FEDERATED GOVERNMENT INCOME SECURITIES, INC.
(FORMERLY, GOVERNMENT INCOME SECURITIES, INC.)
CLASS F SHARES
PROSPECTUS
The Class F Shares of Federated Government Income Securities, Inc. (the "Fund"),
represent interests in 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
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Class F Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares dated August 2,
1996, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-341-7400. To obtain other
information or to make inquiries about the Fund, contact your financial
institution. The Statement of Additional Information, material incorporated by
reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
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 August 2, 1996
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TABLE OF CONTENTS
Summary of Fund Expenses--
Class F Shares...............................................................1
Financial Highlights--Class F Shares...........................................2
General Information............................................................3
Investment Information.........................................................3
Investment Objective.........................................................3
Investment Policies..........................................................3
Special Considerations of Fixed Income
Securities................................................................6
Portfolio Turnover...........................................................8
Investment Limitations.......................................................8
Net Asset Value................................................................9
Investing in Class F Shares....................................................9
Share Purchases..............................................................9
Minimum Investment Required.................................................10
What Shares Cost............................................................10
Eliminating the Sales Charge................................................11
Systematic Investment Program...............................................12
Exchange Privileges...........................................................12
Certificates and Confirmations..............................................13
Dividends...................................................................13
Capital Gains...............................................................13
Retirement Plans............................................................13
Redeeming Class F Shares......................................................14
Through a Financial Institution.............................................14
Redeeming Shares by Telephone...............................................14
Redeeming Shares by Mail....................................................14
Contingent Deferred Sales Charge............................................15
Systematic Withdrawal Program...............................................16
Accounts with Low Balances..................................................16
Fund Information..............................................................17
Management of the Fund......................................................17
Distribution of Class F Shares..............................................18
Shareholder Services........................................................18
Other Payments to Financial
Institutions.............................................................18
Supplemental Payments to Financial
Institutions.............................................................18
Administration of the Fund..................................................19
Expenses of the Fund and Shares.............................................19
Shareholder Information.......................................................20
Voting Rights...............................................................20
Tax Information...............................................................20
Federal Income Tax..........................................................20
State and Local Taxes.......................................................20
Performance Information.......................................................21
Other Classes of Shares.......................................................21
Addresses.....................................................................22
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SUMMARY OF FUND EXPENSES
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
(FORMERLY, GOVERNMENT INCOME SECURITIES, INC.)
CLASS F SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................... 1.00%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1) 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee...................................................... None
ANNUAL CLASS F SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................. 0.50%
12b-1 Fee......................................................... None
Total Other Expenses.............................................. 0.46%
Shareholder Services Fee...................................... 0.25%
Total Operating Expenses (3)............................. 0.96%
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
originial 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 operating expenses would have been 1.21% absent the voluntary
waivers of portions of the management fee and the shareholder services fee.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Investing in Class F Shares," "Redeeming Class F 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 $51 $63 $127
You would pay the following expenses on the same investment, assuming no
redemption................................................................... $20 $40 $63 $127
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS F SHARES' FISCAL YEAR ENDING
FEBRUARY 28, 1997.
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FINANCIAL HIGHLIGHTS--CLASS F SHARES
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
(FORMERLY,GOVERNMENT INCOME SECURITIES, INC.)
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated April 18, 1996, on the Fund's
financial statements for the year ended February 29, 1996, and on the following
table for each of the periods presented, is included in the Annual Report, which
is incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.55 $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49 $ 9.76
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.62 0.63 0.68 0.79 0.83 0.87 0.87 0.86 0.88
- ------------------------
Net realized and
unrealized gain (loss)
on investments 0.20 (0.46) (0.44) (0.05) 0.17 0.15 0.24 (0.53) (0.27)
- ------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 0.82 0.17 0.24 0.74 1.00 1.02 1.11 0.33 0.61
- ------------------------
LESS DISTRIBUTIONS
- ------------------------
Distributions from net
investment income (0.62) (0.62) (0.68) (0.78) (0.83) (0.87) (0.91) (0.82) (0.88)
- ------------------------
Distributions in excess
of net investment
income -- -- -- -- (0.01 (b) (0.02 (b) (0.01 (b) -- --
- ------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total distributions (0.62) (0.62) (0.68) (0.78) (0.84) (0.89) (0.92) (0.82) (0.88)
- ------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD $ 8.75 $ 8.55 $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49
- ------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (C) 9.87% 2.11% 2.63% 8.08% 11.12% 11.63% 12.81% 3.65% 6.80%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.96% 0.97% 0.97% 0.90% 0.92% 0.90% 0.93% 0.88% 0.81%
- ------------------------
Net investment income 6.96% 7.34% 7.39% 8.27% 8.86% 9.43% 9.42% 9.33% 9.47%
- ------------------------
Expense waiver/
reimbursement (d) 0.25% 0.23% 0.19% -- -- -- -- -- --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period
(000 omitted) $2,264,374 $2,538,013 $3,542,078 $3,643,180 $2,261,762 $1,322,749 $1,320,710 $1,482,030 $1,846,198
- ------------------------
Portfolio Turnover 161% 143% 134% 43% 36% 37% 76% 62% 34%
- ------------------------
<CAPTION>
<S> <C>
1987(A)
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.99
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.94
- ------------------------
Net realized and
unrealized gain (loss)
on investments (0.23)
- ------------------------ -----------
Total from investment
operations 0.71
- ------------------------
LESS DISTRIBUTIONS
- ------------------------
Distributions from net
investment income (0.94)
- ------------------------
Distributions in excess
of net investment
income --
- ------------------------ -----------
Total distributions (0.94)
- ------------------------ -----------
NET ASSET VALUE, END OF
PERIOD $ 9.76
- ------------------------ -----------
TOTAL RETURN (C) 6.76%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.95%*
- ------------------------
Net investment income 9.18%*
- ------------------------
Expense waiver/
reimbursement (d) --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period
(000 omitted) $3,183,612
- ------------------------
Portfolio Turnover 208%
- ------------------------
</TABLE>
* Computed on an annualized basis.
(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 did not represent a
return of capital for federal income tax purposes.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated February 29, 1996, which can be obtained free of charge.
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GENERAL INFORMATION
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. At a meeting of the Board of Directors ("Directors") held
on February 26, 1996, the Directors approved an amendment to the Articles of
Incorporation to change the name of Government Income Securities, Inc. to
Federated Government Income Securities, Inc. The Articles of Incorporation
permit the Fund to offer separate series of shares representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date of this
prospectus, the Directors have established four classes of shares, known as
Class A Shares, Class B Shares, Class C Shares, and Class F Shares. This
prospectus relates only to the Class F Shares ("Shares" or "Class F Shares", as
the context requires) of the Fund.
Class F Shares of the Fund are 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.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
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INVESTMENT INFORMATION
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 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 (including zero coupon bonds); and
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the National Bank
for Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers Home
Administration, Federal Home Loan Banks, Farm Credit Banks, Federal Home Loan
Mortgage Corporation, Federal National Mortgage Association, Government
National Mortgage Association, 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 ("Ginnie Mae") 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 ("Fannie Mae"), and Federal Home Loan Mortgage Corporation ("Freddie
Mac") are backed by the credit of the agency or instrumentality issuing the
obligations. Some of the securities purchased by the Fund may represent an
interest solely in the principal repayments or solely in the interest payments
on mortgage-backed securities. These securities are usually structured with two
classes and receive different proportions of the interest and principal
distributions on the pool of underlying mortgage-backed securities ("IOs and
POs"). In addition, the Fund may engage in certain strategies and transactions
as described in the prospectus.
COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOS")
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund will invest only in CMOs that are rated AAA by a nationally recognized
statistical rating organization. The Fund may also invest in certain CMOs which
are issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Fund may invest may
be: (i) securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) securities which are collateralized
by pools of mortgages in which payment of principal and interest is guaranteed
by the issuer and such mortgages in which payment of principal and interest is
guaranteed by the issuer and such guarantee is collateralized by U.S. government
securities; or (iii) other securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and interest
is supported by the credit of an agency or instrumentality of the U.S.
government.
CMOs that include a class bearing a floating rate of interest also may include a
class whose yield floats inversely against a specified index rate. These
"inverse floaters" are more volatile than conventional fixed or floating rate
classes of a CMO and the yield thereon, as well as the value thereof, will
fluctuate in inverse proportion to changes in the index on which interest rate
adjustments are based. As a result, the yield on an inverse floater class of a
CMO will generally increase when market yields (as reflected by the index)
decrease and decrease when market yields increase. The extent of the volatility
of inverse floaters depends on the extent of anticipated changes in market rates
of interest. Generally, inverse floaters provide for interest rate
adjustments based upon a multiple of the specified interest index, which further
increases their volatility. The degree of additional volatility will be directly
proportional to the size of the multiple used in determining interest rate
adjustments.
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.
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 yields generally available
on comparable securities when delivery occurs may be higher than yields on
securities obtained pursuant to such transactions. 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 as interest rates
fluctuate. Accordingly, the Fund may pay more/less than the market value of the
securities on the settlement date. In addition, the seller's failure to complete
these transactions may cause the Fund to miss a price or yield considered to be
advantageous.
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.
Securities lending transactions typically require the Fund to pay interest on
any cash collateral received. The Fund will seek to earn interest and additional
returns by investing cash collateral in repurchase agreements or liquid high
grade securities. The Fund will bear the risk of any losses on such investments
and the risk that the income from such investments are less than the interest
payable to the borrower.
SPECIAL CONSIDERATIONS OF FIXED INCOME SECURITIES
There is no limit to portfolio maturity. The prices of fixed income government
securities fluctuate inversely in relation to the direction of interest rates. A
decline in market interest rates results in a rise in the market prices of
outstanding debt obligations. Conversely, an increase in market interest rates
results in a decline in market prices of outstanding debt obligations. In either
case, the amount of change in market prices of debt obligations in response to
changes in market interest rates generally depends on the maturity of the debt
obligations: the debt obligations with the longest maturities will experience
the greatest market price changes. The prices of zero coupon securities, IOs and
POs, and certain structures of CMOs are more sensitive to fluctuations in
interest rates than are conventional bonds.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
Mortgage-backed securities are generally subject to less predictable and, in
many cases higher, prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage securities tend to increase during periods of
declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield on
the original mortgage security. As a consequence, mortgage securities may be a
less effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation.
With respect to securities that represent an interest solely in the interest
payments on mortgage-backed securities, because the yield to maturity is
extremely sensitive to the rate of principal payments (including prepayments) on
the related underlying mortgage-backed securities, it is possible that the Fund
might not recover its original investment on these securities if there are
substantial prepayments on the underlying mortgage.
In addition, the Fund may, but is not required to, utilize various other
investment strategies as described herein to manage the effective maturity or
duration of the Fund's fixed income securities or to enhance potential gain.
Such strategies are generally accepted by modern portfolio managers and are
regularly utilized by mutual funds and other institutional investors. These
techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed.
For example, the Fund expects to purchase portfolio securities using investment
leverage. The Fund expects that substantially all of its leverage will be used
in connection with when-issued and delayed delivery transactions and portfolio
securities lending. Leveraging creates an opportunity for capital appreciation
but, at the same time, the use of leverage in a declining market will cause a
greater decline in the asset value of the shares than if the Fund were not
leveraged.
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.
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, except for certain restricted
securities which meet the criteria for liquidity as established by the
Directors.
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 total 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
The Fund's net asset value per Share fluctuates. The net asset value for Class F
Shares is determined by adding the interest of the Class F Shares in the market
value of all securities and other assets of the Fund, subtracting the interest
of the Class F Shares in the liabilities of the Fund and those attributable to
the Class F Shares, and dividing the remainder by the total number of Class F
Shares outstanding. The net asset value for Class F Shares may differ from that
of Class A Shares, Class B Shares, and Class C Shares due to the variance in
daily net income realized by each class. Such variance will reflect only accrued
net income to which the shareholders of a particular class are entitled.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the 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.
- --------------------------------------------------------------------------------
INVESTING IN CLASS F SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
Federated Securities Corp. (the "Distributor") or directly from Federated
Securities Corp. once an account has been established. In connection with the
sale of Shares, Federated Securities Corp. may from time to time offer certain
items of nominal value to any shareholder or investor. The Fund reserves the
right to reject any purchase request.
THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order. It is the financial institution's responsibility to transmit orders
promptly. Purchase orders through a registered broker/dealer must be received by
the broker before 4:00 p.m. (Eastern time) and must be transmitted by the broker
to the Fund before 5:00 p.m. (Eastern time) in order for Shares to be purchased
at that day's price. Purchase orders through other financial institutions must
be received by the financial institution and transmitted to the Fund before 4:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge, (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts
on a fully disclosed basis and do not account for share ownership periods
(see "Other Payments to Financial Institutions").
DIRECTLY BY MAIL
An investor may place an order to purchase Shares directly by mail from the
Distributor once an account has been established. To do so, mail a check made
payable to Federated Government Income Securities, Inc.--Class F Shares to
Federated Services Company, P.O. Box 8600, Boston, MA 02266-8600.
Purchases by mail are considered received after payment by check is converted by
the tranfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after the
transfer agent's bank receives the check.
DIRECTLY BY WIRE
To purchase Shares directly from the Distribtuor by Federal Reserve wire once an
account has been established, call the Fund. All information needed will be
taken over the telephone, and the order is considered received when the transfer
agent's bank receives payment by wire. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts 02105; Attention EDGEWIRE; for Credit to: Federated
Government Income Securities, Inc.--Class F Shares; Fund Number (this number can
be found on the account statement or by contacting the Fund); Group Number or
Order Number; Nominee or Institution Name; and ABA Number 011000028. Shares
cannot be purchased by wire on holidays when wire transfers are restricted.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares 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
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales charge for purchases of $1 million or
more. In addition, no sales charge is imposed for Shares purchased through bank
trust departments or investment advisers registered under the Investment
Advisers Act of 1940 purchasing on behalf of their clients, or by sales
representatives, Directors, and employees 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., their spouses and
children under age 21, or any trusts or pension or profit-sharing plans for
these persons, or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, to the extent that no payment was advanced for purchases made by
such entities. Unaffiliated institutions through whom Shares are purchased may
charge fees for services provided, which may be related to the ownership of
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.
Under certain circumstances, described under "Redeeming Class F Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
DEALER CONCESSION
For sales of Shares, broker/dealers will normally receive 100% of the applicable
sales charge. Any portion of the sales charge which is not paid to a
broker/dealer will be retained by the distributor. However, from time to time,
and at the sole discretion of the distributor, all or part of that portion may
be paid to a dealer. The sales charge for Shares sold other than through
registered broker/dealers will be retained by Federated Securities Corp.
Federated Securities Corp. may pay fees to banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the initiation of customer accounts and
purchases of Shares.
ELIMINATING THE SALES CHARGE
The sales charge can be eliminated on the purchase of Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
There is no sales charge for purchases of $1 million or more. The Fund will
combine purchases made on the same day by the investor, his spouse, and his
children under age 21 when it calculates the sales charge. In addition, the
sales charge is eliminated for purchases of $1 million or more made at one time
by a trustee or fiduciary for a single trust estate or a single fiduciary
account.
If an additional purchase of 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 charges on the additional purchase.
The Fund will also combine purchases for the purpose of reducing the contingent
deferred sales charge imposed on some Share redemptions. For example, if a
shareholder already owns Shares having a current value at the public offering
price of $1 million and purchases an additional $1 million at the current public
offering price, the applicable contingent deferred sales charge would be reduced
to .50% for those additional shares. For more information on the levels of
contingent deferred sales charges and holding periods, see the section entitled
"Contingent Deferred Sales Charge."
To receive the sales charge elimination and/or the contingent deferred sales
charge reduction, Federated Securities Corp. must be notified by the shareholder
in writing or by their financial institution at the time the purchase is made
that Shares are already owned or that purchases are being combined. The Fund
will eliminate the sales charge and/or reduce the contingent deferred sales
charge after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $1 million of Shares over the next
13 months, the sales charge may be eliminated by signing a letter of intent to
that effect. This letter of intent includes a provision for a sales charge
elimination depending on the amount actually purchased within the 13-month
period and a provision for the Fund's custodian to hold 1.00% of the total
amount intended to be purchased in escrow (in Shares) until such purchase is
completed.
The 1.00% 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 Shares, is not purchased. In this event, an
appropriate number of escrowed Shares may be redeemed in order to realize the
1.00% sales charge.
This letter of intent will not obligate the shareholder to purchase Shares. This
letter may be dated as of a prior date to include any purchases made within the
past 90 days (purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales charge on such
purchases will not be adjusted to reflect a lower sales charge).
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time right,
within 120 days, to reinvest the redemption proceeds at the next-determined net
asset value without any sales charge. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution of the
reinvestment in order to receive this elimination of the sales charge. If the
shareholder redeems his Shares in the Fund, there may be tax consequences.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge elimination, a shareholder has the
privilege of combining concurrent purchases of two or more of certain funds
offering Class F Shares, the purchase prices of which include a sales charge.
For example, if a shareholder concurrently invested $400,000 in Class F Shares
of one of the other funds advised by subsidiaries of Federated Investors (the
"Federated Funds"), and $600,000 in Shares, the sales charge would be
eliminated.
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales charge
after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
monthly from the shareholder's checking account and invested in Shares at the
net asset value next determined after an order is received by the transfer
agent's bank, plus the 1.00% sales charge for purchases under $1 million. A
shareholder may apply for participation in this program through Federated
Securities Corp. or his financial institution.
EXCHANGE PRIVILEGES
Class F Shareholders may exchange all or some of their Shares, at net asset
value for Class F Shares of other Federated Funds. Exchanges are made at net
asset value without being assessed a contingent deferred sales charge on the
exchanged Shares. To the extent that a shareholder exchanges Shares for Class F
Shares of other Federated Funds, the time for which the exchanged-for Shares are
to be held will be added to the time for which exchanged-from Shares were held
for purposes of satisfying the applicable holding period.
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. Shareholders who desire to automatically exchange Class F Shares
of a predetermined amount on a monthly, quarterly, or annual basis may take
advantage of a systematic exchange privilege.
Further information on these exchange privileges is available by calling
Federated Securities Corp. or the shareholder's financial institution.
The exchange privilege is available to shareholders residing in any state in
which the shares being acquired may be legally sold.
Before making an exchange, a shareholder must receive a prospectus of the fund
for which the exchange is being made.
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending on the circumstances, a capital gain or loss may be
realized.
Please contact your financial institution directly or Federated Securities Corp.
at 1-800-341-7400 for information on and prospectuses for the Federated Funds
into which your Shares may be exchanged free of charge.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested on the application or by contacting the Fund.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
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 CLASS F SHARES
The Fund redeems Shares at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
through a financial institution or directly from the Fund by written request.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares 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, less any applicable contingent deferred sales charge,
next determined after the Fund receives the redemption request from the
financial institution. Redemption requests through a registered broker/dealer
must be received by the broker before 4:00 p.m. (Eastern time) and must be
transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. Redemption requests
through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through an Automated Clearing House member will not
be wired until that method of payment has cleared. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be wired
the following business day. Questions about telephone redemptions on days when
wire transfers are restricted should be directed to your sharehlder services
representative at the telephone number listed on your acount statement.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.
The written request should state: the Fund name and Class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company, or savings association whose deposits are
insured by an organization which is administered by the Federal Deposit
Insurance Corporation; a member firm of a domestic stock exchange; or any other
"eligible guarantor institution," as defined in the Securities Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be charged a contingent
deferred sales charge by the Fund's Distributor of the lesser of the original
purchase price or the net asset value of the Shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT
AMOUNT OF SHARES DEFERRED
PURCHASE HELD SALES CHARGE
<S> <C> <C>
Up to $1,999,999 less than 4
years 1.00%
$2,000,000 to less than 2
$4,999,999 years .50%
Over $5,000,000 less than 1 year .25%
</TABLE>
In instances in which Shares have been acquired in exchange for Class F Shares
in other Federated Funds, (i) the purchase price is the price of the Shares when
originally purchased and (ii) the time period during which the Shares are held
will run from the date of the original purchase. The contingent deferred sales
charge will not be imposed on Shares acquired through the reinvestment of
dividends or distributions of short-term or long-term capital gains. In
computing the amount of contingent deferred sales charge for accounts with
Shares subject to a single holding period, if any, redemptions are deemed to
have occurred in the following order: (1) Shares acquired through the
reinvestment of dividends and long-term capital gains; (2) purchases of Shares
occurring prior to the number of years necessary to satisfy the applicable
holding period; and (3) purchases of Shares occurring within the current holding
period.
The contingent deferred sales charge will not be imposed when a redemption
results from a tax-free return under the following circumstances: (i) a total or
partial distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account after the beneficial owner
attains age 59-1/2; or (iii) from the death or total and permanent disability of
the beneficial owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account does not extend
to account transfers, rollovers, and other redemptions made for purposes of
reinvestment. Contingent deferred sales charges are not charged in connection
with exchanges of Shares for shares in other Federated Funds, or in connection
with redemptions by the Fund of accounts with low balances. Shares of the Fund
originally purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, and third party
administrators acting on behalf of defined contribution plans, are not subject
to the contingent deferred sales charge, to the extent that no payment was
advanced for purchases made by such entities. 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, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder; the minimum withdrawal amount
is $100. Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to Shares, and the
fluctuation of the net asset value of Shares redeemed under this program,
redemptions may reduce, and eventually deplete, the shareholder's investment in
Shares. For this reason, payments under this program should not be considered as
yield or income on the shareholder's investment in Shares. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000 at current offering price.
A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that Shares are sold with a sales charge, it is
not advisable for shareholders to be purchasing Shares while participating in
this program.
Contingent deferred sales charges are charged for Shares redeemed through this
program within four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below a required minimum value of
$1,000. This requirement does not apply, however, if the balance falls below
$1,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
- --------------------------------------------------------------------------------
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
"Adviser"), 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
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. With over $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have elected Federated funds for their
clients.
Both the Fund and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactons in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and
could result in severe penalties.
Kathleen M. Foody-Malus has been the Fund's portfolio manager since July 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. Ms.
Foody-Malus received her M.B.A. in Accounting/Finance from the University of
Pittsburgh.
DISTRIBUTION OF CLASS F 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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
SHAREHOLDER SERVICES
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to .25% of the average daily net asset value of Shares to
obtain certain personal services for shareholders and for the maintenance of
shareholder accounts ("Shareholder Services"). Under the Shareholder Services
Agreement, Federated Shareholder Services will either perform shareholder
services directly or will select financial institutions to perform shareholder
services. Financial institutions will receive fees based upon Shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined from time to time by the Fund and
Federated Shareholder Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
In addition, the Distributor will pay financial institutions, for distribution
and/or administrative services, an amount equal to 1.00% of the offering price
of the Shares acquired by their clients or customers 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 1.00% sales charge on purchases of less than $1 million). The
financial institutions may elect to receive amounts less than those stated,
which would reduce the stated contingent deferred sales charge and/or the
holding period used to calculate the fee.
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
Federated Securities Corp. and Federated Shareholder Services may offer to pay a
fee, from their own assets, to financial institutions as financial assistance
for providing substantial sales services, distribution-related support services,
or shareholder services. The support may include sponsoring sales, educational
and training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the Distributor may be reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of the Federated Funds as specified below:
<TABLE>
<CAPTION>
ADMINISTRATIVE AVERAGE AGGREGATE
FEE DAILY NET ASSETS
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.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 Services Company may choose voluntarily to waive a portion of its fee.
EXPENSES OF THE FUND AND SHARES
Holders of Class F Shares pay their allocable portion of Fund and portfolio
expenses.
The Fund expenses for which holders of Class F Shares pay their allocable
portion include, but are not limited to: the cost of organizing the Fund and
continuing its existence; registering the Fund with federal and state securities
authorities; Directors' fees; auditors' fees; the cost of meetings of Directors;
legal fees of the Fund; association membership dues; and such non-recurring and
extraordinary items as may arise from time to time.
The portfolio expenses for which holders of Class F Shares pay their allocable
portion include, but are not limited to: registering the portfolio and Shares of
the portfolio; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Class F Shares
as a class are expenses under the Fund's Distribution Plan and fees for
Shareholder Services. However, the Directors reserve the right to allocate
certain other expenses to holders of Class F Shares as it deems appropriate
("Class Expenses"). In any case, Class Expenses would be limited to:
distribution fees; transfer agent fees as identified by the transfer agent as
attributable to holders of Class F Shares; fees for Shareholder Services;
printing and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and
registration fees paid to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Class F
Shares; legal fees relating solely to Class F Shares and Directors' fees
incurred as a result of issues relating solely to Class F Shares.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and other
matters submitted for vote. All shares of each portfolio or class in the Fund
have equal voting rights, except that only shares of that particular Fund or
class are entitled to vote in matters affecting that Fund or class.
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 the Directors or by 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
of all series entitled to vote.
As of July 5, 1996, Merrill Lynch, Pierce, Fenner & Smith (as record owner
holding Class F Shares for its clients), owned 102,358,225 of Class F Shares
(43.05%) 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 matter 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.
STATE AND LOCAL TAXES
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 for Class F
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Shares after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the maximum offering price per share of Shares 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
Shares, and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales charge and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class F Shares, Class A
Shares, Class B Shares, and Class C Shares.
From time to time, advertisements for the Class A Shares, Class B Shares, Class
C Shares and Class F Shares of the Fund may refer to ratings, rankings, and
other information in certain financial publications and/or compare the
performance of Class A Shares, Class B Shares, Class C Shares and Class F Shares
to certain indices.
- --------------------------------------------------------------------------------
OTHER CLASSES OF SHARES
The Fund also offers other classes of shares called Class A Shares, Class B
Shares, and Class C Shares which are all sold primarily to customers of
financial institutions subject to certain differences.
Class A Shares are sold subject to a front-end sales charge and a Shareholder
Services Agreement. Investments in Class A Shares are subject to a minimum
initial investment of $500, unless the investment is in a retirement account, in
which case the minimum investment is $50.
Class B Shares are sold at net asset value and are subject to a Rule 12b-1 Plan
and a Shareholder Services Agreement. Investments in Class B Shares are subject
to a minimum initial investment of $1,500, unless the investment is in a
retirement account, in which case the minimum investment is $50. A contingent
deferred sales charge is imposed on certain shares which are redeemed within six
full years of purchase.
Class C Shares are sold at net asset value and are subject to a Rule 12b-1 Plan
and a Shareholder Services Agreement. Investments in Class C Shares are subject
to a minimum investment of $1,500, unless the investment is in a retirement
account, in which case the minimum investment is $50. A contingent deferred
sales charge of 1.00% is imposed on assets redeemed within the first full 12
months following purchase.
Class A Shares, Class B Shares, Class C Shares, and Class F Shares are subject
to certain of the same expenses. Expense differences, however, between Class A
Shares, Class B Shares, Class C Shares, and Class F Shares may affect the
performance of each class.
To obtain more information and a combined prospectus for Class A Shares, Class B
Shares, and Class C Shares, investors may call 1-800-341-7400 or contact their
financial institution.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Government Income Securities, Inc.
Class F Shares 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 P.O. Box 8600
Trust Company Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FEDERATED GOVERNMENT
INCOME SECURITIES, INC.
(FORMERLY, GOVERNMENT INCOME
SECURITIES, INC.)
CLASS F SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
August 2, 1996
[LOGO FEDERATED INVESTORS]
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 313912107
G01090-02 (8/96)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
(FORMERLY, GOVERNMENT INCOME SECURITIES, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
The shares of Federated Government Income Securities, Inc. (the "Fund")
represent interests in 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
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Class A Shares, Class B Shares, and Class C Shares of the Fund.
Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares dated August 2 ,
1996, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-341-7400. To obtain other
information or to make inquiries about the Fund, contact your financial
institution. The Statement of Additional Information, material incorporated by
reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
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 August 2, 1996
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses--
Class A Shares...............................................................1
Summary of Fund Expenses--
Class B Shares...............................................................2
Summary of Fund Expenses--
Class C Shares...............................................................3
General Information............................................................4
Investment Information.........................................................4
Investment Objective.........................................................4
Investment Policies..........................................................4
Special Considerations of Fixed Income
Securities................................................................7
Portfolio Turnover...........................................................9
Investment Limitations.......................................................9
Net Asset Value...............................................................10
Investing in the Fund.........................................................10
Class A Shares..............................................................10
Class B Shares..............................................................10
Class C Shares..............................................................10
How to Purchase Shares........................................................11
Investing in Class A Shares.................................................12
Investing in Class B Shares.................................................14
Investing in Class C Shares.................................................14
Purchasing Shares through a Financial
Institution..............................................................15
Purchasing Shares by Wire...................................................15
Purchasing Shares by Check..................................................15
Special Purchase Features...................................................15
Exchange Privilege............................................................16
Requirements for Exchange...................................................16
How to Redeem Shares..........................................................17
Special Redemption Features.................................................18
Contingent Deferred Sales Charge............................................19
Elimination of Contingent Deferred
Sales Charge.............................................................20
Account and Share Information.................................................20
Fund Information..............................................................21
Management of the Fund......................................................21
Distribution of Shares......................................................22
Administration of the Fund..................................................24
Expenses of the Fund and Shares.............................................24
Shareholder Information.......................................................25
Voting Rights...............................................................25
Tax Information...............................................................25
Federal Income Tax..........................................................25
State and Local Taxes.......................................................25
Performance Information.......................................................26
Other Classes of Shares.......................................................26
Addresses.....................................................................27
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
(FORMERLY, GOVERNMENT INCOME SECURITIES, INC.)
CLASS A SHARES
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable) (1)................................................................................................ 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)................................................................................ 0.50%
12b-1 Fee (3).................................................................................................... 0.00%
Total Other Expenses 0.46%
Shareholder Services Fee.......................................................................... 0.25%
Total Operating Expenses (4)............................................................................ 0.96%
</TABLE>
(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased and redeemed with a
sales charge and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of 0.50 of 1% for redemptions
made within one year of purchase.
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The advisor can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3) The Class A Shares has no present intention of paying or accruing the 12b-1
fee during the fiscal year ending February 28, 1997. If the Fund were paying
or accruing the 12b-1 fee, the Fund would be able to pay up to 0.25% of its
average daily net assets for the 12b-1 fee. See "Fund Information."
(4) The operating expenses are estimated to be 1.21% absent the anticipated
voluntary waiver of a portion of the management fee.
* Total operating expenses in the table above are estimated based on average
expenses expected to be incurred during the period ending February 28, 1997.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class A 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
<S> <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.......................................................... $59 $74
You would pay the following expenses on the same investment, assuming no redemption................ $54 $74
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS A SHARES' FISCAL YEAR ENDING
FEBRUARY 28, 1997.
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED GOVERNMENT INCOME SECURITIES,INC.
(FORMERLY, GOVERNMENT INCOME SECURITIES, INC.)
CLASS B SHARES
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)..................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price).......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable) (1)................................................................................................. 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................................ None
Exchange Fee...................................................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)................................................................................. 0.50%
12b-1 Fee......................................................................................................... 0.75%
Total Other Expenses.............................................................................................. 0.46%
Shareholder Services Fee........................................................................... 0.25%
Total Operating Expenses (3)(4)........................................................................... 1.71%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge").
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The advisor can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The operating expenses are estimated to be 1.96% absent the anticipated
voluntary waiver of portion of the management fee.
* Total Class B Shares operating expenses in the table above are estimated
based on average expenses expected to be incurred during the period ending
February 28, 1997. During the course of this period, expenses may be more or
less than the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class B Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class B Shares" and "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <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............................................................ $74 $98
You would pay the following expenses on the same investment, assuming no redemption.................. $17 $54
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS B SHARES' FISCAL YEAR ENDING
FEBRUARY 27, 1997.
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
(FORMERLY, GOVERNMENT INCOME SECURITIES, INC.)
CLASS C SHARES
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable) (1)................................................................................................ 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)................................................................................ 0.50%
12b-1 Fee........................................................................................................ 0.75%
Total Other Expenses............................................................................................. 0.46%
Shareholder Services Fee.......................................................................... 0.25%
Total Operating Expenses (3)............................................................................ 1.71%
</TABLE>
(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 one
year of their purchase date. For a more complete description, see "Redeeming
Class C Shares".
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The advisor can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(3) The operating expenses are estimated to be 1.96% absent the anticipated
voluntary waiver of a portion of the management fee.
* Total operating expenses in the table above are estimated based on average
expenses expected to be incurred during the period ending February 28, 1997.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class C Shares" and "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <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.......................................................... $28 $54
You would pay the following expenses on the same investment, assuming no redemption................ $17 $54
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS C SHARES' FISCAL YEAR ENDING
FEBRUARY 28, 1997.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
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. At a meeting of the Board of Directors ("Directors") held
on February 26, 1996, the Directors approved an amendment to the Articles of
Incorporation to change the name of Government Income Securities, Inc. to
Federated Government Income Securities, Inc. The Articles of Incorporation
permit the Fund to offer separate series of shares representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Directors
have established four classes of shares, known as Class A Shares, Class B
Shares, Class C Shares, and Class F Shares. This prospectus relates only to the
Class A Shares, Class B Shares, and Class C Shares of the Fund (individually and
collectively as the context requires, "Shares").
Shares of the Fund are designed primarily for individuals and institutions
seeking current income through a professionally managed, diversified portfolio
of U.S. government securities. The minimum initial investment for Class A Shares
is $500. The minimum initial investment for Class B Shares and Class C Shares is
$1,500. However, the minimum initial investment for a retirement account in any
class is $50. Subsequent investments in any class must be in amounts of at least
$100, except for retirement plans which must be in amounts of at least $50.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
- --------------------------------------------------------------------------------
INVESTMENT INFORMATION
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 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 (including zero coupon bonds); and
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the National Bank
for Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers Home
Administration, Federal Home Loan Banks, Farm Credit Banks, Federal Home Loan
Mortgage Corporation, Federal National Mortgage Association, Government
National Mortgage Association, 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 ("Ginnie Mae") 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 ("Fannie Mae"), and Federal Home Loan Mortgage Corporation ("Freddie
Mac") are backed by the credit of the agency or instrumentality issuing the
obligations. Some of the securities purchased by the Fund may represent an
interest solely in the principal repayments or solely in the interest payments
on mortgage-backed securities. These securities are usually structured with two
classes and receive different proportions of the interest and principal
distributions on the pool of underlying mortgage-backed securities ("IOs and
POs"). In addition, the Fund may engage in certain strategies and transactions
as described in the prospectus.
COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOS")
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund will invest only in CMOs that are rated AAA by a nationally recognized
statistical rating organization. The Fund may also invest in certain CMOs which
are issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Fund may invest may
be: (i) securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) securities which are collateralized
by pools of mortgages in which payment of principal and interest is guaranteed
by the issuer and such mortgages in which payment of principal and interest is
guaranteed by the issuer and such guarantee is collateralized by U.S. government
securities; or (iii) other securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and interest
is supported by the credit of an agency or instrumentality of the U.S.
government.
CMOs that include a class bearing a floating rate of interest also may include a
class whose yield floats inversely against a specified index rate. These
"inverse floaters" are more volatile than conventional fixed or floating rate
classes of a CMO and the yield thereon, as well as the value thereof, will
fluctuate in inverse proportion to changes in the index on which interest rate
adjustments are based. As a result, the yield on an inverse floater class of a
CMO will generally increase when market yields (as reflected by the index)
decrease and decrease when market yields increase. The extent of the volatility
of inverse floaters depends on the extent of anticipated changes in market rates
of interest. Generally, inverse floaters provide for interest rate
adjustments based upon a multiple of the specified interest index, which further
increases their volatility. The degree of additional volatility will be directly
proportional to the size of the multiple used in determining interest rate
adjustments.
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.
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 yields generally available
on comparable securities when delivery occurs may be higher than yields on
securities obtained pursuant to such transactions. 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 as interest rates
fluctuate. Accordingly, the Fund may pay more/less than the market value of the
securities on the settlement date. In addition, the seller's failure to complete
these transactions may cause the Fund to miss a price or yield considered to be
advantageous.
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.
Securities lending transactions typically require the Fund to pay interest on
any cash collateral received. The Fund will seek to earn interest and additional
returns by investing cash collateral in repurchase agreements or liquid high
grade securities. The Fund will bear the risk of any losses on such investments
and the risk that the income from such investments are less than the interest
payable to the borrower.
SPECIAL CONSIDERATIONS OF FIXED INCOME SECURITIES
There is no limit to portfolio maturity. The prices of fixed income government
securities fluctuate inversely in relation to the direction of interest rates. A
decline in market interest rates results in a rise in the market prices of
outstanding debt obligations. Conversely, an increase in market interest rates
results in a decline in market prices of outstanding debt obligations. In either
case, the amount of change in market prices of debt obligations in response to
changes in market interest rates generally depends on the maturity of the debt
obligations: the debt obligations with the longest maturities will experience
the greatest market price changes. The prices of zero coupon securities, IOs and
POs, and certain structures of CMOs are more sensitive to fluctuations in
interest rates than are conventional bonds.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
Mortgage-backed securities are generally subject to less predictable and, in
many cases higher, prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage securities tend to increase during periods of
declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield on
the original mortgage security. As a consequence, mortgage securities may be a
less effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation.
With respect to securities that represent an interest solely in the interest
payments on mortgage-backed securities, because the yield to maturity is
extremely sensitive to the rate of principal payments (including prepayments) on
the related underlying mortgage-backed securities, it is possible that the Fund
might not recover its original investment on these securities if there are
substantial prepayments on the underlying mortgage.
In addition, the Fund may, but is not required to, utilize various other
investment strategies as described herein to manage the effective maturity or
duration of the Fund's fixed income securities or to enhance potential gain.
Such strategies are generally accepted by modern portfolio managers and are
regularly utilized by mutual funds and other institutional investors. These
techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed.
For example, the Fund expects to purchase portfolio securities using investment
leverage. The Fund expects that substantially all of its leverage will be used
in connection with when-issued and delayed delivery transactions and portfolio
securities lending. Leveraging creates an opportunity for capital appreciation
but, at the same time, the use of leverage in a declining market will cause a
greater decline in the asset value of the shares than if the Fund were not
leveraged.
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.
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, except for certain restricted
securities which meet the criteria for liquidity as established by the
Directors.
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 total 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
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the 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.
- --------------------------------------------------------------------------------
INVESTING IN THE FUND
The Fund offers investors three classes of Shares that carry sales charges and
contingent deferred sales charges in different forms and amounts and which bear
different levels of expenses.
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales charge of 4.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed (except for special programs offered under "Purchases
with Proceeds From Redemptions of Unaffiliated Investment Companies.") Certain
purchases of Class A Shares qualify for reduced sales charges. See "Reducing the
Sales Charge-Class A Shares." Class A Shares have no conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.
CLASS C SHARES
Class C Shares are sold without an initial sales charge, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within
the first 12 months following purchase. Class C Shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made, but will have a higher expense ratio and pay lower dividends
than Class A Shares due to the higher 12b-1 fee. Class C Shares have no
conversion feature.
- --------------------------------------------------------------------------------
HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased, as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE SALES CHARGE CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than
$100,000 4.50% 4.71% 4.00%
$100,000--
$249,000 3.75% 3.90% 3.25%
$250,000--
$499,999 2.50% 2.56% 2.25%
$500,000--
$999,999 2.00% 2.04% 1.80%
$1 million
or more 0.00% 0.00% 0.25%*
</TABLE>
*See sub-section entitled "Dealer Concession."
No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of the sales charge. However,
investors who purchase Shares through a trust department, investment adviser, or
other financial intermediary may be charged a service fee or other fee by the
financial intermediary. Additionally, no sales charge is imposed for Class A
Shares purchased through "wrap accounts" or similar programs, under which
clients pay a fee for services, or for shareholders designated as Liberty Life
Members.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid to a
dealer will be retained by the distributor. However, the distributor, may offer
to pay dealers up to 100% of the sales charge retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement of
certain expenses of qualified employees and their spouses to attend
informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales charge; however, the distributor will make
twelve monthly payments to the dealer totaling 0.25% of the public offering
price over the first year following the purchase. Such payments are based on the
original purchase price of Shares outstanding at each month end.
The sales charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
REDUCING OR ELIMINATING THE SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Class A Shares
through:
quantity discounts and accumulated purchases;
concurrent purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated investment companies.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As shown in the table on page 7, larger purchases can reduce the sales charge
paid. The Fund will combine purchases of Class A Shares made on the same day by
the investor, the investor's spouse, and the investor's children under age 21
when it calculates the sales charge.
In addition, the sales charge, if applicable, is reduced or eliminated for
purchases made at one time by a trustee or fiduciary for a single trust estate
or a single fiduciary account.
If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $90,000 and he purchases $10,000 more at the current public offering price,
the sales charge on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Class A Shares are already owned or that
purchases are being combined. The Fund will reduce the sales charge after it
confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction or elimination, a
shareholder has the privilege of combining concurrent purchases of Class A
Shares of two or more funds for which affiliates of Federated Investors serve as
investment adviser or principal underwriter (the "Federated Funds"), the
purchase price of which includes a sales charge. For example, if a shareholder
concurrently invested $80,000 in one of the Class A Shares in the Federated
Funds with a sales charge, and $20,000 in the Class A Shares of this Fund, the
sales charge would be reduced.
To receive this sales charge reduction, 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 reduce the sales charge
after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Class A Shares of
Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold up to 4.50% of the total amount intended to be purchased in
escrow (in Shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales charge.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge applicable
to the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any Federated
Funds, excluding money market accounts, will be aggregated to provide a purchase
credit towards fulfillment of the letter of intent. Prior trade prices will not
be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales charge. If
the shareholder redeems his Class A Shares in the Fund, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES
Investors may purchase Class A Shares at net asset value, without a sales
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or redeemed with a sales charge or
commission and were not distributed by Federated Securities Corp. The purchase
must be made within 60 days of the redemption, and Federated Securities Corp.
must be notified by the investor in writing, or by his financial institution, at
the time the purchase is made. From time to time, the Fund may offer dealers a
payment of .50 of 1.00% for Shares purchased under this program. If Shares are
purchased in this manner, redemptions of these Shares will be subject to a
contingent deferred sales charge for one year from the date of purchase.
Shareholders will be notified prior to the implementation of any special
offering as described above.
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales charge,
under certain circumstances described under "Contingent Deferred Sales
Charge--Class B Shares," a contingent deferred sales charge may be applied by
the distributor at the time Class B Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around the
fifteenth of the month eight full years after the purchase date, except as noted
below, and will no longer be subject to a fee under the Fund's Distribution Plan
(see "Distribution of Shares"). Such conversion will be on the basis of the
relative net asset values per Share, without the imposition of any sales charge,
fee or other charge. Class B Shares acquired by exchange from Class B Shares of
another Federated Fund will convert into Class A Shares based on the time of the
initial purchase. For purposes of conversion to Class A Shares, Shares purchased
through the reinvestment of dividends and distributions paid on Class B Shares
will be considered to be held in a separate sub-account. Each time any Class B
Shares in the shareholder's account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B Shares in
the sub-account will also convert to Class A Shares. The conversion of Class B
Shares to Class A Shares is subject to the continuing availability of a ruling
from the Internal Revenue Service or an opinion of counsel that such conversions
will not constitute taxable events for federal tax purposes. There can be no
assurance that such ruling or opinion will be available, and the conversion of
Class B Shares to Class A Shares will not occur if such ruling or opinion is not
available. In such event, Class B Shares would continue to be subject to higher
expenses than Class A Shares for an indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see "Contingent Deferred Sales Charge--Class C
Shares."
PURCHASING SHARES THROUGH A
FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. 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. Financial
institutions may charge additional fees for their services.
The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by Federal Reserve
wire by calling the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston, MA;
Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund Class); Fund Number (this
number can be found on the account statement or by contacting the Fund); Group
Number or Order Number; Nominee or Institution Name; and ABA Number 011000028.
Shares cannot be purchased by wire on holidays when wire transfers are
restricted. Questions on wire purchases should be directed to your shareholder
services representative at the telephone number listed on your account
statement.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by mailing a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the check is
received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
sales charge, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
CLASS A SHARES
Class A shareholders may exchange all or some of their Shares for Class A Shares
of other Federated Funds at net asset value. Neither the Fund nor any of the
Federated Funds imposes any additional fees on exchanges.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other Federated Funds. (Not all Federated Funds currently offer Class B
Shares. Contact your financial institution regarding the availability of Class B
Shares of the Federated Funds). Exchanges are made at net asset value without
being assessed a contingent deferred sales charge on the exchanged Shares. To
the extent that a shareholder exchanges Shares for Class B Shares of other
Federated Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period.
CLASS C SHARES
Class C shareholders may exchange all or some of their Shares for Class C Shares
of other Federated Funds at net asset value without a contingent deferred sales
charge. (Not all Federated Funds currently offer Class C Shares. Contact your
financial institution regarding the availability of Class C Shares of the
Federated Funds). To the extent that a shareholder exchanges Shares for Class C
Shares of other Federated Funds, the time for which the exchanged-for Shares are
to be held will be added to the time for which exchanged-from Shares were held
for purposes of satisfying the applicable holding period. For more information,
see "Contingent Deferred Sales Charge."
Please contact your financial institution directly or Federated Securities Corp.
at 1-800-341-7400 for information on and prospectuses for the Federated Funds
into which your Shares may be exchanged free of charge.
REQUIREMENTS FOR EXCHANGE
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. 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
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanging may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and
other financial institutions during times of drastic economic or market changes.
If a shareholder cannot contact his broker or financial institution by
telephone, it is recommended that an exchange request be made in writing and
sent by overnight mail to: Federated Shareholder Services Company, 1099 Hingham
Street, Rockland, Massachusetts 02370-3317.
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.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Shareholder Services Company, P.O. Box 8600, Boston,
Massachusetts 02266-8600 and deposited to the shareholder's account before being
exchanged. Telephone exchange instructions are recorded and will be binding upon
the shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern
time) and must be received by the Fund before that time for Shares to be
exchanged the same day. Shareholders exchanging into a Fund will begin receiving
dividends the following business day. This privilege may be modified or
terminated at any time.
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
as described below. Redemptions of Shares held through retirement plans will be
governed by the requirements of the respective plans.
REDEEMING SHARES THROUGH YOUR
FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge, next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has
a properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire-transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from
redeemed Shares purchased by check or through ACH will not be wired until that
method of payment has cleared. Proceeds from redemption requests received on
holidays when wire transfers are restricted will be wired the following
business day. Questions about telephone redemptions on days when wire transfers
are restricted should be directed to your shareholder services representative
at the telephone number listed on your account statement.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.
The written request should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company, or savings association whose deposits are
insured by an organization which is administered by the Federal Deposit
Insurance Corporation; a member firm of a domestic stock exchange; or any other
"eligible guarantor institution," as defined in the Securities Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, 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 Shares, and the fluctuation
of the net asset value of 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 an
account value of at least $10,000. A shareholder may apply for participation in
this program through his financial institution. Due to the fact that Class A
Shares are sold with a sales charge, it is not advisable for shareholders to
continue to purchase Class A Shares while participating in this program. A
contingent deferred sales charge may be imposed on Class B Shares and C Shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
CLASS A SHARES
Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of Shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities Corp.
may be charged a contingent deferred sales charge of.50 of 1.00% for redemptions
made within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) Shares acquired through the reinvestment of dividends
and long-term capital gains; (2) Shares held for more than six full years from
the date of purchase with respect to Class B Shares and one full year from the
date of purchase with respect to Class C Shares and applicable Class A Shares;
(3) Shares held for fewer than six years with respect to Class B Shares and for
less than one full year from the date of purchase with respect to Class C Shares
and applicable Class A Shares on a first-in, first-out basis. A contingent
deferred sales charge is not assessed in connection with an exchange of Fund
Shares for Shares of other Federated Funds in the same class (see "Exchange
Privilege"). Any contingent deferred sales charge imposed at the time the
exchanged-for Shares are redeemed is calculated as if the shareholder had held
the Shares from the date on which he became a shareholder of the exchanged-from
Shares. Moreover, the contingent deferred sales charge will be eliminated with
respect to certain redemptions (see "Elimination of Contingent Deferred Sales
Charge").
ELIMINATION OF CONTINGENT
DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor, and their immediate
family members; employees of any financial institution that sells Shares of the
Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of Shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940 or retirement plans where
the third party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Directors reserve the right to discontinue
elimination of the contingent deferred sales charge. Shareholders will be
notified of such elimination. Any Shares purchased prior to the termination of
such waiver would have the contingent deferred sales charge eliminated as
provided in the Fund's prospectus at the time of the purchase of the Shares. If
a shareholder making a redemption qualifies for an elimination of the contingent
deferred sales charge, the shareholder must notify Federated Securities Corp. or
the transfer agent in writing that he is entitled to such elimination.
ACCOUNT AND SHARE INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested in writing to Federated Shareholder Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.
DIVIDENDS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
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 the Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
- --------------------------------------------------------------------------------
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The 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
"Adviser"), 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 a fee from the Fund.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to.75% 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 choose to waive a portion of its fee or reimburse
the Funds for certain operating expenses. The Adviser can terminate this
voluntary reimbursement of expenses at any time at its sole discretion. The
Adviser has also undertaken to reimburse the Fund for operating expenses in
excess of limitations established by certain states.
ADVISER'S BACKGROUND
Federated Advisers, a Delaware business trust organized on April 11, 1989, is a
registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institututions nationwide. More
than 100,000 professionals have elected Federated funds for their clients.
Both the Fund and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors and could
result in severe penalties.
Kathleen Foody-Malus has been the Fund's portfolio manger since July 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. Ms. Foody-Malus
received her M.B.A. in Accounting/Finance from the University of Pittsburgh.
DISTRIBUTION OF 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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
The distributor may offer to pay financial institutions an amount up to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
The distributor will pay dealers an amount equal to 5.50% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial
institutions that waive all or any portion of the advance payments.
DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class A Shares, Class B Shares and Class C
Shares will pay a fee to the distributor in an amount computed at an annual rate
of.25%,.75%, and.75%, respectively, of the average daily net assets of each
class of Shares to finance any activity which is principally intended to result
in the sale of Shares subject to the Distribution Plan. For Class C Shares, the
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales services or distribution-related support services as agents for their
clients or customers. With respect to Class B Shares, because distribution fees
to be paid by the Fund to the distributor may not exceed an annual rate of.75%
of each class of Shares' average daily net assets, it will take the distributor
a number of years to recoup the expenses it has incurred for its distribution
and distribution-related services pursuant to the Plan. The Fund is not
currently making payments for Class A Shares under the Distribution Plan, nor
does it anticipate doing so in the immediate future.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts
("Shareholder Services"). Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
Federated Securities Corp. and Federated Shareholder Services may offer to pay a
fee, from their own assets, to financial institutions as financial assistance
for providing substantial sales services, distribution-related support services,
or shareholder services. The support may include sponsoring sales, educational
and training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM
ADMINISTRATIVE AVERAGE AGGREGATE
FEE DAILY NET ASSETS
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.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 Services Company may choose voluntarily to waive a portion of its fee.
EXPENSES OF THE FUND AND SHARES
Holders of Class A Shares, Class B Shares, and Class C Shares pay their
allocable portion of Fund and portfolio expenses.
The Fund expenses for which holders of Class A Shares, Class B Shares, and Class
C Shares pay their allocable portion include, but are not limited to: the cost
of organizing the Fund and continuing its existence; registering the Fund with
federal and state securities authorities; Directors' fees; auditors' fees; the
cost of meetings of Directors; legal fees of the Fund; association membership
dues; and such non-recurring and extraordinary items as may arise from time to
time.
The portfolio expenses for which holders of Class A Shares, Class B Shares, and
Class C Shares pay their allocable portion include, but are not limited to:
registering the portfolio and Shares of the portfolio; investment advisory
services; taxes and commissions; custodian fees; insurance premiums; auditors'
fees; and such non-recurring and extraordinary items as may arise from time to
time.
At present, the only expenses which are allocated specifically to Class A
Shares, Class B Shares, and Class C Shares as classes are expenses under the
Fund's Distribution Plan and fees for Shareholder Services. However, the
Directors reserve the right to allocate certain other expenses to holders of
Class A Shares, Class B Shares, and Class C Shares as it deems appropriate
("Class Expenses"). In any case, Class Expenses would be limited to:
distribution fees; transfer agent fees as identified by the transfer agent as
attributable to holders of Class A Shares, Class B Shares, and Class C Shares;
fees for Shareholder Services; printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders; registration fees paid to the Securities
and Exchange Commission and registration fees paid to state securities
commissions; expenses related to administrative personnel and services as
required to support holders of Class A Shares, Class B Shares, and Class C
Shares; legal fees relating solely to Class A Shares, Class B Shares, and Class
C Shares and Directors' fees incurred as a result of issues relating solely to
Class A Shares, Class B Shares, and Class C Shares.
- -------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All Shares of each portfolio
in the Fund have equal voting rights, except that in matters affecting only a
particular portfolio or class, only shares of that portfolio or class are
entitled to vote.
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 Directors or by 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 of
all series entitled to vote.
As of July 5, 1996, Merrill Lynch, Pierce, Fenner & Smith (as record owner
holding Class F Shares for its clients), owned 102,358,225 of Class F Shares
(43.05%) 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 of 1986, 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.
STATE AND LOCAL TAXES
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 for each class
of Shares including Class F Shares (as described under "Other Classes of
Shares").
Total return represents the change, over a specified period of time, in the
value of an investment in each class of Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class of Shares 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 each class of Shares, and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges such as
the maximum sales charge or contingent deferred sales charge, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, Class C Shares, and Class F Shares.
From time to time, advertisements for Class A Shares, Class B Shares, Class C
Shares, and Class F Shares of the Fund may refer to ratings, rankings, and other
information in certain financial publications and/or compare the performance of
Class A Shares, Class B Shares, Class C Shares, and Class F Shares to certain
indices.
- --------------------------------------------------------------------------------
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class F Shares. Class F
Shares are sold primarily to customers of financial institutions and are subject
to a front-end sales charge, a contingent deferred sales charge, and a minimum
initial investment of $1500, unless the investment is in a retirement account,
in which case the minimum initial investment is $50.
Class A Shares, Class B Shares, Class C Shares, and Class F Shares are subject
to certain of the same expenses. Expense differences, however, between Class A
Shares, Class B Shares, Class C Shares, and Class F Shares may affect the
performance of each class.
To obtain more information and a prospectus for Class F Shares, investors may
call 1-800-341-7400 or contact their financial institution.
ADDRESSES
- --------------------------------------------------------------------------------
Federated Government Income Securities, Inc.
Class A Shares, Class B Shares Federated Investors Tower
and Class C Shares 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 P.O. Box 8600
Trust Company Boston, Massachusetts 02266-8600
- --------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services P.O. Box 8600
Company Boston, Massachusetts 02266-8600
- --------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- --------------------------------------------------------------------------------
FEDERATED GOVERNMENT
INCOME SECURITIES, INC.
(FORMERLY, GOVERNMENT INCOME
SECURITIES, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
August 2, 1996
[LOGO FEDERATED INVESTORS]
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 313912206
Cusip 313912305
Cusip 313912404
G01090-01 (8/96)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
(FORMERLY, GOVERNMENT INCOME SECURITIES, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
combined prospectus for Class A Shares, Class B Shares, and Class C
Shares and the prospectus for Class F Shares of Federated Government
Income Securities, Inc. (the ``Fund') each dated August 2, 1996. This
Statement is not a prospectus itself. You may request a copy of either
prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated August 2, 1996
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp is the distributor of the Fund
and is a subsidiary of Federated Investors
CUSIP 313912206
CUSIP 313912305
CUSIP 313912404
CUSIP 313912107
8040406B (8/96)
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
TYPES OF INVESTMENTS 1
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS 2
FUTURES AND OPTIONS TRANSACTIONS 2
LENDING OF PORTFOLIO SECURITIES 4
REPURCHASE AGREEMENTS 4
REVERSE REPURCHASE AGREEMENTS 4
PORTFOLIO TURNOVER 5
INVESTMENT LIMITATIONS 5
CRITERIA FOR LIQUIDITY OF RESTRICTED
SECURITIES 6
FEDERATED GOVERNMENT INCOME
SECURITIES, INC. MANAGEMENT 7
THE FUNDS 10
FUND OWNERSHIP 11
DIRECTORS COMPENSATION 12
INVESTMENT ADVISORY SERVICES 13
ADVISER TO THE FUND 13
ADVISORY FEES 13
BROKERAGE TRANSACTIONS 13
OTHER SERVICES 14
FUND ADMINISTRATION 14
CUSTODIAN AND PORTFOLIO ACCOUNTANT 14
TRANSFER AGENT 14
INDEPENDENT AUDITORS 14
PURCHASING SHARES 14
DISTRIBUTION PLAN (CLASS A SHARES,
CLASS B SHARES, AND CLASS C SHARES ONLY)
AND SHAREHOLDER SERVICES 14
CONVERSION TO FEDERAL FUNDS 15
PURCHASES BY SALES REPRESENTATIVES,
FUND DIRECTORS, AND EMPLOYEES 15
EXCHANGING SECURITIES FOR FUND SHARES 15
DETERMINING NET ASSET VALUE 16
DETERMINING MARKET VALUE OF SECURITIES 16
EXCHANGE PRIVILEGE (CLASS F SHARES ONLY) 16
REDUCED SALES CHARGE 16
REQUIREMENTS FOR EXCHANGE 16
TAX CONSEQUENCES 17
MAKING AN EXCHANGE 17
REDEEMING SHARES 17
REDEMPTION IN KIND 17
TAX STATUS 17
THE FUND'S TAX STATUS 17
SHAREHOLDERS' TAX STATUS 18
TOTAL RETURN 18
YIELD 18
CURRENT DISTRIBUTIONS 18
PERFORMANCE COMPARISONS 19
ECONOMIC AND MARKET INFORMATION 19
ABOUT FEDERATED INVESTORS 20
MUTUAL FUND MARKET 20
INSTITUTIONAL CLIENTS 20
TRUST ORGANIZATIONS 20
BROKER/DEALERS AND BANK BROKER/DEALER
SUBSIDIARIES 20
FINANCIAL STATEMENTS 20
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. At a
meeting of the Board of Directors (`Directors'') held on February 26,
1996, the Directors approved an amendment to the Articles of Incorporation
to change the name of Government Income Securities, Inc. to Federated
Government Income Securities, Inc.
Shares of the Fund are currently offered in four classes known as Class A
Shares, Class B Shares, Class C Shares, and Class F Shares (individually
and collectively referred to as `Shares'' as the context may require).
This Statement of Additional Information relates to all classes of Shares
of the Fund.
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:
othe full faith and credit of the U.S. Treasury (such as Farmers Home
Administration and Government National Mortgage Association);
othe issuer's right to borrow from the U.S. Treasury (such as Farmers
Home Administration);
othe 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
othe credit of the agency or instrumentality issuing the obligations
(such as Federal Home Loan Banks, Farmers Home Administration, Farm
Credit Banks, Federal National Mortgage Association, and Federal
Home Loan Mortgage Corporation).
COLLATERALIZED MORTGAGE OBLIGATIONS (``CMOS'')
The Fund does not intend to set a specific percentage limitation on
the amount of CMOs in the portfolio, including inverse floaters and
stripped mortgage-related securities.
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 set a specific percentage limitation on these
types of transactions.
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
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 29, 1996 and February 28, 1995, the portfolio turnover rates were
161% and 143%, 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 pledge, mortgage, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets at the time of the
borrowing. 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, except for certain restricted securities which meet the
criteria for liquidity as established by the Directors.
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 total
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. The Fund will
not purchase put options on securities unless the securities are held
in the Fund's portfolio.
CRITERIA FOR LIQUIDITY OF RESTRICTED SECURITIES
The ability of the Board of Directors (``Directors') to determine the
liquidity of certain restricted securities is permitted under a
Securities and Exchange Commission (``SEC') Staff position set forth in
the adopting release for Rule 144A under the Securities Act of 1933 (the
``Rule'). The Rule is a non-exclusive safe-harbor for certain secondary
market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale
under the Rule. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities to the
Directors. The Directors may consider the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace
trades.
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 or borrow money 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.
FEDERATED GOVERNMENT INCOME SECURITIES, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated 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. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
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; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
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.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President and Director
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Director of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp.; and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some 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: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Master Trust; Federated Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3
Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; Fortress Utility Fund, Inc.;
High Yield Cash Trust; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S.
Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors 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 102,358,225 shares (43.05%) of Class F
Shares of the Fund as of July 5, 1996.
DIRECTORS COMPENSATION
NAME , AGGREGATE TOTAL COMPENSATION PAID
POSITION WITH COMPENSATION FROM TO DIRECTORS FROM
CORPORATION CORPORATION*# CORPORATION AND FUND COMPLEX +
John F. Donahue, $-0- $-0 for the Fund and 54 other
Chairman and Director investment companies in the
Fund Complex
Richard B. Fisher, $-0- $-0- for the Fund and 6 other
President and Director investment companies in
the Fund Complex
Thomas G. Bigley++, $3,386 $86,331 for the Fund and 54
other
Director investment companies in the
Fund Complex
John T. Conroy, Jr., $3,590 $115,760 for the Fund and 54
other
Director investment companies in the
Fund Complex
William J. Copeland, $3,590 $115,760 for the Fund and 54
other
Director investment companies in the
Fund Complex
James E. Dowd, $3,590 $115,760 for the Fund and 54
other
Director investment companies in the
Fund Complex
Lawrence D. Ellis, M.D., $3,386 $104,898 for the Fund and 54
other
Director investment companies in the
Fund Complex
Edward L. Flaherty, Jr., $3,590 $115,760 for the Fund and 54
other
Director investment companies in the
Fund Complex
Peter E. Madden, $3,386 $104,898 for the Fund and 54
other
Director investment companies in the
Fund Complex
Gregor F. Meyer, $3,386 $104,898 for the Fund and 54
other
Director investment companies in the
Fund Complex
John E. Murray, Jr., $3,386 $104,898 for the Fund and 54
other
Director investment companies in the
Fund Complex
Wesley W. Posvar, $3,386 $104,898 for the Fund and 54
other
Director investment companies in the
Fund Complex
Marjorie P. Smuts, $3,386 $104,898 for the Fund and 54
other
Director investment companies in the
Fund Complex
*Information is furnished for the fiscal year ended February 29, 1996.
#The aggregate compensation is provided for the Corporation which is
comprised of one portfolio.
+The information is provided for the last calendar year.
++Mr. Bigley served on 39 investment companies in the Federated Funds
Complex from January 1 through September 30, 1995. On October 1, 1995, he
was appointed a Trustee on 15 additional Federated Funds.
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 29, 1996 and February 28, 1995 and 1994, the Fund's adviser earned
$18,231,613, $22,038,188, and $28,541,303, respectively, of which
$6,060,604, $6,801,420, and $7,242,625, 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.
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 29, 1996 and February 28, 1995 and
1994, the Fund paid no brokerage commissions on brokerage transactions.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services necessary to the Fund for a fee as
described in the respective prospectuses. From March 1, 1994 to March 1,
1996, Federated Administrative Services served as the Fund's Administrator.
Prior to March 1, 1994, Federated Administrative Services, Inc. served as
the Fund's Administrator. Both former Administrators are subsidiaries of
Federated Investors. For purposes of this Statement of Additional
Information, Federated Services Company, Federated Administrative Services,
and Federated Administrative Services, Inc. may hereinafter collectively be
referred to as the `Administrators.'' For the fiscal years ended February
29, 1996 and February 28, 1995 and 1994, the Administrators earned
$1,839,595, $2,232,807, and $2,638,423, respectivley. Dr. Henry J.
Gailliot, an officer of Federated Advisers, the adviser to the Fund, holds
approximately 20% of the outstanding common stock and serves as a director
of Commercial Data Services, Inc., a company which provides computer
processing services to Federated Services Company.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for
securities and cash of the Fund. Federated Services Company, Pittsburgh,
PA, provides certain accounting and recordkeeping services with respect to
the Fund's portfolio investments. The fee paid for this service is based
upon the level of the Fund's average net assets for the period plus out-of-
pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary shareholder
records. For its services, the transfer agent receives a fee based on the
size, type and number of transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, PA.
PURCHASING SHARES
Except under certain circumstances described in the respective
prospectuses, Shares are sold at their net asset value (plus a sales charge
on Class A Shares and Class F Shares only) on days the New York Stock
Exchange is open for business. The procedure for purchasing shares of the
Fund is explained in the respective prospectuses under `How to Purchase
Shares''and "Investing in Class F Shares."
DISTRIBUTION PLAN (CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES ONLY)
AND SHAREHOLDER SERVICES
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, (Class A Shares, Class B Shares, and
Class C Shares only) the Directors expect that the Fund will be able to
achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objective. By identifying
potential investors whose needs are served by the Fund's objective, and
properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended February 29, 1996, payments in the amount of
$6,077,204 were made pursuant to the Shareholder Services Plan for Class F
Shares. Class A Shares, Class B Shares, and Class C Shares did not exist
prior to August 2, 1996.
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. Federated Shareholder Services Company 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 and their
immediate family, or any investment dealer who has a sales agreement with
Federated Securities Corp., and their spouses and children under 21, may
buy shares at net asset value without a sales charge and are not subject to
a redemption fee to the extent the financial institution through which the
shares are sold agrees to waive any initial payment to which it might
otherwise be entitled. Shares may also be sold without a sales charge 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.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange qualifying securities they already own for Shares,
or they may exchange a combination of qualifying securities and cash for
Shares. Any qualifying securities to be exchanged must meet the investment
objective and policies of the Fund, must have readily ascertainable market
value, must be liquid, and must not be subject to restrictions on resale.
The Fund will prepare a list of securities which are eligible for
acceptance and furnish this list to brokers upon request. The Fund reserves
the right to reject any security, even though it appears on the list, and
the right to amend the list of acceptable securities at any time without
notice to brokers or investors.
An investment broker acting for an investor should forward the securities
in negotiable form with an authorized letter of transmittal to Federated
Securities Corp. Federated Securities Corp. will determine that transmittal
papers are in good order and forward to the Fund's custodian, State Street
Bank and Trust Company. The Fund will notify the broker of its acceptance
and valuation of the securities within five business days of their receipt
by State Street Bank.
The Fund values such securities in the same manner as the Fund values its
portfolio securities. The basis of the exchange will depend upon the net
asset value of Shares on the day the securities are valued. One Share will
be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription, conversion, or other rights attached to the securities become
the property of the Fund, along with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the cost basis of the securities
exchanged for Shares, a gain or loss may be realized by the investor.
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 respective
prospectuses.
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 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 (CLASS F SHARES ONLY)
This section relates only to Class F Shares of the Fund. For information
regarding the Exchange Privilege for Class A Shares, Class B Shares, and
Class C Shares of the Fund, please see the prospectus for these classes of
Shares.
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
Class F Shares for Shares in certain other Federated Funds (which are sold
with a sales charge different from that of the Fund or with no sales charge
and which are advised by subsidiaries or affiliates of Federated Investors)
without the assessment of a contingent deferred sales charge on the
exchanged Shares.
The order also allows certain other funds that are not advised by
subsidiaries or affiliates of Federated Investors, which do not have a
sales charge, to exchange their shares for Class F Shares on a basis other
than their current offering price. These exchanges may be made to the
extent that such shares were acquired in a prior exchange, at net asset
value, for shares of a Federated Fund carrying a sales charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Class F Shares having a net
asset value equal to the minimum investment requirements of the fund into
which the exchange is being made. 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, Class F Shares submitted
for exchange are redeemed and the proceeds invested in Class F Shares of
the other fund.
Further information on the exchange privilege and prospectuses for Class F
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 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 agents. 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 agents. 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. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized
or fraudulent telephone instructions.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions may be subject to
a contingent deferred sales charge. Redemption procedures are explained in
the respective prospectuses under `How to Redeem Shares'' or "Redeeming
Class F Shares." Although the transfer agent 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.
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 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. The Fund's 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 Class F Shares' average annual total returns for the one-year and five-
year periods ended February 29, 1996, and for the period from April 4, 1986
(effective date of the Fund's registration statement), to February 29,
1996, were 7.61%, 6.49%, and 7.45%, respectively. Class A Shares, Class B
Shares, and Class C Shares did not exist prior to August 2, 1996.
The average annual total return for each class of Shares of 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 charge,
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. Occassionally, total return, which does not reflect the
effect of the sales charge, may be quoted in advertising.
YIELD
The yield for Class F Shares for the thirty-day period ended February 29,
1996, was 5.62%. Class A Shares, Class B Shares, and Class C Shares did not
exist prior to August 2, 1996.
The yield for each class of Shares is determined by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by each class of Shares over a thirty-day period by the
maximum offering price per share of the respective class 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 12-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 a
class of Shares, 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 29, 1996, 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 of each class of Shares 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 the Fund's or a class of Shares' 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 LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is a universe of
fixed rate securities backed by mortgage pools of Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), and Federal National Mortgage Association (FNMA).
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 all four classes of Shares
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 each class of Shares based on monthly
reinvestment of dividends over a specified period of time.
From time to time , as it deems appropriate, the Fund may advertise the
performance of a class of Shares, 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 various sales charges on Class A Shares, Class B Shares, Class C
Shares, and Class F Shares.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these dvelopments by Fund portfolio managers and their views and analysis
on how such developments could affect the Funds. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making-structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio managers,
analysts, and traders dedicated to specific market sectors. These traders
handle trillions of dollars in annual trading volume.
In the government sector, as of December 1995, Federated Investors managed
9 mortgage-backed, 5 government/agency and 17 government money market
mutual funds, with assets approximating $7.7 billion, $1.7 billion and
$20.9 billion, respectively. Federated trades approximately $300 million in
U.S. government and mortgage-backed securities daily and places
approximately $13 billion in repurchase agreements each day. Federated
introduced the first U.S. government fund to invest in the U.S. government
bond securities in 1969. Federated has been a major force in the short- and
intermediate-term government markets since 1982 and currently manages
nearly $10 billion in government funds within these maturity ranges.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive
Vice President, oversees Federated's domestic fixed income management.
Henry A. Frantzen, Executive Vice President, oversees the management of
Federated's international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mututal funds. These investors, as well as businesses and
institutions, have entrusted over $3 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. Federated's service to
financial professionals and institutions has earned it high rankings in
several DALBAR Surveys. The marketing effort to these firms is headed by
James F. Getz, President, Broker/Dealer Division.
*Source: Investment Company Institute
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended February 29, 1996, are
incorporated herein by reference to the Annual Report for the Fund dated
February 29, 1996 (File Nos. 2-74191 and 811-3266). A copy of the Report
may be obtained without charge by contacting the Fund.
