[LOGO OF FEDERATED INVESTORS]
Federated
Adjustable Rate
U.S. Government
Fund, Inc.
6th Annual Report
February 28, 1997
Established 1991
President's Message
Dear Fellow Shareholder:
Federated Adjustable Rate U.S. Government Fund, Inc. was created in 1991, and I
am pleased to present the 6th Annual Report for the fund.
The report covers the twelve-month period from March 1, 1996, through February
28, 1997. 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 series of graphs that display the results of lump sum and systematic
investments in the fund with dividends reinvested. Second, is a complete
listing of the fund's holdings. Third, is the publication of the fund's
financial statements.
This fund has offered income investors generous yields from a relatively
short-duration portfolio of adjustable rate government securities. On February
28, 1997, the average effective duration of the fund was 1.3 years, and the
30-day current net yield was 5.68%.* Over the reporting period, the fund paid
income distributions totaling $0.543 per share. The share price stood at $9.55
on the first day of the reporting period and $9.56 on the last day. The fund's
net total return for the reporting period based on net asset value was 5.90%.**
On February 28, 1997, the fund's $224.4 million in net assets were invested
primarily in U.S. government adjustable rate securities (76%), with the
remaining net assets invested in Treasury obligations and a repurchase
agreement.
Also, the fund's portfolio maintained its AAAf rating by Standard &
Poor's Ratings Group, the highest quality rating available for a mutual fund.+
Thank you for participating in Federated Adjustable Rate U.S. Government Fund,
Inc. as a conservative way of pursuing income. 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
April 15, 1997
* The 30-day current net yield is calculated by dividing the investment
income per share for the prior 30 days by the maximum offering price per share
on that date. The figure is compounded and annualized.
**Performance quoted represents past performance and is not indicative of
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. The fund's total return for the reporting period based on the
fund's 1% contingent deferred sales charge (that applies to shares redeemed
within four years of purchase) was 4.79%.
+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.
Investment Review
Kathy Foody-Malus
Vice President
Federated Advisers
Please comment on the market's uncertainty about the economy, and the
subsequent impact on the bond market during the reporting period?
The theme due to uncertainties on inflation, rising economy, and the Federal
-
Reserve Board (the ``Fed'') actions throughout 1996 was a trading range
-
environment; however, there were times when the market moved swiftly and sharply
due to shifting Fed anticipated actions. Given this environment, the mortgage-
backed securities sector was the best performing fixed-income sector during the
fiscal year of the fund.
The U.S. Treasury market in 1996 offered lackluster returns to investors versus
1995's impressive returns and played second fiddle to the stellar gains in the
equity market. Short duration U.S. Treasuries posted slightly positive returns,
while the long end of the yield curve produced negative returns.
In this ``up and down'' environment, how did the fund's portfolio of adjustable
rate securities perform for shareholders for the twelve-month period ended
February 28, 1997?
The fund provided a dividend stream of $0.543 per share over
the fiscal year. The fund's net total return for the reporting period, based on
net asset value, was 5.90%.* This compares to an annualized total return of
5.61% for the Merrill Lynch 1-Year Treasury Index, 4.96% for the Merrill Lynch
2-Year Treasury Index, and 5.97% for the Lipper Adjustable Rate Mortage Fund
Average.**
* Performance quoted represents past performance and is not indicative of
future 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 reporting period reflecting the fund's
1% contingent deferred sales charge (that applies to shares redeemed within
four years) was 4.79%.
** The Merrill Lynch 1-Year and 2-Year Treasury Indices are comprised of
the most recently issued 1-Year and 2-Year Treasury notes, respectively. Index
returns are calculated as total returns for periods of one, three, six and
twelve months as well as year-to-date. Lipper figures represent the average of
the annualized total returns reported by all of the mutual funds designated by
Lipper Analytical Services, Inc. as falling into their respective categories.
Lipper figures do not reflect sales charges. The indices and average are
unmanaged and actual investments cannot be made in an index.
How were the assets of the fund invested?
The current asset allocation mix of adjustable and fixed rate mortgages in
combination with short U.S. Treasuries has offered investors good solid
performance, despite the increase in interest rates. During the reporting
period, yields increased about 50 basis points, or half of one percent.
Despite this environment, we continue to believe that the adjustable rate
sector can offer excellent value for the investor with a one- to two-year time
horizon.
As of February 28, 1997, the fund's portfolio was primarily invested in the
following issues:
Percentage
of Total
Market
Maturities Value
---------- -----
Federal Home Loan
Mortgage Corporation
(``FHLMC'') Adjustable
Rate Mortgage
Securities (``ARMS'') 04/01/2018 - 04/01/2029 38%
Government
National Mortgage
Association (``GNMA'') 03/15/2010 - 05/20/2026 27%
Federal National
Mortgage Association
(``FNMA'') 12/01/2010 - 02/01/2031 24%
U.S. Treasury Notes 10/31/1998 - 05/15/1999 10%
What do you see ahead for the bond market through 1997?
As anticipated by bond market participants, the Fed increased the Federal funds
rate by 0.25% on March 25, 1997. Initial reaction was muted as investors
reflected on the increase. However, Treasury yields have risen due to
investors' concerns over further potential tightenings. Our viewpoint is that
when the announcement was made regarding the rate increase, the move was taken
in light of stronger growth rather than emerging inflation pressures. Fed
Chairman Greenspan, prior to and after the announcement, has attempted to
dispel the notion that 1997 is a repeat of 1994. We believe the strength of the
dollar combined with the increase in Treasury yields should help moderate
growth moving forward in 1997, and help to restrain inflation. Given this
scenario, there will be no need, in our opinion, for continuous tightening
moves, and the outlook for the adjustable rate mortgage market in 1997 seems
favorable. The year has already started out strongly for fixed income products
that offer incremental yield pick-up over U.S. Treasury securities.
Two Ways You May Seek to Invest for Success in
Federated Adjustable Rate U.S. Government Fund, Inc.
Initial Investment:
If you made an initial investment of $6,000 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 $7,750 on 2/28/97.
You would have earned a 4.68%* average annual total return for the 6-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 3/31/97, the average annual one-year, five-year and since inception
(7/25/91) total returns were 4.82%, 4.40%, and 4.65% respectively.
Graphic representation `A'' omitted. See Appendix.
* 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.
One Step at a Time:
$1,000 invested each year for 6 years (reinvesting all dividends and capital
gains) grew to $6,965.
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 $6,000, but your
account would have reached a total value of $6,965* by 2/28/97. You would have
earned an average annual total return of 4.84%.
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,
money, and compounding to work!
Graphis representation `B'' omitted. See Appendix.
* 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.
Hypothetical Investor Profile: Investing for Current Income
Six 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.
The Laughlin's account totaled $129,170 as of 2/28/97 for an average annual
total return of 4.68%.*
Graphic representation `C'' omitted. See Appendix.
* 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.
Portfolio Update
The chart shows the percentage of total portfolio market value diversified
across different types of U.S. Government securities at the end of the
reporting period.
Graphic representation `D'' omitted. See Appendix.
Federated 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 28, 1997 compared to the Lehman
Brothers Mutual Fund Short (1-3) U.S. Government Index (``LBMFS1-3USGI'')+, the
Lehman Brothers Adjustable Rate Mortgage Index (``LBARMI'')+, the Lipper
Adjustable Rate Mortgage Funds Average (``LARMFA'')++, the Merrill Lynch 1-Year
Treasury Index (``ML1YTI'')+, the Merrill Lynch 2-Year Treasury Index
(``ML2YTI'')+.
Graphic representation `E'' omitted. See Appendix.
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 their 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 LBMFS1-3USGI,
LBARMI, LARMFA, ML1YTI and ML2YTI 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 LBARMI 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, LBARMI, ML1YTI and the ML2YTI are not adjusted
to reflect 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 Investment Adviser has elected to add two
secondary indices, ML1YTI and ML2YTI, for the purpose of performance
comparisons to the fund. ML1YTI and ML2YTI are unmanaged indices that track
1-year and 2-year U.S. government securities, respectively, and are
representative of the performance of the securities of the fund's portfolio.
LBMFS1-3USGI, which measures the performance of mutual funds investing in
short-term (1-3 year) U.S. government securities, will be removed from the next
financial report.
++ 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.
Portfolio of Investments
- --------------------------------------------------------------------------------
February 28, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- --------------
U.S. GOVERNMENT OBLIGATIONS--87.7%
- ------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--38.0%
--------------------------------------------------------------------------------
$ 81,685,843 7.125%-7.974%, 4/1/2018-4/1/2029 $ 85,293,698
-------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--3.5%
--------------------------------------------------------------------------------
6,997,832 9.500%-12.250%, 12/1/2010-7/1/2016 7,772,261
-------------------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--19.5%
--------------------------------------------------------------------------------
42,812,901 6.088%-7.669%, 7/1/2018-2/1/2031 43,902,690
-------------------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--8.2%
--------------------------------------------------------------------------------
16,040,512 11.000%-12.000%, 3/15/2010-5/15/2020 18,316,368
-------------------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--18.5%
--------------------------------------------------------------------------------
40,732,854 6.000%-7.125%, 3/20/2017-5/20/2026 41,648,429
-------------------------------------------------------------------------------- --------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST $193,925,072) 196,933,446
-------------------------------------------------------------------------------- --------------
U.S. TREASURY NOTES--9.9%
- ------------------------------------------------------------------------------------------------
22,400,000 5.000%-6.375%, 10/31/1998-5/15/1999 22,187,615
-------------------------------------------------------------------------------- --------------
TOTAL U.S. TREASURY NOTES (IDENTIFIED COST $22,323,674) 22,187,615
-------------------------------------------------------------------------------- --------------
(A) REPURCHASE AGREEMENT--1.4%
- ------------------------------------------------------------------------------------------------
3,045,000 BT Securities Corporation, 5.380%, dated 2/28/1997, due 3/3/1997 (AT AMORTIZED
COST) 3,045,000
-------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $219,293,746)(B) $ 222,166,061
-------------------------------------------------------------------------------- --------------
</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 agreements is through participation in a joint
account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $219,293,746.
The net unrealized appreciation of investments on a federal tax basis
amounts to $2,872,315 which is comprised of $3,154,856 appreciation and
$282,541 depreciation at February 28, 1997.
Note: The categories of investments are shown as a percentage of net assets
($224,447,325) at February 28, 1997.
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.
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
February 28, 1997
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $219,293,746) $ 222,166,061
- -------------------------------------------------------------------------------------------------
Income receivable 3,467,807
- -------------------------------------------------------------------------------------------------
Receivable for shares sold 5,987
- ------------------------------------------------------------------------------------------------- --------------
Total assets 225,639,855
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Payable for shares redeemed $ 583,669
- -------------------------------------------------------------------------------------
Income distribution payable 420,626
- -------------------------------------------------------------------------------------
Payable to bank 9,963
- -------------------------------------------------------------------------------------
Accrued expenses 178,272
- ------------------------------------------------------------------------------------- ----------
Total liabilities 1,192,530
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 23,468,724 shares outstanding $ 224,447,325
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid in capital $ 265,032,518
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,872,315
- -------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (43,505,087)
- -------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income 47,579
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 224,447,325
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE ($224,447,325 / 23,468,724 shares outstanding) $ 9.56
- ------------------------------------------------------------------------------------------------- --------------
REDEMPTION PROCEEDS PER SHARE (99/100 of $9.56)* $ 9.46
- ------------------------------------------------------------------------------------------------- --------------
</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.
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended February 28, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $129,421) $ 16,549,302
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee $ 1,540,544
- ------------------------------------------------------------------------------------
Administrative personnel and services fee 194,044
- ------------------------------------------------------------------------------------
Custodian fees 82,807
- ------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 196,997
- ------------------------------------------------------------------------------------
Directors'/Trustees' fees 14,600
- ------------------------------------------------------------------------------------
Auditing fees 17,928
- ------------------------------------------------------------------------------------
Legal fees 3,417
- ------------------------------------------------------------------------------------
Portfolio accounting fees 68,182
- ------------------------------------------------------------------------------------
Distribution services fee 641,893
- ------------------------------------------------------------------------------------
Shareholder services fee 641,893
- ------------------------------------------------------------------------------------
Share registration costs 150,831
- ------------------------------------------------------------------------------------
Printing and postage 49,594
- ------------------------------------------------------------------------------------
Insurance premiums 4,506
- ------------------------------------------------------------------------------------
Taxes 88,942
- ------------------------------------------------------------------------------------
Miscellaneous 8,961
- ------------------------------------------------------------------------------------ -------------
Total expenses 3,705,139
- ------------------------------------------------------------------------------------
Waivers--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee $ (432,964)
- -----------------------------------------------------------------------
Waiver of distribution services fee (616,218)
- -----------------------------------------------------------------------
Waiver of shareholder services fee (25,676)
- ----------------------------------------------------------------------- -----------
Total waivers (1,074,858)
- ------------------------------------------------------------------------------------ -------------
Net expenses 2,630,281
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 13,919,021
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments 254,661
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 222,590
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain on investments 477,251
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations $ 14,396,272
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Adjustable Rate U.S. Government Fund, Inc.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------
Net investment income $ 13,919,021 $ 20,405,963
- ----------------------------------------------------------------------------
Net realized gain (loss) on investments ($254,661 net gain and $2,738,947
net loss, respectively, as computed for federal tax
purposes) 254,661 2,283,920
- ----------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments 222,590 1,057,057
- ---------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 14,396,272 23,746,940
- ---------------------------------------------------------------------------- --------------- ---------------
NET EQUALIZATION CREDITS (DEBITS)-- (117,558) (87,428)
- ---------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ----------------------------------------------------------------------------
Distributions from net investment income (13,801,463) (19,965,541)
- ----------------------------------------------------------------------------
Distributions in excess of net investment income (408,205) --
- ---------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from distributions to
shareholders (14,209,668) (19,965,541)
- ---------------------------------------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- ----------------------------------------------------------------------------
Proceeds from sale of shares 19,371,631 13,345,918
- ----------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions
declared 8,817,292 10,152,854
- ----------------------------------------------------------------------------
Cost of shares redeemed (108,002,125) (142,096,084)
- ---------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from share transactions (79,813,202) (118,597,312)
- ---------------------------------------------------------------------------- --------------- ---------------
Change in net assets (79,744,156) (114,903,341)
- ----------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------
Beginning of period 304,191,481 419,094,822
- ---------------------------------------------------------------------------- --------------- ---------------
End of period (including undistributed net investment income of $47,579 and
$0, respectively) $ 224,447,325 $ 304,191,481
- ---------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Adjustable Rate U.S. Government Fund, Inc.
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1997 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 0.52 0.54 0.47 0.43 0.53 0.47
- ---------------------------------
Net realized and unrealized
gain (loss) on investments 0.03 0.08 (0.32) (0.11) (0.08) (0.06)
- --------------------------------- --------- --------- --------- --------- --------- -----------
Total from investment
operations 0.55 0.62 0.15 0.32 0.45 0.41
- --------------------------------- --------- --------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
- ---------------------------------
Distributions from net
investment income (0.52) (0.53) (0.47) (0.43) (0.53) (0.42)
- ---------------------------------
Distributions in excess of net
investment income (b) (0.02) -- (0.01) -- -- (0.01)
- --------------------------------- --------- --------- --------- --------- --------- -----------
Total distributions (0.54) (0.53) (0.48) (0.43) (0.53) (0.43)
- --------------------------------- --------- --------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.56 $ 9.55 $ 9.46 $ 9.79 $ 9.90 $ 9.98
- --------------------------------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (C) 5.90% 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 5.42% 5.67% 4.76% 4.38% 5.29% 6.79%*
- ---------------------------------
Expense waiver/ reimbursement
(d) 0.42% 0.34% 0.30% 0.24% 0.01% 0.37 %*
- ---------------------------------
SUPPLEMENTAL DATA
- ---------------------------------
Net assets, end of period (000
omitted) $224,447 $304,191 $419,095 $798,213 $1,136,198 $965,289
- ---------------------------------
Portfolio turnover 108% 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)
Federated Adjustable Rate U.S. Government Fund, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
February 28, 1997
(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 AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund 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 agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are
Federated Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
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.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatment of
accumulated equalization. The following reclassifications have been make to
the financial statements.
<TABLE>
<CAPTION>
UNDISTRIBUTED NET
PAID-IN CAPITAL INVESTMENT INCOME
<S> <C> <C>
$(568,745) $ 568,745
</TABLE>
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At February 28, 1997, the Fund, for federal tax purposes, had a capital
loss carryforward of $43,505,087, 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>
2001 $ 5,982,598
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.
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by Government National Mortgage
Association, Federal National
Federated Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
Mortgage Association and Federal Home Loan Mortgage Corporation, 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 28, 1997, 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,
1997 1996
<S> <C> <C>
Shares sold 2,031,531 1,402,242
- ---------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 926,281 1,067,460
- ---------------------------------------------------------------------------------
Shares redeemed (11,343,231) (14,914,416)
- --------------------------------------------------------------------------------- ------------- -------------
Net change resulting from share transactions (8,385,419) (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.
Federated Adjustable Rate U.S. Government Fund, Inc.
- --------------------------------------------------------------------------------
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 average daily 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
February 28, 1997, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
Purchases $ 266,608,641
- -------------------------------------------------------------------------------------------------- --------------
Sales $ 345,527,076
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
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. as of February 28, 1997, the related statement of operations for the year
then ended, the statements of changes in net assets for the years ended February
28, 1997 and February 29, 1996, 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 28, 1997 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 statements and financial highlights present
fairly, in all material respects, the financial position of Federated Adjustable
Rate U.S. Government Fund, Inc. as of February 28, 1997, 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 11, 1997
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, Treasurer and Secretary
John E. Murray, Jr. S. Elliott Cohan
Wesley W. Posvar Assistant Secretary
Marjorie P. Smuts
</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]
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and a subsidiary of Federated Investors.
Cusip 314072109
G00588-01 (4/97)
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. The `x'' axis reflects computation periods
from 7/25/91 to 2/28/97. The `y'' axis is measured in increments of $1,000
ranging from $0 to $9,000 and indicates that the ending value of
hypothetical initial investment of $6,000 in the fund's shares, assuming
the reinvestment of capital gains and dividends, and no redemption of
shares, would have grown to $7,750 on 2/28/97.
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. The `x'' axis reflects computation periods
from 7/25/91 to 2/28/97. The `y'' axis is measured in increments of $1,000
ranging from $0 to $8,000 and indicates that the ending value of
hypothetical yearly investments of $1,000 in the fund's shares, assuming
the reinvestment of capital gains and dividends, and no redemption of
shares, would have grown to $6,965 on 2/28/97.
C. The graphic presentation here displayed consists of a boxed legend in
the lower 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. The `x'' axis reflects computation periods
from 7/25/91 to 2/28/97. The `y'' axis is measured in increments of
$20,000 ranging from $0 to $140,000 and indicates that the ending value of
hypothetical initial investment of $100,000 in the fund's shares, assuming
the reinvestment of capital gains and dividends, and no redemption of
shares, would have grown to $129,170 on 2/28/97.
D. The graphic representation here displayed consists of a boxed pie
chart which shows the percentage of the fund's total portfolio market value
diversified across different types of U.S. government securities as of
February 28, 1997. The pie chart is made up of seven pieces labeled as
follows (going clockwise starting from 12:00 noon): FNMA ARMS, 20%; GNMA
ARMS, 19%; U.S. Treasury Notes, 10%; GNMA, 8%; FNMA, 4%; Repurchase
Agreements, 1%; FHLMC ARMS, 38%.
E. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The fund
shares are represented by a solid line. The LBARMI is represented by a
broken line, the LBMFS1-3USGI is represented by a dashed line, the ML1YTI
is represented by a dotted line, the ML2YTI is represented by a
dashed/dotted line, and the LARMFA is represented by a bold/broken line.
The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 investment in the shares of the fund, the
LBARMI, LBMFS1-3USGI, ML1YTI, ML2YTI, and the LARMFA. The `x'' axis
reflects computation periods from 7/25/91 to 2/28/97. The `y'' axis
reflects increments of $1,000 ranging from $9,000 to $15, 000. The right
margin indicates the ending value of the hypothetical investment. The
ending values were $12,918, $13,855, $14,025, $13,297, $14,020 and $12,379,
respectively. The legend in the bottom center of the graphic presentation
indicates the fund's shares Average Annual Total Returns for the one-year,
and five-year periods ended 2/28/97 and from the fund's start of
performance (7/25/91) to 2/28/97. The total returns were 4.79%, 4.40%, and
4.68%, respectively.
