ANNUAL REPORT
[Graphic]
RICHARD B. FISHER
President
Federated Adjustable Rate
U.S. Government Fund, Inc.
President's Message
Dear Shareholder:
Federated Adjustable Rate U.S. Government Fund, Inc. was created in 1991, and
I am pleased to present its eighth Annual Report. This fund invests in short-
term adjustable rate securities issued by agencies of the U.S. government as
well as the U.S. Treasury. These issues have higher yields than short-term
money market instruments 1 and are, of course, subject to interest rate move
ments.
This report covers the 12-month reporting period from March 1, 1998 through
February 28, 1999. It begins with an interview with the fund's portfolio man
ager, Kathy Foody-Malus, Vice President of Federated Investment Management
Company. She offers her views on today's interest rate environment, fund per
formance and the fund's investments in U.S. government agencies and Treasury
securities. Following her discussion are three additional items of share holder
interest. First is a series of graphs showing the fund's long-term investment
performance. Second is a complete listing of the fund's adjustable rate
securities, and third is the publication of the fund's financial state ments.
Shareholders have received generous monthly income from the fund's conserva tive
portfolio of adjustable rate mortgage backed securities with an average duration
of one year.
Over the 12-month reporting period, the fund paid income distributions total ing
$0.48 per share. The share price stood at $9.52 on the first day of the
reporting period and $9.43 on the last day. The fund's total return perfor mance
during the reporting period was 4.20%, 2 based on net asset value. On February
28, 1999, the fund's 30-day SEC yield was 5.35%. 3
1 Unlike money market funds, which strive to maintain a stable $1.00 share
price, the share value of the fund will fluctuate in value.
2 Performance quoted is based on net asset value, represents past perfor mance,
and is not indicative of future results. Investment return and prin cipal value
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost. The fund's one-year total return as of
February 28, 1999, reflecting the 1.00% contingent deferred sales charge, was
3.20%.
3 The 30-day SEC 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.
On February 28, 1999, most of the fund's $140 million in net assets were
invested in U.S. government mortgage-backed securities, with the remainder
invested in U.S. Treasuries and a repurchase agreement. The fund main tained its
AAAf rating by Standard & Poor's Ratings Group, the highest quality rating
available for a mutual fund. 4
Thank you for participating in Federated Adjustable Rate U.S. Government
Fund, Inc. as a conservative way to pursue investment income. I ask that you
consider the advantages of adding to your account on a regular basis and
reinvesting your dividends. As always, we welcome your comments and ques
tions.
Sincerely,
[Graphic]
Richard B. Fisher
President
April 15, 1999
4 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.
[Graphic]
KATHY FOODY-MALUS
Vice President
Federated Investment Management Company
Investment Review
WHAT ARE YOUR COMMENTS ON THE FIXED-INCOME MARKET DURING THE FUND'S FISCAL YEAR?
During 1998, the "Goldilocks" U.S. economy continued to perform as adver
tised-not too hot and not too cold. The economic drag from weak foreign econ
omies impacted the manufacturing side but not the rest of the U.S. economy. Over
the last year, the U.S. Treasury market posted very strong performance versus
other fixed-income issues. The key factors driving the performance of U.S.
Treasuries were reductions in Treasury supply due to the first budget surplus in
close to 30 years, declining commodity prices, overseas turmoil, and heightened
liquidity premiums. The first half of the reporting period saw a continued
flattening of the yield curve between 1-year and 10-year U.S. Treasuries.
During this period, the yield spread between 1-year and 10-year U.S. Treasuries
declined from 23 basis points to 12 basis points. The turning point for
investors was the emerging market crisis in Russia and Latin Amer ica. As this
crisis unfolded, investors favored the most liquid U.S. Treasury securities
available and avoided all other fixed-income asset classes. At the peak of this
turmoil, yields on longer maturity Treasuries fell to levels not seen in over a
generation. For example, the yield on the 10-year U.S. Treasury reached a low of
4.16%.
During this time of turmoil, the Federal Reserve Board (the "Fed") eased the
Federal Funds Target Rate by 75 basis points over a 3-month time frame to
provide stability to the markets. As the markets stabilized, there was a par
tial reversal by investors out of U.S. Treasuries and into other fixed-income
securities. As the fiscal year ended, the yield spread between 1-year and 10-
year U.S. Treasuries increased from 12 to 43 basis points.
While the last 12 months have been trying times for investors in fixed-income
securities, investors in the adjustable rate sector are starting to benefit as
the new fiscal year begins.
HOW DID THIS VOLATILE ENVIRONMENT IMPACT THE PERFORMANCE OF THE ADJUSTABLE RATE
MORTGAGES ("ARMS") MARKET?
While investors in U.S. Treasuries cheered the events of 1998, the same was not
true of investors in ARMs. Investors in ARMs were faced with declining fixed
mortgage rates and the flattest yield curve since the late 1980s. This presented
an environment of historically fast prepayments and low liquidity. The
combination of low fixed mortgage rates and a relatively flat yield curve
created a significant refinancing incentive for existing ARMs homeowners and
limited new origination of ARMs. From 1997 to 1998, new origination of con
ventional ARMs declined by 23%.
Decline in new origination in the Government National Mortgage Association
("GNMA") sector was even more pronounced. Supply was constrained in early 1998
due to the announcement by the Federal Housing Administration ("FHA") that they
had reached their limit to guarantee GNMA ARMs for their fiscal year. This
announcement effectively eliminated trading in newly originated GNMA ARMs until
the start of the FHA's new fiscal year, October 1, 1998. The combination of
these factors, plus the global turmoil in the third quarter of 1998 and
liquidity constraints, combined to push spreads significantly wider.
HOW HAVE YOU STRUCTURED THE FUND'S PORTFOLIO TO HELP REDUCE EXPOSURE TO PRE
PAYMENT RISK?
The combination of low fixed mortgage rates combined with a flattening yield
curve over the last several years has created the perfect environment for fast
prepayments.
This environment has resulted in homeowners of adjustable rate mortgages
experiencing rate increases on their mortgages above where they could obtain a
fixed rate mortgage. Consequently, our goal is to reduce the prepayment risk by
using other securities in the overall portfolio structure. The strat egy of the
portfolio during this environment has been to maintain the minimum allocation
(65%) allowable by the fund's prospectus to the adjustable rate sector.
Allocation of the other 35% has been to securities that offer prepay ment
protection. This portion of the portfolio used a variety of fixed rate
short-duration securities throughout the fiscal year. The securities favored
included short-term U.S. Treasuries, short average life collateralized mort gage
obligations and newly originated 15-year mortgages with coupons of 6.00%-7.00%.
HOW DID FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. PERFORM FOR
SHAREHOLDERS IN TERMS OF TOTAL RETURN AND INCOME DURING THE REPORTING PERIOD?
The fund paid a consistent monthly dividend stream of $0.04 per share, total ing
$0.48 per share, over the 12-month reporting period from March 1, 1998 through
February 28, 1999. The fund's total return for the same period, based on net
asset value, was 4.20%. 1 This compares to a total return of 5.36% for the
Merrill Lynch 1-Year Treasury Note Index2 and 5.00% for the Merrill Lynch 2-Year
Treasury Note Index. 2 The Lipper Adjustable Rate Mortgage Funds Aver age
produced an average return of 4.00% for the same time period. 3
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, 1999, the fund's portfolio was primarily invested in the
following types of issues:
<TABLE>
<CAPTION>
PERCENTAGE OF
MATURITIES NET ASSETS
<S> <C> <C> Federal National Mortgage Association 12/1/10 to 5/1/36 32.91%
Federal Home Loan Mortgage Corporation 6/15/08 to 4/1/29 31.93% Government
National Mortgage Association 3/15/10 to 2/20/29 30.08% </TABLE>
WHAT ARE YOUR EXPECTATIONS FOR THE REMAINDER OF 1999?
From a fundamental standpoint, the ARMs sector shows signs of promise as the new
year begins. The recent steepening of the yield curve combined with higher fixed
mortgage rates should increase the attractiveness of ARMs as an alternative for
home buyers.
1 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 total return for the period, reflecting
the 1.00% contingent deferred sales charge, was 3.20%.
2 The Merrill Lynch 1-Year and 2-Year Treasury Note Indexes 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. These indexes are unmanaged, and invest ments cannot be made in an
index.
3 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.
Two Ways You May Seek to Invest for Success:
RESULTS OF AN $8,000 INVESTMENT
If you made an initial investment of $8,000 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, your account would have been worth
$11,285 on 2/28/99. You would have earned a 4.63% average annual total return
for the investment life span. 1
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 3/31/99, the fund's average annual 1-year, 5-year and since inception
(7/25/91) total returns were 3.28%, 4.89% and 4.72%, respectively. 1
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 2/28/99. 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 $8,000 in
the fund, assuming the reinvestment of capital gains and dividends, would have
grown to $11,285 on 2/28/99.
1 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% sales
charge. A contingent deferred sales charge of 1.00% would be applied on any
redemption less than four years from the purchase date. Data quoted represents
past performance and does not guarantee future results. Invest ment return and
principal value will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
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 $9,687.
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 $9,6871 by 2/28/99. You would have
earned an average annual total return of 4.66%.
A practical investment plan helps you pursue current income from U.S. govern
ment 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.
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 2/28/99. The
"y" axis is measured in increments of $2,000 ranging from $0 to $10,000 and
indicates that the ending value of a hypothetical initial investment of $1,000
and subsequent yearly investments of $1,000 in the fund for seven years,
assuming the reinvestment of capital gains and dividends, would have grown to
$9,687 on 2/28/99.
1 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 reg ularly over time
and buying shares at various prices, investors can pur chase 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 pur chases
through periods of low price levels.
Hypothetical Investor Profile-
Investing for Growth
Eight 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. Gov
ernment Fund, Inc. because it invests in government securities which tradi
tionally are some of the safest, most creditworthy securities issued in
America. 1
The Laughlins' account totaled $141,056 as of 2/28/99 for an average annual
total return of 4.63%. 2
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 2/28/99. The
"y" axis is measured in increments of $30,000 ranging from $0 to $150,000 and
indicates that the ending value of a hypothetical initial investment of $100,000
in the fund, assuming the reinvestment of capital gains and dividends, would
have grown to $141,056 on 2/28/99.
1 Fund shares are not guaranteed and their value will fluctuate with market
conditions.
2 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 A $10,000 INVESTMENT
The graph below illustrates the hypothetical investment of $10,000 1 in the Fed
erated Adjustable Rate U.S. Government Fund, Inc. (the "Fund") from July 25,
1991 (start of performance) to February 28, 1999, compared to the Lipper Adjust
able Rate Mortgage Funds Average ("LARMFA"), 2 the Merrill Lynch 1-Year Trea
sury Index ("ML1YRTI"),3 and the Merrill Lynch 2-Year Treasury Index
("ML2YRTI"). 3
<TABLE>
<CAPTION>
<S> <C>
Average Annual Total Return4 for
the Period Ended
February 28, 1999
1 Year 3.20%
5 Years 4.72%
Start of Performance (7/25/91) 4.69%
</TABLE>
The graphic presentation displayed here consists of a line graph. The
corresponding components of the line graph are listed in the upper left hand
corner. The Federated Adjustable Rate U.S. Government Fund, Inc. (the "Fund") is
represented by a solid line. The Lipper Adjustable Rate Mortgage Funds Average
("LARMFA") is represented by a dotted line; the Merrill Lynch 1-Year Treasury
Index ("ML1YRTI") is represented by a broken line; and the Merrill Lynch 2-Year
Treasury Index ("ML2YRTI") is represented by dashed line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund, the LARMFA, the ML1YRTI, and the ML2YRTI.
The "x" axis reflects computation periods from 7/25/91 (the Fund's start of
performance) to 2/28/99. The "y" axis reflects the cost of the investment,
beginning with $10,000 and going up to $16,000, in increments of $1,000. The
right margin reflects the ending value of the hypothetical investment in the
Fund as compared to the LARMFA, the ML1YRTI and the ML2YRTI. The ending values
were $14,167, $13,626, 14,850 and $15,744, respectively.
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.
1 Represents a hypothetical investment of $10,000 in the Fund. A 1.00% con
tingent deferred sales charge would be applied on any redemption less than four
years from the purchase date. The Fund's performance assumes the rein vestment
of all dividends and distributions. The LARMFA, ML1YRTI and ML2YRTI have been
adjusted to reflect reinvestment of dividends on securi ties in the indexes and
average.
2 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 indicated, 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.
3 The ML1YRTI and the ML2YRTI 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. These indexes are unmanaged.
4 Total returns quoted reflects the contingent deferred sales charge.
Portfolio of Investments
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM OBLIGATIONS-96.7%
$ 41,804,367 FEDERAL HOME LOAN MORTGAGE CORP. ARM-30.5%
6.792% - 7.500%, 4/1/2018 - 4/1/2029 $ 42,668,070
2,016,569 FEDERAL HOME LOAN MORTGAGE CORP. REMIC-1.4%
Series 1544-E, 6.250%, 6/15/2008 2,021,369
18,919,037 FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM-13.8%
5.936% - 7.013%, 7/1/2018 - 5/1/2036 19,245,588
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC-5.7%
2,969,100 Series 93-206E, 5.650%, 5/25/2017 2,955,412
5,000,000 Series 98-36PA, 6.250%, 7/18/2013 5,006,784
TOTAL 7,962,196
18,597,048 FEDERAL NATIONAL MORTGAGE ASSOCIATION-13.5%
6.000 - 12.250, 12/1/2010 - 11/1/2015 18,853,784
32,255,270 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM-23.4%
5.000% - 6.875%, 3/20/2017 - 2/20/2029 32,793,872
8,174,115 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-6.6%
11.000 - 12.000, 3/15/2010 - 7/15/2019 9,301,623
2,500,000 UNITED STATES TREASURY SECURITY-1.8%
4.000%, 10/31/2000 2,454,600
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $135,462,788) 135,301,102
REPURCHASE AGREEMENT-1.4% 1
1,960,000 ABN AMRO, Inc., 4.860%, dated 2/26/1999, due 3/1/1999 (at
amortized cost) 1,960,000
TOTAL INVESTMENTS (IDENTIFIED COST $137,422,788) 2 $ 137,261,102
</TABLE>
1 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
investments in the repurchase agreement is through participation in a joint
account with other Federated funds.
2 The cost of investments for federal tax purposes amounts to $137,422,788. The
net unrealized depreciation of investments on a federal tax basis amounts to
$161,686 which is comprised of $438,148 appreciation and $599,834 depreciation
at February 28, 1999.
Note: The categories of investments are shown as a percentage of net assets
($139,967,507) at February 28, 1999.
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
Statement of Assets and Liabilities
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and
tax cost $137,422,788) $ 137,261,102
Cash 3,011
Income receivable 2,282,151
Receivable for shares sold 1,077,395
TOTAL ASSETS 140,623,659
LIABILITIES:
Payable for shares redeemed $ 393,702
Income distribution payable 213,806
Payable for shareholder services fee 25,806
Accrued expenses 22,838
TOTAL LIABILITIES 656,152
Net assets for 14,850,336 shares outstanding $ 139,967,507
NET ASSETS CONSIST OF:
Paid in capital $ 182,781,621
Net unrealized depreciation of investments (161,686)
Accumulated net realized loss on investments (42,811,774)
Undistributed net investment income 159,346
TOTAL NET ASSETS $ 139,967,507
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER
SHARE:
Net Asset Value Per Share ($139,967,507 / 14,850,336 shares
outstanding) $9.43
Redemption Proceeds Per Share (99.00/100 of $9.43)1 $9.34
</TABLE>
1 See "What Do Shares Cost" in the Prospectus.
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 9,642,945
EXPENSES:
Investment advisory fee $ 955,395
Administrative personnel and services fee 125,000
Custodian fees 14,802
Transfer and dividend disbursing agent fees and expenses 88,289
Directors'/Trustees' fees 13,319
Auditing fees 17,292
Legal fees 3,738
Portfolio accounting fees 45,704
Distribution services fee 398,081
Shareholder services fee 398,081
Share registration costs 19,783
Printing and postage 33,039
Insurance premiums 3,497
Taxes 19,075
Miscellaneous 13,589
TOTAL EXPENSES 2,148,684
WAIVERS:
Waiver of investment advisory fee $ (119,907)
Waiver of distribution services fee (382,158)
Waiver of shareholder services fee (15,923)
TOTAL WAIVERS (517,988)
Net expenses 1,630,696
Net investment income 8,012,249
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (39,240)
Net change in unrealized depreciation of investments (1,414,222)
Net realized and unrealized loss on investments (1,453,462)
Change in net assets resulting from operations $ 6,558,787
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 8,012,249 $ 11,085,296
Net realized gain (loss) on investments transactions
($135,710 and $732,553, respectively, as computed for
federal tax purposes) (39,240) 732,553
Net change in unrealized depreciation of investments (1,414,222) (1,619,779)
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 6,558,787 10,198,070
NET EQUALIZATION CREDITS (DEBITS) - (47,779)
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (7,982,323) (11,003,484)
SHARE TRANSACTIONS:
Proceeds from sale of shares 3,063,993 5,903,553
Net asset value of shares issued to shareholders in payment
of distributions declared 5,059,352 6,981,358
Cost of shares redeemed (50,336,231) (52,875,114)
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS (42,212,886) (39,990,203)
Change in net assets (43,636,422) (40,843,396)
NET ASSETS:
Beginning of period 183,603,929 224,447,325
End of period (including undistributed net investment income
of $159,346 and $129,391, respectively) $ 139,967,507 $ 183,603,929
</TABLE>
See Notes which are an integral part of the Financial Statements
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.52 $ 9.56 $ 9.55 $ 9.46 $ 9.79
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.48 0.53 0.52 0.54 0.47
Net realized and unrealized gain (loss) on investments (0.09) (0.04) 0.03 0.08 (0.32)
TOTAL FROM INVESTMENT OPERATIONS 0.39 0.49 0.55 0.62 0.15
LESS DISTRIBUTIONS:
Distributions from net investment income (0.48) (0.53) (0.52) (0.53) (0.47)
Distributions in excess of net investment income 1 - - (0.02) - (0.01)
TOTAL DISTRIBUTIONS (0.48) (0.53) (0.54) (0.53) (0.48)
NET ASSET VALUE, END OF PERIOD $ 9.43 $ 9.52 $ 9.56 $ 9.55 $ 9.46
TOTAL RETURN 2 4.20% 5.25% 5.90% 6.77% 1.58%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.02% 1.10% 1.02% 1.02% 1.02%
Net investment income 5.03% 5.53% 5.42% 5.67% 4.76%
Expense waiver/reimbursement 3 0.33% 0.28% 0.42% 0.34% 0.30%
SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $139,968 $183,604 $224,447 $304,191 $419,095
Portfolio turnover 55% 67% 108% 144% 170%
</TABLE>
1 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.
2 Based on net asset value, which does not reflect the sales charge or con
tingent deferred sales charge, if applicable.
3 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
Notes to Financial Statements
FEBRUARY 28, 1999
ORGANIZATION
Federated Adjustable Rate U.S. Government Fund, Inc. (the "Fund") is regis tered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The investment objec tive
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.
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 ser vice.
However, short-term securities with remaining maturities of 60 days or less at
the time of purchase may be valued at amortized cost, which approxi mates fair
market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take posses sion,
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 repur chase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other rec
ognized financial institutions, such as broker/dealers, which are deemed by the
Fund's adviser to be creditworthy pursuant to the guidelines and/or stan dards
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, 1999, the Fund, for federal tax purposes, had a capital loss
carryforward of $42,636,824, 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 carryfor ward will expire
as follows:
EXPIRATION
EXPIRATION YEAR AMOUNT
2001 $ 5,114,335
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 of $50,259 as of August 31, 1998.
INCREASE (DECREASE)
UNDISTRIBUTED
NET INVESTMENT
PAID IN 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 posi
tions 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 secu
rities 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 rev enues reported in
the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At February 28, 1999, 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 1999 1998
<S> <C> <C>
Shares sold 323,500 617,746
Shares issued to shareholders in payment of distributions
declared 534,199 731,042
Shares redeemed (5,297,637) (5,527,238)
NET CHANGE RESULTING FROM SHARE TRANSACTIONS (4,439,938) (4,178,450)
</TABLE>
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 Administra tive 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 Feder ated
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 Share holder
Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of aver age daily
net assets of the Fund shares for the period. The fee paid to FSSC is used to
finance certain services for shareholders and to maintain share holder accounts.
FSSC may voluntarily choose to waive any portion of its fee. FSSC 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, FSSC, serves as transfer and dividend disburs ing
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.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended February 28, 1999, were as follows:
Purchases $ 84,664,355
Sales $ 117,890,423
YEAR 2000 (UNAUDITED)
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 mea sures 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.
SUBSEQUENT EVENT
Effective March 31, 1999, Federated Advisers, Adviser to the Fund, merged into
Federated Investment Management Company.
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, includ ing
the portfolio of investments, of Federated Adjustable Rate U.S. Government Fund,
Inc. as of February 28, 1999, and the related statement of operations for the
year then ended, the statement of changes in net assets for the years ended
February 28, 1999 and 1998, and the financial highlights for the periods
presented. These financial statements and financial high lights 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 stan
dards. 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 finan cial
statements. Our procedures included confirmation of the securities owned as of
February 28, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant esti mates made by
management, as well as evaluating the overall financial state ment 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 Adjust
able Rate U.S. Government Fund, Inc. as of February 28, 1999, 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
Boston, Massachusetts
April 9, 1999
Directors
JOHN F. DONAHUE
THOMAS G. BIGLEY
JOHN T. CONROY, JR.
NICHOLAS P. CONSTANTAKIS
WILLIAM J. COPELAND
JOHN F. CUNNINGHAM
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 and Secretary
RICHARD J. THOMAS
Treasurer
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 govern
ment agency. Investment in mutual funds involves investment risk, including the
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 con
cerning its objective and policies, management fees, expenses and other
information.
AS OF FEBRUARY 28, 1999
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FEDERATED
WORLD-CLASS INVESTMENT MANAGER
ANNUAL REPORT
Federated Adjustable Rate
U.S. Government Fund, Inc.
Established 1991
8TH ANNUAL REPORT
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FEDERATED
Federated Adjustable Rate U.S. Government Fund, Inc.
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 314072109
G00588-01 (4/99)
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