28
PROSPECTUS
Federated Fund for
U.S. Government Securities, Inc.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
A mutual fund seeking to provide current income by investing at least 65% of its
assets in a diversified portfolio of U.S. government securities.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus, and any representation to the contrary is a criminal offense.
MAY 31, 1999
CONTENTS
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities
in Which the Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 8
What Do Shares Cost? 9
How is the Fund Sold? 11
How to Purchase Shares 12
How to Redeem and Exchange Shares 13
Account and Share Information 16
Who Manages the Fund? 16
Financial Information 18
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective 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 strategies and policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund pursues its investment objective by investing at least 65% of its
assets in U.S. government securities, including mortgage backed securities
issued by U.S. government agencies. In addition, the Fund may invest up to 35%
of its assets in investment grade non-governmental mortgage backed securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
* INTEREST RATE RISK. Prices of the fixed income securities generally fall
when interest rates rise.
* PREPAYMENT RISK. When homeowners prepay their mortgages in response to lower
interest rates, the Fund will be required to reinvest the proceeds at the lower
interest rates available. Also, when interest rates fall, the price of mortgage
backed securities may not rise to as great an extent as that of other fixed
income securities.
* CREDIT RISK. It is possible that issuers of non-governmental mortgage backed
securities in which the Fund invests will fail to pay interest or principal on
these securities when due, which would result in the Fund losing money.
* LIQUIDITY RISK. The non-governmental mortgage backed securities in which
the Fund invests may be less readily marketable and may be subject to
greater fluctuation in price than other 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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
RISK/RETURN BAR CHART AND TABLE
The graphic presentation displayed here consists of a bar chart representing the
annual total returns of Class A Shares of the Fund as of the calendar year-end
for each of nine years.
The `y' axis reflects the "% Total Return" beginning with "(-4%)" and increasing
in increments of 4% up to 16%.
The `x' axis represents calculation periods from the earliest first full
calendar year end of the Fund's start of business through the calendar year
ended December 31, 1998. The light gray shaded chart features nine distinct
vertical bars, each shaded in charcoal, and each visually representing by height
the total return percentages for the calendar year stated directly at its base.
The calculated total return percentage for the Fund's Class A Shares for each
calendar year is stated directly at the top of each respective bar, for the
calendar years 1990 through 1998, The percentages noted are: 9.67%, 13.41%,
5.27%, 4.92%, (1.93%), 14.40%, 4.20%, 8.45%, and 6.31%.
The bar chart shows the variability of the Fund's Class A Shares total returns
on a calendar year-end basis.
The total returns displayed for the Fund's Class A Shares do not reflect the
payment of any sales charges or recurring shareholder account fees. If these
charges or fees had been included, the returns shown would have been lower.
The Fund's Class A Shares total return from January 1, 1999 to March 31, 1999
was 0.51%.
Within the period shown in the Chart, the Fund's Class A Shares highest
quarterly return was 7.91% (quarter ended June 30, 1989). Its lowest quarterly
return was (2.29%) (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Fund's Class A, B, and C Shares Average
Annual Total Returns, reduced to reflect applicable sales charges, for the
calendar periods ending December 31, 1998. The table shows the Fund's total
returns averaged over a period of years relative to the Lehman Brothers 5-Year
Treasury Bellwether Index (LB5YRTBI), the Lehman Brothers Mortgage Backed
Securities Index (LBMBSI), broad-based market indexes, and the Lipper U.S.
Mortgage Funds Average (LUSMFA), an average of funds with similar investment
objectives. Total returns for the indexes shown do not reflect sales charges,
expenses or other fees that the Securities and Exchange Commission requires to
be reflected in the Fund's performance. Indexes are unmanaged, and it is not
possible to invest directly in an index.
<TABLE>
<CAPTION>
CALENDAR PERIOD CLASS A CLASS B CLASS C LB5YRTBI LBMBSI LUSMFA
<S> <C> <C> <C> <C> <C> <C>
1 Year 1.56% (0.36%) 4.43% 9.60% 6.96% 6.23%
5 Years 5.17% N/A 5.29% 6.38% 7.23% 5.97%
10 Years 7.22% N/A N/A 8.47% 9.13% 8.04%
Start of Performance 1 7.56% 6.23% 4.88% - - -
</TABLE>
1 The Fund's Class A Shares, Class B Shares and Class C Shares start of
performance dates were October 6, 1969, July 26, 1994, and April 27, 1993,
respectively.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
rewards.
What are the Fund's Fees and Expenses?
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Shares of the Fund's Class A, B or C Shares.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 4.50% None None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or
redemption proceeds, as applicable) 0.00% 5.50% 1.00%
Maximum Sales Charge(Load) Imposed on Reinvested Dividends(and other Distributions)
(as a percentage of offering price). None None None
Redemption Fee (as a percentage of amount redeemed, if applicable) None None None
Exchange Fee None None None
ANNUAL FUND OPERATING
EXPENSES (Before Waivers) 1
Expenses That are Deducted From Fund Assets (as percentage of average net assets)
Management Fee 0.53% 0.53% 0.53%
Distribution (12b-1) Fee None 0.75% 0.75%
Shareholder Services Fee 2 0.25% 0.25% 0.25%
Other Expenses 0.20% 0.20% 0.20%
Total Annual Fund
Operating Expenses 0.98% 1.73% 3 1.73%
1 Although not contractually obligated to do so, the shareholder services
provider waived certain amounts. These are shown below along with the net
expenses the Fund actually paid for the fiscal year ended March 31, 1999.
Total Waiver of Fund Expenses 0.02% 0.00% 0.00%
Total Annual Fund Operating Expenses (after waiver) 0.96% 1.73% 1.73%
2 The shareholder services fee for Class A Shares has been voluntarily reduced.
This voluntary reduction can be terminated at any time. The shareholder services
fee paid by Class A Shares (after the voluntary reduction) was 0.23% for the
fiscal year ended March 31, 1999.
3 Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Class A, B, and C Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Class A, B, and C
Shares for the time periods indicated and then redeem all of your Shares at the
end of those periods. Expenses assuming no redemption are also shown. The
Example also assumes that your investment has a 5% return each year and that the
Fund's Class A, B, and C Shares operating expenses are BEFORE WAIVERS as shown
in the table and remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
CLASS A SHARES
Expenses assuming redemption $545 $748 $967 $1,597
Expenses assuming no redemption $545 $748 $967 $1,597
CLASS B SHARES
Expenses assuming redemption $726 $945 $1,139 $1,842
Expenses assuming no redemption $176 $545 $939 $1,842
CLASS C SHARES
Expenses assuming redemption $276 $545 $939 $2,041
Expenses assuming no redemption $176 $545 $939 $2,041
</TABLE>
What are the Fund's Investment Strategies?
The Fund invests at least 65% of its assets in a portfolio of U.S. government
securities. The Fund may also invest in investment grade mortgage backed
securities issued by non-governmental entities. A description of the various
types of securities in which the Fund invests, and their risks, immediately
follows this strategy section.
The Adviser allocates the Fund's portfolio holdings between mortgage backed
securities and other U.S. government securities, such as U.S. Treasury
securities. Mortgage backed securities generally offer higher relative yields
versus comparable U.S. Treasury securities to compensate for prepayment risk.
Prepayment risk is the unscheduled partial or complete payment of the principal
outstanding on a mortgage loan by the homeowner. One important reason for
prepayments is changes in market interest rates from the time of mortgage
origination. The Adviser actively manages the Fund's portfolio, seeking the
higher relative returns of mortgage backed securities while attempting to limit
the prepayment risk.
The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage
backed securities with characteristics that make prepayments less likely.
Characteristics that the Adviser may consider in selecting securities include
the average interest rates of the underlying mortgages, the prior prepayment
history of the mortgages and the federal agencies that securitize the mortgages.
The Adviser attempts to assess the relative returns and risks of mortgage backed
securities by analyzing how the timing, amount and division of cash flows from
the pool of mortgages underlying the security might change in response to
changing economic and market conditions.
The Adviser selects securities with longer or shorter duration based on its
interest rate outlook. The Adviser generally shortens the portfolio's average
duration when it expects interest rates to rise, and extends duration when it
expects interest rates to fall. Duration measures the price sensitivity of a
portfolio of fixed income securities to changes in interest rates. The Adviser
formulates its interest rate outlook and otherwise attempts to anticipate
changes in economic and market conditions by analyzing a variety of factors such
as:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* changes in the supply of or demand for U.S. government securities.
There is no assurance that the Adviser's efforts to forecast market interest
rates and assess the impact of market interest rates on particular securities
will be successful.
The Adviser may attempt to take advantage of current and potential yield
differentials existing from time to time between various mortgage backed
securities in order to increase the Fund's return. The Fund may also engage in
dollar roll transactions for their potential to enhance income.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash, cash items and shorter-term, higher-quality debt
securities and similar obligations. It may do this to minimize potential losses
and maintain liquidity to meet shareholder redemptions during adverse market
conditions. This may cause the Fund to give up greater investment returns to
maintain the safety of principal, that is, the original amount invested by
shareholders.
PORTFOLIO TURNOVER
Prepayments of mortgage backed securities will cause the Fund to have an
increased portfolio turnover rate. Portfolio turnover increases the Fund's
trading costs and may have an adverse impact on the Fund's performance.
What are the Principal Securities in Which the Fund Invests?
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
fixed rate. The rate may be a fixed percentage of principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security normally within a specified time.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
The following describes the principal types of fixed income securities in which
the Fund invests:
MORTGAGE BACKED SECURITIES
Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates, maturities
and other terms. Mortgages may have fixed or adjustable interest rates.
Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer deducts
its fees and expenses and passes the balance of the payments onto the
certificate holders once a month. Holders of pass-through certificates receive a
pro rata share of all payments and prepayments from the underlying mortgages. As
a result, the holders assume all the prepayment risks of the underlying
mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
CMOs, including interests in real estate mortgage investment conduits (REMICs),
allocate payments and prepayments from an underlying pass-through certificate
among holders of different classes of mortgage backed securities. This creates
different prepayment and interest rate risks for each CMO class. The degree of
increased or decreased prepayment risk depends upon the structure of the CMOs.
However, the actual returns on any type of mortgage security depend upon the
performance of the underlying pool of mortgages, which no one can predict and
which will vary among pools.
NON-GOVERNMENTAL MORTGAGE BACKED SECURITIES
Non-governmental mortgage backed securities (including non-governmental CMOs)
are issued by private entities, rather than by U.S. government agencies. These
securities involve credit risks and liquidity risks. The Fund may invest in
non-governmental mortgage backed securities that are rated BBB or higher by a
nationally recognized statistical rating agency.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities. Agency securities are
generally regarded as having low credit risks, but not as low as Treasury
securities.
The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does not
reduce the interest rate and prepayment risks of these mortgage backed
securities.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.
SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default.
TO BE ANNOUNCED SECURITIES (TBAS)
As with other delayed delivery transactions, a seller agrees to issue a TBA
security at a future date. However, the seller does not specify the particular
securities to be delivered. Instead, the Fund agrees to accept any security that
meets specified terms. For example, in a TBA mortgage backed transaction, the
Fund and the seller would agree upon the issuer, interest rate and terms of the
underlying mortgages. The seller would not identify the specific underlying
mortgages until it issues the security. TBA mortgage backed securities increase
interest rate risks because the underlying mortgages may be less favorable than
anticipated by the Fund.
DOLLAR ROLLS
Dollar rolls are transactions where the Fund sells mortgage backed securities
with a commitment to buy similar, but not identical, mortgage backed securities
on a future date at a lower price. Normally, one or both securities involved are
TBA mortgage backed securities. Dollar rolls are subject to interest rate and
credit risks.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
ASSET COVERAGE
In order to secure its obligations in connection with special transactions, the
Fund will either own the underlying assets, enter into an offsetting transaction
or set aside readily marketable securities with a value that equals or exceeds
the Fund's obligations. Unless the Fund has other readily marketable assets to
set aside, it cannot trade assets used to secure such obligations without
entering into an offsetting derivative contract or terminating a special
transaction. This may cause the Fund to miss favorable trading opportunities or
to realize losses on special transactions.
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal (default) when
due on each security. Lower credit ratings correspond to higher credit risk. If
a security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to interest rate
changes in the interest paid by similar securities. Generally, when interest
rates rise, prices of fixed income securities fall. However, market factors,
such as the demand for particular fixed income securities, may cause the price
of certain fixed income securities to fall while the prices of other securities
rise or remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.
CREDIT RISKS
Credit risk is the possibility that an issuer will default (fail to pay interest
and principal when due). If an issuer defaults, the Fund may lose money.
Many fixed income securities receive credit ratings from companies such as
Standard & Poor's and Moody's Investor Services. Fixed income securities receive
different credit ratings depending on the rating company's assessment of the
likelihood of default by the issuer. The lower the credit rating, the greater
the credit risk.
PREPAYMENT RISKS
Unlike traditional fixed income securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount is due, payments on
mortgage backed securities include both interest and partial payment of
principal. This partial payment of principal may be comprised of a scheduled
principal payment as well as an unscheduled payment from the voluntary
prepayment, refinancing or foreclosure of the underlying loans. These
unscheduled payments of principal can adversely affect the price or yield of
mortgage backed securities. For example, during periods of declining interest
rates, prepayments can be expected to accelerate, and the Fund would be required
to reinvest the proceeds at the lower interest rates then available. In
addition, like other interest-bearing securities, the values of mortgage backed
securities generally fall when interest rates rise.
Since rising interest rates generally result in decreased prepayments of
mortgage backed securities, this could cause mortgage securities to have greater
average lives than expected and their value may decline more than other fixed
income securities. Conversely, when interest rates fall, their potential for
capital appreciation is limited due to the existence of the prepayment feature.
Generally, mortgage backed securities compensate for greater prepayment risk by
paying a higher yield. The additional interest paid for risk is measured by the
difference between the yield of a mortgage backed security and the yield of a
U.S. Treasury security with a comparable weighted average life (the spread). An
increase in the spread will cause the price of the security to decline. Spreads
may generally increase in response to adverse economic or market conditions.
LIQUIDITY RISKS
Liquidity risk refers to the possibility that the Fund may not be able to sell a
security when it wants to. If this happens, the Fund will be required to
continue to hold the security, and the Fund could incur losses.
Trading opportunities are more limited for CMOs that have complex terms or that
are not widely held. These features may make it more difficult to sell or buy a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.
What Do Shares Cost?
You can purchase, redeem or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form,
it is processed at the next calculated net asset value (NAV) plus any applicable
front-end sales charge (public offering price).
NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern
time) each day the NYSE is open.
The Fund's current NAV and public offering price may be found in the mutual
funds section of certain local newspapers under "Federated" and the appropriate
class designation listing.
The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
<TABLE>
<CAPTION>
MINIMUM INITIAL/ MAXIMUM SALES CHARGE
SUBSEQUENT FRONT-END CONTINGENT
SHARES INVESTMENT SALES DEFERRED
OFFERED AMOUNTS 1 CHARGE 2 SALES CHARGE 3
<S> <C> <C> <C>
Class A $1,500/$100 4.50% None
Class B $1,500/$100 None 5.50%
Class C $1,500/$100 None 1.00%
</TABLE>
1 The minimum initial and subsequent investment amounts for retirement plans are
$250 and $100, respectively. The minimum subsequent investment amount for
Systematic Investment Programs is $50. Investment professionals may impose
higher or lower minimum investment requirements on their customers than those
imposed by the Fund. Orders for $250,000 or more will be invested in Class A
Shares instead of Class B Shares to maximize your return and minimize the sales
charges and marketing fees. Accounts held in the name of an investment
professional may be treated differently. Class B Shares will automatically
convert into Class A Shares after eight full years from the purchase date. This
conversion is a non-taxable event.
2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase."
3 See "Sales Charge When You Redeem."
SALES CHARGE WHEN YOU PURCHASE
<TABLE>
<CAPTION>
CLASS A SHARES
SALES CHARGE SALES CHARGE
AS A PERCENTAGE AS A
OF PUBLIC PERCENTAGE
Purchase Amount OFFERING PRICE OF NAV
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $1 million 2.00% 2.04%
$1 million or greater 1 0.00% 0.00%
</TABLE>
1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase under certain
investment programs where an investment professional received an advance payment
on the transaction.
THE SALES CHARGE AT PURCHASE MAY BE REDUCED OR ELIMINATED BY:
* purchasing Shares in greater quantities to reduce the applicable sales
charge;
* combining concurrent purchases of Shares:
- - by you, your spouse and your children under age 21; or
- - of the same share class of two or more Federated Funds (other than money
market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or
* signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).
THE SALES CHARGE WILL BE ELIMINATED WHEN YOU PURCHASE SHARES:
* within 120 days of redeeming Shares of an equal or lesser amount;
* by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);
* through wrap accounts or other investment programs where you pay the
investment professional directly for services;
* through investment professionals that receive no portion of the sales
charge;
* as a Federated Life Member (Class A Shares only) and their immediate
family members; or
* as a Director or employee of the Fund, the Adviser, the Distributor and their
affiliates, and the immediate family members of these individuals.
If your investment qualifies for a reduction or elimination of the sales charge,
you or your investment professional should notify the Fund's Distributor,
Federated Securities Corp., at the time of purchase. If the Distributor is not
notified, you will receive the reduced sales charge only on additional
purchases, and not retroactively on previous purchases.
SALES CHARGE WHEN YOU REDEEM
Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).
<TABLE>
<CAPTION>
CLASS A SHARES
<S>
A CDSC of 0.75% of the redemption amount applies to Class A Shares redeemed up
to 24 months after purchase under certain investment programs where an
investment professional received an advance payment on the transaction.
<CAPTION>
CLASS B SHARES
Shares Held Up To: CDSC
<S> <C>
1 year 5.50%
2 years 4.75%
3 years 4.00%
4 years 3.00%
5 years 2.00%
6 years 1.00%
7 years or more 0.00%
<CAPTION>
CLASS C SHARES
<S>
You will pay a 1% CDSC if you redeem Shares within one year of the purchase
date.
</TABLE>
YOU WILL NOT BE CHARGED A CDSC WHEN REDEEMING SHARES:
* purchased with reinvested dividends or capital gains;
* purchased within 120 days of redeeming Shares of an equal or lesser
amount;
* that you exchanged into the same share class of another Federated Fund where
the shares were held for the applicable CDSC holding period (other than a money
market fund);
* purchased through investment professionals who did not receive advanced
sales payments; or
* if, after you purchase Shares, you become disabled as defined by the IRS.
IN ADDITION, YOU WILL NOT BE CHARGED A CDSC:
* if the Fund redeems your Shares and closes your account for not meeting
the minimum balance requirement;
* if your redemption is a required retirement plan distribution;
* upon the death of the last surviving shareholder of the account.
If your redemption qualifies, you or your investment professional should notify
the Distributor at the time of redemption to eliminate the CDSC. If the
Distributor is not notified, the CDSC will apply.
TO KEEP THE SALES CHARGE AS LOW AS POSSIBLE, THE FUND REDEEMS YOUR SHARES IN
THIS ORDER:
* Shares that are not subject to a CDSC; and
* Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that have
been exchanged for Shares of this Fund).
The CDSC is then calculated using the share price at the time of purchase or
redemption, whichever is lower.
How is the Fund Sold?
The Fund offers three share classes: Class A Shares, Class B Shares and Class C
Shares, each representing interests in a single portfolio of securities.
The Fund's Distributor markets the Shares described in this prospectus to
institutions or individuals, directly or through investment professionals.
When the Distributor receives sales charges and marketing fees, it may pay some
or all of them to investment professionals. The Distributor and its affiliates
may pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares. The Distributor is
a subsidiary of Federated Investors, Inc.
(Federated).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Class B Shares and Class C Shares. Because
these Shares pay marketing fees on an ongoing basis, your investment cost may be
higher over time than other shares with different sales charges and marketing
fees.
How to Purchase Shares
You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.
Where the Fund offers more than one share class and you do not specify the class
choice on your New Account Form or form of payment (e.g., Federal Reserve wire
or check) you automatically will receive Class A Shares.
THROUGH AN INVESTMENT PROFESSIONAL
* Establish an account with the investment professional; and
* Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within three business days.
You will become the owner of Shares and receive dividends when the Fund receives
your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
* Establish your account with the Fund by submitting a completed New
Account Form; and
* Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees the Fund or its transfer agent incurs.
An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.
BY WIRE
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
BY CHECK
Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).
THROUGH AN EXCHANGE
You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.
BY SYSTEMATIC INVESTMENT PROGRAM
Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.
BY AUTOMATED CLEARING HOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
RETIREMENT INVESTMENTS
You may purchase Shares as retirement investments (such as qualified plans and
IRAs or transfer or rollover of assets). Call your investment professional or
the Fund for information on retirement investments. We suggest that you discuss
retirement investments with your tax adviser. You may be subject to an annual
IRA account fee.
How to Redeem and Exchange Shares
You should redeem or exchange Shares:
* through an investment professional if you purchased Shares through an
investment professional; or
* directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption or exchange request to your investment professional by
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The
redemption amount you will receive is based upon the next calculated NAV after
the Fund receives the order from your investment professional.
DIRECTLY FROM THE FUND
BY TELEPHONE
You may redeem or exchange Shares by calling the Fund once you have completed
the appropriate authorization form for telephone transactions.
If you call before the end of regular trading on the NYSE (normally 4:00 p.m.
Eastern time) you will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem or exchange Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the
Fund receives your written request in proper form. Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
* Fund Name and Share Class, account number and account registration;
* amount to be redeemed or exchanged;
* signatures of all shareholders exactly as registered; and
* IF EXCHANGING, the Fund Name and Share Class, account number and account
registration into which you are exchanging.
Call your investment professional or the Fund if you need special instructions.
SIGNATURE GUARANTEES
Signatures must be guaranteed if:
* your redemption will be sent to an address other than the address of
record;
* your redemption will be sent to an address of record that was changed
within the last 30 days;
* a redemption is payable to someone other than the shareholder(s) of
record; or
* IF EXCHANGING (TRANSFERRING) into another fund with a different shareholder
registration.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
* an electronic transfer to your account at a financial institution that is
an ACH member; or
* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
* to allow your purchase to clear;
* during periods of market volatility; or
* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
REDEMPTIONS FROM RETIREMENT ACCOUNTS
In the absence of your specific instructions, 10% of the value of your
redemption from a retirement account in the Fund may be withheld for taxes. This
withholding only applies to certain types of retirement accounts.
EXCHANGE PRIVILEGES
You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:
* ensure that the account registrations are identical;
* meet any minimum initial investment requirements; and
* receive a prospectus for the fund into which you wish to exchange.
An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.
The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated Funds.
SYSTEMATIC WITHDRAWAL PROGRAM
You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis. Complete the appropriate section of the New Account Form or an
Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Shares subject to a sales
charge while redeeming Shares using this program.
SYSTEMATIC WITHDRAWAL PROGRAM (SWP) ON CLASS B SHARES
You will not be charged a CDSC on SWP redemptions if:
* you redeem 12% or less of your account value in a single year;
* you reinvest all dividends and capital gains
distributions; and
* your account has at least a $10,000 balance when you establish the SWP. (You
cannot aggregate multiple Class B Share accounts to meet this minimum balance.)
You will be subject to a CDSC on redemption amounts that exceed the 12% annual
limit. In measuring the redemption percentage, your account is valued when you
establish the SWP and then annually at calendar year-end. You can redeem
monthly, quarterly or semi-annually.
For SWP accounts established prior to April 1, 1999, your account must be at
least one year old to be eligible for the waiver of the CDSC.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
SHARE CERTIFICATES
The Fund no longer issues Share certificates. If you are redeeming or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange request. For
your protection, send your certificates by registered or certified mail, but do
not endorse them.
Account and Share Information
CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions and exchanges (except
for systematic transactions). In addition, you will receive periodic statements
reporting all account activity, including systematic transactions, dividends and
capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares and pays any dividends monthly to shareholders. Dividends are
paid to all shareholders invested in the Fund on the record date. The record
date is the date on which a shareholder must officially own Shares in order to
earn a dividend.
In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a dividend or capital gain
distribution, you will pay the full price for the Shares and then receive a
portion of the price back in the form of a taxable distribution, whether or not
you reinvest the distribution in Shares. Therefore, you should consider the tax
implications of purchasing Shares shortly before the Fund declares a dividend or
capital gain. Contact your investment professional or the Fund for information
concerning when dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, non- retirement
accounts may be closed if redemptions or exchanges cause the account balance to
fall below the minimum initial investment amount. Before an account is closed,
you will be notified and allowed 30 days to purchase additional Shares to meet
the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. Fund distributions of
dividends and capital gains are taxable to you whether paid in cash or
reinvested in the Fund. Dividends are taxable as ordinary income; capital gains
are taxable at different rates depending upon the length of time the Fund holds
its assets.
Fund distributions are expected to be primarily dividends. Redemptions and
exchanges are taxable sales. Please consult your tax adviser regarding your
federal, state and local tax liability.
Who Manages the Fund?
The Board of Directors governs the Fund. The Board selects and oversees the
Adviser, Federated Investment Management Company. The Adviser manages the Fund's
assets, including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which total approximately $111 billion in assets as
of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
KATHLEEN M. FOODY-MALUS
Kathleen M. Foody-Malus has been the Fund's portfolio manager since
July 1993. She is Vice President of the Fund. Ms. Foody-Malus joined
Federated in 1983 and has been a Senior Portfolio Manager since 1996 and a
Vice President of the Fund's Adviser since 1993. She was a Portfolio
Manager and a Vice President of the Fund's Adviser from 1993 to 1996.
Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the
University of Pittsburgh.
EDWARD J. TIEDGE
Edward J. Tiedge has been the Fund's portfolio manager since May 1999.
Mr. Tiedge joined Federated in 1993 as a Senior Analyst and has been a
Portfolio Manager and a Vice President of the Fund's Adviser since 1996. He
served as Portfolio Manager and an Assistant Vice President of the Fund's
Adviser in 1995, and an Investment Analyst during 1993 and 1994. Mr. Tiedge
is a Chartered Financial Analyst and received his M.S. in Industrial
Administration from Carnegie Mellon University.
CHRISTOPHER J. SMITH
Christopher J. Smith has been the Fund's portfolio manager since
November 1997. Mr. Smith joined Federated in 1995 as a Vice President of a
Federated advisory subsidiary. He has been a Vice President of the Fund's
Adviser since March 1997. He was an Assistant Vice President of Provident
Life & Accident Insurance Company from 1987 through 1994. Mr. Smith is a
Chartered Financial Analyst. He received his M.A. in Economics and Finance
from the University of Kentucky.
ADVISORY FEES
The Adviser receives an annual investment advisory fee based on the Fund's
average daily net assets as shown in the chart below plus 4.50% of the Fund's
gross income. The Adviser may voluntarily waive a portion of its fee or
reimburse the Fund for certain operating expenses.
<TABLE>
<CAPTION>
PERCENT OF
AVERAGE DAILY
AVERAGE DAILY NET ASSETS NET ASSETS
<S> <C>
First $500 million 0.250%
Second $500 million 0.225%
Over $1 billion 0.200%
</TABLE>
YEAR 2000 READINESS
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999, or may experience other date-related problems. The Year 2000 problem may
cause systems to process information incorrectly and could disrupt businesses,
such as the Fund, that rely on computers.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
Share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase.
The financial impact of these issues for the Fund is still being determined.
There can be no assurance that potential Year 2000 problems would not have a
material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years, or since inception, if the life of
the Fund is shorter. Some of the information is presented on a per Share basis.
Total returns represent the rate an investor would have earned (or lost) on an
investment in the Fund, assuming reinvestment of any dividends and capital
gains.
This information has been audited by Deloitte & Touche LLP, whose report, along
with the Fund's audited financial statements, is included in the Annual Report.
Financial Highlights - Class A Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.90 $ 7.65 $ 7.78 $ 7.67 $ 7.89
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.46 0.50 0.51 0.54 0.57
Net realized and
unrealized gain (loss)
on investments (0.04) 0.26 (0.14) 0.12 (0.23)
TOTAL FROM
INVESTMENT OPERATIONS 0.42 0.76 0.37 0.66 0.34
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.48) (0.51) (0.50) (0.55) (0.56)
NET ASSET VALUE, END OF
PERIOD $ 7.84 $ 7.90 $ 7.65 $ 7.78 $ 7.67
TOTAL RETURN 1 5.43% 10.21% 4.88% 8.77% 4.59%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.96% 0.94% 0.95% 0.95% 0.95%
Net investment income 5.78% 6.40% 6.60% 6.80% 7.41%
Expense waiver 2 0.02% 0.08% 0.12% 0.11% 0.02%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $1,052,081 $1,138,450 $1,177,071 $1,330,272 $1,367,710
Portfolio turnover 187% 88% 120% 157% 154%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 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
Financial Highlights - Class B Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1999 1998 1997 1996 1995 1
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.90 $ 7.66 $ 7.78 $ 7.67 $ 7.75
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.40 0.44 0.44 0.49 0.37
Net realized and
unrealized gain (loss)
on investments (0.04) 0.25 (0.13) 0.11 (0.06)
TOTAL FROM INVESTMENT
OPERATIONS 0.36 0.69 0.31 0.60 0.31
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.42) (0.45) (0.43) (0.49) (0.37)
Distributions in excess
of net realized gain
on investments 2 - - - - (0.02)
TOTAL DISTRIBUTIONS (0.42) (0.45) (0.43) (0.49) (0.39)
NET ASSET VALUE, END OF
PERIOD $ 7.84 $ 7.90 $ 7.66 $ 7.78 $ 7.67
TOTAL RETURN 3 4.64% 9.16% 4.13% 7.90% 4.13%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.73% 1.77% 1.80% 1.78% 1.76% 4
Net investment income 5.01% 5.57% 5.75% 5.93% 7.02% 4
Expense waiver 5 - - 0.02% 0.04% 0.06% 4
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $141,148 $107,225 $100,439 $93,169 $34,276
Portfolio turnover 187% 88% 120% 157% 154%
</TABLE>
1 Reflects operations for the period from July 26, 1994 (start of performance)
to March 31, 1995.
2 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 purposes.
3 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
4 Computed on an annualized basis.
5 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
Financial Highlights - Class C Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.91 $ 7.66 $ 7.78 $ 7.67 $ 7.89
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.40 0.44 0.45 0.47 0.51
Net realized and
unrealized gain (loss)
on investments (0.05) 0.26 (0.13) 0.12 (0.23)
TOTAL FROM INVESTMENT
OPERATIONS 0.35 0.70 0.32 0.59 0.28
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.42) (0.45) (0.44) (0.48) (0.50)
NET ASSET VALUE, END OF
PERIOD $ 7.84 $ 7.91 $ 7.66 $ 7.78 $ 7.67
TOTAL RETURN 1 4.51% 9.29% 4.14% 7.85% 3.72%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.73% 1.77% 1.80% 1.79% 1.79%
Net investment income 5.01% 5.57% 5.74% 5.96% 6.56%
Expense waiver 2 - - 0.02% 0.02% 0.02%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $50,071 $48,118 $55,842 $79,949 $80,519
Portfolio turnover 187% 88% 120% 157% 154%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 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
PROSPECTUS
[Graphic]
Federated Fund for
U.S. Government Securities, Inc.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
MAY 31, 1999
A Statement of Additional Information (SAI) dated May 31, 1999, is incorporated
by reference into this prospectus. Additional information about the Fund's
investments is contained in the Fund's Annual and SemiAnnual Reports to
shareholders as they become available. The Annual Report discusses market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year. To obtain the SAI, the Annual Report,
Semi-Annual Report and other information without charge, and make inquiries,
call your investment professional or the Fund at 1-800-341-7400.
You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at
http://www.sec.gov. You can call 1-800-SEC-0330 for information on the Public
Reference Room's operations and copying charges.
[Graphic]
Federated
Federated Fund for
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-1890
Cusip 314182106
Cusip 314182205
Cusip 314182304
G01095-01 (5/99)
[Graphic]
Statement of Additional Information
FEDERATED FUND FOR U.S. GOVERNMENT
SECURITIES, INC.
Class A Shares
Class B Shares
class c shares
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated Fund for U.S. Government
Securities, Inc. (Fund), dated May 31, 1999.
This SAI incorporates by reference the Fund's Annual Report. Obtain the
prospectus or the Annual Report without charge by calling 1-800-341-7400.
May 31, 1999
Contents
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Subaccounting Services
Redemption in Kind
Account and Share Information
Tax Information
Who Manages and Provides Services to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Financial Information
Investment Ratings
Addresses
Cusip 314182106
Cusip 314182205
Cusip 314182304
8062807B (5/99)
<PAGE>
HOW IS THE FUND ORGANIZED?
The Fund is a diversified open-end, management investment company that was
established under the laws of the State of Maryland on June 9, 1969. The Fund
changed its name from Fund for U.S. Government Securities, Inc. to Federated
Fund for U.S. Government Securities, Inc. on February 26, 1996.
The Board of Directors (the Board) has established three classes of shares of
the Fund, known as Class A Shares, Class B Shares, and Class C Shares (Shares).
This SAI relates to all classes of the above-mentioned Shares. The Fund's
investment adviser is Federated Investment Management Company (Adviser). The
Adviser, formerly known as Federated Advisers, changed its name effective March
31, 1999.
SECURITIES IN WHICH THE FUND INVESTS
In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
Fixed Income Securities
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities. A security's yield measures the
annual income earned on a security as a percentage of its price. A security's
yield will increase or decrease depending upon whether it costs less (a
discount) or more (a premium) than the principal amount. If the issuer may
redeem the security before its scheduled maturity, the price and yield on a
discount or premium security may change based upon the probability of an early
redemption. Securities with higher risks generally have higher yields. The
following describes the types of fixed income securities in which the Fund
invests.
Treasury Securities
Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the
lowest credit risks. Agency Securities Agency securities are issued or
guaranteed by a federal agency or other government sponsored entity acting
under federal authority (a GSE). The United States supports some GSEs with
its full, faith and credit. Other GSEs receive support through federal
subsidies, loans or other benefits. A few GSEs have no explicit financial
support, but are regarded as having implied support because the federal
government sponsors their activities. Agency securities are generally
regarded as having low credit risks, but not as low as treasury securities.
The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does
not reduce the interest rate and prepayment risks of these mortgage backed
securities. Mortgage Backed Securities Mortgage backed securities represent
interests in pools of mortgages. The mortgages that comprise a pool
normally have similar interest rates, maturities and other terms. Mortgages
may have fixed or adjustable interest rates. Interests in pools of
adjustable rate mortgages are known as ARMs. Mortgage backed securities
come in a variety of forms. Many have extremely complicated terms. The
simplest form of mortgage backed securities are pass-through certificates.
An issuer of pass-through certificates gathers monthly payments from an
underlying pool of mortgages. Then, the issuer deducts its fees and
expenses and passes the balance of the payments onto the certificate
holders once a month. Holders of pass-through certificates receive a pro
rata share of all payments and pre-payments from the underlying mortgages.
As a result, the holders assume all the prepayment risks of the underlying
mortgages.
Collateralized Mortgage Obligations (CMOs)
CMOs, including interests in real estate mortgage investment
conduits (REMICs), allocate payments and prepayments from an
underlying pass-through certificate among holders of different
classes of mortgage backed securities. This creates different
prepayment and market risks for each CMO class. The degree of
increased or decreased prepayment risks depends upon the structure
of the CMOs. However, the actual returns on any type of mortgage
backed security depend upon the performance of the underlying pool
of mortgages, which no one can predict and will vary among pools.
Sequential CMOs
In a sequential pay CMO, one class of CMOs receives all principal
payments and prepayments. The next class of CMOs receives all
principal payments after the first class is paid off. This process
repeats for each sequential class of CMO. As a result, each class
of sequential pay CMOs reduces the prepayment risks of subsequent
classes. PACs, TACs and Companion Classes More sophisticated CMOs
include planned amortization classes (PACs) and targeted
amortization classes (TACs). PACs and TACs are issued with
companion classes. PACs and TACs receive principal payments and
prepayments at a specified rate. The companion classes receive
principal payments and prepayments in excess of the specified
rate. In addition, PACs will receive the companion classes' share
of principal payments, if necessary, to cover a shortfall in the
prepayment rate. This helps PACs and TACs to control prepayment
risks by increasing the risks to their companion classes. IOs and
POs CMOs may allocate interest payments to one class (Interest
Only or IOs) and principal payments to another class (Principal
Only or POs). POs increase in value when prepayment rates
increase. In contrast, IOs decrease in value when prepayments
increase, because the underlying mortgages generate less interest
payments. However, IOs tend to increase in value when interest
rates rise (and prepayments decrease), making IOs a useful hedge
against market risks.
Floaters and Inverse Floaters
Another variant allocates interest payments between two classes of
CMOs. One class (Floaters) receives a share of interest payments
based upon a market index such as LIBOR. The other class (Inverse
Floaters) receives any remaining interest payments from the
underlying mortgages. Floater classes receive more interest (and
Inverse Floater classes receive correspondingly less interest) as
interest rates rise. This shifts prepayment and interest rate
risks from the Floater to the Inverse Floater class, reducing the
price volatility of the Floater class and increasing the price
volatility of the Inverse Floater class. Z Classes CMOs must
allocate all payments received from the underlying mortgages to
some class. To capture any unallocated payments, CMOs generally
have an accrual (Z) class. Z classes do not receive any payments
from the underlying mortgages until all other CMO classes have
been paid off. Once this happens, holders of Z class CMOs receive
all payments and prepayments.
Non-Governmental Mortgage Backed Securities
Non-governmental mortgage backed securities (including non-governmental
CMOs) are issued by private entities, rather than by U. S. government
agencies. The Fund may invest in non-governmental mortgage backed
securities that are rated BBB or higher by a nationally recognized
statistical rating agency. These securities involve credit risks and
liquidity risks.
Credit Enhancement
Credit enhancement consists of an arrangement in which a company agrees to
pay amounts due on a fixed income security if the issuer defaults. In some
cases the company providing credit enhancement makes all payments directly
to the security holders and receives reimbursement from the issuer.
Normally, the credit enhancer has greater financial resources and liquidity
than the issuer. For this reason, the Adviser usually evaluates the credit
risk of a fixed income security based solely upon its credit enhancement.
Special Transactions
Repurchase Agreements
Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually
agreed upon time and price. The repurchase price exceeds the sale price,
reflecting the Fund's return on the transaction. This return is unrelated
to the interest rate on the underlying security. The Fund will enter into
repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the
Adviser. The Fund's custodian or subcustodian will take possession of the
securities subject to repurchase agreements. The Adviser or subcustodian
will monitor the value of the underlying security each day to ensure that
the value of the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
Reverse Repurchase Agreements
Reverse repurchase agreements are repurchase agreements in which the Fund
is the seller (rather than the buyer) of the securities, and agrees to
repurchase them at an agreed upon time and price. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund. Reverse
repurchase agreements are subject to credit risks. In addition, reverse
repurchase agreements create leverage risks because the Fund must
repurchase the underlying security at a higher price, regardless of the
market value of the security at the time of repurchase.
Delayed Delivery Transactions
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with
payment and delivery of the securities scheduled for a future time. During
the period between purchase and settlement, no payment is made by the Fund
to the issuer and no interest accrues to the Fund. The Fund records the
transaction when it agrees to buy the securities and reflects their value
in determining the price of its shares. Settlement dates may be a month or
more after entering into these transactions so that the market values of
the securities bought may vary from the purchase prices. Therefore, delayed
delivery transactions create interest rate risks for the Fund. Delayed
delivery transactions also involve credit risks in the event of a
counterparty default.
To Be Announced Securities (TBAs)
As with other delayed delivery transactions, a seller agrees to issue a
TBA security at a future date. However, the seller does not specify the
particular securities to be delivered. Instead, the Fund agrees to
accept any security that meets specified terms. For example, in a TBA
mortgage backed transaction, the Fund and the seller would agree upon
the issuer, interest rate and terms of the underlying mortgages. The
seller would not identify the specific underlying mortgages until it
issues the security. TBA mortgage backed securities increase interest
rate risks because the underlying mortgages may be less favorable than
anticipated by the Fund. Dollar Rolls Dollar rolls are transactions
where the Fund sells mortgage backed securities with a commitment to
buy similar, but not identical, mortgage backed securities on a future
date at a lower price. Normally, one or both securities involved are
TBA mortgage backed securities. Dollar rolls are subject to interest
rate and credit risks.
Securities Lending
The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from
the borrower as collateral. The borrower must furnish additional collateral
if the market value of the loaned securities increases. Also, the borrower
must pay the Fund the equivalent of any dividends or interest received on
the loaned securities. The Fund will reinvest cash collateral in securities
that qualify as an acceptable investment for the Fund. However, the Fund
must pay interest to the borrower for the use of cash collateral. Loans are
subject to termination at the option of the Fund or the borrower. The Fund
will not have the right to vote on securities while they are on loan, but
it will terminate a loan in anticipation of any important vote. The Fund
may pay administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash collateral to a
securities lending agent or broker. Securities lending activities are
subject to interest rate and credit risks.
Asset Coverage
In order to secure its obligations in connection with special
transactions, the Fund will either own the underlying assets, enter
into an offsetting transaction or set aside readily marketable
securities with a value that equals or exceeds the Fund's obligations.
Unless the Fund has other readily marketable assets to set aside, it
cannot trade assets used to secure such obligations entering into an
offsetting derivative contract or terminating a special transaction.
This may cause the Fund to miss favorable trading opportunities or to
realize losses on special transactions.
Investing in Securities of Other Investment Companies
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
Investment Ratings
Investment Ratings for Investment Grade Securities
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A, and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal (default) when
due on each security. Lower credit ratings correspond to higher credit risk. If
a security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are outlined below.
Interest Rate Risks
o Prices of fixed income securities rise and fall in response to changes in
the interest rate paid by similar securities. Generally, when interest
rates rise, prices of fixed income securities fall. However, market
factors, such as the demand for particular fixed income securities, may
cause the price of certain fixed income securities to fall while the prices
of other securities rise or remain unchanged.
o Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity
of a fixed income security to changes in interest rates.
Credit Risks
o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the
Fund will lose money.
o Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment. Fixed income securities generally compensate for greater credit
risk by paying interest at a higher rate. The difference between the yield
of a security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's rating
is lowered, or the security is perceived to have an increased credit risk.
An increase in the spread will cause the price of the security to decline.
Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.
Prepayment Risks
o Unlike traditional fixed income securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount is due, payments
on mortgage backed securities include both interest and partial payment of
principal. This partial payment of principal may be comprised of a
scheduled principal payment as well as an unscheduled payment from the
voluntary prepayment, refinancing, or foreclosure of the underlying loans.
These unscheduled payments of principal can adversely affect the price or
yield of mortgage backed securities. For example, during periods of
declining interest rates, prepayments can be expected to accelerate, and
the Fund would be required to reinvest the proceeds at the lower interest
rates then available. In addition, like other interest-bearing securities,
the values of mortgage backed securities generally fall when interest rates
rise.
o Since rising interest rates generally result in decreased prepayments of
mortgage backed securities, this could cause mortgage backed securities,
this could cause mortgage securities to have greater average lives than
expected and their value may decline more than other fixed income
securities. Conversely, when interest rates fall, their potential for
capital appreciation is limited due to the existence of the prepayment
feature.
o Generally, mortgage backed securities compensate for greater prepayment
risk by paying a higher yield. The additional interest paid for risk is
measured by the difference between the yield of a mortgage backed security
and the yield of a U.S. Treasury security with a comparable weighted
average life (the spread). An increase in the spread will cause the price
of the security to decline. Spreads may generally increase in response to
adverse economic or market conditions.
Liquidity Risks
o Liquidity risk refers to the possibility that the Fund may not be able to
sell a security when it wants to. If this happens, the Fund will be
required to continue to hold the security, and the Fund could incur losses.
o Trading opportunities are more limited for CMOs that have complex terms or
that are not widely held. These features may make it more difficult to sell
or buy a security at a favorable price or time. Consequently, the Fund may
have to accept a lower price to sell a security, sell other securities to
raise cash or give up an investment opportunity, any of which could have a
negative effect on the Fund's performance. Infrequent trading of securities
may also lead to an increase in their price volatility.
Risks Associated with Complex CMOs
o CMOs with complex terms, such as companion classes, IOs, POs, and Inverse
Floaters, generally entail greater market, prepayment and liquidity risks
than other mortgage backed securities. For example, their prices are more
volatile and their trading market may be more limited.
Leverage Risks
o Leverage risk is created when an investment exposes the Fund to a level of
risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.
FUNDAMENTAL INVESTMENT policies
The Fund will invest at least 65% of its assets in U.S. government securities,
including mortgage backed securities issued by U.S. government agencies. In
addition, the Fund may invest up to 35% of its assets in investment grade
non-governmental mortgage backed securities.
The U.S. government securities in which the Fund invests are primary or direct
obligations of the U.S. government or its instrumentalities or securities which
are guaranteed as to payment of principal and interest by the U.S. government or
its instrumentalities (hereinafter referred to as "U.S. government securities").
The Fund will not borrow money, issue senior securities, or pledge assets,
except that under certain circumstances the Fund may borrow money and engage in
reverse repurchase agreement transactions in amounts up to one-third of the
value of its net assets, including the amounts borrowed, and pledge up to 10% of
the value of those assets to secure such borrowings.
The Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. However, during the period any reverse
repurchase agreements are outstanding, but only to the extent necessary to
assure completion of the reverse repurchase agreements, the Fund will restrict
the purchase of portfolio instruments to money market instruments maturing on or
before the expiration date of the reverse repurchase agreements.
INVESTMENT LIMITATIONS
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.
Investing In Commodities
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, but the Fund may invest in real
estate investment trusts, marketable securities of companies that may represent
indirect interest in real estate, or any investment security that derives its
value from 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 limitations cannot be changed unless authorized by the "vote of a
majority of its outstanding voting securities," as defined by the Investment
Company Act.
Illiquid Securities
The Fund will not invest more than 15% of its total assets in securities which
are illiquid, including repurchase agreements providing for settlement in more
than seven days after notice. 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.
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, 1999
and 1998, the portfolio turnover rates were 187% and 88%, respectively.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
o for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as
determined in good faith by the Board; and
o for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.
WHAT DO SHARES COST?
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.
REDUCING OR eliminating THE FRONT-END SALES CHARGE
You can reduce or eliminate the applicable front-end sales charge, as follows:
Quantity Discounts
Larger purchases of the same Share class reduce or eliminate the sales charge
you pay. You can combine purchases of Shares made on the same day by you, your
spouse and your children under age 21. In addition, purchases made at one time
by a trustee or fiduciary for a single trust estate or a single fiduciary
account can be combined.
Accumulated Purchases
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.
Concurrent Purchases
You can combine concurrent purchases of the same share class of two or more
Federated Funds in calculating the applicable sales charge.
Letter of Intent Class A Shares
You can sign a Letter of Intent committing to purchase a certain amount of the
same class of Shares within a 13-month period to combine such purchases in
calculating the sales charge. The Fund's custodian will hold Shares in escrow
equal to the maximum applicable sales charge. If you complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account. If you
do not fulfill the Letter of Intent, the Custodian will redeem the appropriate
amount from the Shares held in escrow to pay the sales charges that were not
applied to your purchases.
Reinvestment Privilege
You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.
Purchases by Affiliates of the Fund
The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:
o the Directors, employees and sales representatives of the Fund, the
Adviser, the Distributor and their affiliates;
o Employees of State Street Bank Pittsburgh who started their employment on
January 1, 1998, and were employees of Federated Investors, Inc. (Federated)
on December 31, 1997;
o any associated person of an investment dealer who has a sales agreement
with the Distributor; and
o trusts, pension or profit-sharing plans for these individuals.
Federated Life Members
Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:
o through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family
of Funds are no longer marketed); or
o as Liberty Account shareholders by investing through an affinity group prior
to August 1, 1987.
REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
These reductions or eliminations are offered because: no sales commissions have
been advanced to the investment professional selling Shares; the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC); or nominal sales efforts
are associated with the original purchase of Shares.
Upon notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on redemptions:
o following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;
o representing minimum required distributions from an Individual Retirement
Account or other retirement plan to a shareholder who has attained the age of
70 1/2;
o representing a total or partial distribution from a qualified plan. A total
or partial distribution does not include an account transfer, rollover or
other redemption made for purposes of reinvestment. A qualified plan does not
include an Individual Retirement Account, Keogh Plan, or a custodial account,
following retirement;
o which are involuntary redemptions processed by the Fund because the
accounts do not meet the minimum balance requirements;
o which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
o of Shares that represent a reinvestment within 120 days of a previous
redemption;
o of Shares held by the Directors, employees, and sales representatives of the
Fund, the Adviser, the Distributor and their affiliates; employees of any
investment professional that sells Shares according to a sales agreement with
the Distributor; and the immediate family members of the above persons; and
o of Shares originally purchased through a bank trust department, a registered
investment adviser or retirement plans where the third party administrator
has entered into certain arrangements with the Distributor or its affiliates,
or any other investment professional, to the extent that no payments were
advanced for purchases made through these entities.
HOW IS THE FUND SOLD?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professionals for sales and/or administrative services. Any payments
to investment professionals in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.
RULE 12B-1 PLAN
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Fund's service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the marketing-related expenses the
Distributor has incurred. Therefore, it may take the Distributor a number of
years to recoup these expenses.
Federated and its subsidiaries may benefit from arrangements where the Rule
12b-1 Plan fees related to Class B Shares may be paid to third parties who have
advanced commissions to investment professionals.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated, for providing shareholder services and maintaining shareholder
accounts. Federated Shareholder Services Company may select others to perform
these services for their customers and may pay them fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution-related or
shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.
When an investment professional's customer purchases shares, the investment
professional may receive:
o an amount up to 5.50% and 1.00%, respectively, of the NAV of Class B and C
Shares.
In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class A Shares that its customer has not
redeemed over the first year.
Class A Shares
Investment professionals purchasing Class A Shares for their customers are
eligible to receive an advance payment from the Distributor based on the
following breakpoints:
Amount Advance Payments as a Percentage of Public
Offering Price
First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%
For accounts with assets over $1 million, the dealer advance payments reset
annually to the first breakpoint on the anniversary of the first purchase.
Class A Share purchases under this program may be made by Letter of Intent or by
combining concurrent purchases. The above advance payments will be paid only on
those purchases that were not previously subject to a front-end sales charge and
dealer advance payments. Certain retirement accounts may not be eligible for
this program.
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase. The CDSC does not apply
under certain investment programs where the investment professional does not
receive an advance payment on the transaction including, but not limited to,
trust accounts and wrap programs where the investor pays an account level fee
for investment management.
SUBACCOUNTING SERVICES
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the securities
and could incur certain transaction costs.
ACCOUNT AND SHARE INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote.
All Shares of the Fund have equal voting rights, except that in matters
affecting only a particular class, only Shares of that class are entitled to
vote.
Directors may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Fund's outstanding shares.
As of May 7, 1999, no shareholder owned of record, beneficially, or both, 5% or
more of outstanding Class A Shares.
As of May 7, 1999, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class B Shares:
MLPF&S for the sole benefit of its customers, Jacksonville, FL, owned
approximately 912,542 Shares (5.01%).
As of May 7, 1999, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class C Shares:
MLPF&S for the sole benefit of its customers, Jacksonville, FL, owned
approximately 2,001,300 Shares (28.67%); Hubco, Regions Financial Corp.,
Birmingham, AL, owned approximately 928,906 Shares (13.31%); and East
Mississippi, Electric Power Association, Meridian, MS, owned approximately
381,652 Shares (5.47%).
Shareholders owning 25% or more of outstanding Shares may be in control and be
able to affect the outcome of certain matters presented for a vote of
shareholders.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
WHO MANAGES AND PROVIDES SERVICES TO THE FUND?
BOARD OF DIRECTORS
The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Fund's,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Director from the Fund for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Federated Fund Complex is
comprised of 54investment companies, whose investment advisers are affiliated
with the Fund's Adviser.
As of May_7, 1999, the Fund's Board and Officers as a group owned less than 1%
of the Fund's outstanding Class A, B, and C, Shares.
An asterisk (*) denotes a Director who is deemed to be an interested person as
defined in the Investment Company Act of 1940. The following symbol (#) denotes
a Member of the Board's Executive Committee, which handles the Board's
responsibilities between its meetings.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name
Birth Date Aggregate Total
Address Compensation Compensation From
Position With Fund Principal Occupations From Fund Fund and Fund
for Past Five Years Complex
John F. Donahue*#+ Chief Executive Officer and Director or Trustee of the $0 $0 for the
Birth Date: July 28, 1924 Federated Fund Complex; Chairman and Director, Fund and
Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, 54 other
1001 Liberty Avenue Federated Investment Management Company; Chairman and investment
Pittsburgh, PA Director, Federated Investment Counseling and companies
CHAIRMAN AND DIRECTOR Federated Global Investment Management Corp.; in the Fund
Chairman, Passport Research, Ltd. Complex
Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $1,828.82 $113,860.22 for
Birth Date: February 3, 1934 Director, Member of Executive Committee, Children's the
15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, Fund and
Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; 54 other
DIRECTOR Director, Member of Executive Committee, University of investment
Pittsburgh. companies
in the Fund Complex
John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $2,012.00 $125,264.48 for
Birth Date: June 23, 1937 President, Investment Properties Corporation; Senior the
Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., Fund and
John R. Wood Associates, Inc. Realtors; Partner or Trustee in private real estate 54 other
Realtors ventures in Southwest Florida; formerly: President, investment
3255 Tamiami Trial North Naples Property Management, Inc. and Northgate Village companies
Naples, FL Development Corporation. in the Fund Complex
DIRECTOR
Nicholas Constantakis Director or Trustee of the Federated Fund Complex; $0 $47,958.02for the
Birth Date: September 3, 1939 formerly: Partner, Andersen Worldwide SC. Fund and
175 Woodshire Drive 39 other
Pittsburgh, PA investment
DIRECTOR companies
in the Fund Complex
John F. Cunningham++ Director or Trustee of some of the Federated Funds; $0 $0 for the
Birth Date: March 5, 1943 Chairman, President and Chief Executive Officer, Fund and
353 El Brillo Way Cunningham & Co., Inc. ; Trustee Associate, Boston 43 other
Palm Beach, FL College; Director, EMC Corporation; formerly: investment
DIRECTOR Director, Redgate Communications. companies
in the Fund Complex
Previous Positions: Chairman of the Board and Chief
Executive Officer, Computer Consoles, Inc.; President
and Chief Operating Officer, Wang Laboratories;
Director, First National Bank of Boston; Director,
Apollo Computer, Inc.
Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $1,828.82 $113,860.22 for
Birth Date: October 11, 1932 Professor of Medicine, University of Pittsburgh; the
3471 Fifth Avenue Medical Director, University of Pittsburgh Medical Fund and
Suite 1111 Center - Downtown; Hematologist, Oncologist, and 54 other
Pittsburgh, PA Internist, University of Pittsburgh Medical Center; investment
DIRECTOR Member, National Board of Trustees, Leukemia Society companies
of America. in the Fund Complex
Peter E. Madden Director or Trustee of the Federated Fund Complex; $1,873.60 $113,860.22 for
Birth Date: March 16, 1942 formerly: Representative, Commonwealth of the
One Royal Palm Way Massachusetts General Court; President, State Street Fund and
100 Royal Palm Way Bank and Trust Company and State Street Corporation. 54 other
Palm Beach, FL investment
DIRECTOR Previous Positions: Director, VISA USA and VISA companies
International; Chairman and Director, Massachusetts in the Fund Complex
Bankers Association; Director, Depository Trust
Corporation.
Charles F. Mansfield, Jr.++ Director or Trustee of some of the Federated Funds; $0 $0 for the
Birth Date: April 10, 1945 Management Consultant. Fund and
80 South Road 43 other
Westhampton Beach, NY DIRECTOR Previous Positions: Chief Executive Officer, PBTC investment
International Bank; Chief Financial Officer of Retail companies
Banking Sector, Chase Manhattan Bank; Senior Vice in the Fund Complex
President, Marine Midland Bank; Vice President,
Citibank; Assistant Professor of Banking and Finance,
Frank G. Zarb School of Business, Hofstra University.
John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $1,873.60 $113,860.22 for
S.J.D. # President, Law Professor, Duquesne University; the
Birth Date: December 20, 1932 Consulting Partner, Mollica & Murray. Fund and
President, Duquesne University 54 other
Pittsburgh, PA Previous Positions: Dean and Professor of Law, investment
DIRECTOR University of Pittsburgh School of Law; Dean and companies
Professor of Law, Villanova University School of Law. in the Fund Complex
Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $1,828.82 $113,860.22 for
Birth Date: June 21, 1935 Public Relations/Marketing/Conference Planning. the
4905 Bayard Street Fund and
Pittsburgh, PA Previous Positions: National Spokesperson, Aluminum 54 other
DIRECTOR Company of America; business owner. investment
companies
in the Fund Complex
John S. Walsh++ Director or Trustee of some of the Federated Funds; $0 $0 for the
Birth Date: November 28, 1957 President and Director, Heat Wagon, Inc.; President Fund and
2007 Sherwood Drive and Director, Manufacturers Products, Inc.; President, 40 other
Valparaiso, IN Portable Heater Parts, a division of Manufacturers investment
DIRECTOR Products, Inc.; Director, Walsh & Kelly, Inc.; companies
formerly: Vice President, Walsh & Kelly, Inc. in the Fund Complex
J. Christopher Donahue+* President or Executive Vice President of the Federated $0 $0 for the
Birth Date: April 11, 1949 Fund Complex; Director or Trustee of some of the Funds Fund and
Federated Investors Tower in the Federated Fund Complex; President and Director, 22 other
1001 Liberty Avenue Federated Investors, Inc.; President and Trustee, investment
Pittsburgh, PA Federated Investment Management Company; President and companies
PRESIDENT AND DIRECTOR Director, Federated Investment Counseling and in the Fund Complex
Federated Global Investment Management Corp.;
President, Passport Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director, Federated
Services Company.
<PAGE>
Edward C. Gonzales Trustee or Director of some of the Funds in the $0 $0 for the
Birth Date: October 22, 1930 Federated Fund Complex; President, Executive Vice Fund and
Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment
1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated company
Pittsburgh, PA Investors, Inc.; Vice President, Federated investment in the Fund Complex
EXECUTIVE VICE PRESIDENT Management Company, Federated Investment Counseling,
Federated Global Investment Management Corp. and
Passport Research, Ltd.; Executive Vice President and
Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company.
John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the
Birth Date: October 26, 1938 Federated Fund Complex; Executive Vice President, Fund and
Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 54 other
1001 Liberty Avenue Trustee, Federated Investment Management Company; investment
Pittsburgh, PA Director, Federated Investment Counseling and companies
EXECUTIVE VICE PRESIDENT AND Federated Global Investment Management Corp.; in the Fund Complex
SECRETARY Director, Federated Services Company; Director,
Federated Securities Corp.
Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the
Birth Date: June 17, 1954 President - Funds Financial Services Division, Fund and
Federated Investors Tower Federated Investors, Inc.; Formerly: various 54 other
1001 Liberty Avenue management positions within Funds Financial Services investment
Pittsburgh, PA Division of Federated Investors, Inc. companies
TREASURER in the Fund Complex
Richard B. Fisher President or Vice President of some of the Funds in $0 $0 for the
Birth Date: May 17, 1923 the Federated Fund Complex; Director or Trustee of Fund and
Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment
1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies
Pittsburgh, PA Chairman and Director, Federated Securities Corp. in the Fund Complex
VICE PRESIDENT
William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the
Birth Date: March 3, 1949 other Funds in the Federated Fund Complex; Executive Fund and
Federated Investors Tower Vice President, Federated Investment Counseling, 41 other
1001 Liberty Avenue Federated Global Investment Management Corp., investment
Pittsburgh, PA Federated Investment Management Company and Passport companies
CHIEF INVESTMENT OFFICER Research, Ltd.; Registered Representative, Federated in the Fund Complex
Securities Corp.; Portfolio Manager, Federated
Administrative Services; Vice President,
Federated Investors, Inc.; Formerly: Executive
Vice President and Senior Vice President,
Federated Investment Counseling Institutional
Portfolio Management Services Division; Senior
Vice President, Federated Investment
Management Company and Passport Research, Ltd.
Kathleen M. Foody-Malus Kathleen M. Foody-Malus has been the Fund's portfolio $0 $0 for the
Birth Date: March 26, 1960 manager since July 1993. She is Vice President of the Fund and
Federated Investors Tower Fund. Ms. Foody-Malus joined Federated in 1983 and 3 other investment
1001 Liberty Avenue has been a Senior Portfolio Manager since 1996 and a companies
Pittsburgh, PA Vice President of the Fund's Adviser since 1993. She in the Fund Complex
VICE PRESIDENT was a Portfolio Manager and a Vice President of the
Fund's Adviser from 1993 to 1996. Ms. Foody-Malus
received her M.B.A. in Accounting/Finance from the
University of Pittsburgh.
</TABLE>
+ Mr. Donahue is the father of J. Christopher Donahue, President of the Fund.
++ Messrs. Cunningham, Mansfield and Walsh became members of the Board of
Directors on April 1, 1999. They did not earn any fees for serving the Fund
Complex since these fees are reported as of the end of the last calendar year.
They did not receive any fees as of the fiscal year end of the Fund.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Fund or any Fund 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.
Other Related Services
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. 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 may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
Research Services
Research services 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 may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
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 those 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.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
Maximum Administrative Fee Average Aggregate Daily Net Assets of the
Federated Funds
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% 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 voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type, and
number of accounts and transactions made by shareholders.
INDEPENDENT auditors
Deloitte & Touche LLP is the independent auditor for the Fund.
FEES PAID BY THE FUND FOR SERVICES
For the Year ended March 31 1999 1998 1997
Advisory Fee Earned $6,697,258 $7,402,162 $8,025,601
Advisory Fee Reduction $0 $0 $0
Brokerage Commissions $0 $0 $0
Administrative Fee $953,141 $1,006,395 $1,069,801
12b-1 Fee
Class B Shares $921,760 ---- ----
Class C Shares $361,666 ---- ----
Shareholder Services Fee
Class A Shares $2,513,875 ---- ----
Class B Shares $307,253 ---- ----
Class C Shares $120,556 ---- ----
Fees are allocated among classes based on their pro rata share of Fund assets,
except for marketing (Rule 12b-1) fees and shareholder services fees, which are
borne only by the applicable class of Shares.
HOW DOES THE FUND MEASURE PERFORMANCE?
The Fund may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information.
Unless otherwise stated, any quoted Share performance reflects the effect of
non-recurring charges, such as maximum sales charges, which, if excluded, would
increase the total return and yield. The performance of Shares depends upon such
variables as: portfolio quality; average portfolio maturity; type and value of
portfolio securities; changes in interest rates; changes or differences in the
Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
Average Annual Total Returns and Yield
Total returns given for the one-year, five-year and ten-year or start of
performance periods ended March 31, 1999.
Yield is given for the 30-day period ended March 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
30 Day Period 1 Year 5 Years 10 Years
Class A Shares
Total Return N/A 0.72% 5.78% 7.16%
Yield 5.18% N/A N/A N/A
30 Day Period 1 Year
Start of Performance on July
26, 1994
Class B Shares
Total Return N/A (0.82%) 6.05%
Yield 4.65% N/A N/A
30 Day Period 1 Year 5 Years Start of Performance on April
27, 1993
Class C Shares
Total Return N/A 3.52% 5.88% 4.73%
Yield 4.65% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV 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 annual reinvestment of all
dividends and distributions.
YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-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 Shares because of certain adjustments required
by the SEC and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
o references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
o charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the Funds; and
o information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:
o 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.
o 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.
o 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.
o 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.
WHO IS FEDERATED INVESTORS, INC.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state-of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
Federated Funds overview
Municipal Funds
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
Equity Funds
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
Corporate Bond Funds
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.
Government Funds
In the government sector, as of December 31, 1998, Federated manages 9 mortgage
backed, 5 government/ agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 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 approximately $43.2 billion in government funds within these
maturity ranges.
Money Market Funds
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield - J. Thomas
Madden; U.S. fixed income -William D. Dawson, III; and global equities and fixed
income - Henry A. Frantzen. The Chief Investment Officers are Executive Vice
Presidents of the Federated advisory companies.
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 $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
Federated Clients Overview
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
Institutional Clients
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, 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 advisers. The marketing effort
to these institutional clients is headed by John B.
Fisher, President, Institutional Sales Division, Federated Securities Corp.
Bank Marketing
Other institutional clients include 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 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings 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, Broker/Dealer Sales Division, Federated Securities Corp.
FINANCIAL INFORMATION
The Financial Statements for the Fund for the fiscal year ended March 31, 1999
are incorporated herein by reference to the Annual Report to Shareholders of
Federated Fund for U.S. Government Securities, Inc. dated March 31, 1999.
<PAGE>
INVESTMENT RATINGS
Standard and Poor's Long-Term Debt Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 or BB-
rating.
Moody's Investors Service, Inc. Long-Term 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 sometime 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.
<PAGE>
Fitch IBCA, Inc. Long-Term Debt 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 throughout the
life of the issue.
<PAGE>
ADDRESSES
Federated Fund for u.s. government securities, inc.
Class A Shares
Class B Shares
Class C Shares
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Distributor
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Investment Adviser
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
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
125 Summer Street
Boston, MA 02110-1617
