-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EwRjqAGWhpdcDDuUjoCuffe50M9WbpDmdQ1Cjbp/5UdtChCJq3U4cp5B8F39uhJw 2Zet04pAxsOTAqwiMuqQ9g== 0000875267-96-000006.txt : 19960429 0000875267-96-000006.hdr.sgml : 19960429 ACCESSION NUMBER: 0000875267-96-000006 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960426 EFFECTIVENESS DATE: 19960426 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED ADJUSTABLE RATE U S GOVERNMENT FUND INC CENTRAL INDEX KEY: 0000875267 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 251659310 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-41004 FILM NUMBER: 96551220 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06307 FILM NUMBER: 96551221 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWER CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122888127 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TOWER CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 FORMER COMPANY: FORMER CONFORMED NAME: FORTRESS ADJUSTABLE RATE U S GOVERNMENT FUND INC DATE OF NAME CHANGE: 19920703 485BPOS 1 1933 Act File No. 33-41004 1940 Act File No. 811-6307 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X Pre-Effective Amendment No. ............ Post-Effective Amendment No. 10 ........... X -- - and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X Amendment No. 8 ........................... X -- - FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. (formerly, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.) Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779 (Address of Principal Executive Offices) (412) 288-1900 (Registrant's Telephone Number) John W. McGonigle, Esquire, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779 (Name and Address of Agent for Service) It is proposed that this filing will become effective: immediately upon filing pursuant to paragraph (b) X on April 30, 1996 pursuant to paragraph (b) 60 days after filing pursuant to paragraph (a) (i) on pursuant to paragraph (a) (i). 75 days after filing pursuant to paragraph (a)(ii) on pursuant to paragraph (a)(ii) of Rule 485. ----------------- If appropriate, check the following box: This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Registrant has filed with the Securities and Exchange Commission a declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940, and: filed the Notice required by that Rule on ; or ---------- intends to file the Notice required by that Rule on or about ; or ------------ X during the most recent fiscal year did not sell any securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to Rule 24f-2(b)(2), need not file the Notice. Copy to: Matthew G. Maloney, Esquire Dickstein, Shapiro & Morin 2101 L Street, N.W. Washington, D.C. 20037 CROSS REFERENCE SHEET This Amendment to the Registration Statement of FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. is comprised of the following: PART A. INFORMATION REQUIRED IN A PROSPECTUS. Prospectus Heading (Rule 404(c) Cross Reference) Item 1. Cover Page...............Cover Page. Item 2. Synopsis.................Summary of Fund Expenses. Item 3. Condensed Financial Information.............Financial Highlights; Performance Information; Financial Statements. Item 4. General Description of Registrant..............General Information; Investment Information; Investment Objective; Investment Policies; Investment Limitations. Item 5. Management of the Fund...Fund Information; Management of the Fund; Distribution of Fund Shares; Administration of the Fund. Item 6. Capital Stock and Other Securities..............Dividends and Distributions; Shareholder Information; Voting Rights; Tax Information; Federal Income Tax; State and Local Taxes. Item 7. Purchase of Securities Being Offered..................Net Asset Value; Investing in the Fund; Share Purchases; Minimum Investment Required; What Shares Cost; Systematic Investment Program; Exchange Privilege; Certificates and Confirmations; Retirement Plans; Exchange Privilege. Item 8. Redemption or Repurchase.Redeeming Shares; Through a Financial Institution; Directly by Mail; Contingent Deferred Sales Charge; Systematic Withdrawal Program; Accounts with Low Balances. Item 9. Legal Proceedings........None. PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION. Item 10. Cover Page...............Cover Page. Item 11. Table of Contents........Table of Contents. Item 12. General Information and History.................General Information about the Fund. Item 13. Investment Objectives and Policies................Investment Objective and Policies; Types of Investments; Investment Limitations. Item 14. Management of the Fund...Federated Adjustable Rate U.S. Government Fund, Inc. Management. Item 15. Control Persons and Principal Holders of Securities....Fund Ownership; Directors' Compensation; Director Liability. Item 16. Investment Advisory and Other Services.................Investment Advisory Services; Administrative Services. Item 17. Brokerage Allocation.....Brokerage Transactions. Item 18. Capital Stock and Other Securities..............Not Applicable. Item 19. Purchase, Redemption and Pricing of Securities Being Offered.................Purchasing Shares; Determining Net Asset Value; Redeeming Shares; Exchange Privilege. Item 20. Tax Status...............Tax Status. Item 21. Underwriters.............Not applicable. Item 22. Calculation of Performance Data....................Total Return; Yield; Performance Comparisons. Item 23. Financial Statements.....Filed in Part A. FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. (FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.) PROSPECTUS Federated Adjustable Rate U.S. Government, Inc. (the "Fund") is an open-end, diversified management investment company (a mutual fund) that seeks to provide current income consistent with lower volatility of principal by investing primarily in a professionally managed, diversified portfolio of adjustable and floating rate mortgage securities which are issued or guaranteed by the U.S. government, its agencies or instrumentalities. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the information you should read and know before you invest in the Fund. Keep this prospectus for future reference. The Fund has also filed a Statement of Additional Information dated April 30, 1996, with the Securities and Exchange Commission. The information contained in the Statement of Additional Information is incorporated by reference into this prospectus. You may request a copy of the Statement of Additional Information or a paper copy of this prospectus, if you have received your prospectus electronically, free of charge by calling 1-800-235-4669. To obtain other information, or make inquiries about the Fund, contact the Fund at the address listed in the back of this prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated April 30, 1996 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Summary of Fund Expenses.......................................................1 Financial Highlights...........................................................2 General Information............................................................3 Investment Information.........................................................3 Investment Objectives........................................................3 Investment Policies..........................................................3 Investment Limitations.......................................................8 Net Asset Value................................................................9 Investing in the Fund..........................................................9 Share Purchases..............................................................9 Minimum Investment Required.................................................10 What Shares Cost............................................................10 Systematic Investment Program...............................................10 Exchange Privileges.........................................................11 Certificates and Confirmations..............................................11 Dividends and Distributions.................................................11 Retirement Plans............................................................11 Redeeming Shares..............................................................12 Through a Financial Institution.............................................12 Contingent Deferred Sales Charge............................................12 Systematic Withdrawal Program...............................................13 Accounts with Low Balances..................................................14 Fund Information..............................................................14 Management of the Fund......................................................14 Distribution of Fund Shares.................................................15 Administration of the Fund..................................................16 Shareholder Information.......................................................17 Voting Rights...............................................................17 Tax Information...............................................................18 Federal Income Tax..........................................................18 State and Local Taxes.......................................................18 Performance Information.......................................................18 Addresses.....................................................................19 - -------------------------------------------------------------------------------- SUMMARY OF FUND EXPENSES FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. (FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.) SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................ None Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)..................... None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable)(1)..................................................................... 1.00% Redemption Fee (as a percentage of amount redeemed, if applicable)........................................... None Exchange Fee................................................................................................. None ANNUAL OPERATING EXPENSES (As a percentage of average net assets) Management Fee (after waiver)(2)............................................................................. 0.51% 12b-1 Fee (after waiver)(3).................................................................................. 0.01% Total Other Expenses......................................................................................... 0.50% Shareholder Services Fee (after waiver)(4).................................................... 0.24% Total Operating Expenses (5)........................................................................ 1.02%
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the original purchase price or the net asset value of shares redeemed within four years of their purchase date. For a more complete description, see "Contingent Deferred Sales Charge." (2) The management fee has been reduced to reflect the voluntary waiver of a portion of the management fee. The adviser can terminate this voluntary waiver at any time at its sole discretion. The maximum management fee is 0.60%. (3) The maximum 12b-1 fee is 0.25%. (4) The maximum shareholder services fee is 0.25%. (5) The total operating expenses would have been 1.36% absent the voluntary waivers of portions of the management fee, the 12b-1 fee and the shareholder services fee. The purpose of this table is to assist an investor in understanding the various costs and expenses that a shareholder of the Fund will bear, either directly or indirectly. For more complete descriptions of the various costs and expenses, see "Investing in the Fund," "Redeeming Shares" and "Fund Information." Wire-transferred redemptions of less than $5,000 may be subject to additional fees. Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted under the rules of the National Association of Securities Dealers, Inc.
EXAMPLE 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period.................................................................. $21 $44 $56 $125 You would pay the following expenses on the same investment, assuming no redemption................................................................... $10 $32 $56 $125
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. (FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.) (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following table has been audited by Deloitte & Touche LLP, the Fund's independent public accountants. Their report, dated April 18, 1996, on the Fund's financial statements for the year ended February 29, 1996, and on the following table for the periods presented, is included in the Annual Report, which is herein incorporated by reference. This table should be read in conjunction with the Fund's financial statements and notes thereto, which may be obtained free of charge.
YEAR ENDED FEBRUARY 28 OR 29, 1996 1995 1994 1993 1992(A) NET ASSET VALUE, BEGINNING OF PERIOD $ 9.46 $ 9.79 $ 9.90 $ 9.98 $ 10.00 - ------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS - ------------------------------------------------------------------ Net investment income 0.54 0.47 0.43 0.53 0.47 - ------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments 0.08 (0.32) (0.11) (0.08) (0.06) - ------------------------------------------------------------------ --------- --------- --------- --------- ----------- Total from investment operations 0.62 0.15 0.32 0.45 0.41 - ------------------------------------------------------------------ --------- --------- --------- --------- ----------- LESS DISTRIBUTIONS - ------------------------------------------------------------------ Distributions from net investment income (0.53) (0.47) (0.43) (0.53) (0.42) - ------------------------------------------------------------------ Distributions in excess of net investment income (b) -- (0.01) -- -- (0.01) - ------------------------------------------------------------------ --------- --------- --------- --------- ----------- Total distributions (0.53) (0.48) (0.43) (0.53) (0.43) - ------------------------------------------------------------------ --------- --------- --------- --------- ----------- NET ASSET VALUE, END OF PERIOD $ 9.55 $ 9.46 $ 9.79 $ 9.90 $ 9.98 - ------------------------------------------------------------------ --------- --------- --------- --------- ----------- TOTAL RETURN (C) 6.77% 1.58% 3.27% 4.58% 4.14% - ------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS - ------------------------------------------------------------------ Expenses 1.02% 1.02% 1.02% 1.01% 0.63%* - ------------------------------------------------------------------ Net investment income 5.67% 4.76% 4.38% 5.29% 6.79%* - ------------------------------------------------------------------ Expense waiver/reimbursement (d) 0.34% 0.30% 0.24% 0.01% 0.37%* - ------------------------------------------------------------------ SUPPLEMENTAL DATA - ------------------------------------------------------------------ Net assets, end of period (000 omitted) $304,191 $419,095 $798,213 $1,136,198 $965,289 - ------------------------------------------------------------------ Portfolio turnover 144% 170% 40% 56% 22 % - ------------------------------------------------------------------
* Computed on an annualized basis. (a) Reflects operations for the period from July 25, 1991 (date of initial public investment) to February 29, 1992. (b) Distributions in excess of net investment income were the result of certain book and tax timing differences. These distributions do not represent a return of capital for federal income tax purposes. (c) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (d) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. Further information about the Fund's performance is contained in the Fund's annual report for the fiscal year ended February 29, 1996, which can be obtained free of charge. - -------------------------------------------------------------------------------- GENERAL INFORMATION The Fund was incorporated under the laws of the State of Maryland on March 20, 1991. The Fund is designed primarily for individuals seeking current income consistent with lower volatility of principal through a professionally managed, diversified portfolio of adjustable and floating rate mortgage securities which are issued or guaranteed by the U.S. government, its agencies or instrumentalities. Volatility of principal is a measure of the degree to which the Fund's net asset value fluctuates. A fund that invests primarily in adjustable rate securities would tend to have a lower degree of volatility in its net asset value than a fund that invests primarily in fixed-rate securities. This is because the value of adjustable rate securities does not fluctuate as much as the value of fixed-rate securities when interest rates rise or fall. By investing primarily in mortgage securities whose interest rates adjust periodically, the Fund will attempt to maintain a net asset value that would be less volatile than that of a fund which invested primarily in fixed-rate mortgage securities. A minimum initial investment of $1,500 is required, except for an IRA account, which requires a $50 minimum initial investment. The minimum subsequent investment is $100, except for an IRA account, which requires a minimum subsequent investment of $50. Fund shares are sold and redeemed at net asset value. However, a contingent deferred sales charge is imposed on shares, other than shares purchased through reinvestment of dividends, which are redeemed within one to four years of their purchase dates. - -------------------------------------------------------------------------------- INVESTMENT INFORMATION INVESTMENT OBJECTIVE 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. The investment objective cannot be changed without approval of shareholders. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the investment policies described in this prospectus. INVESTMENT POLICIES The Fund's assets will be managed so that the Fund is a permissible investment for federal credit unions under the Federal Credit Union Act and rules and regulations established by the National Credit Union Administration (the "NCUA"). To the extent that any investment or investment practice under the Fund's investment policies listed below are not permissible for federal credit unions, the Fund shall refrain from purchasing such investment or engaging in such practices. The Fund will notify shareholders 60 days before making any change to this policy. The investment policies described below cannot be changed without shareholder approval. ACCEPTABLE INVESTMENTS The Fund pursues its investment objective by investing primarily in adjustable and floating rate mortgage securities. Under normal circumstances, the Fund will invest at least 65% of the value of its total assets in adjustable and floating rate mortgage securities which are issued or guaranteed by the U.S. government, its agencies or instrumentalities. The types of mortgage securities in which the Fund may invest include the following: adjustable rate mortgage securities; collateralized mortgage obligations; real estate mortgage investment conduits; and other securities collateralized by or representing an interest in real estate mortgages whose interest rates reset at periodic intervals and are issued or guaranteed by the U.S. government, its agencies or instrumentalities. In addition to the securities described above, the Fund may also invest in the following: direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes, and bonds; and notes, bonds, and discount notes of U.S. government agencies or instrumentalities, such as the: Farm Credit System, including the National Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal Home Loan Mortgage Corporation; Federal National Mortgage Association; Government National Mortgage Association; and Student Loan Marketing Association. The government securities in which the Fund may invest are backed in a variety of ways by the U.S. government or its agencies or instrumentalities. Some of these securities, such as Government National Mortgage Association mortgage-backed securities, are backed by the full faith and credit of the U.S. government. Other securities, such as obligations of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation, are backed by the credit of the agency or instrumentality issuing the obligations but not the full faith and credit of the U.S. government. The Fund will not invest in stripped mortgage securities. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS") ARMS are pass-through mortgage securities with adjustable rather than fixed interest rates. The ARMS in which the Fund invests are issued by Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC") and are actively traded. The underlying mortgages which collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing Administration ("FHA") or Veterans Administration ("VA"), while those collateralizing ARMS issued by FHLMC or FNMA are typically conventional residential mortgages conforming to strict underwriting size and maturity constraints. Unlike conventional bonds, ARMS pay back principal over the life of the ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would receive monthly scheduled payments of principal and interest, and may receive unscheduled principal payments representing pre-payments on the underlying mortgages. At the time that a holder of the ARMS reinvests the payments and any unscheduled prepayments of principal that it receives, the holder may receive a rate of interest which is actually lower than the rate of interest paid on the existing ARMS. As a consequence, ARMS may be a less effective means of "locking in" long-term interest rates than other types of U.S. government securities. Not unlike other U.S. government securities, the market value of ARMS will generally vary inversely with changes in market interest rates. Thus, the market value of ARMS generally declines when interest rates rise and generally rises when interest rates decline. While ARMS generally entail less risk of a decline during periods of rapidly rising rates, ARMS may also have less potential for capital appreciation than other similar investments (e.g. investments with comparable maturities) because as interest rates decline, the likelihood increases that mortgages will be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal payments may result in some loss of a holder's principal investment to the extent of the premium paid. Conversely, if ARMS are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal would increase current and total returns and would accelerate the recognition of income, which would be taxed as ordinary income when distributed to shareholders. COLLATERALIZED MORTGAGE OBLIGATIONS Collateralized mortgage obligations ("CMOs") are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA, or FHLMC Certificates, but also may be collateralized by whole loans or Private Pass-Throughs (such collateral collectively hereinafter referred to as "Mortgage Assets"). Multiclass pass-through securities are equity interests in a trust composed of Mortgage Assets. Unless the context indicates otherwise, all references herein to CMOs include multiclass pass-through securities. Payments of principal of and interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs or make scheduled distributions on the multiclass pass-through securities. CMOs in which the Fund invests are issued by agencies or instrumentalities of the U.S. government. The issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment Conduit, which has certain special tax attributes. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a "tranche," is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal of and interest on the Mortgage Assets may be allocated among the several classes of a series of a CMO in innumerable ways. In one structure, payments of principal, including any principal prepayments, on the Mortgage Assets are applied to the classes of a CMO in the order of their respective stated maturities or final distribution dates, so that no payment of principal will be made on any class of CMOs until all other classes having an earlier stated maturity or final distribution date have been paid in full. Because the mortgages underlying mortgage-backed securities often may be prepaid without penalty or premium, mortgage-backed securities are generally subject to higher prepayment risks than most other types of debt instruments. Prepayment risks on mortgage securities tend to increase during periods of declining mortgage interest rates because many borrowers refinance their mortgages to take advantage of the more favorable rates. Depending upon market conditions, the yield that the Fund receives from the reinvestment of such prepayments, or any scheduled principal payments, may be lower than the yield on the original mortgage security. As a consequence, mortgage securities may be a less effective means of "locking in" interest rates than other types of debt securities having the same stated maturity and may also have less potential for capital appreciation. For certain types of asset pools, such as collateralized mortgage obligations, prepayments may be allocated to one tranche of securities ahead of other tranches, in order to reduce the risk of prepayment for the other tranches. Prepayments may result in a capital loss to the Fund to the extent that the prepaid mortgage securities were purchased at a market premium over their stated principal amount. Conversely, the prepayment of mortgage securities purchased at a market discount from their stated principal amount will accelerate the recognition of interest income by the Fund, which would be taxed as ordinary income when distributed to the shareholders. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS") REMICs are offerings of multiple class real estate mortgage-backed securities which qualify and elect treatment as such under provisions of the Internal Revenue Code. Issuers of REMICs may take several forms, such as trusts, partnerships, corporations, associations, or a segregated pool of mortgages. Once REMIC status is elected and obtained, the entity is not subject to federal income taxation. Instead, income is passed through the entity and is taxed to the person or persons who hold interests in the REMIC. A REMIC interest must consist of one or more classes of "regular interests," some of which may offer adjustable rates (the type in which the Fund primarily invests), and a single class of "residual interests." To qualify as a REMIC, substantially all the assets of the entity must be in assets directly or indirectly secured principally by real property. REGULATORY COMPLIANCE In accordance with the Rules and Regulations of the NCUA, unless the purchase is made solely to reduce interest-rate risk, the Fund will not invest in any CMO or REMIC security that meets any of the following three tests: (1) the CMO or REMIC has an expected average life greater than 10 years; (2) the average life of the CMO or REMIC extends by more than 4 years assuming an immediate and sustained parallel shift in the yield curve of plus 300 basis points, or shortens by more than 6 years assuming an immediate and sustained parallel shift in the yield curve of minus 300 basis points; or (3) the estimated change in the price of the CMO or REMIC is more than 17%, due to an immediate and sustained parallel shift in the yield curve of plus or minus 300 basis points. Neither test (1) nor (2) above apply to floating or adjustable rate CMOs or REMICs with all of the following characteristics: (a) the interest rate of the instrument is reset at least annually; (b) the interest rate is below the contractual cap of the instrument; (c) the instrument is tied to a widely-used market rate; and (d) the instrument varies directly (not inversely) and is reset in proportion with the index's changes. The Fund may not purchase a residual interest in a CMO or REMIC. In addition, the Fund will not purchase zero coupon securities with maturities greater than 10 years. RESETS OF INTEREST The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund invests generally are readjusted or reset at intervals of one year or less to an increment over some predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat less volatile. CAPS AND FLOORS The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which the Fund invests will frequently have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down: (1) per reset or adjustment interval and (2) over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower's monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization. The value of mortgage securities in which the Fund invests may be affected if market interest rates rise or fall faster and farther than the allowable caps or floors on the underlying residential mortgage loans. An example of the effect of caps and floors on a residential mortgage loan may be found in the Statement of Additional Information. Additionally, even though the interest rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective maturities of the mortgage securities in which the Fund invests to be shorter than the maturities stated in the underlying mortgages. TEMPORARY INVESTMENTS The Fund may invest temporarily in cash and cash items during times of unusual market conditions for defensive purposes and to maintain liquidity. Cash items may include short-term obligations such as: obligations of the U.S. government or its agencies or instrumentalities; and repurchase agreements. To the extent that investments in temporary investments are not for defensive purposes, the Fund intends to limit its investment in these securities to 20% of its total assets. REPURCHASE AGREEMENTS Repurchase agreements are arrangements in which banks, broker/dealers, and other recognized financial institutions sell U.S. government securities or other securities to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. LENDING OF PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend portfolio securities on a short-term or long-term basis up to one-third of the value of its total assets to broker/dealers, banks, or other institutional borrowers of securities. The Fund will only enter into loan arrangements with broker/dealers, banks, or other institutions which the investment adviser has determined are creditworthy under guidelines established by the Fund's Board of Directors ("the Board"). The Fund will receive collateral in the form of cash or U.S. government securities equal to at least 100% of the value of the securities loaned. There is the risk that when lending portfolio securities, the securities may not be available to the Fund on a timely basis and the Fund may, therefore, lose the opportunity to sell the securities at a desirable price. In addition, in the event that a borrower of securities would file for bankruptcy or become insolvent, disposition of the securities may be delayed pending court action. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Fund may purchase securities on a when-issued or delayed delivery basis. These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. Delivery of the security is to be made within 30 days from the trade date and the period from the trade date to the settlement date will not exceed 120 days. The seller's failure to complete these transactions may cause the Fund to miss a price or yield considered to be advantageous. Settlement dates may be a month or more after entering into these transactions, and the market values of the securities purchased may vary from the purchase prices. Accordingly, the Fund may pay more or less than the market value of the securities on the settlement date. The Fund may dispose of a commitment prior to settlement if the adviser deems it appropriate to do so. In addition, the Fund may enter into transactions to sell its purchase commitments to third parties at current market values and simultaneously acquire other commitments to purchase similar securities at later dates. The Fund may realize short-term profits or losses upon the sale of such commitments. PORTFOLIO TURNOVER The Fund does not attempt to set or meet any specific portfolio turnover rate, since turnover is incidental to transactions undertaken in an attempt to achieve the Trust's investment objective. The turnover rates for the fiscal years ended February 29, 1996 and February 28, 1995 were 144% and 170%, respectively. Such high turnover rates may result in higher brokerage commissions and capital gains. See "Tax Information" in this prospectus. INVESTMENT LIMITATIONS The Fund will not: borrow money directly or through reverse repurchase agreements (arrangements in which the Fund sells a portfolio instrument for a percentage of its cash value with an agreement to buy it back on a set date) or pledge securities except, under certain circumstances, the Fund may borrow up to one-third of the value of its total assets and pledge up to 10% of the value of those assets to secure such borrowings; invest more than 10% of the value of its net assets in securities subject to restrictions on resale under the Securities Act of 1933 except for certain restricted securities which meet the criteria for liquidity as established by the Directors; or invest more than 10% of the value of its net assets in securities which are not readily marketable or which are otherwise considered illiquid, including repurchase agreements providing for settlement in more than seven days after notice. ------------------------------------------------------------------------------- NET ASSET VALUE The Fund's net asset value per share fluctuates. It is determined by dividing the sum of the market value of all securities and all other assets, less liabilities, by the number of shares outstanding. - -------------------------------------------------------------------------------- INVESTING IN THE FUND SHARE PURCHASES Fund shares are sold on days on which the New York Stock Exchange is open. Shares of the Fund may be purchased through a financial institution (such as a bank or an investment dealer) which has a sales agreement with the distributor, Federated Securities Corp., or directly from Federated Securities Corp., either by mail or wire. The Fund reserves the right to reject any purchase request. THROUGH A FINANCIAL INSTITUTION An investor may call his financial institution to place an order to purchase shares of the Fund. Orders through a financial institution are considered received when the Fund is notified of the purchase order. Purchase orders through a registered broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in order for shares to be purchased at that day's price. Purchase orders through other financial institutions must be received by the financial institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for shares to be purchased at that day's price. It is the financial institution's responsibility to transmit orders promptly. The financial institution which maintains investor accounts with the Fund must do so on a fully disclosed basis unless it accounts for share ownership periods used in calculating the contingent deferred sales charge (see "Contingent Deferred Sales Charge"). In addition, advance payments made to financial institutions may be subject to reclaim by the distributor for accounts transferred to financial institutions which do not maintain investor accounts on a fully disclosed basis and do not account for share ownership periods (see "Supplemental Payments to Financial Institutions"). DIRECTLY BY MAIL To purchase shares of the Fund by mail directly from Federated Securities Corp.: complete and sign the new account application available from the Fund; enclose a check made payable to Federated Adjustable Rate U.S. Government Fund, Inc.; and send both to the Fund's transfer agent, Federated Shareholder Services Company, c/o State Street Bank and Trust Company, P.O. Box 8600, Boston, MA 02266-8600. Purchases by mail are considered received after payment by check is converted by the transfer agent's bank, State Street Bank and Trust Company ("State Street Bank"), into federal funds. This is generally the next business day after State Street Bank receives the check. DIRECTLY BY WIRE To purchase shares of the Fund directly from Federated Securities Corp. by Federal Reserve wire, call the Fund. All information needed will be taken over the telephone, and the order is considered received when the Fund receives payment by wire. Shares cannot be purchased by wire on holidays when wire transfers are restricted. Questions on wire purchases should be directed to your shareholder services representative at the telephone number listed on your account statement. MINIMUM INVESTMENT REQUIRED The minimum initial investment in the Fund is $1,500 unless the investment is in an IRA account, which requires a minimum initial investment of $50. Subsequent investments must be in amounts of at least $100, except for an IRA account, which must be in amounts of at least $50. WHAT SHARES COST Fund shares are sold at their net asset value next determined after an order is received. Unaffiliated institutions through whom shares are purchased may charge fees for services provided, which may be related to the ownership of Fund shares. This prospectus should, therefore, be read together with any agreement between the customer and institution with regard to services provided, the fees charged for these services, and any restrictions and limitations imposed. The net asset value is determined as of the close of trading (normally 4:00 p.m., Eastern time) on the New York Stock Exchange, Monday through Friday, except on: (i) days on which there are not sufficient changes in the value of the Trust's portfolio securities that its net asset value might be materially affected; (ii) days during which no shares are tendered for redemption and no orders to purchase shares are received; or (iii) the following holidays: New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Under certain circumstances described under "Redeeming Shares," shareholders may be charged a contingent deferred sales charge by the distributor at the time shares are redeemed. SYSTEMATIC INVESTMENT PROGRAM Once a Fund account has been opened, shareholders may add to their investment on a regular basis. Under this program, funds may be automatically withdrawn monthly from the shareholder's checking account and invested in Fund shares at the net asset value next determined after an order is received by the Fund. A shareholder may apply for participation in this program through Federated Securities Corp. EXCHANGE PRIVILEGE Fund shareholders may use the exchange privilege to invest in other Federated Funds which are advised by subsidiaries or affiliates of Federated Investors at net asset value. However, such exchanges may be subject to a contingent deferred sales charge and possibly a sales load. This privilege is available to shareholders resident in any state in which the fund shares being acquired may be sold. Shareholders in existing Federated Funds may exchange their fund shares for shares of the Fund at net asset value without a sales load or a contingent deferred sales charge. Shareholders using this privilege must exchange shares having a net asset value equal to the minimum investment requirement of the fund into which the exchange is being made. Shares in certain Federated Funds which are advised by subsidiaries or affiliates of Federated Investors may also be exchanged for Fund shares at net asset value. Further information on the exchange privilege and prospectuses for other Federated Funds are available by calling Federated Securities Corp. CERTIFICATES AND CONFIRMATIONS As transfer agent for the Fund, Federated Shareholder Services Company maintains a share account for each shareholder. Share certificates are not issued unless requested on the application or by contacting the Fund. Detailed confirmations of each purchase or redemption are sent to each shareholder. Monthly confirmations are sent to report dividends paid during the month. DIVIDENDS AND DISTRIBUTIONS Dividends are declared and paid monthly to all shareholders invested in the Fund on the record date. Distributions of any net realized long-term capital gains will be made at least once every twelve months. Unless shareholders request cash payments on the application or by writing to Federated Securities Corp., dividends and distributions are automatically reinvested in additional shares of the Fund on payment dates at the ex-dividend date net asset value. RETIREMENT PLANS Shares of the Fund can be purchased as an investment for retirement plans or for IRA accounts. For further details contact Federated Securities Corp. and consult a tax adviser. - -------------------------------------------------------------------------------- REDEEMING SHARES The Fund redeems shares at their net asset value next determined after the Fund receives the redemption request. Redemptions will be made on days on which the Fund computes its net asset value. Redemption requests must be received in proper form and can be made through a financial institution or directly from the Fund by written request. THROUGH A FINANCIAL INSTITUTION A shareholder may redeem shares of the Fund by calling his financial institution (such as a bank or an investment dealer) to request the redemption. Shares will be redeemed at the net asset value next determined after the Fund receives the redemption request from the financial institution. Redemption requests through a registered broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in order for shares to be redeemed at that day's net asset value. Redemption requests through other financial institutions must be received by the financial institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for shares to be redeemed at that day's net asset value. The financial institution is responsible for promptly submitting redemption requests and providing proper written redemption instructions to the Fund. The financial institution may charge customary fees and commissions for this service. In the event of drastic economic or market changes, a shareholder may experience difficulty in redeeming through his financial institution. If such a case should occur, another method of redemption, such as "Redeeming Shares by Mail," should be considered. REDEEMING SHARES BY MAIL Shares may be redeemed in any amount by mailing a written request to: Federated Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share certificates have been issued, they should be sent unendorsed with the written request by registered or certified mail to the address noted above. The written request should state: the Fund name; the account name as registered with the Fund; the account number; and the number of shares to be redeemed or the dollar amount requested. All owners of the account must sign the request exactly as the shares are registered. Normally, a check for the proceeds is mailed within one business day, but in no event more than seven days, after the receipt of a proper written redemption request. Dividends are paid up to and including the day that a redemption request is processed. Shareholders requesting a redemption of any amount to be sent to an address other than that on record with the Fund or a redemption payable other than to the shareholder of record must have their signatures guaranteed by a commercial or savings bank, trust company or savings association whose deposits are insured by an organization which is administered by the Federal Deposit Insurance Corporation; a member firm of a domestic stock exchange; or any other "eligible guarantor institution," as defined in the Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed by a notary public. CONTINGENT DEFERRED SALES CHARGE Shareholders redeeming shares from their Fund accounts within certain time periods of the purchase date of those shares will be charged a contingent deferred sales charge by the Fund's distributor of the lesser of the original price or the net asset value of the shares redeemed as follows:
CONTINGENT AMOUNT OF DEFERRED PURCHASE SHARES HELD SALES CHARGE Up to $1,999,999 4 years or less 1.00% $2,000,000 to $4,999,999 2 years or less 0.50% $5,000,000 to $24,999,999 1 year or less 0.25% $25,000,000 or more N/A None
In instances in which Fund shares have been acquired in exchange for shares in other Federated Funds, (i) the purchase price is the price of the shares when originally purchased and (ii) the time period during which the shares are held will run from the date of the original purchase. The contingent deferred sales charge will not be imposed on shares acquired through: (i) the reinvestment of dividends or distributions of long-term capital gains; or (ii) the exchange of shares of Government Income Securities, Inc., where those shares were purchased during that fund's Charter Offering Period. In computing the amount of contingent deferred sales charge for accounts with shares subject to a single holding period, if any, redemptions are deemed to have occurred in the following order: (1) shares acquired through the reinvestment of dividends and long-term capital gains; (2) purchases of shares occurring prior to the number of years necessary to satisfy the applicable holding period; and (3) purchases of shares occurring within the current holding period. For accounts with shares subject to multiple share holding periods, the redemption sequence will be determined first, with reinvested dividends and long-term capital gains, and second, on a first-in, first-out basis. The contingent deferred sales charge will not be imposed when a redemption results from a return under the following circumstances: (i) a total or partial distribution from a qualified plan, other than an IRA, Keogh Plan, or a custodial account, following retirement; (ii) a total or partial distribution from an IRA, Keogh Plan, or a custodial account after the beneficial owner attains age 59-1/2; or (iii) from the death or total and permanent disability of the beneficial owner. The exemption from the contingent deferred sales charge for qualified plans, an IRA, Keogh Plan, or a custodial account does not extend to account transfers, rollovers, and other redemptions made for purposes of reinvestment. Contingent deferred sales charges are not charged in connection with exchanges of shares for shares in other Federated Funds or in connection with redemptions by the Fund of accounts with low balances. Shares of the Fund originally purchased through a bank trust department or investment adviser registered under the Investment Advisers Act of 1940, as amended, or retirement plans where the third party administrator has entered into certain arrangements with Federated Securities Corp. or its affiliates, are not subject to the contingent deferred sales charge, to the extent that no payment was advanced for purchases made by such entities. In addition, shares held in the Fund by a financial institution for its own account which were originally purchased by the financial institution directly from the Fund's distributor without a sales load may be redeemed without a contingent deferred sales charge. For more information, see "Supplemental Payments to Financial Institutions." SYSTEMATIC WITHDRAWAL PROGRAM Shareholders who desire to receive monthly or quarterly payments of a predetermined amount may take advantage of the Systematic Withdrawal Program. Under this program, Fund shares are redeemed to provide for periodic withdrawal payments in an amount directed by the shareholder. Depending upon the amount of the withdrawal payments, the amount of dividends paid and capital gains distributions with respect to Fund shares, and the fluctuation of the net asset value of Fund shares redeemed under this program, redemptions may reduce, and eventually deplete, the shareholder's investment in the Fund. For this reason, payments under this program should not be considered as yield or income on the shareholder's investment in the Fund. To be eligible to participate in this program, a shareholder must have invested at least $10,000 in the Fund (at current offering price). A shareholder may apply for participation in this program through Federated Securities Corp. Contingent deferred sales charges are charged for shares redeemed through this program within one to four years of their purchase dates. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, the Fund may redeem shares in any account, except retirement plans, and pay the proceeds to the shareholder if the account balance falls below a required minimum value of $1,000. This requirement does not apply, however, if the balance falls below $1,000 because of changes in the Fund's net asset value. Before shares are redeemed to close an account, the shareholder is notified in writing and allowed 30 days to purchase additional shares to meet the minimum requirement. - -------------------------------------------------------------------------------- FUND INFORMATION MANAGEMENT OF THE FUND BOARD OF DIRECTORS The Fund is managed by a Board of Directors "the Board". The Directors are responsible for managing the Fund's business affairs and for exercising all the Fund's powers except those reserved for the shareholders. An Executive Committee of the Board handles the Board's responsibilities between meetings of the Board. INVESTMENT ADVISER Investment decisions for the Fund are made by Federated Advisers, the Fund's investment adviser, subject to direction by the Directors. The adviser continually conducts investment research and supervision for the Fund and is responsible for the purchase or sale of portfolio instruments, for which it receives an annual fee from the Fund. ADVISORY FEES The Fund's adviser receives an annual investment advisory fee equal to .60 of 1% of the Fund's average daily net assets. The adviser may voluntarily choose to waive a portion of its fee or reimburse the Fund for certain operating expenses. The adviser can terminate this voluntary waiver of some or all of its advisory fee at any time at its sole discretion. The adviser has also undertaken to reimburse the Fund for operating expenses in excess of limitations established by certain states. ADVISER'S BACKGROUND Federated Advisers, a Delaware business trust organized on April 11, 1989, is a registered investment adviser under the Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the Class A (voting) shares of Federated Investors are owned by a trust, the Trustees of which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of Federated Investors. Federated Management and other subsidiaries of Federated Investors serve as investment advisers to a number of investment companies and private accounts. Certain other subsidiaries also provide administrative services to a number of investment companies. With over $80 billion invested across more than 250 funds under management and/or administration by its subsidiaries, as of December 31, 1995, Federated Investors is one of the largest mutual fund investment managers in the United States. With more than 1,800 employees, Federated continues to be led by the management who founded the company in 1955. Federated funds are presently at work in and through 4,000 financial institutions nationwide. More than 100,000 investment professionals have selected Federated funds for their clients. Kathleen M. Foody-Malus has been the Fund's portfolio manager since July, 1991. Ms. Foody-Malus joined Federated Investors in 1983 and has been a Vice President of the Fund's investment adviser since 1993. Ms. Foody-Malus served as an Assistant Vice President of the investment adviser from 1990 until 1992. Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the University of Pittsburgh. Ms. Susan M. Nason has been the Fund's portfolio manager since July, 1993. Ms. Nason joined Federated Investors in 1987 and has been a Vice President of the Fund's investment adviser since 1993. Ms. Nason served as an Assistant Vice President of the investment adviser from 1990 until 1992. Ms. Nason is a Chartered Financial Analyst and received her M.S. in Industrial Administration from Carnegie Mellon University. Todd A. Abraham has been the Fund's portfolio manager since October 1995. Mr. Abraham joined Federated Investors in 1993 as an Investment Analyst and has been an Assistant Vice President of the Fund's investment adviser since 1995. Mr. Abraham served as a Portfolio Analyst at Ryland Mortgage Co. from 1992 to 1993 and as a Bond Administrator at Ryland Asset Management Company from 1990 to 1992. Mr. Abraham received his M.B.A. in finance from Loyola College. Both the Fund and the Adviser have adopted strict codes of ethics governing the conduct of all employees who manage the Fund and its portfolio securities. These codes recognize that such persons owe a fiduciary duty to the Fund's shareholders and must place the interests of shareholders ahead of the employees' own interest. Among other things, the codes: require preclearance and periodic reporting of personal securities transactions; prohibit personal transactions in securities being purchased or sold, or being considered for purchase or sale, by the Fund; prohibit purchasing securities in initial public offerings; and prohibit taking profits on securities held for less than sixty days. Violations of the codes are subject to review by the Board of Directors, and could result in severe penalties. DISTRIBUTION OF FUND SHARES Federated Securities Corp. is the principal distributor for shares of the Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is the principal distributor for a number of investment companies. Federated Securities Corp. is a subsidiary of Federated Investors. State securities laws may require certain financial institutions such as depository institutions to register as dealers. DISTRIBUTION PLAN AND SHAREHOLDER SERVICES Under a distribution plan adopted in accordance with Investment Company Act Rule 12b-1 (the "Plan"), the distributor may be paid a fee by the Fund in an amount, computed at an annual rate of 0.25 of 1% of the average daily net asset value of the Fund. The distributor may select financial institutions such as banks, fiduciaries, custodians for public funds, investment advisers, and broker/dealers to provide sales services and distribution-related support services as agents for their clients or customers. The Plan is a compensation-type plan. As such, the Fund makes no payments to the distributor except as described above. Therefore, the Fund does not pay for unreimbursed expenses of the distributor, including amounts expended by the distributor in excess of amounts received by it from the Fund, interest, carrying or other financing charges in connection with excess amounts expended, or the distributor's overhead expenses. However, the distributor may be able to recover such amount or may earn a profit from future payments made by the Fund under the Plan. In addition, the Fund has entered into a Shareholder Services Agreement with Federated Shareholder Services, a subsidiary of Federated Investors, under which the Fund may make payments up to .25% of 1% of the average daily net asset value of its shares to obtain certain personal services for shareholders and to maintain shareholder accounts. Under the Shareholder Services Agreement, Federated Shareholder Services will either perform shareholder services directly or will select financial institutions to perform shareholder services. Financial institutions will receive fees based upon shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by the Fund and Federated Shareholder Services. SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS In addition to payments made pursuant to the Shareholder Services Agreement, Federated Securities Corp. and Federated Shareholder Services, from their own assets, may pay financial institutions supplemental fees for the performance of substantial sales services, distribution-related support services, or shareholder services. The support may include sponsoring sales, educational and training seminars for their employees, providing sales literature, and engineering computer software programs that emphasize the attributes of the Fund. Such assistance will be predicated upon the amount of shares the financial institution sells or may sell, and/or upon the type and nature of sales or marketing support furnished by the financial institution. Any payments made by the distributor may be reimbursed by the Fund's investment adviser or its affiliates. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES Federated Services Company, a subsidiary of Federated Investors, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Services Company provides these at an annual rate which relates to the average aggregate daily net assets of all Federated Funds as specified below:
MAXIMUM AVERAGE AGGREGATE ADMINISTRATIVE DAILY NET ASSETS FEE OF THE FEDERATED FUNDS 0.15 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.10 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may choose voluntarily to waive a portion of its fee. - -------------------------------------------------------------------------------- SHAREHOLDER INFORMATION VOTING RIGHTS Each share of the Fund is entitled to one vote at all meetings of shareholders. As a Maryland corporation, the Fund is not required to hold annual shareholder meetings. Shareholder approval will be sought only for certain changes in the Fund's operation and for the election of Directors under certain circumstances. Directors may be removed by a majority vote of the shareholders at a special meeting. A special meeting of shareholders shall be called by the Directors upon the request of shareholders owning at least 10% of the Fund's outstanding shares. - -------------------------------------------------------------------------------- TAX INFORMATION FEDERAL INCOME TAX The Fund will pay no federal income tax because it expects to meet requirements of the Internal Revenue Code applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. Unless otherwise exempt, shareholders are required to pay federal income tax on any dividends and other distributions, including capital gains distributions, received. This applies whether dividends and distributions are received in cash or as additional shares. Distributions representing long-term capital gains, if any, will be taxable to shareholders as long-term capital gains no matter how long the shareholders have held the shares. No federal income tax is due on any distributions earned in an IRA or qualified retirement plan until distributed, so long as such IRA or qualified retirement plan meets the applicable requirements of the Internal Revenue Code. STATE AND LOCAL TAXES Company shares are exempt from personal property taxes imposed by counties, municipalities, and school districts in Pennsylvania. Shareholders are urged to consult their own tax advisers regarding the status of their accounts under state and local tax laws. - -------------------------------------------------------------------------------- PERFORMANCE INFORMATION From time to time the Fund advertises its total return and yield. Total return represents the change, over a specified period of time, in the value of an investment in the Fund after reinvesting all income and capital gain distributions. It is calculated by dividing that change by the initial investment and is expressed as a percentage. The yield of the Fund is calculated by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by the Fund over a thirty-day period by the maximum offering price per share of the Fund on the last day of the period. This number is then annualized using semi-annual compounding. The yield does not necessarily reflect income actually earned by the Fund and, therefore, may not correlate to the dividends or other distributions paid to shareholders. The performance information reflects the effect of the contingent deferred sales charge, a non-recurring charge, which, if excluded, would increase the total return and yield. From time to time, advertisements for the Fund may refer to ratings, rankings, and other information in certain financial publications and/or compare the Fund's performance to certain indices. ADDRESSES - ----------------------------------------------------------------------------------------------------------------------- Federated Adjustable Rate U.S. Government Fund, Inc. Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - ----------------------------------------------------------------------------------------------------------------------- Distributor Federated Securities Corp. Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - ----------------------------------------------------------------------------------------------------------------------- Investment Adviser Federated Advisers Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - ----------------------------------------------------------------------------------------------------------------------- Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, Massachusetts 02266-8600 - ----------------------------------------------------------------------------------------------------------------------- Transfer Agent and Dividend Disbursing Agent Federated Shareholder Federated Investors Tower Services Company Pittsburgh, Pennsylvania 15222-3779 - ----------------------------------------------------------------------------------------------------------------------- Independent Auditors Deloitte & Touche LLP 2500 One PPG Place Pittsburgh, PA 15222-5401 - -----------------------------------------------------------------------------------------------------------------------
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. (FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.) PROSPECTUS April 30, 1996 [LOGO OF FEDERATED INVESTORS] FEDERATED INVESTORS Federated Investors Tower Pittsburgh, PA 15222-3779 Federated Securities Corp. is the distributor of the fund and is a subsidiary of Federated Investors. [RECYCLED PAPER LOGO] Cusip 349554105 1071005A (4/96) FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. (FORMERLY, FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.) STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information should be read with the prospectus of Federated Adjustable Rate U.S. Government Fund, Inc. (the "Fund"), dated April 30, 1996. This Statement is not a prospectus itself. You may request a copy of the Fund's prospectus or a paper copy of this Statement, if you have received it electronically, free of charge by calling 1-800-235-4669. FEDERATED INVESTORS TOWER PITTSBURGH, PENNSYLVANIA 15222-3779 Statement dated April 30, 1996 FEDERATED SECURITIES CORP. Distributor A subsidiary of FEDERATED INVESTORS GENERAL INFORMATION ABOUT THE FUND 1 INVESTMENT OBJECTIVE AND POLICIES 1 Types of Investments 1 Caps and Floors 1 When-Issued and Delayed Delivery Transactions 1 Lending of Portfolio Securities 1 Repurchase Agreements 2 Reverse Repurchase Agreements 2 Restricted Securities 2 Portfolio Turnover 2 INVESTMENT LIMITATIONS 2 FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. MANAGEMENT 4 Fund Ownership 8 Directors' Compensation 9 Director Liability 9 INVESTMENT ADVISORY SERVICES 9 Adviser to the Fund 9 Advisory Fees 10 OTHER SERVICES 10 Fund Administration 10 Custodian and Portfolio Recordkeeper 10 Transfer Agent 10 Independent Public Auditors 10 BROKERAGE TRANSACTIONS 10 PURCHASING SHARES 11 Distribution Plans and Shareholder Services 11 Conversion to Federal Funds 11 DETERMINING NET ASSET VALUE 11 Determining Market Value of Securities 12 EXCHANGE PRIVILEGE 12 Requirements For Exchange 12 Tax Consequences 12 Making an Exchange 12 REDEEMING SHARES 12 Redemption in Kind 13 MASSACHUSETTS PARTNERSHIP LAW 12 TAX STATUS 13 The Fund's Tax Status 13 Shareholders' Tax Status 13 TOTAL RETURN 13 YIELD 13 PERFORMANCE COMPARISONS 14 ABOUT FEDERATED INVESTORS 14 GENERAL INFORMATION ABOUT THE FUND The Fund was incorporated under the laws of the State of Maryland on March 20, 1991. It is qualified to do business as a foreign corporation in Pennsylvania. Effective March 31, 1996, the Fund changed its name to Federated Adjustable Rate U.S. Government Fund, Inc. INVESTMENT OBJECTIVE AND POLICIES 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. The investment objective and policies of the Fund cannot be changed without approval of shareholders. TYPES OF INVESTMENTS The Fund invests primarily in adjustable and floating rate mortgage securities which are issued or guaranteed by the U.S. government, its agencies and instrumentalities. These securities are backed by: o the full faith and credit of the U.S. Treasury; o the issuer's right to borrow from the U.S. Treasury; o the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities; or o the credit of the agency or instrumentality issuing the obligations. Examples of agencies and instrumentalities which may not always receive financial support from the U.S. government are: o Federal Home Loan Banks; o Farmers Home Administration; and o Federal National Mortgage Association. CAPS AND FLOORS The value of mortgage-related securities in which the Fund invests may be affected if interest rates rise or fall faster and farther than the allowable caps on the underlying residential mortgage loans. For example, consider a residential mortgage loan with a rate which adjusts annually, an initial interest rate of 10%, a 2% per annum interest rate cap, and a 5% life of loan interest rate cap. If the index against which the underlying interest rate on the residential mortgage loan is compared--such as the one-year Treasury-- moves up by 3%, the residential mortgage loan rate may not increase by more than 2% to 12% the first year. As one of the underlying residential mortgages for the securities in which the Fund invests, the residential mortgage would depress the value of the securities and, therefore, the net asset value of the Fund. If the index against which the interest rate on the underlying residential mortgage loan is compared moves up no faster or farther than the cap on the underlying mortgage loan allows, or if the index moves down as fast or faster than the floor on the underlying mortgage loan allows, the mortgage would maintain or improve the value of the securities in which the Fund invests and, therefore, the net asset value of the Fund. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS These transactions are made to secure what is considered to be an advantageous price or yield for the Fund. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of the Fund sufficient to make payments for the securities to be purchased are segregated on the Fund's records at the trade date. These assets are marked to market daily and are maintained until the transaction is settled. The Fund does not intend to engage in when-issued and delayed delivery transactions to an extent that would cause the segregation of more than 20% of the total value of its assets. LENDING OF PORTFOLIO SECURITIES The collateral received when the Fund lends portfolio securities must be valued daily and, should the market value of the loaned securities increase, the borrower must furnish additional collateral to the Fund. During the time portfolio securities are on loan, the borrower pays the Fund any dividends or interest paid on such securities. Loans are subject to termination at the option of the Fund or the borrower. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. REPURCHASE AGREEMENTS The Fund requires its custodian to take possession of the securities subject to repurchase agreements, and these securities are marked to market daily. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller files for bankruptcy or becomes insolvent, disposition of securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Fund and allow retention or disposition of such securities. 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 guidelines established by the Board of Directors "the Board". REVERSE REPURCHASE AGREEMENTS The Fund may also enter into reverse repurchase agreements. A reverse repurchase transaction is similar to borrowing cash. In a reverse repurchase agreement the Fund transfers possession of a portfolio instrument to another person, such as a financial institution, broker, or dealer, in return for a percentage of the instrument's market value in cash, and agrees that on a stipulated date in the future, the Fund will repurchase the portfolio instrument by remitting the original consideration plus interest at an agreed upon rate. The use of reverse repurchase agreements may enable the Fund to avoid selling portfolio instruments at a time when a sale may be deemed to be disadvantageous, but the ability to enter into reverse repurchase agreements does not ensure that the Fund will be able to avoid selling portfolio instruments at a disadvantageous time. When effecting reverse repurchase agreements, liquid assets of the Fund, in a dollar amount sufficient to make payment for the obligations to be purchased, are segregated at the trade date. These securities are marked to market daily and are maintained until the transaction is settled. RESTRICTED SECURITIES The ability of the Board to determine the liquidity of certain restricted securities is permitted under an SEC Staff position set forth in the adopting release for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain secondary market transactions involving securities subject to restrictions on resale under federal securities laws. The Rule provides an exemption from registration for resales of otherwise restricted securities to qualified institutional buyers. The Rule was expected to further enhance the liquidity of the secondary market for securities eligible for resale under Rule 144A. The Fund believes that the Staff of the SEC has left the question of determining the liquidity of all restricted securities (eligible for resale under Rule 144A) to the Fund's Board. The Board considers the following criteria in determining the liquidity of certain restricted securities: o the frequency of trades and quotes for the security; o the number of dealers willing to purchase or sell the security and the number of other potential buyers; o dealer undertakings to make a market in the security; and o the nature of the security and the nature of the marketplace trades. PORTFOLIO TURNOVER The Fund will not attempt to set or meet a portfolio turnover rate since any turnover would be incidental to transactions undertaken in an attempt to achieve the Fund's investment objective. For the fiscal years ended February 29, 1996, and February 28, 1995 the portfolio turnover rates were 144% and 170%, respectively. The increase in the portfolio turnover rate was a result of the Fund's acquisition of securities that were more in line with current market conditions relating to pre-payments, coupon rates, and weighted average months to resets. This had no significant impact on the tax liability of the Fund and its shareholders, and Fund expenses were not a factor as the Fund incurred no brokerage commissions. INVESTMENT LIMITATIONS . BUYING ON MARGIN The Fund will not purchase any securities on margin, but may obtain such short-term credits as are necessary for clearance of transactions. ISSUING SENIOR SECURITIES AND BORROWING MONEY The Fund will not issue senior securities except that the Fund may borrow money and engage in reverse repurchase agreements in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money or engage in reverse repurchase agreements for investment leverage, but rather as a temporary, extraordinary, or emergency measure or to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. The Fund will not purchase any securities while borrowings in excess of 5% of its total assets are outstanding, but only to the extent necessary to assure completion of the reverse repurchase agreements, the Fund will restrict the purchase of portfolio instruments to money market instruments maturing on or before the expiration date of the reverse repurchase agreements PLEDGING ASSETS The Fund will not mortgage, pledge, or hypothecate any assets except to secure permitted borrowings. In those cases, it may pledge assets having a market value not exceeding the lesser of the dollar amounts borrowed or 10% of the value of total assets at the time of the borrowing. DIVERSIFICATION OF INVESTMENTS With respect to securities comprising 75% of the value of its total assets, the Fund will not purchase securities of any one issuer (other than cash, cash items or securities issued or guaranteed by the government of the United States or its agencies or instrumentalities and repurchase agreements collateralized by U.S. government securities) if as a result more than 5% of the value of its total assets would be invested in the securities of that issuer. INVESTING IN REAL ESTATE The Fund will not buy or sell real estate, including limited partnership interests in real estate, although it may invest in securities of companies whose business involves the purchase or sale of real estate or in securities which are secured by real estate or interests in real estate. INVESTING IN COMMODITIES The Fund will not purchase or sell commodities. INVESTING IN RESTRICTED SECURITIES The Fund will not invest more than 10% of its net assets in securities subject to restrictions on resale under the Securities Act of 1933, including repurchase agreements providing for settlement in more than seven days after notice. UNDERWRITING The Fund will not underwrite any issue of securities, except as it may be deemed to be an underwriter under the Securities Act of 1933 in connection with the sale of restricted securities which the Fund may purchase pursuant to its investment objective, policies, and limitations. LENDING CASH OR SECURITIES The Fund will not lend any of its assets, except portfolio securities up to one-third of the value of its total assets. This shall not prevent the Fund from purchasing or holding U.S. government obligations, money market instruments, variable amount demand master notes, bonds, debentures, notes, certificates of indebtedness, or other securities, entering into repurchase agreements, or engaging in other transactions where permitted by a Fund's investment objective, policies and limitations. SELLING SHORT The Fund will not sell securities short unless: oduring the time the short position is open, it owns an equal amount of the securities sold or securities readily and freely convertible into or exchangeable, without payment of additional consideration, for securities of the same issue as, and equal in amount to, the securities sold short; and onot more than 10% of the Fund's net assets (taken at current value) is held as collateral for such sales at any one time. INVESTING IN NEW ISSUERS The Fund will not invest more than 5% of the value of its total assets in securities of issuers which have records of less than three years of operating history, including the operation of any predecessor. (This limitation does not apply to issuers of CMOs or REMICs which are collateralized by securities or mortgages issued or guaranteed as to prompt payment of principal and interest by an agency of the U.S. government.) INVESTING IN MINERALS The Fund will not purchase or sell oil, gas, or other mineral exploration or development programs or leases, although it may purchase the securities of issuers which invest in or sponsor such programs. INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND DIRECTORS OF THE FUND The Fund will not purchase or retain the securities of any issuer if the Officers and Directors of the Fund or its investment adviser owning individually more than 1/2 of 1% of the issuer's securities together own more than 5% of the issuer's securities. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES The Fund may not own securities of open-end investment companies. The Fund can acquire up to 3 per centum of the total outstanding stock of closed-end investment companies. The Fund will not be subject to any other limitations with regard to the acquisition of securities of closed-end investment companies so long as the public offering price of the Fund's shares does not include a sales load exceeding 1 1/2 per cent. The Fund will purchase securities of closed-end investment companies only in open-market transactions involving only customary broker's commissions. However, these limitations are not applicable if the securities are acquired in a merger, consolidation, or acquisition of assets. INVESTING IN STRIPPED MORTGAGE SECURITIES The Fund will not invest its assets in stripped mortgage securities Except with respect to borrowing money, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction. The Fund does not expect to pledge securities or invest in stock of closed- end investment companies during the coming year. The Fund has not borrowed money or sold any securities short in an amount exceeding 5% of the value of its net assets during the last fiscal year and has no present intent to do so in the coming fiscal year. For purposes of its policies and limitations, the Fund considers certificates of deposit and demand and time deposits issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment to be "cash items." FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. MANAGEMENT Officers and Directors. Officers and Directors are listed with their addresses, birthdates, present positions with Federated Adjustable Rate U.S. Government Fund, Inc., and principal occupations including those with its affiliates, and the "Funds" described in the Statement of Additional Information. John F. Donahue@* Federated Investors Tower Pittsburgh, PA Birthdate: July 28, 1924 Chairman and Director Chairman and Trustee, Federated Investors, Federated Advisers, Federated Management, and Federated Research; Chairman and Director, Federated Research Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.; Chief Executive Officer and Director or Trustee of the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Company . Thomas G. Bigley 28th Floor, One Oxford Centre Pittsburgh, PA Birthdate: February 3, 1934 Director Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of Pittsburgh; Director or Trustee of the Funds; formerly, Senior Partner, Ernst & Young LLP. John T. Conroy, Jr. Wood/IPC Commercial Department John R. Wood and Associates, Inc., Realtors 3255 Tamiami Trail North Naples, FL Birthdate: June 23, 1937 Director President, Investment Properties Corporation; Senior Vice-President, John R. Wood and Associates, Inc., Realtors; President, Northgate Village Development Corporation; Partner or Trustee in private real estate ventures in Southwest Florida; Director or Trustee of the Funds; formerly, President, Naples Property Management, Inc. William J. Copeland One PNC Plaza - 23rd Floor Pittsburgh, PA Birthdate: July 4, 1918 Director Director and Member of the Executive Committee, Michael Baker, Inc.; Director or Trustee of the Funds; formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc. James E. Dowd 571 Hayward Mill Road Concord, MA Birthdate: May 18, 1922 Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee of the Funds. Lawrence D. Ellis, M.D.* 3471 Fifth Avenue, Suite 1111 Pittsburgh, PA Birthdate: October 11, 1932 Director Professor of Medicine and Member, Board of Trustees, University of Pittsburgh; Medical Director, University of Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds. Edward L. Flaherty, Jr.@ Henny, Kochuba, Meyer and Flaherty Two Gateway Center - Suite 674 Pittsburgh, PA Birthdate: June 18, 1924 Director Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director, Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director or Trustee of the Funds; formerly, Counsel, Horizon Financial, F.A., Western Region. Peter E. Madden Seacliff 562 Bellevue Avenue Newport, RI Birthdate: March 16, 1942 Director Consultant; State Representative, Commonwealth of Massachusetts; Director or Trustee of the Funds; formerly, President, State Street Bank and Trust Company and State Street Boston Corporation. Gregor F. Meyer Henny, Kochuba, Meyer and Flaherty Two Gateway Center - Suite 674 Pittsburgh, PA Birthdate: October 6, 1926 Director Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman, Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the Funds. John E. Murray, Jr., J.D., S.J.D. President, Duquesne University Pittsburgh, PA Birthdate: December 20, 1932 Director President, Law Professor, Duquesne University; Consulting Partner, Mollica, Murray and Hogue; Director or Trustee of the Funds. Wesley W. Posvar 1202 Cathedral of Learning University of Pittsburgh Pittsburgh, PA Birthdate: September 14, 1925 Director Professor, International Politics and Management Consultant; Trustee, Carnegie Endowment for International Peace, RAND Corporation, Online Computer Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center; Director or Trustee of the Funds; President Emeritus, University of Pittsburgh; founding Chairman, National Advisory Council for Environmental Policy and Technology and Federal Emergency Management Advisory Board. Marjorie P. Smuts 4905 Bayard Street Pittsburgh, PA Birthdate: June 21, 1935 Director Public relations/marketing consultant; Conference Coordinator, Non-profit entities; Director or Trustee of the Funds. J. Christopher Donahue Federated Investors Tower Pittsburgh, PA Birthdate: April 11, 1949 Executive Vice President President and Trustee, Federated Investors, Federated Advisers, Federated Management, and Federated Research; President and Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company, and Federated Shareholder Services; Director, Federated Services Company; President or Executive Vice President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Director of the Company. Edward C. Gonzales Federated Investors Tower Pittsburgh, PA Birthdate: October 22, 1930 Executive Vice President Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President, Federated Advisers, Federated Management, Federated Research, Federated Research Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive Vice President and Director, Federated Securities Corp.; Trustee, Federated Shareholder Services Company; Trustee or Director of some of the Funds; President, Executive Vice President and Treasurer of some of the Funds. John W. McGonigle Federated Investors Tower Pittsburgh, PA Birthdate: October 26, 1938 Executive Vice President and Secretary Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee, Federated Advisers, Federated Management, and Federated Research; Director, Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company; President and Trustee, Federated Shareholder Services; Director, Federated Securities Corp.; Executive Vice President and Secretary of the Funds. Richard B. Fisher Federated Investors Tower Pittsburgh, PA Birthdate: May 17, 1923 President Executive Vice President and Trustee, Federated Investors; Chairman and Director, Federated Securities Corp.; President or Vice President of some of the Funds; Director or Trustee of some of the Funds. David M. Taylor Federated Investors Tower Pittsburgh, PA Birthdate: January 13, 1947 Treasurer Senior Vice President and Trustee, Federated Investors; Vice President, Federated Shareholder Services; Executive Vice President, Federated Securities Corp.; Treasurer of some of the Funds. * This Director is deemed to be an "interested person" as defined in the Investment Company Act of 1940. @ Member of the Executive Committee. The Executive Committee of the Board of Directors handles the responsibilities of the Board between meetings of the Board. As used in the table above, "The Funds" and "Funds" mean the following investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Institutional Trust; Federated Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; and World Investment Series, Inc. FUND OWNERSHIP Officers and Directors as a group own less than 1% of the Fund's outstanding shares. As of March 29, 1996, Merrill Lynch Pierce Fenner & Smith, (as record owner holding shares for its clients) owned 9,237,222.7890 shares (29.50%) of the outstanding shares of the Fund. DIRECTORS' COMPENSATION AGGREGATE NAME , COMPENSATION POSITION WITH FROM THE TOTAL COMPENSATION PAID THE FUND FUND* FROM FUND COMPLEX + John F. Donahue, $0 $0 for the Fund and Chairman and Director 54 other investment companies in the Fund Complex Thomas G. Bigley,++ $1,377.88 $86,331 for the Fund and Director 54 other investment companies in the Fund Complex John T. Conroy, Jr., $1,493.06 $115,760 for the Fund and Director 54 other investment companies in the Fund Complex William J. Copeland, $1,493.06 $115,760 for the Fund and Director 54 other investment companies in the Fund Complex James E. Dowd,$1,493.06 $115,760 for the Fund and Director 54 other investment companies in the Fund Complex Lawrence D. Ellis, M.D.,$1,377.88 $104,898 for the Fund and Director 54 other investment companies in the Fund Complex Edward L. Flaherty, Jr. $1,493.06 $115,760 for the Fund and Director 54 other investment companies in the Fund Complex Peter E. Madden $1,377.88 $104,898 for the Fund and Director 54 other investment companies in the Fund Complex Gregor F. Meyer $1,377.88 $104,898 for the Fund and Director 54 other investment companies in the Fund Complex John E. Murray, Jr. $1,377.88 $104,898 for the Fund and Director 54 other investment companies in the Fund Complex Wesley W. Posvar $1,377.88 $104,898 for the Fund and Director 54 other investment companies in the Fund Complex Marjorie P. Smuts $1,377.88 $104,898 for the Fund and Director 54 other investment companies in the Fund Complex *Information is furnished for the fiscal year ended February 29, 1996. +The information is provided for the last calendar year. ++Mr. Bigley served on 39 investment companies in the Federated Funds Complex from January 1 through September 30, 1995. On October 1, 1995, he was appointed a Trustee on 15 additional Federated Funds. DIRECTOR LIABILITY The Fund's Articles of Incorporation provide that the Directors will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office. INVESTMENT ADVISORY SERVICES ADVISER TO THE FUND The Fund's investment adviser is Federated Advisers. It is a subsidiary of Federated Investors. All the voting securities of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, his wife and his son, J. Christopher Donahue. The adviser shall not be liable to the Fund or any shareholder for any losses that may be sustained in the purchase, holding, or sale of any security or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Fund. ADVISORY FEES For its advisory services, Federated Advisers receives an annual investment advisory fee as described in the prospectus. For the fiscal year ended February 29, 1996, and fiscal years ended February 28, 1995, and 1994, the Fund's adviser earned $2,154,062, $3,435,227, and $5,767,213, respectively, of which $332,589, $369,853, and $117,096, respectively, were voluntarily waived. STATE EXPENSE LIMITATIONS The adviser has undertaken to comply with the expense limitations established by certain states for investment companies whose shares are registered for sale in those states. If the Fund's normal operating expenses (including the investment advisory fee, but not including brokerage commissions, interest, taxes, and extraordinary expenses) exceed 2 1/2% per year of the first $30 million of average net assets, 2% per year of the next $70 million of average net assets, and 1 1/2% per year of the remaining average net assets, the adviser will reimburse the Fund for its expenses over the limitation. If the Fund's monthly projected operating expenses exceed this expense limitation, the investment advisory fee paid will be reduced by the amount of the excess, subject to an annual adjustment. If the expense limitation is exceeded, the amount to be reimbursed by the adviser will be limited, in any single fiscal year, by the amount of the investment advisory fee. This arrangement is not part of the advisory contract and may be amended or rescinded in the future. OTHER SERVICES FUND ADMINISTRATION Federated Services Company, a subsidiary of Federated Investors, provides administrative personnel and services to the Fund for a fee as described in the prospectus. From March 1, 1994, to March 1, 1996, Federated Administrative Services served as the Fund's Administrator. Prior to March 1, 1994, Federated Administrative Services, Inc. served as the Fund's Administrator. Both former Administrators are subsidiaries of Federated Investors. For purposes of this Statement of Additional Information, Federated Services Company, Federated Administrative Services, and Federated Administrative Services, Inc. may hereinafter collectively be referred to as the "Administrators." For the fiscal year ended February 29, 1996, and fiscal years ended February 28, 1995, and 1994, Federated Administrative Services earned $271,695, $436,750 and $765,738, respectively. Dr. Henry J. Gailliot, an officer of Federated Management, the adviser to the Fund, holds approximately 20% of the outstanding common stock and serves as a director of Commercial Data Services, Inc., a company which provides computer processing services to Federated Services Company. CUSTODIAN AND PORTFOLIO RECORDKEEPER State Street Bank and Trust Company, Boston, MA, is custodian for the securities and cash of the Fund. Federated Services Company, Pittsburgh, PA, provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments. The fee paid for this service is based upon the level of the Fund's average net assets for the period plus out-of-pocket expenses. TRANSFER AGENT Federated Services Company, through its registered transfer agent, Federated Shareholder Services Company, maintains all necessary shareholder records and receives a fee based on the size, type and number of accounts and transactions made by shareholders. INDEPENDENT AUDITORS The independent auditors for the Fund are Deloitte & Touche LLP, Pittsburgh, Pennsylvania. BROKERAGE TRANSACTIONS When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the adviser looks for prompt execution of the order at a favorable price. In working with dealers, the adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. The adviser makes decisions on portfolio transactions and selects brokers and dealers subject to guidelines established by the Directors. The adviser may select brokers and dealers who offer brokerage and research services. These services may be furnished directly to the Fund or to the adviser and may include: advice as to the advisability of investing in securities; security analysis and reports; economic studies; industry studies; receipt of quotations for portfolio evaluations; and similar services. Research services provided by brokers and dealers may be used by the adviser or its affiliates in advising the Fund and other accounts. To the extent that receipt of these services may supplant services for which the adviser or its affiliates might otherwise have paid, it would tend to reduce their expenses. The adviser and its affiliates exercise reasonable business judgment in selecting brokers who offer brokerage and research services to execute securities transactions. They determine in good faith that commissions charged by such persons are reasonable in relationship to the value of the brokerage and research services provided. During the fiscal year ended February 29, 1996, and fiscal years ended February 28, 1995, and 1994, the Fund paid no brokerage commissions. Although investment decisions for the Fund are made independently from those of the other accounts managed by the adviser, investments of the type the Fund may make may also be made by those other accounts. When the Fund and one or more other accounts managed by the adviser are prepared to invest in, or desire to dispose of, the same security, available investments or opportunities for sales will be allocated in a manner believed by the adviser to be equitable to each. In some cases, this procedure may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund. In other cases, however, it is believed that coordination and the ability to participate in volume transactions will be to the benefit of the Fund. PURCHASING SHARES Except under certain circumstances described in the prospectus, shares are sold at their net asset value on days the New York Stock Exchange is open for business. The procedure for purchasing shares of the Fund is explained in the prospectus under "Investing in the Fund." DISTRIBUTION PLAN AND SHAREHOLDER SERVICES These arrangements permit the payment of fees to financial institutions, the distributor, and Federated Shareholder Services to stimulate distribution activities and to cause services to be provided to shareholders by a representative who has knowledge of the shareholder's particular circumstances and goals. These activities and services may include, but are not limited to, marketing efforts; providing office space, equipment, telephone facilities, and various clerical, supervisory, computer, and other personnel as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries, and assisting clients in changing dividend options, account designations, and addresses. By adopting the Distribution Plan, the Board of Directors expects that the Fund will be able to achieve a more predictable flow of cash for investment purposes and to meet redemptions. This will facilitate more efficient portfolio management and assist the Fund in pursuing its investment objectives. By identifying potential investors whose needs are served by the Fund's objectives, and properly servicing these accounts, it may be possible to curb sharp fluctuations in rates of redemptions and sales. Other benefits, which may be realized under either arrangement, may include: (1) providing personal services to shareholders; (2) investing shareholder assets with a minimum of delay and administrative detail; (3) enhancing shareholder recordkeeping systems; and (4) responding promptly to shareholders' requests and inquiries concerning their accounts. For the fiscal year ended February 29, 1996, the Fund paid $897,526 pursuant to the Fund's Rule 12b-1 plan, $851,425 of which was waived. For the same period, the Fund paid $897,526 in shareholder services fees, $46,101 of which was waived. CONVERSION TO FEDERAL FUNDS It is the Fund's policy to be as fully invested as possible so that maximum interest may be earned. To this end, all payments from shareholders must be in federal funds or be converted into federal funds before shareholders begin to earn dividends. State Street Bank acts as the shareholder's agent in depositing checks and converting them to federal funds. DETERMINING NET ASSET VALUE Net asset value generally changes each day. The days on which net asset value is calculated by the Fund are described in the prospectus. Net asset value will not be calculated on Good Friday and on the following holidays: New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. DETERMINING MARKET VALUE OF SECURITIES Market values of the Fund's securities are determined as follows: o as provided by an independent pricing service; o for short-term obligations, according to the mean between the bid and asked prices, as furnished by an independent pricing service, or for short-term obligations with remaining maturities of 60 days or less at the time of purchase, at amortized cost unless the Board of Directors determines this is not fair value; or o at fair value as determined in good faith by the Fund's Board of Directors. Prices provided by independent pricing services may be determined without relying exclusively on quoted prices. Pricing services may consider: o yield; o quality; o coupon rate; o maturity; o type of issue; o trading characteristics; and o other market data. EXCHANGE PRIVILEGE REQUIREMENTS FOR EXCHANGE Shareholders using this privilege must exchange shares having a net asset value of at least $1,500. Before the exchange, the shareholder must receive a prospectus of the fund for which the exchange is being made. This privilege is available to shareholders residing in any state in which the fund shares being acquired may be sold. Upon receipt of proper instructions and required supporting documents, shares submitted for exchange are redeemed and the proceeds invested in shares of the other fund. Further information on the exchange privilege and prospectuses for Federated. Funds or certain Federated Funds are available by calling the Fund. TAX CONSEQUENCES Exercise of this exchange privilege is treated as a sale for federal income tax purposes. Depending upon the circumstances, a short or long-term capital gain or loss may be realized. MAKING AN EXCHANGE Instructions for exchanges for certain Federated Funds must be given in writing by the shareholder. Written instructions may require a signature guarantee. REDEEMING SHARES The Fund redeems shares at the next computed net asset value after the Fund receives the redemption request. Redemption procedures are explained in the prospectus under "Redeeming Shares." Although the Fund does not charge for telephone redemptions, it reserves the right to charge a fee for the cost of wire-transferred redemptions of less than $5,000. Certain shares redeemed within one to four years of purchase may be subject to a contingent deferred sales charge. The amount of the contingent deferred sales charge is based upon the amount of the administrative fee paid at the time of purchase by the distributor to the financial institutions for services rendered, and the length of time the investor remains a shareholder in the Fund. Should financial institutions elect to receive an amount less than the administrative fee that is stated in the prospectus for servicing a particular shareholder, the contingent deferred sales charge and/or holding period for that particular shareholder will be reduced accordingly. REDEMPTION IN KIND Although the Fund intends to redeem shares in cash, it reserves the right under certain circumstances to pay the redemption price in whole or in part by a distribution of securities from the Fund's portfolio. Redemption in kind will be made in conformity with applicable Securities and Exchange Commission rules, taking such securities at the same value employed in determining net asset value and selecting the securities in a manner the Board of Directors determine to be fair and equitable. The Fund has elected to be governed by Rule 18f-1 of the Investment Company Act of 1940 under which the Fund is obligated to redeem shares for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's net asset value during any 90-day period. Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving their securities and selling them before their maturity could receive less than the redemption value of their securities and could incur certain transaction costs. TAX STATUS THE FUND'S TAX STATUS The Fund will pay no federal income tax because it expects to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. To qualify for this treatment, the Fund must, among other requirements: o derive at least 90% of its gross income from dividends, interest, and gains from the sale of securities; o derive less than 30% of its gross income from the sale of securities held less than three months; o invest in securities within certain statutory limits; and o distribute to its shareholders at least 90% of its net income earned during the year. SHAREHOLDERS' TAX STATUS Shareholders are subject to federal income tax on dividends and capital gains received as cash or additional shares. No portion of any income dividend paid by the Fund is eligible for the dividends received deduction available to corporations. CAPITAL GAINS Shareholders will pay federal tax at capital gains rates on long-term capital gains distributed to them regardless of how long they have held the Fund shares. TOTAL RETURN The Fund's average annual total return for the one-year period ended February 29, 1996, and for the period from July 25, 1991 (date of initial public investment) to February 29, 1996 were 5.76% and 4.41%, respectively. The average annual total return for the Fund is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of shares owned at the end of the period by the offering price per share at the end of the period. The number of shares owned at the end of the period is based on the number of shares purchased at the beginning of the period with $1,000, adjusted over the period by any additional shares, assuming the monthly reinvestment of all dividends and distributions. Any applicable redemption fee is deducted from the ending value of the investment based on the lesser of the original purchase price or the offering price of shares redeemed. YIELD The Fund's yield for the thirty-day period ended February 29, 1996, was 5.72%. The yield for the Fund is determined by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by the Fund over a thirty-day period by the maximum offering price per share of the Fund on the last day of the period. This value is then annualized using semi-annual compounding. This means that the amount of income generated during the thirty-day period is assumed to be generated each month over a twelve-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by the Fund because of certain adjustments required by the Securities and Exchange Commission and, therefore, may not correlate to the dividends or other distributions paid to shareholders. To the extent that financial institutions and broker/dealers charge fees in connection with services provided in conjunction with an investment in the Fund, performance will be reduced for those shareholders paying those fees. PERFORMANCE COMPARISONS The Fund's performance depends upon such variables as: o portfolio quality; o average portfolio maturity; o type of instruments in which the portfolio is invested; o changes in interest rates and market value of portfolio securities; o changes in Fund's expenses; and o various other factors. The Fund's performance fluctuates on a daily basis largely because net earnings and offering price per share fluctuate daily. Both net earnings and offering price per share are factors in the computation of yield and total return. Investors may use financial publications and/or indices to obtain a more complete view of the Fund's performance. When comparing performance, investors should consider all relevant factors such as the composition of any index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include: o LEHMAN BROTHERS ADJUSTABLE RATE MORTGAGE FUNDS AVERAGE is comprised of all agency guaranteed securities with coupons that periodically adjust over a spread of a published index. o LEHMAN BROTHERS MUTUAL FUND SHORT (1-3) U.S. GOVERNMENT INDEX is an index comprised of mutual funds which invest in short-term (1-3 year) government securities. o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all capital gains distributions and income dividends and takes into account any change in net asset value over a specific period of time. From time to time, the Fund will quote its Lipper ranking in the "U.S. Mortgage Funds" category in advertising and sales literature. o MORNINGSTAR, INC., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of all types, according to their risk- adjusted returns. The maximum rating is five stars, and ratings are effective for two weeks. Advertisements and other sales literature for the Fund may quote total returns which are calculated on non-standardized base periods. These total returns represent the historic change in the value of an investment in the Fund based on monthly reinvestment of dividends over a specified period of time. From time to time, the Fund may advertise its performance, using charts, graphs, and descriptions, compared to federally insured bank products including certificates of deposit and time deposits and to money market funds using the Lipper Analytical Services, Inc., money market instruments average. Advertising and sales literature may show the Fund's net asset value history in relation to certain political and economic events. ABOUT FEDERATED INVESTORS Federated Investors is dedicated to meeting investor needs which is reflected in its investment decision making-structured, straightforward, and consistent. This has resulted in a history of competitive performance with a range of competitive investment products that have gained the confidence of thousands of clients and their customers. The company's disciplined security selection process is firmly rooted in sound methodologies backed by fundamental and technical research. Investment decisions are made and executed by teams of portfolio managers, analysts, and traders dedicated to specific market sectors. J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity and high yield corporate bond management while William D. Dawson, Executive Vice President, oversees Federated Investors' domestic fixed income management. Henry A. Frantzen, Executive Vice President, oversees the management of Federated Investors' international portfolios. MUTUAL FUND MARKET Twenty-seven percent of American households are pursuing their financial goals through mutual funds. These investors, as well as businesses and institutions, have entrusted over $2 trillion to the more than 5,500 funds available.* Federated Investors, through its subsidiaries, distributes mutual funds for a variety of investment applications. Specific markets include: INSTITUTIONAL CLIENTS Federated Investors meets the needs of more than 4,000 institutional clients nationwide by managing and servicing separate accounts and mutual funds for a variety of applications, including defined benefit and defined contribution programs, cash management, and asset/liability management. Institutional clients include corporations, pension funds, tax-exempt entities, foundations/endowments, insurance companies, and investment and financial advisors. The marketing effort to these institutional clients is headed by John B. Fisher, President, Institutional Sales Division. TRUST ORGANIZATIONS Other institutional clients include close relationships with more than 1,500 banks and trust organizations. Virtually all of the trust divisions of the top 100 bank holding companies use Federated funds in their clients' portfolios. The marketing effort to trust clients is headed by Mark R. Gensheimer, Executive Vice President, Bank Marketing & Sales. BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES Federated funds are available to consumers through major brokerage firms nationwide--including 200 New York Stock Exchange firms--supported by more wholesalers than any other mutual fund distributor. The marketing effort to these firms is headed by James F. Getz, President, Broker/Dealer Division. *Source: Investment Company Institute PART C. OTHER INFORMATION. Item 24. Financial Statements and Exhibits: (a)Financial Statements (Filed in Part A) (b)Exhibits: (1) (i)Conformed Copy of Articles of Incorporation of the Registrant; (3) (ii)Conformed Copy of Amendment No. 1 to Articles of Incorporation of the Registrant; (3) (2) (i)..........Copy of By-Laws of the Registrant; (3) (ii)..........Copy of Amendment No. 1 to the Bylaws; (3) (3) Not applicable; (4) Copy of Specimen Certificate for Shares of Capital Stock of the Registrant; (2) (5) Copy of Investment Advisory Contract of the Registrant; (3) (6) Copy of Distributor's Contract of the Registrant; (3) (i)..........The Registrant hereby incorporates the conformed copy of the specimen Mutual Funds Sales and Service Agreement; Mutual Funds Service Agreement; and Plan Trustee/Mutual Funds Service CUSIP 349554105 1071005B (4/96) Agreement from Item 4 (b)(6) of the Cash Trust Series II Registration Statement on Form N1-A, filed with the Commission on July 24, 1995. (File Numbers 33-38550 and 811-6269). (7) Not applicable; (8) Conformed Copy of Custodian Agreement of the Registrant; (3) (9) (i)..........Conformed copy of Agreement for Fund Accounting ....Services, Shareholder Recordkeeping Services, and Custody Services Procurement; + (ii) The Registrant hereby incorporates the conformed copy of the Shareholder Services Sub- Contract between National Pensions Alliance, Ltd. and Federated Shareholder Services from Item 24(b)(9)(ii) of the Federated GNMA Trust Registration Statement on Form N-1A, filed with the Commission on March 25, 1996. (File Nos. 2-75670 and 811-3375) + All exhibits have been filed electronically. 1. Response is incorporated by reference to Registrant's Post-Effective Registration Statement on Form N-1A filed April 24, 1994. (File Nos. 33-41004 and 811-6307). 2. Response is incorporated by reference to Registrant's Pre-Effective Amendment No. 1 filed July 18, 1991. (File Nos. 33-41004 and 811-6307) 3. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 8 filed April 21, 1995. (File Nos. 33-41004 and 811-6307) (iii) The Registrant hereby incorporates the conformed copy of the Shareholder Services Sub- Contract between Fidelity and Federated Shareholder Services from Item 24(b)(9)(iii) of the Federated GNMA Trust Registration Statement on Form N-1A, filed with the Commission on March 25, 1996. (File Nos. 2-75670 and 811-3375) (iv) The Registration hereby incorporates the conformed copy of the Shareholder Services Sub- Contract between Fidelity and Federated Shareholder Services from Item 24(b)(9)(iii) of the Commission on March 26, Form N-1A, filed with the Commission on March 26, 1996. (File Nos. 2-75670 and 811-3375). (10) Copy of Opinion and Consent of Counsel as to legality of shares being registered; (3) (11) Conformed copy of Consent of Independent Public Accountants;+ (12) Not applicable; (13) Conformed Copy of Initial Capital Understanding; (3) (14) Not applicable; (15) (i)Conformed Copy of Rule 12b-1 Plan; (1) (ii)Conformed Copy of 12b-1 Agreement; (1) (16) Copy of Schedule for Computation of Fund Performance Data; (3) (17) Copy of Financial Data Schedule;+ (18) Not applicable; (19) Conformed Copy of Power of Attorney;+ + All exhibits have been filed electronically. 1. Response is incorporated by reference to Registrant's Post-Effective Registration Statement on Form N-1A filed April 24, 1994. (File Nos. 33-41004 and 811-6307). 2. Response is incorporated by reference to Registrant's Pre-Effective Amendment No. 1 filed July 18, 1991. (File Nos. 33-41004 and 811-6307) 3. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 8 filed April 21, 1995. (File Nos. 33-41004 and 811-6307) Item 25. Persons Controlled by or Under Common Control with Registrant: None Item 26. Number of Holders of Securities: Number of Record Holders Title of Class as of March 29, 1996 Shares of common stock 31,304,507.2770 ($0.0001 per Share par value) Item 27. Indemnification: (2) Item 28. Business and Other Connections of Investment Adviser: (a)For a description of the other business of the investment adviser, see the section entitled "Fund Information - Management of the Fund" in Part A. The affiliations with the Registrant of four of the Trustees and four of the Officers of the investment adviser are included in Part B of this Registration Statement under "Fortress Adjustable Rate U.S. Government Fund, Inc. Management" The remaining Trustee of the investment adviser, his position with the investment adviser, and, in parentheses, his principal occupation is: Mark D. Olson, (Partner, Wilson, Halbrook & Bayard) 107 W. Market Street, Georgetown, Delaware 19947. The remaining Officers of the investment adviser are: Mark L. Mallon, William D. Dawson, III, and J. Thomas Madden, Executive Vice Presidents; Henry J. Gailliot, Senior Vice President- Economist; Peter R. Anderson, and J. Alan Minteer, Senior Vice Presidents; J. Scott Albrecht, Randall A. Bauer, David A. Briggs, Jonathan C. Conley, Deborah A. Cunningham, Michael P. Donnelly, Mark Durbiano, Kathleen M. Foody-Malus, Thomas M. Franks, Jeff A. Kozemchak, Marian R. Marinack, Gregory M. Melvin, Susan M. Nason, Mary Jo Ochson, Robert J. Ostrowski, Frederick L. Plautz, Jr., Charles A. Ritter, James D. Roberge, Sandra L. Weber, Christopher H. Wiles, Vice Presidents. The business address of each of the Officers of the investment adviser is Federated Investors Tower, Pittsburgh, PA 15222- 3779. These individuals are also officers of a majority of the investment advisers to the Funds listed in Part B of this Registration Statement. 2. Response is incorporated by reference to Registrant's Pre-Effective Amendment No. 1 filed July 18, 1991. (File Nos. 33-41004 and 811-6307) Item 29. Principal Underwriters: (a) 111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated Government Money Trust; BayFunds; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance Series; Federated Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust; Independence One Mutual Funds; Intermediate Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Biltmore Funds; The Biltmore Municipal Funds; The Monitor Funds; The Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus Funds; Tower Mutual Funds; Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.; andWorld Investment Series, Inc. Federated Securities Corp. also acts as principal underwriter for thefollowing closed-end investment company: Liberty Term Trust, Inc.- 1999. (b) (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Underwriter With Registrant Richard B. Fisher Director, Chairman, Chief Vice President Federated Investors Tower Executive Officer, Chief Pittsburgh, PA 15222-3779 Operating Officer, Asst. Secretary, and Asst. Treasurer, Federated Securities Corp. Edward C. Gonzales Director, Executive ViceExecutive Vice Federated Investors Tower President, Federated, President Pittsburgh, PA 15222-3779 Securities Corp. John W. McGonigle Director, Federated Executive Vice Federated Investors Tower Securities Corp. President and Pittsburgh, PA 15222-3779 Secretary John B. Fisher President-Institutional Sales, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James F. Getz President-Broker/Dealer, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark R. Gensheimer Executive Vice President of -- Federated Investors Tower Bank/Trust, Federated Pittsburgh, PA 15222-3779 Securities Corp. Mark W. Bloss Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard W. Boyd Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Theodore Fadool, Jr. Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Bryant R. Fisher Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Underwriter With Registrant Christopher T. Fives Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James S. Hamilton Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James M. Heaton Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Keith Nixon Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Solon A. Person, IV Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Timothy C. Pillion Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Thomas E. Territ Senior Vice President, -- Federated Investors Tower Federated Securities Corp Pittsburgh, PA 15222-3779 John B. Bohnet Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Byron F. Bowman Vice President, Secretary, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jane E. Broeren-Lambesis Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Underwriter With Registrant Mary J. Combs Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 R. Edmond Connell, Jr. Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Kevin J. Crenny Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Daniel T. Culbertson Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 G. Michael Cullen Vice President, -- Federated Investors Tower Federated Securites Corp. Pittsburgh, PA 15222-3779 Laura M. Deger Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jill Ehrenfeld Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark D. Fisher Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Michael D. Fitzgerald Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Joseph D. Gibbons Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Underwriter With Registrant Craig S. Gonzales Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard C. Gonzales Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Scott A. Hutton Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 H. Joseph Kenedy Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 William E. Kugler Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Steven A. La Versa Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark J. Miehl Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard C. Mihm Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 J. Michael Miller Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Michael P. O'Brien Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Underwriter With Registrant Robert D. Oehlschlager Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Robert F. Phillips Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Eugene B. Reed Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Paul V. Riordan Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 John C. Shelar, Jr. Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 David W. Spears Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jeffrey A. Stewart Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jamie M. Teschner Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 William C. Tustin Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Paul A. Uhlman Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard B. Watts Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Underwriter With Registrant Michael P. Wolff Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Charlene H. Jennings Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 J. Timothy Radcliff Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Denis McAuley Treasurer, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Thomas R. Donahue Asstistant Secretary, -- Federated Investors Tower Assistant Treasurer, Pittsburgh, PA 15222-3779 Federated Securities Corp. Joseph M. Huber Assistant Secretary, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 David M. Taylor Assistant Secretary, Treasurer Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (c)Not applicable. Item 30. Location of Accounts and Records: All accounts and records required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated thereunder are maintained at one the following locations: Registrant Federated Investors Tower Pittsburgh, PA 15222-3779 Federated Shareholder Services Company Federated Investors Tower ("Transfer Agent and Pittsburgh, PA 15222-3779 Dividend Disbursing Agent") Federated Administrative Federated Investors Tower Services Pittsburgh, PA 15222-3779 ("Administrator") Federated Advisers Federated Investors Tower ("Adviser") Pittsburgh, PA 15222-3779 State Street Bank and Trust P.O. Box 8604 Company Boston, MA 02266-8604 ("Custodian") Item 31. Management Services: Not applicable. Item 32. Undertakings: Registrant hereby undertakes to comply with the provisions of Section 16(c) of the 1940 Act with respect to the removal of Directors and the calling of special shareholder meetings by shareholders. Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC., certifies that it meets all of the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the 23rd day of April, 1996. FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND BY: /s/ Charles H. Field Charles H. Field, Assistant Secretary Attorney in Fact for John F. Donahue April 25, 1996 Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Statement has been signed below by the following person in the capacity and on the date indicated: NAME TITLE DATE By:/s/ Charles H. Field Charles H. Field Attorney In Fact April 25, 1996 ASSISTANT SECRETARY For the Persons Listed Below John F. Donahue* Chairman and Director (Chief Executive Officer) Richard B. Fisher* President and Director Edward C. Gonzales* Vice President and Treasurer (Principal Financial and Accounting Officer) Thomas G. Bigley* Director John T. Conroy, Jr.* Director William J. Copeland* Director James E. Dowd* Director Lawrence D. Ellis, M.D.* Director Edward L. Flaherty, Jr.* Director Peter E. Madden* Director Gregor F. Meyer* Director John E. Murray, Jr.* Director Wesley W. Posvar* Director Marjorie P. Smuts* Director EX-99.AUDITORCONSNT 2 Exhibit (11) under N-1A Exhibit 23 under 601/Reg SK INDEPENDENT AUDITOR'S CONSENT To the Board Directors and Shareholders of FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.: We consent to the use in Post-Effective Amendment No. 10 to Registration Statement (No. 33-41004) of Federated Adjustable Rate U.S. Government Fund, Inc. (formerly, Fortress Adjustable Rate U.S. Government Fund, Inc.) of our report dated April 18, 1996 appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading "Financial Highlights" in such Prospectus. By: DELOITTE & TOUCHE LLP Deloitte & Touche LLP Pittsburgh, Pennsylvania EX-99.AGMTTOSVCS 3 Exhibit 9(II) under Form N-1A Exhibit 10 under Item 601/Reg. S-K AGREEMENT FOR FUND ACCOUNTING SERVICES, ADMINISTRATIVE SERVICES, TRANSFER AGENCY SERVICES AND CUSTODY SERVICES PROCUREMENT AGREEMENT made as of March 1, 1996, by and between those investment companies listed on Exhibit 1 as may be amended from time to time, having their principal office and place of business at Federated Investors Tower, Pittsburgh, PA 15222-3779 (the "Investment Company"), on behalf of the portfolios (individually referred to herein as a "Fund" and collectively as "Funds") of the Investment Company, and FEDERATED SERVICES COMPANY, a Pennsylvania corporation, having its principal office and place of business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779 on behalf of itself and its subsidiaries (the "Company"). WHEREAS, the Investment Company is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), with authorized and issued shares of capital stock or beneficial interest ("Shares"); WHEREAS, the Investment Company may desire to retain the Company as fund accountant to provide fund accounting services (as herein defined) including certain pricing, accounting and recordkeeping services for each of the Funds, including any classes of shares issued by any Fund ("Classes") if so indicated on Exhibit 1, and the Company desires to accept such appointment; WHEREAS, the Investment Company may desire to appoint the Company as its administrator to provide it with administrative services (as herein defined), if so indicated on Exhibit, and the Company desires to accept such appointment; WHEREAS, the Investment Company may desire to appoint the Company as its transfer agent and dividend disbursing agent to provide it with transfer agency services (as herein defined) if so indicated on Exhibit 1, and agent in connection with certain other activities, and the Company desires to accept such appointment; and WHEREAS, the Investment Company may desire to appoint the Company as its agent to select, negotiate and subcontract for custodian services from an approved list of qualified banks if so indicated on Exhibit 1, and the Company desires to accept such appointment; and NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION ONE: FUND ACCOUNTING. ARTICLE 1. APPOINTMENT. The Investment Company hereby appoints the Company to provide certain pricing and accounting services to the Funds, and/or the Classes, for the period and on the terms set forth in this Agreement. The Company accepts such appointment and agrees to furnish the services herein set forth in return for the compensation as provided in Article 3 of this Section. ARTICLE 2. THE COMPANY'S DUTIES. Subject to the supervision and control of the Investment Company's Board of Trustees or Directors ("Board"), the Company will assist the Investment Company with regard to fund accounting for the Investment Company, and/or the Funds, and/or the Classes, and in connection therewith undertakes to perform the following specific services; A. Value the assets of the Funds using: primarily, market quotations, including the use of matrix pricing, supplied by the independent pricing services selected by the Company in consultation with the adviser, or sources selected by the adviser, and reviewed by the board; secondarily, if a designated pricing service does not provide a price for a security which the Company believes should be available by market quotation, the Company may obtain a price by calling brokers designated by the investment adviser of the fund holding the security, or if the adviser does not supply the names of such brokers, the Company will attempt on its own to find brokers to price those securities; thirdly, for securities for which no market price is available, the Pricing Committee of the Board will determine a fair value in good faith. Consistent with Rule 2a-4 of the 40 Act, estimates may be used where necessary or appropriate. The Company's obligations with regard to the prices received from outside pricing services and designated brokers or other outside sources, is to exercise reasonable care in the supervision of the pricing agent. The Company is not the guarantor of the securities prices received from such agents and the Company is not liable to the Fund for potential errors in valuing a Fund's assets or calculating the net asset value per share of such Fund or Class when the calculations are based upon such prices. All of the above sources of prices used as described are deemed by the Company to be authorized sources of security prices. The Company provides daily to the adviser the securities prices used in calculating the net asset value of the fund, for its use in preparing exception reports for those prices on which the adviser has comment. Further, upon receipt of the exception reports generated by the adviser, the Company diligently pursues communication regarding exception reports with the designated pricing agents; B. Determine the net asset value per share of each Fund and/or Class, at the time and in the manner from time to time determined by the Board and as set forth in the Prospectus and Statement of Additional Information ("Prospectus") of each Fund; C. Calculate the net income of each of the Funds, if any; D. Calculate realized capital gains or losses of each of the Funds resulting from sale or disposition of assets, if any; E. Maintain the general ledger and other accounts, books and financial records of the Investment Company, including for each Fund, and/or Class, as required under Section 31(a) of the 1940 Act and the Rules thereunder in connection with the services provided by the Company; F. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records to be maintained by Rule 31a-1 under the 1940 Act in connection with the services provided by the Company. The Company further agrees that all such records it maintains for the Investment Company are the property of the Investment Company and further agrees to surrender promptly to the Investment Company such records upon the Investment Company's request; G. At the request of the Investment Company, prepare various reports or other financial documents in accordance with generally accepted accounting principles as required by federal, state and other applicable laws and regulations; and H. Such other similar services as may be reasonably requested by the Investment Company. The foregoing, along with any additional services that the Company shall agree in writing to perform for the Investment Company under this Section One, shall hereafter be referred to as "Fund Accounting Services." ARTICLE 3. COMPENSATION AND ALLOCATION OF EXPENSES. A. The Funds will compensate the Company for Fund Accounting Services in accordance with the fees agreed upon from time to time between the parties hereto. Such fees do not include out-of-pocket disbursements of the Company for which the Funds shall reimburse the Company. Out- of-pocket disbursements shall include, but shall not be limited to, the items agreed upon between the parties from time to time. B. The Fund and/or the Class, and not the Company, shall bear the cost of: custodial expenses; membership dues in the Investment Company Institute or any similar organization; transfer agency expenses; investment advisory expenses; costs of printing and mailing stock certificates, Prospectuses, reports and notices; administrative expenses; interest on borrowed money; brokerage commissions; taxes and fees payable to federal, state and other governmental agencies; fees of Trustees or Directors of the Investment Company; independent auditors expenses; legal and audit department expenses billed to the Company for work performed related to the Investment Company, the Funds, or the Classes; law firm expenses; organizational expenses; or other expenses not specified in this Article 3 which may be properly payable by the Funds and/or Classes. C. The compensation and out-of-pocket expenses attributable to the Fund shall be accrued by the Fund and shall be paid to the Company no less frequently than monthly, and shall be paid daily upon request of the Company. The Company will maintain detailed information about the compensation and out-of-pocket expenses by Fund and Class. D. Any schedule of compensation agreed to hereunder, as may be adjusted from time to time, shall be dated and signed by a duly authorized officer of the Investment Company and/or the Funds and a duly authorized officer of the Company. E. The fee for the period from the effective date of this Agreement with respect to a Fund or a Class to the end of the initial month shall be prorated according to the proportion that such period bears to the full month period. Upon any termination of this Agreement before the end of any month, the fee for such period shall be prorated according to the proportion which such period bears to the full month period. For purposes of determining fees payable to the Company, the value of the Fund's net assets shall be computed at the time and in the manner specified in the Fund's Prospectus. F. The Company, in its sole discretion, may from time to time subcontract to, employ or associate with itself such person or persons as the Company may believe to be particularly suited to assist it in performing Fund Accounting Services. Such person or persons may be affiliates of the Company, third-party service providers, or they may be officers and employees who are employed by both the Company and the Investment Company; provided, however, that the Company shall be as fully responsible to each Fund for the acts and omissions of any such subcontractor as it is for its own acts and omissions. The compensation of such person or persons shall be paid by the Company and no obligation shall be incurred on behalf of the Investment Company, the Funds, or the Classes in such respect. SECTION TWO: ADMINISTRATIVE SERVICES. ARTICLE 4. APPOINTMENT. The Investment Company hereby appoints the Company as Administrator for the period on the terms and conditions set forth in this Agreement. The Company hereby accepts such appointment and agrees to furnish the services set forth in Article 5 of this Agreement in return for the compensation set forth in Article 9 of this Agreement. ARTICLE 5. THE COMPANY'S DUTIES. As Administrator, and subject to the supervision and control of the Board and in accordance with Proper Instructions (as defined hereafter) from the Investment Company the Company will provide facilities, equipment, and personnel to carry out the following administrative services for operation of the business and affairs of the Investment Company and each of its portfolios: A. prepare, file, and maintain the Investment Company's governing documents and any amendments thereto, including the Charter (which has already been prepared and filed), the By-laws and minutes of meetings of the Board and Shareholders; B. prepare and file with the Securities and Exchange Commission and the appropriate state securities authorities the registration statements for the Investment Company and the Investment Company's shares and all amendments thereto, reports to regulatory authorities and shareholders, prospectuses, proxy statements, and such other documents all as may be necessary to enable the Investment Company to make a continuous offering of its shares; C. prepare, negotiate, and administer contracts (if any) on behalf of the Investment Company with, among others, the Investment Company's investment advisers and distributors, subject to any applicable restrictions of the Board or the 1940 Act; D. calculate performance data of the Investment Company for dissemination to information services covering the investment company industry; E. prepare and file the Investment Company's tax returns; F. coordinate the layout and printing of publicly disseminated prospectuses and reports; G. perform internal audit examinations in accordance with a charter to be adopted by the Company and the Investment Company; H. assist with the design, development, and operation of the Investment Company and the Funds; I. provide individuals reasonably acceptable to the Board for nomination, appointment, or election as officers of the Investment Company, who will be responsible for the management of certain of the Investment Company's affairs as determined by the Investment Company's Board; and J. consult with the Investment Company and its Board on matters concerning the Investment Company and its affairs. The foregoing, along with any additional services that the Company shall agree in writing to perform for the Investment Company under this Section 4, shall hereafter be referred to as "Administrative Services." ARTICLE 6. RECORDS. The Company shall create and maintain all necessary books and records in accordance with all applicable laws, rules and regulations, including but not limited to records required by Section 31(a) of the Investment Company act of 1940 and the rules thereunder, as the same may be amended from time to time, pertaining to the Administrative Services performed by it and not otherwise created and maintained by another party pursuant to contract with the Investment Company. Where applicable, such records shall be maintained by the Company for the periods and in the places required by Rule 31a-2 under the 1940 Act. The books and records pertaining to the Investment Company which are in the possession of the Company shall be the property of the Investment Company. The Investment Company, or the Investment Company's authorized representatives, shall have access to such books and records at all times during the Company's normal business hours. Upon the reasonable request of the Investment Company, copies of any such books and records shall be provided promptly by the Company to the Investment Company or the Investment Company's authorized representatives. ARTICLE 7. DUTIES OF THE FUND. The Fund assumes full responsibility for the preparation, contents and distribution of its own offering document and for complying with all applicable requirements the 1940 Act, the Internal Revenue Code, and any other laws, rules and regulations of government authorities having jurisdiction. ARTICLE 8. EXPENSES. The Company shall be responsible for expenses incurred in providing office space, equipment, and personnel as may be necessary or convenient to provide the Administrative Services to the Investment Company, including the compensation of the Company employees who serve as trustees or directors or officers of the Investment Company. The Investment Company shall be responsible for all other expenses incurred by the Company on behalf of the Investment Company, including without limitation postage and courier expenses, printing expenses, travel expenses, registration fees, filing fees, fees of outside counsel and independent auditors, or other professional services, organizational expenses, insurance premiums, fees payable to persons who are not the Company's employees, trade association dues, and other expenses properly payable by the Funds and/or the Classes. ARTICLE 9. COMPENSATION. For the Administrative Services provided, the Investment Company hereby agrees to pay and the Company hereby agrees to accept as full compensation for its services rendered hereunder an administrative fee at an annual rate per Fund, as specified below. The compensation and out of pocket expenses attributable to the Fund shall be accrued by the Fund and paid to the Company no less frequently than monthly, and shall be paid daily upon request of the Company. The Company will maintain detailed information about the compensation and out of pocket expenses by the Fund. MAX. ADMIN. AVERAGE DAILY NET ASSETS FEE OF THE FUNDS .150% on the first $250 million .125% on the next $250 million .100% on the next $250 million .075% on assets in excess of $750 million (Average Daily Net Asset break-points are on a complex-wide basis) However, in no event shall the administrative fee received during any year of the Agreement be less than, or be paid at a rate less than would aggregate $125,000 per Fund and $30,000 per Class. The minimum fee set forth above in this Article 9 may increase annually upon each March 1 anniversary of this Agreement over the minimum fee during the prior 12 months, as calculated under this agreement, in an amount equal to the increase in Pennsylvania Consumer Price Index (not to exceed 6% annually) as last reported by the U.S. Bureau of Labor Statistics for the twelve months immediately preceding such anniversary. ARTICLE 10. RESPONSIBILITY OF ADMINISTRATOR. A. The Company shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Investment Company in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. The Company shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Investment Company) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. Any person, even though also an officer, director, trustee, partner, employee or agent of the Company, who may be or become an officer, director, trustee, partner, employee or agent of the Investment Company, shall be deemed, when rendering services to the Investment Company or acting on any business of the Investment Company (other than services or business in connection with the duties of the Company hereunder) to be rendering such services to or acting solely for the Investment Company and not as an officer, director, trustee, partner, employee or agent or one under the control or direction of the Company even though paid by the Company. B. The Company shall be kept indemnified by the Investment Company and be without liability for any action taken or thing done by it in performing the Administrative Services in accordance with the above standards. In order that the indemnification provisions contained in this Article 10 shall apply, however, it is understood that if in any case the Investment Company may be asked to indemnify or hold the Company harmless, the Investment Company shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the Company will use all reasonable care to identify and notify the Investment Company promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the Investment Company. The Investment Company shall have the option to defend the Company against any claim which may be the subject of this indemnification. In the event that the Investment Company so elects, it will so notify the Company and thereupon the Investment Company shall take over complete defense of the claim, and the Company shall in such situation initiate no further legal or other expenses for which it shall seek indemnification under this Article. the Company shall in no case confess any claim or make any compromise in any case in which the Investment Company will be asked to indemnify the Company except with the Investment Company's written consent. SECTION THREE: TRANSFER AGENCY SERVICES. ARTICLE 11. TERMS OF APPOINTMENT. Subject to the terms and conditions set forth in this Agreement, the Investment Company hereby appoints the Company to act as, and the Company agrees to act as, transfer agent and dividend disbursing agent for each Fund's Shares, and agent in connection with any accumulation, open-account or similar plans provided to the shareholders of any Fund ("Shareholder(s)"), including without limitation any periodic investment plan or periodic withdrawal program. ARTICLE 12. DUTIES OF THE COMPANY. The Company shall perform the following services in accordance with Proper Instructions as may be provided from time to time by the Investment Company as to any Fund: A. Purchases (1) The Company shall receive orders and payment for the purchase of shares and promptly deliver payment and appropriate documentation therefore to the custodian of the relevant Fund, (the "Custodian"). The Company shall notify the Fund and the Custodian on a daily basis of the total amount of orders and payments so delivered. (2) Pursuant to purchase orders and in accordance with the Fund's current Prospectus, the Company shall compute and issue the appropriate number of Shares of each Fund and/or Class and hold such Shares in the appropriate Shareholder accounts. (3) For certificated Funds and/or Classes, if a Shareholder or its agent requests a certificate, the Company, as Transfer Agent, shall countersign and mail by first class mail, a certificate to the Shareholder at its address as set forth on the transfer books of the Funds, and/or Classes, subject to any Proper Instructions regarding the delivery of certificates. (4) In the event that any check or other order for the purchase of Shares of the Fund and/or Class is returned unpaid for any reason, the Company shall debit the Share account of the Shareholder by the number of Shares that had been credited to its account upon receipt of the check or other order, promptly mail a debit advice to the Shareholder, and notify the Fund and/or Class of its action. In the event that the amount paid for such Shares exceeds proceeds of the redemption of such Shares plus the amount of any dividends paid with respect to such Shares, the Fund and/the Class or its distributor will reimburse the Company on the amount of such excess. B. Distribution (1) Upon notification by the Funds of the declaration of any distribution to Shareholders, the Company shall act as Dividend Disbursing Agent for the Funds in accordance with the provisions of its governing document and the then-current Prospectus of the Fund. The Company shall prepare and mail or credit income, capital gain, or any other payments to Shareholders. As the Dividend Disbursing Agent, the Company shall, on or before the payment date of any such distribution, notify the Custodian of the estimated amount required to pay any portion of said distribution which is payable in cash and request the Custodian to make available sufficient funds for the cash amount to be paid out. The Company shall reconcile the amounts so requested and the amounts actually received with the Custodian on a daily basis. If a Shareholder is entitled to receive additional Shares by virtue of any such distribution or dividend, appropriate credits shall be made to the Shareholder's account, for certificated Funds and/or Classes, delivered where requested; and (2) The Company shall maintain records of account for each Fund and Class and advise the Investment Company, each Fund and Class and its Shareholders as to the foregoing. C. Redemptions and Transfers (1) The Company shall receive redemption requests and redemption directions and, if such redemption requests comply with the procedures as may be described in the Fund Prospectus or set forth in Proper Instructions, deliver the appropriate instructions therefor to the Custodian. The Company shall notify the Funds on a daily basis of the total amount of redemption requests processed and monies paid to the Company by the Custodian for redemptions. (2) At the appropriate time upon receiving redemption proceeds from the Custodian with respect to any redemption, the Company shall pay or cause to be paid the redemption proceeds in the manner instructed by the redeeming Shareholders, pursuant to procedures described in the then-current Prospectus of the Fund. (3) If any certificate returned for redemption or other request for redemption does not comply with the procedures for redemption approved by the Fund, the Company shall promptly notify the Shareholder of such fact, together with the reason therefor, and shall effect such redemption at the price applicable to the date and time of receipt of documents complying with said procedures. (4) The Company shall effect transfers of Shares by the registered owners thereof. (5) The Company shall identify and process abandoned accounts and uncashed checks for state escheat requirements on an annual basis and report such actions to the Fund. D. Recordkeeping (1) The Company shall record the issuance of Shares of each Fund, and/or Class, and maintain pursuant to applicable rules of the Securities and Exchange Commission ("SEC") a record of the total number of Shares of the Fund and/or Class which are authorized, based upon data provided to it by the Fund, and issued and outstanding. The Company shall also provide the Fund on a regular basis or upon reasonable request with the total number of Shares which are authorized and issued and outstanding, but shall have no obligation when recording the issuance of Shares, except as otherwise set forth herein, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Funds. (2) The Company shall establish and maintain records pursuant to applicable rules of the SEC relating to the services to be performed hereunder in the form and manner as agreed to by the Investment Company or the Fund to include a record for each Shareholder's account of the following: (a) Name, address and tax identification number (and whether such number has been certified); (b) Number of Shares held; (c) Historical information regarding the account, including dividends paid and date and price for all transactions; (d) Any stop or restraining order placed against the account; (e) Information with respect to withholding in the case of a foreign account or an account for which withholding is required by the Internal Revenue Code; (f) Any dividend reinvestment order, plan application, dividend address and correspondence relating to the current maintenance of the account; (g) Certificate numbers and denominations for any Shareholder holding certificates; (h) Any information required in order for the Company to perform the calculations contemplated or required by this Agreement. (3) The Company shall preserve any such records required to be maintained pursuant to the rules of the SEC for the periods prescribed in said rules as specifically noted below. Such record retention shall be at the expense of the Company, and such records may be inspected by the Fund at reasonable times. The Company may, at its option at any time, and shall forthwith upon the Fund's demand, turn over to the Fund and cease to retain in the Company's files, records and documents created and maintained by the Company pursuant to this Agreement, which are no longer needed by the Company in performance of its services or for its protection. If not so turned over to the Fund, such records and documents will be retained by the Company for six years from the year of creation, during the first two of which such documents will be in readily accessible form. At the end of the six year period, such records and documents will either be turned over to the Fund or destroyed in accordance with Proper Instructions. E. Confirmations/Reports (1) The Company shall furnish to the Fund periodically the following information: (a) A copy of the transaction register; (b) Dividend and reinvestment blotters; (c) The total number of Shares issued and outstanding in each state for "blue sky" purposes as determined according to Proper Instructions delivered from time to time by the Fund to the Company; (d) Shareholder lists and statistical information; (e) Payments to third parties relating to distribution agreements, allocations of sales loads, redemption fees, or other transaction- or sales-related payments; (f) Such other information as may be agreed upon from time to time. (2) The Company shall prepare in the appropriate form, file with the Internal Revenue Service and appropriate state agencies, and, if required, mail to Shareholders, such notices for reporting dividends and distributions paid as are required to be so filed and mailed and shall withhold such sums as are required to be withheld under applicable federal and state income tax laws, rules and regulations. (3) In addition to and not in lieu of the services set forth above, the Company shall: (a) Perform all of the customary services of a transfer agent, dividend disbursing agent and, as relevant, agent in connection with accumulation, open-account or similar plans (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to: maintaining all Shareholder accounts, mailing Shareholder reports and Prospectuses to current Shareholders, withholding taxes on accounts subject to back- up or other withholding (including non-resident alien accounts), preparing and filing reports on U.S. Treasury Department Form 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other conformable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders, and providing Shareholder account information; and (b) provide a system which will enable the Fund to monitor the total number of Shares of each Fund (and/or Class) sold in each state ("blue sky reporting"). The Fund shall by Proper Instructions (i) identify to the Company those transactions and assets to be treated as exempt from the blue sky reporting for each state and (ii) verify the classification of transactions for each state on the system prior to activation and thereafter monitor the daily activity for each state. The responsibility of the Company for each Fund's (and/or Class's) state blue sky registration status is limited solely to the recording of the initial classification of transactions or accounts with regard to blue sky compliance and the reporting of such transactions and accounts to the Fund as provided above. F. Other Duties (1) The Company shall answer correspondence from Shareholders relating to their Share accounts and such other correspondence as may from time to time be addressed to the Company; (2) The Company shall prepare Shareholder meeting lists, mail proxy cards and other material supplied to it by the Fund in connection with Shareholder meetings of each Fund; receive, examine and tabulate returned proxies, and certify the vote of the Shareholders; (3) The Company shall establish and maintain facilities and procedures for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. ARTICLE 13. DUTIES OF THE INVESTMENT COMPANY. A. Compliance The Investment Company or Fund assume full responsibility for the preparation, contents and distribution of their own and/or their classes' Prospectus and for complying with all applicable requirements of the Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act and any laws, rules and regulations of government authorities having jurisdiction. B. Share Certificates The Investment Company shall supply the Company with a sufficient supply of blank Share certificates and from time to time shall renew such supply upon request of the Company. Such blank Share certificates shall be properly signed, manually or by facsimile, if authorized by the Investment Company and shall bear the seal of the Investment Company or facsimile thereof; and notwithstanding the death, resignation or removal of any officer of the Investment Company authorized to sign certificates, the Company may continue to countersign certificates which bear the manual or facsimile signature of such officer until otherwise directed by the Investment Company. C. Distributions The Fund shall promptly inform the Company of the declaration of any dividend or distribution on account of any Fund's shares. ARTICLE 14. COMPENSATION AND EXPENSES. A. Annual Fee For performance by the Company pursuant to Section Three of this Agreement, the Investment Company and/or the Fund agree to pay the Company an annual maintenance fee for each Shareholder account as agreed upon between the parties and as may be added to or amended from time to time. Such fees may be changed from time to time subject to written agreement between the Investment Company and the Company. Pursuant to information in the Fund Prospectus or other information or instructions from the Fund, the Company may sub-divide any Fund into Classes or other sub-components for recordkeeping purposes. The Company will charge the Fund the same fees for each such Class or sub- component the same as if each were a Fund. B. Reimbursements In addition to the fee paid under Article 7A above, the Investment Company and/or Fund agree to reimburse the Company for out-of-pocket expenses or advances incurred by the Company for the items agreed upon between the parties, as may be added to or amended from time to time. In addition, any other expenses incurred by the Company at the request or with the consent of the Investment Company and/or the Fund, will be reimbursed by the appropriate Fund. C. Payment The compensation and out-of-pocket expenses shall be accrued by the Fund and shall be paid to the Company no less frequently than monthly, and shall be paid daily upon request of the Company. The Company will maintain detailed information about the compensation and out-of-pocket expenses by Fund and Class. D. Any schedule of compensation agreed to hereunder, as may be adjusted from time to time, shall be dated and signed by a duly authorized officer of the Investment Company and/or the Funds and a duly authorized officer of the Company. SECTION FOUR: CUSTODY SERVICES PROCUREMENT. ARTICLE 15. APPOINTMENT. The Investment Company hereby appoints Company as its agent to evaluate and obtain custody services from a financial institution that (i) meets the criteria established in Section 17(f) of the 1940 Act and (ii) has been approved by the Board as eligible for selection by the Company as a custodian (the "Eligible Custodian"). The Company accepts such appointment. ARTICLE 16. THE COMPANY AND ITS DUTIES. Subject to the review, supervision and control of the Board, the Company shall: A. evaluate and obtain custody services from a financial institution that meets the criteria established in Section 17(f) of the 1940 Act and has been approved by the Board as being eligible for selection by the Company as an Eligible Custodian; B. negotiate and enter into agreements with Eligible Custodians for the benefit of the Investment Company, with the Investment Company as a party to each such agreement. The Company may, as paying agent, be a party to any agreement with any such Eligible Custodian; C. establish procedures to monitor the nature and the quality of the services provided by Eligible Custodians; D. monitor and evaluate the nature and the quality of services provided by Eligible Custodians; E. periodically provide to the Investment Company (i) written reports on the activities and services of Eligible Custodians; (ii) the nature and amount of disbursements made on account of the each Fund with respect to each custodial agreement; and (iii) such other information as the Board shall reasonably request to enable it to fulfill its duties and obligations under Sections 17(f) and 36(b) of the 1940 Act and other duties and obligations thereof; F. periodically provide recommendations to the Board to enhance Eligible Custodian's customer services capabilities and improve upon fees being charged to the Fund by Eligible Custodian; and The foregoing, along with any additional services that Company shall agree in writing to perform for the Fund under this Section Four, shall hereafter be referred to as "Custody Services Procurement." ARTICLE 17. FEES AND EXPENSES. A. Annual Fee For the performance of Custody Services Procurement by the Company pursuant to Section Four of this Agreement, the Investment Company and/or the Fund agree to compensate the Company in accordance with the fees agreed upon from time to time. B. Reimbursements In addition to the fee paid under Section 11A above, the Investment Company and/or Fund agree to reimburse the Company for out-of-pocket expenses or advances incurred by the Company for the items agreed upon between the parties, as may be added to or amended from time to time. In addition, any other expenses incurred by the Company at the request or with the consent of the Investment Company and/or the Fund, will be reimbursed by the appropriate Fund. C. Payment The compensation and out-of-pocket expenses shall be accrued by the Fund and shall be paid to the Company no less frequently than monthly, and shall be paid daily upon request of the Company. The Company will maintain detailed information about the compensation and out-of-pocket expenses by Fund. D. Any schedule of compensation agreed to hereunder, as may be adjusted from time to time, shall be dated and signed by a duly authorized officer of the Investment Company and/or the Funds and a duly authorized officer of the Company. ARTICLE 18. REPRESENTATIONS. The Company represents and warrants that it has obtained all required approvals from all government or regulatory authorities necessary to enter into this arrangement and to provide the services contemplated in Section Four of this Agreement. SECTION FIVE: GENERAL PROVISIONS. ARTICLE 19. PROPER INSTRUCTIONS. As used throughout this Agreement, a "Proper Instruction" means a writing signed or initialed by one or more person or persons as the Board shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved. Oral instructions will be deemed to be Proper Instructions if (a) the Company reasonably believes them to have been given by a person previously authorized in Proper Instructions to give such instructions with respect to the transaction involved, and (b) the Investment Company, or the Fund, and the Company promptly cause such oral instructions to be confirmed in writing. Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Investment Company, or the Fund, and the Company are satisfied that such procedures afford adequate safeguards for the Fund's assets. Proper Instructions may only be amended in writing. ARTICLE 20. ASSIGNMENT. Except as provided below, neither this Agreement nor any of the rights or obligations under this Agreement may be assigned by either party without the written consent of the other party. A. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. B. With regard to Transfer Agency Services, the Company may without further consent on the part of the Investment Company subcontract for the performance of Transfer Agency Services with (1) its subsidiary, Federated Shareholder Service Company, a Delaware business trust, which is duly registered as a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934, as amended, or any succeeding statute ("Section 17A(c)(1)"); or (2) such other provider of services duly registered as a transfer agent under Section 17A(c)(1) as Company shall select. The Company shall be as fully responsible to the Investment Company for the acts and omissions of any subcontractor as it is for its own acts and omissions. C. With regard to Fund Accounting Services, Administrative Services and Custody Procurement Services, the Company may without further consent on the part of the Investment Company subcontract for the performance of such services with Federated Administrative Services, a wholly- owned subsidiary of the Company. D. The Company shall upon instruction from the Investment Company subcontract for the performance of services under this Agreement with an Agent selected by the Investment Company, other than as described in B. and C. above; provided, however, that the Company shall in no way be responsible to the Investment Company for the acts and omissions of the Agent. ARTICLE 21. DOCUMENTS. A. In connection with the appointment of the Company under this Agreement, the Investment Company shall file with the Company the following documents: (1) A copy of the Charter and By-Laws of the Investment Company and all amendments thereto; (2) A copy of the resolution of the Board of the Investment Company authorizing this Agreement; (3) Specimens of all forms of outstanding Share certificates of the Investment Company or the Funds in the forms approved by the Board of the Investment Company with a certificate of the Secretary of the Investment Company as to such approval; (4) All account application forms and other documents relating to Shareholders accounts; and (5) A copy of the current Prospectus for each Fund. B. The Fund will also furnish from time to time the following documents: (1) Each resolution of the Board of the Investment Company authorizing the original issuance of each Fund's, and/or Class's Shares; (2) Each Registration Statement filed with the SEC and amendments thereof and orders relating thereto in effect with respect to the sale of Shares of any Fund, and/or Class; (3) A certified copy of each amendment to the governing document and the By-Laws of the Investment Company; (4) Certified copies of each vote of the Board authorizing officers to give Proper Instructions to the Custodian and agents for fund accountant, custody services procurement, and shareholder recordkeeping or transfer agency services; (5) Specimens of all new Share certificates representing Shares of any Fund, accompanied by Board resolutions approving such forms; (6) Such other certificates, documents or opinions which the Company may, in its discretion, deem necessary or appropriate in the proper performance of its duties; and (7) Revisions to the Prospectus of each Fund. ARTICLE 22. REPRESENTATIONS AND WARRANTIES. A. Representations and Warranties of the Company The Company represents and warrants to the Fund that: (1) it is a corporation duly organized and existing and in good standing under the laws of the Commonwealth of Pennsylvania; (2) It is duly qualified to carry on its business in each jurisdiction where the nature of its business requires such qualification, and in the Commonwealth of Pennsylvania; (3) it is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into and perform this Agreement; (4) all requisite corporate proceedings have been taken to authorize it to enter into and perform its obligations under this Agreement; (5) it has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement; (6) it is in compliance with federal securities law requirements and in good standing as an administrator and fund accountant; and B. Representations and Warranties of the Investment Company The Investment Company represents and warrants to the Company that: (1) It is an investment company duly organized and existing and in good standing under the laws of its state of organization; (2) It is empowered under applicable laws and by its Charter and By- Laws to enter into and perform its obligations under this Agreement; (3) All corporate proceedings required by said Charter and By-Laws have been taken to authorize it to enter into and perform its obligations under this Agreement; (4) The Investment Company is an open-end investment company registered under the 1940 Act; and (5) A registration statement under the 1933 Act will be effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of each Fund being offered for sale. ARTICLE 23. STANDARD OF CARE AND INDEMNIFICATION. A. Standard of Care With regard to Sections One, Three and Four, the Company shall be held to a standard of reasonable care in carrying out the provisions of this Contract. The Company shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Investment Company) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice, provided that such action is not in violation of applicable federal or state laws or regulations, and is in good faith and without negligence. B. Indemnification by Investment Company The Company shall not be responsible for and the Investment Company or Fund shall indemnify and hold the Company, including its officers, directors, shareholders and their agents, employees and affiliates, harmless against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liabilities arising out of or attributable to: (1) The acts or omissions of any Custodian, Adviser, Sub-adviser or other party contracted by or approved by the Investment Company or Fund, (2) The reliance on or use by the Company or its agents or subcontractors of information, records and documents in proper form which (a) are received by the Company or its agents or subcontractors and furnished to it by or on behalf of the Fund, its Shareholders or investors regarding the purchase, redemption or transfer of Shares and Shareholder account information; (b) are received by the Company from independent pricing services or sources for use in valuing the assets of the Funds; or (c) are received by the Company or its agents or subcontractors from Advisers, Sub-advisers or other third parties contracted by or approved by the Investment Company of Fund for use in the performance of services under this Agreement; (d) have been prepared and/or maintained by the Fund or its affiliates or any other person or firm on behalf of the Investment Company. (3) The reliance on, or the carrying out by the Company or its agents or subcontractors of Proper Instructions of the Investment Company or the Fund. (4) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of any state that such Shares be registered in such state or in violation of any stop order or other determination or ruling by any federal agency or any state with respect to the offer or sale of such Shares in such state. Provided, however, that the Company shall not be protected by this Article 23.B. from liability for any act or omission resulting from the Company's willful misfeasance, bad faith, negligence or reckless disregard of its duties or failure to meet the standard of care set forth in 23.A. above. C. Reliance At any time the Company may apply to any officer of the Investment Company or Fund for instructions, and may consult with legal counsel with respect to any matter arising in connection with the services to be performed by the Company under this Agreement, and the Company and its agents or subcontractors shall not be liable and shall be indemnified by the Investment Company or the appropriate Fund for any action reasonably taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel provided such action is not in violation of applicable federal or state laws or regulations. The Company, its agents and subcontractors shall be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signatures of the officers of the Investment Company or the Fund, and the proper countersignature of any former transfer agent or registrar, or of a co-transfer agent or co-registrar. D. Notification In order that the indemnification provisions contained in this Article 23 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's prior written consent. ARTICLE 24. TERM AND TERMINATION OF AGREEMENT. This Agreement shall be effective from March 1, 1996 and shall continue until February 28, 2003 (`Term"). Thereafter, the Agreement will continue for 18 month terms. The Agreement can be terminated by either party upon 18 months notice to be effective as of the end of such 18 month period. In the event, however, of willful misfeasance, bad faith, negligence or reckless disregard of its duties by the Company, the Investment Company has the right to terminate the Agreement upon 60 days written notice, if Company has not cured such willful misfeasance, bad faith, negligence or reckless disregard of its duties within 60 days. The termination date for all original or after-added Investment companies which are, or become, a party to this Agreement. shall be coterminous. Investment Companies that merge or dissolve during the Term, shall cease to be a party on the effective date of such merger or dissolution. Should the Investment Company exercise its rights to terminate, all out- of-pocket expenses associated with the movement of records and materials will be borne by the Investment Company or the appropriate Fund. Additionally, the Company reserves the right to charge for any other reasonable expenses associated with such termination. The provisions of Articles 10 and 23 shall survive the termination of this Agreement. ARTICLE 25. AMENDMENT. This Agreement may be amended or modified by a written agreement executed by both parties. ARTICLE 26. INTERPRETIVE AND ADDITIONAL PROVISIONS. In connection with the operation of this Agreement, the Company and the Investment Company may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Charter. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. ARTICLE 27. GOVERNING LAW. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts ARTICLE 28. NOTICES. Except as otherwise specifically provided herein, Notices and other writings delivered or mailed postage prepaid to the Investment Company at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Company at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to such other address as the Investment Company or the Company may hereafter specify, shall be deemed to have been properly delivered or given hereunder to the respective address. ARTICLE 29. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. ARTICLE 30. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE COMPANY. The execution and delivery of this Agreement have been authorized by the Trustees of the Company and signed by an authorized officer of the Company, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, and the obligations of this Agreement are not binding upon any of the Trustees or Shareholders of the Company, but bind only the appropriate property of the Fund, or Class, as provided in the Declaration of Trust. ARTICLE 31. MERGER OF AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject hereof whether oral or written. ARTICLE 32. SUCCESSOR AGENT. If a successor agent for the Investment Company shall be appointed by the Investment Company, the Company shall upon termination of this Agreement deliver to such successor agent at the office of the Company all properties of the Investment Company held by it hereunder. If no such successor agent shall be appointed, the Company shall at its office upon receipt of Proper Instructions deliver such properties in accordance with such instructions. In the event that no written order designating a successor agent or Proper Instructions shall have been delivered to the Company on or before the date when such termination shall become effective, then the Company shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the 1940 Act, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $2,000,000, all properties held by the Company under this Agreement. Thereafter, such bank or trust company shall be the successor of the Company under this Agreement. ARTICLE 33. FORCE MAJEURE. The Company shall have no liability for cessation of services hereunder or any damages resulting therefrom to the Fund as a result of work stoppage, power or other mechanical failure, natural disaster, governmental action, communication disruption or other impossibility of performance. ARTICLE 34. ASSIGNMENT; SUCCESSORS. This Agreement shall not be assigned by either party without the prior written consent of the other party, except that either party may assign all of or a substantial portion of its business to a successor, or to a party controlling, controlled by, or under common control with such party. Nothing in this Article 34 shall prevent the Company from delegating its responsibilities to another entity to the extent provided herein. ARTICLE 35. SEVERABILITY. In the event any provision of this Agreement is held illegal, void or unenforceable, the balance shall remain in effect. ARTICLE 36. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE INVESTMENT COMPANY. The execution and delivery of this Agreement have been authorized by the Trustees of the Investment Company and signed by an authorized officer of the Investment Company, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, and the obligations of this Agreement are not binding upon any of the Trustees or Shareholders of the Investment Company, but bind only the property of the Fund, or Class, as provided in the Declaration of Trust. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers, as of the day and year first above written. INVESTMENT COMPANIES (LISTED ON EXHIBIT 1) By: /s/ S. Elliott Cohan S. Elliott Cohan Assistant Secretary FEDERATED SERVICES COMPANY By: /s/ Thomas J. Ward Thomas J. Ward Secretary EXHIBIT 1 CONTRACT DATE INVESTMENT COMPANY Portfolios Classes March 1, 1996 FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. FEDERATED SERVICES COMPANY provides the following services: Administrative Services Fund Accounting Services Shareholder Recordkeeping Services EX-99.POWEROFATTY 4 Exhibit 19 under Form N1-A Exhibit 24 under Item 601/Reg S-K POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints the Secretary and Assistant Secretary of FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. and the Deputy General Counsel of Federated Investors, and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for them and in their names, place and stead, in any and all capacities, to sign any and all documents to be filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940, by means of the Securities and Exchange Commission's electronic disclosure system known as EDGAR; and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys- in-fact and agents, and each of them, full power and authority to sign and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. SIGNATURES TITLE DATE /s/ John F. Donahue Chairman April 2, 1996 John F. Donahue (Chief Executive Officer) /s/ Richard B. Fisher President April 2, 1996 Richard B. Fisher /s/ David M. Taylor Treasurer April 2, 1996 David M. Taylor (Principal Financial and Accounting Officer) /s/ Thomas G. Bigley April 2, 1996 Thomas G. Bigley /s/ John T. Conroy, Jr. April 2, 1996 John T. Conroy, Jr. SIGNATURES TITLE DATE /s/ William J. Copeland April 2, 1996 William J. Copeland /s/ James E. Dowd April 2, 1996 James E. Dowd /s/ Lawrence D. Ellis, M.D. April 2, 1996 Lawrence D. Ellis, M.D. /s/ Edward L. Flaherty, Jr. April 2, 1996 Edward L. Flaherty, Jr. /s/ Peter E. Madden April 2, 1996 Peter E. Madden /s/ Gregor F. Meyer April 2, 1996 Gregor F. Meyer /s/ John E. Murray, Jr. April 2, 1996 John E. Murray, Jr. /s/ Wesley W. Posvar April 2, 1996 Wesley W. Posvar /s/ Marjorie P. Smuts April 2, 1996 Marjorie P. Smuts Sworn to and subscribed before me this 2nd day of April , 1996 -- EX-27.FINANDATASCH 5
6 001 Federated Adjustable Rate U.S. Government Fund 12-MOS Feb-29-1996 Feb-29-1996 333,431,595 336,081,320 35,738,633 133,331 0 371,953,284 35,741,662 0 32,020,141 67,761,803 0 345,414,465 31,854,143 44,298,857 0 112,961 (43,759,748) 0 2,649,725 304,191,481 0 24,079,177 0 3,673,214 20,405,963 2,283,920 1,057,057 23,746,940 (87,428) 19,965,541 0 0 1,402,242 14,914,416 1,067,460 (114,903,341) 0 (46,043,668) 465,955 0 2,154,062 0 4,903,329 358,386,568 9.460 0.540 0.080 0.530 0.000 0.000 9.550 1.02 8,380,025 0.226
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