related statements of operations for the year then
ended, the statements of changes in net assets for the years ended February 29,
1996 and February 28, 1995 and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
February 29, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial highlights present fairly, in all material
respects, the financial position of Federated Adjustable Rate U.S. Government
Fund, Inc. as of February 29, 1996, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
April 18, 1996
20
Directors Officers
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Richard B. Fisher
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Richard B. Fisher Edward C. Gonzales
Edward L. Flaherty, Jr. Executive Vice President
Peter E. Madden John W. McGonigle
Gregor F. Meyer Executive Vice President and Secretary
John E. Murray, Jr. David M. Taylor
Wesley W. Posvar Treasurer
Marjorie P. Smuts Charles H. Field
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses and other
information.
[LOGO OF FEDERATED INVESTORS]
Cusip 349554105
G00588-01 (4/96)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
APPENDIX
.A. The graphic presentation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The color-coded mountain chart is a visual representation of
the narrative text above it, which shows that an initial investment of $5,000
in Federated Income Federated Adjustable Rate U.S. Government Fund, Inc. on
July 25, 1991, would have grown to $6,099 by February 29, 1996. The "x"
axis reflects the cost of investment, the "y" axis reflects computation
periods from 1991 to 1996, and the right margin reflects a total investment
range from $0 to $8,000. The chart further indicates the ending market value
attributable to principal, as well as the ending market value attributable to
capital gains and reinvested dividends.
B. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color-coded mountain chart is a visual representation of the
narrative text above it, which shows that an initial investment of $1,000 in
Federated Income Federated Adjustable Rate U.S. Government Fund, Inc. on
July 25, 1991, would have grown to $5,599 by February 29, 1996. The "x"
axis reflects the cost of investment, the "y" axis reflects computation
periods from 1991 to 1996, and the right margin reflects a total investment
range from $0 to $6,000. The chart further indicates the ending market value
attributable to principal, as well as the ending market value attributable to
capital gains and reinvested dividends.
C. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color-coded mountain chart is a visual representation of the
narrative text above it, which shows that an initial investment of $10,000 in
Federated Income Federated Adjustable Rate U.S. Government Fund, Inc. on
July 25, 1991, would have grown to $121,974 by February 29, 1996. The "x"
axis reflects the cost of investment, the "y" axis reflects computation
periods from 1991 to 1996, and the right margin reflects a total investment
range from $0 to $140,000. The chart further indicates the ending market
value attributable to principal, as well as the ending market value
attributable to capital gains and reinvested dividends.
D. The graphic representation here displayed consists of a boxed pie chart
in the upper center of the page which shows the percentage of assets in
Federated Adjustable Rate U.S. Government Fund, Inc. that are diversified
across different types of securities as of February 29, 1996. The pie chart
is made up of eight pieces labeled as follows (going clockwise starting from
12:00 noon): GNMA 11.2%, GNMA (subject to dollar roll transactions) 6.0%,
FNMA ARMS 16.8%, U.S. Treasury Notes 10.3%, FNMA 3.0%, Repurchase Agreements
1.7%, Repurchase Agreements (securities held as collateral for dollar roll
transactions) 9.0% and FHLMC ARMS 42.0%.
E. The graphic representation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Shares
of the Fund are represented by a solid line. Lehman Brothers Mutual Fund
Short (1-3) U.S. Government Index is represented by a broken line. Lehman
Brothers Adjustable Rate Mortgage is represented by a dotted line and Lipper
Adjustable Rate Mortgage Funds Average is represented by a bold dotted line.
The line graph is a visual representation of a comparison of change in value
of a hypothetical investment of $10,000 in the Fund, Lehman Brothers Mutual
Fund Short (1-3) U.S. Government Index, Lehman Brothers Adjustable Rate
Mortgage, and the Lipper Adjustable Rate Mortgage Funds Average for the
period from July 25, 1991 (start of fund performance) to March 31, 1994. The
"y" axis reflects the cost of investment. The "x" axis reflects computation
periods from July 25, 1991 (start of fund performance) to February 28, 1996.
The right margin of the chart reflects the ending value of the hypothetical
investment in Shares of the Fund as compared to Lehman Brothers Mutual Fund
Short (1-3) U.S. Government Index, Lehman Brothers Adjustable Rate Mortgage,
and the Lipper Adjustable Rate Mortgage Funds Average. The ending values are
