Federated Fund for U.S. Government Securities, Inc.
Class A Shares, Class B Shares, Class C Shares
PROSPECTUS
The shares of Federated Fund for U.S. Government 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 to U.S. government
securities.
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 Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated July 31,
1997, with the Securities and Exchange Commission ("SEC"). 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 the Fund at the address listed in the back of this prospectus.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated July 31, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights-Class A Shares 2
Financial Highlights-Class B Shares 3
Financial Highlights-Class C Shares 4
General Information 5
Calling the Fund 5
Investment Information 5
Investment Objective 5
Investment Policies 5
Investment Limitations 7
Net Asset Value 7
Investing in the Fund 8
Purchasing Shares 8
Purchasing Shares Through a
Financial Intermediary 8
Purchasing Shares by Wire 9
Purchasing Shares by Check 9
Systematic Investment Program 9
Retirement Plans 9
Class A Shares 9
Class B Shares 9
Class C Shares 10
Redeeming and Exchanging Shares 10
Redeeming or Exchanging Shares Through a
Financial Intermediary 10
Redeeming or Exchanging Shares by Telephone 10
Redeeming or Exchanging Shares by Mail 10
Requirements for Redemption 11
Requirements for Exchange 11
Systematic Withdrawal Program 11
Contingent Deferred Sales Charge 11
Account and Share Information 12
Confirmations and Certificates 12
Dividends and Distributions 12
Accounts with Low Balances 12
Fund Information 12
Management of the Fund 12
Distribution of Shares 13
Administration of the Fund 14
Administrative Services 14
Shareholder Information 14
Tax Information 14
Federal Income Tax. 14
State and Local Taxes 15
Performance Information 15
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a 4.50% None None
percentage of offering price)
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage
of offering price) None None None
Contingent Deferred Sales Charge (as a percentage
of original
purchase price or redemption proceeds, as None 5.50% 1.00%
applicable)(1)
Redemption Fee (as a percentage of amount redeemed, None None None
if applicable)
Exchange Fee None None None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C> <C>
Management Fee 0.56% 0.56% 0.56%
12b-1 Fee None 0.75% 0.75%
Total Other Expenses 0.39% 0.49% 0.49%
Total Other Expenses 0.39% 0.49% 0.49%
Shareholder Services Fee (after waiver)(2) 0.13% 0.23% 0.23%
Total Operating Expenses(3) 0.95% 1.80%(4) 1.80%
</TABLE>
(1) For shareholders of Class B Shares, the contingent deferred sales charge
is 5.50% in the first year declining to 1.00% in the sixth year and 0.00%
thereafter. For shareholders of Class C Shares, the contingent deferred
sales charge 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 "Contingent Deferred Sales
Charge."
(2) The shareholder services fee for Class A Shares, Class B Shares, and
Class C Shares have been reduced to reflect voluntary waivers. The
shareholder service provider can terminate these voluntary waivers
at any time at its sole discretion. The maximum shareholder services
fee is 0.25%.
(3) The total operating expenses for Class A Shares, Class B Shares, and
Class C Shares would have been 1.07%, 182%, and 1.82%, respectively,
absent the voluntary waivers described in note 2 above.
(4) Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase.
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 "Purchasing 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 PERMITED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment
of maximum sales charge.
1 Year $ 54 $ 75 $ 29
3 Years $ 74 $101 $ 57
5 Years $ 95 $121 $ 97
10 Years $156 $189 $212
You would pay the following expenses on the same investment, assuming no
redemption.
1 Year $ 54 $ 18 $ 18
3 Years $ 74 $ 57 $ 57
5 Years $ 95 $ 97 $ 97
10 Years $156 $189 $212
</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.
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(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 May 2, 1997, on the Fund's
financial statements for the year ended March 31, 1997, and on the following
table for the period 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 MARCH 31
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 7.78 $ 7.67 $ 7.89 $ 8.50 $ 8.51 $ 8.41 $ 8.23 $ 8.01 $ 8.41 $ 8.56
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income 0.51 0.54 0.57 0.63 0.71 0.75 0.77 0.78 0.76 0.78
Net realized and
unrealized
gain (loss) on (0.14) 0.12 (0.23) (0.61) (0.03) 0.08 0.19 0.21 (0.40) (0.15)
investments
Total from investment 0.37 0.66 0.34 0.02 0.68 0.83 0.96 0.99 0.36 0.63
operations
LESS DISTRIBUTIONS
Distributions
from net
investment income (0.50) (0.55) (0.56) (0.63) (0.69) (0.73) (0.78) (0.77) (0.76) (0.78)
NET ASSET VALUE,
END OF PERIOD $ 7.65 $ 7.78 $ 7.67 $ 7.89 $ 8.50 $ 8.51 $ 8.41 $ 8.23 $ 8.01 $ 8.41
TOTAL RETURN(A) 4.88% 8.77% 4.59% 0.13% 8.31% 10.20% 12.12% 12.59% 4.47% 7.66%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.95% 0.95% 0.95% 0.88% 0.83% 0.91% 0.97% 0.96% 0.96% 0.96%
Net investment income 6.60% 6.80% 7.41% 7.50% 8.33% 8.69% 9.21% 9.32% 9.22% 9.31%
Expense 0.12% 0.11% 0.02% -- -- -- -- 0.04% -- 0.01%
waiver/
reimbursement(b)
SUPPLEMENTAL DATA
Net assets, end of
period
(000 omitted) $1,177,071 $1,330,272 $1,367,710 $1,693,293 $1,844,712 $1,384,117 $1,133,017 $1,039,493 $1,054,055 $1,150,395
Portfolio turnover 120% 157% 154% 149% 52% 43% 27% 98% 83% 72%
</TABLE>
(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.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED MARCH 31, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(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 May 2, 1997, on the Fund's
financial statements for the year ended March 31, 1997, and on the following
table for the period 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 MARCH 31,
1997 1996 1995(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.78 $ 7.67 $ 7.75
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.44 0.49 0.37
Net realized and unrealized gain (loss) on investments (0.13) 0.11 (0.06)
Total from investment operations 0.31 0.60 (0.31)
LESS DISTRIBUTIONS
Distributions from net investment income (0.43) (0.49) (0.37)
Distributions in excess of net investment income(b) -- -- (0.02)
Total distributions (0.43) (0.49) (0.39)
NET ASSET VALUE, END OF PERIOD $ 7.66 $ 7.78 $ 7.67
TOTAL RETURN(C) 4.13% 7.90% 4.13%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.80% 1.78% 1.76%*
Net investment income 5.75% 5.93% 7.02%*
Expense waiver/reimbursement(d) 0.02% 0.04% 0.06%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $100,439 $93,169 $34,276
Portfolio turnover 120% 157% 154%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from July 25, 1994 (date of initial
public offering) to March 31, 1995.
(b) Distributions in excess of net investment income were a result of
certain book and tax timing differences. These distributions do not
represent a return of capital for federal income tax purpose.
(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 MARCH 31, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.
FINANCIAL HIGHLIGHTS -- CLASS C SHARES
(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 May 2, 1997, on the Fund's
financial statements for the year ended March 31, 1997, and on the following
table for the period 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 MARCH 31
1997 1996 1995 1994(A)(B)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.78 $ 7.67 $ 7.89 $ 8.54
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.45 0.47 0.51 0.54
Net realized and unrealized gain (loss) on (0.13) 0.12 (0.23) (0.63)
investments
Total from investment operations 0.32 0.59 0.28 (0.09)
LESS DISTRIBUTIONS
Distributions from net investment income (0.44) (0.48) (0.50) (0.54)
Distributions in excess of net investment -- -- -- (0.02)
income(c)
Total distributions (0.44) (0.48) (0.50) (0.56)
NET ASSET VALUE, END OF PERIOD $ 7.66 $ 7.78 $ 7.67 $ 7.89
TOTAL RETURN(D) 4.14% 7.85% 3.72% (1.17%)
RATIOS TO AVERAGE NET ASSETS
Expenses 1.80% 1.79% 1.79% 1.81%*
Net investment income 5.74% 5.96% 6.56% 6.45%*
Expense waiver/ reimbursement(e) 0.02% 0.02% 0.02% --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $55,842 $79,949 $80,519 $103,433
Portfolio turnover 120% 157% 154% 149%
</TABLE>
* Computed on an annualized basis.
(a) As of July 29, 1994, Select Shares were no longer offered and were
reclassified as Class C Shares. For the year ended March 31, 1994, Select
Shares' net assets (000 omitted) were $1,751.
(b) Reflects operations for the period from April 26, 1993 (date of initial
public offering) to March 31, 1994.
(c) Distributions in excess of net investment income were a result of
certain book and tax timing differences. These distributions do not
represent a return of capital for federal income tax purposes.
(d) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(e) 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 MARCH 31, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on June 9,
1969. Class A Shares, Class B Shares, and Class C Shares of the Fund
("Shares") are designed for individuals and institutions as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio of common stocks and other securities of high-quality companies.
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.
CALLING THE FUND
Call the Fund at 1-800-341-7400.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income. 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. The investment objective and the policies and limitations
described below cannot be changed without approval of shareholders.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS
The Fund invests only in securities which are primary or direct obligations
of the U.S. government, its agencies or instrumentalities, or which are
guaranteed as to the payment of principal and interest by the U.S.
government, its agencies, or instrumentalities, and in certain
collateralized mortgage obligations ("CMOs") described below.
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;
* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government, are backed by the full faith and credit of the U.S.
Treasury. No assurances can be given that the U.S. government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These instrumentalities are supported by:
* the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury; and
* the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality or the credit of the agency or
instrumentality.
There is no limit to portfolio maturity. The prices of fixed-income
government securities fluctuate inversely in relation to the direction of
interest rates. The prices of longer term securities fluctuate more widely
in response to market interest rate changes.
Depending upon market conditions, the Fund, at times, will be primarily
invested in mortgage-backed securities, but at times will hold U.S.
Treasuries.
COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Government National Mortgage Association, Federal National
Mortgage Association, or Federal Home Loan Mortgage Corporation
Participation Certificates, but also may be collateralized by whole loans or
Private Pass-Throughs (such collateral collectively hereinafter referred to
as "Mortgage Assets"). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. The Fund will invest only in CMO's which
are rated AAA by a recognized rating agency and which may be: (a)
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; (b) collateralized by pools of mortgages in which payment
of principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or (c) securities in which the
proceeds of the issuance are invested in mortgage securities and payment of
the principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government. CMOs in which the Fund invests are
issued by agencies or instrumentalities of the U.S. government. The issuer
of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (a "REMIC"), which has certain special tax attributes.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final distribution dates. Interest is paid or accrues on all classes of the
CMOs on a monthly, quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the several classes
of a series of a CMO in innumerable ways. In one structure, payments of
principal, including any principal prepayments, on the Mortgage Assets are
applied to the classes of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment of principal will
be made on any class of CMOs until all other classes having an earlier
stated maturity or final distribution date have been paid in full.
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.
Because the mortgages underlying mortgage-backed securities often may be
prepaid without penalty or premium, mortgage-backed securities are generally
subject to 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. For certain types
of asset pools, such as collateralized mortgage obligations, prepayments may
be allocated to one tranche of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be
taxed as ordinary income when distributed to the shareholders.
REPURCHASE AGREEMENTS
The U.S. government securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions
sell U.S. government or other securities to the Fund and agree at the time
of sale to repurchase them at a mutually agreed upon time and price.
As a matter of investment practice which can be changed without shareholder
approval, the Fund will not invest more than 10% of its total assets in
securities which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities
with payment and delivery scheduled for a future time. The seller's failure
to complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions and the market values of the securities
purchased may vary from purchase prices.
The Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. In addition, the Fund may
enter into 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 Fund's adviser
has determined are creditworthy under guidelines established by the Fund's
Directors and will receive collateral equal to at least 100% of the value of
the securities loaned in the form of cash or U.S. government securities.
PORTFOLIO TURNOVER
Securities in the Fund's 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. The Fund's adviser does not
anticipate that portfolio turnover will result in adverse tax consequences.
Any such trading will increase the Fund's portfolio turnover rate and
transaction costs.
INVESTMENT LIMITATIONS
The Fund will not borrow money except, under certain circumstances, the Fund
may borrow up to 10% of the value of its total assets.
The above investment limitation cannot be changed without shareholder
approval. The following limitation, however, can 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 own securities of open-end, or closed-end investment
companies, except under certain circumstances and subject to certain
limitations not exceeding 10% of its net assets.
NET ASSET VALUE
The Fund's net asset value ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for
each class of Shares may differ 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV
is determined as of the close of trading on the New York Stock Exchange
(normally 4:00 p.m., Eastern time) every day the New York Stock Exchange is
open.
INVESTING IN THE FUND
This prospectus offers three classes of Shares each with the characteristics
described below.
CLASS A CLASS B CLASS C
Minimum and $500/$100 $1500/$100 $1500/$100
Subsequent
Investment Amounts
Minimum and $50 $50 $50
Subsequent
Investment Amount
for Retirement Plans
Maximum Sales Charge 4.50%* None None
Maximum Contingent None 5.50%+ 1.00%#
Deferred Sales
Charge**
Conversion Feature No Yes++ No
* SALES CHARGE DEALER
AS A PERCENTAGE OF CONCESSION AS
PUBLIC NET A PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%
** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
+ The following contingent deferred sales charge schedule applies to Class B
Shares:
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
++ Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase. See "Conversion of
Class B Shares."
# The contingent deferred sales charge is assessed on Shares redeemed within
one year of their purchase date.
PURCHASING 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 intermediary (such as a bank or broker/dealer) or by sending a
wire or check directly to the Fund. Financial intermediaries may impose
different minimum investment requirements on their customers. An account
must be established with a financial intermediary or by completing, signing,
and returning the new account form available from the Fund before Shares can
be purchased. Shareholders in certain other funds advised and distributed by
affiliates of Federated Investors ("Federated Funds") may exchange their
Shares for Shares of the corresponding class of the Fund. The Fund reserves
the right to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to
time, offer certain items of nominal value to any shareholder or investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received when
the Fund is notified of the purchase order or when payment is converted into
federal funds. Purchase orders through a 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
intermediaries must be received by the financial intermediary 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 intermediary's
responsibility to transmit orders promptly. Financial intermediaries may
charge fees for their services.
The financial intermediary 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 intermediaries may be
subject to reclaim by the distributor for accounts transferred to financial
intermediaries which do not maintain investor accounts on a fully disclosed
basis and do not account for share ownership periods.
PURCHASING SHARES BY WIRE
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 02266-8600; 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);
Account Number; Trade Date and Order Number; Group Number or Dealer Number;
Nominee or Institution Name; and ABA Number 011000028. Shares cannot be
purchased by wire on holidays when wire transfers are restricted.
PURCHASING SHARES BY CHECK
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).
SYSTEMATIC INVESTMENT PROGRAM
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. Shareholders should contact their financial
intermediary 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.
CLASS A SHARES
Class A Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS A SHARES PURCHASED:
* through financial intermediaries that do not receive sales charge dealer
concessions;
* by Federated Life Members who maintain a $500 minimum balance in at least
one of the Federated Funds; or
* through "wrap accounts" or similar programs under which clients pay a fee
for services.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
* purchasing in quantity and accumulating purchases at the levels in the
table noted under "Investing in the Fund";
* combining concurrent purchases of two or more funds;
* signing a letter of intent to purchase a specific quantity of shares
within 13 months; or
* using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details
on these programs. In order to eliminate the sales charge or receive sales
charge reductions, Federated Securities Corp. must be notified by the
shareholder in writing or by a financial intermediary at the time of
purchase.
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 establishment of customer accounts
and purchases of Shares.
CLASS B SHARES
Class B Shares are sold at NAV. Under certain circumstances, a contingent
deferred sales charge will be assessed at the time of a redemption. Orders
for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares after eight
full years from the purchase date. Such conversion will be on the basis of
the relative NAVs per Share, without the imposition of any charges. 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.
CLASS C SHARES
Class C Shares are sold at NAV. A contingent deferred sales charge of 1.00%
will be charged on assets redeemed within the first full 12 months following
purchase.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Shares of the
same class of other Federated Funds on days on which the Fund computes its
NAV. Shares are redeemed at NAV less any applicable contingent deferred
sales charge. Exchanges are made at NAV. Shareholders who desire to
automatically exchange Shares, of a like Share class, in a pre-determined
amount on a monthly, quarterly, or annual basis may take advantage of a
systematic exchange privilege. Information on this privilege is available
from the Fund or your financial intermediary. Depending upon the
circumstances, a capital gain or loss may be realized when Shares are
redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these
transactions to be processed at that day's NAV, financial intermediaries
(other than broker/dealers) must transmit the request to the Fund before
4:00 p.m. (Eastern time), while broker/dealers must transmit the request to
the Fund before 5:00 p.m. (Eastern time). The financial intermediary is
responsible for promptly submitting transaction requests and providing
proper written instructions. Customary fees and commissions may be charged
by the financial intermediary for this service. Appropriate authorization
forms for these transactions must be on file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for
these transactions must be on file with the Fund. Shares held in certificate
form must first be returned to the Fund as described in the instructions
under "Redeeming or Exchanging Shares by Mail." Redemption proceeds will
either 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 ACH will not be wired until that method of
payment is cleared.
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 or Exchanging Shares By Mail" should
be considered. The telephone transaction privilege may be modified or
terminated at any time. Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, 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 must accompany the written request. It is recommended that
certificates be sent unendorsed by registered or certified mail.
All written requests 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 of the transaction. An
exchange request should also state the name of the Fund into which the
exchange is to be made. All owners of the account must sign the request
exactly as the Shares are registered. A check for redemption proceeds is
normally mailed within one business day, but in no event more than seven
days, after receipt of a proper written redemption request. Dividends are
paid up to and including the day that a redemption or exchange request is
processed.
REQUIREMENTS FOR REDEMPTION
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
Exchange Act of 1934. The Fund does not accept signatures guaranteed by a
notary public.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having a NAV equal to the minimum
investment requirements of the fund into which the exchange is being made.
Contact your financial intermediary directly or the Fund for free
information on and prospectuses for the Federated Funds into which your
Shares may be exchanged. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made.
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. Signature guarantees will be required to
exchange between fund accounts not having identical shareholder
registrations. The exchange privilege may be modified or terminated at any
time. Shareholders will be notified of the modification or termination of
the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000, other than retirement accounts subject to required minimum
distributions. A shareholder may apply for participation in this program
through his financial intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete,
the shareholder's investment in the Fund, payments under this program should
not be considered as yield or income. It is not advisable for shareholders
to continue to purchase Class A Shares subject to a sales charge while
participating in this program. A contingent deferred sales charge may be
imposed on Class B and C Shares.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. 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. The contingent deferred sales charge will not be imposed with
respect to Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains. In determining the applicability
of the contingent deferred sales charge, the required holding period for
your new Shares received through an exchange will include the period for
which your original Shares were held.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon written notification to Federated Securities Corp. or the transfer
agent, no contingent deferred sales charge will be imposed on redemptions:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
* representing minimum required distributions from an Individual Retirement
Account or other retirement plan to a shareholder who has attained the age
of 701U2;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
* which are reinvested in the Fund under the reinvestment privilege;
* of Shares held by Directors, employees and sales representatives of the
Fund, the distributor, or affiliates of the Fund or distributor, employees
of any financial intermediary that sells Shares of the Fund pursuant to a
sales agreement with the distributor, and their immediate family members to
the extent that no payments were advanced for purchases made by these
persons; and
* 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 intermediary, to the extent that no payments were
advanced for purchases made through such entities.
For more information regarding the elimination of the contingent deferred
sales charge through a Systematic Withdrawal Program, or any of the above
provisions, contact your financial intermediary or the Fund. The Fund
reserves the right to discontinue or modify these provisions. Shareholders
will be notified of such action.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND CERTIFICATES
Shareholders will receive detailed confirmations of all transactions and
periodic confirmations reporting other activity. Share certificates are not
issued unless requested in writing to Federated Shareholder Services
Company.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the
Fund on the record date. Net long-term capital gains realized by the Fund,
if any, will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund
on payment dates at the ex-dividend date NAV without a sales charge, unless
shareholders request cash payments on the new account form or by contacting
the transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum
investment amount. Retirement plan accounts and accounts where the balance
falls below the minimum due to NAV changes will not be closed in this
manner. Before an account is closed, the shareholder will be notified and
allowed 30 days to purchase additional Shares to meet the minimum.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible
for managing the Fund's business affairs and for exercising all the Fund's
powers except those reserved for the shareholders. An Executive Committee of
the Board of Directors handles the Board's responsibilities between meetings
of the Board.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Advisers, the Fund's
investment adviser, subject to direction by the Directors. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Adviser receives an annual investment advisory fee based on the Fund's
average daily net assets as shown on the chart below, plus 4.5% of the
Fund's gross income (excluding any capital gains or losses).
AVERAGE DAILY PERCENT OF AVERAGE
NET ASSETS DAILY NET ASSETS
First $500 million 0.250%
Second $500 million 0.225%
Over $1 billion 0.200%
The Adviser may voluntarily waive a portion of its fee or reimburse the Fund
for certain operating expenses. The Adviser can terminate this voluntary
waiver at any time at its sole discretion.
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 $110 billion invested across
over 300 funds under management and/or administration by its subsidiaries,
as of December 31, 1996, Federated Investors is one of the largest mutual
fund investment managers in the United States. With more than 2,000
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through 4,500
financial institutions nationwide.
Kathleen M. Foody-Malus has been a portfolio manager of the Fund 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.
Todd A. Abraham has been a portfolio manager of the Fund since May 1997. Mr.
Abraham joined Federated Investors in 1993 as an Investment Analyst and has
been an Assistant Vice President of the Fund's investment adviser since
1995. Mr. Abraham served as a Portfolio Analyst at Ryland Mortgage Co. from
1992 to 1993. Mr. Abraham received his M.B.A. in finance from Loyola
College.
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.
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.
The distributor may offer to pay financial institutions an amount equal 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 5.5% 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 (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES
Under a distribution plan adopted in accordance with Investment Company Act
Rule 12b-1 (the "Distribution Plan"), Class B Shares and Class C Shares will
pay a fee to the distributor in an amount computed at an annual rate of
0.75% 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 0.75% 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
sales services and distribution and distribution-related support services
pursuant to the Distribution Plan.
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 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. 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
With respect to Class A Shares, Class B Shares, and Class C Shares, in
addition to payments made pursuant to the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of 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 Fund's investment 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 funds advised by affiliates of Federated
Investors as specified below:
MAXIMUM
ADMINISTRATIVE AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
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.
SHAREHOLDER INFORMATION
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 or class 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.
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 written request of shareholders owning at least 10% of the Fund's
outstanding Shares of all series entitled to vote.
As of July 7, 1997, Merrill Lynch Pierce Fenner & Smith, Jacksonville,
Florida, for the sole benefit of its customers, was the owner of record of
2,665,739 shares (39.47%) of the Class C Shares of the Fund, and, therefore,
may, for certain purposes, be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of shareholders.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code, as amended, 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 the
Shares. No federal income tax is due on any dividends earned in an IRA or
qualified retirement plan until distributed.
STATE AND LOCAL TAXES
Fund shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time the Fund advertises its total return and yield for each
class of Shares.
Total return represents the change, over a specific 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 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 charges,
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, and Class C Shares. Expense differences between Class A
Shares, Class B Shares, and Class C Shares may affect the performance of
each class.
From time to time, advertisements for Class A Shares, Class B Shares, and
Class C 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, and Class C Shares to certain indices.
[Graphic]
Federated Fund for U.S. Government Securities, Inc.
Class A Shares, Class B Shares,
Class C Shares
PROSPECTUS
JULY 31, 1997
An Open-End, Diversified
Management Investment Company
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
CLASS A SHARES, CLASS B SHARES, CLASS C SHARES
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, PA 15222-5401
Federated Securities Corp., Distributors
Cusip 314182106
Cusip 314182205
Cusip 314182304
G01095-01 (7/97)
[Graphic]
2RIBUTORFederated Securities CorWord Work File D 2502~~~~TEXTMS~~TEXTMSWD~
~~~~~~~~~~~~~~~~~~~~~~~-y~o~~~~~~~Cerated Advisers
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
B~~~
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Federated Fund for U.S. Government Securities, Inc. (the "Fund") dated
July 31, 1997. This Statement is not a prospectus. You may request a copy of
a 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 July 31, 1997
[Graphic]
Cusip 314182106
Cusip 314182205
Cusip 314182304
8062807B (7/97)
[Graphic]
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
Stripped Mortgage-Related Securities 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 1
Lending of Portfolio Securities 2
Portfolio Turnover 2
Investment Limitations 2
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC. MANAGEMENT 3
Fund Ownership 6
Director Compensation 7
Director Liability 7
INVESTMENT ADVISORY SERVICES 7
Adviser to the Fund 7
Advisory Fees 8
BROKERAGE TRANSACTIONS 8
OTHER SERVICES 8
Fund Administration 8
Custodian and Portfolio Accountant 8
Transfer Agent 8
Independent Auditors 8
PURCHASING SHARES 9
Quantity Discounts and
Accumulated Purchases 9
Concurrent Purchases 9
Letter of Intent 9
Reinvestment Privilege 9
Conversion of Class B Shares 10
Distribution Plan (Class B Shares and Class C Shares Only) and
Shareholder Services 10
Conversion to Federal Funds 10
Purchases by Sales Representatives, Fund Directors,
and Employees 10
Determining Net Asset Value 11
Determining Market Value of Securities 11
Redeeming Shares 11
Redemption in Kind 11
Contingent Deferred Sales Charge 11
Elimination of the Contingent Deferred
Sales Charge -- Class B Shares 12
TAX STATUS 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 12
YIELD 13
PERFORMANCE COMPARISONS 13
Economic and Market Information 14
ABOUT FEDERATED INVESTORS 14
Mutual Fund Market 15
Institutional Clients 15
Bank Marketing 15
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 15
FINANCIAL STATEMENTS 15
APPENDIX 16
GENERAL INFORMATION ABOUT THE FUND
The Fund was incorporated under the laws of the State of Maryland on June 9,
1969. On April 28, 1992, the shareholders of the Fund voted to permit the
Fund to offer separate series and classes of shares. On February 26, 1996,
the Board of Directors ("Directors") approved an amendment to the Articles
of Incorporation to change the name of the Fund from Fund for U.S.
Government Securities, Inc. to Federated Fund for U.S. Government
Securities, Inc. Shares of the Fund are offered in three classes known as
Class A Shares, Class B Shares, and Class C Shares (individually and
collectively referred to as "Shares" as the context may require). This
Statement of Additional Information relates to all three classes of the
above-mentioned Shares.
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
short-term capital gains.
TYPES OF INVESTMENTS
The Fund invests only in U.S. government securities which are primary or
direct obligations of the U.S. government or its agencies or
instrumentalities or which are guaranteed by the U.S. government, its
agencies or instrumentalities and in certain collateralized mortgage
obligations ("CMOs"). This investment policy and the objective stated above
cannot be changed without approval of shareholders.
STRIPPED MORTGAGE-RELATED SECURITIES
Some of the mortgage-related securities purchased by the Fund may represent
an interest solely in the principal repayments or solely in the interest
payments on mortgage-backed securities (stripped mortgage-backed securities
or "SMBSs"). Due to the possibility of prepayments on the underlying
mortgages, SMBSs may be more interest-rate sensitive than other securities
purchased by the Fund. If prevailing interest rates fall below the level at
which SMBSs were issued, there may be substantial prepayments on the
underlying mortgages, leading to the relatively early prepayments of
principal-only SMBSs and a reduction in the amount of payments made to
holders of interest-only SMBSs. It is possible that the Fund might not
recover its original investment on interest-only SMBSs if there are
substantial prepayments on the underlying mortgages. Therefore,
interest-only SMBSs generally increase in value as interest rates rise and
decrease in value as interest rates fall, counter to changes in value
experienced by most fixed income securities. The Fund's adviser intends to
use this characteristic of interest-only SMBSs to reduce the effects of
interest rate changes on the value of the Fund's portfolio, while continuing
to pursue current income.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. The Fund or its
custodian will take possession of the securities subject to repurchase
agreements, and these securities will be 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 investment adviser to be
creditworthy pursuant to guidelines established by the Directors.
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 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.
PORTFOLIO TURNOVER
The Fund's policy of managing its portfolio of U.S. government securities,
including the sale of securities held for a short period of time, to achieve
its investment objective of current income may result in high 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. During the fiscal years
ended March 31, 1997, and 1996, the portfolio turnover rates were 120% and
157%, respectively.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described below
without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. The Fund may purchase and
dispose of U.S. government securities and CMOs before they are issued and
may also purchase and dispose of them on a delayed delivery basis.
BORROWING MONEY
In extraordinary or emergency situations, the Fund may borrow amounts not in
excess of 10% of its total assets taken at cost.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its securities.
INVESTING IN COMMODITIES AND MINERALS
The Fund will not purchase or sell commodities or commodity contracts.
UNDERWRITING
The Fund will not underwrite any issue of securities.
BUYING OR SELLING REAL ESTATE
The Fund will not buy or sell real estate.
LENDING CASH OR SECURITIES
The Fund will not lend any 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 or Charter.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified before
any material change in these limitations become effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not own securities of open-end investment companies, own more
than 3% of the total outstanding voting stock of any closed-end investment
company, invest more than 5% of its total assets in any closed-end
investment company, or invest more than 10% of its total assets in
closed-end investment companies in general. The Fund will purchase
securities of closed-end investment companies only in open-market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, or acquisition of assets. The Fund will initially bear its
proportionate share of any fees and expenses paid by open-end funds in
addition to the fees and expenses payable directly by the Fund.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of 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 borrow money in excess of 5% of the value of its net assets
during the last fiscal year and has no present intent to do so in the coming
fiscal year. The Fund does not intend to invest more than 5% of the value of
its total assets in inverse floaters or interest-only mortgage-related
securities in the coming fiscal year.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Fund for U.S. Government 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, President and
Director of the Company.
Thomas G. Bigley
15 Old Timber Trail
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.; Director, Member
of Executive Committee, 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.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Director
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.
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.
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
203 Kensington Ct.
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney, Retired 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; 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 and U.S. Space Foundation;
President Emeritus, University of Pittsburgh; Founding Chairman, National
Advisory Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center, Prague; Director or
Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public Relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
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.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
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.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Directors handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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 Insurance Series; Federated Investment
Portfolios; Federated Investment 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.; High Yield Cash Trust; 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 Obligations Trust II;
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; Wesmark Funds; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding Shares.
As of July 7, 1997, no shareholders of record owned 5% or more of the Class
A Shares or Class B Shares of the Fund.
As of July 7, 1997, the following shareholders of record owned 5% or more of
the Class C Shares of the Fund: Merrill Lynch, Pierce, Fenner & Smith for
the sole benefit of its customers, Jacksonville, Florida, owned
approximately 2,665,739 shares (39.47%); East Mississippi Electric Power
Association, Meridian, Mississippi, owned approximately 381,652 shares
(5.65%).
DIRECTOR COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND* FROM FUND COMPLEX+
<S> <C> <S>
John F. Donahue, $0 $0 for the Fund and Chairman and
Director 56 other investment companies in the Fund Complex
J. Christopher Donahue, $0 $0 for the Fund and
President and Director 18 other investment companies in the Fund Complex
Thomas G. Bigley, $2,373 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
John T. Conroy, Jr., $2,611 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
William J. Copeland, $2,611 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
James E. Dowd, $2,611 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $2,373 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Edward L Flaherty, Jr., $2,611 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
Peter E. Madden, $2,373 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Gregor F. Meyer, Jr., $2,373 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
John E. Murray, Jr., $2,373 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Wesley W. Posvar, $2,373 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Marjorie P. Smuts, $2,373 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended March 31, 1997.
+ The information is provided for the last calendar year.
DIRECTOR LIABILITY
The Articles of Incorporation provide that the Directors will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the "Adviser"). 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, his wife, and his son, J. Christopher Donahue, who is President and
Trustee of Federated Investors. 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
March 31, 1997, 1996, and 1995, the Fund's Adviser earned $8,025,601,
$8,731,709, and $9,463,243, of which $0, $142,099, and $338,354, was
voluntarily waived.
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 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 guidelines established by the Directors. The Adviser
may select brokers and dealers who offer brokerage and research services.
These services may be furnished directly to the Fund or to the Adviser and
may include: advice as to the advisability of investing in securities;
security analysis and reports; economic studies; industry studies; receipt
of quotations for portfolio evaluations; and similar services. Research
services provided by brokers and dealers may be used by the Adviser or its
affiliates in advising the Fund 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. 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. During the fiscal
years ended March 31, 1997, 1996, and 1995, no brokerage commissions were
paid by the Fund.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the Adviser, investments of the type the
Fund may make may also be make by those other accounts. When the Fund and
one or more other accounts managed by the Adviser are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
Adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund. In other cases, however, it is believed
that coordination and the ability to participate in volume transactions will
be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus. From March 1, 1994, to March 1, 1996, Federated
Administrative Services, a subsidiary of Federated Investors, served as the
Fund's Administrator. For purposes of this Statement of Additional
Information, Federated Services Company and Federated Administrative
Services may hereinafter collectively be referred to as the
"Administrators." For the fiscal years ended March 31, 1997, 1996, and 1995,
the Administrators earned $1,069,801, $1,153,399, and $1,193,581,
respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for the
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 upon the size,
type, and number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, Shares are
sold at their net asset value (plus a sales charge on Class A Shares only)
on days the New York Stock Exchange is open for business. The procedure for
purchasing Shares is explained in the prospectus under "Investing in the
Fund" and "Purchasing Shares."
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the table in the prospectus, larger purchases reduce or
eliminate 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 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 intermediary at
the time the purchase is made that Class A Shares are already owned or that
purchases are being combined. The Fund will reduce or eliminate the sales
charge after it confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, 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 and principal underwriter (the "Federated Funds"), the purchase
price of which includes a sales charge. For example, if a shareholder
concurrently invested $30,000 in the Class A Shares of one of the other
Federated Funds with a sales charge, and $70,000 in 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 intermediary 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
The reinvestment privilege is available for all Shares of the Fund. 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. Similarly, shareholders who redeem
Class B Shares or Class C Shares may be reinvested in the same Share class
within 120 days but would not be entitled to a reimbursement of the
contingent deferred sales charge if paid at the time of redemption. However,
such reinvested shares would not be subject to a contingent deferred sales
charge upon later redemption. In addition, if the Class B or Class C Shares
were reinvested through a financial intermediary, the financial intermediary
would not be entitled to an advanced payment from Federated Securities Corp.
on the reinvested Shares. Federated Securities Corp. must be notified by the
shareholder in writing or by his financial intermediary of the reinvestment
in order to eliminate a sales charge or a contingent deferred sales charge.
If the shareholder redeems Shares in the Fund, there may be tax
consequences.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around
the 15th of the month eight full years from the purchase date and will no
longer be subject to a fee under the distribution plan. 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 a 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.
DISTRIBUTION PLAN (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 B Shares and Class C Shares only),
the Directors expect that the Class B Shares and Class C Shares of 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
objectives. By identifying potential investors whose needs are served by the
Fund's objectives, 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; and (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended March 31, 1997, payments in the amount of $735,142
(Class B Shares) and $512,501 (Class C Shares) were made pursuant to the
Distribution Plan, all of which were paid to financial institutions. In
addition, for the fiscal year ended March 31, 1997, payments in the amount
of $3,123,496 (Class A Shares), $245,047 (Class B Shares), and $170,834
(Class C Shares) were made pursuant to the Shareholder Services Agreement,
of which $1,463,188 (Class A Shares), $17,532 (Class B Shares), and $11,147
(Class C Shares), were voluntarily waived.
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
The following individuals and their immediate family members may buy Class A
Shares at net asset value without a sales charge:
* Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* Federated Life Members; and
* any associated person of an investment dealer who has a sales agreement
with Federated Securities Corp. Shares may also be sold without a sales
charge to trusts, pensions, or profit-sharing plans for these individuals.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
The Fund's net asset value per Share fluctuates and is based on the market
value of all securities and other assets of the Fund. The net asset value
for each class of Shares may differ due to the variance in daily net income
realized by each class.
Net asset value is not determined 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; or (iii) the following holidays: New Year's Day, Martin Luther
King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* according to the last sale price on a national securities exchange, if
available;
* in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices and for bonds and other
fixed income securities, as determined by an independent pricing service; or
* for short-term obligations according to the 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, or
at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider yield, quality, coupon
rate, maturity, type of issue, trading characteristics, and other market
data.
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
prospectus under "Redeeming and Exchanging 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 SEC 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.
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; (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 on a first-in, first-out basis.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
To qualify for elimination of the contingent deferred sales charge through a
Systematic Withdrawal Program, the redemptions of Class B Shares must be
from an account that is at least 12 months old, has all Fund distributions
reinvested in Fund Shares, and has an account value of at least $10,000 when
the Systematic Withdrawal Program is established. Qualifying redemptions may
not exceed 1.00% monthly of the account value as periodically determined by
the Fund. The amounts that a shareholder may withdraw under a Systematic
Withdrawal Program that qualify for elimination of the Contingent Deferred
Sales Charge may not exceed 12% annually with reference initially to the
value of the Class B Shares upon establishment of the Systematic Withdrawal
Program and then as calculated at the annual valuation date. Redemptions on
a qualifying Systematic Withdrawal Program can be made at a rate of 1.00%
monthly, 3.00% quarterly, or 6.00% semi-annually with reference to the
applicable account valuation amount. Amounts that exceed the 12.00% annual
limit for redemption, as described, may be subject to the Contingent
Deferred Sales Charge. 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 12-month
holding requirement. However, for purposes of meeting the $10,000 minimum
account value requirement, Class B Share accounts will be not be aggregated.
Any Shares purchased prior to the termination of this program would have the
contingent deferred sales charge eliminated as provided in the Fund's
prospectus at the time of the purchase of the Shares.
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:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* derive less than 30% of its gross income from the sale of securities held
less than three months;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital
gains, are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held Fund
Shares.
TOTAL RETURN
The Fund's average annual total returns based on offering price for the
following periods ended March 31, 1997 were:
<TABLE>
<CAPTION>
SHARE CLASS INCEPTION DATE ONE-YEAR FIVE-YEARS TEN-YEARS SINCE INCEPTION
<S> <S> <C> <C> <C> <C>
Class A October 16, 1969 0.12% 4.33% 6.82% 7.49%
Class B July 25, 1994 -1.55% -- -- 4.42%
Class C April 26, 1993 3.06% -- -- 3.65%
</TABLE>
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 equal 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 net asset value 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 net asset value of Shares redeemed.
YIELD
The Fund's yields for the thirty-day period ended March 31, 1997 were:
SHARE CLASS YIELD
Class A 6.19%
Class B 5.61%
Class C 5.61%
The yield for each class of Shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by any 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 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 the shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any
class of Shares, the performance will be reduced for those shareholders
paying those fees.
PERFORMANCE COMPARISONS
The performance of each of the classes of Shares depends upon such variables
as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Fund's or any class of Shares' expenses; and
* various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
* SALOMON BROTHERS 15 YEAR MORTGAGE BACKED SECURITIES INDEX includes the
average of all 15-year mortgage securities which include Federal Home Loan
Mortgage Corp., Federal National Mortgage Association, and Government
National Mortgage Association. 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. mortgage funds category in advertising
and sales literature.
* 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.
* LEHMAN BROTHERS FIVE-YEAR TREASURY BELLWETHER INDEX is an unmanaged index
comprised of U.S. government Treasury Bonds with an average maturity of five
years.
* LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is a universe of fixed
rate securities backed by mortgage pools of Government National Mortgage
Association, Federal Home Loan Mortgage Corporation, and Federal National
Mortgage Association. The minimum principal amount required for inclusion is
$50 million. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment.
* LIPPER ANALYTICAL SERVICES, INC. ranks funds in various 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.
Mortgage Funds" category in advertising and sales literature.
Advertisements and other sales literature for any class 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 any 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 any class of Shares using charts, graphs, and descriptions,
compared to federally insured bank products including certificates of
deposit and time deposits and to money market funds using the Lipper
Analytical Services money market instruments average. In addition,
advertising and sales literature for the Fund may use charts and graphs to
illustrate the principals of dollar-cost averaging and may disclose the
amount of dividends paid by the Fund over certain periods of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge on Class A 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
developments 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 31, 1996, Federated Investors
managed 9 mortgage-backed, 5 government/agency and 17 government money
market mutual funds, with assets approximating $6.3 billion, $1.7 billion
and $23.6 billion, respectively. Federated trades approximately $309 million
in U.S. government and mortgage-backed securities daily and places
approximately $17 billion in repurchase agreements each day. Federated
introduced the first U.S. government fund to invest in 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
$30 billion in government funds within these maturity ranges.
J. Thomas Madden, Executive Vice President, oversees Federated Investors'
equity and high-yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' international portfolios and global
portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3.5 trillion to the more than 6,000 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.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
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 Timothy C.
Pillion, Senior Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide -- we have over 2,000 broker/dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any
other mutual fund distributor. Federated Investors' service to financial
professionals and institutions has earned it high rankings in several surveys
performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for
service quality measurement. The marketing effort to these firms is headed by
James F. Getz, President, Federated Securities Corp.
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended March 31, 1997, are
incorporated herein by reference to the Annual Report of the Fund dated
March 31, 1997 (File Nos. 2-33490 and 811-1890). A copy of this report may
be obtained without charge by contacting the Fund.
* Source: Investment Company Institute
APPENDIX
STANDARD & POOR'S RATINGS GROUP LONG TERM DEBT RATING DEFINITIONS
AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB" rating.
B -- Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" rating.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATING DEFINITIONS
AAA -- Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
A -- Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium -- grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment some
time in the future.
BAA -- Bonds which are rated "Baa" are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
BA -- Bonds which are "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
FITCH INVESTORS SERVICE, INC., INVESTMENT GRADE BOND RATING DEFINITIONS
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+".
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity.
