Government Income Securities, Inc.
Prospectus
Government Income Securities, Inc. (the "Fund"), is an open-end, diversified
management investment company (a mutual fund) that seeks current income by
investing in a professionally managed, diversified portfolio limited primarily
to securities guaranteed as to payment of principal and interest by the U.S.
government or 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
governmental 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,
1994, 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
free of charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact your financial institution.
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, 1994
Table of Contents
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Summary of Fund Expenses 1
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Financial Highlights 2
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General Information 3
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Fortress Investment Program 3
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Investment Information 4
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Investment Objective 4
Investment Policies 4
Acceptable Investments 4
Temporary Investments 5
Repurchase Agreements 5
When-Issued and Delayed Delivery
Transactions 5
Lending of Portfolio Securities 5
Put and Call Options 5
Financial Futures and Options on
Futures 6
Risks 7
Portfolio Turnover 7
Investment Limitations 7
Net Asset Value 8
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Investing in the Fund 8
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Share Purchases 8
Through a Financial Institution 8
Directly by Mail 8
Directly by Wire 8
Minimum Investment Required 9
What Shares Cost 9
Dealer Concession 9
Eliminating the Sales Charge 9
Quantity Discounts and Accumulated
Purchases 9
Letter of Intent 10
Reinvestment Privilege 10
Concurrent Purchases 10
Systematic Investment Program 11
Exchange Privilege 11
Certificates and Confirmations 11
Dividends and Distributions 11
Retirement Plans 11
Redeeming Shares 12
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Through a Financial Institution 12
Directly by Mail 12
Signatures 12
Receiving Payment 13
Contingent Deferred Sales Charge 13
Systematic Withdrawal Program 14
Accounts with Low Balances 14
Exchanges for Shares of Other Funds 14
Fund Information 15
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Management of the Fund 15
Board of Directors 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Other Payments to
Financial Institutions 16
Distribution of Fund Shares 16
Administration of the Fund 16
Administrative Services 16
Shareholder Services Plan 17
Custodian 17
Transfer Agent and Dividend
Disbursing Agent 17
Legal Counsel 17
Independent Auditors 17
Shareholder Information 17
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Voting Rights 17
Tax Information 18
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Federal Income Tax 18
Pennsylvania Corporate and Personal
Property Taxes 18
Performance Information 18
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Financial Statements 19
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Independent Auditors' Report 31
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Addresses Inside Back Cover
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Summary of Fund Expenses
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<TABLE>
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................................................... 1.00%
Maximum Sales Load 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 Fund Operating Expenses
(As a percentage of average net assets)
</TABLE>
<TABLE>
<S> <C> <C>
Management Fee (after waiver) (2)......................................................................... 0.56%
12b-1 Fee................................................................................................. None
Total Other Expenses...................................................................................... 0.41%
Shareholder Services Fee................................................................... 0.25%
Total Fund Operating Expenses (3)................................................................ 0.97%
</TABLE>
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(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.
(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
0.75%.
(3) The Total Fund Operating Expenses would have been 1.16% absent the voluntary
waiver of a portion of the management 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
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....... $30 $52 $63 $128
You would pay the following expenses on the same investment, assuming no
redemption............................................................... $20 $41 $63 $128
</TABLE>
The above example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
Government Income Securities, Inc.
Financial Highlights
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(For a share outstanding throughout each period)
Reference is made to the Independent Auditors' Report on page 31.
<TABLE>
<CAPTION>
Year Ended February 28 or 29,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 1993 1992 1991 1990 1989 1988 1987
Net asset value, beginning of
period $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49 $ 9.76 $ 9.99
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Income from investment operations
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Net investment income 0.68 0.79 0.83 0.87 0.87 0.86 0.88 0.94
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Net realized and unrealized gain
(loss) on investments (0.44) (0.05) 0.17 0.15 0.24 (0.53) (0.27) (0.23)
- ----------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations 0.24 0.74 1.00 1.02 1.11 0.33 0.61 0.71
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Less distributions
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Dividends to shareholders from net
investment income (0.68) (0.78) (0.83) (0.87) (0.91) (0.82) (0.88) (0.94)
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Distributions in excess of net
investment income -- -- (0.01)** (0.02)** (0.01)** -- -- --
- ----------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total distributions (0.68) (0.78) (0.84) (0.89) (0.92) (0.82) (0.88) (0.94)
- ----------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49 $ 9.76
- ----------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total return* 2.63% 8.08% 11.12% 11.63% 12.81% 3.65% 6.80% 6.76%
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Ratios to Average Net Assets
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Expenses 0.97% 0.90% 0.92% 0.90% 0.93% 0.88% 0.81% 0.95%
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Net investment income 7.39% 8.27% 8.86% 9.43% 9.42% 9.33% 9.47% 9.18%
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Expense waiver/reimbursement (a) 0.19% -- -- -- -- -- -- --
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Supplemental Data
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Net assets, end of period
(000 omitted) $3,542,078 $3,643,180 $2,261,762 $1,322,749 $1,320,710 $1,482,030 $1,846,198 $3,183,612
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Portfolio turnover rate 134% 43% 36% 37% 76% 62% 34% 208%
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</TABLE>
* Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
** Distributions in excess of net investment income for the years ended
February 29, 1992, February 28, 1991, and 1990 were a result of certain book
and tax timing differences. These distributions do not represent a return of
capital for federal income tax purposes.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report dated February 28, 1994, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
General Information
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The Fund was established as a Massachusetts business trust on September 23,
1981, and reorganized as a corporation under the laws of the State of Maryland
on February 4, 1986. The Fund is designed primarily for individuals and
institutions seeking current income through a professionally managed,
diversified portfolio of U.S. government securities. A minimum initial
investment of $1,500 is required, except for retirement plans.
Fund shares are sold at net asset value plus an applicable sales charge and are
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.
Fortress Investment Program
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The Fund is a member of a family of funds, collectively known as the Fortress
Investment Program (the "Fortress Funds"). The other funds in the Program are:
American Leaders Fund, Inc. (Fortress Shares only)--a fund providing
growth of capital and income through high-quality stocks;
California Municipal Income Fund (Fortress Shares only)--a fund providing
current income exempt from federal regular income tax and California
personal income taxes;
Fortress Adjustable Rate U.S. Government Fund, Inc.--a fund providing
current income consistent with low volatility of principal by investing in
adjustable and floating rate mortgage securities;
Fortress Bond Fund--a fund providing current income primarily through
high-quality corporate debt;
Fortress Municipal Income Fund, Inc.--a fund providing a high level of
current income generally exempt from federal regular income tax by
investing primarily in a diversified portfolio of municipal bonds;
Fortress Utility Fund, Inc.--a fund providing high current income and
moderate capital appreciation primarily through equity and debt securities
of utility companies;
Liberty Equity Income Fund, Inc. (Fortress Shares only)--an equity fund
investing primarily in stocks which have a history of regular dividends;
Limited Term Fund (Fortress Shares only)--a fund providing a high level of
current income consistent with minimum fluctuation in principal value;
Limited Term Municipal Fund (Fortress Shares only)--a fund providing high
level of current income which is exempt from federal regular income tax
consistent with the preservation of capital;
Money Market Management, Inc.--a fund providing current income consistent
with stability of principal through high-quality money market instruments;
New York Municipal Income Fund (Fortress Shares only)--a fund providing
current income exempt from federal regular income tax, New York personal
income taxes, and New York City income taxes;
Ohio Municipal Income Fund (Fortress Shares only)--a fund providing
current income exempt from federal regular income tax and Ohio personal
income taxes;
Strategic Income Fund (Fortress Shares only)--a fund providing high
current income through investing in domestic corporate debt obligations,
U.S. government securities, and foreign government and corporate debt
obligations; and
World Utility Fund (Fortress Shares only)--a fund providing total return
by investing primarily in securities issued by domestic and foreign
companies in the utilities industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus. Prospectuses for these funds are available
by writing to Federated Securities Corp.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
Investment Information
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Investment Objective
The investment objective of the Fund is to provide current income. 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 investment policies described below may be changed by the Board of Directors
("Directors") without shareholder approval. Shareholders will be notified before
any material change in these policies becomes effective.
Acceptable Investments. The Fund invests primarily in securities which are
guaranteed as to payment of principal and interest by the U.S. government or
U.S. government agencies or instrumentalities. Under normal circumstances, the
Fund will invest at least 65% of the value of its total assets in U.S.
government securities.
The U.S. government securities in which the Fund invests include:
direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks, Farmers Home Administration, Federal Farm Credit
Banks, Federal National Mortgage Association, Government National Mortgage
Association, and Federal Home Loan Mortgage Corporation.
The obligations of U.S. government agencies or instrumentalities which the Fund
may buy are backed in a variety of ways by the U.S. government or its agencies
or instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-backed securities and obligations of the Farmers
Home Administration, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers Home Administration are backed by the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Farmers Home
Administration, Federal Farm Credit Banks, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation are backed by the credit
of the agency or instrumentality issuing the obligations.
The Fund may purchase and sell financial futures contracts and purchase and sell
options on financial futures contracts and on its portfolio securities.
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.
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.
When-Issued and Delayed Delivery Transactions. The Fund may purchase securities
on a when-issued or delayed delivery basis. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
Lending of Portfolio Securities. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a 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 Directors and 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.
Put and Call Options. The Fund may purchase put and call options on its
portfolio securities. These options will be used as a hedge to attempt to
protect securities which the Fund holds, or will be purchasing, against
decreases or increases in value. The Fund may also write (sell) put and call
options on all or any portion of its portfolio to generate income for the Fund.
The Fund will write call options on securities either held in its portfolio or
for which it has the right to obtain without payment of further consideration or
for which it has segregated cash in the amount of any additional consideration.
In the case of put options, the Fund will segregate cash or U.S. Treasury
obligations with a value equal to or greater than the exercise price of the
underlying securities.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
Financial Futures and Options on Futures. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio of
long-term debt securities against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government at a certain time in the future. The seller of the contract
agrees to make delivery of the type of instrument called for in the contract and
the buyer agrees to take delivery of the instrument at the specified future
time.
The Fund may write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value resulting from anticipated increases in market interest
rates. When the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling the futures contract at a fixed price at
any time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on financial
futures contracts as a hedge against rising purchase prices of portfolio
securities resulting from anticipated decreases in market interest rates. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the Fund writes a put option on a futures
contract, it is undertaking to buy a particular futures contract at a fixed
price at any time during a specified period if the option is exercised. As a
purchaser of a call option on a futures contract, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.
Risks. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events,
the Fund may lose money on the futures contract or option. It is not
certain that a secondary market for positions in futures contracts or for
options will exist at all times. Although the investment adviser will
consider liquidity before entering into options transactions, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.
Portfolio Turnover. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held.
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 net assets and pledge up to
10% of the value of its total assets to secure such borrowings; or
.invest more than 10% of its total assets in securities subject to
restrictions on resale under the Securities Act of 1933.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
invest more than 15% of its net assets in securities which are not readily
marketable or which are otherwise considered illiquid, including
over-the-counter options and repurchase agreements providing for
settlement in more than seven days after notice.
Net Asset Value
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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
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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) who 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. It is the financial institution's responsibility to transmit orders
promptly. 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
"Other Payments to Financial Institutions").
Directly by Mail. To purchase shares of the Fund by mail directly from
Federated Securities Corp.:
complete and sign a new account application available from the Fund;
enclose a check made payable to Government Income Securities, Inc.; and
send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Eastern, MA
02266-8604.
Purchases by mail are considered received after payment by check is converted,
upon instruction of the transfer agent, 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.
Minimum Investment Required
The minimum initial investment in the Fund is $1,500 unless the investment is in
a retirement plan, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement plans 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, plus a sales charge of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales charge for purchases of $1 million or
more. In addition, no sales charge is imposed for Fund shares purchased through
bank trust departments or investment advisers registered under the Investment
Advisers Act of 1940 who are purchasing on behalf of their clients. However,
investors who purchase Fund shares through a trust department or investment
adviser may be charged an additional service fee by that institution.
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 at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund'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; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Dealer Concession. For sales of shares of the Fund, broker/dealers will
normally receive 100% of the applicable sales charge. Any portion of the sales
charge which is not paid to a broker/dealer will be retained by the distributor.
However, from time to time, and at the sole discretion of the distributor, all
or part of that portion may be paid to a dealer.
The sales charge for shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Fund
shares.
Eliminating the Sales Charge
The sales charge can be eliminated on the purchase of Fund shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
Quantity Discounts and Accumulated Purchases. There is no sales charge for
purchases of
$1 million or more. The Fund will combine purchases made on the same day by the
investor, his spouse, and his children under age 21 when it calculates the sales
charge. In addition, the sales charge
is eliminated for purchases of $1 million or more made at one time by a trustee
or fiduciary for a single trust estate or a single fiduciary account.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$900,000 and purchases $100,000 more at the current public offering price, there
will be no sales charge on the additional purchase. The Fund will also combine
purchases for the purpose of reducing the contingent deferred sales charge
imposed on some share redemptions. For example, if a shareholder already owns
shares of the Fund having a current value at the public offering price of $1
million and purchases an additional $1 million at the current public offering
price, the applicable contingent deferred sales charge would be reduced to .50%
for those additional shares. For more information on the levels of contingent
deferred sales charge and holding periods, see the section entitled "Contingent
Deferred Sales Charge."
To receive the sales charge elimination and/or the contingent deferred sales
charge reduction, Federated Securities Corp. must be notified by the shareholder
in writing or by their financial institution at the time the purchase is made
that Fund shares are already owned or that purchases are being combined. The
Fund will eliminate the sales charge and/or reduce the contingent deferred sales
charge after it confirms the purchases.
Letter of Intent. If a shareholder intends to purchase at least $1 million of
Fund shares over the next 13 months, the sales charge may be eliminated by
signing a letter of intent to that effect. This letter of intent includes a
provision for a sales charge elimination depending on the amount actually
purchased within the 13-month period and a provision for the Fund's custodian to
hold 1% of the total amount intended to be purchased in escrow (in shares of the
Fund) until such purchase is completed.
The 1% held in escrow will be applied to the shareholder's account at the end of
the 13-month period unless the amount specified in the letter of intent, which
must be $1 million or more of Fund shares, is not purchased. In this event, an
appropriate number of escrowed shares may be redeemed in order to realize the 1%
sales charge.
This letter of intent also includes a provision for reductions in the contingent
deferred sales charge and holding period depending on the amount actually
purchased within the 13-month period. For more information on the various levels
of contingent deferred sales charge and holding periods, see the section
entitled "Contingent Deferred Sales Charge."
This letter may be dated as of a prior date to include any purchases made within
the past 90 days toward the dollar fulfillment of the letter of intent. Prior
trade practices will not be adjusted.
Reinvestment Privilege. If shares have been redeemed in the Fund, the
shareholder has a one-time right, within 120 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to receive this
elimination of the sales charge. If the shareholder redeems his shares in the
Fund, there may be tax consequences.
Concurrent Purchases. For purposes of qualifying for a sales charge
elimination, a shareholder has the privilege of combining concurrent purchases
of two or more funds in the Fortress Investment
Program, the purchase prices of which include a sales charge. For example, if a
shareholder concurrently invested $400,000 in one of the other Fortress Funds
and $600,000 in the Fund, the sales charge would be eliminated.
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales charge
after it confirms the purchases.
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, plus
the 1% sales charge for purchases under $1 million. A shareholder may apply for
participation in this program through Federated Securities Corp.
Exchange Privilege
Shares in other Fortress Funds may be exchanged for Fund shares at net asset
value without a sales charge (if previously paid) or contingent deferred sales
charge.
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 (plus a sales charge, if applicable).
Shareholders using this privilege must exchange shares having a net asset value
of at least $1,500. Further information on the exchange privilege is available
by calling Federated Securities Corp.
Certificates and Confirmations
As transfer agent for the Fund, Federated 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 without a
sales charge.
Retirement Plans
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, including prototype retirement plans, 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 written requests, should be
considered.
Directly by Mail
Shareholders may also redeem shares by sending a written request to Federated
Services Company,
c/o State Street Bank and Trust Company, P.O. Box 8604, Boston, MA 02266-8604.
This written request must include the shareholder's name, the Fund name, the
Fund account number, and the share or dollar amount to be redeemed. Shares will
be redeemed at their net asset value next determined after State Street Bank
receives the redemption request.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders may call the Fund for assistance in redeeming by mail.
Signatures. Shareholders requesting a redemption of $50,000 or more, 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 signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; 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.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Receiving Payment. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder.
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:
<TABLE>
<CAPTION>
Amount of Purchase Shares Held Contingent Deferred Sales Charge
<S> <C> <C>
Up to $1,999,999 less than 4 years 1%
$2,000,000 to $4,999,999 less than 2 years .50%
$5,000,000 or more less than 1 year .25%
</TABLE>
In instances in which Fund shares have been acquired in exchange for shares in
other Fortress 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 the reinvestment of
dividends or distributions of long-term capital gains. 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 tax-free 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 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 Fortress 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, are not subject to the contingent deferred
sales charge. 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 charge may be redeemed without a contingent deferred sales charge. For
more information, see "Other 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. Due to the fact that shares are sold with a sales charge, it is
not advisable for shareholders to be purchasing shares while participating in
this program.
Contingent deferred sales charges are charged for shares redeemed through this
program within 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.
Exchanges for Shares of Other Funds
Fund shares may be exchanged for shares in other Fortress Funds at net asset
value without a contingent deferred sales charge or a sales charge. This
privilege is available to shareholders resident in any state in which the fund
shares being acquired may be sold.
Fund shares may also be exchanged for shares in other Federated Funds which are
advised by subsidiaries or affiliates of Federated Investors at net asset value
plus any applicable sales charge.
Shareholders using this privilege must exchange shares having a net asset value
of at least $1,500. Further information on the exchange privilege and
prospectuses for other Fortress Funds and Federated Funds are available by
calling the Fund.
Fund Information
- --------------------------------------------------------------------------------
Management of the Fund
Board of Directors. The Fund is managed by a Board of Directors. 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 of Directors 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 .75 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, which provides for the voluntary waiver and
reimbursement of expenses by the adviser, the adviser may voluntarily waive
all or a portion of the advisory fee and reimburse some of the operating
expenses of the Fund. The adviser can terminate this voluntary waiver of
its fee or reimbursement of expenses 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 Advisers 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. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk-averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Gary J. Madich and Kathleen M. Foody-Malus are the Fund's co-portfolio
managers. Gary J. Madich has been the Fund's co-portfolio manager since
April of 1986. Mr. Madich joined Federated Investors in 1984 and has been a
Senior Vice President of the Fund's investment adviser since 1993. Mr.
Madich served as a Vice President of the Fund's investment adviser from
1988 until 1993. Mr. Madich is a Chartered Financial Analyst and received
his M.B.A. in Public Finance from the University of Pittsburgh.
Kathleen M. Foody-Malus has been the Fund's co-portfolio manager since July
of 1993. 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, and from 1986 until 1989 she acted as an investment analyst.
Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the
University of Pittsburgh.
Other Payments to Financial Institutions. In addition to periodic payments
to financial institutions under Shareholder Services Plans, certain
financial institutions may be compensated by the adviser or its affiliates
for the continuing investment of customers' assets in certain funds,
including the Fund, advised by those entities. These payments will be made
directly by the distributor or adviser from their assets, and will not be
made from the assets of the Fund or by the assessment of a sales charge on
shares.
Federated Securities Corp. will pay financial institutions, for
distribution and/or administrative services, an amount equal to 1% of the
net asset value of shares purchased by their clients or customers (except
for participants in the Liberty Family Retirement Program) on purchases up
to $1,999,999, .50% of the offering price on purchases of $2,000,000 to
$4,999,999, and .25% of the offering price on purchases of $5,000,000 or
more. (This fee is in addition to the 1% sales charge on purchases of less
than $1 million.) Financial institutions may elect to waive the initial
payment described above; such waiver will result in the waiver by the Fund
of the otherwise applicable contingent deferred sales charge.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described in this
prospectus or should Congress relax current restrictions on depository
institutions, the distributor and adviser will consider appropriate changes in
the administrative services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
Distribution of Fund Shares
Federated Securities Corp. is the principal distributor for shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. 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.
Administration of the Fund
Administrative Services. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
Average Aggregate Daily
Maximum Administrative Fee Net Assets of the Federated Funds
<S> <C>
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
</TABLE>
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 Administrative Services may choose voluntarily to waive a portion of
its fee.
Shareholder Services Plan. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the Fund to obtain certain personal services
for shareholders and for the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
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.
Custodian. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
Transfer Agent and Dividend Disbursing Agent. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund.
Legal Counsel. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, Washington, D.C.
Independent Auditors. The independent auditors for the Fund are Deloitte &
Touche, Boston, Massachusetts.
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 their shares. No federal income tax is due on
any dividends 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.
Pennsylvania Corporate and Personal Property Taxes
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
the Fund is subject to the Pennsylvania corporate franchise tax; and
Fund 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. In addition,
it will, on occasion, inform Fund shareholders of the Fund's current
distributions.
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 maximum sales load and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
Government Income Securities, Inc.
Portfolio of Investments
February 28, 1994
- --------------------------------------------------------------------------------
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--98.3%
- ----------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.--11.4%
-----------------------------------------------------------------------------
$ 1,356,623 13.00%, 8/1/2011-5/1/2014 $ 1,547,811
-----------------------------------------------------------------------------
1,403,679 12.50%, 6/1/2011-1/1/2014 1,595,366
-----------------------------------------------------------------------------
10,006,646 12.00%, 9/1/2007-5/1/2016 11,311,730
-----------------------------------------------------------------------------
10,715,018 11.50%, 4/1/2011-5/1/2019 12,016,099
-----------------------------------------------------------------------------
6,354,441 11.00%, 1/1/2001-7/1/2019 7,083,003
-----------------------------------------------------------------------------
41,696,336 10.50%, 7/1/2004-12/1/2020 46,067,644
-----------------------------------------------------------------------------
11,039,798 9.50%, 6/1/2021-12/1/2022 11,943,626
-----------------------------------------------------------------------------
28,063,010 9.00%, 8/1/2004-10/1/2006 29,609,085
-----------------------------------------------------------------------------
80,000,000 7.50%, 1/1/2024 82,349,600**
-----------------------------------------------------------------------------
200,000,000 7.00%, 1/1/2024 200,874,000**
----------------------------------------------------------------------------- -----------------
Total 404,397,964
----------------------------------------------------------------------------- -----------------
Federal Home Loan Mortgage Corp. REMIC--3.0%
-----------------------------------------------------------------------------
8,659,162 9.50%, Series 1051C, 3/15/2021 1,677,713
-----------------------------------------------------------------------------
4,800,000 9.50%, Series 139F, 6/15/2020 4,975,344
-----------------------------------------------------------------------------
5,000,000 9.30%, Series 141C, 9/15/2020 5,225,900
-----------------------------------------------------------------------------
10,000,000 9.00%, Series 151E, 9/15/2020 10,364,600
-----------------------------------------------------------------------------
4,800,000 9.00%, Series 60G, 9/15/2019 4,939,248
-----------------------------------------------------------------------------
20,602,210 9.00%, Series 1136Y, 9/15/2015 4,867,272
-----------------------------------------------------------------------------
115,577,250 7.00%, Series 1578U, 11/15/2017 19,467,832
-----------------------------------------------------------------------------
20,000,000 6.60%, Series 1559VH, 12/15/2021 19,296,200
-----------------------------------------------------------------------------
19,085,000 6.50%, Series 1450E, 9/15/2004 19,160,386
-----------------------------------------------------------------------------
19,000,000 6.50%, Series 1564I, 5/15/2007 3,057,860
-----------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. REMIC--continued
-----------------------------------------------------------------------------
$ 14,120,000 6.50%, Series 1608K, 9/15/2022 $ 13,298,498
----------------------------------------------------------------------------- -----------------
Total 106,330,853
----------------------------------------------------------------------------- -----------------
Federal National Mortgage Association --7.7%
-----------------------------------------------------------------------------
2,323,371 13.00%, 9/1/2013-6/1/2015 2,673,317
-----------------------------------------------------------------------------
12,894,951 12.50%, 12/1/2013-5/1/2015 14,860,843
-----------------------------------------------------------------------------
8,300,702 12.25%, 12/1/2010-2/1/2012 9,538,006
-----------------------------------------------------------------------------
6,339,334 12.00%, 1/1/2011-3/1/2016 7,240,660
-----------------------------------------------------------------------------
10,353,859 11.50%, 3/1/2014-4/1/2019 11,763,712
-----------------------------------------------------------------------------
63,509,662 11.00%, 5/1/2010-5/1/2023 71,379,935
-----------------------------------------------------------------------------
2,698,968 10.50%, 9/1/2004 2,890,406
-----------------------------------------------------------------------------
1,238,361 10.00%, 2/1/2004 1,323,102
-----------------------------------------------------------------------------
8,847,893 9.00%, 5/1/2004 9,375,936
-----------------------------------------------------------------------------
45,810,000 8.00%, 5/1/2022-7/1/2023 47,885,766
-----------------------------------------------------------------------------
90,000,000 7.50%, 1/1/2024 92,530,800**
----------------------------------------------------------------------------- -----------------
Total 271,462,483
----------------------------------------------------------------------------- -----------------
Federal National Mortgage Association REMIC--5.5%
-----------------------------------------------------------------------------
7,500,000 9.30%, Series 90-20H, 1/25/2019 7,776,675
-----------------------------------------------------------------------------
6,210,878 9.20%, Series 88-14F, 12/25/2017 6,406,210
-----------------------------------------------------------------------------
15,900,000 9.00%, Series 90-116G, 11/25/2019 16,283,985
-----------------------------------------------------------------------------
8,700,000 8.75%, Series 90-4G, 5/25/2017 9,254,190
-----------------------------------------------------------------------------
13,000,000 8.70%, Series G89-1D, 11/25/2017 13,439,530
-----------------------------------------------------------------------------
6,425,000 8.70%, Series 90-2E, 12/25/2018 6,754,924
-----------------------------------------------------------------------------
3,799,912 8.50%, Series 91-138M, 10/25/2006 517,738
-----------------------------------------------------------------------------
12,402,000 7.75%, Series G91-33 PD, 2/15/2016 12,476,660
-----------------------------------------------------------------------------
17,000,000 7.00%, Series 93-133J, 12/25/2022 16,575,510
-----------------------------------------------------------------------------
26,800,000 7.00%, Series 93-155J, 12/25/2022 26,061,660
-----------------------------------------------------------------------------
17,800,000 6.75%, Series 93-163PY, 3/25/2022 17,221,500
-----------------------------------------------------------------------------
$ 10,000,000 6.50%, Series 93-071PK, 1/25/2008 $ 9,573,800
-----------------------------------------------------------------------------
14,200,000 6.50%, Series 93-187K, 8/25/2022 13,361,348
-----------------------------------------------------------------------------
20,000,000 6.50%, Series 93-189PK, 3/25/2022 19,113,600
-----------------------------------------------------------------------------
10,000,000 6.25%, Series 93-194PM, 6/25/2008 9,438,200
-----------------------------------------------------------------------------
10,000,000 6.15%, Series 93-160AG, 12/25/2020 9,700,200
----------------------------------------------------------------------------- -----------------
Total 193,955,730
----------------------------------------------------------------------------- -----------------
Government National Mortgage Association MPT--64.4%
-----------------------------------------------------------------------------
17,292,746 12.50%, 4/15/2010-9/20/2015 20,285,285
-----------------------------------------------------------------------------
52,325,545 12.00%, 5/15/2011-4/20/2016 60,796,827
-----------------------------------------------------------------------------
66,269,367 11.50%, 3/15/2010-3/20/2020 76,201,341
-----------------------------------------------------------------------------
45,543,279 11.00%, 8/20/2009-5/15/2020 51,233,171
-----------------------------------------------------------------------------
56,674,182 10.50%, 11/15/2015-9/15/2020 63,596,107
-----------------------------------------------------------------------------
346,258,033 10.00%, 11/15/2009-1/15/2021 381,544,311
-----------------------------------------------------------------------------
269,207,550 9.50%, 4/15/2016-2/15/2022 290,884,606
-----------------------------------------------------------------------------
207,237,827 9.00%, 6/15/2016-6/20/2022 221,482,559
-----------------------------------------------------------------------------
190,535,018 8.00%, 3/15/2017-8/15/2023 200,026,389
-----------------------------------------------------------------------------
602,167,111 7.50%, 12/15/2022-1/1/2024 619,100,050
-----------------------------------------------------------------------------
295,660,872 7.00%, 11/15/2007-2/15/2024 297,070,750
----------------------------------------------------------------------------- -----------------
Total 2,282,221,396
----------------------------------------------------------------------------- -----------------
United States Treasury Notes --6.3%
-----------------------------------------------------------------------------
5,000,000 5.875%, 2/15/2004 4,899,950
-----------------------------------------------------------------------------
152,200,000 6.25%, 2/15/2003 153,055,364
-----------------------------------------------------------------------------
66,000,000 6.375%, 8/15/2002 67,010,460
----------------------------------------------------------------------------- -----------------
Total 224,965,774
----------------------------------------------------------------------------- -----------------
Total Long-Term Obligations (identified cost, $3,505,811,680) 3,483,334,200
----------------------------------------------------------------------------- -----------------
*Repurchase Agreements--11.0%
- ----------------------------------------------------------------------------------------------
$ 210,000,000 \\First Boston Corp., 3.15%, dated 2/14/94, due 3/14/94 $ 210,000,000
-----------------------------------------------------------------------------
19,170,000 J.P. Morgan Securities, Inc., 3.49%, dated 2/28/94, due 3/1/94 19,170,000
-----------------------------------------------------------------------------
160,000,000 \\Kidder Peabody & Co., 3.15%, dated 2/14/94, due 3/14/94 160,000,000
----------------------------------------------------------------------------- -----------------
Total (at amortized cost) (Note2B) 389,170,000
----------------------------------------------------------------------------- -----------------
Total Investments (identified cost, $3,894,981,680) $ 3,872,504,200\
----------------------------------------------------------------------------- -----------------
</TABLE>
\ The cost of investments for federal tax purposes amounts to
$3,894,981,680. The net unrealized depreciation on a federal tax cost
basis amounts to $22,477,480, which is comprised of $33,115,893
appreciation and $55,593,373 depreciation at February 28, 1994.
\\ Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days.
* The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investments in the repurchase agreements are through participation in a joint
account with other Federated funds.
** Includes securities with a market value of $375,754,400 subject to Dollar
Roll transactions.
Note: The categories of investments are shown as a percentage of net assets
($3,542,078,031) at February 28, 1994.
The following abbreviations are used in this portfolio:
MPT--Modified Pass-Through
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
Government Income Securities, Inc.
Statement of Assets and Liabilities
February 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets:
- ----------------------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B)
(identified and tax cost, $3,894,981,680) $3,872,504,200
- ----------------------------------------------------------------------------------------------
Cash 21,920
- ----------------------------------------------------------------------------------------------
Receivable for investments sold 311,497,753
- ----------------------------------------------------------------------------------------------
Interest receivable 25,549,153
- ----------------------------------------------------------------------------------------------
Receivable for capital stock sold 10,346,028
- ---------------------------------------------------------------------------------------------- -----------------
Total assets 4,219,919,054
- ----------------------------------------------------------------------------------------------
Liabilities:
- ----------------------------------------------------------------------------------------------
Payable for dollar roll transactions (Note 2E) $378,067,020
- -----------------------------------------------------------------------------
Payable for investments purchased 264,763,418
- -----------------------------------------------------------------------------
Dividends payable 15,319,145
- -----------------------------------------------------------------------------
Payable for capital stock redeemed 17,286,059
- -----------------------------------------------------------------------------
Shareholder services fee payable (Note 5) 1,545,733
- -----------------------------------------------------------------------------
Transfer agent fee payable (Note 5) 464,873
- -----------------------------------------------------------------------------
Accrued expenses 394,775
- ----------------------------------------------------------------------------- ---------------
Total liabilities 677,841,023
- ---------------------------------------------------------------------------------------------- -----------------
Net Assets for 393,369,198 shares of capital stock outstanding $3,542,078,031
- ---------------------------------------------------------------------------------------------- -----------------
Net Assets Consist of:
- ----------------------------------------------------------------------------------------------
Paid-in capital $3,833,445,179
- ----------------------------------------------------------------------------------------------
Unrealized depreciation of investments (22,477,480)
- ----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (268,712,881)
- ----------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (Note 3) (176,787)
- ---------------------------------------------------------------------------------------------- -----------------
Total $3,542,078,031
- ---------------------------------------------------------------------------------------------- -----------------
Net Asset Value Per Share ($3,542,078,031 / 393,369,198 shares outstanding) $9.00
- ---------------------------------------------------------------------------------------------- -----------------
Computation of Offering Price: Offering Price Per Share ( 100/99 of $9.00)* $9.09
- ---------------------------------------------------------------------------------------------- -----------------
Computation of Proceeds on Redemption:
Redemption Proceeds Per Share (99/100 of $9.00)** $8.91
- ---------------------------------------------------------------------------------------------- -----------------
</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
Year Ended February 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income:
- -----------------------------------------------------------------------------------------------
Interest income (Note 2D) (net of dollar roll interest expense of $3,423,930) $ 318,221,322
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 28,541,303
- -------------------------------------------------------------------------------
Directors' fees 54,819
- -------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 2,638,423
- -------------------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees
and expenses 2,371,284
- -------------------------------------------------------------------------------
Capital stock registration fees 548,271
- -------------------------------------------------------------------------------
Taxes 286,339
- -------------------------------------------------------------------------------
Printing and postage 189,886
- -------------------------------------------------------------------------------
Legal fees 28,620
- -------------------------------------------------------------------------------
Auditing fees 19,522
- -------------------------------------------------------------------------------
Shareholder services fees (Note 5) 9,513,768
- -------------------------------------------------------------------------------
Insurance premiums 66,115
- -------------------------------------------------------------------------------
Miscellaneous 34,333
- ------------------------------------------------------------------------------- --------------
Total expenses 44,292,683
- -------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 5) 7,242,625
- ------------------------------------------------------------------------------- --------------
Net expenses 37,050,058
- ----------------------------------------------------------------------------------------------- ----------------
Net investment income 281,171,264
- ----------------------------------------------------------------------------------------------- ----------------
Realized and Unrealized Gain (Loss) on Investments:
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) (107,551,473)
- -----------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (70,667,358)
- ----------------------------------------------------------------------------------------------- ----------------
Net realized and unrealized loss on investments (178,218,831)
- ----------------------------------------------------------------------------------------------- ----------------
Change in net assets resulting from operations $ 102,952,433
- ----------------------------------------------------------------------------------------------- ----------------
</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,
<S> <C> <C>
1994 1993
Increase (Decrease) in Net Assets:
- ---------------------------------------------------------------------------
Operations--
- ---------------------------------------------------------------------------
Net investment income $ 281,171,264 $ 238,432,536
- ---------------------------------------------------------------------------
Net realized gain (loss) from investment transactions
($83,738,305 net loss and $7,365,127 net loss, respectively,
as computed for federal income tax purposes) (107,551,473) (27,110,566)
- ---------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (70,667,358) 11,651,499
- --------------------------------------------------------------------------- ----------------- -----------------
Change in net assets resulting from operations 102,952,433 222,973,469
- --------------------------------------------------------------------------- ----------------- -----------------
Net Equalization (Debits) Credits (Note 2H) (190,224) 3,430,013
- --------------------------------------------------------------------------- ----------------- -----------------
Distributions to Shareholders (Note 3)--
- ---------------------------------------------------------------------------
Dividends from net investment income (279,463,100) (239,699,407)
- --------------------------------------------------------------------------- ----------------- -----------------
Capital Stock Transactions (Note 4)--
- ---------------------------------------------------------------------------
Proceeds from sale of shares 961,917,817 1,764,747,517
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders electing
to receive payment of dividends in capital stock 79,453,646 58,406,587
- ---------------------------------------------------------------------------
Cost of shares redeemed (965,772,201) (428,440,100)
- --------------------------------------------------------------------------- ----------------- -----------------
Change in net assets from capital stock transactions 75,599,262 1,394,714,004
- --------------------------------------------------------------------------- ----------------- -----------------
Change in net assets (101,101,629) 1,381,418,079
- ---------------------------------------------------------------------------
Net Assets:
- ---------------------------------------------------------------------------
Beginning of period 3,643,179,660 2,261,761,581
- --------------------------------------------------------------------------- ----------------- -----------------
End of period $ 3,542,078,031 $ 3,643,179,660
- --------------------------------------------------------------------------- ----------------- -----------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Government Income Securities, Inc.
Notes to Financial Statements
February 28, 1994
- --------------------------------------------------------------------------------
(1) Organization
Government Income Securities, Inc. (the "Fund") is organized as a corporation
under the laws of the State of Maryland and is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end, 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. The
policies are in conformity with generally accepted accounting principles.
A. Investment Valuations--U.S. government obligations are valued at the mean
between the over-the-counter bid and asked prices as furnished by an
independent pricing service. U.S. government obligations maturing in sixty
days or less are valued at amortized cost, which approximates value.
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 securities to ensure the existence
of a proper level of collateral.
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 Fund's Directors. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. Federal Taxes--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code (the "Code") applicable to investment companies and
to distribute to shareholders each year all of its taxable income.
Accordingly, no provision for federal taxes is 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.
D. Income--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including
original issue discount as required by the Code.
E. Dollar Roll Transactions--The Fund enters into dollar roll transactions,
with respect to mortgage-backed securities issued by GNMA, FNMA and FHLMC,
in which the Fund sells mortgage-backed securities to financial
institutions and simultaneously agrees to repurchase substantially similar
(same type, coupon and maturity) securities at a later date at an agreed
upon price. During the period between the sale and repurchase, the Fund
foregoes principal and interest paid on the mortgage securities sold. The
Fund is compensated by the interest earned on the cash proceeds of the
initial sale and any additional fee income received on the sale.
F. When-Issued and Delayed Delivery Transactions--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain 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.
G. Option Accounting Principles--Upon the writing of a covered call option, an
amount equal to the premium received by the Fund is included in the
Statement of Assets and Liabilities as an asset and a corresponding
liability. The amount of the liability is subsequently marked-to-market to
reflect the current market value of the call option written. When a call
option expires on a stipulated expiration date, or the Fund enters into a
closing purchase transaction, the Fund will realize a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when
the option was written) without regard to any unrealized gain or loss on
the underlying security, and the liability related to such option will be
extinguished. When a call option is exercised, the Fund will realize a gain
or loss from the sale of the underlying security and the proceeds of sale
are increased by the premium originally received.
The premium paid by the Fund for the purchase of a put option is included
in the asset section of the Fund's Statement of Assets and Liabilities as
an investment and subsequently marked-to-market to reflect the current
market value of the put option. When a put option expires on a stipulated
expiration date, the Fund will realize a loss in the amount of the premium
paid. If the Fund enters into a closing sale transaction, the Fund will
realize a gain or loss, depending on whether the sales proceeds from the
closing sale transaction are greater or less than the cost of the
option. If the Fund exercises the put option, it will realize a gain or
loss from the sale of the underlying security and the proceeds of the sale
are decreased by the premium originally paid.
H. 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 Fund shares.
I. Reclassifications--During the current period, the Fund adopted Statement of
Position 93-2 Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions
by Investment Companies. Accordingly, permanent book and tax basis
differences relating to loss recognition have been reclassified to
paid-in-capital. As of March 1, 1993, the cumulative effect of such
differences, totaling $3,212,681 was reclassified from accumulated net
realized loss on investments to paid-in-capital. Net investment income, net
realized losses, and net assets were not affected by this change.
J. Other--Investment transactions are accounted for on the date of the
transaction.
(3) Dividends and Distributions
Dividends from net investment income are declared and paid monthly.
Distributions of any net realized capital gains will be made at least once every
twelve months. Dividends and capital gain distributions, if any, are recorded on
the ex-dividend date.
The amount shown in the financial statements for net investment income for the
year ended
February 28, 1994, differs from those determined for tax purposes because of
certain timing differences. This resulted in distributions to shareholders in
excess of net investment income. These distributions do not represent a return
of capital for federal income tax purposes.
Government Income Securities, Inc.
- --------------------------------------------------------------------------------
(4) Capital Stock
At February 28, 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,
<S> <C> <C>
1994 1993
- --------------------------------------------------------------------------------
Shares outstanding, beginning of period 386,096,687 238,580,780
- --------------------------------------------------------------------------------
Shares sold 103,266,660 186,632,955
- --------------------------------------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in capital stock 8,616,192 6,216,033
- --------------------------------------------------------------------------------
Shares redeemed (104,610,341) (45,333,081)
- -------------------------------------------------------------------------------- --------------- ---------------
Shares outstanding, end of period 393,369,198 386,096,687
- -------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(5) Investment Advisory Fee and Other Transactions with Affiliates
Federated Advisers ("Adviser") receives for its services an annual investment
advisory fee equal to .75% of the Fund's average daily net assets. The Adviser
has voluntarily agreed to waive a portion of its fee. The Adviser can modify or
terminate this agreement at any time at its sole discretion.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Effective March 1, 1994, Federated
Administrative Services ("FAS") will provide administrative personnel and
services. The fee is based on the level of average aggregate net assets of the
total Federated Funds for the period. 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.
During the year ended February 28, 1994, the Fund engaged in purchase and sale
transactions with other funds advised by the Adviser pursuant to Rule 17a-7 of
the Investment Company Act of 1940 amounting to $66,634,488 and $108,341,907,
respectively. These purchases and sales were conducted on an arms-length basis,
insofar as they were transacted for cash consideration only, at independent
current market prices and without brokerage commission, fee or other
remuneration.
The Fund has adopted a Shareholder Services Plan (the "Services Plan") with
respect to the Fund. The Fund will reimburse Federated Securities Corp. ("FSC")
from the net assets of the Fund for fees FSC paid which relate to administrative
support services of the Fund. The Services Plan provides that the Fund may incur
shareholder services expenses up to 0.25 of 1% of the average daily net assets
of the Fund. Under the terms of a shareholder service arrangement with Federated
Shareholder Services ("FSS") which takes effect March 1, 1994, the Fund will pay
FSS a fee to obtain certain personal services for shareholders and the
maintenance of shareholder accounts. The fee is based on the level of average
net assets for the period.
Government Income Securities, Inc.
- --------------------------------------------------------------------------------
Certain Officers and Trustees of the Fund are Officers and Directors of the
above Corporations.
(6) Investment Transactions
Purchases, and sales of investments, excluding short-term securities, for the
year ended
February 28, 1994, were as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------
Purchases-- $ 5,135,095,450
- ----------------------------------------------------------------------------------------------- -----------------
Sales-- $ 5,098,703,378
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
GOVERNMENT INCOME SECURITIES, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Government Income Securities, Inc. as of
February 28, 1994, the related statement of operations for the year then ended,
the statement of changes in net assets for the years ended
February 28, 1994 and 1993, and the financial highlights (see page 2 of the
prospectus) for each of the years in the eight-year period ended February 28,
1994. 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 the securities owned at
February 28, 1994 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Government Income
Securities, Inc. as of February 28, 1994, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Boston, Massachusetts
April 15, 1994
Addresses
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Government Income Securities, 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 8604
Boston, Massachusetts 02266-8604
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 125 Summer Street
Boston, Massachusetts 02110-1617
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Government Income
Securities, Inc.
Prospectus
An Open-End, Diversified
Management Investment Company
April 30, 1994
8040406A (4/94)
Government Income Securities, Inc.
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Government Income Securities, Inc. (the "Fund"), dated
April 30, 1994. This Statement is not a prospectus itself. To receive
a copy of the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1994
FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
Table of Contents
- --------------------------------------------------------------------------------
General Information About the Fund 1
- ---------------------------------------------------------------
Investment Objective and Policies 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed Delivery
Transactions 1
Futures and Options Transactions 2
Lending of Portfolio Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
Investment Limitations 4
Fund Management 6
- ---------------------------------------------------------------
Officers and Directors 6
The Funds 8
Fund Ownership 8
Investment Advisory Services 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 9
Administrative Services 9
- ---------------------------------------------------------------
Shareholder Services Plan 9
Brokerage Transactions 10
- ---------------------------------------------------------------
Purchasing Shares 10
- ---------------------------------------------------------------
Conversion to Federal Funds 10
Purchases by Sales Representatives,
Fund Directors, and Employees 10
Determining Net Asset Value 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
Exchange Privilege 11
- ---------------------------------------------------------------
Reduced Sales Charge 11
Requirements for Exchange 11
Tax Consequences 11
Making an Exchange 11
Redeeming Shares 12
- ---------------------------------------------------------------
Redemption in Kind 12
Tax Status 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
Shareholders' Tax Status 12
Total Return 12
- ---------------------------------------------------------------
Yield 13
- ---------------------------------------------------------------
Current Distributions 13
- ---------------------------------------------------------------
Performance Comparisons 13
- ---------------------------------------------------------------
General Information About the Fund
- --------------------------------------------------------------------------------
The Fund was established as a Massachusetts business trust on September 23,
1981, and reorganized as a Maryland corporation on February 4, 1986.
Investment Objective and Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income. Current income
includes, in general, discount earned on U.S. Treasury bills and agency discount
notes, interest earned on all other U.S. government securities and
mortgage-related securities, and short-term capital gains. The investment
objective cannot be changed without approval of shareholders.
Types of Investments
The Fund invests primarily in securities which are guaranteed as to payment of
principal and interest by the U.S. government or its instrumentalities.
U.S. Government Securities
The types of U.S. government securities in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are
backed by:
the full faith and credit of the U.S. Treasury (such as Farmers Home
Administration and Government National Mortgage Association);
the issuer's right to borrow from the U.S. Treasury (such as Farmers
Home Administration);
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities (such as Federal Home Loan
Banks and Farmers Home Administration); or
the credit of the agency or instrumentality issuing the obligations
(such as Federal Home Loan Banks, Farmers Home Administration, Federal
Farm Credit Banks, Federal National Mortgage Association, and Federal
Home Loan Mortgage Corporation).
Stripped Mortgage-Related Securities
Some of the mortgage-related securities purchased by the Fund may
represent an interest solely in the principal repayments or solely in the
interest payments on mortgage-backed securities (stripped mortgage-backed
securities or "SMBSs"). Due to the possibility of prepayments on the
underlying mortgages, SMBSs may be more interest-rate sensitive than
other securities purchased by the Fund. If prevailing interest rates fall
below the level at which SMBSs were issued, there may be substantial
prepayments on the underlying mortgages, leading to the relatively early
prepayments of principal-only SMBSs and a reduction in the amount of
payments made to holders of interest-only SMBSs. It is possible that the
Fund might not recover its original investment on interest-only SMBSs if
there are substantial prepayments on the underlying mortgages. Therefore,
interest-only SMBSs generally increase in value as interest rates rise
and decrease in value as interest rates fall, counter to changes in value
experienced by most fixed income securities. The Fund's adviser intends
to use this characteristic of interest-only SMBSs to reduce the effects
of interest rate changes on the value of the Fund's portfolio, while
continuing to pursue current income.
When-Issued and Delayed Delivery Transactions
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies and not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. 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.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
- --------------------------------------------------------------------------------
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, the Fund may buy and sell call and put options on U.S. government
securities.
Financial Futures Contracts
A futures contract is a firm commitment by two parties, the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
Purchasing Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
Writing Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
- --------------------------------------------------------------------------------
Writing Put Options on Financial Futures Contracts
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option.
Purchasing Call Options on Financial Futures Contracts
An additional way in which the Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option, the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge.
Limitation on Open Futures Positions
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the
Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good-faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing Put and Call Options on U.S. Government Securities
The Fund may purchase put and call options on U.S. government securities
to protect against price movements in particular securities. A put option
gives the Fund, in return for a premium, the right to
sell the underlying security to the writer (seller) at a specified price
during the term of the option. A call option gives the Fund, in return
for a premium, the right to buy the underlying security from the seller.
Writing Covered Put and Call Options on U.S. Government Securities
The Fund may write covered put and call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
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 filed for bankruptcy or
became insolvent, disposition of such 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.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. This 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 maintained until the transaction is settled.
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 28, 1994,
and February 28, 1993, the portfolio turnover rates were 134% and 43%,
respectively.
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. The
deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.
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 net 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 any such borrowings are
outstanding. During the period any reverse repurchase agreements 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 these 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. Neither
the deposit of underlying securities and other assets in escrow in
connection with the writing of put or call options on U.S. government
securities nor margin deposits for the purchase and sale of financial
futures contracts and related options are deemed to be a pledge.
Investing in Real Estate
The Fund will not buy or sell 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, except that the Fund may
purchase and sell financial futures contracts and related options.
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 securities in accordance with its investment
objective, policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio securities.
(This shall not prevent the purchase or holding of U.S. government
securities, repurchase agreements covering U.S. government securities, or
other transactions which are permitted by the Fund's investment objective
and policies.)
Selling Short
The Fund will not sell securities short.
Restricted Securities
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Board of Directors
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets in
securities which are not readily marketable or which are otherwise
considered illiquid, including over-the-counter options and repurchase
agreements providing for settlement in more than seven days after notice.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment companies.
- --------------------------------------------------------------------------------
Writing Covered Put and Call Options and Purchasing Put Options
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment. When writing put options, the Fund
will segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities. The Fund
will not purchase put options on securities unless the securities are
held in the Fund's portfolio.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of the 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 did not engage in reverse repurchase agreements, borrow money, or
invest in illiquid securities in excess of 5% of the value of its total 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."
Fund Management
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Officers and Directors
Officers and Directors are listed with their addresses, principal occupations,
and present positions, including any affiliation with Federated Advisers,
Federated Investors, Federated Services Company, Federated Securities Corp.,
Federated Administrative Services, and the Funds (as defined below).
<TABLE>
<CAPTION>
Name and Address Positions with Principal Occupations
the Fund During Past Five Years
<S> <C> <C>
John F. Donahue* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Tower Director Advisers, Federated Management, and Federated Research; Director, Aetna
Pittsburgh, PA Life and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director, The Standard
Fire Insurance Company. Mr. Donahue is the father of J. Christopher Donahue,
Vice President of the Fund.
John T. Conroy, Jr. Director President, Investment Properties Corporation; Senior Vice-President, John R.
Wood/IPC Commercial Wood and Associates, Inc., Realtors; President, Northgate Village Development
Department Corporation; General Partner or Trustee in private real estate ventures in
John R. Wood and Southwest Florida; Director, Trustee, or Managing General Partner of the
Associates, Inc., Realtors Funds; formerly, President, Naples Property Management, Inc.
3255 Tamiami Trail North Naples,
FL
William J. Copeland Director Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
23rd Floor Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan
Pittsburgh, PA Homes, Inc.
James E. Dowd Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Richard B. Fisher* President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Tower and Director Director, Federated Securities Corp.; President or Vice President of the
Pittsburgh, PA Funds; Director or Trustee of some of the Funds.
Edward L. Flaherty, Jr. Director Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Director Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly, President, State
Boston, MA Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer
Learning Library Center, Inc., and U.S. Space Foundation; Chairman, National Advisory
University of Pittsburgh Council for Environmental Policy and Technology; Chairman, Czecho Slovak
Pittsburgh, PA Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or Managing General
4905 Bayard Street Partner of the Funds.
Pittsburgh, PA
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Services
Federated Investors Tower Company, Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA President and Director, Federated Administrative Services; President or
Vice President of the Funds; Director, Trustee, or Managing General Partner
of some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman
and Director of the Fund.
Edward C. Gonzales Vice President Vice President, Treasurer, and Trustee, Federated Investors; Vice President
Federated Investors Tower and Treasurer and Treasurer, Federated Advisers, Federated Management, and Federated
Pittsburgh, PA Research; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Chairman, Treasurer, and Director, Federated
Administrative Services; Trustee, Federated Services Company; Trustee or
Director of some of the Funds; Vice President and Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice President,
Secretary, and Director, Federated Administrative Services; Executive Vice
President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Vice President and Secretary of the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Tower Federated Securities Corp.; President and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance Company and President
of its Federated Research Division.
</TABLE>
*This Director is deemed to be an "interested person" of the Fund as
defined in the Investment Company Act of 1940.
Member of the Fund's Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board of Directors between
meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money
Market Trust; Liberty Term Trust, Inc.--1999; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Managed Series Trust; Mark Twain Funds; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut
Funds; Short-Term Municipal Trust; Signet Select Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark 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 own less than 1% of the Fund's outstanding shares.
Merrill Lynch, Pierce, Fenner & Smith, as record owner holding Fund shares for
its clients, owned approximately 178,135,149 shares (46.8%) of the Fund as of
March 31, 1994.
Investment Advisory Services
- --------------------------------------------------------------------------------
Adviser to the Fund
The Fund's investment adviser is Federated Advisers. It is a subsidiary of
Federated Investors. All of 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. John F. Donahue, Chairman and Trustee of
Federated Advisers, is Chairman and Trustee of Federated Investors and Chairman
and Director of the Fund. John A. Staley, IV, President and Trustee of Federated
Advisers, is Vice President and Trustee of Federated Investors, Executive Vice
President of Federated Securities Corp., and Vice President and Secretary of the
Fund. J. Christopher Donahue, Trustee of Federated Advisers, is President and
Trustee of Federated Investors; President and Director of Federated
Administrative Services; Trustee, Federated Services Company; and Vice President
of the Fund. John W. McGonigle, Vice President, Secretary, and Trustee of
Federated Advisers, is Trustee, Vice President, Secretary, and General Counsel
of Federated Investors; Executive Vice President, Secretary, and Director of
Federated Administrative Services; Executive Vice President and Director of
Federated Securities Corp.; Trustee, Federated Services Company; and Vice
President and Secretary of the Fund.
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. During the fiscal years ended
February 28, 1994, 1993, and February 29, 1992, the Fund's adviser earned
$28,541,303, $21,620,403, and $12,361,980, respectively, of which $7,242,625,
$0, and $0, 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
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.
Administrative Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the fiscal years ended February 28, 1994, 1993, and February 29,
1992, Federated Administrative Services, Inc., the Fund's former administrator,
earned $2,638,423, $1,705,319, and $986,311, respectively. John A. Staley, IV,
an officer of the Fund and Dr. Henry J. Gailliot, an officer of Federated
Advisers, the adviser to the Fund, each hold approximately 15% and 20%,
respectively, of the outstanding common stock and serve as directors of
Commercial Data Services, Inc., a company which provides computer processing
services to Federated Administrative Services, Inc. and Federated Administrative
Services. For the fiscal years ended February 28, 1994, 1993, and February 29,
1992, Federated Administrative Services, Inc. paid approximately $159,222,
$179,920 and $202,532, respectively, for services provided by Commercial Data
Services, Inc. to the Funds.
Shareholder Services Plan
This arrangement permits the payment of fees to Federated Shareholder Services
and, indirectly, to financial institutions 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, 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. For
the fiscal period ending February 28, 1994, payments in the amount of $9,513,768
were made pursuant to the Shareholder Services Plan, all of which was paid to
financial institutions.
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
review by the Board of 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.
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.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising Federated Funds 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.
For the fiscal years ended February 28, 1994, 1993, and February 29, 1992, the
Fund paid $0, $0, and $11,000, respectively, in brokerage commissions on
brokerage transactions.
Purchasing Shares
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales charge 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."
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 and Trust Company ("State Street Bank") acts
as the shareholder's agent in depositing checks and converting them to federal
funds.
Purchases by Sales Representatives, Fund Directors, and Employees
Directors, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp., and their spouses and
children under 21, may buy shares at net asset value without a sales charge and
are not subject to a redemption fee to the extent the financial institution
through which the shares are sold agrees to waive any initial payment to which
it might otherwise be entitled. Shares may also be sold without sales charges to
trusts or pension or profit-sharing plans for these persons.
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
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.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are determined as follows:
.as provided by an independent pricing service;
.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
.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:
yield;
quality;
coupon rate;
maturity;
type of issue;
trading characteristics; and
other market data.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
Exchange Privilege
- --------------------------------------------------------------------------------
The Securities and Exchange Commission has issued an order exempting the Fund
from certain provisions of the Investment Company Act of 1940. As a result, Fund
shareholders are allowed to exchange all or some of their shares for shares in
other Fortress Funds or certain Federated Funds which are sold with a sales
charge different from that of the Fund or with no sales charge and which are
advised by subsidiaries or affiliates of Federated Investors. These exchanges
are made at net asset value plus the difference between the Fund's sales charge
already paid and any sales charge of the fund into which the shares are to be
exchanged, if higher.
The order also allows certain other funds, including funds that are not advised
by subsidiaries or affiliates of Federated Investors, which do not have a sales
charge, to exchange their shares for Fund shares on a basis other than their
current offering price. These exchanges may be made to the extent that such
shares were acquired in a prior exchange, at net asset value, for shares of a
Federated Fund carrying a sales charge.
Reduced Sales Charge
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp.
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 resident 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 Fortress
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-term or long-term capital
gain or loss may be realized.
Making an Exchange
Instructions for exchanges for Fortress Funds or certain Federated Funds may be
given in writing or by telephone. Written instructions may require a signature
guarantee.
Telephone Instructions
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with
the Fund or its agent. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with
the Fund or its agent. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Telephoned exchange instructions may be recorded. They must be received
by the Fund or its agent before 4:00 p.m. (Eastern time) for shares to be
exchanged that day. The Fund will follow the above
procedures and others to protect shareholders, and itself, against losses
from unauthorized telephone instructions.
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 administrator for services rendered and the
length of time the investor remains a shareholder in the Fund. Should
administrators elect to receive an administrative fee that is less than that
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
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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:
. derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of its gross income from the sale of securities held less
than three months;
.invest in securities within certain statutory limits; and
.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. These dividends, and any short-term capital gains, are taxable as
ordinary income.
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 returns for the one-year and five-year periods
ended February 28, 1994, and for the period from April 4, 1986 (effective date
of the Fund's registration statement), to February 28, 1994, were 0.54%, 8.97%,
and 7.84%, 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 maximum 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, less any
applicable sales load, adjusted over the period by any additional shares,
assuming the monthly reinvestment of all dividends and distributions. Any
applicable contingent deferred sales charge 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 28, 1994, was 4.36%.
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,
the performance will be reduced for those shareholders paying those fees.
Current Distributions
- --------------------------------------------------------------------------------
The Fund's average net annualized current distribution rate for the thirty days
ended February 28, 1994, was 7.19%.
The Fund calculates its current distributions daily based upon its past twelve
months' income dividends and short-term capital gains distributions per share
divided by its offering price per share on that day. The Fund may reduce the
time period upon which it bases its calculation of current distributions if the
investment adviser believes a shortened period would be more representative in
light of current market conditions.
Performance Comparisons
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in Fund expenses; and
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:
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. government
funds" category in advertising and sales literature.
The Salomon Brothers Total Rate-of-Return Index for mortgage pass-through
securities reflects the entire mortgage pass through market and reflects their
special characteristics. The index represents data aggregated
by mortgage pool and coupon within a given sector. A market weighted portfolio
is constructed considering all newly created pools and coupons.
Salomon Brothers 15-Year Mortgage-Backed Securities Index includes the average
of all 15-year mortgage securities, which include Federal Home Loan Mortgage
Corporation (Freddie Mac), Federal National Mortgage Association (Fannie Mae),
and Government National Mortgage Association (Ginnie Mae).
.The Merrill Lynch Taxable Bond Indices include U.S. Treasury and agency issues
and were designed to keep pace with structural changes in the fixed income
market. The performance indicators capture all rating changes, new issues, and
any structural changes of the entire market.
.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 also
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 deposits and time deposits, and to money market funds using the
Lipper Analytical Services money market instruments average.
Advertisements may quote performance information which does not reflect the
effect of a sales load.
8040406B (4/94)
GOVERNMENT INCOME SECURITIES, INC.
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ANNUAL REPORT FOR FISCAL YEAR ENDED FEBRUARY 28, 1994
Investment Review
---------------------------------------------------------------------------
Government Income Securities, Inc. (the "Fund"), a member of the
Fortress Family of Funds, is designed for individuals and institutions
seeking participation in a professionally managed portfolio of U.S.
government securities. The Fund's primary emphasis is current income with
total assets allocated primarily to mortgage-backed securities and
non-callable U.S. Treasuries. The Treasury position helps cushion overall
performance by adding predictable cash flows as well as protecting against
the potential for changes in yield spreads of mortgage securities to
Treasuries. Current investment strategy emphasizes a diversified range of
coupons averaging 8.06% and offering a weighted average modified duration
of 3.2 years. Considering the Fund's total portfolio, it will have price
volatility similar to an intermediate-term government security over a
long-term horizon as well as daily liquidity and U.S. government/agency
guarantees.
The mortgage-backed market has had to contend with two very different
market psychologies over the past year. The strong bull market, which
brought extremely low rates, caused severe underperformance of
mortgage-backed securities. This underperformance was the direct result of
refinancing activity by homeowners which returned principal on bonds ahead
of schedule and required reinvestment into lower yielding instruments.
When GDP growth in the fourth quarter of 1993 launched itself into the
7% range, rates trended upward. This rise in rates reduced the homeowners'
incentive to refinance and allowed mortgages to outperform Treasuries as
investors became more comfortable holding them.
However, the Federal Reserve's change to a more restrictive monetary
policy, as signaled by recent hikes in the Federal Funds rate, led to a
significant sell off in the fixed income markets, and the outperformance
was erased. Mortgage-backed securities should again perform well versus
Treasuries as lower volatility and reduced supply (due to less refinancing)
could make them an attractive income generating vehicle.
The near term strategy could error on the shorter side of our targeted
average life/ duration by purchasing defensive securities that will
outperform in a weak market. Securities of this type which have been
purchased by the Fund include adjustable rate mortgages and short duration
U.S. Treasuries. This approach has allowed the Fund to reduce its interest
rate risk profile by shortening its duration from 4.7 years in August 1993,
to 3.2 years at the end of February. A cautious monitoring of prepayment
risk has also been a major part of the Fund's strategy. As a follow through
from the low interest rates in the Fall, refinancings by homeowners
continue to flow through to the holders of mortgage-backed securities.
Therefore, the Fund continues to emphasize those securities that are
appropriately priced to include prepayment risk.
As of February 28, 1994, total net assets were $3.5 billion and the
average 30-day SEC net yield was 4.36%* based upon the offering price of
$9.09 per share. The Fund is rated AAA+**, the highest mutual fund rating
of Standard & Poor's, and will continue to provide monthly cash flow and
daily liquidity while seeking competitive yields.
--------------
*Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
**Ratings are subject to change.
Performance Comparison
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN
GOVERNMENT INCOME SECURITIES, INC., SALOMON BROTHERS 15-YEAR MORTGAGE-
BACKED SECURITIES INDEX , AND LIPPER U.S. MORTGAGE FUNDS AVERAGE
Graphic representation omitted. See Appendix.
Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated April 30, 1994.
*Reflects performance of Government Income Securities, Inc. from
4/4/86 through 2/28/94.
** Represents a hypothetical investment of $10,000 in Government
Income Securities, Inc., after deducting the maximum sales charge
of 1.00% ($10,000 investment minus $100 sales charge = $9,900).
The Fund's performance assumes the reinvestment of all dividends
and distributions. The Salomon Brothers 15-Year Mortgage-Backed
Securities Index and the Lipper U.S. Mortgage Funds Average
Category are adjusted to reflect reinvestment of dividends on
securities in the index and category.
***The ending value of the Fund reflects a contingent deferred sales
charge of 1.00% on any redemption less than 4 years from the
purchase date.
The Salomon Brothers 15-Year Mortgage-Backed Securities Index is not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Fund's performance.
FEDERATED SECURITIES CORP.
--------------------------------------------------------------------------
Distributor
8040406ARS (4/94)
The Lipper U.S. Mortgage Funds Average is a compilation of mutual fund total
returns reported to Lipper Analytical Services, Inc. Each fund is reported
net of sales loads, expenses, or other fees that the SEC requires to be
reflected in a fund's performance.
Reflects maximum applicable fees.
FEDERATED SECURITIES CORP.
--------------------------------------------------------------------------
Distributor
8040406ARS (4/94)
