[Graphic - Photograph]
Richard B. Fisher
President
Federated Adjustable Rate
U.S. Government Fund, Inc.
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 ninth Semi-Annual Report. This fund is designed for
investors seeking a higher level of income than money market funds provide, 1
and can help to protect against a significant loss of principal during periods
of rising interest rates.
The fund's portfolio focuses on a mix of short-maturity, adjustable rate
mortgage-backed securities issued by U.S. government agencies, including the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
These securities are guaranteed as to principal by the
U.S. government, its agencies or instrumentalities. 2
As of August 31, 1999, the fund's net assets totaled $122.3 million, serving
over 2,693 shareholders. Currently, the average coupon of the fund's holdings is
6.85%. The fund's portfolio has continued to be rated AAAf by Standard & Poor's,
the highest quality rating available for a mutual fund. 3 As of September 30,
1999, the fund enjoyed an overall four-star Morningstar Rating(TM) out of 1,585
Taxable Bond funds.4
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 Fund shares are not guaranteed.
3 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.
4 Morningstar proprietary ratings reflect historical risk-adjusted performance
as of September 30, 1999. They are subject to change every month. Past
performance is no guarantee of future results. Ratings are calculated from the
funds' three-, five- and ten-year average annual returns in excess of 90-day
Treasury bill returns with appropriate fee adjustments, and a risk factor that
reflects fund performance below 90-day Treasury bill returns. The fund received
four and four stars for the three- and five-year periods and was rated among
1,585 and 1,153 funds, respectively. The top ten percent of funds in a broad
asset class receive 5 stars, the next 22.5% receive 4 stars, the next 35%
receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1
star.
This report covers the first half of the fund's fiscal year, which is the
six-month period from March 1, 1999 through August 31, 1999. It begins with an
interview with the fund's portfolio manager, Kathy Foody-Malus, Vice President
of Federated Investment Management Company. Following her discussion covering
the economic influences on the U.S. bond market, the fund's performance, her
strategies and outlook 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.
In the last six months, the actions of the Federal Reserve Board (the "Fed")
have caused all bond prices to decline, as Fed Chairman Alan Greenspan increased
interest rates based on his fears of inflation threatening the U.S. The fund's
monthly income distributions totaled $0.22 per share during the reporting
period. The share price performance was consistent with the fund's objective of
minimizing declines in rising rate environments. The share price declined by a
modest $0.07 over the six-month reporting period, much less than longer maturity
bond funds have experienced. The fund's total return (net of expenses)
performance for the six-month reporting period ended August 31, 1999 was 1.56%,
based on net asset value. 5
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 monthly dividends. As always, we welcome your comments and
questions.
Sincerely,
[Graphic - Signature]
Richard B. Fisher
President
October 15, 1999
5 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 six-month total return, reflecting
the 1.00% contingent deferred sales charge, was 0.57%.
[Graphic - Photograph]
Kathy Foody-Malus
Vice President
Federated Investment Management Company
Investment Review
THE U.S. ECONOMY'S STRENGTH HAS PROVED TO BE A CHALLENGE FOR THE FED. DURING THE
SEMI-ANNUAL REPORTING PERIOD, THE FED HAS INCREASED INTEREST RATES TWICE. WHAT
ARE YOUR COMMENTS ON THE FED'S ACTIONS AND THE EFFECTS ON THE FIXED-INCOME
MARKET OVER THIS PERIOD?
The U.S. economy has continued to perform exceptionally well in 1999. The
ongoing economic expansion is moving into a near-record ninth year. The
combination of an unemployment rate hovering around lows not seen since the
early 1970s, inflation remaining subdued, and real output expanding vigorously
has been the main contributor. Two of the major threats faced by the economy in
late 1998-economic downturns in many foreign nations and turmoil in financial
markets around the world-dissipated during the first half of 1999. The Fed was
concerned that as the economic activity strengthened abroad, the firming of
commodity and other prices might create a less favorable inflationary
environment. To gain some greater assurance that the benign inflation
performance of the economy would continue, the Fed decided at the June and
August 1999 meetings to reverse portions of the easings put into place last fall
when global financial markets were disrupted. The overnight Fed Funds Target
Rate increased twice, for a total of 0.50%, to end the reporting period at
5.25%.
AS A TURNABOUT FROM LAST YEAR'S FED POLICY OF "EASING," OR LOWERING RATES, THE
CURRENT RISING INTEREST RATE ENVIRONMENT HAS ELIMINATED THE INCENTIVE FOR
CONSUMERS TO REFINANCE AND PREPAY ADJUSTABLE-RATE MORTGAGES. HOW HAVE YOU
STRUCTURED THE PORTFOLIO IN THIS ENVIRONMENT?
For the first time in close to five years, the refinancing incentive, as
measured by the ability of an adjustable-rate borrower to convert to a
fixed-rate mortgage, is negative. The adjustable-rate market is currently at the
lowest level of overall refinancing pressure since 1994. Compounding the
decreasing refinancing pressure is the usual slowing of prepayments as the peak
housing season has passed and winter approaches.
The slowing of prepayments has been accompanied by the widening of spreads in
the adjustable-rate sector. The widening of spreads was due to several factors:
Year 2000 concerns, widening swap spreads, and anticipated heavy supply in
adjustable-rate mortgages. The increased supply of adjustable-rate mortgages has
come in the form of GNMAs. The important point to remember is that the net
issuance of GNMA adjustable-rate mortgages and of most sectors of the
adjustable-rate mortgage market is still negative. The combination of a slowdown
in prepayments and increased short-term issuance is unlikely to change this
situation.
The fund's portfolio, during the semi-annual reporting period, increased its
allocation to the adjustable-rate market as opportunities arose. Sectors of the
adjustable-rate market favored were 11th District Cost of Funds and GNMA
adjustable-rate mortgages. The underperformance of both of these sectors versus
Treasuries offered an opportunity to increase exposure to these sectors. The
technical factors of bank demand and increased sponsorship caused
adjustable-rate mortgages to perform well versus other mortgage assets as the
reporting period ended.
HOW DID FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. PERFORM FOR
SHAREHOLDERS IN TERMS OF TOTAL RETURN AND INCOME DURING THE FIRST SIX MONTHS OF
ITS FISCAL YEAR?
The fund paid a consistent monthly dividend stream of $.036 per share, which
totaled $0.22 per share over the six-month period from March 1, 1999 through
August 31, 1999. For the six-month period ended August 31, 1999, the fund's
total return (net of expenses), based on net asset value, was 1.56%. 1 This
compares to a total return of 2.39% for the Merrill Lynch 1-Year Treasury Index,
1.47% for the Merrill Lynch 2-Year Treasury Index, and 2.11% for the Lipper ARMs
Fund Average.2
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% contingent deferred sales charge, was 0.57%.
2 The Merrill Lynch 1-Year and 2-Year Treasury 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 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. Lipper figures do not take sales charges
into account.
HOW WERE THE ASSETS OF THE FUND ALLOCATED AMONG DIFFERENT TYPES OF
MORTGAGE-BACKED SECURITIES AT THE END OF THE REPORTING PERIOD?
As of August 31, 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 Home Loan Mortgage Corporation 04/01/2018-
04/01/2029 31.42%
Government National Mortgage Association 03/15/2013-
05/20/2029 30.69%
Federal National Mortgage Association 12/01/2010-
05/01/2036 31.53%
</TABLE>
WHAT IMPACT WILL THE DECISION BY THE FED AT THE OCTOBER 5, 1999 FEDERAL OPEN
MARKET COMMITTEE ("FOMC") MEETING TO MOVE TO A "TIGHTENING BIAS" HAVE ON THE
ADJUSTABLE-RATE MARKET?
The announcement by the Fed after the October 5, 1999 FOMC meeting pointed out
that Fed governors were concerned about highter inflation in the U.S. Although a
tightening bias signals that a new rate hike is more likely than an easing, the
important point was that the bias does not imply a commitment to raise rates in
the months ahead. The Fed stated that they would evaluate upcoming information
on the economy and conditions in the equity and bond markets. The Fed
announcement, recovery in Europe and Asia, a strong Japanese yen versus the U.S.
dollar, and firm oil prices have kept investors on edge. However, the
counterbalance of recent difficulties in the stock market is beginning to raise
the possibility of eventual slowing in domestic demand. The bottom line is that
investors are on the defensive near term as economic data will ultimately
determine the direction of rates.
Given this environment, investors are being rewarded for favoring fixed-income
securities that trade at some spread over Treasuries. The adjustable-rate sector
looks attractive for investors who are looking for short duration assets with a
generous yield advantage over comparable Treasuries.
Two Ways You May Seek to Invest for Success:
INITIAL INVESTMENT
IF YOU MADE AN INITIAL INVESTMENT OF $9,000 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 $12,947 ON
8/31/99. YOU WOULD HAVE EARNED A 4.59% 1 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 9/30/99, the fund's average annual one-year, five-year, and since-
inception (7/25/91) total returns were 2.60%, 5.27%, and 4.61%, respectively. 1
INITIAL INVESTMENT OF $9,000
[Graphic representation omitted. See Appendix A.1.]
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%
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.
ONE STEP AT A TIME
$1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR FOR
EIGHT YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $10,883.
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 $9,000, but your
account would have reached a total value of $10,883 1 by 8/31/99. You would have
earned an average annual total return of 4.59%.
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 can work 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.
YEARLY INVESTMENTS OF $1,000
[Graphic representation omitted. See Appendix A.2.]
1 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.
Portfolio of Investments
AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM OBLIGATIONS- 95.7%
FEDERAL HOME LOAN MORTGAGE CORP. ARM-30.3%
$ 36,112,123 6.683% - 7.011%, 4/1/2018 - 4/1/2029 $ 37,106,655
FEDERAL HOME LOAN MORTGAGE CORP. REMIC-1.1%
1,341,916 Series 1544-E, 6.250%, 6/15/2008 1,341,580
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM-18.2%
22,099,163 5.740% - 6.727%, 7/1/2018 - 5/1/2036 22,228,209
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC-4.1%
5,000,000 Series 98-36PA, 6.250%, 7/18/2013 4,974,879
FEDERAL NATIONAL MORTGAGE ASSOCIATION-11.3%
13,886,386 1 6.500% - 12.250%, 12/1/2010 - 6/1/2029 13,901,144
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM-
24.5%
29,940,233 5.000% - 6.625%, 3/20/2017 - 5/20/2029 30,017,087
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-6.2%
6,656,820 11.000% - 12.000%, 3/15/2010 - 5/15/2020 7,540,452
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $117,909,891) 117,110,006
REPURCHASE AGREEMENTS-6.7% 2
4,710,000 3 Morgan Stanley Group, Inc., 5.180%, dated 8/16/1999, due 9/20/1999 4,710,000
3,535,000 Salomon Brothers, Inc., 5.500%, dated 8/31/1999, due 9/1/1999 3,535,000
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 8,245,000
TOTAL INVESTMENTS (IDENTIFIED COST $126,154,891) 4
$ 125,355,006
</TABLE>
1 Subject to dollar roll transactions.
2 The repurchase agreements are 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 agreements are through participation in joint
accounts with other Federated funds.
3 Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase agreement
within seven days if the credit worthiness of the issuer is downgraded.
4 The cost of investments for federal tax purposes amounts to $126,154,891. The
net unrealized depreciation of investments on a federal tax basis amounts to
$799,885 which is comprised of $330,370 appreciation and $1,130,255 depreciation
at August 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($122,365,722) at August 31, 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
AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost
$126,154,891) $ 125,355,006
Cash 3,834
Income receivable 1,968,060
Receivable for investments sold 2,449,408
Receivable for shares sold 39,991
TOTAL ASSETS 129,816,299
LIABILITIES:
Payable for investments purchased $ 2,538,802
Payable for shares redeemed 104,847
Income distribution payable 191,396
Payable for dollar roll transactions 4,581,401
Accrued expenses 34,131
TOTAL LIABILITIES 7,450,577
Net assets for 13,075,838 shares outstanding $ 122,365,722 NET ASSETS CONSIST
OF: Paid in capital $ 166,023,154 Net unrealized depreciation of investments
(799,885) Accumulated net realized loss on investments (43,013,886)
Undistributed net investment income 156,339 TOTAL NET ASSETS $ 122,365,722 NET
ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: Net Asset Value
Per Share ($122,365,722 / 13,075,838 shares outstanding) $9.36 </TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
SIX MONTHS ENDED AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar roll expense of $26,431) $ 3,627,798
EXPENSES:
Investment advisory fee $ 393,049
Administrative personnel and services fee 63,014
Custodian fees 11,746
Transfer and dividend disbursing agent fees and expenses 77,938
Directors'/Trustees' fees 7,448
Auditing fees 8,684
Legal fees 1,882
Portfolio accounting fees 30,156
Distribution services fee 163,771
Shareholder services fee 163,771
Share registration costs 8,738
Printing and postage 17,675
Insurance premiums 1,217
Taxes 5,071
Miscellaneous 7,520
TOTAL EXPENSES 961,680
WAIVERS:
Waiver of investment advisory fee $ (126,844)
Waiver of distribution services fee (157,220)
Waiver of shareholder services fee (6,551)
TOTAL WAIVERS (290,615)
Net expenses 671,065
Net investment income 2,956,733
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (202,112)
Net change in unrealized depreciation of investments (638,199)
Net realized and unrealized loss on investments (840,311)
Change in net assets resulting from operations $ 2,116,422
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(unaudited) YEAR ENDED
AUGUST 31, FEBRUARY 28,
1999 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 2,956,733 $ 8,012,249
Net realized loss on investments ($(202,112) and $135,710, respectively, as computed
for federal tax purposes) (202,112) (39,240)
Net change in unrealized depreciation of investments (638,199) (1,414,222)
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 2,116,422 6,558,787
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (2,959,740) (7,982,323)
SHARE TRANSACTIONS:
Proceeds from sale of shares 3,510,318 3,063,993
Net asset value of shares issued to shareholders in payment of distributions declared
1,824,405 5,059,352
Cost of shares redeemed (22,093,190) (50,336,231)
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS (16,758,467) (42,212,886)
Change in net assets (17,601,785) (43,636,422)
NET ASSETS:
Beginning of period 139,967,507 183,603,929
End of period (including undistributed net investment income of $156,339 and $159,346,
respectively) $ 122,365,722 $ 139,967,507
</TABLE>
See Notes which are an integral part of the Financial Statements
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(unaudited)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1999 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.43 $ 9.52 $ 9.56 $ 9.55 $ 9.46 $ 9.79
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.22 0.48 0.53 0.52 0.54 0.47
Net realized and
unrealized gain (loss)
on investments (0.07) (0.09) (0.04) 0.03 0.08 (0.32)
TOTAL FROM
INVESTMENT OPERATIONS 0.15 0.39 0.49 0.55 0.62 0.15
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.22) (0.48) (0.53) (0.52) (0.53) (0.47)
Distributions in excess of
net investment income 1 - - - (0.02) - (0.01)
TOTAL DISTRIBUTIONS (0.22) (0.48) (0.53) (0.54) (0.53) (0.48)
NET ASSET VALUE, END OF
PERIOD $ 9.36 $ 9.43 $ 9.52 $ 9.56 $ 9.55 $ 9.46
TOTAL RETURN 2 1.56% 4.20% 5.25% 5.90% 6.77% 1.58%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 3 1.46% 4 1.35% 1.38% 1.44% 1.36% 1.32%
Net investment income 3 4.06% 4 4.70% 5.25% 5.00% 5.33% 4.46%
Expenses (after waivers
and reimbursements) 1.02% 4 1.02% 1.10% 1.02% 1.02% 1.02%
Net investment income
(after waivers
and reimbursements) 4.50% 4 5.03% 5.53% 5.42% 5.67% 4.76%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $122,366 $139,968 $183,604 $224,447 $304,191 $419,095
Portfolio turnover 33% 55% 67% 108% 144% 170%
</TABLE>
1 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.
2 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
3 During the period, certain fees were voluntarily waived and reimbursed. If
such voluntary waivers and reimbursements had not occurred, the ratios would
have been as indicated.
4 Computed on an annualized basis.
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
AUGUST 31, 1999 (UNAUDITED)
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.
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, 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 carryforward will expire as
follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2001 $ 5,114,335
2002 12,916,149
2003 21,867,393
2004 2,738,947
</TABLE>
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.
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.
CAPITAL STOCK
At August 31, 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>
SIX MONTHS
ENDED YEAR ENDED
AUGUST 31, FEBRUARY 28,
1999 1999
<S> <C> <C>
Shares sold 372,434 323,500
Shares issued to shareholders in payment of distributions declared 193,878 534,199
Shares redeemed (2,340,810) (5,297,637)
NET CHANGE RESULTING FROM SHARE TRANSACTIONS (1,774,498) (4,439,938)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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 Fund
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 Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average 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 shareholder 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 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.
INTERFUND TRANSACTIONS
During the period ended August 31, 1999, the Trust engaged in sales transactions
with funds that have a common investment adviser (or affiliated advisers),
common Directors/Trustees, and/or common officers. These sales transactions were
made at current market value pursuant to Rule 17a-7 under the Act amounting to
$2,552,532.
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
period ended August 31, 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $ 42,551,900
Sales $ 44,057,456
</TABLE>
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.
Directors
JOHN F. DONAHUE
THOMAS G. BIGLEY
JOHN T. CONROY, JR.
NICHOLAS P. CONSTANTAKIS
JOHN F. CUNNINGHAM
J. CHRISTOPHER DONAHUE
LAWRENCE D. ELLIS, M.D.
PETER E. MADDEN
CHARLES F. MANSFIELD, JR.
JOHN E. MURRAY, JR., J.D., S.J.D.
MARJORIE P. SMUTS
JOHN S. WALSH
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
TODD A. ABRAHAM
Vice President
RICHARD J. THOMAS
Treasurer
C. GRANT ANDERSON
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 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 concerning
its objective and policies, management fees, expenses, and other information.
SEMI-ANNUAL REPORT AS OF AUGUST 31, 1999
[Graphic - Logo]
Federated
World-Class Investment Manager
Federated Adjustable Rate U.S. Government Fund, Inc.
Established 1991
9TH SEMI-ANNUAL REPORT
[Graphic - Logo]
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
2091401 (10/99)
[Graphic - Recycle Logo]
APPENDIX
A.1. The graphic presentation here displayed consists of a 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 7/25/1991 to 8/31/1999.
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 $9,000
in the fund's shares, assuming the reinvestment of capital gains and dividends,
would have grown to $12,947 on 8/31/1999.
A.2. The graphic presentation here displayed consists of a 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 7/25/1991 to 8/31/1999.
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 initial investment of $1,000
and subsequent yearly investments of $1,000 over 8 years in the fund's shares,
assuming the reinvestment of capital gains and dividends, would have grown to
$10,883 on 8/31/1999.
