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Federated Investors
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Federated Fund for U.S. Government Securities, Inc.
29TH ANNUAL REPORT
MARCH 31, 1998
ESTABLISHED 1969
PRESIDENT'S MESSAGE
Dear Fellow Shareholder:
[Graphic]
Federated Fund for U.S. Government Securities, Inc. was created in 1969, and
I am pleased to present its 29th Annual Report. On March 31, 1998, the
fund's total assets stood at $1.2 billion representing over 62,000
shareholders.
This report covers the 12-month period from April 1, 1997 through March 31,
1998. It begins with a discussion with the fund's portfolio manager, Kathy
Foody-Malus, Vice President of Federated Advisers. She offers you her views on
today's interest rate environment, fund performance, and the fund's investments
in U.S. government mortgage-backed securities. Following her discussion are
three additional items of shareholder interest. First is a series of graphs
showing long-term investment performance. Second is a complete listing of the
fund's holdings in U.S. government mortgage-backed securities. Third is the
publication of the fund's financial statements.
During the 12-month reporting period, the fund's portfolio produced a healthy
income stream and total returns competitive with the overall Treasury market, as
well as with the average U.S. government mortgage fund. Individual share class
total return performance and income distributions follow.*
INCOME
TOTAL RETURN DISTRIBUTIONS NET ASSET VALUE INCREASE
Class A Shares 10.21% $0.51 $7.65 to $7.90 = 3%
Class B Shares 9.16% $0.45 $7.66 to $7.90 = 3%
Class C Shares 9.29% $0.45 $7.66 to $7.91 = 3%
The fund's management continues to emphasize mortgage-backed securities for
their attractive yields and good long-term value. These securities are issued by
Government National Mortgage Association, Federal National Mortgage Association,
and Federal Home Loan Mortgage Corporation. More than 97% of the fund's net
assets were invested in these mortgage-backed securities. These securities are
guaranteed as to principal and interest by the U.S. government, its agencies or
instrumentalities.**
* Performance quoted is based on net asset value, represents past performance,
and is not indicative of future results. Investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Total returns for the period based on
offering price for Class A, B, and C Shares were 5.26%, 3.38%, and 8.19%,
respectively.
** Unlike individual government and Treasury securities, fund shares are not
guaranteed.
The fund's portfolio has continued to be rated AAAf by Standard & Poor's, the
highest quality rating available for a mutual fund.***
Thank you for pursuing income opportunities through Federated Fund for U.S.
Government Securities, Inc. If you have any questions or comments, do not
hesitate to write.
Sincerely,
[Graphic]
J. Christopher Donahue
President
May 15, 1998
*** An AAAf rating means that the fund's portfolio holdings and counterparties
provide extremely strong protection against losses from credit defaults.
Ratings are subject to change, and do not remove market risks..
INVESTMENT REVIEW
[Graphic]
Kathy Foody-Malus
Vice President
Federated Advisers
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THE FUND'S FISCAL YEAR WAS CHARACTERIZED BY STEADY GROWTH IN THE U.S.
ECONOMY, NEGLIGIBLE INFLATION, AND THE ASIAN ECONOMIC CRISIS. HOW HAS THE
BOND MARKET REACTED TO THESE INFLUENCES?
The first half of the fund's fiscal year was dominated by strong growth and
benign inflation. These factors caused the Federal Reserve Board to tighten
interest rates 25 basis points once during this period. The dominating issues in
the second half of the fund's fiscal year were the currency and financial crisis
in the Asian markets. The bond market rallied on the trouble in Asia and its
potential cooling effect on inflation and growth in the U.S. The 30-year
Treasury bond reached a cyclical low of 5.69% in mid-January 1998. Since then,
interest rates have slightly risen from their historical lows, and the market
continues to support a view of low inflation and slower economic growth.
The catalyst that caused mortgage investors to reevaluate prepayment risk during
the fiscal period was the significant volatility in January interest rates. The
10-year Treasury yield ranged from 5.39% to 5.78% and ended the first quarter of
1998 in the mid-range at 5.65%. This movement in rates created concern for
mortgage-backed securities investors, because homeowners were able to refinance
their mortgages at the best levels in over four years. The prepayment numbers
released by the agencies have begun to show this increased activity by
homeowners. Given this scenario, the mortgage-backed securities market near term
will be volatile, but longer term should offer investors solid returns.
[Graphic]
FOR MOST OF THE FUND'S FISCAL YEAR, THE MORTGAGE-BACKED SECURITIES MARKET'S
PERFORMANCE WAS STELLAR. TO WHAT EXTENT HAVE MORTGAGE-BACKED SECURITIES
OUTPERFORMED TREASURIES?
Overall, the mortgage-backed securities market outperformed comparable duration
Treasuries by 80 basis points during the fund's fiscal year. The majority of the
mortgage-backed securities market's strong performance over Treasuries occurred
in the first half of 1997. During this period, the mortgage-backed securities
market was the beneficiary of a trading range environment in the U.S. Treasury
market, low volatility, and tightening spreads. The second half of 1997 proved
to be less favorable as interest rates declined on the 10-year Treasury by 75
basis points, the yield curve flattened, and volatility increased.
The recent decline in interest rates is feeding fears of prepayment spikes
comparable to those witnessed in 1993 and 1996. With the virtually flat yield
curve--which means that securities with longer maturities do not offer
proportionally higher yields--fixed-rate refinancing to date has mirrored the
relatively benign 1996 experience, compared to the record refinancings of 1993.
However, while the flat yield curve restrains refinancings, improvements in the
financing process could offset this effect.
[Graphic]
WHAT WAS YOUR STRATEGY FOR THIS TYPE OF MARKET?
The bond market environment over the last several years has been very friendly
for mortgage-backed securities investors. The mortgage-backed securities market
has outperformed equivalent duration Treasuries for the last two years annually
in excess of 100 basis points. Given this environment, we were very proactive in
adding prepayment protection to the portfolio in various types of securities.
This prepayment protection was able to be added at very attractive levels, given
the fact that most investors were unconcerned about the potential for any
increase in refinancing if interest rates were to decline.
HOW MUCH OF THE FUND'S PORTFOLIO FOCUSED ON THE MORTGAGE-BACKED SECURITIES
MARKET?
The portfolio continued to have a high weighting in agency mortgage-backed
securities due to attractive valuations versus other high-grade, fixed-income
assets. As of March 31, 1998, the portfolio composition was:
PERCENTAGE OF
NET ASSETS
Government National Mortgage Association 79.6%
Federal National Mortgage Association 9.2%
Federal Home Loan Mortgage Corporation 8.4%
U.S. Treasury Obligations 1.6%
Repurchase Agreements 9.4%
[Graphic]
HOW DID FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC. PERFORM FOR
SHAREHOLDERS IN TERMS OF TOTAL RETURN AND INCOME FOR THE FISCAL YEAR ENDED
MARCH 31, 1998?
For the 12-month reporting period ended March 31, 1998, investors in the fund's
Class A Shares received an average annual total return of 10.21%, based on net
asset value. Investors in the fund's Class B and C Shares received average
annual total returns of 9.16% and 9.29%, respectively, based on net asset
value.*
The fund's returns were consistent with those of the overall 5-year Treasury
market and the average U.S. government mortgage fund. For the same period,
in comparison, the Merrill Lynch 5-Year and 10-Year U.S. Treasury Note
Indices returned 10.63% and 15.18%, respectively.** The total return for the
Lipper U.S. Mortgage Funds Average was 10.12%.+
In terms of income, the fund's Class A, B, and C Shares paid monthly dividends
totaling $0.51, $0.45, and $0.45 per share, respectively over the 12-month
reporting period.
* Performance quoted is based on net asset value, represents past performance,
and is not indicative of future results. Investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Total returns for the period based on
offering price for Class A, B, and C Shares were 5.26%, 3.38%, and 8.19%,
respectively.
** Merrill Lynch 5-Year and 10-Year Treasury Note indices comprise the most
recently issued 5-year and 10-year U.S. Treasury notes. Index returns are
calculated as total returns for periods of 1, 3, 6, and 12 months as well as
year-to-date. Indices are unmanaged, and investments cannot be made in an
index.
+ Lipper U.S. Mortgage Funds Average represents the average of the total returns
reported by all mutual funds designated by Lipper Analytical Services, Inc. as
falling into this category. The category contains funds that invest at least
65% of assets in mortgages/securities issued or guaranteed as to the principal
and interest by the U.S. government and certain federal agencies. This figure
does not reflect sales charges.
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WHAT ARE YOUR EXPECTATIONS FOR THE REMAINDER OF 1998, AND HOW WILL THAT IMPACT
YOUR STRATEGY?
The U.S. economic environment continues to pursue the best of both
worlds--steady growth without inflation. The signs of strength have been solid
consumer spending, continued strength in employment, and a pickup in housing
activity. While there is concern of an economic slowdown due to weaker
manufacturing activity and the Asian crisis, to date these effects have been
slight. Inflation, as measured by the Consumer Price Index, has also contributed
to this favorable environment. The 1.4% year-over-year change in the Index marks
the lowest increase since the 1960s. The Federal Reserve Board is likely to keep
rates on hold in the near term unless there are dramatic changes in growth or
inflation.
As a result, the current environment in bonds continues to be a trading range
which will continue until the release of further economic data confirming a
slowdown in economic growth and continued low inflation. The mortgage-backed
securities market will incur some bumps along the way, as the low rates earlier
this year filter through the prepayment numbers which will be released over the
next several months. Overall, we continue to believe that the focus on
mortgage-backed securities with prepayment protection will serve investors well
moving through the remainder of 1998.
BOND INVESTING TERMS
MATURITY -- The amount of time in which a bond's principal becomes due.
COUPON -- The interest rate on a bond that the issuer promises to pay until the
bond matures.
CURRENT YIELD -- The amount of interest paid by a bond, expressed as a
percentage of its value. Yield may differ from the coupon because the bond's
value may change over time. As a bond's price falls, its yield rises, and vice
versa.
DURATION -- A measurement of a bond's price volatility relative to a change in
the general level of interrest rates. Duration takes into account the size of
the coupon and the time to maturity. Generally, longer or higher durations have
more risk than shorter or lower durations.
INVESTMENT GRADE BONDS -- Corporate and municipal bonds rated within the top
four categories (Baa or higher by Moody's or BBB or higher by Standard & Poor's)
based on the issuer's ability to pay the interest and principal. Bonds rated
lower are more speculative. U.S. Treasury and government agency bonds are not
rated because the payment of principal and interest are guaranteed directly by
the U.S. government or the issing agency.
FEDERAL RESERVE BOARD -- Under the direction of a Chairman (currently Alan
Greenspan), the Federal Reserve Board (the Fed) consists of seven-members that
are appointed by the President. The Fed regulates the U.S. monetary and banking
system and sets economic policy, including the direction of short-term interest
rates. When the Fed is said to "tighten," it raises rates. When it "eases," it
lowers rates.
MORTGAGE-BACKED BOND -- A bond that gives the owner an interest in a group of
home mortgages, known as a pool.
PREPAYMENTS -- This occurs when homeowners move or refinance mortgages to take
advantage of lower interest rates. As a result, the principal is paid off to
investors who own interests in the mortgages--and have to reinvest in a lower
rate environment.
PASS-THROUGH MORTGAGE SECURITIES -- A group of mortgages pooled together and
sold to investors.
GNMA -- An abbreviation for the Government National Mortgage Association, a U.S.
government agency that issues pass-through mortgage securities. These securities
are known as "Ginnie Maes," and the their payment of principal and interest is
guaranteed by the U.S. government.
FNMA -- An abbreviation for the Federal National Mortgage Association, a
publicly owned, government-sponsored company that buys mortgages from lenders
and packages them into securities for sale to investors. This agency and each
mortgage-backed security are also known as "Fannie Mae."
FHLMC -- An abbreviation for the Federal Home Loan Mortgage Corporation, an
agency that buys mortgages from lenders and packages them into securities for
sale to investors. The agency and each mortgage-backed security it issues are
also known as "Freddie Mac."
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
INITIAL INVESTMENT:
IF YOU HAD MADE AN INITIAL INVESTMENT OF $29,000 IN THE CLASS A SHARES OF
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC. ON 10/6/69, REINVESTED YOUR
DIVIDENDS AND CAPITAL GAINS, AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD
HAVE BEEN WORTH $232,918 ON 3/31/98. YOU WOULD HAVE EARNED A 7.59%* AVERAGE
ANNUAL TOTAL RETURN FOR THE INVESTMENT LIFESPAN.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 3/31/98, Class A Shares' average annual 1-year, 5-year, and 10-year total
returns were 5.26%, 4.69%, and 7.06%, respectively. Class B Shares' average
annual 1-year and since inception (7/26/94) total returns were 3.38% and 6.02%,
respectively. Class C Shares' average annual 1-year and since inception
(4/27/93) total returns were 8.19% and 4.77%, respectively.**
[GRAPHIC REPRESENTATION OMITTED
SEE APPENDIX A1]
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 4.50%
sales charge applicable to an initial investment in Class A Shares.
Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
** The total return stated takes into account the 4.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge for Class B Shares, and
the 1.00% contingent deferred sales charge for Class C Shares..
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
ONE STEP AT A TIME:
$1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR FOR 28
YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $105,263.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of Federated
Fund for U.S. Government Securities, Inc. on 10/6/69, reinvested your dividends
and capital gains, and did not redeem any shares, you would have invested only
$29,000, but your account would have reached a total value of $105,263* by
3/31/98. You would have earned an average annual total return of 7.89%.
A practical investment plan helps you pursue long-term performance from U.S.
government securities. Through systematic investing, you buy shares on a regular
basis and reinvest all earnings. An investment plan works for you when you
invest only $1,000 annually. You can take it one step at a time.
Put time, money, and compounding to work.
[GRAPHIC REPRESENTATION OMITTED
SEE APPENDIX A2]
* This chart assumes that the subsequent annual investments are made on the last
day of each anniversary month. No method of investing can guarantee a profit
or protect against loss in down markets. However, by investing regularly over
time and buying shares at various prices, investors can purchase more shares
at lower prices. All accumulated shares have the ability to pay income to the
investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR CURRENT INCOME
Ten years ago in March 1988, Anne and Denny Laughlin, an imaginary working
couple with no children, had to decide how to invest a $100,000 inheritance from
her late father's estate. They chose Federated Fund for U.S. Government
Securities, Inc. because it invests in government securities which traditionally
are some of the safest, most creditworthy securities issued in America.
They like the way they can use their account for an occasional
extravagance--like the $50,000 Jaguar they bought last August to celebrate their
anniversary--without touching their original principal.
The Laughlin's account totaled $199,496 as of March 31, 1998, for an average
annual total return of 7.15%.
[GRAPHIC REPRESENTATION OMITTED
SEE APPENDIX A3]
This hypothetical scenario is provided for illustrative purposes only and
does not represent the result obtained by any particular shareholder. Past
performance does not guarantee future results.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
A HISTORY OF SOLID EARNINGS-- TWENTY 10-YEAR PERIODS
$10,000 INVESTED WITH DISTRIBUTIONS REINVESTED
How a $10,000 investment grew during each 10-year period since the fund's
inception.
This chart shows what your account would be worth had you invested $10,000 in
Class A Shares at the beginning of these consecutive decades.
OVER EVERY 10-YEAR PERIOD SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT IN
ITS CLASS A SHARES (WITH ALL DIVIDENDS AND CAPITAL GAINS REINVESTED) GREW IN
VALUE. At the end of each decade, no investor who stayed invested for the period
would have lost money.
A HISTORY OF INVESTMENT
INITIAL DIVIDENDS AND
APRIL 1 - NUMBER CAPITAL GAINS TOTAL ENDING VALUE
MARCH 31 OF SHARES REINVESTED SHARES OF SHARES
1969-1979* 955 $ 8,163 1,858 $16,797
1970-1980 951 7,432 1,981 14,302
1971-1981 866 6,993 1,838 13,218
1972-1982 907 7,349 1,997 13,460
1973-1983 935 10,113 2,120 18,085
1974-1984 991 10,955 2,319 19,132
1975-1985 1007 12,169 2,461 20,598
1976-1986 988 13,416 2,518 22,082
1977-1987 978 13,523 2,556 21,908
1978-1988 1015 14,314 2,717 22,852
1979-1989 1056 14,552 2,873 23,010
1980-1990 1323 18,900 3,619 29,786
1981-1991 1328 19,392 3,634 30,561
1982-1992 1416 20,128 3,782 32,182
1983-1993 1120 15,490 2,942 25,008
1984-1994 1157 14,218 2,959 23,350
1985-1995 1141 12,590 2,782 21,341
1986-1996 1089 11,256 2,528 19,775
1987-1997 1115 10,768 2,515 19,344
1988-1998 1135 10,823 2,506 19,794
* This 10-year period is October 6, 1969 through March 31, 1979.
For each time period shown, share price fluctuated.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
CLASS A SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES,
INC. (CLASS A SHARES)
The graph below illustrates the hypothetical investment of $10,000* in
Federated Fund for U.S. Government Securities, Inc. (Class A Shares) (the
"Fund") from March 31, 1988 to March 31, 1998, compared to the Lehman
Brothers 5-Year Treasury Bellwether Index (LB5YRTBI), the Salomon Brothers
15-Year Mortgage Index (SB15YRMI), the Lehman Brothers Mortgaged-Backed
Securities Index (LBMBSI), and the Lipper U.S. Mortgage Funds Average
(LUSMFA).+
[GRAPHIC REPRESENTATION OMITTED
SEE APPENDIX A4]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge
= $9,550). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LB5YRTBI, SB15YRMI, LBMBSI, and the LUSMFA have been
adjusted to reflect reinvestment of dividends on securities in the indices and
the average.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The LB5YRTBI, SB15YRMI, and LBMBSI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged. The LUSMFA represents the average of
the total returns reported by all of the mutual funds designated by Lipper
Analytical Services, Inc. as falling into this category, and is not adjusted
to reflect any sales charges. However, these total returns are reported net of
expenses or other fees that the SEC requires to be reflected in a fund's
performance. The Fund has elected to change the benchmark index from the
SB15YRMI to the LBMBSI. The LBMBSI is more representative of the securities in
which the Fund invests. It is composed of all fixed rate securitized mortgage
pools by Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corp. (FHMLC),
including GNMA Graduated Payment Mortgages, all of which can have maturities
in excess of 15 years. In contrast, while the SB15YRMI consists of many of the
same securities, it limits their maturities to 15 years.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
CLASS B SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES,
INC. (CLASS B SHARES)
The graph below illustrates the hypothetical investment of $10,000* in
Federated Fund for U.S. Government Securities, Inc. (Class B Shares) (the
"Fund") from July 26, 1994 (start of performance) to March 31, 1998,
compared to the Lehman Brothers 5-Year Treasury Bellwether Index (LB5YRTBI),
the Salomon Brothers 15-Year Mortgage Index (SB15YRMI), the Lehman Brothers
Mortgage-Backed Securities Index (LBMBSI), and the Lipper U.S. Mortgage
Funds Average (LUSMFA).+
[GRAPHIC REPRESENTATION OMITTED
SEE APPENDIX A5]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 3.00% contingent deferred sales charge on any
redemption less than four years from the purchase date. The maximum contingent
deferred sales charge is 5.50% on any redemption less than one year from the
purchase date. The Fund's performance assumes the reinvestment of all
dividends and distributions. The LB5YRTBI, SB15YRMI, LUSMFA, and LBMBSI have
been adjusted to reflect reinvestment of dividends on securities in the
indices and the average.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The LB5YRTBI, SB15YRMI, and LBMBSI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged. The LUSMFA represents the average of
the total returns reported by all of the mutual funds designated by Lipper
Analytical Services, Inc. as falling into this category and is not adjusted to
reflect any sales charges. However, these total returns are reported net of
expenses or other fees that the SEC requires to be reflected in a fund's
performance.
The Fund has elected to change the benchmark index from the SB15YRMI to the
LBMBSI. The LBMBSI is more representative of the securities in which the Fund
invests. It is composed of all fixed rate securitized mortgage pools by
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corp. (FHMLC),
including GNMA Graduated Payment Mortgages, all of which can have maturities
in excess of 15 years. In contrast, while the SB15YRMI consists of many of the
same securities, it limits their maturities to 15 years.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
CLASS C SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES,
INC. (CLASS C SHARES)
The graph below illustrates the hypothetical investment of $10,000* in
Federated Fund for U.S. Government Securities, Inc. (Class C Shares) (the
"Fund") from April 27, 1993 (start of performance) to March 31, 1998,
compared to the Lehman Brothers 5-Year Treasury Bellwether Index (LB5YRTBI),
the Salomon Brothers 15-Year Mortgage Index (SB15YRMI), the Lehman Brothers
Mortgage-Backed Securities Index (LBMBSI), and the Lipper U.S. Mortgage
Funds Average (LUSMFA).+
[GRAPHIC REPRESENTATION OMITTED
SEE APPENDIX A6]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 1.00% contingent deferred sales charge on any
redemption less than one year from the purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions. The LB5YRTBI,
SB15YRMI, LUSMFA, and LBMBSI have been adjusted to reflect reinvestment of
dividends on securities in the indices and the average.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The LB5YRTBI, SB15YRMI, and LBMBSI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged. The LUSMFA represents the average of
the total returns reported by all of the mutual funds designated by Lipper
Analytical Services, Inc. as falling into this category and is not adjusted to
reflect any sales charges. However, these total returns are reported net of
expenses or other fees that the SEC requires to be reflected in a fund's
performance. The Fund has elected to change the benchmark index from the
SB15YRMI to the LBMBSI. The LBMBSI is more representative of the securities in
which the Fund invests. It is composed of all fixed rate securitized mortgage
pools by Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corp. (FHMLC),
including GNMA Graduated Payment Mortgages, all of which can have maturities
in excess of 15 years. In contrast, while the SB15YRMI consists of many of the
same securities, it limits their maturities to 15 years.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM U.S. GOVERNMENT OBLIGATIONS--98.8%
FEDERAL HOME LOAN MORTGAGE CORPORATION--3.8%
$ 48,447,311 7.00%, 10/1/2012 - 12/1/2012 $ 49,295,139
7,828 11.00%, 12/1/2017 8,642
54,953 11.75%, 1/1/2011 63,068
8,478 12.00%, 6/1/2000 8,895
1,301 12.50%, 10/1/2012 1,498
8,945 12.75%, 1/1/2013 - 10/1/2013 10,230
57,570 13.00%, 11/1/1999 - 2/1/2015 65,748
62,384 13.25%, 3/1/2014 72,277
15,639 13.50%, 10/1/2013 18,146
42,979 13.75%, 1/1/2011 - 10/1/2011 50,089
320 14.00%, 12/1/2012 371
81,066 14.50%, 8/1/2012 - 10/1/2012 93,576
8,021 14.75%, 8/1/2011 9,327
4,718 15.50%, 8/1/2011 5,821
Total 49,702,827
FEDERAL HOME LOAN MORTGAGE CORPORATION REMIC--4.6%
29,949,000 Series 1468-HA, 5.00%, 2/15/2021 28,003,213
21,350,000 Series 1621-E, 5.50%, 6/15/2018 21,182,830
10,000,000 Series 1666-H, 6.25%, 9/15/2023 9,942,000
Total 59,128,043
FEDERAL NATIONAL MORTGAGE ASSOCIATION--9.2%
20,190,823 6.50%, 3/1/2028 - 4/1/2028 19,965,777
60,000,000 (a)7.00%, 5/1/2028 60,600,000
</TABLE>
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM U.S. GOVERNMENT OBLIGATIONS--CONTINUED
FEDERAL NATIONAL MORTGAGE ASSOCIATION--CONTINUED
$ 36,567,419 8.50%, 12/1/2026 $ 38,281,699
265,159 11.00%, 10/1/2010 296,330
6,118 11.75%, 10/1/2015 7,010
4,255 12.00%, 7/1/1999 - 1/1/2013 4,566
9,339 12.25%, 3/1/2005 - 8/1/2013 10,098
10,132 12.50%, 8/1/2013 11,731
72,850 12.75%, 10/1/2010 - 8/1/2014 84,433
39,678 13.00%, 6/1/2000 - 8/1/2015 45,342
133,075 13.50%, 10/1/2014 - 12/1/2014 155,240
3,480 13.75%, 6/1/2014 4,046
6,154 14.00%, 11/1/2014 7,194
47,294 14.50%, 11/1/2012 55,290
7,632 15.00%, 10/1/2012 8,919
Total 119,537,675
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--77.3%
110,589,109 6.50%, 11/15/2023 - 12/15/2025 109,892,565
210,386,100 7.00%, 7/15/2023 - 3/15/2028 212,804,486
43,800,000 (b)7.00%, 4/15/2028 44,238,000
302,213,219 7.50%, 1/15/1999 - 2/15/2028 310,708,824
172,037,181 8.00%, 5/15/2017 - 9/15/2026 179,054,548
24,349,084 8.50%, 11/15/2017 - 8/15/2026 25,929,324
79,688,488 9.00%, 11/15/2017 - 9/15/2025 86,301,928
27,957,982 9.50%, 9/15/2016 - 8/15/2023 30,549,277
</TABLE>
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM U.S. GOVERNMENT OBLIGATIONS--CONTINUED
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--CONTINUED
$ 35,929 10.50%, 4/15/1998 - 1/15/2001 $ 36,649
568 11.25%, 9/20/2015 642
530 11.50%, 10/20/1999 542
74,853 11.75%, 7/15/2013 84,783
18,511 12.00%, 2/20/1999 - 5/15/2000 19,466
3,942 12.50%, 7/15/1999 - 5/20/2000 4,058
5,734 12.75%, 11/15/1999 5,987
210,450 13.00%, 9/15/1999 - 9/20/2014 242,616
8,657 13.50%, 9/20/1999 8,898
25,068 13.75%, 9/15/2014 29,173
Total 999,911,766
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--2.3%
9,723,925 6.00%, 11/15/2027 9,840,126
18,869,020 7.00%, 1/20/2022 - 9/20/2023 19,353,024
Total 29,193,150
SMALL BUSINESS ADMINISTRATION--0.0%
1,300,751 (c)1.394%, (Interest Only) 4/1/1998 31,409
21,305 10.125%, 3/25/2000 21,685
Total 53,094
U.S. TREASURY NOTE--1.6%
21,000,000 5.75%, 11/30/2002 21,066,780
TOTAL LONG-TERM U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $1,251,320,149) $ 1,278,593,335
</TABLE>
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(D)REPURCHASE AGREEMENTS--9.4%
$ 17,880,000 BT Securities Corp., 5.97%, dated 3/31/1998, $ 17,880,000
due 4/1/1998
43,800,000 (e)Credit Suisse First Boston, Inc., 5.52%,
dated 3/13/1998,
due 4/20/1998 43,800,000
50,000,000 (e)Goldman Sachs Group, LP, 5.47%, dated
3/27/1998,
due 5/13/1998 50,000,000
10,000,000 (e)J.P. Morgan & Co., Inc., 5.48%, dated 10,000,000
3/27/1998, due 5/13/1998
TOTAL REPURCHASE AGREEMENT (AT AMORTIZED COST) 121,680,000
TOTAL INVESTMENTS (IDENTIFIED COST $ 1,400,273,335
$1,373,000,149)(F)
</TABLE>
(a) This security is subject to forward dollar roll transactions.
(b) This security is subject to dollar roll transactions.
(c) Floating rate note with current rate and next reset date shown.
(d) The repurchase agreements are fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio. The
investments in the repurchase agreements are through participation in joint
accounts with other Federated funds.
(e) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days.
(f) The cost of investments for federal tax purposes amounts to $1,373,000,149.
The net unrealized appreciation of investments on a federal tax basis
amounts to $27,273,186 which is comprised of $28,341,810 appreciation and
$1,068,624 depreciation at March 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($1,293,793,372) at March 31, 1998.
The following acronyms are used throughout this portfolio:
ARM --Adjustable Rate Mortgages
LP --Limited Partnership
REMIC --Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $1,400,273,335
$1,373,000,149)
Income receivable 7,723,328
Receivable for investments sold 50,601,312
Receivable for shares sold 5,944,440
Total assets 1,464,542,415
LIABILITIES:
Payable for investments purchased $ 120,818,125
Payable for shares redeemed 2,308,953
Income distribution payable 2,382,249
Payable for dollar roll transactions 44,471,494
Accrued expenses 768,222
Total liabilities 170,749,043
NET ASSETS for 163,710,156 shares outstanding $1,293,793,372
NET ASSETS CONSIST OF:
Paid in capital $1,427,470,378
Net unrealized appreciation of investments 27,273,186
Accumulated net realized loss on investments (168,767,254)
Undistributed net investment income 7,817,062
Total Net Assets $1,293,793,372
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($1,138,450,450 / 144,054,940 shares $7.90
outstanding)
Offering Price Per Share (100/95.50 of $7.90)* $8.27
Redemption Proceeds Per Share $7.90
CLASS B SHARES:
Net Asset Value Per Share ($107,224,544 / 13,569,226 shares $7.90
outstanding)
Offering Price Per Share $7.90
Redemption Proceeds Per Share (94.50/100 of $7.90)* $7.47
CLASS C SHARES:
Net Asset Value Per Share ($48,118,378 / 6,085,990 shares $7.91
outstanding)
Offering Price Per Share $7.91
Redemption Proceeds Per Share (99.00/100 of $7.91)* $7.83
</TABLE>
* See "Investing in the Fund" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar roll expense of $3,024,146) $ 97,960,703
EXPENSES:
Investment advisory fee $ 7,402,162
Administrative personnel and services fee 1,006,395
Custodian fees 105,843
Transfer and dividend disbursing agent fees and expenses 1,415,908
Directors'/Trustees' fees 12,123
Auditing fees 23,282
Legal fees 8,618
Portfolio accounting fees 174,855
Distribution services fee--Class B Shares 769,612
Distribution services fee--Class C Shares 391,101
Shareholder services fee--Class A Shares 2,946,973
Shareholder services fee--Class B Shares 256,538
Shareholder services fee--Class C Shares 130,367
Share registration costs 47,000
Printing and postage 148,812
Insurance premiums 10,926
Miscellaneous 21,888
Total expenses 14,872,403
Waivers
Waiver of shareholder services fee--Class A Shares $ (953,019)
Waiver of shareholder services fee--Class B Shares (1,625)
Waiver of shareholder services fee--Class C Shares (1,229)
Total waivers (955,873)
Net expenses 13,916,530
Net investment income 84,044,173
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 13,521,505
Net change in unrealized appreciation of investments 31,409,180
Net realized and unrealized gain on investments 44,930,685
Change in net assets resulting from operations $ 128,974,858
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 84,044,173 $ 91,996,880
Net realized gain (loss) on investments ($11,329,355 net gain
and $20,479,836 net loss, respectively, as computed for
federal
tax purposes) 13,521,505 (22,638,986)
Net change in unrealized appreciation/depreciation 31,409,180 (2,749,753)
Change in net assets resulting from operations 128,974,858 66,608,141
NET EQUALIZATION CREDITS (DEBITS)-- (794,932) (1,276,332)
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (76,464,715) (80,122,258)
Class B Shares (5,856,259) (5,509,826)
Class C Shares (2,931,158) (3,782,566)
Change in net assets resulting from distributions
to shareholders (85,252,132) (89,414,650)
SHARE TRANSACTIONS--
Proceeds from sale of shares 168,006,126 153,017,859
Net asset value of shares issued to shareholders in payment of
distributions declared 53,229,763 55,974,907
Cost of shares redeemed (303,722,752) (354,947,794)
Change in net assets resulting from share transactions (82,486,863) (145,955,028)
Change in net assets (39,559,069) (170,037,869)
NET ASSETS:
Beginning of period 1,333,352,441 1,503,390,310
End of period (including undistributed net investment income
of $7,817,062 and $9,025,021, respectively) $ 1,293,793,372 $ 1,333,352,441
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.65 $ 7.78 $ 7.67 $ 7.89 $ 8.50
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.50 0.51 0.54 0.57 0.63
Net realized and unrealized gain
(loss)
on investments 0.26 (0.14) 0.12 (0.23) (0.61)
Total from investment operations 0.76 0.37 0.66 0.34 0.02
LESS DISTRIBUTIONS
Distributions from net investment (0.51) (0.50) (0.55) (0.56) (0.63)
income
NET ASSET VALUE, END OF PERIOD $ 7.90 $ 7.65 $ 7.78 $ 7.67 $ 7.89
TOTAL RETURN(A) 10.21% 4.88% 8.77% 4.59% 0.13%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.94% 0.95% 0.95% 0.95% 0.88%
Net investment income 6.40% 6.60% 6.80% 7.41% 7.50%
Expense waiver/reimbursement(b) 0.08% 0.12% 0.11% 0.02% ---
SUPPLEMENTAL DATA
Net assets, end of period (000 $1,138,450 $1,177,071 $1,330,272 $1,367,710 $1,693,293
omitted)
Portfolio turnover 88% 120% 157% 154% 149%
</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.
(See Notes which are an integral part of the Financial Statements)
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996 1995(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.66 $ 7.78 $ 7.67 $ 7.75
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.44 0.44 0.49 0.37
Net realized and unrealized gain (loss) on 0.25 (0.13) 0.11 (0.06)
investments
Total from investment operations 0.69 0.31 0.60 0.31
LESS DISTRIBUTIONS
Distributions from net investment income (0.45) (0.43) (0.49) (0.37)
Distributions in excess of net investment -- -- -- (0.02)
income(b)
Total distributions (0.45) (0.43) (0.49) (0.39)
NET ASSET VALUE, END OF PERIOD $ 7.90 $ 7.66 $ 7.78 $ 7.67
TOTAL RETURN(C) 9.16% 4.13% 7.90% 4.13%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.77% 1.80% 1.78% 1.76%*
Net investment income 5.57% 5.75% 5.93% 7.02%*
Expense waiver/reimbursement(d) 0.00% 0.02% 0.04% 0.06%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $107,225 $100,439 $93,169 $34,276
Portfolio turnover 88% 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 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.
(See Notes which are an integral part of the Financial Statements)
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996 1995 1994(A)(B)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.66 $ 7.78 $ 7.67 $ 7.89 $ 8.54
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.44 0.45 0.47 0.51 0.54
Net realized and unrealized gain (loss)
on investments 0.26 (0.13) 0.12 (0.23) (0.63)
Total from investment operations 0.70 0.32 0.59 0.28 (0.09)
LESS DISTRIBUTIONS
Distributions from net investment income (0.45) (0.44) (0.48) (0.50) (0.54)
Distributions in excess of net investment
income(c) -- -- -- -- (0.02)
Total distributions (0.45) (0.44) (0.48) (0.50) (0.56)
NET ASSET VALUE, END OF PERIOD $ 7.91 $ 7.66 $ 7.78 $ 7.67 $ 7.89
TOTAL RETURN(D) 9.29% 4.14% 7.85% 3.72% (1.17%)
RATIOS TO AVERAGE NET ASSETS
Expenses 1.77% 1.80% 1.79% 1.79% 1.81%*
Net investment income 5.57% 5.74% 5.96% 6.56% 6.45%*
Expense waiver/reimbursement(e) 0.00% 0.02% 0.02% 0.02% --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $48,118 $55,842 $79,949 $80,519 $103,433
Portfolio turnover 88% 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 return
of capital for federal income tax purpose.
(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.
(See Notes which are an integral part of the Financial Statements)
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
1. ORGANIZATION
Federated Fund for U.S. Government Securities, Inc. (the "Fund") is
registered under the Investment Company Act of 1940, as amended (the "Act"),
as a diversified, open-end management investment company. The Fund offers
three classes of shares: Class A Shares, Class B Shares, and Class C Shares.
The investment objective of the Fund is to provide current income.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS -- U.S. government securities are generally valued at the
mean of the latest bid and asked price as furnished by an independent pricing
service. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with remaining
maturities of sixty days or less at the time of purchase may be valued at
amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS -- It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS -- Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Distributions to
shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for equalization.
The following reclassifications have been made to the financial statements.
INCREASE (DECREASE)
UNDISTRIBUTED NET
PAID-IN CAPITAL INVESTMENT INCOME
$(794,932) $794,932
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES -- It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At March 31, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $168,862,760, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal tax. Pursuant to the Code, such capital loss carryforward
will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2001 $ 1,192,442
2002 19,245,203
2003 123,323,419
2004 4,621,860
2005 20,479,836
EQUALIZATION -- The Fund follows the accounting practice known as equalization.
With equalization, a portion of the proceeds from sales and costs of redemptions
of Fund shares (equivalent, on a per share basis, to the amount of undistributed
net investment income on the date of the transaction) is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or redemptions of Fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
DOLLAR ROLL TRANSACTIONS -- The Fund enters into dollar roll transactions, with
respect to mortgage securities issued by GNMA, FNMA and FHLMC, in which the Fund
sells mortgage securities to financial institutions and simultaneously agrees to
accept substantially similar (same type, coupon and maturity) securities at a
later date at an agreed upon price. Dollar roll transactions involve "to be
announced" securities and are treated as short-term financing arrangements which
will not exceed twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments, which may enhance the Fund's
current yield and total return.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ from
those estimated.
OTHER -- Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
At March 31, 1998, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF PAR VALUE
CLASS NAME CAPITAL STOCK AUTHORIZED
Class A Shares 750,000,000
Class B Shares 500,000,000
Class C Shares 750,000,000
Total 2,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 15,417,220 $ 120,074,973 13,802,678 $ 106,373,098
Shares issued to
shareholders in
payment of distributions 6,176,322 48,245,312 6,594,535 50,648,967
declared
Shares redeemed (31,378,305) (244,988,746) (37,560,941) (288,629,597)
Net change resulting
from Class A Share (9,784,763) $ (76,668,461) (17,163,728) $ (131,607,532)
transactions
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 4,539,299 $ 35,836,422 4,065,970 $ 31,504,278
Shares issued to
shareholders in
payment of distributions 435,630 3,427,033 420,703 3,252,961
declared
Shares redeemed (4,522,214) (35,616,226) (3,348,106) (25,930,245)
Net change resulting from
Class B Share transactions 452,715 $ 3,647,229 1,138,567 $ 8,826,994
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,528,796 $ 12,094,731 1,953,059 $ 15,140,483
Shares issued to
shareholders in
payment of distributions 198,010 1,557,418 268,312 2,072,979
declared
Shares redeemed (2,932,406) (23,117,780) (5,206,746) (40,387,952)
Net change resulting from
Class C share transactions (1,205,600) $ (9,465,631) (2,985,375) $ (23,174,490)
Net change resulting from
share transactions (10,537,648) $ (82,486,863) (19,010,536) $ (145,955,028)
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE -- Federated Advisers, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to (a) a maximum of 0.25% of the average daily net assets of the Fund, and
(b) 4.5% of gross income of the Fund, excluding capital gains or losses. The
Adviser may voluntarily choose to waive any portion of its fee. The Adviser can
modify or terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE -- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE -- The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the
Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Class B Shares and Class C Shares. The Plan
provides that the Fund may incur distribution expenses according to the
following schedule annually, to compensate FSC.
PERCENTAGE OF AVERAGE DAILY
SHARE CLASS NAME NET ASSETS OF CLASS
Class B Shares 0.75%
Class C Shares 0.75%
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
SHAREHOLDER SERVICES FEE -- Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ, through its
subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer
and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES -- FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL -- Certain of the Officers and Directors of the Fund are Officers and
Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended March 31, 1998, were as follows:
PURCHASES $1,182,711,772
SALES $1,149,475,585
6. YEAR 2000 ISSUE
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Fund for U.S. Government Securities,
Inc. as of March 31, 1998, the related statement of operations for the year then
ended, the statements of changes in net assets for the years ended March 31,
1998 and 1997, and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1998, by correspondence with the custodian and brokers; where replies were
not received, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Fund for
U.S. Government Securities, Inc. as of March 31, 1998, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
May 8, 1998
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
J. Christopher Donahue
President
Richard B. Fisher
Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President,
Treasurer, and Secretary
Matthew S. Hardin
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus, which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
[Graphic]
Cusip 314182106
Cusip 314182205
Cusip 314182304
8042505 (5/98)
[Graphic]
APPENDIX
A1. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 10/6/69
to 3/31/98. The "y" axis is measured in increments of $40,000 ranging from $0 to
$280,000 and indicates that the ending value of hypothetical initial investment
of $29,000 in the fund, assuming the reinvestment of capital gains and
dividends, would have grown to $232,918 on 3/31/98.
A2: The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 10/6/69
to 3/31/98. The "y" axis is measured in increments of $20,000 ranging from $0 to
$120,000 and indicates that the ending value of hypothetical yearly investments
of $1,000 in the fund, assuming the reinvestment of capital gains and dividends,
would have grown to $105,263 on 3/31/98.
A3: The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 3/31/88
to 3/31/98. The "y" axis is measured in increments of $37,000 ranging from $0 to
$225,000 and indicates that the ending value of hypothetical initial investment
of $100,000 in the fund, assuming the reinvestment of capital gains and
dividends, would have grown to $199,496 on 3/31/98.
A4: The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Class A Shares
of Federated Fund for U.S. Government Securities, Inc., (the "Fund") are
represented by a solid line. The Lehman Brothers 5-Year Treasury Bellwether
Index ("LB5YRTBI") is represented by a dotted line, the Salomon Brothers 15-Year
Mortgage Index ("SB15YRMI") is represented by a dashed line, the Lehman Brothers
Mortgaged-Backed Securities Index ("LBMBSI") is represented by a broken line and
the Lipper U.S. Mortgage Funds Average ("LUSMFA") is represented by a broken /
dotted line. The line graph is a visual representation of a comparison of change
in value of a $10,000 hypothetical investment in Class A Shares of the Fund, the
LB5YRTBI, the SB15YRM, the LBMBSI and the LUSMFA. The "x" axis reflects
computation periods from 3/31/88 to 3/31/98. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in Class A Shares of the Fund as compared to the LB5YRTBI, the
SB15YRM, the LBMBSI and the LUSMFA. The ending values were $19,793, $21,266,
$23,345, $23,719, and $21,249, respectively. The legend in the bottom quadrant
of the graphic presentation indicates the Fund's Average Annual Total Returns
for the one, five and ten year periods ended 3/31/98 and from the start of
performance of the Fund (10/6/69) to 3/31/98. The total returns were 5.26%,
4.69%, 7.06% and 7.59%, respectively.
A5: The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Class B Shares
of Federated Fund for U.S. Government Securities, Inc., (the "Fund") are
represented by a solid line. The Lehman Brothers 5-Year Treasury Bellwether
Index ("LB5YRTBI") is represented by a dotted line, the Salomon Brothers 15-Year
Mortgage Index ("SB15YRMI") is represented by a dashed line, the Lehman Brothers
Mortgaged-Backed Securities Index ("LBMBSI") is represented by a broken line and
the Lipper U.S. Mortgage Funds Average ("LUSMFA") is represented by a broken /
dotted line. The line graph is a visual representation of a comparison of change
in value of a $10,000 hypothetical investment in Class B Shares of the Fund, the
LB5YRTBI, the SB15YRM, the LBMBSI and the LUSMFA. The "x" axis reflects
computation periods from 7/26/94 to 3/31/98. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in Class B Shares of the Fund as compared to the LB5YRTBI, the
SB15YRM, the LBMBSI and the LUSMFA. The ending values were $12,347, $13,001,
$13,740, $13,600, and $13,057, respectively. The legend in the bottom quadrant
of the graphic presentation indicates the Fund's Average Annual Total Returns
for the one year period ended 3/31/98 and from the start of performance of the
Fund (7/26/94) to 3/31/98. The total returns were 3.38% and 6.02%, respectively.
A6: The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Class C Shares
of Federated Fund for U.S. Government Securities, Inc., (the "Fund") are
represented by a solid line. The Lehman Brothers 5-Year Treasury Bellwether
Index ("LB5YRTBI") is represented by a dotted line, the Salomon Brothers 15-Year
Mortgage Index ("SB15YRMI") is represented by a dashed line, the Lehman Brothers
Mortgaged-Backed Securities Index ("LBMBSI") is represented by a broken line and
the Lipper U.S. Mortgage Funds Average ("LUSMFA") is represented by a broken /
dotted line. The line graph is a visual representation of a comparison of change
in value of a $10,000 hypothetical investment in Class C Shares of the Fund, the
LB5YRTBI, the SB15YRM, the LBMBSI and the LUSMFA. The "x" axis reflects
computation periods from 4/27/93 to 3/31/98. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in Class C Shares of the Fund as compared to the LB5YRTBI, the
SB15YRM, the LBMBSI and the LUSMFA. The ending values were $12,583, $13,240,
$14,016, $13,907, and $13,196, respectively. The legend in the bottom quadrant
of the graphic presentation indicates the Fund's Average Annual Total Returns
for the one year period ended 3/31/98 and from the start of performance of the
Fund (4/27/93) to 3/31/98. The total returns were 8.19% and 4.77%, respectively.
