Federated Adjustable Rate U.S. Government Fund, Inc.
8TH SEMI-ANNUAL REPORT
AUGUST 31, 1998
ESTABLISHED 1991
PRESIDENT'S MESSAGE
[Graphic]
Dear Shareholder:
Federated Adjustable Rate U.S. Government Fund, Inc. was established in 1991,
and I am pleased to present its eighth Semi-Annual Report. This report covers
the first half of the fund's fiscal year which is the six-month period from
March 1, 1998 through August 31, 1998. It begins with Kathy Foody-Malus, Vice
President of Federated Advisers, discussing the economic influences on the bond
market and the fund's performance, along with her strategies and outlook.
Following Kathy's discussion are three additional items of shareholder interest.
First is a series of graphs showing the fund's long-term investment performance.
Second is a complete listing of the fund's holdings in U.S. government
securities, and third is the publication of the fund's financial statements.
The fund's short-term holdings may offer shareholders a higher level of income
than money market funds and help to protect against a significant loss of
principal in periods of rising interest rates.+ The fund's income distributions
totaled $0.24 per share during the reporting period. The fund's total return
performance for the six-month and one-year periods ended August 31, 1998 were
2.23% and 4.54%, respectively, based on net asset value.* In addition, the
fund's portfolio maintained an AAAf rating by Standard & Poor's Ratings Group,
the highest quality rating available for a mutual fund.**
Thank you for your continued 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, 1998
* Performance quoted is based on net asset value, 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 performance for the
six-month and one-year periods ended August 31, 1998 were 1.26% and 3.55%,
respectively, based on offering price. As of August 31, 1998, the fund's
five-year and since inception (7/25/91) annualized total returns, based on
offering price, were 4.58% and 4.74%, respectively.
** An AAAf rating means that the fund's portfolio holdings and counterparties
provide extremely strong protection against losses from credit defaults. Ratings
are subject to change and do not remove market risks.
+ Unlike money market funds, the share value of the fund will fluctuate in
value.
INVESTMENT REVIEW
[Graphic]
Kathy Foody-Malus
Vice President
Federated Advisers
[Graphic]
WHAT ARE YOUR COMMENTS ON THE BOND MARKET OVER THE FIRST HALF OF THE
FUND'S FISCAL YEAR, WHICH SAW MINIMAL INFLATION, EXTREME STOCK MARKET
VOLATILITY AND OVERSEAS ECONOMIC DISTRESS?
During the first five months of the semi-annual reporting period, the
U.S. Treasury market traded in a narrowly defined trading range of 25 basis
points. However, this trend reversed during the month of August 1998 when
the stock market started to crack due to disappointing earnings
expectations. Other factors driving the U.S. Treasury market included the
financial crises in Southeast Asia, Russia, Latin America and the potential
that these crises would spread to other countries. The U.S. Treasury market
was the main beneficiary as the "flight to quality" sent bond prices
soaring and yields plummeting to levels not seen in 30 years. The 30-year
Treasury yield as of August 31, 1998 was 5.26%.
[Graphic]
IN THIS LOW RATE ENVIRONMENT, THE ADJUSTABLE RATE MORTGAGE SECURITIES
MARKET HAS EXPERIENCED A RECORD LEVEL OF REFINANCINGS. HOW HAVE YOU
STRUCTURED THE FUND'S PORTFOLIO TO HELP REDUCE EXPOSURE TO PREPAYMENT
RISK?
Prepayment risk continues to be the dominant issue in the adjustable
rate mortgage securities market. The U.S. Treasury market rally
accompanied by all-time lows in fixed rate mortgages, has served to
further highlight this concern. The strategy during this environment has
been to maintain the minimum allocation (65% of the fund's portfolio as
defined in the prospectus) to the adjustable rate mortgage securities
sector. Allocation of the other 35% of the fund's portfolio will be to
securities that offer prepayment protection. This portion of the
portfolio during the reporting period favored a mortgage origination
barbell. The combination of securities over ten years old and newly
originated mortgage-backed securities produced an improved portfolio
prepayment profile. The older securities consisted of fixed-rate
premium mortgage-backed securities that are no longer subject to heavy
prepayment activity. Newly originated securities purchased were 15-year
with 6.00%-7.00% coupons. This overall portfolio structure of seasoned
adjustable rate mortgage securities and a blend of different origination
fixed-rate mortgage-backed securities is intended to reduce prepayment
exposure. Given these uncertain times in the market, this overall
portfolio composition may benefit shareholders over the long run.
[Graphic]
HOW DID FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. PERFORM FOR
SHAREHOLDERS IN TERMS OF TOTAL RETURN AND INCOME DURING THE SIX-MONTH
REPORTING PERIOD ENDED AUGUST 31, 1998?
The fund paid a consistent monthly dividend stream of $0.04 per share,
totaling $0.24 per share, over the six-month period from March 1, 1998
through August 31, 1998. For the same period, the fund's total return,
based on net asset value, was 2.23%.* This compares to a total return of
3.18% for the Merrill Lynch 1-Year Treasury Note Index, 3.70% for the
Merrill Lynch 2-Year Treasury Note Index, and 2.29% for the Lipper ARMs
Funds Average.**
[Graphic]
HOW WAS THE FUND'S PORTFOLIO ALLOCATED AMONG DIFFERENT TYPES OF
MORTGAGE-BACKED SECURITIES AT THE END OF THE REPORTING PERIOD?
As of August 31, 1998, the portfolio composition was:
<TABLE>
<CAPTION>
MATURITIES PERCENTAGE OF
NET ASSETS
<S> <C> <C>
Federal Home Loan
Mortgage Corporation 11/01/2016 to 04/01/2029 41.41%
Government National
Mortgage Association 03/15/2010 to 04/20/2026 31.26%
Federal National
Mortgage Association 12/01/2010 to 06/01/2029 21.63%
</TABLE>
* Performance quoted is based on net asset value, 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 period, based on offering price, was 1.26%.
** The Merrill Lynch 1-Year and 2-Year Treasury Note Indexes 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 1, 3, 6, and
12 months as well as year-to-date. These indexes 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, Inc. as falling into the category indicated.
These figures do not reflect sales charges.
[Graphic]
WITH THE RECENT "EASING," OR INTEREST RATE CUTS BY THE FEDERAL RESERVE
BOARD, WHAT IS YOUR OUTLOOK FOR THE REMAINDER OF THE FUND'S FISCAL
YEAR, AND HOW MAY IT IMPACT YOUR STRATEGY?
With the recent easing by the Federal Reserve Board in the Federal Funds
Target Rate, the portfolio will continue to maintain the minimum
allowable exposure to the adjustable rate securities sector. The reason
for this has to do with the shape of the yield curve. The yield curve, as
measured by the yield differential between the 1-year and 10-year
maturity U.S. Treasury, is very flat. This type of yield curve enhances
the ability for homeowners to refinance their adjustable rate mortgages
into fixed-rate mortgages at highly attractive levels. Therefore, the
goal is to reduce the prepayment risk by utilizing other securities in
the overall portfolio structure. Investors should be aware that over the
next several months, the adjustable rate securities market will be
difficult. However, we believe that investors will be rewarded for
"staying the course."
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 $8,000 IN FEDERATED ADJUSTABLE RATE
U.S. GOVERNMENT FUND, INC. ON 7/25/91, REINVESTED DIVIDENDS AND CAPITAL
GAINS, AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD HAVE BEEN WORTH
$11,107 ON 8/31/98. YOU WOULD HAVE EARNED A 4.73% AVERAGE ANNUAL TOTAL
RETURN FOR THE 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 9/30/98, the fund's average annual 1-year, 5-year, and since inception
(7/25/91) total returns were 3.40%, 4.61%, and 4.75%, respectively.*
[Graphic]
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 1.00%
contingent deferred sales charge.
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 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH
YEAR FOR SEVEN YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW
TO $9,535.
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 did not redeem any shares, you would have invested
only $8,000, but your account would have reached a total value of $9,535*
by 8/31/98. You would have earned an average annual total return of
4.84%.
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. 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.
[Graphic]
* This chart assumes that the subsequent annual investments are made on the
last day of the anniversary month. 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. 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.
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS--99.7%
$48,730,804 Federal Home Loan Mortgage Corp. ARM--32.6%
7.500% - 7.645%, 4/1/2018 - 4/1/2029 $ 50,362,211
2,849,986 Federal Home Loan Mortgage Corp. REMIC.--1.9%
Series 1544-E, 6.25%, 6/15/2008 2,864,065
9,931,752 Federal Home Loan Mortgage Corp.--6.6%
7.000% - 9.000%, 5/1/2013 - 11/1/2016 10,213,991
21,623,640 Federal National Mortgage Association ARM--14.3%
6.131% - 7.450%, 4/1/2023 - 5/1/2036 22,025,707
Federal National Mortgage Association REMIC--9.0%
3,712,000 Series 93-206E, 5.650%, 5/25/2017 3,718,756
10,000,000 Series 98-36PA, 6.250%, 7/18/2013 10,155,858
Total 13,874,614
10,558,639 Federal National Mortgage Association--7.2%
6.500% - 12.250%, 12/1/2010 - 7/1/2016 11,154,214
28,561,391 Government National Mortgage Association ARM--18.9%
6.875% - 7.000%, 3/20/2017 - 7/20/2024 29,150,018
2,590,000 Government National Mortgage Association--1.7%
5.000%, 8/20/2028 2,582,722
10,114,002 Government National Mortgage Association--7.5%
11.000% - 12.000%, 3/15/2010 - 5/15/2020 11,580,737
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST
$153,061,406) 153,808,279
(A)REPURCHASE AGREEMENTS--0.6%
925,000 BT Securities Corp., 5.800%, dated 8/31/1998, due 9/1/1998
(AT AMORTIZED COST) 925,000
TOTAL INVESTMENTS (IDENTIFIED COST $153,986,406)(B) $154,733,279
</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 $153,986,406.
The net unrealized appreciation of investments on a federal tax basis
amounts to $746,873 which is comprised of $1,016,205 appreciation and
$269,332 depreciation at August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($154,221,199) at August 31, 1998.
The following acronyms are used throughout this portfolio:
ARM --Adjustable Rate Mortgage
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and
tax cost $153,986,406) $154,733,279
Cash 22,162
Income receivable 2,508,558
Total assets 157,263,999
LIABILITIES:
Payable for investments purchased $2,591,394
Payable for shares redeemed 158,025
Income distribution payable 203,991
Accrued expenses 89,390
Total liabilities 3,042,800
NET ASSETS for 16,250,807 shares outstanding $154,221,199
NET ASSETS CONSIST OF:
Paid in capital $196,032,442
Net unrealized appreciation of investments 746,873
Accumulated net realized loss on investments (42,695,132)
Undistributed net investment income 137,016
Total Net Assets $154,221,199
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PROCEEDS PER SHARE:
Net Asset Value Per Share ($154,221,199 / 16,250,807 shares
outstanding) $9.49
Redemption Proceeds Per Share (99.00/100 of $9.49)* $9.40
</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
SIX MONTHS ENDED AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $5,200,034
EXPENSES:
Investment advisory fee $ 521,672
Administrative personnel and services fee 65,557
Custodian fees 6,303
Transfer and dividend disbursing agent fees and expenses 55,048
Directors'/Trustees' fees 5,576
Auditing fees 9,196
Legal fees 2,210
Portfolio accounting fees 25,339
Distribution services fee 217,363
Shareholder services fee 217,363
Share registration costs 9,138
Printing and postage 17,416
Insurance premiums 1,778
Taxes 4,836
Miscellaneous 12,203
Total expenses 1,170,998
Waivers--
Waiver of investment advisory fee $ (62,966)
Waiver of distribution services fee (208,669)
Waiver of shareholder services fee (8,695)
Total waivers (280,330)
Net expenses 890,668
Net investment income 4,309,366
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 77,402
Net change in unrealized depreciation of investments (505,663)
Net realized and unrealized loss on investments (428,261)
Change in net assets resulting from operations $3,881,105
</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>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
AUGUST 31, FEBRUARY 28,
1998 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 4,309,366 $ 11,085,296
Net realized gain (loss) on investments ($77,402 and
$732,553, respectively, as computed for federal tax
purposes) 77,402 732,553
Net change in unrealized appreciation/(depreciation) (505,663) (1,619,779)
Change in net assets resulting from operations 3,881,105 10,198,070
NET EQUALIZATION CREDITS (DEBITS)-- -- (47,779)
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (4,301,741) (11,003,484)
SHARE TRANSACTIONS--
Proceeds from sale of shares 1,201,688 5,903,553
Net asset value of shares issued to shareholders in payment
of distributions declared 2,742,548 6,981,358
Cost of shares redeemed (32,906,330) (52,875,114)
Change in net assets resulting from share transactions (28,962,094) (39,990,203)
Change in net assets (29,382,730) (40,843,396)
NET ASSETS:
Beginning of period 183,603,929 224,447,325
End of period (including undistributed net investment income
of $137,016 and $129,391, respectively) $154,221,199 $183,603,929
</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>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1998 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.52 $ 9.56 $ 9.55 $ 9.46 $ 9.79 $ 9.90
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.24 0.53 0.52 0.54 0.47 0.43
Net realized and unrealized gain (loss) on investments (0.03) (0.04) 0.03 0.08 (0.32) (0.11)
Total from investment operations 0.21 0.49 0.55 0.62 0.15 0.32
LESS DISTRIBUTIONS
Distributions from net investment income (0.24) (0.53) (0.52) (0.53) (0.47) (0.43)
Distributions in excess of net investment income(a) -- -- (0.02) -- (0.01) --
Total distributions (0.24) (0.53) (0.54) (0.53) (0.48) (0.43)
NET ASSET VALUE, END OF PERIOD $ 9.49 $ 9.52 $ 9.56 $ 9.55 $ 9.46 $ 9.79
TOTAL RETURN(B) 2.23% 5.25% 5.90% 6.77% 1.58% 3.27%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.02%* 1.10% 1.02% 1.02% 1.02% 1.02%
Net investment income 4.96%* 5.53% 5.42% 5.67% 4.76% 4.38%
Expense waiver/reimbursement(c) 0.32%* 0.28% 0.42% 0.34% 0.30% 0.24%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $154,221 $183,604 $224,447 $304,191 $419,095 $798,213
Portfolio turnover 25% 67% 108% 144% 170% 40%
</TABLE>
* Computed on an annualized basis.
(a) Distribution 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.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) 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
AUGUST 31, 1998 (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.
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 will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are
deemed by the Fund's adviser to be creditworthy pursuant to the
guidelines and/or standards reviewed or established by the Board of
Directors (the "Directors"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the repurchase
price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Distributions to shareholders are recorded on the ex-dividend
date.
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, 1998, the Fund, for federal tax purposes, had a capital
loss carryforward of $42,772,534, 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:
EXPIRATION YEAR EXPIRATION AMOUNT
2001 $5,250,045
2002 12,916,149
2003 21,867,393
2004 2,738,947
EQUALIZATION--Effective March 1, 1998, the Fund discontinued its use of
equalization. Equalization is an accounting practice whereby a portion
of the proceeds of sales and costs of redemptions of Fund shares is
credited or charged to undistributed net investment income on a per
share basis, as determined on the date of transaction. This change in
accounting policy does not effect the Fund's net assets, net asset value
per share, or net investment income. The financial statements included
herein reflect the following reclass entry to close out accumulated
equalization credits as of August 31, 1998.
INCREASE (DECREASE)
UNDISTRIBUTED
PAID IN NET INVESTMENT
CAPITAL INCOME
$(50,259) $50,259
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 TRANSACTION--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 involve "to be announced" securities and are treated
as 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. For the period ended August 31, 1998,
the Fund did not engage in dollar roll transactions.
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, 1998, there were 5,000,000,000 shares of $0.001 par value
capital stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR ENDED
AUGUST 31, FEBRUARY 28,
1998 1998
<S> <C> <C>
Shares sold 126,125 617,746
Shares issued to shareholders in payment of distributions
declared 288,369 731,042
Shares redeemed (3,453,961) (5,527,238)
Net change resulting from share transactions (3,039,467) (4,178,450)
</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, Inc. 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 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 Fund are Officers
and Directors or Trustees of the above companies.
5. YEAR 2000
Similar to other financial organizations, the Fund could be adversely
affected if the computer systems used by the Fund's service providers do
not properly process and calculate date-related information and data
from and after January 1, 2000. The Fund's Adviser and Administrator are
taking measures that they believe are reasonably designed to address the
Year 2000 issue with respect to computer systems that they use and to
obtain reasonable assurances that comparable steps are being taken by
each of the Fund's other service providers. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any
adverse impact to the Fund.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for
the period ended August 31, 1998, were as follows:
PURCHASES $42,316,972
SALES $58,569,290
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
Nicholas P. Constantakis
William J. Copeland
James E. Dowd, Esq.
Lawrence D. Ellis, M.D.
Richard B. Fisher
Edward L. Flaherty, Jr., Esq.
Peter E. Madden
John E. Murray, Jr., J.D., S.J.D.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Richard B. Fisher
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Nicholas J. Seitanakis
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in mutual funds involves investment
risk, including possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains
facts concerning its objective and policies, management fees, expenses,
and other information.
[Graphic]
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
www.federatedinvestors.com
Cusip 314072109
2091401 (10/98)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT BOND FUND, INC.
APPENDIX
A1. 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 8/31/98. The "y" axis is measured in increments of $3,000 ranging from $0 to
$15,000 and indicates that the ending value of a hypothetical initial investment
of $8,000 in the fund, assuming the reinvestment of capital gains and dividends,
would have grown to $11,107 on 8/31/98.
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT BOND FUND, INC.
APPENDIX
A2. 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 8/31/98. The "y" axis is measured in increments of $2,000 ranging from $0 to
$12,000 and indicates that the ending value of a hypothetical $1,000 initial
investment and subsequent yearly investments of $1,000 in the fund, assuming the
reinvestment of capital gains and dividends, would have grown to $9,535 on
8/31/98.
