FORTRESS UTILITY FUND, INC.
PROSPECTUS
An open-end, diversified management investment company (a mutual fund) investing
in equity and debt securities of utility companies to achieve high current
income and moderate capital appreciation.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Fortress Utility Fund, Inc. (the "Fund"). Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information dated July 31,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference in this
prospectus. You may request a copy of the Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact your financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated July 31, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS 2
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GENERAL INFORMATION 3
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FORTRESS INVESTMENT PROGRAM 3
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INVESTMENT INFORMATION 4
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Investment Objective 4
Investment Policies 4
Acceptable Investments 4
Common Stocks 4
Securities of Foreign Issuers 4
Other Securities 5
Restricted and Illiquid Securities 5
Temporary Investments 5
Repurchase Agreements 5
Reverse Repurchase Agreements 5
Lending of Portfolio Securities 6
When-Issued and Delayed
Delivery Transactions 6
Portfolio Turnover 6
Investment Risks 6
Reducing Risks of Utility Securities 6
Investment Limitations 7
NET ASSET VALUE 7
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INVESTING IN THE FUND 7
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Share Purchases 7
Through a Financial Institution 7
Directly By Mail 8
Directly By Wire 8
Minimum Investment Required 8
What Shares Cost 8
Dealer Concession 9
Eliminating the Sales Load 9
Quantity Discounts and Accumulated
Purchases 9
Letter of Intent 10
Reinvestment Privilege 10
Concurrent Purchases 10
Systematic Investment Program 10
Exchange Privilege 11
Certificates and Confirmations 11
Dividends and Distributions 11
Retirement Plans 11
REDEEMING SHARES 12
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Through a Financial Institution 12
By Telephone 12
Directly By Mail 13
Signatures 13
Receiving Payment 13
Contingent Deferred Sales Charge 13
Systematic Withdrawal Program 14
Accounts with Low Balances 15
FUND INFORMATION 15
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Management of the Fund 15
Board of Directors 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Distribution of Fund Shares 16
Other Payments to Financial Institutions 16
Administration of the Fund 17
Administrative Services 17
Shareholder Services Plan 17
Custodian 17
Transfer Agent and Dividend
Disbursing Agent 17
Legal Counsel 17
Independent Auditors 18
Brokerage Transactions 18
SHAREHOLDER INFORMATION 18
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Voting Rights 18
TAX INFORMATION 18
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Federal Income Tax 18
Pennsylvania Corporate and
Personal Property Taxes 19
PERFORMANCE INFORMATION 19
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FINANCIAL STATEMENTS 20
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REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS 30
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ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................... 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)......................................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................ None
Exchange Fee.................................................................................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)............................................................. 0.63%
12b-1 Fee..................................................................................... None
Total Other Expenses.......................................................................... 0.48%
Shareholder Services Fee (3).............................................................. 0.20%
Total Fund Operating Expenses (4).................................................... 1.11%
</TABLE>
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(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within
four years of their purchase date. For a more complete description see
"Redeeming Shares".
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.
(3) The maximum shareholder services fee is 0.25%.
(4) The Total Fund Operating Expenses would have been 1.23% absent the
voluntary waiver of a portion of the management fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS
COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER DIRECTLY OR
INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES,
SEE "FUND INFORMATION," "REDEEMING SHARES," AND "INVESTING IN THE FUND." Wire-
transferred redemptions of less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period....... $31 $56 $71 $144
You would pay the following expenses on the same investment, assuming no
redemption............................................................... $21 $45 $71 $144
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FORTRESS UTILITY FUND, INC.
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors, on page
30.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 1993 1992 1991 1990 1989 1988 1987*
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
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Net investment income 0.63 0.68 0.69 0.77 0.67 0.63 0.63 0.24
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Net realized and unrealized gain
(loss) on investments (0.61) 1.25 1.07 0.51 0.48 0.77 (0.34) (0.98)
- ------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations 0.02 1.93 1.76 1.28 1.15 1.40 0.29 (0.74)
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LESS DISTRIBUTIONS
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Dividends to shareholders from net
investment income (0.61) (0.67) (0.66) (0.75) (0.71) (0.60) (0.57) (0.08)
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Distributions to shareholders from
net realized gain on investment
transactions (0.01) (0.05) -- (0.08) -- -- -- --
- ------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.62) (0.72) (0.66) (0.83) (0.71) (0.60) (0.57) (0.08)
- ------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 12.30 $ 12.90 $ 11.69 $ 10.59 $ 10.14 $ 9.70 $ 8.90 $ 9.18
- ------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN** 0.01% 17.02% 17.07% 13.44% 12.13% 16.47% 3.21% (7.74)%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.11% 1.07% 1.10% 1.03% 1.05% 1.08% 1.04% 0.53%(b)
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Net investment income 4.92% 5.45% 6.01% 7.12% 6.77% 6.92% 7.18% 7.95%(b)
- -------------------------------------
Expense waiver/reimbursement (a) 0.12% 0.05% 0.11% 0.61% 1.39% 0.86% 1.00% 0.97%(b)
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SUPPLEMENTAL DATA
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Net assets, end of period (000
omitted) $892,490 $742,067 $247,482 $66,578 $29,844 $13,476 $9,256 $6,305
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Portfolio turnover rate 28% 27% 26% 53% 49% 17% 23% 12%
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</TABLE>
* 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.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended May 31, 1994, which can be obtained free
of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
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The Fund was established as a Massachusetts business trust on October 15, 1986,
and reorganized as a corporation under the laws of the state of Maryland on May
30, 1990. The Fund is designed to give individuals and institutions a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio of equity and debt securities of utility companies. A minimum initial
investment of $1,500 is required, except for an IRA account which requires a $50
minimum initial investment.
Fund shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on shares, other than shares purchased through reinvestment of
dividends, which are redeemed within four years of their purchase dates.
FORTRESS INVESTMENT PROGRAM
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This Fund is a member of a family of funds, collectively known as the Fortress
Investment Program. The funds in the Program are:
California Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and California personal
income taxes;
_ Fortress Adjustable Rate U.S. Government Fund, Inc., providing current
income consistent with lower volatility of principal through a
diversified portfolio of adjustable and floating rate mortgage securities
which are issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
_ Fortress Bond Fund, providing current income primarily through
high-quality corporate debt;
_ Fortress Municipal Income Fund, Inc., providing a high level of current
income generally exempt from the federal regular income tax by investing
primarily in a diversified portfolio of municipal bonds;
_ Fortress Utility Fund, Inc., providing high current income and moderate
capital appreciation primarily through equity and debt securities of
utility companies;
_ Government Income Securities, Inc., providing current income through
long-term U.S. government securities;
_ Limited Term Fund (Fortress Shares only), providing a high level of
current income consistent with minimum fluctuation in principal value;
_ Limited Term Municipal Fund (Fortress Shares only), providing a high
level of current income which is exempt from federal income tax
consistent with the preservation of capital;
_ Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
_ New York Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax, New York personal income
taxes, and New York City income taxes; and
_ Ohio Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and Ohio personal income
taxes.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus. Prospectuses for these Funds are available
by writing to Federated Securities Corp.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles, and by providing
the investment services of proven, professional investment advisers.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve high current income and
moderate capital appreciation by investing primarily in a professionally managed
and diversified portfolio of equity and debt securities of utility companies.
The investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the policies described in this prospectus.
INVESTMENT POLICIES
The investment policies described below may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund's investment approach is based on the
conviction that over the long-term, the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of utility companies. The Fund intends to achieve its
investment objective by investing in equity and debt securities of utility
companies that produce, transmit, or distribute gas and electric energy as well
as those companies that provide communications facilities, such as telephone and
telegraph companies. As a matter of investment policy which can be changed
without shareholder vote, the Fund will invest at least 65% of its total assets
in securities of utility companies. The Fund may also engage in put and call
options, financial futures, and options on futures.
COMMON STOCKS. The Fund invests primarily in common stocks of utility
companies selected by the Fund's investment adviser on the basis of
traditional research techniques, including assessment of earnings and
dividend growth prospects and of the risk and volatility of the company's
industry. However, other factors, such as product position, market share,
or profitability will also be considered by the Fund's investment adviser.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of
foreign issuers which are freely traded on United States securities
exchanges or in the over-the-counter market in the form of depository
receipts. Securities of a foreign issuer may present greater risks in the
form of nationalization, confiscation, domestic marketability, or other
national or international restrictions. As a matter of practice, the Fund
will not invest in the securities of a foreign issuer if any such risk
appears to the investment adviser to be substantial.
OTHER SECURITIES. The Fund may invest in preferred stocks, corporate
bonds, notes, and warrants of these companies and in cash, U.S. government
securities, and money market instruments in proportions determined by its
investment adviser. The prices of fixed income securities fluctuate
inversely to the direction of interest rates.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies but which are
subject to restrictions upon resale under federal securities law. However, the
Fund will limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of its total assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended
("Section 4(2)"). Section 4(2) commercial paper is restricted as to disposition
under federal securities law and is generally sold to institutional investors,
such as the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the purchaser
must be in an exempt transaction. Section 4(2) commercial paper is normally
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash, cash
items, and short-term instruments, including notes and commercial paper, for
liquidity and during times of unusual market conditions for defensive purposes.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. The Fund or its
custodian will take possession of the securities subject to repurchase
agreements and these securities will be marked to market daily. To the extent
that the original seller does not repurchase the securities from the Fund, the
Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Directors.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse repurchase
agreements. This transaction is similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities on a short-term or a long-term basis up
to one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Fund's Board of Directors and will receive collateral equal to at least
100% of the value of the securities loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases or sells securities with payment and delivery
scheduled for a future time. The Fund engages in when-issued and delayed
delivery transactions only for the purpose of acquiring portfolio securities
consistent with the Fund's investment objective and policies, not for investment
leverage. In when-issued and delayed delivery transactions, the Fund relies on
the seller to complete the transaction. The seller's failure to complete the
transaction may cause the Fund to miss a price or yield considered to be
advantageous. The Fund will limit its purchases of securities on a when-issued
or delayed delivery basis to no more than 10% of the value of its total assets.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the Fund's
investment adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held.
INVESTMENT RISKS
Because of the Fund's investment concentration, there exist certain risks
associated with the utility industry of which investors should be aware. These
include difficulty in earning adequate returns on investment despite frequent
rate increases, restrictions on operations and increased costs and delays due to
governmental regulations, building or construction delays, environmental
regulations, difficulty of the capital markets in absorbing utility debt and
equity securities, and difficulties in obtaining fuel at reasonable prices.
REDUCING RISKS OF UTILITY SECURITIES. The Fund's adviser believes that the
risks of investing in utility securities can be reduced. The professional
portfolio management techniques used by the Fund to attempt to reduce these
risks include credit research. The Fund's investment adviser will perform its
own credit analysis in addition to using recognized rating agencies and other
sources, including discussions with the issuer's management, the judgment of
other investment analysts, and its own informed judgment. The adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness to
changes in interest rates and business conditions, and its anticipated cash
flow, interest or dividend coverage, and earnings. In evaluating an issuer, the
adviser places special emphasis on the estimated current value of the issuer's
assets rather than historical costs.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings;
invest more than 5% of its total assets in securities of one issuer
(except cash and cash items and U.S. government securities);
invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations;
invest more than 10% of its total assets in certain securities subject to
restrictions on resale under federal securities law;
acquire more than 10% of any class of voting securities of any issuer; or
underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations.
NET ASSET VALUE
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The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and all other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
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SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange is open.
Shares of the Fund may be purchased through a financial institution (such as a
bank or investment dealer) which has a sales agreement with the distributor or
directly from Federated Securities Corp., either by mail or wire. The Fund
reserves the right to reject any purchase request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
to place an order to purchase shares of the Fund. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 P.M.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
P.M. (Eastern time) in order for shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 P.M. (Eastern
time) in order for shares to be purchased at that day's price. Orders through a
financial institution are considered received when the Fund is notified of the
purchase order. It is the financial institution's responsibility to transmit
orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial
institutions which do not maintain investor accounts on a fully disclosed basis
and do not account for share ownership periods (see "Other Payments to Financial
Institutions").
DIRECTLY BY MAIL. To purchase shares of the Fund by mail, directly from
Federated Securities Corp.:
complete and sign the application available from the Fund;
enclose a check made payable to Fortress Utility Fund, Inc.; and
send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company ("State Street Bank"), P.O. Box 8604,
Boston, MA 02266-8604.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank, into federal funds. This is
generally the next business day after State Street Bank receives the check.
DIRECTLY BY WIRE. To purchase shares of the Fund directly from Federated
Securities Corp. by Federal Reserve wire, call the Fund. All information needed
will be taken over the telephone, and the order is considered received when the
Fund receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,500 unless the investment is in
an IRA account, which requires a minimum initial investment of $50. Subsequent
investments must be in amounts of at least $100, except for an IRA account,
which must be in amounts of at least $50.
WHAT SHARES COST
Fund shares are sold at their net asset value, less any applicable contingent
deferred sales charge, next determined after an order is received, plus a sales
load of 1% of the offering price (which is 1.01% of the net amount invested).
There is no sales load for purchases of $1 million or more. Investors who
purchase Fund shares through a non-affiliated bank, broker, or institution may
be charged an additional service fee by that bank, broker, or institution. This
prospectus should, therefore, be read together with any agreement between
customer and institution with regard to services provided, the fees charged for
these services, and any restrictions and limitations imposed.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Shares," shareholders may
be charged a contingent deferred sales charge by the distributor at the time
shares are redeemed.
Shareholders of record in the Fund on September 30, 1989, are exempt from the
sales load for purchases of shares of the Fund in their existing accounts as
long as they maintain a $500 balance in the Fund. Financial institutions
(including depository institutions such as commercial banks and savings and loan
associations) are also exempt from sales loads when purchasing shares directly
from the Fund's distributor for their own accounts. In addition, no sales load
is imposed for Fund shares purchased through bank trust departments or
investment advisers registered under the Investment Advisers Act of 1940, as
amended, purchasing on behalf of their clients.
DEALER CONCESSION. For sales of shares of the Fund, the distributor will
normally offer to pay dealers up to 100% of the sales load retained by it. Such
payments may take the form of cash or promotional incentives, such as
reimbursement of certain expenses of qualified employees and their spouses to
attend informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell significant amount of Shares.
The sales load for shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Fund shares.
ELIMINATING THE SALES LOAD
The sales load can be eliminated on the purchase of Fund shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales load for
purchases of $1 million or more. The Fund will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales load. In addition, the sales load is eliminated for
purchases of $1 million or more made at one time by a trustee or fiduciary for a
single trust estate or a single fiduciary account.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$900,000, and he purchases $100,000 or more at the current public offering
price, there will be no sales load on the additional purchase.
The Fund will also combine purchases for the purpose of reducing the contingent
deferred sales charge imposed on some share redemptions. For example, if a
shareholder already owns shares of the Fund having a current value at public
offering price of $1 million and purchases an additional $1 million at the
current public offering price, the applicable contingent deferred sales charge
would be reduced to .50% of those additional shares. For more information on the
levels of contingent deferred sales charges and holding periods, see the section
entitled "Contingent Deferred Sales Charge."
To receive the sales load elimination and/or the contingent deferred sales
charge reduction, Federated Securities Corp. must be notified by the shareholder
in writing or by his or her financial institution at the time the purchase is
made that Fund shares are already owned or that purchases are being combined.
The Fund will eliminate the sales load and/or reduce the contingent deferred
sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $1 million of
Fund shares over the next 13 months, the sales load may be eliminated by signing
a letter of intent to that effect. This letter of intent includes a provision
for a sales load elimination depending on the amount actually purchased within
the 13-month period and a provision for the Fund's custodian to hold 1.00% of
the total amount intended to be purchased in escrow (in shares of the Fund)
until such purchase is completed.
The 1.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent,
which must be $1 million or more of Fund shares, is not purchased. In this
event, an appropriate number of escrowed shares may be redeemed in order to
realize the 1.00% sales load.
This letter of intent also includes a provision for reductions in the contingent
deferred sales charge and holding period depending on the amount actually
purchased within the 13-month period. For more information on the various levels
of contingent deferred sales charges and holding periods, see the section
entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase shares. The
letter may be dated as of a prior date to include any purchases made within the
past 90 days (purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales load on such purchases
will not be adjusted to reflect a lower sales load).
REINVESTMENT PRIVILEGE. If shares have been redeemed in the Fund, the
shareholder has a one-time right, within 120 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales load.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to receive this
elimination of the sales load. If the shareholder redeems his shares in the
Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load elimination,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Fortress Investment Program, the purchase prices of which include a
sales load. For example, if a shareholder concurrently invested $400,000 in one
of the other Fortress Funds and $600,000 in the Fund, the sales load would be
eliminated.
To receive this sales load elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales load
after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account and invested in Fund shares
at the net asset value next determined after an order is received by State
Street Bank, plus the 1.00% sales load for purchases under $1 million. A
shareholder may apply for participation in this program through Federated
Securities Corp. or his financial institution.
EXCHANGE PRIVILEGE
Shares in Fortress Utility Fund, Inc. or in other Fortress Funds may be
exchanged for shares in the Fortress Investment Program at net asset value
without a sales load (if previously paid) or a contingent deferred sales charge.
The exchange privilege is available to shareholders residing in any state in
which the shares being acquired may be legally sold.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares at net asset
value. With the exception of exchanges into other Fortress Funds, such exchanges
will be subject to a contingent deferred sales charge and possibly a sales load.
Shareholders using the exchange privilege must exchange Shares having a net
asset value which at least meets the minimum investment required for the fund
into which the exchange is being made. Shareholders who desire to automatically
exchange Shares of a pre-determined amount on a monthly, quarterly, annual or
other periodic basis may take advantage of a systematic exchange privilege.
Further information on these exchange privileges is available by calling
Federated Securities Corp. or the shareholder's financial institution.
Before a financial institution may request exchange by telephone on behalf of a
shareholder, an authorization form permitting the Fund to accept exchange by
telephone must first be completed. Exchange redemption instructions may be
recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
Exercise of the exchange privilege is treated as a sale for federal income tax
purposes. Depending on the circumstances, a short-term or long-term capital gain
or loss may be realized. Before making an exchange, a shareholder must receive a
prospectus of the fund for which the exchange is being made.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
quarter.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Unless shareholders request cash
payments on the application or by writing to Federated Securities Corp.,
dividends and distributions are automatically reinvested in additional shares of
the Fund on payment dates at the ex-dividend date net asset value without a
sales load.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, including prototype retirement plans, contact
Federated Securities Corp. and consult a tax adviser.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
through a financial institution or directly from the Fund.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem shares of the Fund by calling his or her financial
institution (such as a bank or an investment dealer) to request the redemption.
Shares will be redeemed at the net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request from the financial institution. Redemption requests through a registered
broker/dealer must be received by the broker before 4:00 P.M. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 P.M. (Eastern time) in order
for shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Directly by Mail," should be considered.
BY TELEPHONE
Shareholders who have not purchased through a financial institution may redeem
their Shares by telephoning the Fund. The proceeds will be mailed to the
shareholder's address of record or wire transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System,
normally within one business day, but in no event longer than seven days, after
the request. The minimum amount for a wire transfer is $1,000. If at any time
the Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the transfer agent to accept telephone requests
must first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem shares by sending a written request to Federated
Services Company, c/o State Street Bank, P.O. Box 8604, Boston, MA 02266-8604.
This written request must include the shareholder's name, the Fund name, the
Fund account number, and the share or dollar amount to be redeemed. Shares will
be redeemed at their net asset value, less any applicable contingent deferred
sales charge, next determined after the Fund receives the redemption request.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures of all registered owners on written redemption requests
guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Company ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder, provided the Fund has collected payment for shares from the
shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from their Fund accounts within certain time
periods of the purchase date of those shares will be charged a contingent
deferred sales charge by the Fund's distributor of the lesser of the original
price or the net asset value of the shares redeemed as follows:
<TABLE>
<S> <C> <C>
Amount of Purchase Shares Held Redemption Fee
Up to $1,999,999 less than 4 years 1%
$2,000,000 to $4,999,999 less than 2 years .50%
$5,000,000 or more less than 1 year .25%
</TABLE>
To the extent that a shareholder exchanging between or among Fortress Shares in
other funds in the Fortress Investment Program, the time for which the
exchanged-for shares were held will be added, or "tacked", to the time for which
the exchanged-from shares were held for purposes of satisfying the one-year
holding period.
In instances in which Fund shares have been acquired in exchange for shares in
other Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The contingent deferred sales
charge will not be imposed on shares acquired through the reinvestment of
dividends or distributions of long-term capital gains. In computing the amount
of contingent deferred sales charge for accounts with shares subject to a single
holding period, if any, redemptions are deemed to have occurred, in the
following order: (1) first of shares acquired through reinvestment of dividends
and long-term capital gains; (2) second of purchases of shares occurring prior
to the number of years necessary to satisfy the applicable holding period; and
(3) finally of purchase of shares occurring within the current holding period.
For accounts with shares subject to multiple share holding periods, the
redemption sequence will be determined first, with reinvested dividends and
long-term capital gains, and second, on a first-in, first-out basis.
The contingent deferred sales charge will not be imposed when a redemption
results from a return under the following circumstances: (i) a total or partial
distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account, after the beneficial owner
attains age 59 1/2; or (iii) from the death or disability of the beneficial
owner. The exemption from the contingent deferred sales charge for qualified
plans, an IRA, Keogh Plan, or a custodial account does not extend to account
transfers, rollovers, and other redemptions made for purposes of reinvestment.
Contingent deferred sales charges are not assessed in connection with exchanges
of shares for shares in other Fortress Funds, or in connection with redemptions
by the Fund of accounts with low balances. Shares of the Fund originally
purchased through a bank trust department or investment adviser registered under
the Investment Advisers Act of 1940, as amended, and third party administrators
acting on behalf of deferred contribution plans, are not subject to the
contingent deferred sales charge, to the extent no payment was advanced for
purchases made by such entities. In addition, shares held in the Fund by a
financial institution for its own account, which were originally purchased by
the financial institution directly from the Fund's distributor without a sales
load may be redeemed without a contingent deferred sales charge. For more
information, see "Other Payments to Financial Institutions."
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal Program.
Under this program, Fund shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to Fund shares, and the fluctuation of the net asset
value of Fund shares redeemed under this program, redemptions may reduce, and
eventually use up, the shareholder's investment in the Fund. For this reason,
payments under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have invested at least $10,000 in the Fund (at
current offering price).
A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that shares are sold with a sales load, it is
not advisable for shareholders to be purchasing shares while participating in
this program.
A contingent deferred sales charge is imposed on shares, other than shares
purchased through reinvestment of dividends, which are redeemed through this
program within four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below a required minimum value of
$1,000. This requirement does not apply, however, if the balance falls below
$1,000 because of changes in the Fund's net asset value.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Fund's business affairs and for exercising all
the Fund's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, the Fund's investment adviser, subject to direction by the
Directors. The investment adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's investment adviser receives an annual investment
advisory fee equal to .75 of 1% of the Fund's average daily net assets. The
investment adviser may voluntarily choose to waive a portion of its fee or
reimburse the Fund for certain operating expenses. The investment adviser
can terminate this voluntary waiver of its advisory fee at any time at its
sole discretion. The investment adviser has also undertaken to reimburse
the Fund for operating expenses in excess of limitations established by
certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940, as amended. It is a subsidiary of
Federated Investors. All of the Class A (voting) shares of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue,
Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and Mr.
Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also
provide administrative services to a number of investment companies. Total
assets under management or administration by these and other subsidiaries
of Federated Investors are approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc., develops and
manages mutual funds primarily for the financial industry. Federated
Investors' track record of competitive performance and its disciplined,
risk averse investment philosophy serve approximately 3,500 client
institutions nationwide. Through these same client institutions, individual
shareholders also have access to this same level of investment expertise.
Christopher H. Wiles has been the Fund's portfolio manager since May 1990.
Mr. Wiles joined Federated Investors in 1990 and has been a Vice President
of the Fund's investment adviser since 1992. Mr. Wiles served as Assistant
Vice President of the Fund's investment adviser from 1990 to 1992. Mr.
Wiles was a portfolio manager at Mellon Bank from 1986 until 1990. Mr.
Wiles is a Chartered Financial Analyst and received his M.B.A. in Finance
from Cleveland State University.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor may select
administrators (including broker/dealers and depository institutions such as
commercial banks and savings and loan associations) to provide distribution and
administrative services. These services include, but are not limited to,
distributing prospectuses and other information, providing accounting
assistance, and communicating or facilitating purchases and redemptions of Fund
shares. These administrative services are in addition to other services that may
be performed by a financial institution in a role such as custodian for
Individual Retirement Accounts included in the Fortress Investment Program.
Financial institutions may also charge their customers fees for such other
services.
The distributor will pay administrators for the above services an amount equal
to 1% of the offering price of the shares acquired by their clients or customers
on purchases up to $1,999,999, .50% of the offering price on purchases of
$2,000,000 to $4,999,999, and .25% of the offering price on purchases of
$5,000,000 or more. (This fee is in addition to the 1% sales charge on purchases
of less than $1 million.) In addition, the distributor will pay brokers an
annual fee of .25 of 1% of the average daily net asset value of shares owned by
their clients or customers for which they perform services. The administrator
may elect to receive amounts lesser than those stated which would reduce or
eliminate the stated redemption fee and/or the holding period used to calculate
the fee.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
distributor and adviser will consider appropriate changes in the administrative
services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. _Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors (the "Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
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 Administrative Services may choose voluntarily to waive a portion of
its fee.
SHAREHOLDER SERVICES PLAN. _The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it make payments up to 0.25 of 1% of the
average daily net asset value of the Fund to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholders
Services.
CUSTODIAN. _State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. _Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh and Dickstein, Shapiro & Morin, L.L.P., Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young,
Pittsburgh.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the investment adviser looks for prompt execution of the order at a
favorable price. In working with dealers, the investment adviser will generally
utilize those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained elsewhere.
In selecting among firms believed to meet these criteria, the investment adviser
may give consideration to those firms which have sold or are selling shares of
the Fund and other Funds distributed by Federated Securities Corp. The
investment adviser makes decisions on portfolio transactions and selects brokers
and dealers subject to review by the Board of Directors.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund is entitled to one vote at all meetings of shareholders.
As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Fund's outstanding shares
of all series entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. No federal income tax is due on
any dividends earned in an IRA or qualified retirement plan until distributed,
so long as such IRA or qualified retirement plan meets the applicable
requirements of the Internal Revenue Code.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
the Fund is subject to the Pennsylvania corporate franchise tax; and
Fund shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
FORTRESS UTILITY FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- ---------------
COMMON STOCKS--61.2%
- -----------------------------------------------------------------------------------------------
UTILITIES--54.3%
-------------------------------------------------------------------------------
445,000 Baltimore Gas & Electric Co. $ 10,123,750
-------------------------------------------------------------------------------
700,000 BCE, Inc. 24,762,500
-------------------------------------------------------------------------------
625,000 British Telecommunications, ADR 23,815,625
-------------------------------------------------------------------------------
77,200 Cilcorp, Inc. 2,383,550
-------------------------------------------------------------------------------
500,000 Cincinnati Gas & Electric Co. 11,312,500
-------------------------------------------------------------------------------
525,000 CMS Energy Corp. 11,878,125
-------------------------------------------------------------------------------
400,000 Consolidated Edison Co. 11,050,000
-------------------------------------------------------------------------------
657,000 DPL, Inc. 13,222,125
-------------------------------------------------------------------------------
500,000 DQE, Inc. 15,875,000
-------------------------------------------------------------------------------
300,000 Duke Power Co. 10,800,000
-------------------------------------------------------------------------------
446,400 Entergy Corp. 12,889,800
-------------------------------------------------------------------------------
400,000 Florida Progress Corp. 10,750,000
-------------------------------------------------------------------------------
222,600 FPL Group, Inc. 7,067,550
-------------------------------------------------------------------------------
650,000 General Public Utilities 18,606,250
-------------------------------------------------------------------------------
500,000 GTE Corp. 15,437,500
-------------------------------------------------------------------------------
300,000 Hong Kong Telecommunications, ADR 17,512,500
-------------------------------------------------------------------------------
600,000 Long Island Lighting Co. 12,075,000
-------------------------------------------------------------------------------
269,000 MCN Corp. 10,625,500
-------------------------------------------------------------------------------
600,000 NIPSCO Industries, Inc. 18,450,000
-------------------------------------------------------------------------------
700,000 Northeast Utilities Co. 15,925,000
-------------------------------------------------------------------------------
550,000 NYNEX Corp. 20,762,500
-------------------------------------------------------------------------------
800,000 Pacific Enterprises 16,500,000
-------------------------------------------------------------------------------
1,000,000 Pacificorp 17,625,000
-------------------------------------------------------------------------------
700,000 Peco Energy Co. 19,075,000
-------------------------------------------------------------------------------
225,000 Peoples Energy Corp. 6,271,875
-------------------------------------------------------------------------------
600,000 (a)Pinnacle West Capital Corp. $ 10,425,000
-------------------------------------------------------------------------------
460,000 PSI Resources, Inc. 10,120,000
-------------------------------------------------------------------------------
525,000 Public Service Enterprises Group, Inc. 14,568,750
-------------------------------------------------------------------------------
750,000 Sonat, Inc. 21,375,000
-------------------------------------------------------------------------------
710,000 Southern Co. 13,135,000
-------------------------------------------------------------------------------
150,000 Southern Indiana Gas & Electric Co. 4,162,500
-------------------------------------------------------------------------------
500,000 Southern New England Telecommunications 16,125,000
-------------------------------------------------------------------------------
482,300 UGI Corp. 10,128,300
-------------------------------------------------------------------------------
616,184 Utilicorp United, Inc. 17,792,313
-------------------------------------------------------------------------------
425,000 Western Resources, Inc. 11,900,000
------------------------------------------------------------------------------- ---------------
Total 484,528,513
------------------------------------------------------------------------------- ---------------
CONSUMER DURABLES--0.5%
-------------------------------------------------------------------------------
335,000 Southwestern Properties, REIT 4,313,125
------------------------------------------------------------------------------- ---------------
CONSUMER SERVICES--2.4%
-------------------------------------------------------------------------------
275,000 CBL and Associates, REIT 5,293,750
-------------------------------------------------------------------------------
593,500 Simon Property Group, Inc., REIT 16,247,063
------------------------------------------------------------------------------- ---------------
Total 21,540,813
------------------------------------------------------------------------------- ---------------
ENERGY--2.1%
-------------------------------------------------------------------------------
300,000 Texaco, Inc. 19,050,000
------------------------------------------------------------------------------- ---------------
HEALTHCARE--1.9%
-------------------------------------------------------------------------------
500,000 Meditrust, REIT 17,375,000
------------------------------------------------------------------------------- ---------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $554,945,865) 546,807,451
------------------------------------------------------------------------------- ---------------
PREFERRED STOCKS--32.4%
- -----------------------------------------------------------------------------------------------
ADJUSTABLE RATE PREFERRED STOCKS--5.4%
-------------------------------------------------------------------------------
170,000 Enserch Corp., ARPS 16,957,500
-------------------------------------------------------------------------------
125,000 Illinova Corp., Pfd. B, ARPS 6,375,000
-------------------------------------------------------------------------------
150,000 Niagara Mohawk Power Corp., Pfd. C, ARPS 3,806,250
-------------------------------------------------------------------------------
65,045 Texas Utilities Electric Co., Pfd. A, ARPS $ 5,984,140
-------------------------------------------------------------------------------
90,000 Texas Utilities Electric Co., Pfd. B, ARPS 8,460,000
-------------------------------------------------------------------------------
178,000 Toledo Edison Co., Pfd. B, ARPS 4,027,250
-------------------------------------------------------------------------------
60,500 USX Marathon Group Corp., ARPS 3,017,437
------------------------------------------------------------------------------- ---------------
Total 48,627,577
------------------------------------------------------------------------------- ---------------
CONVERTIBLE PREFERRED STOCKS--27.0%
-------------------------------------------------------------------------------
22,400 Catellus Development Corp., Conv. Pfd., 7.50% 1,120,000
-------------------------------------------------------------------------------
200,000 Cointel/Telefonica De Argentina PRIDES, Conv. Pfd., 7% 14,096,600
-------------------------------------------------------------------------------
970,000 Citicorp, Conv. Pfd., Series P, 8.25% 18,915,000
-------------------------------------------------------------------------------
200,000 Freeport McMoran, Inc., Conv. Pfd., $4.375 9,325,000
-------------------------------------------------------------------------------
268,700 Kaufman and Broad Home Corp., Conv. Pfd., Series B, 8.75% 4,769,425
-------------------------------------------------------------------------------
350,000 Nacional Fin./TELMEX PRIDES, 11.25% 22,881,250
-------------------------------------------------------------------------------
400,000 Occidental Pete, Conv. Pfd., 7.75% 19,850,000
-------------------------------------------------------------------------------
475,000 Phillipine Long Distance, Conv. Pfd., 5.75% 19,613,700
-------------------------------------------------------------------------------
213,900 Reynolds Metals Co., Conv. Pfd., 7% 10,454,363
-------------------------------------------------------------------------------
2,274,500 RJR Nabisco Holdings, Inc., Conv. Pfd, 6.375% 14,499,938
-------------------------------------------------------------------------------
500,000 Sears Roebuck & Co., Conv. Pfd., Series A, $3.75 27,812,500
-------------------------------------------------------------------------------
277,500 Sun America Inc., Conv. Pfd., $2.78, Series D 10,510,312
-------------------------------------------------------------------------------
375,800 Sun America Inc., Conv. Pfd., Series P, 8.50% 6,529,525
-------------------------------------------------------------------------------
450,000 Tenneco, Inc., Conv. Pfd., 9.50% 18,056,250
-------------------------------------------------------------------------------
397,800 Unisys Corp., Conv. Pfd., $3.75 15,464,475
-------------------------------------------------------------------------------
1,925,000 Westinghouse Electric Corp., PEPS 9% 26,684,350
------------------------------------------------------------------------------- ---------------
Total 240,582,688
------------------------------------------------------------------------------- ---------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST, $276,063,456) 289,210,265
------------------------------------------------------------------------------- ---------------
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------- ---------------
CONVERTIBLE BONDS--4.5%
- -----------------------------------------------------------------------------------------------
$ 15,000,000 National Power, 6.25% Conv. Bonds, 9/23/2008 $ 24,418,341
-------------------------------------------------------------------------------
39,250,000 Turner Broadcasting System, Inc., LYON, 7.25% accrual, 2/13/2007 15,503,750
------------------------------------------------------------------------------- ---------------
TOTAL CONVERTIBLE BONDS (IDENTIFIED COST, $40,866,478) 39,922,091
------------------------------------------------------------------------------- ---------------
*REPURCHASE AGREEMENT--0.7%
- -----------------------------------------------------------------------------------------------
5,870,000 J.P. Morgan Securities, Inc., 4.27%, dated 5/31/94, due 6/1/94
(at amortized cost) (Note 2B) 5,870,000
------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST, $877,745,799) $ 881,809,807\
------------------------------------------------------------------------------- ---------------
</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 was through participation in a joint
account with other Federated funds.
\ The cost for federal tax purposes amounts to $877,748,923. The net
unrealized appreciation of investments on a federal tax cost basis amounts
to $4,060,884, which is comprised of $48,067,721 appreciation and
$44,006,837 depreciation at May 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($892,490,239) at
May 31, 1994.
The following abbreviations are used in this portfolio:
ADR--American Depository Receipts
ARPS--Adjustable Rate Preferred Stock
LYON--Liquid Yield Option Note
PEPS--Participating Equity Preferred Stock
PRIDES--Preferred Redeemable Increased Dividend Equity Securities
REIT--Real Estate Investment Trust
(See Notes which are an integral part of the Financial Statements)
FORTRESS UTILITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------
Investments, at value (Notes 2A and 2B)
(identified cost, $877,745,799 and tax cost, $877,748,923) $ 881,809,807
- ------------------------------------------------------------------------------------------------
Cash 72,096
- ------------------------------------------------------------------------------------------------
Receivable for investments sold 9,237,692
- ------------------------------------------------------------------------------------------------
Dividends and interest receivable 5,745,813
- ------------------------------------------------------------------------------------------------
Receivable for capital stock sold 2,037,252
- ------------------------------------------------------------------------------------------------ ---------------
Total assets 898,902,660
- ------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------
Payable for investments purchased $ 157,412
- ---------------------------------------------------------------------------------
Dividends payable 1,908,031
- ---------------------------------------------------------------------------------
Payable for capital stock redeemed 3,971,381
- ---------------------------------------------------------------------------------
Accrued expenses and other liabilities 375,597
- --------------------------------------------------------------------------------- -------------
Total liabilities 6,412,421
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS for 72,569,867 shares of capital stock outstanding $ 892,490,239
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------
Paid-in capital $ 868,997,502
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,064,008
- ------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (4,617,342)
- ------------------------------------------------------------------------------------------------
Undistributed net investment income 24,046,071
- ------------------------------------------------------------------------------------------------ ---------------
Total Net Assets $ 892,490,239
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSET VALUE, Per Share
($892,490,239 / 72,569,867 shares of capital stock outstanding) $12.30
- ------------------------------------------------------------------------------------------------ ---------------
Computation of Offering Price: Offering Price Per Share (100/99 of 12.30)* $12.42
- ------------------------------------------------------------------------------------------------ ---------------
Computation of Proceeds on Redemption:
Redemption Proceeds Per Share (99/100 of 12.30)** $12.18
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** Under certain conditions, the contingent deferred sales charge 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
YEAR ENDED MAY 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------------------
Dividend income (Note 2C) $ 51,762,189
- -------------------------------------------------------------------------------------------------
Interest income (Note 2C) 4,121,203
- ------------------------------------------------------------------------------------------------- ---------------
Total investment income 55,883,392
- -------------------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------------------
Investment advisory fee* $ 6,950,251
- ---------------------------------------------------------------------------------
Directors' fees 15,203
- ---------------------------------------------------------------------------------
Administrative personnel and services* 1,008,365
- ---------------------------------------------------------------------------------
Custodian and portfolio accounting fees 253,405
- ---------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 939,281
- ---------------------------------------------------------------------------------
Shareholder services fees* 1,849,650
- ---------------------------------------------------------------------------------
Capital stock registration fees 149,490
- ---------------------------------------------------------------------------------
Auditing fees 16,800
- ---------------------------------------------------------------------------------
Legal fees 13,270
- ---------------------------------------------------------------------------------
Printing and postage 86,578
- ---------------------------------------------------------------------------------
Taxes 57,711
- ---------------------------------------------------------------------------------
Insurance premiums 18,510
- ---------------------------------------------------------------------------------
Miscellaneous 9,064
- --------------------------------------------------------------------------------- --------------
Total expenses 11,367,578
- ---------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee* 1,097,659
- --------------------------------------------------------------------------------- --------------
Net expenses 10,269,919
- ------------------------------------------------------------------------------------------------- ---------------
Net investment income 45,613,473
- ------------------------------------------------------------------------------------------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (2,146,782)
- -------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (52,699,309)
- ------------------------------------------------------------------------------------------------- ---------------
Net realized and unrealized loss on investments (54,846,091)
- ------------------------------------------------------------------------------------------------- ---------------
Change in net assets resulting from operations $ (9,232,618)
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
* See Note 4.
(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 MAY 31,
---------------------------------
1994 1993
<S> <C> <C>
- ------------------------------------------------------------------------------ ---------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------
Net investment income $ 45,613,473 $ 24,600,206
- ------------------------------------------------------------------------------
Net realized gain (loss) on investments ($362,425 net gain
and $1,277,452 net gain, respectively, as computed for federal
tax purposes) (Note 2D) (2,146,782) 1,277,452
- ------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (52,699,309) 43,909,874
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from operations (9,232,618) 69,787,532
- ------------------------------------------------------------------------------ ---------------- ---------------
NET EQUALIZATION (DEBITS)/CREDITS (NOTE 2E) 3,241,019 10,090,103
- ------------------------------------------------------------------------------ ---------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- ------------------------------------------------------------------------------
Dividends to shareholders from net investment income (43,554,138) (24,938,735)
- ------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (790,659) (1,290,076)
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from distributions to shareholders (44,344,797) (26,228,811)
- ------------------------------------------------------------------------------ ---------------- ---------------
CAPITAL STOCK TRANSACTIONS (NOTE 3)--
- ------------------------------------------------------------------------------
Net proceeds from sale of shares 481,074,828 492,480,678
- ------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 20,339,263 10,149,388
- ------------------------------------------------------------------------------
Cost of shares redeemed (300,654,866) (61,693,139)
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from capital stock transactions 200,759,225 440,936,927
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets 150,422,829 494,585,751
- ------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------
Beginning of period 742,067,410 247,481,659
- ------------------------------------------------------------------------------ ---------------- ---------------
End of period (including undistributed net investment income of $24,046,071
and $15,024,531, respectively) $ 892,490,239 $ 742,067,410
- ------------------------------------------------------------------------------ ---------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FORTRESS UTILITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Fund is registered under the Investment Company Act of 1940, as amended (the
"Act"), as a diversified, open-end, load, management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles (GAAP).
A. INVESTMENT VALUATIONS--Listed equity securities, corporate bonds, and other
fixed income securities are valued at the last sales price reported on
national securities exchanges. Unlisted securities and bonds are generally
valued at the price provided by an independent pricing service. Short-term
securities with remaining maturities of sixty days or less at the time of
purchase may be stated 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 agreement, 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 adviser to be creditworthy pursuant to guidelines established
by the Board of Directors ("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. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code").
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. Additionally, net
capital losses of $2,507,402 attributable to security transactions incurred
after October 31, 1993 are treated as arising on June 1, 1994, the first
day of the Fund's next taxable year.
During the year ended May 31, 1991, Federated Corporate Cash Trust was
merged into the Fund. 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 Code's change of ownership rules. The maximum amount of
carryforwards available to the Fund at May 31, 1994 is $2,109,940 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. A Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
G. 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 differences
have been reclassified to paid-in-capital. As of June 1, 1994, the
cumulative effect of such differences, totaling $260,348, was reclassified
from undistributed net investment income and 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.
H. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At May 31, 1994, there were 2,000,000,000 shares of $.001 par value capital
stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
<S> <C> <C>
----------------------------
<CAPTION>
1994 1993
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Shares sold 37,006,327 40,627,313
- -----------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,579,370 839,320
- -----------------------------------------------------------------------------------
Shares redeemed (23,548,310) (5,097,558)
- ----------------------------------------------------------------------------------- ------------- -------------
Net change resulting from capital stock transactions 15,037,387 36,369,075
- ----------------------------------------------------------------------------------- ------------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "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 may
voluntarily choose to waive a portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during any fiscal year shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
TRANSFER AND DIVIDEND DISBURSING AGENT--Federated Services Company ("FServ")
serves as transfer and dividend disbursing agent for the Fund. The FServ fee is
based on the size, type and number of accounts and transactions by shareholders.
SHAREHOLDER SERVICES PLAN--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average net assets of the Fund for the period. This fee is to obtain
certain personal services for shareholders and the maintenance of shareholder
accounts.
Certain of the Officers and Directors of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended May 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
PURCHASES $ 456,731,484
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 245,589,053
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
FORTRESS UTILITY FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Fortress Utility Fund, Inc., as of May 31, 1994
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended and
the financial highlights (see page 2 of the prospectus) for each of the eight
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned as of May 31, 1994 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Fortress Utility Fund, Inc., at May 31, 1994, the results of its operations for
the year then ended, and the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the eight
years in the period then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
July 8, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Fortress Utility Fund, Inc. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh,
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FORTRESS UTILITY
FUND, INC.
PROSPECTUS
An Open-End, Diversified
Management Investment Company
July 31, 1994
349561100
9090505A (7/94)
FORTRESS UTILITY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Fund dated July 31, 1994. This Statement is not a
prospectus itself. To receive a copy of the prospectus, write or call
Fortress Utility Fund, Inc. (the "Fund").
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated July 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
-----------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
U.S. Government Securities 1
When-Issued and Delayed Delivery
Transactions 1
Lending of Portfolio Securities 1
Reverse Repurchase Agreements 1
Put and Call Options 1
Financial Futures and Options on Futures 2
Risks 2
Portfolio Turnover 2
CONCENTRATION OF INVESTMENTS 2
- ---------------------------------------------------------------
INVESTMENT LIMITATIONS 2
- ---------------------------------------------------------------
FUND MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Directors 5
The Funds 7
Fund Ownership 7
Director Liability 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 7
Other Related Services 8
OTHER PAYMENT TO FINANCIAL INSTITUTIONS 8
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
SHAREHOLDER SERVICES PLAN 8
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Purchases by Sales Representatives, Fund
Directors, and Employees 9
DETERMINING NET ASSET VALUE 9
- ---------------------------------------------------------------
Determining Value of Securities 9
REDEEMING SHARES 9
- ---------------------------------------------------------------
Redemption in Kind 10
EXCHANGING SECURITIES FOR FUND SHARES 10
- ---------------------------------------------------------------
Tax Consequences 10
EXCHANGE PRIVILEGE 10
- ---------------------------------------------------------------
Reduced Sales Load 10
Requirements for Exchange 10
Tax Consequences 11
Making an Exchange 11
By Telephone 11
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
APPENDIX 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund was established as a Massachusetts business trust on October 15, 1986
and reorganized as a Maryland corporation on May 30, 1990. The Fund's name prior
to the reorganization was Federated Utility Trust. It is qualified to do
business as a foreign corporation in Pennsylvania.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to achieve high current income and moderate
capital appreciation by investing primarily in a professionally managed and
diversified portfolio of equity and debt securities of utility companies. The
investment objective cannot be changed without approval of shareholders.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government obligations which generally include
direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and
bonds) and obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Federal Land Banks;
Central Bank for Cooperatives;
Federal Intermediate Credit Banks;
Federal Home Loan Banks;
Farmers Home Administration; and
Federal National Mortgage Association.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled. The Fund may engage in these transactions to an extent that would cause
the segregation of an amount up to 20% of the total value of its assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
REVERSE REPURCHASE AGREEMENTS
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
PUT AND CALL OPTIONS
The Fund may purchase put options on its portfolio securities. These options
will be used as a hedge to attempt to protect securities which the Fund holds
against decreases in value. The Fund will only purchase puts on portfolio
securities which are traded on a recognized exchange.
The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. The Fund will write call options on securities
either held in its portfolio or for which it has the right to obtain without
payment of further consideration or for which it has segregated cash in the
amount of any additional consideration. The call options which the Fund writes
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Directors.
FINANCIAL FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio of long-term debt securities against changes in
interest rates. Financial futures contracts call for the delivery of particular
debt instruments issued or guaranteed by the U.S. Treasury or by specified
agencies or instrumentalities of the U.S. government at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures as
hedging devices, there is a risk that the prices of the securities
subject to the futures contracts may not correlate perfectly with the
prices of the securities in the Fund's portfolio. This may cause the
futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's
investment adviser could be incorrect in its expectations about the
direction or extent of market factors such as interest rate movements. In
these events, the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into futures and options
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures
and options positions depends on this secondary market.
PORTFOLIO TURNOVER
For the fiscal years ended May 31, 1994, and 1993 the portfolio turnover rates
were 28%, and 27%, respectively.
CONCENTRATION OF INVESTMENTS
- --------------------------------------------------------------------------------
As a fundamental policy, which cannot be changed without shareholder approval,
the Fund will invest at least 25% of its total assets in securities of utility
companies. The Fund will not invest less than 25% of its total assets in
securities of utility companies unless approved by shareholders.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put options on portfolio securities and on financial futures
contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell calls
on financial futures contracts. The Fund will notify shareholders before
such a change in its operating policies is implemented.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, although it may invest in
the securities of companies whose business involves the purchase or sale
of real estate or in securities which are secured by real estate or
interests in real estate.
BUYING ON MARGIN
The Fund will not purchase any securities on margin, other than in
connection with the purchase of put options on financial futures
contracts, but may obtain such short-term credits as may be necessary for
the clearance of transactions.
SELLING SHORT
The Fund will not sell securities short unless:
during the time the short position is open, it owns an equal amount of
the securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short; and
not more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its net assets, including the amounts borrowed.
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. The Fund will
not purchase any securities while any such borrowings are outstanding.
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.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
purchase or holding of corporate bonds, debentures, notes, certificates
of indebtedness or other debt securities of an issuer, repurchase
agreements, or other transactions which are permitted by the Fund's
investment objective and policies.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its total assets in certain
securities subject to restrictions on resale under federal securities
law.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and limitations.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest in
or sponsor such programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of companies, including their predecessors, that have been in
operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS OF THE FUND
The Fund will not purchase or retain the securities of any issuer if the
officers and Directors of the Fund or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
DIVERSIFICATION OF INVESTMENT
The Fund will not purchase the securities of any issuer (other than the
U.S. government, its agencies, or instrumentalities or instruments
secured by securities of such issuers, such as repurchase agreements or
cash or cash items) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of such issuer, or
acquire more than 10% of any class of voting securities of any issuer.
For these purposes the Fund takes all common stock and all preferred
stock of an issuer each as a single class, regardless of priorities,
series, designations, or other differences.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund will acquire no more
than 10% of the voting securities of an issuer and may exercise its
voting power in the Fund's best interest. From time to time, the Fund,
together with other investment companies advised by affiliates or
subsidiaries of Federated Investors, may together buy and hold
substantial amounts of a company's voting stock. All such stock may be
voted together. In some cases, the Fund and the other investment
companies might collectively be considered to be in control of the
company in which they have invested. Officers or affiliates of the Fund
might possibly become directors of companies in which the Fund holds
stock.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants, not
more than 2% of which may be warrants not listed on the New York Stock
Exchange or the American Stock Exchange.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase shares of or otherwise invest in any other
investment companies.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
WRITING COVERED CALL OPTIONS AND PURCHASING PUT OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment. The Fund will not purchase put options
on securities unless the securities are held in the Fund's portfolio.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of the 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 does not intend to borrow money, invest in reverse repurchase
agreements, or sell securities short during the coming year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
of savings and loan having capital surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items." Cash items may
include obligations such as:
certificates of deposit (including those issued by domestic and foreign
branches of FDIC insured banks);
obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and
repurchase agreements.
OFFICERS AND DIRECTORS
Officers and Directors are listed with their addresses, principal occupations,
and present positions, including any affiliation with Federated Management,
Federated Investors, Federated Securities Corp., Federated Administrative
Services, Federated Services Company, and the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST/FUND DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Director Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Director, AEtna Life and Casualty Company; Chief Executive Officer
and Director, Trustee, or Managing General Partner of the Funds;
formerly, Director, The Standard Fire Insurance Company. Mr. Donahue
is the
father of J. Christopher Donahue, Vice President of the Fund.
John T. Conroy, Jr. Director President, Investment Properties Corporation; Senior Vice President,
Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate
Department Village Development Corporation; General Partner or Trustee in
John R. Wood and private real estate ventures in Southwest Florida; Director, Trustee,
Associates, Inc., Realtors or Managing General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management, Inc.
Naples, FL
William J. Copeland Director Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds;
23rd Floor formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank
Pittsburgh, PA Corp. and Director, Ryan Homes, Inc.
James E. Dowd Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly,
Concord, MA Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the
Pittsburgh, PA Funds.
Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Director Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds;
Boston, MA formerly, President, State Street Bank and Trust Company and State
Street Boston Corporation; Lahey Clinic Foundation, Inc.
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare,
5916 Penn Mall Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Vice Chairman,
Horizon Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant; Trustee,
1202 Cathedral of Carnegie Endowment for International Peace, RAND Corporation, Online
Learning Computer Library Center, Inc., and U.S. Space Foundation; Chairman,
University of Pittsburgh Czecho Slovak Management Center; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
Glen R. Johnson* Director Trustee, Federated Investors; President and/or Trustee of some of the
Federated Investors Tower Funds; staff member, Federated Securities Corp. and Federated
Pittsburgh, PA Administrative Services.
J. Christopher Donahue* Vice President President and Trustee, Federated Investors; President and Trustee,
Federated Investors Tower Federated Advisers, Federated Management, and Federated Inc.;
Pittsburgh, PA Trustee, Federated Services Company; President or Vice President of
the Funds; Director, Trustee, or Managing General Partner of some of
the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Director of the Fund.
Richard B. Fisher President Executive Vice President and Trustee, Federated Investors; Chairman
Federated Investors Tower and Director, Federated Securities Corp.; President or Vice President
Pittsburgh, PA of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales* Vice President Vice President, Treasurer, and Trustee, Federated Investors; Vice
Federated Investors Tower and Treasurer President and Treasurer, Federated Advisers, Federated Management,
Pittsburgh, PA and Federated Research; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Trustee, Federated Services
Company; Chairman, Treasurer, and Director, Federated Administrative
Services; Trustee or Director of some of the Funds; Vice President
and Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower and Secretary Investors; Vice President, Secretary, and Trustee, Federated
Pittsburgh, PA Advisers, Federated Management, and Federated Research; Trustee,
Federated Services Company; Executive Vice President, Secretary, and
Director, Federated Administrative Services; Director and Executive
Vice President, Federated Securities Corp.; Vice President and
Secretary of the Funds.
</TABLE>
* This Director is deemed to be an "interested person" of the Trust/Fund as
defined in the Investment Company Act of 1940.
\ Members of the Executive Committee. The Executive Committee of the Board of
Directors handles the responsibilities of the Board of Directors between
meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series, Inc.; Cash Trust Series II; 111 Corcoran Funds; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Intermediate Government
Trust; Federated Intermediate Municipal Trust; Federated Master Trust; Federated
Municipal Trust; Federated Short-Intermediate Government Trust; Federated
Short-Intermediate Municipal Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insight Institutional Series, Inc.;
Insurance Management Series; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Equity
Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal
Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty U.S. Government
Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed
Series Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New
York Municipal Cash Trust; Peachtree Funds; The Planters Funds; Portage Funds;
RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet
Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and
Bond Fund, Inc.; Sunburst Funds; Trademark Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding shares.
As of July 10, 1994, the following shareholder of record owned 5% or more of the
outstanding shares of the Fund:
Merrill Lynch, Pierce, Fenner & Smith, (as record owner holding shares for its
clients) Jacksonville, Florida owned approximately 19,107,767 shares (27%).
DIRECTOR LIABILITY
The Fund's Articles of Incorporation provide that the Directors will not be
liable for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management. It is a subsidiary of
Federated Investors. All of the voting securities of Federated Investors are
owned by a trust, the trustees of which are John F. Donahue, his wife, and his
son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee of Federated
Management, is Chairman and Trustee of Federated Investors and Chairman and
Director of the Fund. J. Christopher Donahue is President and Trustee of
Federated Management, President and Trustee of Federated Investors, Trustee of
Federated Administrative Services, Trustee of Federated Services Company, and
Vice President of the Fund. John W. McGonigle, Trustee of Federated Management,
is Vice President, Secretary, General Counsel, and Trustee of Federated
Investors; Executive Vice President, Secretary, and Trustee of Federated
Administrative Services; Executive Vice President and Director of Federated
Securities Corp; and Vice President and Secretary of the Fund.
The adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, or sale of any security or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Fund.
ADVISORY FEES
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus. During the fiscal years ended May
31, 1994, 1993, and 1992, the Fund's adviser earned $6,950,251, $3,387,794, and
$1,111,201, of which $1,097,659, $217,481, and $165,564 were voluntarily waived
in 1994, 1993, and 1992, respectively because of undertakings to limit the
Fund's expenses.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitation
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2.5% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1.5% per year
of the remaining average net assets, the adviser will reimburse the Fund
for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
OTHER RELATED SERVICES
Affiliates of the investment adviser may, from time to time, provide certain
electronic equipment and software to institutional customers in order to
facilitate the purchase of shares of funds offered by Federated Securities Corp.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
- --------------------------------------------------------------------------------
For the fiscal years ended May 31, 1994, 1993, and 1992, the distributor paid
$1,297,367, $3,475,017, and $1,463,021, respectively to administrators for
distribution and administrative services. The administrative services include,
but are not limited to, providing office space, equipment, telephone facilities,
and various personnel, including clerical, supervisory, and computer, as is
necessary or beneficial to establish and maintain shareholders' accounts and
records, process purchase and redemption transactions, process automatic
investments of client account cash balances, answer routine client inquiries
regarding the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund may
reasonably request.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. Prior to March 1, 1994, Federated Administrative Services, Inc.,
also a subsidiary of Federated Investors, served as the Fund's administrator.
(For purposes of this Statement of Additional Information, Federated
Administrative Services and Federated Administrative Services, Inc., may
hereinafter collectively be referred to as, the "Administrators".) For the
fiscal year ended May 31, 1994, the Administrators collectively earned
$1,008,365. For the fiscal years ended May 31, 1993, and 1992 Federated
Administrative Services, Inc., earned $571,029 and $290,108, respectively.
SHAREHOLDER SERVICES PLAN
- --------------------------------------------------------------------------------
This arrangement permits the payment of fees to Federated Shareholder Services
and, indirectly, to Financial Institutions to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may include,
but are not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
For the fiscal period ending May 31, 1994, payments in the amount of $1,849,650
were made pursuant to the Shareholder Services Plan.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The investment adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund or to
the investment adviser and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The investment adviser and its affiliates exercise reasonable business judgment
in selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising the Funds and other accounts. To
the extent that receipt of these services may supplant services for which the
investment adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
For the fiscal years ended May 31, 1994, 1993, and 1992, the Fund paid $479,862,
$697,146, and $258,240, respectively, in brokerage commissions on brokerage
transactions.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales charge on days the New York Stock Exchange
is open for business. The procedure for purchasing shares of the Fund is
explained in the prospectus under "Investing in the Fund."
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund and Federated
Securities Corp. or their affiliates, or any investment dealer who has a sales
agreement with Federated Securities Corp., and their spouses and children under
21, may buy shares at net asset value without a sales charge. Shares may also be
sold without a sales charge to trusts or pension or profit-sharing plans for
these persons.
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING VALUE OF SECURITIES
The market values of the Fund's portfolio securities are determined as follows:
for equity securities and bonds and other fixed income securities, according to
the last sale price on a national securities exchange, if available;
in the absence of recorded sales for equity securities, according to the mean
between the last closing bid and asked prices, and for bonds and other fixed
income securities as determined by an independent pricing service;
for unlisted equity securities, the latest mean prices;
for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service or for short-term obligations
with remaining maturities of 60 days or less, at the time of purchase, at
amortized cost; or
for all other securities, at fair value as determined in good faith by the
Board of Directors.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although State Street Bank does not charge
for telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
Certain shares redeemed within one to four years of purchase may be subject to a
contingent deferred sales charge. The amount of the contingent deferred sales
charge is based upon the amount of the administrative fee paid at the time of
purchase by the distributor to the administrator for services rendered, and the
length of time the investor remains a shareholder in the Fund. Should
administrators elect to receive an administrative fee that is less than that
stated in the Prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular shareholder will
be reduced accordingly.
REDEMPTION IN KIND
The Fund is obligated to redeem shares solely in cash up to $250,000 or 1% of
the Fund's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Directors
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Directors deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
EXCHANGING SECURITIES FOR FUND SHARES
- --------------------------------------------------------------------------------
Investors may exchange certain securities they already own for Fund shares, or
they may exchange a combination of securities and cash for Fund shares. An
investor should forward the securities in negotiable form with an authorized
letter of transmittal to Federated Securities Corp. The Fund will notify the
investor of its acceptance and valuation of the securities within five business
days of their receipt by State Street Bank.
Securities eligible for exchange are limited to those securities which meet the
investment objective and policies of the Fund; are acquired for investment and
not for resale; are not restricted; and have a value which is readily
ascertainable (and not established only by evaluation procedures) as evidenced
by a listing on the American Stock Exchange, the New York Stock Exchange, or
NASDAQ.
The basis of the exchange will depend upon the net asset value of Fund shares on
the day the securities are valued. One share of the Fund will be issued for each
equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The Securities and Exchange Commission has issued an order exempting the Fund
from certain provisions of the Investment Company Act of 1940, as amended. As a
result, Fund shareholders are allowed to exchange all or some of their shares
for shares in other Fortress Funds or certain Federated Funds which are sold
with a sales load different from that of the Fund's or with no sales load and
which are advised by subsidiaries or affiliates of Federated Investors. These
exchanges are made at net asset value plus the difference between the Fund's
sales load already paid and any sales load of the fund into which the shares are
to be exchanged, if higher.
The order also allows certain other funds, including funds that are not advised
by subsidiaries or affiliates of Federated Investors, which do not have a sales
load to exchange their shares for Fund shares on a basis other than their
current offering price. These exchanges may be made to the extent that such
shares were acquired in a prior exchange, at net asset value, for shares of a
Federated Fund carrying a sales load.
REDUCED SALES CHARGE
If a shareholder making an exchange qualifies for a reduction or elimination of
the sales load, the shareholder must notify Federated Securities Corp. or State
Street Bank in writing.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may be sold. Upon receipt of proper instructions and required
supporting documents, shares submitted for exchange are redeemed and the
proceeds invested in shares of the other fund.
Further information on the exchange privilege and prospectuses for Fortress
Funds or certain Federated Funds are available by calling the Fund.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a gain or loss may be realized by
the investor.
MAKING AN EXCHANGE
Instructions for exchanges for Fortress Funds or certain Federated Funds must be
given in writing by the shareholder. Written instruction may require a signature
guarantee.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with
the Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the Fund.
Shares may be exchanged between two funds by telephone only if the two
funds have identical shareholder registrations.
Telephoned exchange instructions may be recorded and will be binding upon
the shareholder. They must be received by the Fund before 4:00 p.m.
(Eastern time) for shares to be exchanged that day. If reasonable
procedures are not followed by the Fund, it may be liable for losses due
to unauthorized or fraudulent telephone instructions.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. These dividends, and any short-term
capital gains, are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.
TOTAL RETURN
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The Fund's average annual total returns for the one-year and five-year periods
ended May 31, 1994 and for the period from January 30, 1987 (effective date of
the Fund's registration statement) to May 31, 1994, were (1.95)%, 11.52%, and
9.25%, respectively.
The average annual total return for the Fund 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 net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load, adjusted
over the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions. Any applicable contingent deferred sales charge
is deducted from the ending value of the investment based on the lesser of the
original purchase price or the net asset value of shares redeemed.
YIELD
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The Fund's yield for the thirty-day period ended May 31, 1994 was 5.18%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a 12 month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
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The Fund's performance depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in Fund expenses; and
various other factors.
The Fund performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of the 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:
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "utility funds"
category in advertising and sales literature.
DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected blue
chip industrial corporations as well as public utility and transportation
companies. The DJIA indicates daily changes in the average price of stocks in
any of its categories. It also reports total sales for each group of
industries. Because it represents the top corporations of America, the DJIA is
a leading economic indicator for the stock market as a whole.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, financial, and public
utility companies, compares total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard & Poor's index
assumes reinvestment of all dividends paid by stocks listed on its index. Taxes
due on any of these distributions are not included, nor are brokerage or other
fees calculated in Standard & Poor's figures.
STANDARD & POOR'S UTILITY INDEX is an unmanaged index of common stocks from
forty different utilities. This index indicates daily changes in the price of
the stocks. The index also provides figures for changes in price from the
beginning of the year to date, and for a twelve month period.
DOW JONES UTILITY INDEX is an unmanaged index comprised of fifteen utility
stocks that tracks changes in price daily and over a six month period. The
index also provides the highs and lows for each of the past five years.
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.
Advertisements and other sales literature for the Fund may quote total returns,
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
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STANDARD & POOR'S CORPORATION, ("S&P") CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by S&P. 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, B, CCC, CC--Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
C--The rating C is reversed for income bonds on which no interest is being paid.
D--Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." 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 a 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.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative to a
large degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
349561100
9090505B (7/94)
