[LOGO] FEDERATED INVESTORS
Fortress
Utility
Fund, Inc.
9th Semi-Annual Report
November 30, 1995
Established 1987
Equity
President's Message
[PHOTO]
Dear Shareholder:
I am pleased to present the Semi-Annual Report for Fortress Utility
Fund, Inc., which covers the period from June 1, 1995 through November
30, 1995.
This report begins with an interview with portfolio manager Christopher
H. Wiles, Vice President, Federated Management. Following his interview
are three additional items of shareholder interest.
o First is a series of graphs that display the fund's performance with
income dividends reinvested and the investment results of making
additional investment in fund shares with dividends reinvested.
o Second is a complete listing of the fund's holdings in dividend-paying
utilities, convertible securities and adjustable rate preferreds.
* Third is the publication of the fund's financial statements.
Nearly 32,000 shareholders have invested more than $782 million in
Fortress Utility Fund, Inc.'s diversified portfolio. Consistent with a
highly favorable environment for utilities, the fund rewarded
shareholders with a total return of 9.85% based on net asset value
during the six-month reporting period ended November 30, 1995.*
Contributing to the fund's performance was a $0.97 increase in its net
asset value from the first day of the period to the last day of the
period. Dividends paid during the reporting period totaled $0.26 per
share.
We trust you were pleased with the positive performance of your
investment in Fortress Utility Fund, Inc. Remember, reinvesting your
earnings is a convenient way to build your account-and help your money
grow through the benefit of compounding.
As always, we welcome your comments and suggestions.
Sincerely,
Richard B. Fisher
President
January 15, 1996
*Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Total
return for the period ended November 30, 1995 based on offering price
was 7.70%.
Investment Review
[PHOTO]
Christopher H. Wiles
Vice President
Federated Management
Q. The utilities market rewarded investors with extremely fine performance
during the year. Can you comment?
A. The S&P Utility Index was up a stunning 42.11% in 1995, which even
outpaced the S&P 500 which was up 37.58%.* The key variables in
determining where utility stocks will head in 1996 continue to be
earnings and interest rates. The rapid fall in rates during 1995 gave
utilities their initial thrust. But earnings growth was also a surprise
in 1995 as investors came to a realization that restructuring can lead
to higher margins and increased efficiencies.
Q. How has Fortress Utility Fund, Inc. performed during 1995 and the
six-month period?
A. While the fund posted a respectable total return of 25.48% based on net
asset value for all of 1995,** it was relatively below the 27.7% return
of its peer group, the Lipper Utility Fund Average.* During the
six-month period the fund's total return was 9.85% based on net asset
value as share price rose from $12.69 to $13.66 and dividends totaled
$0.26 per share.**
Q. To what do you attribute this relative underperformance?
A. This relative underperformance was due mainly to our underweighting in
the Baby Bells. The Regional Bell Operating Companies comprise nearly
53% of the S&P Utility Index and were up 50.8% in 1995. We believe that
the coming of the long-distance, cable and cellular competition will
eventually lead to lower profit margins for the Baby Bells.
In addition, Fortress Utility Fund, Inc. is invested 65% in utilities
stocks, and 35% in securities that are not as interest rate sensitive
such as convertible securities (Equitable Companies, Softe SA, and
Telekom Malaysia), and adjustable preferred stocks (RJR Nabisco
Holdings Corp. and General Motors Corp. among others).
*The S&P Utility Index is an unmanaged index of common stocks from
forty different utilities. The S&P 500 is a composite index of five
hundred common stocks in industry, transportation, financial and public
utility companies. Actual investments may not be made in an index.
Indexes are unmanaged.
**Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Total
return for the period based on offering price was 7.70%.
Q. In the previous report you highlighted the fund's international
holdings. What is your outlook for international utility companies?
A. We believe that the valuations and growth rates for international
utilities are very compelling at this time. These securities have
significantly underperformed their U.S. peer group during 1995, and we
are subsequently increasing our international exposure.*
Q. The fund offers a prudent approach to pursuing income opportunities
inherent in the utilities market. Assets are primarily invested in
income-producing stocks issued by electric, natural gas and
telecommunications utility companies. You also invest a portion of fund
assets in foreign utilities, and non-utility securities. How are the
fund's assets currently allocated?
A. Our current asset allocation is as follows:
Electric 37%
Telecoms 21%
Natural Gas 10%
Non-Utility 20%
International 8%
Cash 4%
We believe that a diversified portfolio will allow us to participate on
the upside and offer above average downside protection.
Q. Can you comment on the record extended run-up in stocks, which seems to
make the fund's defensive characteristics more appealing than ever?
A. As of the end of 1995 the Dow Jones Industrial Average+ has gone 1907
days without a correction of 12%; this is the longest bull market by
415 days. While it is always impossible to forecast the timing of a
market correction we are able to compare current valuations to historic
valuations. By any yardstick this market advance is more than a little
long in the tooth.
That said, we expect that the above-average yield and stable earnings
and dividend growth traditionally associated with utilities should
continue to provide investors with a safe harbor when the eventual
correction does occur.
*International securities involve a higher degree of risk than U.S.
securities due to factors such as increased volatility and currency
fluctuation.
+The Dow Jones Industrial Average represents share prices of selected
blue chip industrial corporations as well as public utility and
transportation companies.
Two Ways You May Seek to Invest for Success in
Fortress Utility Fund, Inc.
If you had made an initial investment of $9,000 in the Fortress Utility
Fund, Inc. on 1/30/87, reinvested your dividends and capital gains and
didn't redeem any shares, your account would be worth $20,520 on
11/30/95. You would have earned a 9.77%* average annual total return
for the 8-year investment lifespan-quite attractive for a utility fund,
especially during a time when the economic markets went through several
cycles.
One key to investing wisely is to reinvest all distributions in Fund
shares. This increases the number of shares on which you can earn
future dividends gaining the benefit of compounding at the same time.
As of 12/31/95, average annual one-year, five-year, and since inception
(1/30/87) total returns were 23.15%, 12.55%, and 10.10%, respectively.
[SEE APPENDIX A.1]
**Total return represents the change in the value of an investment
after reinvesting all income and capital gains, and taking into account
the 1% sales charge and the 1% contingent deferred sales charge on
shares redeemed prior to 48 months on the initial
investment.
Data quoted represents past performance and does not guarantee future
results. Investment return and principal value will fluctuate so an
investor's shares, when redeemed, may be worth more or less than their
original cost.
Fortress Utility Fund, Inc.
One Step at a Time
$1,000 invested each year for 8 years (reinvesting all dividends and
capital gains) grew to $15,312.
With this approach, the key is consistency.
If you had started investing $1,000 annually in Fortress Utility Fund,
Inc. on 1/30/87, reinvested your dividends and capital gains, and
didn't redeem any shares, you would have invested only $9,000, but your
account would have reached a total value of $15,312 by 11/30/95. You
would have earned an average annual total return of 10.81%.*
A practical investment plan helps you pursue long-term performance from
utility securities. Through systematic investing, you buy shares on a
regular basis and reinvest all earnings. This investment plan works for
you even if you invest only $1,000 annually. You can take it
one step at a time. Put time and compounding to work!
[SEE APPENDIX A.2]
*No method of investing can guarantee a profit or protect against loss
in down markets. However, by investing regularly over time and buying
shares at various prices, investors can purchase more shares at lower
prices. All accumulated shares have the ability to pay income to the
investor.
Because such a plan involves continuous investment, regardless of
changing price levels, the investor should consider whether or not to
continue purchases through periods of low price levels.
Fortress Utility Fund, Inc.
Portfolio of Investments
- --------------------------------------------------------------------------------
November 30, 1995 (unaudited)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- --------------------- ------------------------------------------------------------------------- --------------
COMMON STOCKS--74.9%
- ------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES--1.1%
-------------------------------------------------------------------------
100,000 Philip Morris Cos., Inc. $ 8,775,000
------------------------------------------------------------------------- --------------
ELECTRIC UTILITIES: CENTRAL--16.3%
-------------------------------------------------------------------------
544,000 Cinergy Corp. 16,048,000
-------------------------------------------------------------------------
684,300 CMS Energy Corp. 18,647,175
-------------------------------------------------------------------------
795,900 DPL, Inc. 19,101,600
-------------------------------------------------------------------------
595,800 Illinova Corp. 16,905,825
-------------------------------------------------------------------------
435,900 NIPSCO Industries, Inc. 16,128,300
-------------------------------------------------------------------------
237,100 Ohio Edison Co. 5,394,025
-------------------------------------------------------------------------
157,200 Unicom Corp. 5,030,400
-------------------------------------------------------------------------
534,900 Utilicorp United, Inc. 14,910,337
-------------------------------------------------------------------------
464,500 Western Resources, Inc. 15,386,562
------------------------------------------------------------------------- --------------
Total 127,552,224
------------------------------------------------------------------------- --------------
ELECTRIC UTILITIES: EAST--7.4%
-------------------------------------------------------------------------
375,800 Baltimore Gas & Electric Co. 10,005,675
-------------------------------------------------------------------------
662,800 DQE, Inc. 19,138,350
-------------------------------------------------------------------------
369,800 General Public Utilities 11,694,925
-------------------------------------------------------------------------
595,300 Peco Energy Co. 17,263,700
------------------------------------------------------------------------- --------------
Total 58,102,650
------------------------------------------------------------------------- --------------
ELECTRIC UTILITIES: SOUTH--12.5%
-------------------------------------------------------------------------
543,500 Duke Power Co. 24,389,562
-------------------------------------------------------------------------
337,700 Florida Progress Corp. 11,608,438
-------------------------------------------------------------------------
639,700 FPL Group, Inc. 27,746,987
-------------------------------------------------------------------------
44,500 Houston Industries, Inc. 2,035,875
-------------------------------------------------------------------------
647,500 Southern Co. 14,811,563
-------------------------------------------------------------------------
453,900 Texas Utilities Co. 17,475,150
------------------------------------------------------------------------- --------------
Total 98,067,575
------------------------------------------------------------------------- --------------
</TABLE>
Fortress Utility Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- --------------------- ------------------------------------------------------------------------- --------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES: WEST--4.5%
-------------------------------------------------------------------------
570,200 Pacificorp $ 11,190,175
-------------------------------------------------------------------------
714,400 Pinnacle West Capital Corp. 19,467,400
-------------------------------------------------------------------------
294,000 SCE Corp. 4,593,750
------------------------------------------------------------------------- --------------
Total 35,251,325
------------------------------------------------------------------------- --------------
ENERGY MINERALS--1.4%
-------------------------------------------------------------------------
146,200 Exxon Corp. 11,312,225
------------------------------------------------------------------------- --------------
FINANCE--2.2%
-------------------------------------------------------------------------
447,800 Meditrust, REIT 14,777,400
-------------------------------------------------------------------------
90,800 PNC Financial Corp. 2,655,900
------------------------------------------------------------------------- --------------
Total 17,433,300
------------------------------------------------------------------------- --------------
MAJOR U.S. TELECOMMUNICATIONS--14.0%
-------------------------------------------------------------------------
488,300 AT&T Corp. 32,227,800
-------------------------------------------------------------------------
428,500 BellSouth Corp. 16,657,938
-------------------------------------------------------------------------
620,000 GTE Corp. 26,427,500
-------------------------------------------------------------------------
606,900 MCI Communications Corp. 16,234,575
-------------------------------------------------------------------------
325,600 SBC Communications, Inc. 17,582,400
------------------------------------------------------------------------- --------------
Total 109,130,213
------------------------------------------------------------------------- --------------
NATURAL GAS DISTRIBUTION--3.6%
-------------------------------------------------------------------------
620,300 MCN Corp. 13,491,525
-------------------------------------------------------------------------
533,900 Pacific Enterprises 14,281,825
------------------------------------------------------------------------- --------------
Total 27,773,350
------------------------------------------------------------------------- --------------
NON-U.S. UTILITIES--3.1%
-------------------------------------------------------------------------
84,600 Cable & Wireless, ADR 1,744,875
-------------------------------------------------------------------------
355,210 National Power Co. PLC, ADR 4,084,915
-------------------------------------------------------------------------
201,500 Telefonica de Espana, ADR 8,362,250
-------------------------------------------------------------------------
671,900 Westcoast Energy, Inc. 9,910,525
------------------------------------------------------------------------- --------------
Total 24,102,565
------------------------------------------------------------------------- --------------
</TABLE>
Fortress Utility Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- --------------------- ------------------------------------------------------------------------- --------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
OIL/GAS TRANSMISSION--7.8%
-------------------------------------------------------------------------
400,300 Enron Corp. $ 15,011,250
-------------------------------------------------------------------------
314,100 Enron Global Power & Pipelines, L.L.C. 7,891,763
-------------------------------------------------------------------------
187,800 Panhandle Eastern Corp. 5,328,825
-------------------------------------------------------------------------
661,600 Sonat, Inc. 21,336,600
-------------------------------------------------------------------------
266,500 Williams Companies, Inc. (The) 11,193,000
------------------------------------------------------------------------- --------------
Total 60,761,438
------------------------------------------------------------------------- --------------
TECHNOLOGY--1.0%
-------------------------------------------------------------------------
135,000 Nokia (AB), ADR 7,323,750
------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST $496,375,634) 585,585,615
------------------------------------------------------------------------- --------------
PREFERRED STOCKS--16.5%
- ------------------------------------------------------------------------------------------------
BASIC INDUSTRY--3.1%
-------------------------------------------------------------------------
18,000 (a)International Paper Co., Conv. Pfd. 819,000
-------------------------------------------------------------------------
338,100 James River Corp. of Virginia, DECS, Series P, $1.55 10,143,000
-------------------------------------------------------------------------
250,200 Reynolds Metals Co., PRIDES, $3.30 13,135,500
------------------------------------------------------------------------- --------------
Total 24,097,500
------------------------------------------------------------------------- --------------
CONSUMER DURABLES--0.5%
-------------------------------------------------------------------------
272,700 Kaufman & Broad Homes Corp., Conv. Pfd., Series B, $1.52 3,613,275
------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--3.6%
-------------------------------------------------------------------------
4,789,750 RJR Nabisco Holdings Corp., Conv. Pfd., Series C, $.60 28,139,781
------------------------------------------------------------------------- --------------
FINANCE--4.2%
-------------------------------------------------------------------------
6,500 First USA, Inc., PRIDES, $1.99 263,250
-------------------------------------------------------------------------
213,000 Merrill Lynch & Co., Inc., STRYPES, Series MGIC, $3.12 11,235,750
-------------------------------------------------------------------------
283,600 Sunamerica, Inc., Conv. Pfd., Series D, $2.78 13,577,350
-------------------------------------------------------------------------
112,000 Sunamerica, Inc., Conv. Pfd., Series E, $3.10 7,504,000
------------------------------------------------------------------------- --------------
Total 32,580,350
------------------------------------------------------------------------- --------------
NON-U.S. UTILITIES--2.1%
-------------------------------------------------------------------------
310,000 (a)Cointel, Telefonica de Argentina SA, PRIDES, $5.04 16,236,250
------------------------------------------------------------------------- --------------
</TABLE>
Fortress Utility Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
FOREIGN CURRENCY
PAR AMOUNT OR
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
- --------------------- ------------------------------------------------------------------------- --------------
PREFERRED STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
OIL/GAS TRANSMISSION--1.0%
-------------------------------------------------------------------------
111,250 Williams Companies, Inc. (The), Conv. Pfd., $7.00 $ 8,037,813
------------------------------------------------------------------------- --------------
PRODUCER MANUFACTURING--1.0%
-------------------------------------------------------------------------
469,200 Westinghouse Electric Corp., PEPS, Series C, $1.30 7,741,800
------------------------------------------------------------------------- --------------
TECHNOLOGY--1.0%
-------------------------------------------------------------------------
116,800 General Motors Corp., Conv. Pfd., Series C (GME), $3.25 8,380,400
------------------------------------------------------------------------- --------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST $122,251,259) 128,827,169
------------------------------------------------------------------------- --------------
CONVERTIBLE BONDS--5.3%
- ------------------------------------------------------------------------------------------------
FINANCE--0.9%
-------------------------------------------------------------------------
$ 6,470,000 Equitable Cos., Inc., Conv. Sub. Deb., 6.125%, 12/15/2024 7,214,050
------------------------------------------------------------------------- --------------
NON-U.S. UTILITIES--3.0%
-------------------------------------------------------------------------
20,000,000,000 Softe SA, Conv. Bond, 4.25%, 7/30/1998 13,538,273
-------------------------------------------------------------------------
10,500,000 Telekom Malaysia, Conv. Bond, 4.00%, 10/3/2004 10,001,250
------------------------------------------------------------------------- --------------
Total 23,539,523
------------------------------------------------------------------------- --------------
RETAIL TRADE--0.5%
-------------------------------------------------------------------------
3,220,000 Federated Department Stores, Inc., Conv. Bond, 5.00%,
10/1/2003 3,364,900
------------------------------------------------------------------------- --------------
TECHNOLOGY--0.9%
-------------------------------------------------------------------------
1,500,000 (a)3Com Corp., Conv. Bond, 10.25%, 11/1/2001 2,392,500
-------------------------------------------------------------------------
2,500,000 (a)National Semiconductor Corp., Conv. Bond, 6.50%, 10/1/2002 2,309,375
-------------------------------------------------------------------------
2,500,000 VLSI Technology, Inc., Conv. Bond, 8.25%, 10/1/2005 2,337,500
------------------------------------------------------------------------- --------------
Total 7,039,375
------------------------------------------------------------------------- --------------
TOTAL CONVERTIBLE BONDS (IDENTIFIED COST $43,460,377) 41,157,848
------------------------------------------------------------------------- --------------
(B) REPURCHASE AGREEMENTS--2.9%
- ------------------------------------------------------------------------------------------------
22,735,000 J.P. Morgan & Co., Inc., 5.93%, dated 11/30/1995, due 12/1/1995 22,735,000
------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $684,822,270) (C) $ 778,305,632
------------------------------------------------------------------------- --------------
</TABLE>
Fortress Utility Fund, Inc.
- --------------------------------------------------------------------------------
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At the end of the period, these securities
amounted to $21,757,125 which represents 2.8% of net assets.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations, based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(c) The cost of investments for federal tax purposes amounts to $684,822,270.
The net unrealized appreciation of investments on a federal tax basis
amounts to $93,483,362 which is comprised of $105,838,933 appreciation and
$12,355,571 depreciation at November 30, 1995.
Note: The categories of investments are shown as a percentage of net assets
($782,231,668) at November 30, 1995.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
DECS--Dividend Enhanced Convertible Stock
PEPS--Participating Equity Preferred Stock
PLC--Public Limited Company
PRIDES-- Preferred Redeemable Increased Dividend Equity Securities
REIT--Real Estate Investment Trust
STRYPES-- Structured Yield Product Exchangeable for Stock
SA--Support Agreement
(See Notes which are an integral part of the Financial Statements)
Fortress Utility Fund, Inc.
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
November 30, 1995 (unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $684,822,270) $ 778,305,632
- -------------------------------------------------------------------------------------------------
Income receivable 3,589,100
- -------------------------------------------------------------------------------------------------
Receivable for investments sold 11,891,288
- -------------------------------------------------------------------------------------------------
Receivable for shares sold 224,323
- -------------------------------------------------------------------------------------------------
Prepaid expenses 153,282
- ------------------------------------------------------------------------------------------------- --------------
Total assets 794,163,625
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Payable for investments purchased $ 9,686,713
- -----------------------------------------------------------------------------------
Payable for shares redeemed 914,068
- -----------------------------------------------------------------------------------
Income distribution payable 784,513
- -----------------------------------------------------------------------------------
Payable to Bank 116,681
- -----------------------------------------------------------------------------------
Accrued expenses 429,982
- ----------------------------------------------------------------------------------- ------------
Total liabilities 11,931,957
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 57,257,502 shares outstanding $ 782,231,668
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid in capital $ 688,639,337
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 93,483,110
- -------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (14,835,038)
- -------------------------------------------------------------------------------------------------
Undistributed net investment income 14,944,259
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 782,231,668
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($782,231,668 / 57,257,502 shares outstanding) $13.66
- ------------------------------------------------------------------------------------------------- --------------
Offering Price Per Share (100/99 of $13.66)* $13.80
- ------------------------------------------------------------------------------------------------- --------------
Redemption Proceeds Per Share (99/100 of $13.66)** $13.52
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
* See "What Shares Cost" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
Fortress Utility Fund, Inc.
Statement of Operations
- --------------------------------------------------------------------------------
Six Months Ended November 30, 1995 (unaudited)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Dividends $ 18,992,457
- ----------------------------------------------------------------------------------------------------
Interest 2,360,038
- ---------------------------------------------------------------------------------------------------- ------------
Total income 21,352,495
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------------------
Investment advisory fee $ 2,884,192
- ---------------------------------------------------------------------------------------
Administrative personnel and services fee 291,111
- ---------------------------------------------------------------------------------------
Custodian fees 53,839
- ---------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 553,764
- ---------------------------------------------------------------------------------------
Directors'/Trustees' fees 10,614
- ---------------------------------------------------------------------------------------
Auditing fees 8,967
- ---------------------------------------------------------------------------------------
Legal fees 4,941
- ---------------------------------------------------------------------------------------
Portfolio accounting fees 57,684
- ---------------------------------------------------------------------------------------
Shareholder services fee 961,397
- ---------------------------------------------------------------------------------------
Share registration costs 17,202
- ---------------------------------------------------------------------------------------
Printing and postage 48,495
- ---------------------------------------------------------------------------------------
Insurance premiums 8,967
- ---------------------------------------------------------------------------------------
Taxes 79,971
- ---------------------------------------------------------------------------------------
Miscellaneous 7,869
- --------------------------------------------------------------------------------------- -----------
Total expenses 4,989,013
- ---------------------------------------------------------------------------------------
Waivers--
- ---------------------------------------------------------------------------
Waiver of investment advisory fee ($ 395,841)
- ---------------------------------------------------------------------------
Waiver of shareholder services fee (115,368)
- --------------------------------------------------------------------------- ----------
Total waivers (511,209)
- --------------------------------------------------------------------------------------- -----------
Net expenses 4,477,804
- ---------------------------------------------------------------------------------------------------- ------------
Net investment income 16,874,691
- ---------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized gain on investments 13,945,539
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 41,635,749
- ---------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain on investments 55,581,288
- ---------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 72,455,979
- ---------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Fortress Utility Fund, Inc.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(UNAUDITED) YEAR ENDED
NOVEMBER 30, 1995 MAY 31, 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------
Net investment income $ 16,874,691 $ 37,130,452
- ------------------------------------------------------------------------
Net realized gain (loss) on investments ($13,945,539 and ($13,799,534),
respectively, as computed for federal tax
purposes) 13,945,539 (22,913,166)
- ------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 41,635,749 47,783,353
- ------------------------------------------------------------------------ ---------------------- ----------------
Change in net assets resulting from operations 72,455,979 62,000,639
- ------------------------------------------------------------------------ ---------------------- ----------------
NET EQUALIZATION CREDITS (DEBITS)-- (1,279,628) (3,344,167)
- ------------------------------------------------------------------------ ---------------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------------
Distributions from net investment income (15,511,496) (40,393,334)
- ------------------------------------------------------------------------ ---------------------- ----------------
SHARE TRANSACTIONS
- ------------------------------------------------------------------------
Proceeds from sale of shares 40,750,456 111,749,191
- ------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 9,500,371 19,819,937
- ------------------------------------------------------------------------
Cost of shares redeemed (102,503,854) (263,502,665)
- ------------------------------------------------------------------------ ---------------------- ----------------
Change in net assets resulting from share transactions (52,253,027) (131,933,537)
- ------------------------------------------------------------------------ ---------------------- ----------------
Change in net assets 3,411,828 (113,670,399)
- ------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------
Beginning of period 778,819,840 892,490,239
- ------------------------------------------------------------------------ ---------------------- ----------------
End of period (including undistributed net investment income of
$14,944,259 and $14,860,692, respectively) $ 782,231,668 $ 778,819,840
- ------------------------------------------------------------------------ ---------------------- ----------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Fortress Utility Fund, Inc.
Financial Highlights
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
NOVEMBER 30, YEAR ENDED MAY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1995 1994 1993 1992 1991 1990 1989
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.69 $ 12.30 $ 12.90 $ 11.69 $ 10.59 $ 10.14 $ 9.70 $ 8.90
- ---------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income 0.28 0.56 0.63 0.68 0.69 0.77 0.67 0.63
- ---------------------------------
Net realized and unrealized
gain (loss) on investments 0.95 0.44 (0.61) 1.25 1.07 0.51 0.48 0.77
- --------------------------------- ------ --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 1.23 1.00 0.02 1.93 1.76 1.28 1.15 1.40
- ---------------------------------
LESS DISTRIBUTIONS
- ---------------------------------
Distributions from net
investment income (0.26) (0.61) (0.61) (0.67) (0.66) (0.75) (0.71) (0.60)
- ---------------------------------
Distributions from net realized
gain on investment transactions -- -- (0.01) (0.05) -- (0.08) -- --
- --------------------------------- ------ --------- --------- --------- --------- --------- --------- ---------
Total distributions (0.26) (0.61) (0.62) (0.72) (0.66) (0.83) (0.71) (0.60)
- --------------------------------- ------ --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 13.66 $ 12.69 $ 12.30 $ 12.90 $ 11.69 $ 10.59 $ 10.14 $ 9.70
- --------------------------------- ------ --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (B) 9.85% 8.48% 0.01% 17.02% 17.07% 13.44% 12.13% 16.47%
- ---------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------
Expenses 1.16%* 1.14% 1.11% 1.07% 1.10% 1.03% 1.05% 1.08%
- ---------------------------------
Net investment income 4.38%* 4.58% 4.92% 5.45% 6.01% 7.12% 6.77% 6.92%
- ---------------------------------
Expense waiver/
reimbursement (c) 0.13%* 0.11% 0.12% 0.05% 0.11% 0.61% 1.39% 0.86%
- ---------------------------------
SUPPLEMENTAL DATA
- ---------------------------------
Net assets, end of period (000
omitted) $782,232 $778,820 $892,490 $742,067 $247,482 $66,578 $29,844 $13,476
- ---------------------------------
Portfolio turnover 32% 56% 28% 27% 26% 53% 49% 17%
- ---------------------------------
<CAPTION>
<S> <C> <C>
1988 1987(A)
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.18 $ 10.00
- ---------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income 0.63 0.24
- ---------------------------------
Net realized and unrealized
gain (loss) on investments (0.34) (0.98)
- --------------------------------- --------- -----------
Total from investment
operations 0.29 (0.74)
- ---------------------------------
LESS DISTRIBUTIONS
- ---------------------------------
Distributions from net
investment income (0.57) (0.08)
- ---------------------------------
Distributions from net realized
gain on investment transactions -- --
- --------------------------------- --------- -----------
Total distributions (0.57) (0.08)
- --------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 8.90 $ 9.18
- --------------------------------- --------- -----------
TOTAL RETURN (B) 3.21% (7.74%)
- ---------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------
Expenses 1.04% 0.53%*
- ---------------------------------
Net investment income 7.18% 7.95%*
- ---------------------------------
Expense waiver/
reimbursement (c) 1.00% 0.97%*
- ---------------------------------
SUPPLEMENTAL DATA
- ---------------------------------
Net assets, end of period (000
omitted) $9,256 $6,305
- ---------------------------------
Portfolio turnover 23% 12%
- ---------------------------------
</TABLE>
* Computed on an annualized basis.
(a) 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, the net investment income was distributed to the Fund's investment
adviser. Such distribution represented net income of the Fund prior to the
initial public offering of the Fund shares which commenced on January 30,
1987.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Fortress Utility Fund, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
November 30, 1995 (unaudited)
(1) ORGANIZATION
Fortress Utility Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
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.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code"). Dividend
income and distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At May 31, 1995, the Fund, for federal tax purposes, had a capital loss
carryforward of $15,909,474, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve
the Fund of any liability for federal tax. Pursuant to the Code, such
capital loss carryforward will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
1998 $2,109,940
2003 $13,799,534
</TABLE>
Additionally, net capital losses of $11,675,961 attributable to security
transactions incurred after October 31, 1994 are treated as arising on 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, 1995, is $2,109,940 which
will expire in 1998.
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (equivalent, on a per share basis, to
the amount of undistributed net investment income on the date of the
transaction) is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee.
Additional information on each restricted security held at November 30,
1995 is as follows:
Fortress Utility Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
- ---------------------------------------------------------------------- ------------------------- --------------
3Com Corp., Conv. Bond, 10.25%, 11/1/2001 11/30/1995 $ 2,436,830
- ----------------------------------------------------------------------
Cointel, Telefonica de Argentina SA, PRIDES, $5.04 2/24/1994-11/7/1994 20,061,467
- ----------------------------------------------------------------------
International Paper Co., Conv. Pfd. 11/30/1995 819,000
- ----------------------------------------------------------------------
National Semiconductor Corp., Conv. Bond, 6.50%,
10/1/2002 10/12/1995-10/16/1995 2,438,610
- ----------------------------------------------------------------------
</TABLE>
OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At November 30, 1995, there were 2,000,000,000 shares of $0.001 per share par
value capital stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
NOVEMBER 30, 1995 MAY 31, 1995
<S> <C> <C>
Shares sold 3,205,017 9,455,561
- ------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 744,941 1,681,625
- ------------------------------------------------------------------------
Shares redeemed (8,081,081) (22,318,428)
- ------------------------------------------------------------------------ ------------ ----------------
Net change resulting from share transactions (4,131,123) (11,181,242)
- ------------------------------------------------------------------------ ------------ ----------------
</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 any 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"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. This 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 the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--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 daily net
assets of the Fund shares for the period. This fee is to obtain certain services
for shareholders and to maintain shareholder accounts. FSS may voluntarily
choose to waive any portion of its fee. FSS can modify or terminate this
voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("Fserv") serves as transfer and dividend disbursing agent for the Fund. This
fee is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Directors of the Corporation are Officers
and Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended November 30, 1995, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 240,116,910
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 305,781,465
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
Directors Officers
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Richard B. Fisher
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Glen R. Johnson Executive Vice President
Peter E. Madden John W. McGonigle
Gregor F. Meyer Executive Vice President and Secretary
John E. Murray, Jr. David M. Taylor
Wesley W. Posvar Treasurer
Marjorie P. Smuts Charles H. Field
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed
by any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other government
agency.
Investment in mutual funds involves investment risk, including possible loss of
principal.
This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the Fund's prospectus, which contains facts concerning its
objective and policies, management fees, expenses and other information.
[LOGO] FEDERATED FUNDS
WHERE EXPERTS INVEST
Federated Securities Corp. is the distributor of the fund.
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
Cusip 349561100
8010410 (1/96)
FORTESS UTILITY FUND, INC.
APPENDIX A
A.1 The graphic representation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The lighter shaded portion represents the value of
reinvested income for the Fund. The dark shaded portion reflects the
principal value of a $9,000 investment in the Fund, which is 888 shares. The
color-coded mountain chart is a visual representation of the narrative text
above it, which shows that an initial investment of $9,000 in Fortess Utility
Fund, Inc. on Janury 30, 1987 (date of initial public investment) would have
grown to $20,520 on November 30, 1996. The "x" axis reflects computation
periods from Janury 30, 1987 (date of initial public investment) to November
30, 1996. The right margin of the chart reflects the ending value of a
hypothetical investment of $9,000 in the Fund measured in increments of
$3,000 ranging from $0 to $21,000.
A.2 The graphic representation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The lighter shaded portion represents the value of
reinvested income for the Fund. The dark shaded portion reflects the
principal value of a $1,000 investment in the Fund annually, which is 99
shares. The color-coded mountain chart is a visual representation of the
narrative text above it, which shows that an annual investment of $1,000 in
Fortess Utility Fund, Inc. beginning on Janury 30, 1987 (date of initial
public investment) would have grown to $15,312, which is 1,117 shares, on
November 30, 1996. The "x" axis reflects computation periods from Janury 30,
1987 (date of initial public investment) to November 30, 1996. The right
margin of the chart reflects the ending value of a hypothetical investment of
$9,000 in the Fund measured in increments of $4,000 ranging from $0 to
