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,
1995, 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, 1995
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
Investment Limitations 7
NET ASSET VALUE 8
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INVESTING IN THE FUND 8
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Share Purchases 8
Minimum Investment Required 9
What Shares Cost 9
Eliminating the Sales Load 10
Systematic Investment Program 11
Exchange Privilege 11
Certificates and Confirmations 11
Dividends and Distributions 12
Retirement Plans 12
REDEEMING SHARES 12
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Through a Financial Institution 12
Directly by Mail 12
Contingent Deferred Sales Charge 13
Systematic Withdrawal Program 14
Accounts with Low Balances 14
Exchanges for Shares of Other Funds 15
FUND INFORMATION 15
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Management of the Fund 15
Distribution of Fund Shares 16
Administration of the Fund 17
SHAREHOLDER INFORMATION 18
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Voting Rights 18
TAX INFORMATION 18
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Federal Income Tax 18
Pennsylvania Personal Property
Taxes 18
PERFORMANCE INFORMATION 19
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FINANCIAL STATEMENTS 20
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INDEPENDENT AUDITORS' REPORT 32
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ADDRESSES 33
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <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
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)......................................................................... 0.52%
12b-1 Fee................................................................................................. None
Total Other Expenses...................................................................................... 0.45%
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. For a more complete description, see
"Contingent Deferred Sales Charge."
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.
(3) The total Fund operating expenses would have been 1.20% 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 32.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1995 1994 1993 1992 1991 1990 1989 1988 1987(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49 $ 9.76 $ 9.99
- ------------------------------
INCOME FROM INVESTMENT
OPERATIONS
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Net investment income 0.63 0.68 0.79 0.83 0.87 0.87 0.86 0.88 0.94
- ------------------------------
Net realized and unrealized
gain (loss) on investments (0.46) (0.44) (0.05) 0.17 0.15 0.24 (0.53) (0.27) (0.23)
- ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 0.17 0.24 0.74 1.00 1.02 1.11 0.33 0.61 0.71
- ------------------------------
LESS DISTRIBUTIONS
- ------------------------------
Dividends from net investment
income (0.62) (0.68) (0.78) (0.83) (0.87) (0.91) (0.82) (0.88) (0.94)
- ------------------------------
Distributions in excess of
net
investment income 0.00 0.00 0.00 (0.01)(b) (0.02)(b) (0.01)(b) 0.00 0.00 0.00
- ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.62) (0.68) (0.78) (0.84) (0.89) (0.92) (0.82) (0.88) (0.94)
- ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 8.55 $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49 $ 9.76
- ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (C) 2.11% 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% 0.97% 0.90% 0.92% 0.90% 0.93% 0.88% 0.81% 0.95%
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Net investment income 7.34% 7.39% 8.27% 8.86% 9.43% 9.42% 9.33% 9.47% 9.18%
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Expense waiver/
reimbursement (d) 0.23% 0.19% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
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SUPPLEMENTAL DATA
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Net assets, end of period
(000 omitted) $2,538,013 $3,542,078 $3,643,180 $2,261,762 $1,322,749 $1,320,710 $1,482,030 $1,846,198 $3,183,612
- ------------------------------
Portfolio turnover 143% 134% 43% 36% 37% 76% 62% 34% 208%
- ------------------------------
</TABLE>
(a) Reflects operations for the period from April 4, 1986 (date of initial
public investment) to February 28, 1987.
(b) 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.
(c) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended February 28, 1995, 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, in which case the
minimum initial investment is $50.
Fund shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge
("CDSC") 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. --a fund providing growth of capital and
income through high-quality stocks;
California Municipal Income Fund--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 minimal volatility of principal by
investing in adjustable and floating rate U.S. government 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.--an equity fund investing primarily in
stocks which have a history of regular dividends;
Limited Term Fund--a fund providing a high level of current income
consistent with minimum fluctuation in principal value;
Limited Term Municipal Fund--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--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--a fund providing current income exempt from
federal regular income tax and Ohio personal income taxes;
Strategic Income Fund--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--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
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives, Banks for Cooperatives; and Farm Credit
Banks; Federal Home Loan Banks, Farmers Home Administration, Farm Credit
Banks, Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Mortgage Corporation and Student
Loan Marketing Association.
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, 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.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
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. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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 10% 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 or when converted into Federal Funds. 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 CDSC, (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 by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank "), into federal funds. This is generally the next business day after State
Street Bank receives the check.
DIRECTLY BY WIRE. To purchase shares of the Fund directly from Federated
Securities Corp. by Federal Reserve wire, call the Fund. All information needed
will be taken over the telephone, and the order is considered received when the
Fund receives payment by wire.
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 load of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales load for purchases of $1 million or
more. In addition, no sales load is imposed for Fund shares purchased through
bank trust departments or investment advisers registered under the Investment
Advisers Act of 1940, as amended, or retirement plans where the third party
administrator has entered into certain arrangements with Federated Securities
Corp., or its affiliates. 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 load. Any portion of the sales
load 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 load 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 load 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 LOAD
The sales load 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 load 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 load. In addition, the sales load 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 load on the additional purchase. The Fund will also combine
purchases for the purpose of reducing the CDSC 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
CDSC would be reduced to .50% for those additional shares. For more information
on the levels of CDSC and holding periods, see the section entitled "Contingent
Deferred Sales Charge."
To receive the sales load elimination and/or the CDSC 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 load and/or reduce the CDSC 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 load may be eliminated by signing
a letter of intent to that effect. This letter of intent includes a provision
for a sales load 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 load.
This letter of intent also includes a provision for reductions in the CDSC and
holding period depending on the amount actually purchased within the 13-month
period. For more information on the various levels of CDSC 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 load.
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 load. If the shareholder redeems his shares in the
Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load 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 load. For example, if a shareholder concurrently invested $400,000 in one
of the other Fortress Funds and $600,000 in the Fund, the sales load would be
eliminated.
To receive this sales load 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 load
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 Federated
Services Company, plus the 1% sales load 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 load (if previously paid) or CDSC.
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 load, 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 transfer agent.
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 Services Company,
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 load.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details contact Federated Securities Corp. and consult
a tax adviser.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value, less any applicable CDSC, next
determined after Federated Services Company 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 Federated Services
Company 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
Federated Services Company 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 Federated Services Company 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, less any
applicable CDSC, next determined after Federated Services Company 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 CDSC 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 4 years or less 1%
$2,000,000 to $4,999,999 2 years or less .50%
$5,000,000 or more 1 year or less .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 CDSC will not be imposed on
shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In computing the amount of CDSC 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 CDSC 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 70-1/2; or (iii) from
the death or disability of the beneficial owner. The exemption from the CDSC 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. CDSCs 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, as amended, or retirement plans where the third party
administrator has entered into certain arrangements with Federated Securities
Corp., or its affiliates, are not subject to the CDSC to the extent that no
payments were advanced for purchases made through such entities. In addition,
shares held in the Fund by a financial institution for its own account which
were originally purchased by the financial institution directly from the Fund's
distributor without a sales load may be redeemed without a CDSC. 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 load, it is
not advisable for shareholders to be purchasing shares while participating in
this program.
CDSCs 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 CDSC or a sales load. 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 load.
Shareholders using this privilege must exchange shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. 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 may also undertake 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.
James D. Roberge has been the Fund's co-portfolio manager since March,
1995. Mr. Roberge joined Federated Investors in 1990 and has been a Vice
President of the Fund's investment adviser since October, 1994. Prior to
this, Mr. Roberge served as an Assistant Vice President of the Fund's
investment adviser. From 1990 until 1992, Mr. Roberge acted as an
investment analyst. Mr. Roberge is a Chartered Financial Analyst and
received his M.B.A. in Finance from Wharton Business School in 1990.
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.
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>
MAXIMUM FEE AVERAGE AGGREGATE DAILY NET ASSETS
<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.
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 load 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 CDSC.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational-type facilities, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell and/or upon the type and
nature of sales and marketing support furnished by the financial institution.
Any payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
CUSTODIAN. State Street Bank and Trust Company, 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.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
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.
As of April 7, 1995, Merrill Lynch, Pierce, Fenner & Smith, owned 79,755 shares
(44.22%) of voting securities of the Fund, and, therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, (the "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 Code.
PENNSYLVANIA PERSONAL PROPERTY TAXES
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 CDSC, which, if excluded, would
increase the total return and yield.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
GOVERNMENT INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------ ----------------
LONG-TERM OBLIGATIONS--99.3%
- ----------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--3.7%
------------------------------------------------------------------------------
$ 993,879 13.00%, 8/1/2011-5/1/2014 $ 1,104,438
------------------------------------------------------------------------------
1,050,515 12.50%, 6/1/2011-1/1/2014 1,158,508
------------------------------------------------------------------------------
7,260,364 12.00%, 9/1/2007-5/1/2016 7,961,256
------------------------------------------------------------------------------
7,435,186 11.50%, 4/1/2011-5/1/2019 8,080,051
------------------------------------------------------------------------------
4,729,220 11.00%, 1/1/2001-7/1/2019 5,080,808
------------------------------------------------------------------------------
28,830,752 10.50%, 7/1/2004-12/1/2020 30,777,887
------------------------------------------------------------------------------
8,154,017 9.50%, 6/1/2021-12/1/2022 8,582,021
------------------------------------------------------------------------------
20,484,718 9.00%, 8/1/2004-10/1/2006 21,217,981
------------------------------------------------------------------------------
9,840,302 8.00%, 4/1/2024 9,778,702
------------------------------------------------------------------------------ ----------------
Total 93,741,652
------------------------------------------------------------------------------ ----------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--2.1%
------------------------------------------------------------------------------
5,000,000 9.30%, Series 141C, 9/15/2020 5,182,850
------------------------------------------------------------------------------
20,000,000 6.60%, Series 1559VH, 12/15/2021 18,215,600
------------------------------------------------------------------------------
19,085,000 6.50%, Series 1450E, 9/15/2004 18,425,422
------------------------------------------------------------------------------
14,120,000 6.50%, Series 1608K, 9/15/2022 12,286,942
------------------------------------------------------------------------------ ----------------
Total 54,110,814
------------------------------------------------------------------------------ ----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION --12.0%
------------------------------------------------------------------------------
1,673,176 13.00%, 9/1/2013-6/1/2015 1,865,575
------------------------------------------------------------------------------
2,648,756 12.50%, 12/1/2013-3/1/2015 2,942,556
------------------------------------------------------------------------------
6,617,756 12.25%, 12/1/2010-2/1/2012 7,318,708
------------------------------------------------------------------------------
4,695,300 12.00%, 3/1/2011-3/1/2016 5,183,846
------------------------------------------------------------------------------
7,050,674 11.50%, 3/1/2014-1/1/2016 7,707,381
------------------------------------------------------------------------------
46,534,486 11.00%, 9/1/2010-5/1/2023 50,449,468
------------------------------------------------------------------------------
1,939,745 10.50%, 9/1/2004 2,065,189
------------------------------------------------------------------------------
83,853,626 ***10.00%, 2/1/2004-2/1/2025 89,478,340
------------------------------------------------------------------------------
</TABLE>
GOVERNMENT INCOME SECURITIES, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------ ----------------
LONG-TERM OBLIGATIONS--CONTINUED
- ----------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION --CONTINUED
------------------------------------------------------------------------------
$ 106,750,323 ***9.00%, 5/1/2004-2/1/2025 $ 110,105,923
------------------------------------------------------------------------------
26,460,000 8.00%, 2/1/2025 26,294,360
------------------------------------------------------------------------------ ----------------
Total 303,411,346
------------------------------------------------------------------------------ ----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--5.9%
------------------------------------------------------------------------------
7,500,000 9.30%, Series 90-20H, 1/25/2019 7,772,400
------------------------------------------------------------------------------
15,730,921 9.00%, Series 90-116G, 11/25/2019 16,130,329
------------------------------------------------------------------------------
8,700,000 8.75%, Series 90-4G, 5/25/2017 8,888,007
------------------------------------------------------------------------------
13,000,000 8.70%, Series G89-1D, 11/25/2017 13,281,190
------------------------------------------------------------------------------
6,425,000 8.70%, Series 90-2E, 12/25/2018 6,545,469
------------------------------------------------------------------------------
17,000,000 7.00%, Series 93-133J, 12/25/2022 15,670,430
------------------------------------------------------------------------------
26,800,000 7.00%, Series 93-155J, 12/25/2022 24,697,272
------------------------------------------------------------------------------
17,800,000 6.75%, Series 93-163PY, 3/25/2022 16,103,126
------------------------------------------------------------------------------
14,200,000 6.50%, Series 93-187K, 8/25/2022 12,500,260
------------------------------------------------------------------------------
20,000,000 6.50%, Series 93-189PK, 3/25/2022 17,845,800
------------------------------------------------------------------------------
10,000,000 6.15%, Series 93-160AG, 12/25/2020 9,184,000
------------------------------------------------------------------------------ ----------------
Total 148,618,283
------------------------------------------------------------------------------ ----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MPT--67.4%
------------------------------------------------------------------------------
12,417,059 12.50%, 4/15/2010-9/20/2015 13,941,028
------------------------------------------------------------------------------
36,043,278 12.00%, 5/15/2011-4/20/2016 40,102,558
------------------------------------------------------------------------------
46,674,697 11.50%, 3/15/2010-3/20/2020 51,471,847
------------------------------------------------------------------------------
30,551,243 11.00%, 8/20/2009-5/15/2020 33,085,689
------------------------------------------------------------------------------
39,807,865 10.50%, 11/15/2015-9/15/2020 43,165,185
------------------------------------------------------------------------------
249,014,831 10.00%, 11/15/2009-1/15/2021 267,530,401
------------------------------------------------------------------------------
284,943,783 ***9.50%, 4/15/2016-2/15/2025 300,988,503
------------------------------------------------------------------------------
247,089,401 9.00%, 2/15/2009-1/15/2025 256,026,246
------------------------------------------------------------------------------
179,469,353 8.50%, 1/15/2017-1/15/2025 182,888,244
------------------------------------------------------------------------------
227,781,535 ***8.00%, 8/15/2022-2/15/2025 226,212,120
------------------------------------------------------------------------------
</TABLE>
GOVERNMENT INCOME SECURITIES, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------ ----------------
LONG-TERM OBLIGATIONS--CONTINUED
- ----------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MPT--CONTINUED
------------------------------------------------------------------------------
$ 235,300,077 7.50%, 11/15/2022-2/15/2025 $ 227,502,233
------------------------------------------------------------------------------
73,091,336 7.00%, 8/15/2023-5/15/2024 68,453,691
------------------------------------------------------------------------------ ----------------
Total 1,711,367,745
------------------------------------------------------------------------------ ----------------
UNITED STATES TREASURY NOTES --8.2%
------------------------------------------------------------------------------
49,000,000 7.50%, 12/31/1996 49,657,090
------------------------------------------------------------------------------
67,000,000 7.25%, 11/15/1996-8/15/2004 67,332,400
------------------------------------------------------------------------------
43,100,000 6.375%, 8/15/2002 41,067,404
------------------------------------------------------------------------------
55,000,000 6.25%, 2/15/2003 51,812,750
------------------------------------------------------------------------------ ----------------
Total 209,869,644
------------------------------------------------------------------------------ ----------------
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST, $2,540,530,829) 2,521,119,484
------------------------------------------------------------------------------ ----------------
*REPURCHASE AGREEMENTS--18.0%
- ----------------------------------------------------------------------------------------------
88,000,000 Harris Government Securities, Inc. 6.07%, dated 2/28/1995,
due 3/1/1995 88,000,000
------------------------------------------------------------------------------
105,000 J.P. Morgan Securities, Inc., 6.13%, dated 2/28/1995, due 3/1/1995 105,000
------------------------------------------------------------------------------
65,000,000 **First Boston Corp. 6.01%, dated 2/15/1995, due 3/15/1995 65,000,000
------------------------------------------------------------------------------
30,000,000 **Goldman Sachs Corp., 6.00%, dated 2/21/1995, due 3/16/1995 30,000,000
------------------------------------------------------------------------------
40,000,000 **Merrill Lynch Government Securities, Inc., 6.00%, dated
2/16/1995, due 3/16/1995 40,000,000
------------------------------------------------------------------------------
100,000,000 **Merrill Lynch Government Securities, Inc., 6.00%, dated
2/13/1995, due 3/13/1995 100,000,000
------------------------------------------------------------------------------
83,000,000 **J.P. Morgan Securities, Inc., 6.00%, dated 2/21/1995, due 3/20/1995 83,000,000
------------------------------------------------------------------------------
50,000,000 **J.P. Morgan Securities, Inc., 6.00%, dated 2/22/1995, due 3/21/1995 50,000,000
------------------------------------------------------------------------------ ----------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 456,105,000
------------------------------------------------------------------------------ ----------------
TOTAL INVESTMENTS (IDENTIFIED COST, $2,996,635,829) $ 2,977,224,484+
------------------------------------------------------------------------------ ----------------
</TABLE>
GOVERNMENT INCOME SECURITIES, INC.
- --------------------------------------------------------------------------------
* The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investments in the repurchase agreements is through participation in joint
account with other Federated funds.
** Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement.
*** Includes securities with a market value of $314,012,310 subject to Dollar
Roll transactions.
The cost of investments for federal tax purposes amounts to $2,996,652,019.
The net unrealized depreciation on a federal tax cost basis amounts to
$19,427,535 which is comprised of $25,258,228 appreciation and $44,685,763
depreciation at February 28, 1995.
Note: The categories of investments are shown as a percentage of net assets
($2,538,013,274) at February 28, 1995.
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, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------
Investments in repurchase agreements $ 456,105,000
- -----------------------------------------------------------------------------
Investments in securities 2,521,119,484
- ----------------------------------------------------------------------------- ----------------
Total investments, at value (identified cost, $2,996,635,829
and tax cost, $2,996,652,019) $2,977,224,484
- -----------------------------------------------------------------------------------------------
Cash 2,874
- -----------------------------------------------------------------------------------------------
Receivable for investments sold 65,080,347
- -----------------------------------------------------------------------------------------------
Income receivable 17,215,316
- -----------------------------------------------------------------------------------------------
Receivable for shares sold 3,655,782
- ----------------------------------------------------------------------------------------------- ----------------
Total assets 3,063,178,803
- -----------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------------------
Payable for dollar roll transactions $ 373,761,799
- -----------------------------------------------------------------------------
Payable for investments purchased 132,899,479
- -----------------------------------------------------------------------------
Income distribution payable 10,608,346
- -----------------------------------------------------------------------------
Payable for shares redeemed 7,019,729
- -----------------------------------------------------------------------------
Accrued expenses 876,176
- ----------------------------------------------------------------------------- ----------------
Total liabilities 525,165,529
- ----------------------------------------------------------------------------------------------- ----------------
NET ASSETS for 296,990,037 shares outstanding $2,538,013,274
- ----------------------------------------------------------------------------------------------- ----------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------
Paid-in capital $3,004,227,258
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (19,411,345)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (451,098,697)
- -----------------------------------------------------------------------------------------------
Undistributed net investment income 4,296,058
- ----------------------------------------------------------------------------------------------- ----------------
Total Net Assets $2,538,013,274
- ----------------------------------------------------------------------------------------------- ----------------
NET ASSET VALUE Per Share ($2,538,013,274 / 296,990,037 shares outstanding) $8.55
- ----------------------------------------------------------------------------------------------- ----------------
Offering Price Per Share ( 100/99 of $8.55)* $8.64
- ----------------------------------------------------------------------------------------------- ----------------
Redemption Proceeds Per Share (99/100 of $8.55)** $8.46
- ----------------------------------------------------------------------------------------------- ----------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Contingent Deferred Sales Charge" 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, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $16,206,847) $ 244,168,572
- ------------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------------------
Investment advisory fee $ 22,038,188
- ---------------------------------------------------------------------------------
Administrative personnel and services fee 2,232,807
- ---------------------------------------------------------------------------------
Custodian fees 370,642
- ---------------------------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and expenses 2,251,441
- ---------------------------------------------------------------------------------
Directors'/Trustees' fees 34,852
- ---------------------------------------------------------------------------------
Auditing fees 17,360
- ---------------------------------------------------------------------------------
Legal fees 28,064
- ---------------------------------------------------------------------------------
Portfolio accounting fees 68,505
- ---------------------------------------------------------------------------------
Shareholder services fees 7,346,063
- ---------------------------------------------------------------------------------
Share registration costs 184,090
- ---------------------------------------------------------------------------------
Printing and postage 304,908
- ---------------------------------------------------------------------------------
Insurance premiums 52,162
- ---------------------------------------------------------------------------------
Taxes 259,987
- ---------------------------------------------------------------------------------
Miscellaneous 23,979
- --------------------------------------------------------------------------------- -------------
Total expenses 35,213,048
- ---------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee 6,801,420
- --------------------------------------------------------------------------------- -------------
Net expenses 28,411,628
- ------------------------------------------------------------------------------------------------ ---------------
Net investment income 215,756,944
- ------------------------------------------------------------------------------------------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (192,595,526)
- ------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 3,066,135
- ------------------------------------------------------------------------------------------------ ---------------
Net realized and unrealized gain (loss) on investments (189,529,391)
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from operations $ 26,227,553
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
1995 1994
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------
Net investment income $ 215,756,944 $ 281,171,264
- -----------------------------------------------------------------------------
Net realized gain (loss) on investments ($192,317,284 and $83,738,305 net
loss, respectively, as computed for federal income tax purposes) (192,595,526) (107,551,473)
- -----------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 3,066,135 (70,667,358)
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in assets resulting from operations 26,227,553 102,952,433
- ----------------------------------------------------------------------------- ---------------- ----------------
NET EQUALIZATION CREDITS (DEBITS) (2,212,810) (190,224)
- ----------------------------------------------------------------------------- ---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------------------------
Dividends from net investment income (209,071,289) (279,463,100)
- ----------------------------------------------------------------------------- ---------------- ----------------
SHARE TRANSACTIONS
- -----------------------------------------------------------------------------
Proceeds from sale of Shares 140,367,951 961,917,817
- -----------------------------------------------------------------------------
Net asset value of Shares issued to shareholders in payment of distributions
declared 63,719,987 79,453,646
- -----------------------------------------------------------------------------
Cost of Shares redeemed (1,023,096,149) (965,772,201)
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets from share transactions (819,008,211) 75,599,262
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets (1,004,064,757) (101,101,629)
- -----------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------
Beginning of period 3,542,078,031 3,643,179,660
- ----------------------------------------------------------------------------- ---------------- ----------------
End of period (including undistributed (overdistributed) net investment
income of $4,296,058 and ($176,787), respectively) $ 2,538,013,274 $ 3,542,078,031
- ----------------------------------------------------------------------------- ---------------- ----------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT INCOME SECURITIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------------------------------------------------
Investment income received $ 290,842,896
- -----------------------------------------------------------------------------------------------
Payment of operating expenses (29,940,833)
- -----------------------------------------------------------------------------------------------
Proceeds from sales and maturities of investments 5,130,056,440
- -----------------------------------------------------------------------------------------------
Purchase of investments (4,281,158,135)
- -----------------------------------------------------------------------------------------------
Net purchase of short-term investments (66,935,000)
- ----------------------------------------------------------------------------------------------- -----------------
Cash provided by operating activities 1,042,865,368
- ----------------------------------------------------------------------------------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -----------------------------------------------------------------------------------------------
Net proceeds from share activity (888,517,092)
- -----------------------------------------------------------------------------------------------
Decrease in payable for dollar roll transactions (4,305,221)
- -----------------------------------------------------------------------------------------------
Distributions paid (150,062,101)
- ----------------------------------------------------------------------------------------------- -----------------
Cash used for financing activities (1,042,884,414)
- ----------------------------------------------------------------------------------------------- -----------------
Decrease in cash (19,046)
- -----------------------------------------------------------------------------------------------
Cash at beginning of period 21,920
- ----------------------------------------------------------------------------------------------- -----------------
Cash at end of period $ 2,874
- ----------------------------------------------------------------------------------------------- -----------------
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS TO CASH PROVIDED BY OPERATING
ACTIVITIES:
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 26,227,553
- -----------------------------------------------------------------------------------------------
Net decrease in investments 895,279,716
- -----------------------------------------------------------------------------------------------
Decrease in interest receivable 8,333,837
- -----------------------------------------------------------------------------------------------
Decrease in receivable for investments sold 246,417,406
- -----------------------------------------------------------------------------------------------
Decrease in payable for investments purchased (131,863,939)
- -----------------------------------------------------------------------------------------------
Decrease in shareholder services fee payable (1,545,733)
- -----------------------------------------------------------------------------------------------
Decrease in transfer agent fee payable (464,873)
- -----------------------------------------------------------------------------------------------
Increase in accrued expenses 481,401
- ----------------------------------------------------------------------------------------------- -----------------
Cash provided by operating activities $ 1,042,865,368
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Government Income Securities, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), 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. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. U.S. government obligations are
generally valued at the mean between the over-the-counter bid and asked
prices as furnished by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank or broker to take possession, to have legally segregated in
the Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement investments. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying collateral to ensure that the value of collateral at
least equals the principal amount of the repurchase transaction, including
accrued interest.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors. Risks may
arise from the potential inability of counterparties to honor the terms of
the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. At February 28,
1995, the Fund, for federal tax purposes, had a capital loss carryforward
of ($404,873,973), which will reduce the Fund's taxable income arising from
future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire in 1996 ($68,203,141), 1997 ($35,933,841), 1998
($13,325,628), 1999 ($147,841), 2000 ($3,842,806), 2001 ($7,365,127), 2002
($83,738,305), 2003 ($192,317,284). Additionally, net capital losses of
($46,208,535) attributable to security transactions incurred after October
31, 1994 are treated as arising on March 1, 1995, the first day of the
Fund's next taxable year.
EQUALIZATION--The Fund follows the accounting practice known as
equalization, in which a portion of the proceeds from sales and costs of
redemptions of fund shares equivalent, on a per share basis, equal 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.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
OPTIONS CONTRACTS--The Fund may write option contracts. A written option
obligates the Fund to deliver a security (a call), or to receive a security
(a put), equal to the contract amount upon exercise by the holder of the
option. The value of the option contract is recorded as a liability and
unrealized gain or loss is measured by the difference between the current
value and the premium received. For the year ended February 28, 1995, the
Fund had no options outstanding.
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, FHLMC, in which
the Fund loans mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund may use the proceeds generated from the
transactions to invest in short-term investments, which may enhance the
Fund's current yield and total return.
STATEMENT OF CASH FLOWS--Information on financial transactions which have
been settled through the receipt or disbursement of cash is presented in
the Fund's Statement of Cash Flows. The cash amount shown in the Statement
of Cash Flows is the amount reported as cash in the Fund's Statement of
Assets and Liabilities and represents cash on hand in its custodian bank
account and does not include any short-term investments at February 28,
1995.
OTHER--Investment transactions are accounted for on the trade date.
RECLASSIFICATION--Income distribution and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily
due to differing treatments for expiring capital loss
carryforwards. Amounts as of February 28, 1995, have been reclassified to
reflect a decrease in paid-in capital of $10,209,710, and an increase in
accumulated net realized gain/loss. Net investment income, net realized
gains, and net assets were not affected by this change.
(3) CAPITAL STOCK
At February 28, 1995, there were 2,000,000,000 shares of $.001 par value capital
stock authorized. Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
1995 1994
<S> <C> <C>
- ----------------------------------------------------------------------------------
Shares sold 16,366,043 103,266,660
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 6,992,784 8,616,192
- ----------------------------------------------------------------------------------
Shares redeemed (119,737,988) (104,610,341)
- ---------------------------------------------------------------------------------- -------------- --------------
Net change resulting from share transactions (96,379,161) 7,272,511
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser,
(the "Adviser"), receives for its services an annual investment advisory
fee equal to .75 of 1% of the Fund's average daily net assets. The Adviser
may voluntarily choose to waive any portion of its fee. The Adviser can
modify or terminate this voluntary waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during
the period of the Administrative Services Agreement shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will pay
FSS up to .25 of 1% of average daily net assets of the Fund for the period.
This fee is to obtain certain personal services for shareholders and to
maintain the shareholder accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent
for the Fund. This fee is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's
average daily net assets for the period plus, out-of-pocket expenses.
GENERAL--Certain of the Officers and Directors of the Fund are Officers and
Trustees or Directors of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended
February 28, 1995, were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
PURCHASES-- $ 4,110,953,709
- ------------------------------------------------------------------------------------------------ ----------------
SALES-- $ 4,182,090,323
- ------------------------------------------------------------------------------------------------ ----------------
</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, 1995, the related statements of operations and cash flows for the
year then ended, the statement of changes in net assets for the years ended
February 28, 1995 and 1994, and the financial highlights (see page 2 of the
prospectus) for each of the years in the nine-year period ended February 28,
1995. 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, 1995 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, 1995, 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 LLP
Pittsburgh, Pennsylvania
April 17, 1995
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
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
GOVERNMENT INCOME
SECURITIES, INC.
PROSPECTUS
An Open-End, Diversified
Management Investment Company
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
383733102
8040406A (4/95)
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,
1995. 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, 1995
FEDERATED
SECURITIE
S CORP.
Distr
ibuto
r
A
subsi
diary
of
FEDER
ATED
INVES
TORS
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 5
Fund Management 6
Officers and Directors 6
Government Income
Securities, Inc.
Management 7
The Funds 10
Fund Ownership 11
Directors Compensation 11
Investment Advisory
Services 12
Adviser to the Fund 12
Advisory Fees 12
Administrative Services 12
Transfer Agent and
Dividend Disbursing
Agent 12
Shareholder Services
Plan 12
Brokerage Transactions 13
Conversion to Federal
Funds 13
Purchases by Sales
Representatives,
Fund Directors, and
Employees 13
Determining Net Asset
Value 14
Determining Market
Value of Securities 14
Exchange Privilege 14
Reduced Sales Load 14
Requirements for
Exchange 14
Tax Consequences 15
Making an Exchange 15
Redeeming Shares 15
Redemption in Kind 15
Tax Status 15
The Fund's Tax Status 15
Shareholders' Tax
Status 16
Total Return 16
Yield 16
Current Distributions 16
Performance Comparisons 16
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:
o the full faith and credit of the U.S.
Treasury (such as Farmers Home Administration
and Government National Mortgage
Association);
o the issuer's right to borrow from the U.S.
Treasury (such as Farmers Home
Administration);
o 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
o 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 made to secure what is
considered to be an advantageous price or yield for
the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the
securities to be purchased are segregated on the
Fund's records at the trade date. These assets are
marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend
to engage in when-issued and delayed delivery
transactions to an extent that would cause the
segregation of more than 20% of the total value of its
assets.
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, 1995, and 1994, the portfolio
turnover rates were 143% and 134%, respectively. The
elevated portfolio turnover rate is a result of the
Fund's acquisition of securities that were more in
line with current market conditions relating to pre-
payments and coupon rates. This had no significant
impact on the tax liability of the Fund and its
shareholders, and Fund expenses were not a factor as
the Fund incurred no brokerage commissions.
Investment Limitations
Buying on Margin
The Fund will not purchase any securities on
margin, but may obtain such short-term credits
as are necessary for clearance of transactions.
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 10% 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."
Cash items may include short-term obligations such
as:
o obligations of the U.S. government or its
agencies or instrumentalities; and
o repurchase agreements.
Fund Management
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).
Officers and Directors are listed with their
addresses, principal occupations, and present
positions.
Government Income Securities, Inc. Management
Officers and Directors are listed with their
addresses, present positions with Government Income
Securities, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director,
AEtna Life and Casualty Company; Chief Executive
Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director, Oberg Manufacturing Co.; Chairman of the
Board, Children's Hospital of Pittsburgh; Director,
Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior
Vice-President, John R. Wood and Associates, Inc.,
Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate
ventures in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee,
Michael Baker, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Vice Chairman
and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund,
Inc.; Director, Trustee, or Managing General Partner
of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine and Member, Board of Trustees,
University of Pittsburgh; Medical Director, University
of Pittsburgh Medical Center - Downtown; Member, Board
of Directors, University of Pittsburgh Medical Center;
formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director,
Trustee, or Managing General Partner of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President and Director
Executive Vice President and Trustee, Federated
Investors; Director, Federated Research Corp.;
Chairman and Director, Federated Securities Corp.;
President or Vice President of some of the Funds;
Director or Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and
Flaherty; Director, Eat'N Park Restaurants, Inc., and
Statewide Settlement Agency, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Director
Consultant; State Representative, Commonwealth of
Massachusetts; Director, Trustee, or Managing General
Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Koehuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer and
Flaherty; Chairman, Meritcare, Inc.; Director, Eat'N
Park Restaurants, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Vice Chairman,
Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University;
Consulting Partner, Mollica, Murray and Hogue;
Director, Trustee or Managing General Partner of the
Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, Foreign Policy and Management Consultant;
Trustee, Carnegie Endowment for International Peace,
RAND Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman, Czecho
Slovak 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
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Director
Public relations/marketing consultant; Director,
Trustee, or Managing General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Vice President
President and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services
Company, and Federated Shareholder 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 Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated
Investors; Vice President and Treasurer, Federated
Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.;
Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some
of the Funds; Vice President and Treasurer of the
Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and
Trustee, Federated Investors; Vice President,
Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport
Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive
Vice President and Director, Federated Securities
Corp.; Vice President and Secretary of the Funds.
* This Director is deemed to be an "interested
person" as defined in the Investment Company
Act of 1940, as amended.
@ Member of the 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
As used in the table above, "The Funds" and "Funds"
mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Arrow
Funds; 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 Institutional 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.;
Government Income 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; The Medalist Funds: Money
Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; New York Municipal Cash Trust;
111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-
Term Municipal Trust; 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; 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 79,755 shares 44.22% of the Fund as of
April 7, 1995.
Directors Compensation
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND*# FROM FUND COMPLEX
Thomas G. Bigley $1,984.00
$3,632.00 for the Fund and
50 other investment
companies in the Fund Complex
John T. Conroy, Jr. $4,621.00
$17,311.00 for the Fund and
65
other investment companies in the Fund Complex
William J. Copeland $4,621.00
$17,311.00 for the Fund and
65
other investment companies in the Fund Complex
James E. Dowd $4,621.00
$17,311.00 for the Fund and
65
other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $4,185.00
$15,695.00 for the Fund and
65
other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $4,621.00
$17,311.00 for the Fund and
65
other investment companies in the Fund Complex
Peter E. Madden $3,569.00
$13,361.00 for the Fund and
65
other investment companies in the Fund Complex
Gregor F. Meyer $4,185.00
$15,695.00 for the Fund and
65
other investment companies in the Fund Complex
John E. Murray, Jr. $ -0- $0 for
the Fund and
69
other investment companies in the Fund Complex
Wesley W. Posvar $4,185.00
$15,695.00 for the Fund and
65
other investment companies in the Fund Complex
Marjorie P. Smuts $4,185.00
$15,695.00 for the Fund and
65
other investment companies in the Fund Complex
* Information is furnished for the fiscal year ended
January 31, 1995.
# The aggregate compensation is provided for the Fund
which is comprised of one portfolio.
+ The information is provided for the last calendar
year.
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.
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,
1995, 1994, and 1993, the Fund's adviser earned
$22,038,188, $28,541,303, and $21,620,403,
respectively, of which $6,801,420, $7,242,625, 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 described in the
prospectus. Prior to March 1, 1994, Federated
Administrative Services, Inc., also a subsidiary of
Federated Investors, served as the Fund's
administrator. For the fiscal year ended February 28,
1995, Federated Administrative Services earned
$2,232,807. For the fiscal years ended February 28,
1994, and 1993, Federated Administrative Services,
Inc., earned $ 2,638,423, $ 1,705,319, respectively.
Dr. Henry J. Gailliot, an officer of Federated
Advisors, the Adviser to the Fund, holds approximately
20%, of the outstanding common stock and serves as a
director of Commercial Data Services, Inc., a company
which provides computer processing services to
Federated Administrative Services, Inc.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent
and dividend disbursing agent for the Fund. The fee
paid to the transfer agent is based upon the size,
type and number of accounts and transactions made by
shareholders.
Federated Services Company also maintains the Fund's
accounting records. The fee paid for this service is
based upon the level of the Fund's average net assets
for the period plus out-of-pocket expenses.
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, 1995,
payments in the amount of $ 7,346,063 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:
o advice as to the advisability of investing in
securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations;
and
o 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, 1995, 1994,
and 1993, the Fund paid $0, $0, and $0, 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 load 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 load 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 loads 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:
o as provided by an independent pricing service;
o for short-term obligations, according to the
mean between the bid and asked prices, as
furnished by an independent pricing service, or
for short-term obligations with remaining
maturities of 60 days or less at the time of
purchase, at amortized cost unless the Board of
Directors determines this is not fair value; or
o at fair value as determined in good faith by the
Fund's Board of Directors.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted
prices. Pricing services may consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
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
load different from that of the Fund or with no sales
load 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 load already paid and any sales load
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 load, 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
load.
Reduced Sales Load
If a shareholder making such an exchange qualifies for
a reduction or elimination of the sales load, 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
The Fund's Tax Status
The Fund will pay no federal income tax because it
expects to meet the requirements of Subchapter M of
the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax
treatment afforded to such companies. To qualify for
this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from
dividends, interest, and gains from the sale of
securities;
o derive less than 30% of its gross income from
the sale of securities held less than three
months;
o invest in securities within certain statutory
limits; and
o distribute to its shareholders at least 90% of
its net income earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on
dividends and capital gains received as cash or
additional shares. No portion of any income dividend
paid by the Fund is eligible for the dividends
received deduction available to corporations. 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, 1995,
and for the period from April 4, 1986 (effective date
of the Fund's registration statement), to February 28,
1995, were 0.04%, 6.83%, and 7.18%, 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, 1995, was 7.00%.
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, 1995, was
7.00%.
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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is
invested;
o changes in interest rates and market value of
portfolio securities; .changes in Fund expenses;
and
o various other factors.
The Fund's performance fluctuates on a daily basis
largely because net earnings and offering price per
share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of
yield and total return.
Investors may use financial publications and /or
indices to obtain a more complete view of the Fund's
performance. When comparing performance, investors
should consider all relevant factors such as the
composition of any index used, prevailing market
conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute
offering price. The financial publications and/or
indices which the Fund uses in advertising may
include:
o 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.
o 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).
o 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.
o Morningstar, Inc., an independent rating
service, is the publisher of the bi-weekly
Mutual Fund Values. Mutual Fund Values rates
more than 1,000 NASDAQ-listed mutual funds of
all types, according to their risk-adjusted
returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for the Fund
may quote total returns, which are calculated on non-
standardized base periods. These total returns 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.
383733102
8040406B (4/95)
GOVERNMENT INCOME SECURITIES, INC.
APPENDIX
A. The graphic representation here displayed
consists of a line graph. The corresponding
components of the line graph are listed underneath.
The Fund is represented by a solid line. Salomon
Brothers 15 Year Mortgage Backed Securities Index is
represented by a broken line. Lipper U.S. Mortgage
Funds Average is represented by a dotted line. The
line graph is a visual representation of a comparison
of change in value of a hypothetical investment of
$10,000 in the Fund, Salomon Brothers 15 Year Mortgage
Backed Securities Index, and Lipper U.S. Mortgage
Funds Average for period from April 4, 1986 (start of
performance) to February 28, 1995. The "y" axis
reflects the cost of investment. The "x" axis
reflects computation periods from April 4, 1986 (start
of performance) to February 28, 1995. The right
margin of the chart reflects the ending value of the
hypothetical investment in the Fund as compared to
Salomon Brothers 15 Year Mortgage Backed Securities
Index, Lipper U.S. Mortgage Funds Average. The ending
values are $18,544, $21,075 and $18,957, respectively.
B. The graphic representation here displayed
consists of a boxed legend in the upper left quadrant
indicating the components of the corresponding
mountain chart. The lighter shaded portion represents
the value of reinvested income for the Fund. The dark
shaded portion reflects the principal value of $9,000
investment in the Fund over a 9 year period. The
color-coded mountain chart is a visual representation
of the narrative text above it, which shows that an
initial investment of a $9,000 in Government Income
Securities, Inc. on April 4, 1986 (start of
performance) would have grown to $16,690 on February
28, 1995. The "x" axis reflects computation periods
from April 4, 1986 (start of performance) to February
28, 1995, based on reinvested income. The right
margin of the chart reflects the ending value of a
hypothetical investment of $9,000 in the Fund measured
in increments of $5,000 ranging from $0 to $20,000.
C. The graphic representation here displayed
consists of a boxed legend in the upper left quadrant
indicating the components of the corresponding
mountain chart. The lighter shaded portion represents
the value of reinvested income for the Fund. The dark
shaded portion reflects the principal value of annual
$1,000 investments in the Fund over a 9 year period.
The color-coded mountain chart is a visual
representation of the narrative text above it, which
shows that an annual investment of $1,000 in
Government Income Securities, Inc. from April 4, 1986
(start of performance) to February 28, 1995 would grow
to $12,607 at the end of the 9 year period. The "x"
axis reflects computation periods from April 4, 1986
(start of performance) to February 28, 1995 and the
right margin of the chart reflects the ending value of
a hypothetical annual $1,000 investment in the Fund
measured in increments of $3,000 ranging from $0 to
$15,000.
D. The graphic representation here displayed
consists of a boxed legend in the upper left quadrant
indicating the components of the corresponding
mountain chart. The lighter shaded portion represents
the value of reinvested income for the Fund. The dark
shaded portion reflects the principal value of an
initial $100,000 investment in the Fund over a 9 year
period . The color-coded mountain chart is a visual
representation of the narrative text above it, which
shows that an investment of $100,000 in Government
Income Securities, Inc. on April 4, 1986 would have
grown to $185,446 on February 28, 1995. The "x" axis
reflects computation periods from April 4, 1986
(start of performance) to February 28, 1995. The right
margin of the chart reflects the ending value of a
hypothetical $100,000 investment in the Fund measured
in increments of $40,000 ranging from $0 to $200,000.
E. The graphic representation here displayed
consists of a boxed pie chart in the upper center of
the page which shows the percentage of assets in
Government Income Securities, Inc. that are
diversified across different types of securities as of
February 28, 1995. The pie chart is made up of six
pieces labeled as follows (going clockwise starting
from 12:00 noon): GNMA, 58%; FNMA, 10%; FHLMC, 3%;
CMOs, 7%; U.S. Treasury Notes, 7%; and Repurchase
Agreements, 15%.
