[Graphic]
Federated Government Income Securities, Inc.
12th Semi-Annual Report
August 31, 1998
Established 1986
President's Message
[Graphic]
Dear Fellow Shareholder:
Federated Government Income Securities, Inc. was established in 1986, and I am
pleased to present its 12th Semi-Annual Report. As of August 31, 1998, the
fund's assets totaled $1.5 billion, serving over 45,000 shareholders. This
report covers the first half of the fund's fiscal year which is the six-month
period from March 1, 1998 through August 31, 1998. It begins with Kathy
Foody-Malus, Vice President of Federated Advisers, discussing the economic
influences on the bond market, the fund's performance, her strategies and
outlook. During the six-month reporting period ended August 31, 1998, the fund's
share price increased as individual and institutional investors purchased U.S.
government securities as safe havens with attractive yields.
Following Kathy's discussion are three additional items of shareholder interest.
First is a series of graphs showing the fund's long-term investment performance.
Second is a complete listing of the fund's holdings in U.S. government
securities, and third is the publication of the fund's financial statements.
The fund's portfolio focuses exclusively on a mix of government securities
including Treasury, agency and mortgage-backed securities. At the end of the
reporting period, 66% of the fund's assets were invested in mortgage-backed
securities. These securities are issued by the Government National Mortgage
Association, the Federal National Mortgage Corporation and the Federal Home Loan
Mortgage Corporation, and are guaranteed as to principal by the U.S. government,
its agencies or instrumentalities.*
Currently, the fund's duration target is five years, and the average coupon of
its holdings is 7.17%. The fund's portfolio continues to be rated AAAf by
Standard & Poor's Ratings Group, the highest quality rating available for a
mutual fund.**
* Fund shares are not guaranteed.
** An AAAf rating means that the fund's portfolio holdings and counterparties
provide extremely strong protection against losses from credit defaults. Ratings
are subject to change and do not remove market risks.
Over the six-month reporting period, the fund's shareholders experienced the
price performance of U.S. Treasury securities-which have benefited from
declining yields-and enjoyed the income advantage of the mortgage-backed
securities market. The fund's total return was consistent with that of the
overall 5-year Treasury market as well as the average U.S. government bond fund.
Individual share class total return performance and income distributions
follow.**
<TABLE>
<CAPTION>
TOTAL INCOME
RETURN DISTRIBUTIONS NET ASSET VALUE INCREASE
<S> <C> <C> <C>
Class A Shares 4.69% $0.26 $8.84 to $8.99 = 1.69%
Class B Shares 3.97% $0.23 $8.84 to $8.96 = 1.69%
Class C Shares 4.20% $0.23 $8.84 to $8.98 = 1.69%
Class F Shares 4.58% $0.26 $8.83 to $8.97 = 1.69%
</TABLE>
The one-year total returns for the fund's Class A, B, C, and F Shares as of
August 31, 1998 were 10.73%, 9.62%, 9.83%, and 10.74%, respectively, based on
net asset value.**
Thank you for participating in the income opportunities of
U.S. government securities through Federated Government Income
Securities, Inc. If you have any questions or comments, please do not
hesitate to write.
Very sincerely yours,
[Graphic]
Richard B. Fisher
President
October 15, 1998
** Performance quoted is based on net asset value, reflects past performance
and is not indicative of future results. Investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. Total returns, based on offering price, for Class
A, B, C, and F Shares were (0.06%), (1.69%), 3.16%, and 2.49%, respectively, for
the six-month reporting period. The fund's one-year total returns as of August
31, 1998, based on offering price, for Class A, B, C, and F Shares were 5.73%,
3.77%, 8.74%, and 8.50%, respectively.
Investment Review
[Graphic]
Kathy Foody-Malus
Vice President
Federated Advisers
[Graphic]
WHAT ARE YOUR COMMENTS ON THE BOND MARKET OVER THE FIRST HALF OF THE
FUND'S FISCAL YEAR, WHICH SAW MINIMAL INFLATION, EXTREME STOCK MARKET
VOLATILITY AND OVERSEAS ECONOMIC DISTRESS?
During the first five months of the semi-annual reporting period, the U.S.
Treasury market traded in a narrowly defined trading range of 25 basis points.
However, this trend reversed during the month of August 1998 when the stock
market started to crack due to disappointing earnings expectations. Other
factors driving the U.S. Treasury market included the financial crises in
Southeast Asia, Russia, Latin America, and the potential that these crises would
spread to other countries. The U.S. Treasury market was the main beneficiary as
the "flight to quality" sent bond prices soaring and yields plummeting to levels
not seen in 30 years. The 30-year Treasury yield as of August 31, 1998 was
5.26%.
[Graphic]
HOW EXTENSIVE WAS THE FLIGHT TO QUALITY TO TREASURIES DURING THE REPORTING
PERIOD, AND HOW DID THE MORTGAGE-BACKED SECURITIES MARKET FARE RELATIVE TO
THE TREASURY MARKET?
The massive flight to quality occurred during August 1998. This was due to
investors bailing out of equities and lower quality fixed-income spread sectors.
Although mortgage-backed securities did underperform U.S. Treasuries during this
period, they outperformed lower quality fixed-income spread products. For
example, during the month of August, the mortgage-backed securities market
underperformed U.S. Treasuries by 0.88% compared to investment-grade corporate
bonds, which underperformed by 2.66%. An area of concern for mortgage-backed
securities investors has been the potential increase in refinancing activity.
However, the difference between today's refinancing wave versus the one that
occurred in the early 1990s is significant. During the early 1990s, many
homeowners were able to take advantage of a significant refinancing opportunity
for the first time and did so with a vengeance. Since we have been in an
environment of relatively low rates for a number of years, the potential
refinancing advantages have not been as sensational.
[Graphic]
WHAT HAS BEEN YOUR STRATEGY FOR THE FUND IN THESE MARKET CONDITIONS?
The strategy of the fund continues to be balancing the price performance of U.S.
Treasury securities with the income advantage of the mortgage-backed securities
market. In this historically low interest rate environment, the portfolio
continues to favor mortgage-backed securities that are less sensitive to
prepayments. These securities are issued by the Government National Mortgage
Association ("GNMA"), and are backed by the full faith and credit of the U.S.
government. The typical GNMA borrower tends to be slower to take advantage of
refinancing due to income constraints and the inability to finance the up-front
costs. The U.S. Treasury component favors the longer maturity sector to aid in
maintaining the overall portfolio duration of 5 years.
[Graphic]
HOW WAS THE FUND'S PORTFOLIO ALLOCATED AT THE END OF THE REPORTING
PERIOD?
The portfolio continued to have a more than 70% weighting in mortgage-backed
securities due to attractive valuations versus other high-grade, fixed-income
assets. As of August 31, 1998, the portfolio composition was:
Percentage of
Net Assets
Federal National Mortgage Association 31.8%
U.S. Treasury and Agency Obligations 26.5%
Government National Mortgage Association 27.7%
Federal Home Loan Mortgage Corporation 12.0%
[Graphic]
HOW DID FEDERATED GOVERNMENT INCOME SECURITIES, INC. PERFORM FOR ITS
SHAREHOLDERS IN TERMS OF TOTAL RETURN AND INCOME FOR THE SIX-MONTH
REPORTING PERIOD ENDED AUGUST 31, 1998?
For the first half of the fund's fiscal year, Class A Shares of the fund
produced a total return of 4.69%, based on net asset value. Class B, C, and F
Shares produced total returns of 3.97%, 4.20%, and 4.58%, respectively, based on
net asset value.*
The fund's returns kept pace with those of the market overall. For the six-month
reporting period ended August 31, 1998, the Merrill Lynch 5- Year and 10-Year
Treasury Indexes returned 5.48% and 7.03%, respectively.** For the same period,
the total return for the Lipper General U.S. Government Funds Average was
4.84%.+
In terms of income, the fund's Class A, B, C, and F Shares paid monthly
dividends totaling $0.26, $0.23, $0.23, and $0.26 per share, respectively.
* Performance quoted is based on net asset value, reflects past performance,
and is not indicative of future results. Investment return and principal value
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Total returns based on offering price for
Class A, B, C, and F Shares were (0.06%), (1.69%), 3.16%, and 2.49%,
respectively, for the six-month reporting period.
** Merrill Lynch 5-Year and 10-Year Treasury Note Indexes comprise the most
recently issued 5-year and 10-year U.S. Treasury notes. Index returns are
calculated as total returns for periods of 1, 3, 6, and 12 months as well as
year-to-date. These indexes are unmanaged, and investments cannot be made in an
index.
+ Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category indicated. These figures do not reflect sales charges.
[Graphic]
WITH THE RECENT FEDERAL RESERVE BOARD EASING, OR CUTS IN RATES, WHAT IS YOUR
OUTLOOK FOR THE REMAINDER OF THE FUND'S FISCAL YEAR, AND HOW MAY IT IMPACT YOUR
STRATEGY?
Chairman Greenspan, throughout the month of September 1998, expressed concern
that the Asian contagion is far from being under control. The impact to the U.S.
economy could produce economic "headwinds" that would slow U.S. growth into
1999. The typical time period for the economy to feel the impact of an interest
rate movement is 6 to 9 months. In recent speeches, Greenspan and other Federal
Reserve Board governors have indicated that they could move sooner to head off
an economic slowdown in the U.S.
[Graphic]
WHAT DOES AN INTEREST RATE CUT MEAN TO SHAREHOLDERS OF FEDERATED GOVERNMENT
INCOME SECURITIES, INC.?
The current portfolio composition of two-thirds mortgage-backed securities and
one-third U.S. Treasuries should benefit shareholders. The potential reward is
in the form of capital appreciation from U.S. Treasuries as rates decline and an
attractive income stream from mortgage-backed securities in a lower rate
environment.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
INITIAL INVESTMENT:
IF YOU MADE AN INITIAL INVESTMENT OF $13,000 IN THE CLASS F SHARES OF FEDERATED
GOVERNMENT INCOME SECURITIES, INC. ON 4/4/86, REINVESTED DIVIDENDS AND CAPITAL
GAINS, AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD HAVE BEEN WORTH $31,831
ON 8/31/98. YOU WOULD HAVE EARNED A 7.49%* AVERAGE ANNUAL TOTAL RETURN FOR THE
INVESTMENT LIFE SPAN.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 9/30/98, the Class A Shares' average annual 1-year and since- inception
(8/5/96) total returns were 5.93% and 7.14%, respectively. Class B Shares'
average annual 1-year and since-inception (8/5/96) total returns were 4.13% and
6.69%, respectively. Class C Shares' average annual 1-year and since-inception
(8/5/96) total returns were 8.91% and 8.68%, respectively. Class F Shares'
average annual 1-year, 5-year, and 10-year total returns were 8.65%, 6.47%, and
7.92%, respectively.
[Graphic] See appendix A1.
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 1.00% sales
charge and 1.00% contingent deferred sales charge for Class F Shares.
Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
** The total return stated takes into account the 4.50% sales charge for Class
A Shares, the 5.50% contingent deferred sales charge for Class B Shares, the
1.00% contingent deferred sales charge for Class C Shares, and the 1.00% sales
charge and the 1.00% contingent deferred sales charge for Class F Shares.
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
ONE STEP AT A TIME:
$1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR
FOR 12 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO
$21,288.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class F Shares of Federated
Government Income Securities, Inc. on 4/4/86, reinvested your dividends and
capital gains, and did not redeem any shares, you would have invested only
$13,000, but your account would have reached a total value of $21,288* by
8/31/98. You would have earned an average annual
total return of 7.47%.
A practical investment plan helps you pursue long-term performance from U.S.
government securities. Through systematic investing, you buy shares on a regular
basis and reinvest all earnings. An investment plan works for you when you
invest only $1,000 annually. You can take it one step at a time. Put time,
money, and compounding to work.
[Graphic] See appendix A2
* This chart assumes that the subsequent annual investments are made on the
last day of each anniversary month. No method of investing can guarantee a
profit or protect against loss in down markets. However, by investing regularly
over time and buying shares at various prices, investors can purchase more
shares at lower prices. All accumulated shares have the ability to pay income to
the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue purchases
through periods of low price levels.
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR CURRENT INCOME
Twelve years ago, in April 1986, Anne and Denny Laughlin, an imaginary working
couple with no children, had to decide how to invest a $100,000 inheritance from
her late father's estate. They chose Class F Shares of Federated Government
Income Securities, Inc. because the fund invests in government securities which
traditionally are some of the safest, most creditworthy securities issued in
America.+
They like the way they can use their account for an occasional extravagance-like
the $50,000 Jaguar they bought to celebrate their anniversary-without touching
their original principal.
The Laughlin's account totaled $244,854 as of August 31, 1998 for an average
annual total return of 7.49%.*
[Graphic] See appendix A3
+ Fund shares are not guaranteed and their value will fluctuate.
* This hypothetical scenario is provided for illustrative purposes only and
does not represent the results obtained by any particular shareholder.
Past performance does not guarantee future results.
Federated Government Income Securities, Inc.
Portfolio of Investments
August 31, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM OBLIGATIONS--98.0%
FEDERAL HOME LOAN BANK--1.5%
$ 22,325,000 5.925%, 4/9/2008 $ 22,701,400
FEDERAL HOME LOAN MORTGAGE CORP.--1.4%
12,742,291 9.500%, 8/1/2016 13,749,696
8,266,116 7.500%, 1/1/2027 8,490,872
Total 22,240,568
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--5.6%
24,400,000 Series 1127-G, 8.500%, 8/15/2006 26,230,000
10,000,000 Series 1347-I, 8.000%, 8/15/2022 10,652,000
7,000,000 Series 2081-ED, 7.500%, (Interest only), 8/15/2028 1,944,688
22,000,000 Series 1591-PV, 6.250%, 10/15/2023 22,258,280
23,991,000 Series 2024-E, 6.000%, 1/15/2028 22,749,946
Total 83,834,914
FEDERAL NATIONAL MORTGAGE ASSOCIATION--22.5%
49,914,480 7.500%, 7/1/2028 50,912,769
48,000,000(a)7.000%, 9/1/2028 48,885,120
77,500,000(a)6.500%, 9/1/2028 77,814,650
101,620,347 6.500%, 6/1/2013 - 7/1/2028 102,202,581
59,360,452 6.000%, 8/1/2013 - 7/1/2028 58,699,155
Total 338,514,275
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--9.3%
58,499,482 Series 97-33I, 8.500%, (Interest only), 4/25/2024 4,021,839
20,893,252 Series 97-33I, 8.000%, 10/25/2006 21,642,275
25,000,000 Series 97-33I, 6.500%, 10/18/2012 25,564,563
10,324,345 Series 97-33I, 6.500%, 2/25/2024 10,703,042
30,000,000 Series 97-33I, 6.500%, 2/25/2024 29,985,000
16,000,000 Series 97-33I, 6.500%, 3/25/2024 16,308,960
13,970,000 Series 97-33I, 6.500%, 3/25/2024 14,459,788
11,075,000 Series 97-33I, 6.250%, 10/25/2023 11,209,672
52,000,000 Series 97-33I, (Interest-only Inverse), 2.844%, 5/18/2028 5,866,120
Total 139,761,259
</TABLE>
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM OBLIGATIONS--CONTINUED
FEDERAL HOME LOAN MORTGAGE CORPORATION AGENCY DEBENTURE--5.0%
$ 73,800,000 5.750%, 7/15/2003 - 4/15/2008 $ 74,565,778
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--27.1%
1,108,228 13.000%, 1/15/2011 - 11/15/2014 1,303,664
4,350,292 12.500%, 4/15/2010 - 7/15/2015 5,081,104
19,670,768 12.000%, 5/15/2011 - 1/15/2016 22,824,940
6,648,673 11.000%, 12/15/2009 - 10/15/2019 7,504,362
5,268,031 10.500%, 3/15/2016 5,891,976
267,137 9.000%, 2/15/2009 287,255
37,233,000 8.000%, 9/15/2028 38,629,238
90,233,701 8.000%, 6/15/2017 - 2/15/2028 93,994,980
107,460,696 7.500%, 4/15/2027 - 4/15/2028 110,684,512
62,800,689 7.000%, 6/15/2028 - 8/15/2028 64,115,736
56,615,107 6.500%, 10/15/2023 - 5/15/2024 57,322,796
Total 407,640,563
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION REMIC--0.6%
14,233,060 Series 97-7PI, 8.0% (Interest Only), 5/16/2027 3,807,343
16,694,831 Series 97-13PI, 8.0% (Interest Only), 9/16/2027 4,799,764
Total 8,607,107
UNITED STATES TREASURY SECURITIES--25.0%
22,000,000 12.000%, 5/15/2005 30,533,140
14,600,000 11.250%, 2/15/2015 24,026,782
27,300,000 10.750%, 8/15/2005 36,239,931
15,000,000 9.250%, 2/15/2016 21,451,050
40,800,000 9.000%, 11/15/2018 58,453,344
78,225,000 8.125%, 8/15/2019 - 5/15/2021 105,032,008
39,500,000 5.875%, 9/30/2002 40,716,205
16,100,000 5.750%, 10/31/2002 16,526,328
3,300,000 5.625%, 12/31/2002 3,377,319
115,000,000 0% Principal Strip, 8/15/2017 - 5/15/2018 39,896,080
Total 376,252,187
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $1,442,044,759) 1,474,118,051
</TABLE>
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(B)REPURCHASE AGREEMENTS--10.7%
$ 35,370,000 BT Securities Corp., 5.800%, dated 8/31/1998, due 9/1/1998 $ 35,370,000
77,619,000(c)(d)Morgan Stanley Group, Inc., 5.530%, dated 8/12/1998,
due 9/14/1998 77,619,000
48,000,000(c)(d)Warburg Dillon Reed LLC, 5.530%, dated 8/6/1998,
due 9/14/1998 48,000,000
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 160,989,000
TOTAL INVESTMENTS (IDENTIFIED COST $1,603,033,759)(E) $1,635,107,051
</TABLE>
(a) Indicates securities subject to dollar roll transactions with a total
market value of $126,699,770.
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the portfolio.
The investments in the repurchase agreements are through participation in joint
accounts with other Federated funds.
(c) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase agreement
within seven days if credit of the issuer is downgraded.
(d) Securities held as collateral for future dollar roll transactions.
(e) The cost of investments for federal tax purposes amounts to $1,603,033,759.
The net unrealized appreciation of investments on a federal tax basis amounts to
$32,073,292 which is comprised of $37,817,173 appreciation and $5,743,881
depreciation at August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($1,504,106,186) at August 31, 1998.
The following acronyms are used throughout this portfolio:
LLC --Limited Liability Corporation
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value
(identified and tax cost $1,603,033,759) $1,635,107,051
Income receivable 12,486,391
Receivable for investments sold 29,411,938
Receivable for shares sold 1,151,242
Total assets 1,678,156,622
LIABILITIES:
Payable for investments purchased $ 38,879,144
Payable for shares redeemed 1,097,291
Income distribution payable 7,193,288
Payable for dollar roll transactions 126,280,889
Accrued expenses 599,824
Total liabilities 174,050,436
NET ASSETS for 167,703,800 shares outstanding $1,504,106,186
NET ASSETS CONSIST OF:
Paid in capital $1,778,173,418
Net unrealized appreciation of investments 32,073,292
Accumulated net realized loss on investments (307,468,884)
Undistributed net investment income 1,328,360
Total Net Assets $1,504,106,186
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($171,896,675 / 19,129,636 shares outstanding) $8.99
Offering Price Per Share (100/95.50 of $8.99)* $9.41
Redemption Proceeds Per Share (100.00/100 of $8.99) $8.99
CLASS B SHARES:
Net Asset Value Per Share ($20,720,720 / 2,311,469 shares outstanding) $8.96
Offering Price Per Share (100/100.00 of $8.96) $8.96
Redemption Proceeds Per Share (94.50/100 of $8.96)** $8.47
CLASS C SHARES:
Net Asset Value Per Share ($5,697,762 / 634,424 shares outstanding) $8.98
Offering Price Per Share (100/100.00 of $8.98) $8.98
Redemption Proceeds Per Share (99.00/100 of $8.98)** $8.89
CLASS F SHARES:
Net Asset Value Per Share ($1,305,791,029 / 145,628,271 shares outstanding) $8.97
Offering Price Per Share (100/99.00 of $8.97)* $9.06
Redemption Proceeds Per Share (99.00/100 of $8.97)** $8.88
</TABLE>
* See "What Shares Cost" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar roll expense of $3,557,795) $52,188,500
Expenses:
Investment advisory fee $ 5,781,849
Administrative personnel and services fee 581,269
Custodian fees 65,405
Transfer and dividend disbursing agent fees and expenses 554,235
Directors'/Trustees' fees 11,792
Auditing fees 10,511
Legal fees 4,000
Portfolio accounting fees 89,323
Distribution services fee--Class A Shares 191,890
Distribution services fee--Class B Shares 52,555
Distribution services fee--Class C Shares 14,972
Shareholder services fee--Class A Shares 191,890
Shareholder services fee--Class B Shares 17,518
Shareholder services fee--Class C Shares 4,991
Shareholder services fee--Class F Shares 1,712,884
Share registration costs 22,993
Printing and postage 58,565
Insurance premiums 7,235
Miscellaneous 12,677
Total expenses 9,386,554
Waivers--
Waiver of investment advisory fee $(1,552,433)
Waiver of distribution services fee--Class A Shares (191,890)
Waiver of shareholder services fee--Class F Shares (13,703)
Total waivers (1,758,026)
Net expenses 7,628,528
Net investment income 44,559,972
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 6,563,885
Net change in unrealized appreciation of investments 15,336,918
Net realized and unrealized gain on investments 21,900,803
Change in net assets resulting from operations $66,460,775
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
AUGUST 31, FEBRUARY 28,
1998 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 44,559,972 $ 115,159,955
Net realized gain on investments ($6,563,885 and
$26,969,638, respectively, as computed for federal tax
purposes) 6,563,885 29,943,557
Net change in unrealized appreciation 15,336,918 14,565,744
Change in net assets resulting from operations 66,460,775 159,669,256
NET EQUALIZATION CREDITS (DEBITS)-- -- (123,530)
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (4,505,110) (6,962,087)
Class B Shares (377,882) (388,908)
Class C Shares (105,489) (139,249)
Class F Shares (39,155,661) (107,135,838)
Change in net assets resulting from distributions to
shareholders (44,144,142) (114,626,082)
SHARE TRANSACTIONS--
Proceeds from sale of shares 85,968,965 186,850,576
Net asset value of shares issued to shareholders in payment
of distributions declared 20,136,776 60,263,685
Cost of shares redeemed (205,116,368) (489,191,268)
Change in net assets resulting from share transactions (99,010,627) (242,077,007)
Change in net assets (76,693,994) (197,157,363)
NET ASSETS:
Beginning of period 1,580,800,180 1,777,957,543
End of period (including undistributed net investment income
of $1,328,360 and $912,530, respectively) $1,504,106,186 $ 1,580,800,180
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28,
1998 1998 1997(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.84 $ 8.59 $ 8.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.26 0.62** 0.30
Net realized and unrealized gain (loss) on investments 0.15 0.22 (0.02)
Total from investment operations 0.41 0.84 0.28
LESS DISTRIBUTIONS
Distributions from net investment income (0.26) (0.59) (0.32)
NET ASSET VALUE, END OF PERIOD $ 8.99 $ 8.84 $ 8.59
TOTAL RETURN(B) 4.69% 10.10% 3.34%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.98%* 0.96% 1.03%*
Net investment income 6.47%* 7.13% 6.45%*
Expense waiver/reimbursement(c) 0.45%* 0.49% 0.50%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $171,897 $138,554 $289
Portfolio turnover 94% 264% 97%
</TABLE>
* Computed on an annualized basis.
** Per share information is based upon the average number of shares
outstanding.
(a) Reflects operations for the period from August 5, 1996 (date of initial
public investment) to February 28, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28,
1998 1998 1997(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.84 $ 8.59 $ 8.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.22 0.58 0.28
Net realized and unrealized gain (loss) on investments 0.13 0.20 (0.02)
Total from investment operations 0.35 0.78 0.26
LESS DISTRIBUTIONS
Distributions from net investment income (0.23) (0.53) (0.30)
NET ASSET VALUE, END OF PERIOD $ 8.96 $ 8.84 $ 8.59
TOTAL RETURN(B) 3.97% 9.34% 3.00%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.73%* 1.71% 1.71%*
Net investment income 5.71%* 6.51% 5.80%*
Expense waiver/reimbursement(c) 0.20%* 0.24% 0.26%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $20,721 $10,819 $2,421
Portfolio turnover 94 % 264% 97%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 5, 1996 (date of initial
public investment) to February 28, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS-CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28,
1998 1998 1997(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.84 $ 8.59 $ 8.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23 0.55 0.27
Net realized and unrealized gain (loss) on investments 0.14 0.23 (0.01)
Total from investment operations 0.37 0.78 0.26
LESS DISTRIBUTIONS
Distributions from net investment income (0.23) (0.53) (0.30)
NET ASSET VALUE, END OF PERIOD $ 8.98 $ 8.84 $ 8.59
TOTAL RETURN(B) 4.20% 9.29% 3.02%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.73%* 1.71% 1.71%*
Net investment income 5.81%* 6.21% 5.65%*
Expense waiver/reimbursement(c) 0.20%* 0.24% 0.26%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $5,698 $2,836 $1,343
Portfolio turnover 94% 264% 97%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 5, 1996 (date of initial
public investment) to February 28, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS--CLASS F SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1998 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.83 $ 8.59 $ 8.75 $ 8.55 $ 9.00 $ 9.44
INCOME FROM
INVESTMENT OPERATIONS
Net investment income 0.26 0.61 0.55 0.62 0.63 0.68
Net realized and unrealized
gain (loss) on investments 0.14 0.24 (0.15) 0.20 (0.46) (0.44)
Total from
investment operations 0.40 0.85 0.40 0.82 0.17 0.24
LESS DISTRIBUTIONS
Distributions from
net investment income (0.26) (0.61) (0.56) (0.62) (0.62) (0.68)
NET ASSET VALUE,
END OF PERIOD $ 8.97 $ 8.83 $ 8.59 $ 8.75 $ 8.55 $ 9.00
TOTAL RETURN(A) 4.58% 10.19% 4.81% 9.87% 2.11% 2.63%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.98%* 0.96% 0.96% 0.96% 0.97% 0.97%
Net investment income 6.21%* 6.87% 6.42% 6.96% 7.34% 7.39%
Expense waiver/reimbursement(b) 0.20%* 0.24% 0.26% 0.25% 0.23% 0.19%
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $1,305,791 $1,428,591 $1,773,905 $2,264,374 $2,538,013 $3,542,078
Portfolio turnover 94% 264% 97% 161% 143% 134%
</TABLE>
* Computed on an annualized basis.
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 (UNAUDITED)
1. ORGANIZATION
Federated Government Income Securities, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund offers four classes of shares:
Class A Shares, Class B Shares, Class C Shares, and Class F Shares. The Fund's
objective is to provide current income.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government securities are generally valued at the
mean of the latest bid and asked price as furnished by an independent pricing
service. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with remaining
maturities of sixty days or less at the time of purchase may be valued at
amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and expenses are
accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Distributions to
shareholders are recorded on the ex-dividend date.
FEDERAL TAXES-It is the Fund's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute
to shareholders each year substantially all of its income. Accordingly,
no provisions for federal tax are necessary.
At February 28, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $314,032,767, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal tax. Pursuant to the Code, such capital loss carryforward
will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2002 $ 81,450,069
2003 192,317,284
2004 16,981,637
2005 23,283,777
EQUALIZATION--Effective March 1, 1998, the Fund discontinued its use of
equalization. Equalization is an accounting practice whereby a portion of the
proceeds of sales and costs of redemptions of Fund shares is credited or charged
to undistributed net investment income per share basis, as determined on the
date of transaction. This change in accounting policy does not effect the Fund's
net assets, net asset value per share, or net investment income. The financial
statements included herein reflect the following reclass entry to close out
accumulated equalization debits as of August 31, 1998.
INCREASE (DECREASE)
UNDISTRIBUTED NET
PAID IN CAPITAL INVESTMENT INCOME
$(78,184) $78,184
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when- issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions, with
respect to mortgage securities issued by GNMA, FNMA, and FHLMC, in which the
Fund sells mortgage securities to financial institutions and simultaneously
agrees to accept substantially similar (same type, coupon and maturity)
securities at a later date at an agreed upon price. Dollar roll transactions
involve "to be announced" securities and are treated as short-term financing
arrangements which will not exceed twelve months. The Fund will use the proceeds
generated from the transactions to invest in short-term investments, which may
enhance the Fund's current yield and total return.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ from
those estimated.
OTHER--Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
At February 28, 1998, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF PAR VALUE
CLASS NAME CAPITAL STOCK AUTHORIZED
Class A Shares 500,000,000
Class B Shares 500,000,000
Class C Shares 500,000,000
Class F Shares 500,000,000
Total 2,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 6,460,143 $ 57,428,342 17,863,053 $ 154,174,787
Shares issued to shareholders in payment of distributions
declared 354,854 3,144,458 686,406 6,011,544
Shares redeemed (3,351,736) (29,767,372) (2,916,697) (25,430,665)
Net change resulting from Class A Share transactions 3,463,261 $ 30,805,428 15,632,762 $ 134,755,666
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,239,742 $ 11,019,101 1,033,325 $ 9,058,031
Shares issued to shareholders in payment of distributions
declared 19,121 168,967 24,091 211,420
Shares redeemed (171,187) (1,516,486) (115,339) (1,007,902)
Net change resulting from Class B Share transactions 1,087,676 $ 9,671,582 942,077 $ 8,261,549
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 677,341 $ 6,022,717 370,357 $ 3,245,060
Shares issued to shareholders in payment of distributions
declared 5,922 52,213 9,162 80,022
Shares redeemed (369,611) (3,289,107) (215,020) (1,900,157)
Net change resulting from Class C Share transactions 313,652 $ 2,785,823 164,499 $ 1,424,925
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
CLASS F SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,291,316 $ 11,498,805 2,333,488 $ 20,372,698
Shares issued to shareholders in payment of distributions
declared 1,896,500 16,771,138 6,195,998 53,960,699
Shares redeemed (19,422,084) (170,543,403) (53,122,484) (460,852,544)
Net change resulting from Class F Share transactions (16,234,268) $ (142,273,460) (44,592,998) $ (386,519,147)
Net change resulting from share transactions (11,369,679) $ (99,010,627) (27,853,660) $ (242,077,007)
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.75% of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive any portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors, Inc. for the period. The administrative fee received during the
period of the Administrative Services Agreement shall be at least $125,000 per
portfolio and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Class A Shares, Class B Shares, and Class C Shares. The Plan
provides that the Fund may incur distribution expenses according to the
following schedule annually, to compensate FSC.
PERCENTAGE OF AVERAGE
SHARE CLASS NAME DAILY NET ASSETS OF CLASS
Class A Shares 0.25%
Class B Shares 0.75%
Class C Shares 0.75%
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ, through its
subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer
and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Directors of the Fund are Officers and
Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1998, were as follows:
PURCHASES $1,430,474,192
SALES $1,577,026,409
6. YEAR 2000
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
Nicholas P. Constantakis
William J. Copeland
James E. Dowd, Esq.
Lawrence D. Ellis, M.D.
Richard B. Fisher
Edward L. Flaherty, Jr., Esq.
Peter E. Madden
John E. Murray, Jr., J.D., S.J.D.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Richard B. Fisher
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Matthew S. Hardin
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.
[Graphic]
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 313912206
Cusip 313912305
Cusip 313912404
Cusip 313912107
8092706 (10/98)
[Graphic]
A1. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 4/4/86
to 8/31/98. The "y" axis is measured in increments of $9,000 ranging from $0 to
$36,000 and indicates that the ending value of a hypothetical initial investment
of $13,000 (1,290 Shares) in the fund's Class F Shares, assuming the
reinvestment of capital gains and dividends, would have grown to $31,831 (3,549
Shares) on 8/31/98.
A2. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 4/4/86
to 8/31/98. The "y" axis is measured in increments of $5,000 ranging from $0 to
$25,000 and indicates that the ending value of a hypothetical initial investment
of $1,000 (99
Shares) and subsequent yearly investments of $1,000 in the fund's Class F
Shares, assuming the reinvestment of capital gains and dividends, would have
grown to $21,288 (2,373 Shares) on 8/31/98.
A3. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 4/4/86
to 8/31/98. The "y" axis is measured in increments of $50,000 ranging from $0 to
$300,000 and indicates that the ending value of a hypothetical initial
investment of $100,000 (9,930 Shares) in the fund's Class F Shares, assuming the
reinvestment of capital gains and dividends, would have grown to $244,854
(27,297 Shares) on 8/31/98.
