FORTRESS
UTILITY
FUND, INC.
SEMI-ANNUAL REPORT
NOVEMBER 30, 1993
ESTABLISHED 1987
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
DISTRIBUTOR
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Fellow Shareholder:
I am pleased to present the Semi-Annual Report for
Fortress Utility Fund, Inc. (the "Fund") for the six-month
period ended November 30, 1993.
This report contains an interview with the Fund's
portfolio manager, Christopher Wiles, Vice President of
Federated Management. A complete list of the Fund's
investment holdings and the Fund's Financial Statements
are also included.
During the six-month period from June 1, 1993, to November
30, 1993, the Fund's net assets grew from $742 million to
$986 million. The total divi- dend income paid for the
report period totaled $0.306 per share. The Fund's share
value increased from $12.90 to $13.15, an increase of
1.90%*. The Fund's 30-day yield on November 30, 1993 was
4.80%, based on net asset value (4.75% based on offering
price)*.
The Fund is invested primarily in electric utility stocks
to take advantage of their potential for attractive
yields. The Fund holds more than 40 issues in the utility
sector, as well as other high-yielding, income-producing
securities. The Fund's net assets were invested as
follows: 62.4% in common stocks; 4.90% in adjustable rate
preferred stock; 26.4% in convertible securities, and 5.7%
in repurchase agreements. Fortress Utility Fund, Inc.
continues its excellent performance. As of November 30,
1993, the Fund's annualized total returns for the
one-year, five-year, and since inception (1/30/87) periods
ended November 30, 1993, were 12.91%, 14.52%, and 10.65%,
respectively, based on offering price. The Fund's
performance has merited a five-star rating by Morningstar,
Inc., the highest by this rating service.**
Thank you for choosing Fortress Utility Fund, Inc. as a
long-term income investment. As always, we welcome your
questions and comments.
Sincerely yours,
Richard B. Fisher
President
January 15, 1994
* Data quoted represent past performance and are
not indicative of future results. Investment
return and principal value will fluctuate, so
when shares are redeemed they may be worth more
or less than the original cost.
** Ratings are based on past performance and are
subject to change every two weeks. This rating
is as of December 24, 1993.
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
Q How has Fortress Utility Fund, Inc. (the "Fund")
performed during the past
six-and twelve-month periods?
A The Fund had good relative performance for the
twelve months ended November
30, 1993. The Fund achieved a total return of
15.09% based on net asset value
(12.91% based on offering price) versus
19.14% for the Standard & Poor's Utility Index* and
8.92% for the Dow Jones Utility Average.
Q How has the Fund performed versus other utility
funds?
A The Fund continues to have a five-star rating
from Morningstar, Inc.
for the period ending November 30, 1993.** This means
that the Fund is in the top 10% of all equity funds
over the last five years when measured on a
risk-adjusted basis. For the one year period ended
Christopher H. Wiles December 2, 1993, the Fund ranked 18 out of 41
Vice President, utility funds tracked by Lipper Analytical Services.
Federated For the five year period ended September 30, 1993,
Management the Fund ranked 8 out of 17 utility funds tracked by
Lipper Analytical Services.***
Q The utility market has had a fairly volatile
year. Can you explain the causes of this
volatility?
A During the first nine months of 1993, utilities
were up an impressive 19%.
The reason for this stunning performance is related
to falling interest rates, which led investors to
utility stocks and utility funds. As these investors
sought out utility stocks, they forced the prices up.
With utility stocks at higher
prices, their yields and dividend growth declined to
the point where they were no
longer the most attractive yielding equity. Investors
sought other alternatives with
similar yields and growth potential in such
industries as tobacco, pharmaceutical,
energy, and financial. As investors moved into these
other areas, utility stock
prices began to fall. By the end of November,
utilities had fallen approximately 7%,
and yet remained 12% for the year.
Q How did the Fund perform during this period?
A Due to our diversified portfolio and our emphasis
on risk control, we underperformed slightly while
utilities were rising, but more importantly, we
outperformed greatly when utility stock prices fell.
Our goal continues to be
average performance on the upside with superior
performance on the downside.
Q I noticed a few more international securities in
the Fund. Can you explain
this international movement?
A As U.S. utility stocks rose in value this year,
we were able to find several
international utilities with comparable yields and
superior growth expectations.
We currently have approximately 11% of the Fund's
assets invested in foreign utility
securities. These companies are: Hong Kong
Telecommunications, Philippine Long
Distance, BCE Inc., British Telecommunications, and
National Power of the United Kingdom.\
Q What other areas of opportunity do you see?
A Recently, we have made additions to two
areas--Real Estate Investment Trusts
(REITs) and natural gas stocks. Both of these
industries have recently
weakened in price making their yields and total
return potential more attractive.
They also have very strong long-term fundamentals,
and give our Fund greater diversification.
Q The Fund is probably one of the most diversified
utility funds available. Can you comment on this
strategy?
A The Fund is really an "equity" income fund that
just happens to own a considerable amount of
utilities. Due to SEC requirements regarding utility
funds, we must have at least 65% of our assets in
utility stocks, but we believe
that our non-utility holdings greatly lower our
downside risk when utility stocks
decline. As October and November have shown, our
ability to outperform on the
downside is a very attractive feature. We will
continue to pursue above-average,
risk-adjusted total returns. We like to own good
dividend-paying companies with good
growth potential.
* This index is unmanaged.
** Ratings are subject to change.
*** Past performance is not indicative of future
results. Lipper rankings are based
on total return and do not take sales charges
into account. During the ranking
periods, certain Fund expenses were waived and/or
advanced; otherwise, rankings
may have been different.
\ International stocks involve different risks than
U.S. equities due to differences
in behavior between overseas markets and our own.
FORTRESS UTILITY FUND, INC.
Utility Securities For Investors
Seeking Current Income
and Long-Term Growth of Income
If you invested $7,000 initially and
reinvested all dividends
and capital gains . . .
"Graphic representation "A" omitted. See Appendix."
As this illustration shows, an investment of $7,000 in Fortress
Utility Fund, Inc. on the Fund's inception date of 1/30/87, with
dividends and capital gains reinvested, and no redemption of Shares,
would be worth $13,982 on 11/30/93. This reflects a 10.65%* average
annual total return (before capital gains taxes, if any) for the
seven year investment lifespan.
ONE KEY TO INVESTING IS TO HAVE IS TO HAVE ALL DISTRIBUTIONS
REINVESTED IN FUND SHARES. BY REINVESTING IN FUND SHARES, YOU BUY
MORE SHARES EACH YEAR AND GAIN THE BENEFIT OF COMPOUNDING.
*Total return represents the change in the value of an investment
after reinvesting all income and capital gains, and taking into
account the 1% sales charge and the 1% redemption fee on shares
redeemed prior to 48 months on the initial investment. Data quoted
represent past performance and are not indicative of future results.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
AS OF 12/31/93, THE FUND'S AVERAGE ANNUALIZED ONE-YEAR, FIVE-YEAR, AND
SINCE INCEPTION TOTAL RETURNS WERE 13.02%, 14.76%,
AND 10.88%, RESPECTIVELY.
Investing in FORTRESS UTILITY FUND, INC.
ONE STEP AT A TIME . . .$1,000 invested each year for 7 years
(1987 to 1993)
---------------------------------------------------------------------
$7,000 invested with all dividends and capital gains reinvested
is valued at $11,526
"Graphic representation "B" omitted. See Appendix."
WHEN IT COMES TO INVESTING, THE KEY IS CONSISTENCY.
A practical investment plan helps you pursue current income and
long-term growth of principal from primarily electric, gas, and
communications utilities companies. Through systematic investing, you
buy shares on a regular basis and reinvest all earnings. An
investment plan works for you when you invest only $1,000 annually.
YOU CAN TAKE IT ONE STEP AT A TIME. Put time and compounding to work!
This graph illustrates the investment growth you would have enjoyed
if you started investing $1,000 annually in Fortress Utility Fund,
Inc. on 1/30/87, reinvested your dividends and capital gains, and did
not redeem any shares. As of 11/30/93, your investment account would
have reached a total value of $11,526.** This works out to an average
annual total return of 12.91%.
*The difference from the ending figure and the actual reinvested
figure is due to the increase in the share value of the shares
purchased by the reinvestment of the dividends and capital gains.
**No method of investing can guarantee a profit or protect against
loss in down markets. However, by investing regularly over time and
buying shares at various prices, investors can purchase more shares
at lower prices. All accumulated shares have the ability to pay
income to the investor. Since such a plan involves continuous
investment, regardless of changing price levels, the investor
should consider whether or not to continue purchases through
periods of low price levels.
FORTRESS UTILITY FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- ---------------
COMMON STOCKS -- 62.4%
- -----------------------------------------------------------------------------------------------
UTILITIES--57.2%
-------------------------------------------------------------------------------
500,000 Allegheny Power Systems, Inc. $ 13,062,500
-------------------------------------------------------------------------------
340,400 American Electric Power, Inc. 12,296,950
-------------------------------------------------------------------------------
445,000 Baltimore Gas & Electric Co. 11,236,250
-------------------------------------------------------------------------------
800,000 BCE, Inc. 27,400,000
-------------------------------------------------------------------------------
25,000 British Telecommunications, ADR 1,753,125
-------------------------------------------------------------------------------
600,000 British Telecommunications, ADR 19,575,000
-------------------------------------------------------------------------------
600,000 Carolina Power & Light Co. 17,400,000
-------------------------------------------------------------------------------
135,000 Cilcorp, Inc. 5,062,500
-------------------------------------------------------------------------------
500,000 Cincinnati Gas & Electric Co. 13,437,500
-------------------------------------------------------------------------------
525,000 CMS Energy Corp. 13,125,000
-------------------------------------------------------------------------------
400,000 Consolidated Edison Co. 12,450,000
-------------------------------------------------------------------------------
500,000 Detroit Edison Co. 16,125,000
-------------------------------------------------------------------------------
657,000 DPL, Inc. 12,729,375
-------------------------------------------------------------------------------
500,000 DQE, Inc. 16,875,000
-------------------------------------------------------------------------------
300,000 Duke Power Co. 12,600,000
-------------------------------------------------------------------------------
400,000 Florida Progress Corp. 13,150,000
-------------------------------------------------------------------------------
650,000 General Public Utilities 19,337,500
-------------------------------------------------------------------------------
500,000 GTE Corp. 18,562,500
-------------------------------------------------------------------------------
800,000 (a)Gulf States Utilities Co. 15,200,000
-------------------------------------------------------------------------------
425,000 Hong Kong Telecommunications 23,640,625
-------------------------------------------------------------------------------
230,000 Ipalco Enterprises, Inc. 8,021,250
-------------------------------------------------------------------------------
600,000 Long Island Lighting Co. 14,250,000
-------------------------------------------------------------------------------
269,000 MCN Corp. 9,347,750
-------------------------------------------------------------------------------
500,000 Niagara Mohawk Power Corp. 10,250,000
-------------------------------------------------------------------------------
</TABLE>
FORTRESS UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- -----------------------------------------------------------------------------------------------
UTILITIES--CONTINUED
-------------------------------------------------------------------------------
600,000 Nipsco Industries, Inc. $ 19,050,000
-------------------------------------------------------------------------------
700,000 Northeast Utilities Co. 16,362,500
-------------------------------------------------------------------------------
420,000 NYNEX Corp. 17,902,500
-------------------------------------------------------------------------------
600,000 Pacific Enterprises 15,375,000
-------------------------------------------------------------------------------
700,000 Pacificorp 13,300,000
-------------------------------------------------------------------------------
225,000 Peoples Energy Corp. 6,553,125
-------------------------------------------------------------------------------
700,000 Philadelphia Electric Co. 19,600,000
-------------------------------------------------------------------------------
400,000 Pinnacle West Capital Corp. 8,450,000
-------------------------------------------------------------------------------
460,000 PSI Holdings, Inc. 11,845,000
-------------------------------------------------------------------------------
600,000 Public Service Enterprises Group, Inc. 19,425,000
-------------------------------------------------------------------------------
355,000 Southern Co. 15,353,750
-------------------------------------------------------------------------------
150,000 Southern Indiana Gas & Electric Co. 4,931,250
-------------------------------------------------------------------------------
500,000 Southern New England Telecommunications 18,312,500
-------------------------------------------------------------------------------
482,300 UGI Corp. 10,550,313
-------------------------------------------------------------------------------
500,000 Utilicorp, Inc. 15,500,000
-------------------------------------------------------------------------------
425,000 Western Resources, Inc. 14,396,875
------------------------------------------------------------------------------- ---------------
Total 563,795,638
------------------------------------------------------------------------------- ---------------
CONSUMER DURABLES -- 0.9%
-------------------------------------------------------------------------------
275,000 CBL REIT 4,984,375
-------------------------------------------------------------------------------
335,000 Southwestern Properties REIT 4,271,250
------------------------------------------------------------------------------- ---------------
Total 9,255,625
------------------------------------------------------------------------------- ---------------
ENERGY -- 2.6%
-------------------------------------------------------------------------------
400,000 Texaco, Inc. 25,700,000
------------------------------------------------------------------------------- ---------------
HEALTHCARE -- 1.7%
-------------------------------------------------------------------------------
500,000 Meditrust REIT 16,312,500
------------------------------------------------------------------------------- ---------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $583,708,951) 615,063,763
------------------------------------------------------------------------------- ---------------
</TABLE>
FORTRESS UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- ---------------
PREFERRED STOCKS -- 26.5%
- -----------------------------------------------------------------------------------------------
ADJUSTABLE RATE PREFERRED STOCKS -- 4.9%
-------------------------------------------------------------------------------
150,000 Enserch Corp., ARPS $ 15,225,000
-------------------------------------------------------------------------------
125,000 Illinois Power Co., Pfd. B, ARPS 6,359,375
-------------------------------------------------------------------------------
150,000 Niagra Mohawk Power Corp., C, ARPS 3,900,000
-------------------------------------------------------------------------------
65,045 Texas Utilities Electric Co., A, ARPS 6,309,365
-------------------------------------------------------------------------------
90,000 Texas Utilities Electric Co., Pfd. B, ARPS 9,090,000
-------------------------------------------------------------------------------
178,000 Toledo Edison Co., Pfd. B, ARPS 4,450,000
-------------------------------------------------------------------------------
60,500 USX Marathon Group Corp., ARPS 3,070,375
------------------------------------------------------------------------------- ---------------
Total 48,404,115
------------------------------------------------------------------------------- ---------------
CONVERTIBLE PREFERRED STOCKS -- 21.2%
-------------------------------------------------------------------------------
222,500 Ashland Oil Co., Conv. Pfd., 6.25% 13,405,625
-------------------------------------------------------------------------------
80,000 Catellus Development Corp., Conv. Pfd., 7.50% 4,620,000
-------------------------------------------------------------------------------
975,000 Citicorp, Conv. Pfd., Series P, 8.25% 19,012,500
-------------------------------------------------------------------------------
220,000 Freeport Copper & Gold, Inc., Conv. Pfd., $1.25 4,840,000
-------------------------------------------------------------------------------
200,000 Freeport McMoran, Inc., Conv. Pfd., $4.375 9,700,000
-------------------------------------------------------------------------------
303,700 Kaufman and Broad Home Corp., Conv. Pfd., Series B, 8.75% 6,453,625
-------------------------------------------------------------------------------
400,000 Occidental Pete, Conv. Pfd., 7.75% 21,400,000
-------------------------------------------------------------------------------
540,000 Phillipine Long Distance, Conv. Pfd., 5.75% 18,832,500
-------------------------------------------------------------------------------
2,200,000 RJR Nabisco Holdings, Conv. Pfd, 8.25% 15,125,000
-------------------------------------------------------------------------------
500,000 Sears Roebuck & Co., Conv. Pfd., Series A, 3.75% 28,000,000
-------------------------------------------------------------------------------
277,500 Sun America Inc., Conv. Pfd., $2.78, Series D 11,100,000
-------------------------------------------------------------------------------
344,700 Sun America Inc., Conv. Pfd., Series P, 8.50% 6,075,337
-------------------------------------------------------------------------------
450,000 Tenneco, Inc., Conv. Pfd., 9.50% 18,450,000
-------------------------------------------------------------------------------
473,900 Unisys Corp., Conv. Pfd., $3.75 23,458,050
-------------------------------------------------------------------------------
120,000 Utilicorp, Inc., Conv. Pfd., $1.78 3,615,000
-------------------------------------------------------------------------------
230,000 Westmoreland Coal Co., Conv. Pfd., 8.50% 5,060,000
------------------------------------------------------------------------------- ---------------
Total 209,147,637
------------------------------------------------------------------------------- ---------------
</TABLE>
FORTRESS UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- ---------------
PREFERRED STOCKS--CONTINUED
- -----------------------------------------------------------------------------------------------
PREFERRED INVERSE FLOATING RATE -- 0.4%
-------------------------------------------------------------------------------
30 Potomac Electric Power Co., Pfd. Inv., Series 1991 B $ 3,630,000
------------------------------------------------------------------------------- ---------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST, $230,584,433) 261,181,752
------------------------------------------------------------------------------- ---------------
CONVERTIBLE BONDS -- 5.2%
- -----------------------------------------------------------------------------------------------
$ 15,000,000 National Power of the United Kingdom, 6.25% Conv. Bonds,
9/23/2008 24,934,103
-------------------------------------------------------------------------------
342,375 Tele-Communications, Inc., LYON, 7.25% accrual, 4/25/2008 10,314,047
-------------------------------------------------------------------------------
39,250,000 Turner Broadcasting System, Inc., LYON, 7.25% accrual, 2/13/2007 16,485,000
------------------------------------------------------------------------------- ---------------
TOTAL CONVERTIBLE BONDS (IDENTIFIED COST, $47,771,718) 51,733,150
------------------------------------------------------------------------------- ---------------
*REPURCHASE AGREEMENT--5.7%
- -----------------------------------------------------------------------------------------------
55,815,000 J.P. Morgan Securities, Inc., 3.24%, dated 11/30/93, due 12/1/93
(at amortized cost) (Note 1B) 55,815,000
------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (AT IDENTIFIED COST, $917,880,102) $ 983,793,665\
------------------------------------------------------------------------------- ---------------
</TABLE>
(a) Non-income producing.
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
\ The cost of investments for federal tax purposes amounts to $917,880,102.
The net unrealized appreciation of investments on a federal tax basis amounts
to $65,913,563 which is comprised of $78,083,923 appreciation and $12,170,360
depreciation at November 30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($986,147,493) at November 30, 1993.
The following abbreviations are used in this portfolio:
ADR--American Depository Receipts
ARPS--Adjustable Rate Preferred Stock
LYON--Liquid Yield Option Note
REIT--Real Estate Investment
(See Notes which are an integral part of the Financial Statements)
FORTRESS UTILITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------
Investments, at value (Notes 1A and 1B)
(identified and tax cost, $917,880,102) $ 983,793,665
- ------------------------------------------------------------------------------------------------
Cash 77,465
- ------------------------------------------------------------------------------------------------
Dividends and interest receivable 6,423,005
- ------------------------------------------------------------------------------------------------
Receivable for capital stock sold 4,722,109
- ------------------------------------------------------------------------------------------------
Receivable for investments sold 998,516
- ------------------------------------------------------------------------------------------------
Other receivable 5,052
- ------------------------------------------------------------------------------------------------ ---------------
Total assets 996,019,812
- ------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------
Payable for investments purchased $ 5,624,577
- ---------------------------------------------------------------------------------
Dividends payable 2,042,902
- ---------------------------------------------------------------------------------
Payable for capital stock redeemed 1,755,819
- ---------------------------------------------------------------------------------
Accrued expenses and other liabilities 449,021
- --------------------------------------------------------------------------------- -------------
Total liabilities 9,872,319
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS for 75,016,794 shares of capital stock outstanding $ 986,147,493
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------
Paid-in capital $ 903,193,183
- ------------------------------------------------------------------------------------------------
Unrealized appreciation of investments 65,913,563
- ------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (2,966,569)
- ------------------------------------------------------------------------------------------------
Undistributed net investment income 20,007,316
- ------------------------------------------------------------------------------------------------ ---------------
Total $ 986,147,493
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSET VALUE, Per Share
($986,147,493 / 75,016,794 shares of capital stock outstanding) $13.15
- ------------------------------------------------------------------------------------------------ ---------------
Computation of Offering Price: Offering Price Per Share (100/99 of 13.15)* $13.28
- ------------------------------------------------------------------------------------------------ ---------------
Computation of Proceeds on Redemption:
Redemption Proceeds Per Share (99/100 of 13.15)** $13.02
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
* There is no sales charge for purchases of $1 million or more, as stated under
"What Shares Cost" in the prospectus.
** Under certain conditions, the redemption fee of 1.00% is not imposed, as
stated under "Redeeming Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FORTRESS UTILITY FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED NOVEMBER 30, 1993
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Income (Note 1C)--
- --------------------------------------------------------------------------------------------------
Dividends $ 24,433,842
- --------------------------------------------------------------------------------------------------
Interest 2,380,637
- -------------------------------------------------------------------------------------------------- --------------
Total investment income 26,814,479
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee (Note 3) $ 3,369,021
- -----------------------------------------------------------------------------------
Directors' fees 7,718
- -----------------------------------------------------------------------------------
Administrative personnel and services (Note 3) 545,360
- -----------------------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees
and expenses 404,612
- -----------------------------------------------------------------------------------
Capital stock registration costs 145,943
- -----------------------------------------------------------------------------------
Shareholder servicing fees 898,406
- -----------------------------------------------------------------------------------
Auditing fees 10,900
- -----------------------------------------------------------------------------------
Legal fees 8,300
- -----------------------------------------------------------------------------------
Printing and postage 30,500
- -----------------------------------------------------------------------------------
Insurance premiums 8,971
- -----------------------------------------------------------------------------------
Taxes 27,108
- -----------------------------------------------------------------------------------
Miscellaneous 1,650
- ----------------------------------------------------------------------------------- -------------
Total expenses 5,458,489
- -----------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 3) 487,041
- ----------------------------------------------------------------------------------- -------------
Net expenses 4,971,448
- -------------------------------------------------------------------------------------------------- --------------
Net investment income 21,843,031
- -------------------------------------------------------------------------------------------------- --------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net Realized Gain on investment transactions (identified cost basis) 296,454
- --------------------------------------------------------------------------------------------------
Net Change in unrealized appreciation on investment 9,150,246
- -------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain on investments 9,446,700
- -------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ 31,289,731
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FORTRESS UTILITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------
1994* 1993
<S> <C> <C>
- ------------------------------------------------------------------------------ ---------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------
Net investment income $ 21,843,031 $ 24,600,206
- ------------------------------------------------------------------------------
Net realized gain on investment transactions ($296,454 and $1,277,452 net
gain, respectively, as computed for federal
tax purposes) 296,454 1,277,452
- ------------------------------------------------------------------------------
Change in unrealized appreciation of investments 9,150,246 43,909,874
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from operations 31,289,731 69,787,532
- ------------------------------------------------------------------------------ ---------------- ---------------
NET EQUALIZATION CREDITS (NOTE 1E)-- 3,948,395 10,090,103
- ------------------------------------------------------------------------------ ---------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1C)--
- ------------------------------------------------------------------------------
Dividends to shareholders from net investment income (20,808,641) (24,938,735)
- ------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (790,658) (1,290,076)
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from distributions to shareholders (21,599,299) (26,228,811)
- ------------------------------------------------------------------------------ ---------------- ---------------
CAPITAL STOCK TRANSACTIONS (NOTE 2)
(EXCLUSIVE OF AMOUNTS ALLOCATED TO NET INVESTMENT INCOME)--
- ------------------------------------------------------------------------------
Net proceeds from sale of shares 322,457,089 492,480,678
- ------------------------------------------------------------------------------
Net asset value of shares issued to shareholders electing
to receive payment of dividends and capital gain distributions
in capital stock 9,594,264 10,149,388
- ------------------------------------------------------------------------------
Cost of shares redeemed (101,610,097) (61,693,139)
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from capital stock transactions 230,441,256 440,936,927
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets 244,080,083 494,585,751
- ------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------
Beginning of period 742,067,410 247,481,659
- ------------------------------------------------------------------------------ ---------------- ---------------
End of period (including undistributed net investment income of $20,007,316
and $15,024,531, respectively) $ 986,147,493 $ 742,067,410
- ------------------------------------------------------------------------------ ---------------- ---------------
</TABLE>
* Six months ended November 30, 1993 (unaudited).
(See Notes which are an integral part of the Financial Statements)
FORTRESS UTILITY FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
1994*** 1993 1992 1991 1990 1989 1988 1987**
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.90 $ 11.69 $ 10.59 $ 10.14 $ 9.70 $ 8.90 $ 9.18 $ 10.00
- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------
Net investment income 0.32 0.68 0.69 0.77 0.67 0.63 0.63 0.24
- --------------------------------------
Net realized and unrealized gain
(loss) on investments 0.25 1.25 1.07 0.51 0.49 0.77 (0.34) (0.98)
- -------------------------------------- ----------- --------- --------- --------- --------- --------- --------- -----------
Total from investment operations 0.57 1.93 1.76 1.28 1.16 1.40 0.29 (0.74)
- --------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------
Dividends to shareholders from net
investment income (0.31) (0.67) (0.66) (0.75) (0.72) (0.60) (0.57) (0.08)
- --------------------------------------
Distributions to shareholders from
net realized gain on investment
transactions (0.01) (0.05) -- (0.08) -- -- -- --
- -------------------------------------- ----------- --------- --------- --------- --------- --------- --------- -----------
TOTAL DISTRIBUTIONS (0.32) (0.72) (0.66) (0.83) (0.72) (0.60) (0.57) (0.08)
- -------------------------------------- ----------- --------- --------- --------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 13.15 $ 12.90 $ 11.69 $ 10.59 $ 10.14 $ 9.70 $ 8.90 $ 9.18
- -------------------------------------- ----------- --------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN* 4.39% 17.02% 17.07% 13.44% 12.13% 16.47% 3.21% (7.74%)
- --------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------
Expenses 1.11%(b) 1.07% 1.10% 1.03% 1.05% 1.08% 1.04% 0.53%(b)
- --------------------------------------
Net Investment Income 4.86%(b) 5.45% 6.01% 7.12% 6.77% 6.92% 7.18% 7.95%(b)
- --------------------------------------
Expense waiver/reimbursement (a) 0.11%(b) 0.05% 0.11% 0.61% 1.39% 0.86% 1.00% 0.97%(b)
- --------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------
Net assets, end of period (000
omitted) $986,147 $742,067 $247,482 $66,578 $29,844 $13,476 $9,256 $6,305
- --------------------------------------
Portfolio turnover rate 10 % 27% 26% 53% 49% 17% 23% 12 %
- --------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from January 30, 1987 to May 31, 1987.
For the period from the start of business January 14, 1987 to January 29,
1987, net investment income aggregating $0.024 per share ($244) was
distributed to the Fund's investment adviser. Such distribution represented
net income of the Fund prior to the initial public offering of Fund shares
which commenced on January 30, 1987.
*** For six months ended November 30, 1993 (unaudited).
(a) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 3).
(b) Computed on an annualized basis.
(See Notes which are an integral part of the Financial Statements)
FORTRESS UTILITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end, management investment company. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at last sale
prices reported on national securities exchanges. Unlisted securities or
listed securities for which there were no sales on the valuation date are
generally valued at the mean between bid and asked prices. Short-term
obligations are valued at the mean between bid and asked prices as
furnished by an independent pricing service. Short-term obligations with
maturities of sixty days or less are valued at amortized cost, which
approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying collateral to ensure the value at
least equals the principal amount of the repurchase transaction, including
accrued interest.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines established
by the directors. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis and includes discount earned less
any premium.
D. FEDERAL TAXES--It is the Fund's policy to continue to comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies and to distribute to shareholders each year substantially all of
its taxable income, including any net realized gain on investments.
Accordingly no provision for federal tax is necessary.
During the year ended May 31, 1991, Federated Corporate Cash Trust was
merged into the Fund (See Note 5). As part of this transaction for federal
tax purposes, Federated Corporate Cash Trust succeeded to the Fund, capital
loss carryforwards of $15,211,243, expiring in various years through 1998.
The Fund's ability to use these losses will be limited through the
application of the tax code's
change of ownership rules. The maximum amount of carryforwards available to
the Fund at May 31, 1993 is $2,472,365 which will expire in 1998.
E. EQUALIZATION--The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
redemptions of capital stock equivalent, on a per-share basis, to the
amount of undistributed net investment income on the date of the
transaction is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of capital stock.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund will record
when-issued securities and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
G. DIVIDENDS--Dividends from net investment income are declared and paid
monthly. Distributions of any net realized capital gains will be made at
least once every twelve months. Dividends and capital gain distributions,
if any, are recorded on the ex-dividend date.
H. RECLASSIFICATIONS--During the current period, the Fund adopted Statement of
Position 93-2 Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions
by Investment Companies. Accordingly, permanent book and tax basis
differences relating to shareholder distributions have been reclassified to
paid-in-capital. As of June 1, 1993, the cumulative effect of such
differences, totaling $4,773,998, was reclassified from accumulated
undistributed net realized gain on investments to paid-in-capital. Net
investment income, net realized gains, and net assets were not affected by
this change.
I. OTHER--Investment transactions are accounted for on the date of the
transaction.
(2) CAPITAL STOCK
At November 30, 1993, there were 2,000,000,000 shares of $.001 par value capital
stock authorized. Transactions in capital stock were as follows:
FORTRESS UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
11/30/93 5/31/93
<S> <C> <C>
- ------------------------------------------------------------------------------------ ------------- -------------
Shares outstanding, beginning of period 57,532,480 21,163,405
- ------------------------------------------------------------------------------------
Shares sold 24,510,579 40,627,313
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 727,348 839,320
- ------------------------------------------------------------------------------------
Shares redeemed (7,753,613) (5,097,558)
- ------------------------------------------------------------------------------------ ------------- -------------
Shares outstanding, end of period 75,016,794 57,532,480
- ------------------------------------------------------------------------------------ ------------- -------------
</TABLE>
(3) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Management, the Fund's investment adviser ("Adviser"), receives for
its services an annual investment advisory fee equal to .75 of 1% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to waive the
amount, if any, by which the Fund's aggregate annual normal operating expenses
(including the investment advisory fee, but excluding interest, taxes, brokerage
commissions, insurance premiums, and extraordinary expenses) exceed 1.10% of the
Fund's average daily net assets. For the six months ended November 30, 1993 the
Adviser received a fee amounting to $3,369,021 of which $487,041 was voluntarily
waived in accordance with such undertaking.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. ("FAS"). Certain of the Officers and
Directors of the Fund are Officers and Directors of the above corporations.
(4) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities, for the
six months ended November 30, 1993, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
PURCHASES: $ 307,475,408
- ------------------------------------------------------------------------------------------------- ---------------
SALES AND MATURITIES: $ 88,430,948
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
(5) ACQUISITION OF FEDERATED CORPORATE CASH TRUST
On June 14, 1990, Fortress Utility Fund, Inc. ("FUFI"), acquired all the net
assets of Federated Corporate Cash Trust ("FCCT") pursuant to a plan of
reorganization approved by Federated Corporate Cash Trust shareholders. The
acquisition was accomplished by a tax-free exchange of 665,110 shares of FUFI
(valued at $6,877,235) for the 878,319 shares of FCCT outstanding (valued at
$6,877,235) on June 14, 1990. FCCT's net assets at that date ($6,877,235),
including $607,712 of unrealized depreciation and $15,247,401 of net realized
losses on investment transactions, were combined with those of FUFI. The
aggregate net assets of FUFI immediately before and after the acquisition were
$30,576,566 and $37,453,801, respectively.
DIRECTORS OFFICERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Richard B. Fisher
James E. Dowd President
Lawrence D. Ellis, M.D. J. Christopher Donahue
Edward L. Flaherty, Jr. Vice President
Glen R. Johnson Edward C. Gonzales
Peter E. Madden Vice President and Treasurer
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar Vice President and Secretary
Marjorie P. Smuts John A. Staley, IV
Vice President
David M. Taylor
Assistant Treasurer
Charles H. Field
Assistant Secretary
</TABLE>
Mutual funds are not obligations of or insured by any bank nor are they insured
by the federal government or any of its agencies. Investment in these shares
involves risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the Fund's prospectus which contains facts concerning its
objective and policies, management fees, expenses and other information.
APPENDIX A
The graphic presentation displayed here consists of a
three dimensional area chart which represents the change in
the value of a hypothetical $7,000 initial investment in the
Fortress Utility Fund, Inc. The x-axis represents time and
is divided into six units. The first unit represents the
period of time from the Fund's inception date of January 30,
1987 to November 30, 1988. The following five units
represent increases in yearly increments up to and including
1993. The y-axis represents dollar value and is divided
into seven units with increments of $2,000. The values of
the y-axis range from $2,000 to $14,000.
The Initial Net Asset Value, and the Cost of Investment
on January 30, 1987 are $6931 and $7,000, respectively. The
Total Value of Investment on November 30, 1993 is $13,982.
The Key in the upper left hand corner of the chart states
the following: that the cost of investment is represented by
black shading; that the principal value of investment is
represented by grey shading; and that the white areas
represent capital gains and reinvested dividends.
APPENDIX B
The graphic presentation displayed here consists of a
three dimensional bar graph which represents the change in
the value of a hypothetical $7,000 investment ($1,000
invested each year for seven years) in the Fortress Utility
Fund, Inc., with all dividends and capital gains reinvested.
The x-axis represents time and is divided into seven units.
The first unit represents the period of time from the Fund's
inception date of January 30, 1987 to November 30, 1987. The
following six units represent increases in yearly increments
up to and including 1993. The y-axis represents dollar
value and is divided into six equal units with increments of
$2,000. The values of the y-axis range from $0 to $12,000.
The Key at the bottom of the graph states the
following: that the initial investment of $1,000 is
represented by black shading; that the principal value of
investment is represented by grey shading; and that the
white areas represent capital gains and reinvested
dividends.
The right side of the graph contains two brackets.
The first bracket ranges from $0 to $8,965, representing
initial and principal value of investment. The second
ranges from $8,965 to $11,526, representing capital gains
and reinvested dividends, and is shown as a value of $2,561.
As of November 30, 1993, $7,000 invested with all dividends
and capital gains reinvested is valued at $11,526.
