[Graphic]
[Graphic]
Federated Investors
Federated Adjustable Rate
U.S. Government
Fund, Inc.
7TH ANNUAL REPORT
FEBRUARY 28, 1998
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 its seventh Annual Report.
The report covers the 12-month period from March 1, 1997, through February 28,
1998. It begins with a discussion with the fund's portfolio manager, Kathy
Foody-Malus, Vice President of Federated Advisers. She offers her views on
today's interest rate environment, fund performance and the fund's investments
in U.S. government securities. Following her discussion, you will find three
additional items of shareholder interest. First, is a series of graphs that
display the fund's performance of a lump sum investment with all income
dividends reinvested and the investment results of making systematic investments
in fund shares with dividends reinvested. Second, is a complete listing of the
fund's holdings. Third, is the publication of the fund's financial statements.
Shareholders have received generous monthly income from the fund's conservative
portfolio of adjustable-rate mortgage-backed securities with short maturities of
1.50 to 1.75 years.
Over the 12-month reporting period, the fund paid income distributions totaling
$0.53 per share. The share price stood at $9.56 on the first day of the
reporting period and $9.52 on the last day. The fund's total return performance
during the reporting period was 5.25% based on net asset value.* On February 28,
1998, the 30-day current net yield was 5.55%.**
On February 28, 1998, 93.3% of the fund's $183.6 million in net assets were
invested in U.S. government mortgage-backed securities, with the remainder
invested in a repurchase agreement. The fund maintained its AAAf credit rating
by Standard & Poor's, the highest credit quality rating available for a mutual
fund.+
* 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 1-year total return reflecting the 1% contingent deferred sales
charge was 4.14%.
** 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.
+ 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.
Thank you for participating in Federated Adjustable Rate U.S. Government
Fund, Inc. as a conservative way to pursue income. Consider the advantages
of adding to your account on a regular basis and reinvesting your dividends.
As always, we welcome your comments and questions.
Sincerely,
[Graphic]
Richard B. Fisher
President
April 15, 1998
INVESTMENT REVIEW
[Graphic]
Kathy Foody-Malus
Vice President
Federated Advisers
[Graphic]
THE FUND'S FISCAL YEAR WAS CHARACTERIZED BY STEADY GROWTH IN THE U.S.
ECONOMY, NEGLIGIBLE INFLATION, AND THE ASIAN ECONOMIC CRISIS. HOW HAS THE
BOND MARKET REACTED TO THESE INFLUENCES?
The first half of the fund's fiscal year was dominated by strong growth and
benign inflation. These factors caused the Federal Reserve Board to tighten
interest rates 25 basis points once during this period. The dominating issues in
the second half of the fund's fiscal year were the currency and financial crisis
in the Asian markets. The bond market rallied on the trouble in Asia and its
potential cooling effect on inflation and growth in the U.S. The 30-year
Treasury bond reached a cyclical low of 5.69% in mid- January, 1998. Since then,
interest rates have slightly risen from their historical lows, and the market
continues to support a view of low inflation and slower economic growth.
[Graphic]
IN THIS RELATIVELY LOW RATE ENVIRONMENT, TO WHAT EXTENT HAVE MORTGAGE
REFINANCINGS AFFECTED THE ADJUSTABLE-RATE MARKET?
Many investors remember the 1992-1993 surge in refinancing and the corresponding
poor performance by the fixed-rate mortgage market. This time around, it is not
the fixed-rate market, but the adjustable-rate market that is most impacted by
the rally in Treasuries. During the fund's fiscal reporting period ended
February 28, 1998, the spread among 1-year and 10-year U.S. Treasuries flattened
by 66 basis points, with the majority occurring in the 10-year Treasury, as
rates rallied by 94 basis points. The combination of a flat yield curve and
attractive fixed-rate mortgage rates is the perfect scenario for increased
prepayment activity by adjustable-rate borrowers. In recent months many
homeowners have taken advantage of this opportunity and refinanced from an
adjustable-rate mortgage into a lower 30-year fixed-rate mortgage.
[Graphic]
WHAT WAS YOUR STRATEGY TO COMBAT THESE PREPAYMENT RISKS?
The fund's strategy focused on seasoned conventional and Government National
Mortgage Association adjustable-rate mortgages, combined with structured
mortgage products. This strategy served fund investors well as seasoned
adjustable-rate mortgages were fully indexed for some time and have endured
several environments conducive to refinancing. Highly rate-sensitive borrowers
are likely to have refinanced while remaining loans will exhibit lower
refinancing sensitivity.
[Graphic]
HOW DID FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. PERFORM FOR
SHAREHOLDERS IN TERMS OF TOTAL RETURN AND INCOME DURING ITS FISCAL YEAR?
The fund paid a monthly dividend stream totaling $0.53 per share over the
12-month period from March 1, 1997 through February 28, 1998. The fund's total
return for the period, based on net asset value, was 5.25%.* This compares to a
total return of 6.00% for the Merrill Lynch 1-Year Treasury Index, 6.95% for the
Merrill Lynch 2-Year Treasury Index, and 5.84% for the Lipper Adjustable Rate
Mortgage Fund Average.**
* 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 reporting
period reflecting the 1% contingent deferred sales charge was 4.14%.
** The Merrill Lynch 1-Year and 2-Year Treasury Indices comprise 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. 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. Lipper figures do not reflect sales
charges. The indices and average are unmanaged and actual investments cannot be
made in an index.
[Graphic]
HOW WERE THE ASSETS OF THE FUND ALLOCATED AMONG DIFFERENT TYPES OF
MORTGAGE-BACKED SECURITIES AT THE END OF THE REPORTING PERIOD?
As of February 28, 1998, the fund's portfolio was primarily invested in the
following types of issues:
PERCENTAGE OF
TOTAL MARKET
MATURITIES VALUE
Federal Home Loan
Mortgage
Corporation 11/01/2016 to
("FHLMC") 04/01/2029 41.41%
Government National
Mortgage Association 03/15/2010 to
("GNMA") 04/20/2026 31.26%
Federal National
Mortgage Association 12/01/2010 to
("FNMA") 06/01/2029 21.63%
[Graphic]
WHAT ARE YOUR EXPECTATIONS FOR THE REMAINDER OF 1998, AND HOW WILL THAT IMPACT
YOUR STRATEGY?
The current environment in bonds continues to be a trading range until the
release of further economic data confirming a slowdown in economic growth and
continued low inflation. Near term, the road will be rocky as adjustable-rate
investors deal with prepayments; however, over the longer term, we believe that
the sector will continue to provide a competitive return advantage.
BOND INVESTING TERMS
MATURITY -- The amount of time in which a bond's principal becomes due.
COUPON -- The interest rate on a bond that the issuer promises to pay until the
bond matures.
CURRENT YIELD -- The amount of interest paid by a bond, expressed as a
percentage of its value. Yield may differ from the coupon because the bond's
value may change over time. As a bond's price falls, its yield rises, and vice
versa.
DURATION -- A measurement of a bond's price volatility relative to a change in
the general level of interest rates. Duration takes into account the size of the
coupon and the time to maturity. Generally, longer or higher durations have more
risk than shorter or lower durations.
INVESTMENT GRADE BONDS -- Corporate and municipal bonds rated within the top
four categories (Caa or higher by Moody's or BBB or higher by Standard & Poor's)
based on the issuer's ability to pay the interest and principal. Bonds rated
lower are more speculative. U.S. Treasury and government agency bonds are not
rated because the payment of principal and interest are guaranteed directly by
the U.S. government or the issuing agency.
FEDERAL RESERVE BOARD -- Under the direction of a Chairman (currently Alan
Greenspan), the Federal Reserve Board (the "Fed") consists of seven members that
are appointed by the President. The Fed regulates the U.S. monetary and banking
system and sets economic policy, including the direction of short-term interest
rates. When the Fed is said to "tighten," it raises rates. When it "eases," it
lowers rates.
MORTGAGE-BACKED BOND -- A bond that gives the owner an interest in a group of
home mortgages, known as a pool.
PREPAYMENTS -- This occurs when homeowners move or refinance mortgages to take
advantage of lower interest rates. As a result, the principal is paid off to
investors who own interests in the mortgages--and have to reinvest in a lower
rate environment.
PASS-THROUGH MORTGAGE SECURITIES -- A group of mortgages pooled together and
sold to investors.
GNMA -- An abbreviation for the Government National Mortgage Association, a U.S.
government agency that issues pass-through mortgage securities. These securities
are known as "Ginnie Maes," and their payment of principal and interest is
guaranteed by the U.S. government.
FNMA -- An abbreviation for the Federal National Mortgage Association, a
publicly owned, government-sponsored company that buys mortgages from lenders
and packages them into securities for sale to investors. This agency and each
mortgage-backed security are also known as "Fannie Mae."
FHLMC -- An abbreviation for the Federal Home Loan Mortgage Corporation, an
agency that buys mortgages from lenders and packages them into securities for
sale to investors. The agency and each mortgage-backed security it issues are
also known as "Freddie Mac."
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 $7,000 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 $9,517 ON 2/28/98.
YOU WOULD HAVE EARNED A 4.76%* AVERAGE ANNUAL TOTAL RETURN FOR THE 7-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 3/31/98, the average annual one-year, five-year and since inception
(7/25/91) total returns were 4.41%, 4.59%, and 4.78% respectively.
[Graphic representation "A1" 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 1.00%
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 7 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL
GAINS) GREW TO $8,356.
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 $7,000, but your
account would have reached a total value of $8,356* by 2/28/98. You would have
earned an average annual total return of 4.93%.
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.
[Graphic representation "A2" omitted. SEE APPENDIX]
* This chart assumes that the subsequent annual investments are made on the last
day of each 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.
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR CURRENT INCOME
Seven 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 $135,952 as of 2/28/98 for an average annual
total return of 4.76%.**
[Graphic representation "A3" omitted. SEE APPENDIX]
* Fund shares are not guarantueed and their value will fluctuate with market
conditions.
** 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.
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 Federated
Adjustable Rate U.S. Government Fund, Inc. (the "Fund") from July 25, 1991
(start of performance) to February 28, 1998, compared to the Lehman Brothers
Adjustable Rate Mortgage Index ("LBARMI"), the Lipper Adjustable Rate Mortgage
Funds Average ("LARMFA"), the Merrill Lynch 1-Year Treasury Index ("ML1YTI"),
and the Merrill Lynch 2-Year Treasury Index ("ML2YTI").+
[Graphic representation "A4" 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 LBARMI, ML1YTI and the ML2YTI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged. 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. 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 SEC requires to be
reflected in a fund's performance.
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS--93.3%
$ 55,881,351 Federal Home Loan Mortgage Corp. PC ARM--31.5%
7.563% - 7.832%, 4/1/2018 - 4/1/2020 $ 57,926,008
FEDERAL HOME LOAN MORTGAGE CORP. - REMIC --8.3%
10,000,000 5.600%, 8/15/2017 (Series 1608-E) 9,945,300
2,025,000 5.750%, 10/15/2016 (Series 1584-E) 2,019,148
3,250,000 6.250%, 6/15/2008 (Series 1544-E) 3,261,993
Total 15,226,441
1,956,472 Federal Home Loan Mortgage Corp. --1.1%
9.000%, 11/1/2016 2,092,819
25,042,393 Federal National Mortgage Association ARM --13.9%
6.201% - 7.640%, 7/1/2018 - 5/1/2036 25,599,741
FEDERAL NATIONAL MORTGAGE ASSOCIATION - REMIC--4.1%
3,712,000 5.650%, 5/25/2017 (Series 93-206-E) 3,688,503
3,869,000 5.750%, 7/25/2005 (Series 93-209-E) 3,851,899
Total 7,540,402
5,504,238 Federal National Mortgage Association --3.4%
9.500% - 12.250%, 12/1/2010 - 7/1/2016 6,158,412
32,398,372 Government National Mortgage Association ARM--18.1%
6.000% - 7.375%, 3/20/2017 - 11/20/2027 33,155,699
20,973,698 Government National Mortgage Association --12.9%
9.500% - 12.000%, 3/15/2010 - 12/15/2021 23,647,181
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST 171,346,703
$170,094,167)
(A)REPURCHASE AGREEMENT--5.6%
10,370,000 BT Securities Corp., 5.640%, dated 2/27/1998, due
3/2/1998 (AT AMORTIZED COST) 10,370,000
TOTAL INVESTMENTS (IDENTIFIED COST $180,464,167)(B) $ 181,716,703
</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 $180,464-167.
The net unrealized appreciation of investments on a federal tax basis amounts to
$1,252,536 which is comprised of $1,376,709 appreciation and $124,173
depreciation at February 28, 1998.
Note: The categories of investments are shown as a percentage of net assets
($183,603,929) at February 28, 1998.
The following acronyms are used throughout this portfolio:
ARM --Adjustable Rate Mortgage
PC --Participation Certificate
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
FEBRUARY 28, 1998
<TABLE>
<S> <C> <C>
ASSET:
Total investments in securities, at value (identified and
tax cost $180,464,167) $ 181,716,703
Cash 968
Income receivable 2,656,657
Receivable for shares sold 820
Total assets 184,375,148
LIABILITIES:
Payable for shares redeemed $344,755
Income distribution payable 308,901
Accrued expenses 117,563
Total liabilities 771,219
NET ASSETS for 19,290,274 shares outstanding $ 183,603,929
NET ASSETS CONSIST OF:
Paid in capital $ 224,994,536
Net unrealized appreciation of investments 1,252,536
Accumulated net realized loss on investments (42,772,534)
Undistributed net investment income 129,391
Total Net Assets $ 183,603,929
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
Net Asset Value Per Share ($183,603,929 / 19,290,274 shares $9.52
outstanding)
Redemption Proceeds Per Share (99.00/100 of $9.52)* $9.42
</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, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 13,282,008
EXPENSES:
Investment advisory fee $ 1,201,782
Administrative personnel and services fee 151,178
Custodian fees 26,765
Transfer and dividend disbursing agent fees and 173,656
expenses
Directors'/Trustees' fees 11,402
Auditing fees 19,496
Legal fees 3,643
Portfolio accounting fees 77,689
Distribution services fee 500,743
Shareholder services fee 500,743
Share registration costs 18,502
Printing and postage 38,273
Insurance premiums 3,420
Miscellaneous 36,010
Total expenses 2,763,302
Waivers--
Waiver of investment advisory fee $ (65,849)
Waiver of distribution services fee (480,712)
Waiver of shareholder services fee (20,029)
Total waivers (566,590)
Net expenses 2,196,712
Net investment income 11,085,296
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 732,553
Net change in unrealized appreciation of investments (1,619,779)
Net realized and unrealized loss on investments (887,226)
Change in net assets resulting from operations $ 10,198,070
</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,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 11,085,296 $ 13,919,021
Net realized gain (loss) on investments ($732,553 net gain
and $254,661 net gain, respectively, as computed for federal
tax purposes) 732,553 254,661
Net change in unrealized appreciation/(depreciation) (1,619,779) 222,590
Change in net assets resulting from operations 10,198,070 14,396,272
NET EQUALIZATION CREDITS (DEBITS)-- (47,779) (117,558)
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (11,003,484) (13,801,463)
Distributions in excess of net investment income -- (408,205)
Change in net assets resulting from distributions to (11,003,484) (14,209,668)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 5,903,553 19,371,631
Net asset value of shares issued to shareholders in payment
of distributions declared 6,981,358 8,817,292
Cost of shares redeemed (52,875,114) (108,002,125)
Change in net assets resulting from share transactions (39,990,203) (79,813,202)
Change in net assets (40,843,396) (79,744,156)
NET ASSETS:
Beginning of period 224,447,325 304,191,481
End of period (including undistributed net investment income
of $129,391 and $47,579, respectively) $ 183,603,929 $ 224,447,325
</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,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.56 $ 9.55 $ 9.46 $ 9.79 $ 9.90
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.52 0.54 0.47 0.43
Net realized and unrealized gain (loss) (0.04) 0.03 0.08 (0.32) (0.11)
on investments
Total from investment operations 0.49 0.55 0.62 0.15 0.32
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.52) (0.53) (0.47) (0.43)
Distributions in excess of net investment -- (0.02) -- (0.01) --
income(a)
Total distributions (0.53) (0.54) (0.53) (0.48) (0.43)
NET ASSET VALUE, END OF PERIOD $ 9.52 $ 9.56 $ 9.55 $ 9.46 $ 9.79
TOTAL RETURN(B) 5.25% 5.90% 6.77% 1.58% 3.27%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.10% 1.02% 1.02% 1.02% 1.02%
Net investment income 5.53% 5.42% 5.67% 4.76% 4.38%
Expense waiver/reimbursement(c) 0.28% 0.42% 0.34% 0.30% 0.24%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $183,604 $224,447 $304,191 $419,095 $798,213
Portfolio turnover 67% 108% 144% 170% 40%
</TABLE>
(a) 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.
(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
FEBRUARY 28, 1998
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.
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 treatments of accumulated
equalization. The following reclassifications have been made to the financial
statements.
UNDISTRIBUTED NET
PAID-IN CAPITAL INVESTMENT INCOME
$(47,779) $47,779
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
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 -- 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 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.
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, 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>
YEAR ENDED FEBRUARY 28,
1998 1997
<S> <C> <C>
Shares sold 617,746 2,031,531
Shares issued to shareholders in payment of distributions 731,042 926,281
declared
Shares redeemed (5,527,238) (11,343,231)
Net change resulting from share transactions (4,178,450) (8,385,419)
</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 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. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended February 28, 1998, were as follows:
PURCHASES $130,593,267
SALES $177,484,104
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, 1998, and the related statement of operations for the
year then ended, the statements of changes in net assets for the years ended
February 28, 1998 and 1997, 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, 1998, by correspondence with the custodian and brokers; where
replies were not received, 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, 1998, 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 10, 1998
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
Nicholas S. Constantakis
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Richard B. Fisher
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
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 Investors
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 314072109
G00588-01 (4/98)
[Graphic]
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 2/28/98. The "y" axis is measured in increments of $2,000 ranging from $0 to
$12,000 and indicates that the ending value of hypothetical initial investment
of $7,000 in the fund, assuming the reinvestment of capital gains and dividends,
would have grown to $9,517 on 2/28/98.
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 2/28/98. The "y" axis is measured in increments of $2,000 ranging from $0 to
$10,000 and indicates that the ending value of hypothetical yearly investments
of $1,000 in the fund, assuming the reinvestment of capital gains and dividends,
would have grown to $8,356 on 2/28/98.
A3: 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 2/28/98. The "y" axis is measured in increments of $40,000 ranging from $0 to
$160,000 and indicates that the ending value of hypothetical initial investment
of $100,000 in the fund, assuming the reinvestment of capital gains and
dividends, would have grown to $135,952 on 2/28/98.
A4: The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Shares of
Federated Adjustable Rate U.S. Government Fund, Inc. (the "Fund") are
represented by a solid line. The Lehman Brothers Adjustable Rate Mortgage Index
("LBARMI") is represented by a dotted line, the Lipper Adjustable Rate Mortgage
Funds Average ("LARMFA") is represented by a dashed line, the Merrill Lynch
1-year Treasury Index ("ML1YTI") is represented by a broken line and the Merrill
Lynch 2-year Treasury Index ("ML2YTI") is represented by a broken / dotted line.
The line graph is a visual representation of a comparison of change in value of
a $10,000 hypothetical investment in shares of the Fund, the LBARMI, the LARMFA,
the ML1YTI and the ML2YTI. The "x" axis reflects computation periods from
7/25/91 to 2/28/98. The "y" axis reflects the cost of the investment. The right
margin reflects the ending value of the hypothetical investment in shares of the
Fund as compared to the LBARMI, the LARMFA, the ML1TYI and the ML2YTI. The
ending values were $13,596, $14,815, $13102, $14,994, and $14,094, respectively.
The legend in the bottom quadrant of the graphic presentation indicates the
Fund's Average Annual Total Returns for the one and five year periods ended
2/28/98 and from the start of performance of the Fund (7/25/91) to 2/28/98. The
total returns were 4.14%, 4.54% and 4.76%, respectively.
