[LOGO] FEDERATED
GOVERNMENT
INCOME
SECURITIES
INC.
8th SEMI-ANNUAL REPORT
August 31, 1994
Established 1986
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Fellow Shareholder:
I am pleased to present the Government Income Securities, Inc. ("GISI'' or the
"Fund") Semi-Annual Report for the period March 1, 1994 to August 31, 1994. This
layout and design with investment charts makes the report easier to read and
presents more information. The report contains an interview with the Fund's
portfolio manager, Gary Madich, Senior Vice President of Federated Advisers.
Following the interview you will find the Fund's Financial Statements and a
complete listing of the Fund's investments in U.S. government securities.
On August 31, 1994, the Fund's assets stood at $3.4 billion. Shareholders
received dividends of $114.8 million or $0.32 per share for the six month period
ended August 31, 1994. On March 1, 1994, the Fund's net asset value was $9.00
per share and on August 31, 1994, the net asset value was $8.59. The share price
decline reflected increases in interest rates.
The Fund's managers invest primarily in U.S. government mortgage-backed
securities. These securities offer high current income and, historically,
downside protection in a rising interest rate environment. The Fund's managers
are confident in their defensive position: the Fund's average duration is 4.8
years, and the average coupon is 8.66%, the Fund's 30-day distribution rate was
7.31% as of August 31, 1994, and the 30-day SEC yield as of August 31, 1994, was
6.13% based on the offering price.* The annual total returns as of August 31,
1994, for the Fund, were -2.97% for one year, 6.93% for five years, and 7.23%
since inception on April 4, 1986.**
Assets as of August 31, 1994, were invested approximately as follows:
<TABLE>
<S> <C> <C>
68.6% Government National Mortgage $2.0 billion
Association (GNMA)
14.1% Federal National Mortgage $419.4 million
Association (FNMA)
10.9% U.S. Treasury Notes $324.6 million
6.1% Federal Home Loan Mortgage Corporation $180.7 million
</TABLE>
I urge you to read the interview with Gary Madich as he expresses his views on
today's interest rate environment and the risks involved.
Over the last six, twelve, and eighteen months, the Fund's managers have held to
their belief that it is more prudent to invest in mortgage-backed securities
than to move out the yield curve with 30-year Treasury bonds. The Fund continues
to buy these mortgaged backed securities for their attractive yields.
Thank you for your continued support of Government Income Securities, Inc. If
you have any questions or comments, please do not hesitate to write.
Very sincerely yours,
Richard B. Fisher
President
October 14, 1994
*Distribution rate reflects actual distributions made to shareholders. It is
calculated by dividing the monthly annualized dividend plus short-term capital
gains, if any, by the average 30-day offering price. Current net yield is
calculated by dividing the net investment income per share for the prior 30
days by the maximum offering price per share on that date.
**Past performance is not indicative of future results. Investment return and
principal value will fluctuate, so when shares are redeemed, they may be worth
more or less than the original cost.
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
Gary Madich, CFA
Senior Vice President,
Federated Advisers
Q COULD YOU PLACE THE FUND IN PERSPECTIVE IN RELATION TO THE PRESSURES NOW
BEING FELT IN THE DERIVATIVES MARKET?
A In 1993, the most common investment strategy in managing U.S. government bond
portfolios and funds was described as being daring. Securities and investment
techniques once considered to be extremely risky became mainstream, everyday
investments. In a declining rate and steepening curve environment, these
investments were rewarded with well above-average income streams and capital
appreciation. In 1993, GISI, by employing a more traditional approach and
strategy, lagged most indices. With rising rates and volatility returning in the
first quarter of 1994, however, many of the derivative strategies have reversed
their superior return profiles, adding increased market risk to the portfolios
that used them.
GOVERNMENT INCOME SECURITIES, INC. REMAINS A TRADITIONAL PRODUCT THAT STRESSES
QUALITY, COMPETITIVE DISTRIBUTION STREAMS, AND RELATIVELY LOW VOLATILITY. The
Fund strives to earn consistent returns, not an average return resulting from
large performance peaks and valleys.
Q GOVERNMENT BOND FUNDS SUCH AS GOVERNMENT INCOME SECURITIES, INC. HAVE
CONTINUED TO EXPERIENCE DIVIDEND REDUCTIONS. CAN YOU BRIEFLY COMMENT?
A Dividends are dependent on two primary determining factors: current market
reinvestment rates and Fund portfolio structure. This Fund's design is a
defensive portfolio representing the use of lower yielding, shorter duration
securities. In addition, reinvestment decisions still represent cash flows from
seasoned, higher yielding mortgage securities and bond swaps related to the
current lower rate environment vs. rates of prior years. When one combines this
with the belief that any port-folio of securities will lag market moves in both
directions, there are usually periods in which current market interest rate
levels gap current distribu-tion levels.
Despite the reductions over the past year, the Fund's distribution stream
remained competitive with intermediate Treasury notes. The Fund will strive to
offer the needed flexibility to support the net asset value in what seems to be
a more challenging, volatile market. With a shorter duration core strategy, the
Fund intends to err on the side of giving up income to protect principal.
Q HOW DID THE FUND PERFORM DURING THE LAST TWELVE MONTHS?
A As the Federal Reserve Board (the ''Fed'') continued to raise Fed fund rates,
the Fund's price per share declined as a direct result of the market's drop over
the last quarter of the Fund's fiscal year. However, in reviewing the last 12
months' performance, it is important to keep short-term performance in
perspective with the long-term picture, as well as the Fund's conservative
investment philosophy and objective. The Fund's diversification by security and
maturity has clearly kept its volatility lower than that of individual bonds.
Shareholders should also remember that the Fund has continued to supply monthly
income.
As you have experienced, the present environment of rising rates affects the
price of all bonds. We do believe the major portion of the interest rate move is
behind us, and we are buyers of selected U.S. government securities when their
yields offer attractive rates and their prices are at a discount or at a slight
premium.
Q ASSUMING THAT MARKET VOLATILITY WILL CONTINUE TO SOME DEGREE, WHAT IS THE
FUND'S POSITION?
A The current structure of the portfolio calls for a neutral strategy. With the
fear of further Fed tightening, continued deleveraging in the fixed-income
markets, and the potential for larger levels of investor liquidity, management
will err on the side of caution. Portfolio duration and average life measures
remain equal to or slightly less than market neutral in an effort to directly
defend against the concern that volatility will remain at higher levels, and
yield curve flattening will occur sporadically. The Fund's duration is 3.5 years
and the average life is 5.4 years.
Portfolio structure continues to favor an overweighted position in mortgage-
backed securities due to the appearance of good long-term value versus
comparable government and corporate securities. The assessment of mortgage
security value resides in the fact that future supply levels are limited,
prepayment risk has been minimized, the majority of extension risk has been
realized, and wider yield spreads will attract demand once volatility declines.
Security selection favors the more liquid pass-through sector with a lower than
usual concentration in the well-structured Collateralized Mortgage Obligation
("CMO") market. Pass-through exposure favors current coupon Government National
Mortgage Association securities that offer less yield sensitively to
prepayments, while CMOs are limited to short and intermediate Planned
Amortization Class bonds. U.S. Treasury holdings represent a position- oriented
structure in an attempt to pick up yield and liquidity.
Thus, in an environment of market decline, volatility, and wider yield spreads
in most fixed-income sectors, our traditional strategies seem to offer the best
dimension in which to manage the Fund's portfolio. In the long run, management
believes the Fund's returns will be driven primarily by sector allocation and
yield curve decisions. With this in mind, our caution will be maintained until
our market assessment changes.
Q HOW ARE CURRENT ECONOMIC TRENDS AFFECTING THE FUND?
A Interest rates rose all along the yield curve during the first three quarters
of 1994. Just as the market began to recover in January from the negative fourth
quarter of 1993, the Fed increased the Fed funds' target rate from 3% to 3.25%
in early February. This was in reaction to a stronger U.S. economy and was a
preemptive strike against any threat of inflation. Interest rates continued to
rise after the Fed's move due to market expectations of further Fed tightenings.
These tightenings did follow in March, April, May, and August, resulting in a
Fed funds' rate of 4.75%, as the Fed moved towards a more neutral monetary
stance from the accommodative posture in 1993.
As rates and volatility rose, investor sentiment shifted in an attempt to defend
against eroding prices. Concerns about extension risk, liquidity, leverage, and
inflation forced executions of U.S. government securities sales in an extremely
imprecise fashion. Along the lines of direct securities, the Fund has
experienced net asset value decline, but to a much lesser degree than comparable
Treasuries of two-year and five-year maturities.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
GOVERNMENT INCOME SECURITIES, INC.
- --------------------------------------------------------------------------------
INITIAL INVESTMENT:
A $9,000 INVESTMENT (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO
$16,182.
If you had invested $9,000 in Government Income Securities, Inc. on 4/4/86,
reinvested dividends and capital gains, and didn't redeem any shares, your
account would have been worth $16,182 on 8/31/94. You would have earned a 7.23%*
average annual total return for the 8-year investment life span.
One key to investing wisely is to reinvest all distributions in Fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 9/30/94, the Fund's average annual one-year, five-year and since inception
(4/4/86) total returns were -3.83%, 6.68%, and 7.04%, respectively.
"Graphic representation 'A' omitted. See Appendix."
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 1% sales
charge and 1% contingent deferred sales charge prior to 48 months.
Data quoted represents past performance and do not guarantee future results.
Investment return and principal value will fluctuate so an investor's shares,
when redeemed, may be worth more or less than their original cost.
GOVERNMENT INCOME SECURITIES, INC.
- --------------------------------------------------------------------------------
ONE STEP AT A TIME:
$1,000 INVESTED EACH YEAR FOR 8 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL
GAINS) GREW TO $12,223.
With this approach, the key is consistency.
If you had started investing $1,000 annually in Government Income Securities,
Inc. on 4/4/86, reinvested your dividends and capital gains and didn't redeem
any shares, you would have invested only $9,000, but your account would have
reached a total value of $12,223 by 8/31/94. You would have earned an average
annual total return of 6.84%.*
A practical investment plan helps you pursue long-term performance from U.S.
government securities. Through systematic investing, you buy shares on a regular
basis and reinvest all earnings. An investment plan works for you when you
invest only $1,000 annually. You can take it one step at a time. Put time and
compounding to work!
"Graphic representation 'B' omitted. See Appendix."
* No method of investing can guarantee a profit or protect against loss in down
markets. However, by investing regularly over time and buying shares at
various prices, investors can purchase more shares at lower prices, and all
accumulated shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
GOVERNMENT INCOME SECURITIES, INC.
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR CURRENT INCOME
- --------------------------------------------------------------------------------
Eight years ago, in April 1986, Anne and Denny Laughlin, an imaginary working
couple with no children, had to decide how to invest a $100,000 inheritance from
her late father's estate. They chose Government Income Securities, Inc. because
it invests in government securities which traditionally are some of the safest,
most credit-worthy securities issued in America.
They like the way they can use their GISI account for an occasional
extravagance-like the $50,000 Jaguar they bought this August to celebrate their
10th anniversary-without touching their original principal.
The Laughlin's account totaled $179,800 as of 8/31/94 for a total return of
7.23%. Anne and Denny are fictional, but the figures are real.*
"Graphic representation 'C' omitted. See Appendix."
* This hypothetical scenario is provided for illustrative purposes only and does
not represent the result obtained by any particular shareholder. Past
performance does not guarantee future results.
GOVERNMENT INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
August 31, 1994
(unaudited)
The obligations listed below are issued, guaranteed or insured by the U.S.
government, its agencies or instrumentalities, or secured by such obligations.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- ----------------
LONG-TERM OBLIGATIONS--99.7%
- -----------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--3.6%
-------------------------------------------------------------------------------
$ 1,055,376 13.00%, 8/1/2011-5/1/2014 $ 1,187,625
-------------------------------------------------------------------------------
1,260,741 12.50%, 6/1/2011-1/1/2014 1,413,605
-------------------------------------------------------------------------------
8,416,608 12.00%, 9/1/2007-5/1/2016 9,357,508
-------------------------------------------------------------------------------
8,781,047 11.50%, 4/1/2011-5/1/2019 9,655,078
-------------------------------------------------------------------------------
5,286,188 11.00%, 1/1/2001-7/1/2019 5,719,408
-------------------------------------------------------------------------------
32,891,514 10.50%, 7/1/2004-12/1/2020 35,313,195
-------------------------------------------------------------------------------
8,934,390 9.50%, 6/1/2021-12/1/2022 9,422,923
-------------------------------------------------------------------------------
23,165,432 9.00%, 8/1/2004-10/1/2006 24,063,873
-------------------------------------------------------------------------------
10,332,529 8.00%, 8/1/2024 10,300,188
------------------------------------------------------------------------------- ----------------
Total 106,433,403
------------------------------------------------------------------------------- ----------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--2.5%
-------------------------------------------------------------------------------
4,800,000 9.50%, Series 139F, 6/15/2020 4,922,160
-------------------------------------------------------------------------------
5,000,000 9.30%, Series 141C, 9/15/2020 5,186,300
-------------------------------------------------------------------------------
10,000,000 9.00%, Series 151E, 9/15/2020 10,293,000
-------------------------------------------------------------------------------
4,800,000 9.00%, Series 60G, 9/15/2019 4,888,608
-------------------------------------------------------------------------------
20,000,000 6.60%, Series 1559VH, 12/15/2021 18,213,600
-------------------------------------------------------------------------------
19,085,000 6.50%, Series 1450E, 9/15/2004 18,478,097
-------------------------------------------------------------------------------
14,120,000 6.50%, Series 1608K, 9/15/2022 12,254,466
------------------------------------------------------------------------------- ----------------
Total 74,236,231
------------------------------------------------------------------------------- ----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--8.1%
-------------------------------------------------------------------------------
$ 1,853,157 13.00%, 9/1/2013-6/1/2015 $ 2,083,635
-------------------------------------------------------------------------------
3,058,568 12.50%, 12/1/2013-3/1/2015 3,429,420
-------------------------------------------------------------------------------
7,067,548 12.25%, 12/1/2010-2/1/2012 7,977,495
-------------------------------------------------------------------------------
5,276,925 12.00%, 3/1/2011-3/1/2016 5,887,043
-------------------------------------------------------------------------------
8,195,646 11.50%, 3/1/2014-1/1/2016 9,105,920
-------------------------------------------------------------------------------
52,080,276 11.00%, 9/1/2010-5/1/2023 57,299,475
-------------------------------------------------------------------------------
2,120,374 10.50%, 9/1/2004 2,238,310
-------------------------------------------------------------------------------
987,795 10.00%, 2/1/2004 1,040,266
-------------------------------------------------------------------------------
7,030,601 9.00%, 5/1/2004-4/1/2005 7,320,613
-------------------------------------------------------------------------------
144,186,189 8.00%, 12/1/2019-11/1/2023 143,645,491
------------------------------------------------------------------------------- ----------------
Total 240,027,668
------------------------------------------------------------------------------- ----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--6.0%
-------------------------------------------------------------------------------
7,500,000 9.30%, Series 90-20H, 1/25/2019 7,773,000
-------------------------------------------------------------------------------
4,544,617 9.20%, Series 88-14F, 12/25/2017 4,663,822
-------------------------------------------------------------------------------
15,900,000 9.00%, Series 90-116G, 11/25/2019 16,321,668
-------------------------------------------------------------------------------
8,700,000 8.75%, Series 90-4G, 5/25/2017 9,023,031
-------------------------------------------------------------------------------
13,000,000 8.70%, Series G89-1D, 11/25/2017 13,291,590
-------------------------------------------------------------------------------
6,425,000 8.70%, Series 90-2E, 12/25/2018 6,584,147
-------------------------------------------------------------------------------
8,627,894 7.75%, Series G91-33 PD, 2/15/2016 8,638,334
-------------------------------------------------------------------------------
17,000,000 7.00%, Series 93-133J, 12/25/2022 15,482,920
-------------------------------------------------------------------------------
26,800,000 7.00%, Series 93-155J, 12/25/2022 24,401,400
-------------------------------------------------------------------------------
17,800,000 6.75%, Series 93-163PY, 3/25/2022 16,086,216
-------------------------------------------------------------------------------
10,000,000 6.50%, Series 93-071PK, 1/25/2008 9,086,100
-------------------------------------------------------------------------------
14,200,000 6.50%, Series 93-187K, 8/25/2022 12,283,284
-------------------------------------------------------------------------------
20,000,000 6.50%, Series 93-189PK, 3/25/2022 17,717,200
-------------------------------------------------------------------------------
$ 10,000,000 6.25%, Series 93-194PM, 6/25/2008 $ 8,909,600
-------------------------------------------------------------------------------
10,000,000 6.15%, Series 93-160AG, 12/25/2020 9,164,500
------------------------------------------------------------------------------- ----------------
Total 179,426,812
------------------------------------------------------------------------------- ----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MPT--68.6%
-------------------------------------------------------------------------------
14,058,822 12.50%, 4/15/2010-9/20/2015 16,099,172
-------------------------------------------------------------------------------
41,641,279 12.00%, 5/15/2011-4/20/2016 47,255,039
-------------------------------------------------------------------------------
52,473,296 11.50%, 3/15/2010-3/20/2020 58,989,964
-------------------------------------------------------------------------------
34,276,584 11.00%, 8/20/2009-5/15/2020 37,618,700
-------------------------------------------------------------------------------
43,672,025 10.50%, 11/15/2015-9/15/2020 47,745,325
-------------------------------------------------------------------------------
280,187,187 10.00%, 11/15/2009-11/15/2021 301,356,121
-------------------------------------------------------------------------------
253,171,757 9.50%, 4/15/2016-2/15/2022 268,169,426
-------------------------------------------------------------------------------
265,119,769 9.00%, 6/15/2016-1/15/2023 275,431,797
-------------------------------------------------------------------------------
433,140,729 8.50%, 1/15/2017-8/15/2024 440,854,965***
-------------------------------------------------------------------------------
298,590,865 8.00%, 8/15/2022-8/15/2024 296,724,673***
-------------------------------------------------------------------------------
181,147,493 7.50%, 6/15/2023-3/15/2024 174,919,643
-------------------------------------------------------------------------------
80,138,549 7.00%, 6/15/2023-7/15/2024 74,854,213
------------------------------------------------------------------------------- ----------------
Total 2,040,019,038
------------------------------------------------------------------------------- ----------------
UNITED STATES TREASURY NOTES--10.9%
-------------------------------------------------------------------------------
115,000,000 7.25%, 11/15/96-8/15/2004 116,629,050
-------------------------------------------------------------------------------
65,000,000 6.75%, 6/30/99 64,908,350
-------------------------------------------------------------------------------
90,000,000 6.25%, 2/15/2003 85,073,400
-------------------------------------------------------------------------------
35,000,000 5.625%, 1/31/98 34,045,900
-------------------------------------------------------------------------------
25,000,000 5.375%, 5/31/98 23,989,500
------------------------------------------------------------------------------- ----------------
Total 324,646,200
------------------------------------------------------------------------------- ----------------
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST, $3,012,454,340) 2,964,789,352
------------------------------------------------------------------------------- ----------------
*REPURCHASE AGREEMENTS--14.2%
-------------------------------------------------------------------------------
$ 2,705,000 J.P. Morgan Securities, Inc. 4.85%, dated 8/31/94, due 9/1/94 $ 2,705,000
-------------------------------------------------------------------------------
200,000,000 **Bankers Trust Co., 4.58%, dated 8/18/94, due 9/21/94 200,000,000
-------------------------------------------------------------------------------
60,000,000 **First Boston Corp., 4.75%, dated 8/18/94, due 9/21/94 60,000,000
-------------------------------------------------------------------------------
160,000,000 **Goldman Sachs Corp., 4.60%, dated 8/18/94, due 9/21/94 160,000,000
------------------------------------------------------------------------------- ----------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 422,705,000
------------------------------------------------------------------------------- ----------------
TOTAL INVESTMENTS (IDENTIFIED COST, $3,435,159,340) $ 3,387,494,352+
------------------------------------------------------------------------------- ----------------
</TABLE>
*The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investments in the repurchase agreements is through participation in a joint
account with other Federated funds.
**Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement.
***Includes securities with a market value of $421,465,200 subject to Dollar
Roll transactions.
+The cost of investments for federal tax purposes amounts to $3,435,159,340.
The net unrealized depreciation on a federal tax cost basis amounts to
$47,664,988 and is comprised of $13,166,212 appreciation and $60,831,200
depreciation at August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($2,972,912,961) at August 31, 1994.
The following abbreviations are used in this portfolio:
MPT--Modified Pass-Through
REMIC--Real Estate Mortgage Investment Conduit
(The accompanying Notes are an integral part of the Financial Statements)
GOVERNMENT INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
August 31, 1994
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (Identified and tax cost, $3,435,159,340) $ 3,387,494,352
- -----------------------------------------------------------------------------------------------
Cash 46,919
- -----------------------------------------------------------------------------------------------
Receivable for investments sold 31,652,222
- -----------------------------------------------------------------------------------------------
Interest receivable 21,974,687
- -----------------------------------------------------------------------------------------------
Receivable for capital stock sold 5,103,877
- ----------------------------------------------------------------------------------------------- ----------------
Total assets 3,446,272,057
- -----------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------------------
Payable for dollar roll transactions $ 418,154,457
- -------------------------------------------------------------------------------
Payable for investments purchased 30,432,292
- -------------------------------------------------------------------------------
Dividends payable 12,341,484
- -------------------------------------------------------------------------------
Payable for capital stock redeemed 12,068,210
- -------------------------------------------------------------------------------
Accrued expenses 362,653
- ------------------------------------------------------------------------------- --------------
Total liabilities 473,359,096
- ----------------------------------------------------------------------------------------------- ----------------
NET ASSETS for 346,003,738 shares of capital stock outstanding $ 2,972,912,961
- ----------------------------------------------------------------------------------------------- ----------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------
Paid-in capital 3,421,602,855
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (47,664,988)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (397,125,493)
- -----------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (3,899,413)
- ----------------------------------------------------------------------------------------------- ----------------
Total Net Assets $ 2,972,912,961
- ----------------------------------------------------------------------------------------------- ----------------
NET ASSET VALUE Per Share ($2,972,912,961 / 346,003,738 shares outstanding) $ 8.59
- ----------------------------------------------------------------------------------------------- ----------------
Offering Price Per Share (100/99 of $8.59)* $ 8.68
- ----------------------------------------------------------------------------------------------- ----------------
Redemption Proceeds Per Share (99/100 of $8.59)** $ 8.50
- ----------------------------------------------------------------------------------------------- ----------------
</TABLE>
*See "What Shares Cost" in the prospectus.
**See "Redeeming Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended August 31, 1994
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------------------
Interest income (net of dollar roll interest expense of $6,035,926) $ 127,682,216
- ------------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------------------
Investment advisory fee $ 12,039,704
- ---------------------------------------------------------------------------------
Directors' fees 14,672
- ---------------------------------------------------------------------------------
Administrative personnel and services fees 1,223,627
- ---------------------------------------------------------------------------------
Custodian fees 147,459
- ---------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 1,102,702
- ---------------------------------------------------------------------------------
Capital stock registration fees 119,784
- ---------------------------------------------------------------------------------
Taxes 205,808
- ---------------------------------------------------------------------------------
Printing and postage 118,710
- ---------------------------------------------------------------------------------
Legal fees 10,522
- ---------------------------------------------------------------------------------
Auditing fees 17,214
- ---------------------------------------------------------------------------------
Shareholder services fees 4,013,235
- ---------------------------------------------------------------------------------
Insurance premiums 13,888
- ---------------------------------------------------------------------------------
Miscellaneous 3,000
- --------------------------------------------------------------------------------- -------------
Total expenses 19,030,325
- ---------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee 3,440,553
- --------------------------------------------------------------------------------- -------------
Net expenses 15,589,772
- ------------------------------------------------------------------------------------------------ ---------------
Net investment income 112,092,444
- ------------------------------------------------------------------------------------------------ ---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (128,412,612)
- ------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (25,187,507)
- ------------------------------------------------------------------------------------------------ ---------------
Net realized and unrealized gain (loss) on investments (153,600,119)
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from operations ($ 41,507,675)
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
1995* 1994
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------
Net investment income $ 112,092,444 $ 281,171,264
- -----------------------------------------------------------------------------
Net realized gain (loss) on investments ($128,412,612 net loss
and $83,738,305 net loss, respectively, as computed for federal
income tax purposes) (128,412,612) (107,551,473)
- -----------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments (25,187,507) (70,667,358)
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets resulting from operations (41,507,675) 102,952,433
- ----------------------------------------------------------------------------- ---------------- ----------------
NET EQUALIZATION (DEBITS)/CREDITS (1,038,509) (190,224)
- ----------------------------------------------------------------------------- ---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------------------------
Dividends to shareholders from net investment income (111,053,935) (279,463,100)
- -----------------------------------------------------------------------------
Distributions in excess of net investment income (3,722,626) --
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets resulting from distributions to
shareholders (114,776,561) (279,463,100)
- ----------------------------------------------------------------------------- ---------------- ----------------
CAPITAL STOCK TRANSACTIONS--
- -----------------------------------------------------------------------------
Proceeds from sale of shares 89,772,482 961,917,817
- -----------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 32,820,511 79,453,646
- -----------------------------------------------------------------------------
Cost of shares redeemed (534,435,318) (965,772,201)
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets from capital stock transactions (411,842,325) 75,599,262
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets (569,165,070) (101,101,629)
- -----------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------
Beginning of period 3,542,078,031 3,643,179,660
- ----------------------------------------------------------------------------- ---------------- ----------------
End of period $ 2,972,912,961 $ 3,542,078,031
- ----------------------------------------------------------------------------- ---------------- ----------------
</TABLE>
* Six months ended August 31, 1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1995* 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49 $ 9.76
- ------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------
Net investment income 0.31 0.68 0.79 0.83 0.87 0.87 0.86 0.88
- ------------------------------------
Net realized and unrealized gain
(loss) on investments (0.40) (0.44) (0.05) 0.17 0.15 0.24 (0.53) (0.27)
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations (0.09) 0.24 0.74 1.00 1.02 1.11 0.33 0.61
- ------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------
Dividends to shareholders from net
investment income (0.31) (0.68) (0.78) (0.83) (0.87) (0.91) (0.82) (0.88)
- ------------------------------------
Dividends in excess of net
investment income (0.01) -- -- (0.01)*** (0.02)*** (0.01)*** -- --
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.32) (0.68) (0.78) (0.84) (0.89) (0.92) (0.82) (0.88)
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 8.59 $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN** (1.00%) 2.63% 8.08% 11.12% 11.63% 12.81% 3.65% 6.80%
- ------------------------------------
RATIOS TO AVERAGE NET ASSTES
- ------------------------------------
Expenses 0.97%(a) 0.97% 0.90% 0.92% 0.90% 0.93% 0.88% 0.81%
- ------------------------------------
Net investment income 6.98%(a) 7.39% 8.27% 8.86% 9.43% 9.42% 9.33% 9.47%
- ------------------------------------
Expense waiver/reimbursement (b) 0.22%(a) 0.19% -- -- -- -- -- --
- ------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------
Net assets, end of period (000
omitted) $2,972,913 $3,542,078 $3,643,180 $2,261,762 $1,322,749 $1,320,710 $1,482,030 $1,846,198
- ------------------------------------
Portfolio turnover rate 87% 134% 43% 36% 37% 76% 62% 34%
- ------------------------------------
<CAPTION>
<S> <C>
1987
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.99
- ------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------
Net investment income 0.94
- ------------------------------------
Net realized and unrealized gain
(loss) on investments (0.23)
- ------------------------------------ -----
Total from investment operations 0.71
- ------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------
Dividends to shareholders from net
investment income (0.94)
- ------------------------------------
Dividends in excess of net
investment income --
- ------------------------------------ -----
TOTAL DISTRIBUTIONS (0.94)
- ------------------------------------ -----
Net asset value, end of period $ 9.76
- ------------------------------------ -----
TOTAL RETURN** 6.76%
- ------------------------------------
RATIOS TO AVERAGE NET ASSTES
- ------------------------------------
Expenses 0.95%
- ------------------------------------
Net investment income 9.18%
- ------------------------------------
Expense waiver/reimbursement (b) --
- ------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------
Net assets, end of period (000
omitted) $3,183,612
- ------------------------------------
Portfolio turnover rate 208%
- ------------------------------------
</TABLE>
* Six months ended August 31, 1994 (unaudited).
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
*** Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
August 31, 1994
(unaudited)
(1) ORGANIZATION
The Fund is registered under the Investment Company Act of 1940, as amended (the
"Act"), as a diversified, open-end, load, management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
During the six months ended August 31, 1994, the Fund changed its method of
accounting for costing securities and calculating gains and losses for
financial reporting purposes from the average cost method to the specific
identification method. This accounting change resulted only in
reclassification between unrealized and realized gains and losses, and
therefore had no effect on the net results from operations, net assets or
net asset value per share. The specific identification method is the
preferred method used in the industry and it more closely agrees with the
costing method used for federal tax purposes.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying collateral to ensure that the value
of collateral at least equals the principal amount of the repurchase
agreement, including accrued interest.
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 Trustees ("Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. At February 28,
1994, the Fund, for federal tax purposes, had a capital loss carryover of
$222,766,399, which will reduce the Fund's taxable income arising from
future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal tax. Pursuant to the Code, such capital loss
carryover will expire in 1995 ($10,209,710), 1996 ($68,203,141), 1997
($35,933,841), 1998 ($13,473,469), 2000 ($3,842,806), 2001 ($7,365,127) and
2002 ($83,738,305). Additionally, net capital losses of $45,946,482
attributable to security transactions incurred after October 31, 1993 are
treated as arising on the first day of the Fund's next taxable year.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, FHLMC, in which
the Fund loans mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments may enhance the Fund's
current yield and total return.
G. EQUALIZATION--The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
redemptions of capital stock equivalent, on a per share basis, to the
amount of undistributed net investment income on the date of the
transaction is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of capital stock.
H. OPTIONS CONTRACTS WRITTEN--The Fund may write option contracts. A written
option obligates the Fund to deliver (a call), or to receive (a put), the
contract amount upon exercise by the holder of the option. The value of the
option contract is recorded as a liability and unrealized gain or loss is
measured by the difference between the current value and the premium
received. The Fund had no options outstanding at August 31, 1994.
I. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At August 31, 1994, there were 2,000,000,000 shares of $.001 par value capital
stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
1995* 1994
<S> <C> <C>
- ---------------------------------------------------------------------------------- ------------- ---------------
Shares sold 10,343,043 186,632,955
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 3,802,548 6,216,033
- ----------------------------------------------------------------------------------
Shares redeemed (61,511,051) (45,333,081)
- ---------------------------------------------------------------------------------- ------------- ---------------
Net change resulting from capital stock transactions (47,365,460) (147,515,907)
- ---------------------------------------------------------------------------------- ------------- ---------------
</TABLE>
* Six months ended August 31, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.75 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25 of
1% of average net assets of the Fund for the period. This fee is to obtain
certain personal services for shareholders and to maintain the shareholder
accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
INTERFUND TRANSACTIONS--During the six months ended August 31, 1994, the Fund
engaged in purchase and sale transactions with other affiliated funds pursuant
to Rule 17a-7 under the Act amounting to $141,526,864 and $9,894,787,
respectively. These purchases and sales were conducted on an arms length basis
and transacted for cash consideration only, at independent current market prices
and without brokerage commissions, fees or other remuneration.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the six
months ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
PURCHASES $ 2,693,165,508
- ------------------------------------------------------------------------------------------------ ----------------
SALES $ 2,698,685,429
- ------------------------------------------------------------------------------------------------ ----------------
</TABLE>
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
DIRECTORS OFFICERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Richard B. Fisher
James E. Dowd President
Lawrence D. Ellis, M.D. J. Christopher Donahue
Richard B. Fisher Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Vice President and Treasurer
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar Vice President and Secretary
Marjorie P. Smuts David M. Taylor
Assistant Treasurer
Charles H. Field
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank,
and are not insured or guaranteed by the U.S. government, the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other government
agency. Investment in mutual funds involves investment risk, including
possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the Fund's prospectus, which contains facts concerning its
objective and policies, management fees, expenses, and other information.
Logo
Federated Securities Corp.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INFVESTORS TOWER
PITTSBURGH, PA 15222-3779
383733102
8092706 (10/94)
APPENDIX
A. The graphic representation here displayed consists of a
boxed legend in the upper left quadrant indicating the
components of the corresponding mountain chart. The lighter
shaded portion represents the value of reinvested income for
the Fund. The dark shaded portion reflects the principal
value of a $9,000 investment in Government Income
Securities, Inc. (the "Fund"). The color-coded mountain
chart is a visual representation of the narrative text above
it, which shows that an initial investment of $9,000 in the
Fund on April 4, 1994, would have grown to $16,182 on August
31, 1994. The "x" axis reflects computation periods from
April 4, 1994 (the Fund's inception date) to August 31,
1994. The right margin of the chart reflects the ending
value of a hypothetical investment of $9,000 in the Fund
measured in increments of $5,000 ranging from $0 to $20,000.
B. The graphic representation here displayed consists of a
boxed legend in the upper left quadrant indicating the
components of the corresponding mountain chart. The lighter
shaded portion represents the value of reinvested income for
the Fund. The dark shaded portion reflects the principal
value of annual $1,000 investments in the Fund. The color-
coded mountain chart is a visual representation of the
narrative text beneath it, which shows that an annual
investment of $1,000 in the Fund on April 4, 1994, would
grow to $12,223 on August 31, 1994. The "x" axis reflects
computation periods from April 4, 1994 (the Fund's inception
date) to August 31, 1994. The right margin of the chart
reflects the ending value of a hypothetical annual $1,000
investment in the Fund measured in increments of $2,500
ranging from $0 to $12,500.
C. The graphic representation here displayed consists of a
boxed legend in the upper left quadrant indicating the
components of the corresponding mountain chart. The lighter
shaded portion represents the value of reinvested income for
the Fund. The dark shaded portion reflects the principal
value of $100,000 investment in the Fund. The color-coded
mountain chart is a visual representation of the narrative
text beneath it, which shows that an investment of $100,000
in the Fund in April, 1994, would grow to $179,800 on August
31, 1994. The "x" axis reflects computation periods from
April, 1994 (the Fund's inception date) to August 31, 1994.
The right margin of the chart reflects the ending value of a
hypothetical annual $100,000 investment in the Fund measured
in increments of $40,000 ranging from $0 to $200,00.
