Federated Adjustable Rate U.S. Government Fund, Inc.
(formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.)
6TH SEMI-ANNUAL REPORT
AUGUST 31, 1996
ESTABLISHED 1991
INCOME
PRESIDENT'S MESSAGE
[Graphic]
Dear Fellow Shareholder:
I am pleased to present the Semi-Annual Report for Federated Adjustable Rate
U.S. Government Fund, Inc.
The Report covers the six-month period from March 1, 1996, through August
31, 1996. Kathy Foody-Malus, Vice President of Federated Advisers discusses
today's interest rate environment, its past and present effect on adjustable
rate mortgage-backed issues, and the fund's performance. Following her
discussion, you will find a complete listing of the fund's holdings and its
financial statements.
The bond market rally of 1995 came to an end during the first quarter of
1996 as interest rates rose quickly. While bond prices fell as a result, the
fund's short-term investment arena of 18 to 20 months proved much less
volatile than longer term bonds.
Specifically, the fund's short-maturity holdings helped protect shareholders
against a significant loss of principal in a period of rising interest
rates. Of course, the fund continued to pay competitive income distributions
that totaled $0.25 per share during the period. The fund's six-month total
return performance was 2.17%* based on net asset value.
In addition, the fund maintained its AAAf rating by Standard & Poor's
Ratings Group, the highest quality rating available for a mutual fund.**
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,
[Graphic]
Richard B. Fisher
President
October 15, 1996
* 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
for the period reflecting the 1% contingent deferred sales charge (that
applies to shares redeemed within four years) was 1.20%.
** An AAAf rating by Standard & Poor's means that the fund's portfolio
holdings and counterparties provide extremely strong protection against
losses from credit defaults. This rating, however, is subject to change and
does not remove market risk.
Investment Review
[Graphic]
Kathy Foody-Malus
Vice President,
Federated Advisers
[Graphic]
JUST WHEN 1994'S RATE ENVIRONMENT AND NEGATIVE BOND MARKET NEARLY FADED FROM
MEMORY, 1996 SAW A RETURN OF RISING INTEREST RATES AND FALLING BOND PRICES
- -- WITHOUT ANY ACTION BY THE FEDERAL RESERVE BOARD. CAN YOU COMMENT?
Basically, an economic recovery forced rates higher. The first half of
fiscal 1996, by all definitions, was robust; second quarter GDP was 4.8%,
following first quarter GDP growth of 2.0%. On a year-over-year basis, GDP
growth was up 2.6% in the second quarter, which was the highest quarter
since the first quarter of 1995. As the second half of 1996 started, the
economic data being released initially showed signs of weakness. However,
this optimism was short-lived, as stronger economic numbers surfaced in
August which forced yields on Treasurys to year-to-date highs. For example,
both consumer outlays and factory output rebounded in August from the early
summer doldrums. The labor market has continued to tighten as payroll growth
on a year-to-date basis has averaged 236,000 per month, and wage inflation
is continuing to pick up.
These economic numbers, in combination with the revelation that the Federal
Reserve Board (the "Fed") assumed a tightening bias at the July meeting,
have bond market participants anticipating when the Fed will tighten
monetary policy. We anticipate continued gnashing of teeth and wringing of
hands by investors as to what course of action the Fed pursues over the
balance of 1996.
[Graphic]
IN THIS ENVIRONMENT, HOW DID FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND
PERFORM FOR SHAREHOLDERS FOR THE PAST 6 MONTHS?
The fund provided a dividend stream of $0.25 per share over the period. The
total return for the period was 2.17%* based on net asset value. This
compares to a total return of 2.39% for the Merrill Lynch 1-Year Treasury
Note Index,** 1.48% for the Merrill Lynch 2-Year Treasury Note Index,** and
2.20% 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 1.20%.
** The Merrill Lynch 1-Year Treasury Note Index and Merrill Lynch 2-Year
Treasury Note Index are comprised of the most recently issued 1-Year
Treasury Notes and 2-Year Treasury Notes, respectively. Index returns are
calculated as total returns for periods of one, three, and twelve months as
well as year-to-date. These indices are unmanaged and actual investments
cannot be made in an index. Lipper figures represent the average of the
total returns reported by all of the mutual funds designated by Lipper
Analytical Services as falling into the particular categories. Lipper
figures do not reflect sales charges.
[Graphic]
THE FUND'S STRATEGY OF PURSUING INCOME WITH MINIMAL PRINCIPAL FLUCTUATION
WAS TESTED DURING THE PERIOD. WHAT WAS THE KEY INFLUENCE ON FUND
PERFORMANCE?
Over the course of the past six months, interest rates in the 1-2 year area
of the U.S. Treasury market rose on average 75 basis points. The adjustable
rate market during this time period was the best performing fixed-income
sector due to the demand for short-duration investments, as the possibility
increased that the Federal Reserve would institute a rate hike. Within the
adjustable rate sector, seasoned ARM securities were the asset of choice
given the shorter duration and higher income stream. The fund's portfolio
has always had a core holding in seasoned conventional ARM securities. This
core holding in combination with U.S. Treasurys and seasoned fixed-rate
mortgages has allowed the fund to perform quite well in this difficult
market environment.
[Graphic]
HOW IS THE PORTFOLIO OF THE FUND INVESTED?
The fund's portfolio is primarily invested in adjustable rate mortgage
issues as follows:
<TABLE>
<S> <C>
Federal Home Loan Mortgage Corporation (FHLMC) 43.49%
Federal National Mortgage Association (FNMA) 25.28%
Government National Mortgage Association (GNMA) 16.42%
U.S. Treasury Notes 11.62%
</TABLE>
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 MADE AN INITIAL INVESTMENT OF $6,000 IN THE FUND, ON JULY 25, 1991,
REINVESTED DIVIDENDS AND CAPITAL GAINS, AND DID NOT REDEEM ANY SHARES, YOUR
ACCOUNT WOULD HAVE BEEN WORTH $7,477 ON AUGUST 31, 1996. YOU WOULD HAVE
EARNED A 4.39%* AVERAGE ANNUAL TOTAL RETURN FOR THE 5-YEAR INVESTMENT LIFE
SPAN.
One key to investing wisely is to reinvest all distributions in fund
shares. This increases the number of shares on which you can earn future
dividends, and you gain the benefit of compounding.
As of September 30, 1996, the fund's average annual one-year, five-year, and
since inception (7/25/91) total returns were 4.56%, 4.38% and 4.48%
respectively.*
[Graphic 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 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 $6,715.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the fund on July 25, 1991,
reinvested your dividends and capital gains, and didn't redeem any shares,
you would have invested only $6,000, but your account would have reached a
total value of $6,715* by August 31, 1996. You would have earned an average
annual total return of 4.30%.*
A practical investment plan helps you pursue long-term performance from U.S.
government securities. Through systematic investing, you buy shares on a
regular basis and reinvest all earnings. This investment plan works for you
even if you invest only $1,000 annually. You can take it one step at a time.
Put time and compounding to work!
[Graphic 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.)
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS -- 86.1%
$ 107,333,313 Federal Home Loan Mortgage Corp. PC ARM -- 44.0%
7.125%-7.946%, 4/1/2018-4/1/2029 $110,652,646
8,038,873 Federal National Mortgage Association -- 3.5%
9.50%-12.25%, 12/1/2010-7/1/2016 8,864,232
54,446,577 Federal National Mortgage Association ARM -- 22.0%
5.65%-7.621%, 1/1/1999-6/1/2029 55,463,424
20,940,831 Government National Mortgage Association ARM -- 8.3%
5.50%-6.00%, 10/20/2025-5/20/2026 20,953,420
18,399,377 Government National Mortgage Association -- 8.3%
11.00%-12.00%, 3/15/2013-5/15/2020 20,835,534
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST $215,318,701)
216,769,256
U.S. TREASURY OBLIGATIONS -- 11.8%
29,300,000 U.S. Treasury Notes
5.00%-7.25%, 1/31/1998-2/15/1998 29,558,362
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $29,615,104)
29,558,362
(A)REPURCHASE AGREEMENT -- 3.2%
8,100,000 Bankers Trust Company, 5.27%, dated 8/30/1996, due 9/3/1996
(AT AMORTIZED COST) 8,100,000
TOTAL INVESTMENTS (IDENTIFIED COST $253,033,805)(B) $254,427,618
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to
$253,033,805. The net unrealized appreciation of investments on a federal
tax basis amounts to $1,393,813 which is comprised of $1,863,960
appreciation and $470,147 depreciation at August 31, 1996.
Note: The categories of investments are shown as a percentage of net assets
($251,556,323) at August 31, 1996.
The following acronyms are used throughout this portfolio:
ARM -- Adjustable Rate Mortgage
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
AUGUST 31, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $253,033,805) $254,427,618
Cash 11,348
Income receivable 3,799,178
Receivable for shares sold 159,979
Deferred expenses 130,174
Total assets 258,528,297
LIABILITIES:
Payable for investments purchased $5,054,763
Payable for shares redeemed 1,236,367
Income distribution payable 454,396
Accrued expenses 226,448
Total liabilities 6,971,974
NET ASSETS for 26,479,328 shares outstanding $251,566,323
NET ASSETS CONSIST OF:
Paid in capital $294,337,661
Net unrealized appreciation of investments 1,393,813
Accumulated net realized loss on investments (44,149,920)
Distributions in excess of net investment income (25,231)
Total Net Assets $251,556,323
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
Net Asset Value Per Share: ($251,556,323 O 26,479,328 shares outstanding) $9.50
Offering Price Per Share: $9.50
Redemption Proceeds Per Share: (99.00/100 of $9.50)* $9.41
</TABLE>
* See "Contingent Deferred Sales Charge" in the Prospectus.
(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 OPERATIONS
AUGUST 31, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar roll expense of $129,421) $ 8,981,662
EXPENSES:
Investment advisory fee $ 845,459
Administrative personnel and services fee 106,528
Custodian fees 40,190
Transfer and dividend disbursing agent fees and expenses 93,259
Directors'/Trustees' fees 6,594
Auditing fees 8,708
Legal fees 2,974
Portfolio accounting fees 33,559
Distribution services fee 352,274
Shareholder services fee 352,274
Share registration costs 74,078
Printing and postage 20,786
Insurance premiums 3,834
Taxes 45,696
Miscellaneous 10,366
Total expenses 1,996,579
Waivers --
Waiver of investment advisory fee $ (200,721)
Waiver of distribution services fee (338,183)
Waiver of shareholder services fee (14,091)
Total waivers (552,995)
Net expenses 1,443,584
Net investment income 7,538,078
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (390,172)
Net change in unrealized (depreciation) of investments (1,255,912)
Net realized and unrealized loss on investments (1,646,084)
Change in net assets resulting from operations $ 5,891,994
</TABLE>
(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 CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
AUGUST 31, FEBRUARY 29,
1996 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 7,538,078 $ 20,405,963
Net realized gain (loss) on investments ($390,172 net gain and
$2,738,947 net loss, respectively, as computed for federal tax purposes) (390,172) 2,283,920
Net change in unrealized appreciation (depreciation) (1,255,912) 1,057,057
Change in net assets resulting from operations 5,891,994 23,746,940
NET EQUALIZATION CREDITS (DEBITS) -- (72,471) (87,428)
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income (7,352,646) (19,965,541)
Distributions in excess of net investment income (25,231) --
Change in net assets resulting from distributions to shareholders (7,377,877) (19,965,541)
SHARE TRANSACTIONS --
Proceeds from sale of shares 6,702,844 13,345,918
Net asset value of shares issued to shareholders in payment of
distributions declared 4,523,143 10,152,854
Cost of shares redeemed (62,302,791) (142,096,084)
Change in net assets resulting from share transactions (51,076,804) (118,597,312)
Change in net assets (52,635,158) (114,903,341)
NET ASSETS:
Beginning of period 304,191,481 419,094,822
End of period $251,556,323 $ 304,191,481
</TABLE>
(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.)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1996 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.55 $ 9.46 $ 9.79 $ 9.90 $ 9.98 $10.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.25 0.54 0.47 0.43 0.53 0.47
Net realized and unrealized
gain (loss) on investments (0.05) 0.08 (0.32) (0.11) (0.08) (0.06)
Total from investment
operations 0.20 0.62 0.15 0.32 0.45 0.41
LESS DISTRIBUTIONS
Distributions from net
investment income (0.25) (0.53) (0.47) (0.43) (0.53) (0.42)
Distributions in excess of
net investment income(b) -- -- (0.01) -- -- (0.01)
Total distributions (0.25) (0.53) (0.48) (0.43) (0.53) (0.43)
NET ASSET VALUE, END
OF PERIOD $ 9.50 $ 9.55 $ 9.46 $ 9.79 $ 9.90 $ 9.98
TOTAL RETURN(C) 2.17% 6.77% 1.58% 3.27% 4.58% 4.14%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.02%* 1.02% 1.02% 1.02% 1.01% 0.63%*
Net investment income 5.35%* 5.67% 4.76% 4.38% 5.29% 6.79%*
Expense waiver/
reimbursement(d) 0.39%* 0.34% 0.30% 0.24% 0.01% 0.37%*
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $251,566 $304,191 $419,095 $798,213 $1,136,198 $965,289
Portfolio turnover 67% 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 August 31, 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)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
(FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 (UNAUDITED)
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 with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the
Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
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 over a period of five years from the Fund's commencement date.
DOLLAR ROLL TRANSACTIONS -- The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA and FHLMC, in which
the Fund 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 August 31, 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>
PERIOD ENDED YEAR ENDED
AUGUST 31, 1996 FEBRUARY 29, 1996
<S> <C> <C>
Shares sold 705,613 1,402,242
Shares issued to shareholders in
payment of distributions declared 476,164 1,067,460
Shares redeemed (6,556,592) (14,914,416)
Net change resulting from share transactions (5,374,815) (12,444,714)
</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
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. FSC may voluntarily choose
to waive any portion of its fee. FSC 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 AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ through
its subsidiary, Federated Shareholder Services Company ("FSSC") serves as
transfer and dividend disbursing agent for the Fund. The fee paid to FSSC is
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 August 31, 1996, were as follows:
<TABLE>
<S> <C>
PURCHASES $183,643,771
SALES $235,097,052
</TABLE>
<TABLE>
<S> <S>
TRUSTEES OFFICERS
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Richard B. Fisher
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Executive Vice President
Gregor F. Meyer John W. McGonigle
John E. Murray, Jr. Executive Vice President, Treasurer,
Wesley W. Posvar and Secretary
Marjorie P. Smuts Douglas L. Hein
Assistant Treasurer
S. Elliott Cohan
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.
[Graphic]
Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
[Graphic]
Cusip 314072109
2091401 (10/96)
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 beneath it, which shows that an initial of $6,000 in
Federated Adjustable Rate U.S. Government Fund, Inc. in 1991 would have
grown to $7,477. The `x axis feflects the cost of invesmtne, the ``y''
axis relfects computation periods from 1991 to 1996, and the right margin
reflects a total investment range from $0 to $9,000. 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 beneath it, which shows that a yearly investment of
$1,000 in Federated Adjustable Rate U.S. Government Fund, Inc. in 1991
would have grown to $6,715. The `x'' axis reflects the cost of investment,
the `y'' axis reflects computation periods from 1987 to 1996, and the
right margin reflects a total investment range from $0 to $7,000. 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.
