U.S. GOVERNMENT SECURITIES FUND
11 Hanover Square, New York, NY 10005
American Stock
Exchange Symbol:
BBG
August 17, 1998
Fellow Shareholders:
We are very pleased to submit this Annual Report to shareholders and to note
that the Fund's total return was 12.87% on a market value basis, and 6.43% on a
net asset value basis, for the twelve months ending on the Fund's June 30, 1998
fiscal year. We are also pleased to note that at this writing the Fund's 12
month dividend distribution yield stands at 8.30%, as reported by Morningstar,
Inc. The Fund's current net asset value is $14.59. With a recent closing market
price of $13.25 per share, we believe this represents an opportunity to purchase
shares at an attractive discount from their underlying value.
In our December 31, 1997 report, we predicted rising bond prices on interest
rate declines during the first half of 1998. While we are pleased to have been
correct, we note that bond price increases were not uniform throughout the
entire maturity spectrum of U.S. government obligations. The yields on
U.S.government securities maturing in ten and thirty years declined by 0.3% to
5.45% and 5.63%, respectively, while yields on debt maturing in two and five
years decline by only .18 % to 5.47%, and by .24% to 5.47%. This "flattening of
the yield curve" is predominantly the result of the inability of short term
rates to decline significantly lower than the Fed Funds overnight rate, which
has been maintained at 5.5% since March 1997.
In December, we identified several variables that would contribute to a decline
in interest rates. We felt that turmoil in Asia would have a deflationary impact
on the prices of commodities and manufactured imports, would mitigate against
domestic price pressures caused by low levels of unemployment, and would create
a global preference for the safety of U.S. government securities. In addition,
we felt that the Federal budget surplus, which reduced the supply of government
debt, when combined with the huge reinvestment demand from interest payments on
the National Debt would create a structural imbalance which would promote lower
interest rates.
Finally, we anticipated that a slowdown in the torrid pace of domestic growth,
which could prompt easier monetary policy and reduce inflationary pressures.
Predominantly our outlook has been correct, and is unchanged. While GDP grew at
a torrid rate of 5.4 % in the first quarter, we anticipate much slower growth
for the balance of the year. We are pleased that monthly inflation reports
continue to be low, but also note that this has been the case for so long that
additional improvement in the year-over-year data which we monitor has become
difficult to attain. We also note that real government securities yields in the
United States are among the most attractive in the developed world, and expect
continued demand for U.S. debt from both value and safety conscious
international investors.
Future declines in interest rates will continue to be constrained by the Federal
Funds overnight rate. Historically, the Federal Funds rate is thought to be
neutral when it is around 1.75 percentage points greater than the rate of
inflation. Over the past year, core producer prices are up only 0.8 %, and core
consumer prices have risen only 2.2%, implying a neutral Fed Funds rate between
2.5% and 4%, much lower than the current 5.5% level. In his February
Humphrey-Hawkins Testimony to the Congress, Alan Greenspan acknowledged this
passive increase in monetary restraint by the Fed as a deliberate and welcome
tightening, intended to offset sources of stimulus in the economy, such as
rising equity prices. We expect this rate to remain unchanged until the balance
of forces in the economy tilt either toward a reemergence of inflation, which
would prompt greater restraint, or clear signs that weakness in Asia has become
excessively deflationary and threatens growth globally. While "inverted yield
curves" where long term interest rates are lower than short term rates, are
historically anomalous, they are not unprecedented, and we continue to believe
that intermediate and long term interest rates can decline further, despite
current Federal Reserve Bank policy. In view of market conditions, the Fund's
strategy during the year was to maintain a longer than average duration
during periods of declining rates, and to reallocate U.S.Treasury securities
relative to mortgage backed securities in the Fund's portfolio.
<PAGE>
As explained in the letter to Fund shareholders on August 17, 1998, the Fund
announced that it intends to invest up to 35% of its total assets in equity and
other securities, commencing on October 19, 1998. The Board of Directors of the
Fund believes that a portion of the Fund's assets may be invested more
effectively if the permissible investments are broadened. In a rapidly changing
market, it is important for the Fund to have the flexibility to purchase a
variety of instruments because while under certain market conditions certain
types of securities may be deemed most appropriate for purchase by the Fund,
under other market conditions other types of securities may be deemed
preferable. By expanding the universe of securities the Fund may purchase, the
Fund's management will be given the opportunity to adjust the Fund's portfolio
from time to time in such manner as it then deems appropriate.
Dividend Distribution Increase Reflects New Policy
We are also pleased to report that beginning with the fourth quarter of 1997,
the Fund's quarterly dividend distribution was increased to $.30 per share from
$.19 previously. This substantial increase is a result of the Fund's Board of
Directors recently adopting a managed 8% distribution policy. The policy is
intended to provide shareholders with a stable cash flow and eliminate or
reduce the amount by which net asset value per share (8% on an annual basis)
will be paid primarily from ordinary income and any capital gains with the
balance coming from return of capital. We believe shares of the fund are a
sound value for safety conscious income oriented investors.
Reinvestment Plan Offers Important Advantage
The Bull & Bear U.S. Government Securities Fund Dividend Reinvestment Plan is
particulary attractive because quarterly dividend distributions are reinvested
without charge at the lower of net asset value per share or market price, which
can contribute significantly to growing your investment over time.
We appreciate your support and look forward to continuing to serve your
investment needs.
Sincerely,
Thomas B. Winmill Steven A. Landis
President Senior Vice President
Portfoloio Manager
<PAGE>
BULL & BEAR U.S. GOVERNMENT SECURITIES FUND, INC.
Schedule of Portfolio Investments - June 30, 1998
Principal Market
Amount Value
U.S. Government Obligations (35.1%)
$1,000,000 U.S. Treasury Note, 5.75%, due 10/31/02 $ 1,008,438
1,000,000 U.S. Treasury Note, 5.75%, due 4/30/03 1,010,001
1,000,000 U.S. Treasury Note, 6.625%, due 5/15/07 1,075,001
1,000,000 U.S. Treasury Note, 5.625%, due 5/15/08 1,014,063
400,000 U.S. Treasury Note, 6.125%, due 11/15/27 428,750
Total U.S. Government Obligations (cost: $4,496,881) 4,536,253
U.S. Government Agencies (64.9%)
1,000,000 Federal Home Loan Bank, 6.46%, due 10/12/12 1,059,570
1,000,000 Federal National Mortgage Assn., 6.08%, due 9/25/00 1,009,624
1,000,000 Federal National Mortgage Assn., 6.41%, due 11/13/12 1,057,805
707,551 Government National Mortgage Assn., 6.50%, due 7/15/08 715,287
994,581 Government National Mortgage Assn., 6.50%, due 1/15/28 993,338
1,799,875 Government National Mortgage Assn., 7.0%, due 11/15/10 1,844,873
618,092 Government National Mortgage Assn., 7.0%, due 6/15/23 628,526
115,732 Government National Mortgage Assn., 7.0%, due 5/15/24 117,686
946,716 Government National Mortgage Assn., 7.25%, due 1/15/27 968,603
Total U.S. Government Agencies (cost: $8,229,225) 8,395,312
Total Investments (cost: $12,726,106) (100.0%) $12,931,565
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
ASSETS:
Investments at market value
(cost: $12,726,106) (note 1) $12,931,565
<PAGE>
Interest receivable 107,164
Other assets 959
Total assets 13,039,688
LIABILITIES:
Payables:
Borrowings - reverse repurchase
agreement 2,035,000
Interest 1,542
Demand note payable to bank 130,022
Accrued expenses 78,999
Total liabilities 2,245,563
NET ASSETS: (applicable to 747,236
outstanding shares: 250,000,000 shares
of $.01 par value authorized) $10,794,125
NET ASSET VALUE PER SHARE:
($10,794,125 ÷ 747,236 shares outstanding) $14.45
At June 30, 1998, net assets consisted of:
Paid-in capital $11,381,283
Accumulated net realized loss
on investments (792,617)
Net unrealized appreciation on investments 205,459
$10,794,125
STATEMENT OF OPERATIONS Year Ended June 30, 1998 INVESTMENT INCOME:
Interest $821,223
EXPENSES:
Legal (note 7) 319,621
Interest 91,976
Investment management (note 3) 77,098
<PAGE>
Printing 53,114
Directors 26,596
Custodian 21,572
Transfer agent 18,201
Accounting and audit (note 3) 13,595
Registration (note 3) 8,569
Miscellaneous 10,915
Expenses 641,257
Investment management fees waived
(note 3) (6,264)
Net Expenses 634,993
Net investment income 186,230
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 311,085
Unrealized appreciation of investments
during the period 153,901
Net realized and unrealized gain
on investments 464,986
Net increase in net assets resulting
from operations $651,216
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended June 30, 1998 1997
OPERATIONS:
<S> <C> <C>
Net investment income $ 186,230 $ 526,240
Net realized gain (loss) from security transactions 311,085 (61,091)
Unrealized appreciation of investments during the period 153,901 153,626
Net change in net assets resulting from operations 651,216 618,775
Subtractions from paid in capital (note 6) (39,253) (73,428)
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income ($0.25 and $0.71 (186,230) (533,200)
per share, respectively) (311,085) _
Distributions in excess of net realized gains ($0.42 per share) (307,240) _
Distributions from paid in capital ($0.42 per share)
CAPITAL SHARE TRANSACTIONS: 195,513 (2,256,179)
Change in net assets resulting from capital share transactions (a) (note 6) 2,921 (2,244,032)
Total increase (decrease) in net assets
NET ASSETS: 10,791,204 13,035,236
Beginning of period $ 10,794,125 $ 10,791,204
End of period
</TABLE>
(a) Transactions in capital shares were as follows:
1998 1997
Shares Value Shares Value
Shares sold 14,896 _ 8,064 $ 118,784
Shares issued in
reinvestment of distributions _ $195,513 17,044 228,039
Shares redeemed _ _ (176,926) (2,603,002)
Net increase (decrease) 14,896 $195,513 (151,818) $(2,256,179)
<PAGE>
Notes to Financial Statements
(1) The Fund, a Maryland corporation, is registered under the Investment Company
Act of 1940, as amended, as a diversified closed-end management investment
company. The Fund's shares are listed on the American Stock Exchange. The
investment objective of the Fund is to provide investors with a high level of
income, liquidity, and safety of principal. The Fund seeks to achieve its
investment objective by investing primarily in securities backed by the full
faith and credit of the United States, as set forth in its prospectus. On August
17, 1998, the Fund announced that it intends to invest up to 35% of its total
assets in equity and other securities, commencing on October 19, 1998. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements. With respect to
security valuation, securities listed or traded on a national securities
exchange or the Nasdaq National Market System ("NMS") are valued at the last
quoted sales price on the day the valuations are made. Such listed securities
that are not traded on a particular day and securities traded in the
over-the-counter market that are not on the NMS are valued at the mean between
the current bid and asked prices. Securities for which quotations from the
national securities exchange or the NMS are not readily available or reliable
and other assets may be valued based on over-the-counter quotations or at fair
value as determined in good faith by or under the direction of the Board of
Directors. Debt obligations with remaining maturities of 60 days or less are
valued at cost adjusted for amortization of premiums and accretion of discounts.
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual basis. In
preparing financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(2) The Fund intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute
substantially all of its taxable investment income and net capital gains, if
any, after utilization of any capital loss carryforward, to its shareholders and
therefore no Federal income tax provision is required. At June 30, 1998, the
Fund had an unused capital loss carryforward of approximately $772,000, of which
$361,000 expires in 2003, $202,000 in 2004 and $209,000 in 2005. Based on
Federal income tax cost of $12,726,106, gross unrealized appreciation and gross
unrealized depreciation were $216,656 and $11,197, respectively at June 30,
1998.
(3) The Fund retains Bull & Bear Advisers, Inc. as its Investment Manager. Under
the terms of the Investment Management Agreement, the Investment Manager
receives a management fee, payable monthly, based on the average weekly net
assets of the Fund, at the annual rate of 7/10 of 1% of the first $250 million,
5/8 of 1% from $250 million to $500 million, and 1/2 of 1% over $500 million.
The Investment Manager has agreed to waive all or part of its fee or reimburse
the Fund monthly if and to the extent the aggregate operating expenses of the
Fund exceed the most restrictive limit imposed by any state in which shares of
the Fund are qualified for sale, although currently the Fund is not subject to
any such limits. The Investment Manager voluntarily waived $6,264 of its
management fee during the year ended June 30, 1998. Certain officers and
directors of the Fund are officers and directors of the Investment Manager and
Investor Service Center, Inc., the Fund's former distributor. The Fund
reimbursed the Investment Manager $3,726 for providing certain administrative
and accounting services at cost for the year ended June 30, 1998.
(4) Purchases and proceeds of sales of U.S. government obligations other than
short term investments aggregated $21,765,714 and $23,072,308, respectively, for
the year ended June 30, 1998.
(5) The Fund has a committed bank line of credit. At June 30, 1998, the balance
outstanding was $130,022 and the interest rate was equal to the Federal Reserve
Funds Rate plus 1.00 percentage point. For the year ended June 30, 1998, the
weighted average interest rate was 4.95% based on the balances outstanding from
the line of credit and the reverse repurchase agreement during the year and the
weighted average amount outstanding was $1,852,939.
(6) Effective October 4, 1996, the Fund converted from an open-end management
investment company to a closed-end management investment company. In connection
with the conversion, costs of approximately $112,700 were charged against
paid-in capital. In addition, the Fund has adopted a Dividend Reinvestment Plan
(the "Plan"). Under the Plan, each dividend and capital gain distribution, if
any, declared by the Fund on outstanding shares will, unless elected otherwise
by each shareholder by notifying the Fund in writing at any time prior to the
record date for a particular dividend or distribution, be paid on the payment
date fixed by the Directors in additional shares in accordance with the
following: whenever the Market Price (as defined below) per share is equal to or
exceeds the net asset value per share at the time shares are valued for the
purpose of determining the number of
<PAGE>
shares equivalent to the cash dividend or capital gain distribution (the
"Valuation Date"), participants will be issued additional shares equal to the
amount of such dividend divided by the Fund's net asset value per share.
Whenever the Market Price per share is less than such net asset value on the
Valuation Date, participants will be issued additional shares equal to the
amount of such dividend divided by the Market Price. The Valuation Date is the
dividend or distribution payment date or, if that date is not an American Stock
Exchange trading day, the next trading day. For all purposes of the Plan: (a)
the Market Price of the shares on a particular date shall be the average closing
market price on the five trading days the shares traded ex-dividend on the
Exchange prior to such date or, if no sale occurred on the Exchange prior to
such date, then the mean between the closing bid and asked quotations for the
shares on the Exchange on such date, and (b) net asset value per share on a
particular date shall be as determined by or on behalf of the Fund.
(7) A group called Karpus Investment Management ("KIM") failed to elect its
slate of nominees in opposition to management at the 1997 annual meeting of
stockholders of the Fund. On February 19, 1998, the Fund filed a lawsuit against
KIM in the United States District Court for the Southern district of New York,
98 Civ.1190, and KIM filed a lawsuit against the Fund in the Circuit Court for
Baltimore City, Maryland, Case No. 9805005. In connection with these and related
matters, legal expenses borne by the Fund increased to $319,621 for the year
ended June 30, 1998. In addition, KIM has filed preliminary proxy materials
with the SEC to remove the Investment Manager of the Fund. The outcome of
these matters and their effect on the Fund or the management agreement with
the Investment Manager cannot be predicted with certainty.
The date after which notice of a shareholder proposal for the Fund's annual
meeting of stockholders submitted outside the processes of 17 CFR S240.14a-8 is
considered untimely is September 7, 1998. In addition to any other applicable
requirements, for a nomination to be made by a stockholder or for any other
business to be properly brought before the annual meeting by a stockholder, such
stockholder must have given timely notice thereof in proper written to the
Secretary of the Fund in the manner set forth in the Fund's By-laws.
<PAGE>
FINANCIAL HIGHLIGHTS
Years Ended June 30,
<TABLE>
<CAPTION>
PER SHARE DATA
1998 1997 1996 1995 1994
Net asset value at beginning of period $14.74 $14.74 $15.20 $14.63 $15.53
Income from investment operations:
<S> <C> <C> <C> <C> <C>
Net investment income .25 .70 .64 .73 .78
Net realized and unrealized gain (loss) on investments .55 .01 (.46) .60 (1.03)
Total from investment operations .80 .71 .18 1.33 (.25)
Less distributions:
Distributions from net investment income (.25) (.71) (.64) (.76) (.65)
Distributions in excess of net realized gains (.42)
Distributions from paid in capital (.42) _ _ _ _
Increase (decrease) in net asset value (.29) _ (.46) .57 (.90)
Net asset value at end of period $14.45 $14.74 $14.74 $15.20 $14.63
Per share market value at end of period $13.13 $12.63
TOTAL RETURN ON NET ASSET VALUE BASIS 6.43% 5.58% 1.18% 9.40% (1.76)%
TOTAL RETURN ON MARKET VALUE BASIS (a) 12.87% (9.57)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's omitted) $10,794 $10,791 $13,035 $16,377 $17,777
Ratio of expenses to average net assets (b)(c)(d) 5.77% 2.13% 2.10% 2.00% 1.85%
Ratio of net investment income to average net assets (e)(f) 1.69% 4.48% 4.25% 4.96% 4.16%
Portfolio turnover rate 168% 246% 762% 482% 261%
</TABLE>
(a) Effective October 4, 1996, the Fund converted from an open-end management
investment company to a closed-end management investment company. The Fund has
calculated total return based upon purchases and sales of shares of the Fund at
current market values and reinvestment of dividends and distributions at the
lower of the per share net asset value on the payment date or the average of the
closing market price for the five days preceding the payment date.
(b) The ratio for the year ended June 30, 1997 after custodian fee credits was
2.07%. Prior to July 1,1996, there was no reduction of custodian fees. There
were no custodian credits for the year ended June 30, 1998.
(c) Ratio excluding interest expense was 4.93% and 1.94% for the years ended
June 30, 1998 and 1997, respectively.
(d) Ratio prior to reimbursement was 5.82% for the year ended June 30, 1998.
(e) Ratio excluding interest expense was 2.53% and 4.67% for the years ended
June 30, 1998 and 1997, respectively.
(f) Ratio prior to reimbursement was 1.64% for the year ended June 30, 1998.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Bull & Bear U.S. Government Securities Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of Bull &
Bear U.S. Government Securities Fund, Inc. including the schedule of portfolio
investments as of June 30, 1998, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1998, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Bull &
Bear U.S. Government Securities Fund, Inc. as of June 30, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
July 17, 1998, except for the fifth sentence of Note 1 as to which the date is
August 17, 1998
U.S. GOVERNMENT SECURITIES FUND
11 Hanover Square
New York, NY 10005
1-888-847-4200
Independent Accountants
Tait, Weller & Baker
