LIBERTY UTILITY FUND, INC.
CLASS B SHARES
PROSPECTUS
The Class B Shares of Liberty Utility Fund, Inc. (the "Fund") offered by this
prospectus represent interests in the Fund which is an open-end, diversified
management investment company (a mutual fund).
The Fund invests in a diversified portfolio comprised primarily of equity
securities of utility companies to achieve current income and long-term growth
of income. Capital appreciation is a secondary objective.
THE CLASS B 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 CLASS B SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class B Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Class
A Shares, Class B Shares, and Class C Shares dated September 27, 1994, with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Combined 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 September 27, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES--CLASS B SHARES 1
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GENERAL INFORMATION 2
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LIBERTY FAMILY OF FUNDS 2
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INVESTMENT INFORMATION 3
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Investment Objectives 3
Investment Policies 3
Repurchase Agreements 4
Lending of Portfolio Securities 4
Restricted and Illiquid Securities 4
When-Issued and Delayed
Delivery Transactions 4
Covered Call Options 5
Securities of Foreign Issuers 5
Investment Risks 5
Reducing Risks of Utility Securities 6
Investment Limitations 6
NET ASSET VALUE 7
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INVESTING IN CLASS B SHARES 7
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Share Purchases 7
Through a Financial Institution 7
Directly from the Distributor 8
Minimum Investment Required 8
What Shares Cost 8
Conversion of Class B Shares 9
Systematic Investment Program 9
Certificates and Confirmations 9
Dividends 9
Capital Gains 9
Retirement Plans 10
EXCHANGE PRIVILEGE 10
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Requirements for Exchange 10
Tax Consequences 10
Making an Exchange 10
Telephone Instructions 11
REDEEMING CLASS B SHARES 11
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Through a Financial Institution 11
Directly from the Fund 11
By Telephone 11
By Mail 12
Signatures 12
Contingent Deferred Sales Charge 12
Elimination of Contingent Deferred
Sales Charge 13
Systematic Withdrawal Program 14
Reinvestment Privilege 14
Accounts with Low Balances 14
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 Class B Shares 15
Distribution and Shareholder Services Plans 16
Other Payments to Financial Institutions 16
Administration of the Fund 17
Administrative Services 17
Custodian 17
Transfer Agent and
Dividend Disbursing Agent 17
Legal Counsel 17
Independent Auditors 17
Brokerage Transactions 17
Expenses of the Fund and Class B Shares 18
SHAREHOLDER INFORMATION 18
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Voting Rights 18
TAX INFORMATION 19
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Federal Income Tax 19
Pennsylvania Corporate and
Personal Property Taxes 19
PERFORMANCE INFORMATION 19
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OTHER CLASSES OF SHARES 20
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Financial Highlights--Class A Shares 21
Financial Highlights--Class C Shares 22
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ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................... None
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) ................................................................. 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................ None
Exchange Fee.................................................................................. None
ANNUAL CLASS B SHARES OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee (after waiver)(2) ............................................................. 0.58%
12b-1 Fee..................................................................................... 0.75%
Total Other Expenses.......................................................................... 0.54%
Shareholder Services Fee.............................................................0.25%
Total Class B Shares Operating Expenses(3)(4) .......................................... 1.87%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year, declining
to 1.00% in the sixth year, and 0.00% thereafter. (See "Contingent Deferred
Sales Charge.")
(2) The estimated management fee has been reduced to reflect the anticipated
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) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The Total Class B Shares Operating Expenses are estimated to be 2.04%
absent the anticipated voluntary waiver of a portion of the management fee.
*Total Class B Shares Operating Expenses are estimated based on average expenses
expected to be incurred during the period ending February 28, 1995. During the
course of this period, expenses may be more or less than the average amount
shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS B SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE " INVESTING IN CLASS B SHARES" AND "FUND
INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales loads permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
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<S> <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................ $ 76 $ 103
You would pay the following expenses on the same investment, assuming no redemption... $ 19 $ 59
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING FEBRUARY
28, 1995.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Fund. The Fund also offers two additional classes of
shares called Class A Shares and Class C Shares. Class B Shares, Class A Shares,
and Class C Shares are subject to certain of the same expenses; however, Class A
Shares are subject to a maximum sales load of 5.50%, but are not subject to a
12b-1 fee or a contingent deferred sales charge. Class C Shares are subject to a
12b-1 fee of up to 0.75% and may be subject to a contingent deferred sales
charge of 1.00%, but are not subject to a front-end sales load. See "Other
Classes of Shares."
GENERAL INFORMATION
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The Fund was incorporated under the laws of the State of Maryland on April 20,
1987. The Fund's address is Liberty Center, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. The Articles of Incorporation permit the
Fund to offer separate series of shares representing interests in separate
portfolios of securities. The shares in any one portfolio may be offered in
separate classes. With respect to the Fund, as of the date of this prospectus,
the Board of Directors (the "Directors") has established three classes of
shares, known as Class A Shares, Class B Shares, and Class C Shares. This
prospectus relates only to Class B Shares ("Shares") of the Fund.
Shares of the Fund are designed to give institutions and individuals a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio comprised primarily of equity securities of utility
companies. A minimum initial investment of $1,500 is required, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
Except as otherwise noted in this prospectus, Shares are sold at net asset value
and redeemed at net asset value. However, a contingent deferred sales charge is
imposed on certain Shares of the Fund which are redeemed within six full years
of the date of purchase.
LIBERTY FAMILY OF FUNDS
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This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
- American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
- Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
- Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
- International Equity Fund, providing long-term capital growth and income
through international securities;
- International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
- Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income-producing equity securities;
- Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated corporate bonds;
- Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
- Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value through investment-grade
securities;
- Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;
- Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;
- Pennsylvania Intermediate Municipal Trust, providing current income
exempt from federal regular income tax and the personal income taxes
imposed by the Commonwealth of Pennsylvania, primarily through
Pennsylvania municipal securities;
- Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
- Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax through
high-quality, short-term municipal securities; and
- World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industry.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds 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 OBJECTIVES
The primary investment objectives of the Fund are current income and long-term
growth of income. Capital appreciation is a secondary objective. While there is
no assurance that the Fund will achieve its investment objectives, it endeavors
to do so by following the policies described in this prospectus. The investment
objectives cannot be changed without approval of shareholders.
INVESTMENT POLICIES
The Fund will seek to achieve its investment objectives by investing primarily
in common stocks, preferred stocks, units of participation in master limited
partnerships which are traded on national securities exchanges, securities
convertible into stock, and debt securities issued by companies in the utilities
industry. Under normal conditions, the Fund will invest at least 65% of its
total assets in securities issued by companies in the utilities industry, which
include companies engaged in the production, transmission or distribution of
electric energy or gas, or in communications facilities such as telephone or
telegraph services.
Debt obligations in the portfolio, at the time they are purchased, shall be
limited to those which fall in one of the following categories: (i) rated
investment grade by either Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P"), or (ii) determined by the investment
adviser to be of investment grade and not rated by either of the aforementioned
rating services, or (iii) the subordinated debt of issuers whose senior debt
obligations are deemed to be investment grade by either of the aforementioned
rating services.
For temporary, defensive purposes, the Fund may be primarily invested in
short-term money market instruments including certificates of deposit,
obligations issued or guaranteed by the United States government or its agencies
or instrumentalities, commercial paper rated not lower than A-1 by S&P or
Prime-1 by Moody's or repurchase agreements.
The investment policies described above cannot be changed without shareholder
approval.
Downgraded securities will be evaluated on a case by case basis by the
investment adviser. The investment adviser will determine whether or not the
security continues to be an acceptable investment. If not, the security will be
sold. The Directors do not consider this limitation to apply to debt securities
of an issuer convertible into stock of that issuer. The prices of fixed income
securities fluctuate inversely to the direction of interest rates.
REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be
purchased pursuant to 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. 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.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities, on a short-term or long-term basis, to
broker/dealers, banks, or other institutional borrowers of securities. The Fund
will limit the amount of portfolio securities it may lend to not more than
one-third of its total assets. 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 Directors
and will receive collateral in cash or United States government securities that
will be maintained in an amount equal to at least 100% of the current market
value of the securities loaned.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its total
assets in restricted securities. Restricted securities are any securities in
which the Fund may otherwise invest pursuant to its investment objectives and
policies but which are subject to restriction on resale under federal securities
law. To the extent these securities are deemed to be illiquid, the Fund will
limit its purchases together with other securities considered to be illiquid to
15% of its net assets.
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 securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. 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. Accordingly, the Fund
may pay more/less than the market value of the securities on the settlement
date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
COVERED CALL OPTIONS. The Fund may also write call options on all or any portion
of its portfolio to generate Income for the Fund. Call options written by the
Fund give the holder the right to buy the underlying securities of the Fund at
the stated exercise price. The Fund will write call options only 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
and sells must be listed on a recognized options exchange. The Fund's investment
in call options shall not exceed 5% of the Fund's total assets.
SECURITIES OF FOREIGN ISSUERS. The Fund may purchase American Depository
Receipts ("ADRs") issued by U.S. Banks as a substitute for direct ownership of
securities of foreign companies in the utilities industry. ADRs are traded in
the United States on stock exchanges and in the over-the-counter markets like
stocks of domestic companies.
The Fund may also purchase securities of foreign issuers in the utilities
industry. While investment in foreign securities is intended to reduce risk by
providing further diversification, such investments involve sovereign risk in
addition to the credit and market risks normally associated with domestic
securities. Foreign investments may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations. There may be less
publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing, and
financial reporting standards and requirements comparable to those applicable to
U.S. companies. Securities of some foreign companies are less liquid or more
volatile than securities of U.S. companies, and foreign brokerage commissions
and custodian fees are generally higher than in the U.S. Investments in foreign
securities may also be subject to other risks different from those affecting
U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and currency blockage (which would prevent cash
from being brought back to the U.S.). It may also be more difficult to enforce
contractual obligations or obtain court judgments abroad than would be the case
in the United States because of differences in the legal systems. These risks
are carefully considered by the Fund's adviser prior to the purchase of these
securities.
INVESTMENT RISKS
The Fund will attempt to meet its investment objectives by being at least 65%
invested in securities issued by companies in the utility industry. There exist
certain risks associated with the utility industry of which investors in the
Fund 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 investment 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
investment 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 investment adviser places special
emphasis on the estimated current value of the issuer's assets rather than
historical costs.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described below
without approval of shareholders. The Fund will not:
- invest more than 25% of its total assets (valued at time of investment)
in securities of companies engaged principally in any one industry other
than the utilities industry, except that this restriction does not apply
to cash or cash items and securities issued or guaranteed by the United
States government or its agencies or instrumentalities;
- invest more than 5% of the value of its total assets in securities of
companies, including their predecessors, which have been in operation for
less than three years;
- invest more than 5% of its total assets (valued at the time of
investment) in the securities of any one issuer, except that this
restriction does not apply to cash and cash items, repurchase agreements,
and securities issued or guaranteed by the United States government or
its agencies or instrumentalities;
- acquire more than 10% of the outstanding voting securities of any one
issuer (at the time of acquisition);
- borrow money, issue senior securities, or pledge assets, except that
under certain circumstances the Fund may borrow money and engage in
reverse repurchase transactions in amounts up to one-third of the value
of its net assets, including the amounts borrowed, and pledge up to 10%
of the value of those assets to secure such borrowings. The Fund will not
borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or emergency measure
to facilitate management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous. 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;
- 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 objectives and
policies;
- 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's investment in put or call options,
straddles, spreads, or any combination thereof shall not exceed 5% of the
Fund's total assets;
- invest more than 5% of its net assets in warrants, not more than 2% of
which can be warrants not listed on recognized exchanges; or
- invest more than 15% of total assets in securities of foreign issuers not
listed on recognized exchanges.
If a percentage restriction set forth above is adhered to at the time a
transaction is effected, later changes in percentage resulting from changes in
value or in the number of outstanding securities of an issuer will not be
considered a violation.
NET ASSET VALUE
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The Fund's net asset value per Class B Share fluctuates. The net asset value for
Class B Shares is determined by adding the interest of the Class B Shares in the
market value of all securities and other assets of the Fund, subtracting the
interest of the Class B Shares in the liabilities of the Fund and those
attributable to the Class B Shares, and dividing the remainder by the total
number of Class B Shares outstanding. The net asset value for Class B Shares may
differ from that of Class A Shares and Class C Shares due to the variance in
daily net income realized by each class. Such variance will reflect only accrued
net income to which the shareholders of a particular class are entitled.
INVESTING IN CLASS B SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may, from time to time, offer certain items of
nominal value to any shareholder or investor. The Fund reserves the right to
reject any purchase request.
Orders for $250,000 or more of Class B Shares will normally be invested in Class
A Shares. (See "Other Classes of Shares.")
THROUGH A FINANCIAL INSTITUTION. Investors may call their financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders placed through a financial institution are considered received when the
Fund is notified of the purchase order or when converted into federal funds. It
is the financial institution's responsibility to transmit orders promptly.
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.
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 FROM THE DISTRIBUTOR. An investor may place an order to purchase Shares
directly from the distributor once an account has been established. To do so:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to Liberty Utility Fund, Inc.--Class B
Shares; and
- mail both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, MA
02266-8604.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after State
Street Bank receives the check.
To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Liberty Utility Fund,
Inc.--Class B Shares; Title or Name of Account; Wire Order Number; and Account
Number. Shares cannot be purchased by wire on days on which the New York Stock
Exchange is closed and on federal holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500 unless the investment is in a
retirement account, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement accounts, which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. 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; and (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 Class B Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor as the Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on the fifteenth
day of the month, eight years after the purchase date, except as noted below,
and will no longer be subject to a distribution fee. (See "Other Classes of
Shares.") Such conversion will be on the basis of the relative net asset values
per share, without the imposition of any sales load, fee, or other charge. Class
B Shares acquired by exchange from Class B Shares of another fund in the Liberty
Family of Funds will convert into Class A Shares based on the time of the
initial purchase. For purposes of conversion to Class A Shares, Shares purchased
through the reinvestment of dividends and distributions paid on Class B Shares
will be considered to be held in a separate sub-account. Each time any Class B
Shares in the shareholder's account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B Shares in
the sub-account will also convert to Class A Shares. The availability of the
conversion feature is subject to the granting of an exemptive order by the
Securities and Exchange Commission or the adoption of a rule permitting such
conversion. In the event that the exemptive order or rule ultimately issued by
the Securities and Exchange Commission requires any conditions additional to
those described in this prospectus, shareholders will be notified. The
conversion of Class B Shares to Class A Shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversions will not constitute taxable events for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B Shares to Class A Shares will not occur
if such ruling or opinion is not available. In such event, Class B Shares would
continue to be subject to higher expenses than Class A Shares for an indefinite
period.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the Fund. Shareholders may apply for participation in this program
through their financial institution or directly through the Fund.
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
in writing to the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Quarterly confirmations are sent to report dividends paid during
that quarter.
DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Unless shareholders request cash payments on the new
account form or by writing to the Fund, dividends are automatically reinvested
in additional Shares on payment dates at the ex-dividend date net asset value.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every twelve months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class B shareholders may exchange all or some of their
Shares for Class B Shares of other funds in the Liberty Family of Funds at net
asset value without being assessed a contingent deferred sales charge on the
exchanged Shares. (Not all funds in the Liberty Family of Funds currently offer
Class B Shares. Contact your financial institution regarding the availability of
other Class B Shares in the Liberty Family of Funds.) To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, 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 applicable holding period.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund into which the exchange is being made.
This privilege is available to shareholders resident 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 Class B Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An 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.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds or certain Federated
Funds may be given in writing or by telephone. Written instructions may require
a signature guarantee. Shareholders of the Fund may have difficulty in making
exchanges by telephone through brokers and other financial institutions during
times of drastic economic or market changes. If shareholders cannot contact
their broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to Federated
Services Company, c/o State Street Bank and Trust Company, P.O. Box 8604,
Boston, Massachusetts 02266-8604.
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.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604, and deposited to the
shareholder's account before being exchanged. Telephone exchange instructions
may be recorded. Such instructions will be processed as of 4:00 p.m. (Eastern
time) and must be received by the Fund before that time for Shares to be
exchanged that day. Shareholders exchanging into a fund will not receive any
dividend that is payable to shareholders of record on that date. This privilege
may be modified or terminated at any time. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING CLASS B SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request, less any applicable contingent deferred sales
charge. (See "Contingent Deferred Sales Charge.") Redemptions will be made on
days on which the Fund computes its net asset value. Redemptions can be made
through a financial institution or directly from the Fund. Redemption requests
must be received in proper form.
THROUGH A FINANCIAL INSTITUTION
Shareholders may redeem Shares by calling their financial institution (such as a
bank or an investment dealer) to request the redemption. 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 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.
DIRECTLY FROM THE FUND
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 Fund 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, such as redeeming by mail, should be considered.
BY MAIL. Any shareholder may redeem Shares by sending a written request to
Federated Services Company, c/o State Street Bank and Trust Company, P.O. Box
8604, Boston, Massachusetts 02266-8604. The written request should include the
shareholder's name, the Fund name and class designation, the account number, and
the Share or dollar amount requested, and should be signed exactly as the Shares
are registered.
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 should 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 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 Corporation ("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.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within six full years of
the purchase date of those Shares will be charged a contingent deferred sales
charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the
redeemed Shares at the time of purchase or the net asset value of the redeemed
Shares at the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
--------------------------------------------- --------------------
<S> <C>
One full year or less........................ 5.50%
Two full years or less....................... 4.75%
Three full years or less..................... 4.00%
Four full years or less...................... 3.00%
Five full years or less...................... 2.00%
Six full years or less....................... 1.00%
Seven years and thereafter................... 0.00%
</TABLE>
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and/or (2) Shares held for more than
six full years from the date of purchase. Redemptions will be processed in a
manner intended to maximize the amount of redemption which will not be subject
to a contingent deferred sales charge. In computing the amount of the applicable
contingent deferred sales charge, redemptions are deemed to have occurred in the
following order: (1) Shares acquired through the reinvestment of dividends and
long-term capital gains; (2) Shares held for more than six full years from the
date of purchase; and (3) Shares held for six years or less on a first-in,
first-out basis.
A contingent deferred sales charge is not assessed in connection with an
exchange of Fund Shares for shares of other Class B Shares of funds in the
Liberty Family of Funds. (See "Exchange Privilege.") Any contingent deferred
sales charge imposed at the time the exchanged-for shares are redeemed is
calculated as if the shareholder had held the shares from the date on which the
investor became a shareholder of the exchanged-from Shares. Moreover, the
contingent deferred sales charge will be eliminated with respect to certain
redemptions. (See "Elimination of Contingent Deferred Sales Charge.")
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other qualified retirement plan to a
shareholder who has attained the age of 70- 1/2; and (3) involuntary redemptions
by the Fund of Shares in shareholder accounts that do not comply with the
minimum balance requirements. In addition, to the extent that the distributor
does not make advance payments to certain financial institutions for purchases
made by their clients, no contingent deferred sales charge will be imposed on
redemptions of Shares held by Directors, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or distributor; employees
of any financial institution that sells Shares of the Fund pursuant to a sales
agreement with the distributor; and spouses and children under the age of 21 of
the aforementioned persons. Finally, no contingent deferred sales charge will be
imposed on the redemption of Shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940, as amended, or a
retirement plan where the third-party administrator has entered into certain
arrangements with Federated Securities Corp. or its affiliates, or any other
financial institution, to the extent that no payments were advanced for
purchases made through or by such entities.
The Directors reserve the right to discontinue elimination of the contingent
deferred sales charge. Shareholders will be notified of such elimination. Any
Shares purchased prior to the termination of such waiver would have the
contingent deferred sales charge eliminated as provided in the Fund's prospectus
at the time of the purchase of the Shares. If a shareholder making a redemption
qualifies for an elimination of the contingent deferred sales charge, the
shareholder must notify Federated Securities Corp. or the Fund in writing that
said shareholder is entitled to such elimination.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, 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 Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in Shares. For this reason, payments under this program
should not be considered as yield or income on the shareholder's investment in
Shares. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. Shareholders may apply for participation
in this program through their financial institution. A contingent deferred sales
charge will be imposed on Shares redeemed within six full years of their
purchase date. (See "Contingent Deferred Sales Charge.")
REINVESTMENT PRIVILEGE
If Shares have been redeemed, the shareholder has a one-time right, within 120
days, to reinvest the redemption proceeds into Class A Shares at the
next-determined net asset value without a sales load. (See "Other Classes of
Shares.") Federated Securities Corp. must be notified by the shareholder in
writing or by his or her financial institution of the reinvestment in order to
receive this privilege. If the shareholder redeems his or her Shares, there may
be tax consequences.
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 the required minimum value of
$1,500. This requirement does not apply, however, if the balance falls below
$1,500 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. An 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 Passport
Research, Ltd., the Fund's investment adviser (the "Adviser"), subject to
direction by the Directors. The 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 Adviser receives an annual investment advisory fee equal
to .75 of 1% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The Adviser may voluntarily choose to waive a
portion of its fee or reimburse the Fund for certain operating expenses.
The Adviser can terminate this voluntary waiver or reimbursement at any
time at its sole discretion. The Adviser has also undertaken to reimburse
the Fund for operating expenses in excess of limitations established by
certain states.
ADVISER'S BACKGROUND. Passport Research, Ltd. is a Pennsylvania limited
partnership organized in 1981. Federated Advisers is the general partner of
the Adviser and has a 50.5% interest in the Adviser. Federated Advisers is
a subsidiary of Federated Investors. Edward D. Jones & Co. is the limited
partner of the investment Adviser and has a 49.5% interest in the Adviser.
Passport Research, Ltd. has also acted as investment adviser for Edward D.
Jones & Co. Daily Passport Cash Trust since 1982. Employees of the Adviser
are also employees of other advisers which are affiliates of Federated
Investors.
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 Adviser since 1992. Mr. Wiles served as Assistant Vice President of
the Adviser from 1990 until 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 CLASS B 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.
The distributor will pay financial institutions an amount equal to 5.50% of the
net asset value of Shares purchased by their clients or customers. These
payments will be made directly by the distributor from its assets, and will not
be made from the assets of the Fund. Dealers may voluntarily waive receipt of
all or any portion of these payments.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Class B Shares will pay to the distributor an amount, computed at an annual
rate of 0.75 of 1% of the average daily net assets of Class B Shares, to finance
any activity which is principally intended to result in the sale of Shares
subject to the Distribution Plan. The distributor may pay a portion of this
amount to financial institutions that waive all or any portion of the payments
discussed in the preceding paragraph. Because distribution fees to be paid by
the Fund to the distributor may not exceed an annual rate of 0.75 of 1% of the
Shares' average daily net assets, it will take the distributor a number of years
to recoup the expenses it has incurred for its distribution and
distribution-related services pursuant to the Distribution Plan.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Class
B Shares under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Class B Shares to obtain certain personal services for
shareholders and for 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
Shareholder Services.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings and loan association) from being an underwriter or distributor
of most 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 Directors
will consider appropriate changes in the 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 laws.
The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Distribution Plan.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. 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 at recreational-type facilities, 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 nature and type 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.
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 ("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.
CUSTODIAN. State Street Bank and Trust Company, 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 shares of the Fund and dividend
disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the 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 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 Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Directors.
EXPENSES OF THE FUND AND CLASS B SHARES
Holders of Shares pay their allocable portion of Fund expenses.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Fund and continuing
its existence; registering the Fund with federal and state securities
authorities; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; Directors' fees; auditors' fees; the cost of meetings
of Directors; legal fees of the Fund; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Shares as a
class are expenses under the Fund's Services and Distribution Plans. However,
the Directors reserve the right to allocate certain other expenses to holders of
Shares as they deem appropriate ("Class Expenses"). In any case, Class Expenses
would be limited to: distribution fees; transfer agent fees as identified by the
transfer agent as attributable to holders of Shares; fees under the Fund's
Services Plan; printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxies to
current shareholders; registration fees paid to the Securities and Exchange
Commission and state securities commissions; expenses related to administrative
personnel and services as required to support holders of Shares; legal fees
relating solely to Shares; and Directors' fees incurred as a result of issues
relating solely to Shares.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholders for vote. All shares of each portfolio or
class in the Fund have equal voting rights, except that in matters affecting
only a particular portfolio or class, only shares of that portfolio or class are
entitled to vote.
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 two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written 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 the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
- the Fund is subject to Pennsylvania corporate franchise taxes; 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 laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises the total return and yield for Class B
Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in Class B Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Class B Shares is calculated by dividing the net investment income
per Share (as defined by the Securities and Exchange Commission) earned by Class
B Shares over a thirty-day period by the maximum offering price per Share 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
Class B Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges such as
the contingent deferred sales charge, which, if excluded, would increase the
total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, and Class C Shares. Because Class B Shares and Class C Shares are
subject to a Rule 12b-1 fee, the yield for Class A Shares, for the same period,
may exceed that of Class B Shares and Class C Shares. Because Class A Shares are
subject to a front-end sales load, the total return for Class B Shares and Class
C Shares, for the same period, may exceed that of Class A Shares. Depending on
the dollar amount invested and the
time period for which any class of shares is held, the total return for any
particular class may exceed that of another.
From time to time, the Fund may advertise the performance of Class B Shares
using certain financial publications and/or compare the performance of Class B
Shares to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Class A Shares are sold primarily to customers of financial institutions subject
to a front-end sales load of up to 5.50%. Under certain circumstances, investors
may qualify for reduced sales loads on purchases of Class A Shares. Class A
Shares are subject to a Services Plan fee of up to 0.25 of 1% of the Class A
Shares' average daily net assets and are subject to a minimum initial investment
of $500, unless the investment is in a retirement account, in which case the
minimum investment is $50.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no initial sales load. Class C Shares are distributed pursuant
to a Distribution Plan adopted by the Fund whereby the distributor is paid a fee
of up to 0.75 of 1%, in addition to a Services Plan fee of up to 0.25 of 1%, of
the Class C Shares' average daily net assets. In addition, Class C Shares may be
subject to certain contingent deferred sales charges. Investments in Class C
Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
The amount of dividends payable to Class A Shares will generally exceed that
payable to Class B Shares and Class C Shares by the difference between Class
Expenses and distribution and shareholder service expenses borne by shares of
each respective class.
The stated advisory fee is the same for all classes of shares.
LIBERTY UTILITY FUND, INC.
CLASS A SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated April 13, 1994, on the Fund's Financial
Statements for the year ended February 28, 1994, is included in the Combined
Statement of Additional Information. This table should be read in conjunction
with the Fund's Financial Statements and notes thereto, which may be obtained
from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28, OR 29
------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $12.29 $11.03 $10.13 $9.82 $9.15 $9.15 $9.30
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.60 0.58 0.68 0.71 0.71 0.72 0.55
- -------------------------------------
Net realized and unrealized gain
(loss) on investments -- 1.44 0.92 0.43 0.79 (0.02) (0.31)
- ------------------------------------- ------- ------- ------- ------- ------ ------- ------
Total from investment operations 0.60 2.02 1.60 1.14 1.50 0.70 0.24
- -------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from net
investment income (0.61) (0.66) (0.64) (0.70) (0.76) (0.70) (0.39)
- -------------------------------------
Distributions to shareholders from
net realized gain on investment
transactions (0.04) (0.10) (0.06) (0.13) (0.07) -- --
- ------------------------------------- ------- ------- ------- ------- ------ ------- ------
Total distributions (0.65) (0.76) (0.70) (0.83) (0.83) (0.70) (0.39)
- ------------------------------------- ------- ------- ------- ------- ------ ------- ------
NET ASSET VALUE, END OF PERIOD $12.24 $12.29 $11.03 $10.13 $9.82 $9.15 $9.15
- ------------------------------------- ------- ------- ------- ------- ------ ------- ------
TOTAL RETURN** 4.93% 19.26% 16.48% 12.41% 16.72% 8.00% 3.25%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 1.12% 1.04% 1.05% 1.02% 1.02% 1.00% 1.56%(b)
- -------------------------------------
Net investment income 4.81% 5.98% 6.31% 7.41% 7.17% 8.04% 8.24%(b)
- -------------------------------------
Expense waiver/reimbursement(a) 0.17% 0.01% 0.19% 0.51% 0.74% 0.40% 0.38%(b)
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000
omitted) $877,513 $739,511 $375,656 $125,599 $48,050 $410,575 $52,947
- -------------------------------------
Portfolio turnover rate 24% 18% 35% 45% 37% 34% 17%
- -------------------------------------
</TABLE>
* Reflects operations for the period from June 5, 1987 through February 29,
1988. For the period from the start of business, May 28, 1987 to June 4,
1987, net investment income aggregating $0.012 per share ($124) was
distributed to the Fund's Investment Adviser.
** 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.
(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 February 28, 1994, which can be obtained
free of charge.
LIBERTY UTILITY FUND, INC.
CLASS C SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated April 13, 1994, on the Fund's Financial
Statements for the year ended February 28, 1994, is included in the Combined
Statement of Additional Information. This table should be read in conjunction
with the Fund's Financial Statements and notes thereto, which may be obtained
from the Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1994*
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.27
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net investment income 0.48
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.07)
-----------------
- ------------------------------------------------------------------------------------
Total from investment operations 0.41
-----------------
- ------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.41)
- ------------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.04)
-----------------
- ------------------------------------------------------------------------------------
Total distributions (0.45)
-----------------
- ------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.23
-----------------
- ------------------------------------------------------------------------------------
TOTAL RETURN** 3.28%
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses 1.87%(b)
- ------------------------------------------------------------------------------------
Net investment income 4.02%(b)
- ------------------------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.17%(b)
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $64,409
- ------------------------------------------------------------------------------------
Portfolio turnover rate 24%
- ------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 30, 1993 (date of initial
public offering) to February 28, 1994.
** 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.
(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 February 28, 1994, which can be obtained
free of charge.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Liberty Utility Fund, Inc. Federated Investors Tower
Class B Shares Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Passport Research, Ltd. 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, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
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 LLP One Oxford Centre
Pittsburgh, PA 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
LIBERTY UTILITY FUND, INC.
CLASS B SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
September 27, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
531545309
0011102A-B (9/94)
LIBERTY UTILITY FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with the
respective prospectuses of the Class A Shares and Class C Shares of Liberty
Utility Fund, Inc. (the "Fund") dated April 30, 1994, and the Class B Shares of
the Fund dated September 27, 1994. This Statement is not a prospectus itself. To
receive a copy of any of the prospectuses, write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated September 27, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 1
- ---------------------------------------------------------------
Temporary Investments 1
Units of Master Limited Partnerships 1
Convertible Securities 1
Repurchase Agreements 2
Lending of Portfolio Securities 2
Restricted Securities 2
When-Issued and Delayed Delivery
Transactions 2
Reverse Repurchase Agreements 2
Covered Call Options 3
Portfolio Turnover 3
Investment Limitations 3
LIBERTY UTILITY FUND, INC., MANAGEMENT 5
- ---------------------------------------------------------------
The Funds 7
Fund Ownership 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution and Shareholder Services Plans 9
Conversion to Federal Funds 10
Purchases by Sales Representatives,
Fund Directors, and Employees 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
REDEEMING SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 13
- ---------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 22
- ---------------------------------------------------------------
APPENDIX 23
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund was incorporated under the laws of the State of Maryland on April 20,
1987. It is qualified to do business as a foreign corporation in Pennsylvania.
Shareholders of the Fund, at a meeting held January 18, 1990, approved the
Fund's name change from "Progressive Income Equity Fund, Inc." to "Liberty
Utility Fund, Inc."
Shares of the Fund are offered in three classes, known as Class A Shares, Class
B Shares, and Class C Shares (individually and collectively referred to as
"Shares," as the context may require). This Combined Statement of Additional
Information relates to all three classes of the above mentioned Shares.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The primary investment objectives of the Fund are current income and long-term
growth of income. Capital appreciation is a secondary objective. The Fund will
seek to achieve its investment objectives by investing in a diversified
portfolio comprised primarily of equity securities. The investment objectives
cannot be changed without approval of shareholders.
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.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
- instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or
if the principal amount of the instrument is insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"), or the Savings Association Insurance
Fund ("SAIF"), which is administered by the FDIC; and
- prime commercial paper (rated A-1 by Standard and Poor's Ratings Group,
Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch Investors
Service).
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
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.
UNITS OF MASTER LIMITED PARTNERSHIPS
The Fund may invest in units of participation in master limited partnerships.
Master limited partnerships are generally partnerships with a large number of
limited partners whose ownership interests are publicly traded. The Fund will
not invest in partnerships investing in real estate or real estate investments.
The Fund will invest only in units of participation in master limited
partnerships that are traded on a national securities exchange.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is a fixed
income security (a bond or preferred stock) which may be converted at a stated
price within a specified period of time into a certain quantity of common stock
of the same or a different issuer. Convertible securities are senior to common
stocks in a corporation's capital structure,
- --------------------------------------------------------------------------------
but are usually subordinated to similar nonconvertible securities. While
providing a fixed income stream (generally higher in yield than the income
derivable from a common stock but lower than that afforded by a similar
nonconvertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security's
underlying common stock.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are 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 deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Board of Directors (the
"Directors").
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.
RESTRICTED SECURITIES
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. Section
4(2) 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) 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) paper, thus providing liquidity.
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the staff of the Securities and Exchange Commission has left
the question of determining the liquidity of all restricted securities (eligible
for resale under Rule 144A) for determination by the Directors. The Directors
consider the following criteria in determining the liquidity of certain
restricted securities:
- - the frequency of trades and quotes for the security;
- - the number of dealers willing to purchase or sell the security and the number
of potential buyers;
- - dealer undertakings to make a market in the security; and
- - the nature of the security and the nature of the marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or 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 transactions 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 assets are marked to market daily
and are maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of its
assets.
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. 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.
When effecting reverse repurchase agreements, liquid 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. These securities are
marked to market daily and maintained until the transaction is settled.
COVERED CALL OPTIONS
The Fund will receive a premium for writing a call option which increases the
Fund's return in the event the option expires unexercised or is closed out at a
profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option and the volatility of the market
price of the underlying security. By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option.
The Fund may terminate a call option it has written prior to expiration of the
option by entering into a closing purchase transaction in which it purchases an
option having the same terms as the option written. The Fund will realize a gain
or loss from such transaction if the cost of such transaction is less or more
than the premium received from writing the option. Because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from repurchase of a call
option is likely to be offset in whole or in part by the unrealized appreciation
of the underlying security owned by the Fund.
PORTFOLIO TURNOVER
The Fund's investment adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. However, relatively high portfolio turnover
may result in high transaction costs to the Fund. For the fiscal years ended
February 28, 1994 and 1993, the portfolio turnover rates were 24% and 18%,
respectively.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described below
without approval of shareholders.
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of its total assets (valued at the
time of investment) in securities of companies engaged principally in any
one industry other than the utilities industry, except that this
restriction does not apply to cash or cash items and securities issued or
guaranteed by the United States government or its agencies or
instrumentalities.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not purchase securities on margin, or make short sales of
securities, except for the use of short-term credit necessary for the
clearance of purchases and sales of portfolio securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not borrow money, issue senior securities, or pledge
assets, except that under certain circumstances the Fund may borrow money
and engage in reverse repurchase transactions in amounts up to one-third
of the value of its net assets, including the amounts borrowed, and
pledge up to 10% of the value of those assets to secure such borrowings.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or 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
(including reverse repurchase agreements) 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.
PLEDGING ASSETS
The Fund will not pledge, mortgage, or hypothecate its assets, except to
secure permitted borrowings. In those cases, it may pledge, mortgage, or
hypothecate up to 10% of the value of assets to secure such borrowings.
- --------------------------------------------------------------------------------
The preceding limitations regarding buying on margin, borrowing money, and
pledging assets do not apply to intra-day cash advances made by the Fund's
custodian, or the grant of a security interest in securities by the Fund to its
custodian to collateralize such intra-day cash advances in order to enable the
Fund to settle securities purchases or to redeem shares of the Fund.
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, which have been in
operation for less than three years.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
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 objectives, policies, and
limitations.
DIVERSIFICATION OF INVESTMENTS
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) 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.
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 objectives and policies.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under federal securities law (except
for commercial paper issued under Section 4(2) of the Securities Act of
1933).
WRITING COVERED CALL 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's investment in put or call
options, straddles, spreads, or any combination thereof shall not exceed
5% of the Fund's total assets.
INVESTING IN WARRANTS
The Fund will limit its investment in warrants to 5% of net assets, not
more than 2% of which can be warrants not listed on recognized exchanges.
INVESTING IN SECURITIES OF FOREIGN ISSUERS
The Fund will limit its ability to purchase securities of foreign issuers
to not more than 15% of total assets in securities of foreign issuers not
listed on recognized exchanges.
INVESTING IN ILLIQUID SECURITIES
The Fund will limit its investment in illiquid securities, including
repurchase agreements providing for settlement in more than seven days
after notice, to not more than 15% of net assets.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND DIRECTORS 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 1/2 of 1% of the issuer's securities together own more than
5% of the issuer's securities.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or mineral exploration
or development programs, except it may purchase the securities of issuers
which invest in or sponsor such programs.
- --------------------------------------------------------------------------------
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate or any interest therein,
except that the Fund may invest in securities secured by real estate or
interests therein, such as mortgage pass-throughs, pay-throughs,
collateralized mortgage obligations, and securities issued by companies
that invest in real estate or interests therein. The Fund will not invest
in limited partnerships investing in real estate or real estate
investments.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase or retain shares of any open-end investment
company (exclusive of shares acquired as a result of merger,
consolidation, or other plan of reorganization).
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not invest for the purpose of exercising control over or
management of any company.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts.
In addition, in order to comply with certain state restrictions, the Fund will
not invest in oil, gas, or mineral leases. If state requirements change, this
limitation may be amended without notice to shareholders.
The Fund will not purchase any securities while borrowings in excess of 5% of
the value of its total assets are outstanding.
The Fund did not borrow money or invest in reverse repurchase agreements in
excess of 5% of the value of its net assets during the last fiscal year and has
no present intention to do so in the current fiscal 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
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
LIBERTY UTILITY FUND, INC., MANAGEMENT
- --------------------------------------------------------------------------------
Officers and Directors are listed with their addresses, principal occupations,
and present positions.
- --------------------------------------------------------------------------------
John F. Donahue*+
Federated Investors Tower
Pittsburgh, PA
Chairman and Director of the Fund
Chairman and Trustee, Federated Investors; Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue, Vice
President and Director of the Fund.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director of the Fund
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
- --------------------------------------------------------------------------------
William J. Copeland
One PNC Plaza-23rd Floor
Pittsburgh, PA
Director of the Fund
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director of the Fund
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director of the Fund
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
President and Director of the Fund
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA
Director of the Fund
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park Restaurants,
Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Director of the Fund
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Director of the Fund
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director of the Fund
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, RAND Corporation, Online Computer Library Center, Inc.,
and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director of the Fund
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
Daniel A. Burkhardt
201 Progress Parkway
Maryland Heights, MO
Vice President of the Fund
Director, Essex County Gas Company, Amesbury, Massachusetts; Galaxy Cablevision
Management, Sikeston, Missouri; Dial Real Estate Investment Trust, Omaha,
Nebraska; St. Joseph Light & Power Company, St. Joseph, Missouri; Chairman,
Community Service Radio, Peoria, Illinois; Chairman and President of Community
Investment Partners, L.P., St. Louis, Missouri.
- --------------------------------------------------------------------------------
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Vice President of the Fund
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
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.
- --------------------------------------------------------------------------------
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer of the Fund
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary of the Fund
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Trustee and Secretary, Federated Shareholder Services; Director and
Executive Vice President, Federated Securities Corp.; Vice President and
Secretary of the Funds.
- --------------------------------------------------------------------------------
* This Director is deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
+ Members of the Fund's Executive Committee. The Executive Committee of the
Board handles the responsibilities of the Board 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; 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 Institutional Trust; Federated
Intermediate Government Trust; Federated Master Trust; Federated Municipal
Trust; Federated Short-Intermediate Government 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; The Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New
York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; 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 8, 1994, the following shareholder of record owned 5% or more of the
outstanding Class A Shares of the Fund: Merrill Lynch, Pierce, Fenner & Smith
(as record owner holding Class A Shares for its clients), Jacksonville, Florida,
owned approximately 5,874,985 Shares (8.11%).
As of July 8, 1994, the following shareholder of record owned 5% or more of the
outstanding Class C Shares of the Fund: Merrill Lynch, Pierce, Fenner & Smith
(as record owner holding Class C Shares for its clients), Jacksonville, Florida,
owned approximately 2,540,078 Shares (44.93%).
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser, Passport Research, Ltd. (the "Adviser"), was
organized as a Pennsylvania limited partnership in 1981. Federated Advisers is
the general partner of the Adviser and has a 50.5% interest in the Adviser. The
limited partner of the Adviser is Edward D. Jones & Co., which owns a 49.5%
interest in the adviser. Federated Advisers is owned by FII Holdings, Inc., 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.
At any time, Edward D. Jones & Co. can require Federated Investors to repurchase
all of its partnership interest in the Adviser at the then current book value.
Edward D. Jones & Co. cannot transfer, sell, or assign its partnership interest
in the Adviser without first offering it to Federated Investors.
As long as Edward D. Jones & Co. owns a partnership interest in the Adviser, it
cannot acquire, organize, or cause the organization of any other money market
mutual fund or enter into arrangements with an investment adviser or underwriter
of any other money market mutual fund in which Edward D. Jones & Co. will offer
the shares of the other money market mutual fund. Edward D. Jones & Co. has
agreed not to solicit proxies in opposition to management of the Fund unless a
court of competent jurisdiction finds the conduct of a majority of the Board of
Directors constitutes willful misfeasance, bad faith, gross negligence, or
reckless disregard of its duties.
All of the officers of the Fund, except Daniel A. Burkhardt, are officers of the
Adviser. The relationships are described under 'Fund Management--Officers and
Directors.'
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, Passport Research, Ltd. receives an annual investment
advisory fee as described in the prospectus. During the fiscal years ended
February 28, 1994, and 1993, and February 29, 1992, the Adviser earned
$6,774,071, $4,017,913, and $1,741,765, respectively, which were reduced by
$1,510,782, $22,320, and $437,123, respectively.
STATE EXPENSE LIMITATION
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 1/2% 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 1/2% 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 expense
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.
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 the fiscal years ended February 28, 1994 and 1993, and February 29, 1992,
Federated Administrative Services, Inc., earned $959,288, $576,939, and
$345,896, respectively. Dr. Henry J. Gailliot, an officer of the Adviser to the
Fund, holds approximately 20% of the outstanding common stock and serves as a
director of Commercial Data Services, Inc., a company which provides computer
processing services to Federated Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
- --------------------------------------------------------------------------------
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee is based on the size, type and number of accounts
and transactions made by shareholders.
Federated Services Company also maintains the Fund's accounting records. The fee
is based on the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the 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 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 relation to the value of the brokerage and
research services provided. The Fund anticipates that Edward D. Jones & Co.,
which is the limited partner of the Adviser, may upon occasion, subject to
certain restrictions, act as broker or dealer in connection with portfolio
transactions for the Fund.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising certain other accounts. To the
extent that receipt of these services may supplant services for which the
Adviser or its affiliates might otherwise have paid, it would tend to reduce
their expenses.
For the fiscal years ended February 28, 1994 and 1993, and February 29, 1992,
the Fund paid $636,925, $540,200, and $384,799, respectively, in brokerage
commissions on brokerage transactions.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales load on Class A Shares
only) on days the New York Stock Exchange is open for business. The procedure
for purchasing Shares of the Fund is explained in the respective prospectuses
under "Investing in Class A Shares," "Investing in Class B Shares" or "Investing
in Class C Shares."
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to simulate distribution
activities and 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, marketing efforts; 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.
By adopting the Distribution Plan (Class B and Class C Shares only), the
Directors expect that the Fund will be able to achieve a more predictable flow
of cash for investment purposes and to meet redemptions. This will facilitate
more efficient portfolio management and assist the Fund in pursuing its
investment objectives. By identifying potential investors whose needs are served
by the Fund's objectives, and properly servicing these accounts, it may be
possible to curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
During the fiscal year ended February 28, 1994, payments in the amount of
$230,438 were made pursuant to the Distribution Plan, all of which was paid to
financial institutions. In addition, for the fiscal year ended February 28,
1994, payments in the amount of $2,256,405 were made pursuant to the Shareholder
Services Plan.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated Advisers,
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 load and
are not subject to a contingent deferred sales charge (Class B Shares and Class
C Shares only) to the extent the financial institution through which the Shares
are sold agrees to waive any initial payment to which it might otherwise be
entitled. Shares may also be sold without sales charges to trusts or pension of
profit-sharing plans for these persons and to persons who elect to sweep into
the Fund (i.e., directly invest) the dividends payable on shares of common and
preferred stock, unit investment trusts, and closed-end investment companies,
owned directly or indirectly of such 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 respective prospectuses.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
- - 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; or
- - for short-term obligations, according to the 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
at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider yield, quality, coupon
rate, maturity, type of issue, trading characteristics, and other market data.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions of Class B Shares and
Class C Shares may be subject to a contingent deferred sales charge.
- --------------------------------------------------------------------------------
Redemption procedures are explained in the respective prospectuses under
"Redeeming Class A Shares," "Redeeming Class B Shares" or "Redeeming Class C
Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price, in whole or in part, by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Directors determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem Shares for any shareholder
in cash up to the lesser of $250,000 or 1% of a class of Shares' net asset value
during any 90-day period.
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.
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 gains on 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. Only a nominal portion of any income
dividend paid by the Fund is expected to be eligible for the dividends received
deduction available to corporations. 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
Fund Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for Class A Shares for the one-year
period ended February 28, 1994, and for the period from May 27, 1988 (effective
date) to February 28, 1994, were 0.21% and 13.14%, respectively.
The Fund's cumulative total return for Class C Shares for the period from April
30, 1993 (effective date) to February 28, 1994 was 2.27%.
The average annual total return for all classes of Shares of 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 offering price 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 quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Class A Shares and Class C Shares were 4.82% and 4.31%,
respectively, for the thirty-day period ended February 28, 1994.
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per Share of any class of Shares 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 any
class of Shares because of certain adjustments required by the SEC and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance of each class of Shares 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 the Fund's or a class of Shares' expenses; and
- - various other factors.
A class of Shares' 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 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., for example, makes comparative calculations
for one month, three month, one year, and five year periods which assume the
reinvestment of all capital gains distributions and income dividends.
- - 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 any class of Shares may quote
total returns which are calculated on nonstandardized base periods. These total
returns also represent the historic change in the value of an investment in any
class of Shares based on quarterly reinvestment of dividends over a specified
period of time.
From time to time, the Fund may advertise the performance of any class of Shares
using charts, graphs and descriptions, compared to federally insured bank
products including certificates of deposit and time deposits and to money market
funds using the Lipper Analytical Services money market instruments average.
Advertisements may quote performance information which does not reflect the
effect of a sales load or contingent deferred sales charge, as applicable.
LIBERTY UTILITY FUND, INC.
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
COMMON STOCKS--64.6%
- --------------------------------------------------------------------------------------------------
UTILITIES--58.3%
--------------------------------------------------------------------------------
500,000 Allegheny Power Systems, Inc. $ 12,062,500
--------------------------------------------------------------------------------
129,000 American Electric Power Co., Inc. 4,273,125
--------------------------------------------------------------------------------
525,000 Baltimore Gas & Electric Co. 12,206,250
--------------------------------------------------------------------------------
800,000 BCE, Inc. 28,900,000
--------------------------------------------------------------------------------
625,000 British Telecommunications ADR 18,734,375
--------------------------------------------------------------------------------
600,000 Carolina Power & Light Co. 16,350,000
--------------------------------------------------------------------------------
200,000 Cilcorp, Inc. 6,775,000
--------------------------------------------------------------------------------
500,000 Cincinnati Gas & Electric Co. 12,250,000
--------------------------------------------------------------------------------
450,000 CMS Energy Corp. 10,293,750
--------------------------------------------------------------------------------
418,000 Consolidated Edison Co. 12,383,250
--------------------------------------------------------------------------------
500,000 Detroit Edison Co. 14,062,500
--------------------------------------------------------------------------------
650,000 DPL, Inc. 12,918,750
--------------------------------------------------------------------------------
500,000 DQE, Inc. 15,875,000
--------------------------------------------------------------------------------
300,000 Duke Power Co. 11,587,500
--------------------------------------------------------------------------------
390,600 Entergy Corp. 12,987,450
--------------------------------------------------------------------------------
400,000 Florida Progress Corp. 11,850,000
--------------------------------------------------------------------------------
650,000 General Public Utilities 18,606,250
--------------------------------------------------------------------------------
475,000 GTE Corp. 15,496,875
--------------------------------------------------------------------------------
300,000 Hong Kong Telecommunications ADR 17,062,500
--------------------------------------------------------------------------------
325,000 Ipalco Enterprises, Inc. 10,603,125
--------------------------------------------------------------------------------
600,000 Long Island Lighting Co. 13,875,000
--------------------------------------------------------------------------------
310,000 MCN Corp. 11,935,000
--------------------------------------------------------------------------------
66,000 Niagara Mohawk Power Corp. 1,237,500
--------------------------------------------------------------------------------
630,000 Nipsco Industries, Inc. 19,057,500
--------------------------------------------------------------------------------
625,000 Northeast Utilities Co. 14,609,375
--------------------------------------------------------------------------------
500,000 NYNEX Corp. 18,625,000
--------------------------------------------------------------------------------
800,000 Pacific Enterprises 17,000,000
--------------------------------------------------------------------------------
1,000,000 Pacificorp 18,000,000
--------------------------------------------------------------------------------
700,000 Peco Energy Co. 18,812,500
--------------------------------------------------------------------------------
273,000 Peoples Energy Corp. 8,155,875
--------------------------------------------------------------------------------
600,000 Pinnacle West Capital Corp. 12,825,000
--------------------------------------------------------------------------------
400,000 PSI Resources, Inc. 9,600,000
--------------------------------------------------------------------------------
600,000 Public Service Enterprises Group, Inc. 18,225,000
--------------------------------------------------------------------------------
750,000 Sonat, Inc. 22,781,250
--------------------------------------------------------------------------------
375,000 Southern Co. 15,421,875
--------------------------------------------------------------------------------
401,400 Southern New England Telecommunications Corp. 12,694,275
--------------------------------------------------------------------------------
420,000 UGI Corp. New 9,660,000
--------------------------------------------------------------------------------
</TABLE>
LIBERTY UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -------------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
UTILITIES--CONTINUED
--------------------------------------------------------------------------------
500,000 Utilicorp, Inc. $ 14,625,000
--------------------------------------------------------------------------------
550,000 Western Resources, Inc. 16,706,250
-------------------------------------------------------------------------------- ------------
Total 549,124,600
-------------------------------------------------------------------------------- ------------
CONSUMER SERVICES--2.2%
--------------------------------------------------------------------------------
275,000 CBL & Associate Properties, Inc. 5,431,250
--------------------------------------------------------------------------------
586,000 Simon Property Group, Inc. 15,089,500
-------------------------------------------------------------------------------- ------------
Total 20,520,750
-------------------------------------------------------------------------------- ------------
ENERGY--1.7%
--------------------------------------------------------------------------------
255,000 Texaco, Inc. 16,543,125
-------------------------------------------------------------------------------- ------------
HEALTH CARE--1.9%
--------------------------------------------------------------------------------
525,000 Meditrust REIT 17,521,875
-------------------------------------------------------------------------------- ------------
CONSUMER DURABLE--0.5%
--------------------------------------------------------------------------------
335,000 Southwestern Properties REIT 4,438,750
-------------------------------------------------------------------------------- ------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $567,147,006) 608,149,100
-------------------------------------------------------------------------------- ------------
PREFERRED STOCKS--28.9%
- --------------------------------------------------------------------------------------------------
ADJUSTABLE RATE PREFERRED STOCKS--6.2%
--------------------------------------------------------------------------------
162,600 Enserch Corp., ARPS 16,422,600
--------------------------------------------------------------------------------
180,000 Illinois Power Co., Pfd. B, ARPS 9,022,500
--------------------------------------------------------------------------------
335,000 Niagara Mohawk Power Corp., C, ARPS 8,542,500
--------------------------------------------------------------------------------
100,000 Texas Utilities Electric Co., A, ARPS 9,700,000
--------------------------------------------------------------------------------
52,000 Texas Utilities Electric Co., Pfd. B, ARPS 5,252,000
--------------------------------------------------------------------------------
255,050 Toledo Edison Co., Pfd. B, ARPS 6,440,013
--------------------------------------------------------------------------------
66,508 USX Marathon Group Corp., ARPS 3,333,714
-------------------------------------------------------------------------------- ------------
Total 58,713,327
-------------------------------------------------------------------------------- ------------
CONVERTIBLE PREFERRED STOCKS--22.0%
--------------------------------------------------------------------------------
1,025,000 Citicorp, Conv. Pfd., Series P, 8.25% 20,500,000
--------------------------------------------------------------------------------
185,000 * Cointel/Telefonica De Argentina Prides, Conv. Pfd., 7.00% 13,220,100
--------------------------------------------------------------------------------
200,000 Freeport McMoran, Inc., Conv. Pfd., $4.375 10,025,000
--------------------------------------------------------------------------------
230,000 Kaufman and Broad Home Corp., Conv. Pfd., Series B, 8.75% 4,830,000
--------------------------------------------------------------------------------
400,000 * Occidental Petroleum, Conv. Pfd., 7.75% 20,800,000
--------------------------------------------------------------------------------
450,000 * Phillipine Long Distance, Conv. Pfd., 5.75% 19,068,750
--------------------------------------------------------------------------------
200,000 Reynolds Metals Co., Conv. Pfd., 7.00% 10,450,000
--------------------------------------------------------------------------------
2,500,000 RJR Nabisco Holdings, Conv. Pfd., 8.25% 17,812,500
--------------------------------------------------------------------------------
475,000 Sears Roebuck & Co., Conv. Pfd., Series A, $3.75 25,650,000
--------------------------------------------------------------------------------
300,000 Sun America, Inc., Conv. Pfd., Series D, $2.78 11,550,000
--------------------------------------------------------------------------------
653,400 Sun America, Inc., Conv. Pfd., Series P, $8.50 11,516,175
--------------------------------------------------------------------------------
450,000 Tenneco, Inc., Conv. Pfd., 9.50% 18,843,750
--------------------------------------------------------------------------------
365,000 Unisys Corp., Conv. Pfd., $3.75 18,341,250
--------------------------------------------------------------------------------
144,000 Utilicorp, Inc., Conv. Pfd. $1.78 4,068,000
-------------------------------------------------------------------------------- ------------
Total 206,675,525
-------------------------------------------------------------------------------- ------------
</TABLE>
LIBERTY UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- ----------- -------------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
PREFERRED STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
PREFERRED INVERSE FLOATING STOCKS--0.7%
--------------------------------------------------------------------------------
54 * Potomac Electric Power Co., Pfd. Inv., Series 1991B $ 6,385,500
-------------------------------------------------------------------------------- ------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST, $244,455,019) 271,774,352
-------------------------------------------------------------------------------- ------------
CONVERTIBLE CORPORATE BONDS--3.9%
- --------------------------------------------------------------------------------------------------
BROADCASTING--1.9%
--------------------------------------------------------------------------------
$44,000,000 Turner Broadcasting System, Inc., LYON, 7.25%, accrual 2/13/2007 17,985,000
-------------------------------------------------------------------------------- ------------
UTILITIES--2.0%
--------------------------------------------------------------------------------
10,000,000 * National Power, 6.25% Conv. Bonds, 9/23/2008 18,817,803
-------------------------------------------------------------------------------- ------------
TOTAL CONVERTIBLE CORPORATE BONDS (IDENTIFIED COST, $33,601,473) 36,802,803
-------------------------------------------------------------------------------- ------------
**REPURCHASE AGREEMENT--2.5%
- --------------------------------------------------------------------------------------------------
23,675,000 J.P. Morgan Securities, Inc., 3.49%, dated 2/28/94, due 3/1/94
(at amortized cost) (Note 2B) 23,675,000
-------------------------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST, $868,878,498) $940,401,255+
-------------------------------------------------------------------------------- ------------
</TABLE>
* Restricted securities--Investment in securities not registered under the
Securities Act of 1933. At the end of the period, these securities amounted
to 8.3% of net assets (Note 2G).
** The repurchase agreement is fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio. The investment in the
repurchase agreement is through participation in a joint account with other
Federated Funds.
+ The cost of investments for federal tax purposes amounts to $868,878,498 at
February 28, 1994. The net unrealized appreciation on a federal tax basis
amounts to $71,522,757, which is comprised of $89,061,458 appreciation and
$17,538,701 depreciation, at February 28, 1994.
Note: The categories of investments are shown as a percentage of net assets
($941,922,323) at February 28, 1994.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
ADR -- American Depository Receipts
ARPS -- Adjustable Rate Preferred Stock
LYON -- Liquid Yield Option Note
REIT -- Real Estate Investment Trust
</TABLE>
(See Notes which are an integral part of the Financial Statements)
LIBERTY UTILITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B) (identified and tax cost, $868,878,498) $940,401,255
- -----------------------------------------------------------------------------------------------
Cash 47,700
- -----------------------------------------------------------------------------------------------
Receivable for investments sold 11,260,624
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 5,906,640
- -----------------------------------------------------------------------------------------------
Receivable for capital stock sold 2,322,591
- ----------------------------------------------------------------------------------------------- ------------
Total assets 959,938,810
- -----------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------
Payable for investments purchased $13,320,000
- ---------------------------------------------------------------------------------
Payable for capital stock redeemed 3,900,138
- ---------------------------------------------------------------------------------
Accrued expenses and other liabilities 796,349
- --------------------------------------------------------------------------------- -----------
Total liabilities 18,016,487
- ----------------------------------------------------------------------------------------------- ------------
NET ASSETS for 76,940,337 shares of capital stock outstanding $941,922,323
- ----------------------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------
Paid-in capital $846,626,193
- -----------------------------------------------------------------------------------------------
Unrealized appreciation of investments 71,522,757
- -----------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 9,475,267
- -----------------------------------------------------------------------------------------------
Undistributed net investment income 14,298,106
- ----------------------------------------------------------------------------------------------- ------------
Total $941,922,323
- ----------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE PER SHARE:
- -----------------------------------------------------------------------------------------------
Class A Shares (net assets of $877,512,912 / 71,672,469 shares of capital stock outstanding) $ 12.24
- ----------------------------------------------------------------------------------------------- ------------
Class C Shares (net assets of $64,409,411 / 5,267,868 shares of capital stock outstanding) $ 12.23
- ----------------------------------------------------------------------------------------------- ------------
OFFERING PRICE PER SHARE:
- -----------------------------------------------------------------------------------------------
Class A Shares (100/95.5 of $12.24) $ 12.82*
- ----------------------------------------------------------------------------------------------- ------------
Class C Shares $ 12.23
- ----------------------------------------------------------------------------------------------- ------------
REDEMPTION PROCEEDS PER SHARE:
- -----------------------------------------------------------------------------------------------
Class A Shares $ 12.24
- ----------------------------------------------------------------------------------------------- ------------
Class C Shares (99/100 of $12.23) $ 12.11**
- ----------------------------------------------------------------------------------------------- ------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Redeeming Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
LIBERTY UTILITY FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------------------
Dividends (Note 2C) $ 48,595,296
- -----------------------------------------------------------------------------------------------
Interest (Note 2C) 4,878,009
- ----------------------------------------------------------------------------------------------- ------------
Total income 53,473,305
- -----------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 6,774,071
- ---------------------------------------------------------------------------------
Directors' fees 20,491
- ---------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 959,288
- ---------------------------------------------------------------------------------
Custodian and recordkeeper fees 213,407
- ---------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 802,987
- ---------------------------------------------------------------------------------
Shareholder servicing fee (Note 5) 2,256,405
- ---------------------------------------------------------------------------------
Distribution services fee (Note 5) 230,438
- ---------------------------------------------------------------------------------
Capital stock registration fees 207,404
- ---------------------------------------------------------------------------------
Auditing fees 30,269
- ---------------------------------------------------------------------------------
Legal fees 25,337
- ---------------------------------------------------------------------------------
Printing and postage 171,243
- ---------------------------------------------------------------------------------
Taxes 87,078
- ---------------------------------------------------------------------------------
Insurance premiums 19,600
- ---------------------------------------------------------------------------------
Miscellaneous 10,936
- --------------------------------------------------------------------------------- -----------
Total expenses 11,808,954
- ---------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 5) 1,510,782
- --------------------------------------------------------------------------------- -----------
Net expenses 10,298,172
- ----------------------------------------------------------------------------------------------- ------------
Net investment income 43,175,133
- ----------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) 12,441,016
- -----------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (18,342,651)
- ----------------------------------------------------------------------------------------------- ------------
Net realized and unrealized loss on investments (5,901,635)
- ----------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 37,273,498
- ----------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
LIBERTY UTILITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-----------------------------
1994 1993
------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------
Net investment income $ 43,175,133 $ 31,948,020
- -------------------------------------------------------------------------------
Net realized gain (loss) on investments ($11,416,757 net gain and $2,500,511
net gain, respectively, as computed for federal income tax purposes) 12,441,016 1,476,253
- -------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (18,342,651) 68,494,526
- ------------------------------------------------------------------------------- ------------- ------------
Change in net assets resulting from operations 37,273,498 101,918,799
- ------------------------------------------------------------------------------- ------------- ------------
NET EQUALIZATION (DEBITS)/CREDITS (Note 2F) 1,150,284 3,599,572
- ------------------------------------------------------------------------------- ------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS (Note 3)--
- -------------------------------------------------------------------------------
Dividends to shareholders from net investment income
- -------------------------------------------------------------------------------
Class A Shares (41,477,441) (29,470,349)
- -------------------------------------------------------------------------------
Class C Shares (965,765) --
- -------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investments
- -------------------------------------------------------------------------------
Class A Shares (2,715,075) (4,381,113)
- -------------------------------------------------------------------------------
Class C Shares (101,609) --
- ------------------------------------------------------------------------------- ------------- ------------
Change in net assets from distributions to shareholders (45,259,890) (33,851,462)
- ------------------------------------------------------------------------------- ------------- ------------
CAPITAL STOCK TRANSACTIONS (NOTE 4)--
- -------------------------------------------------------------------------------
Proceeds from sale of shares 327,197,815 327,761,325
- -------------------------------------------------------------------------------
Net asset value of shares issued to shareholders electing to receive
payment of distributions in capital stock 31,818,829 22,789,102
- -------------------------------------------------------------------------------
Cost of shares redeemed (149,769,576) (58,362,219)
- ------------------------------------------------------------------------------- ------------- ------------
Change in net assets from capital stock transactions 209,247,068 292,188,208
- ------------------------------------------------------------------------------- ------------- ------------
Change in net assets 202,410,960 363,855,117
- -------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------
Beginning of period 739,511,363 375,656,246
- ------------------------------------------------------------------------------- ------------- ------------
End of period (including undistributed net investment income of $14,298,106 and
$12,415,895, respectively) $ 941,922,323 $739,511,363
- ------------------------------------------------------------------------------- ------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
LIBERTY UTILITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Effective April 30, 1993 (the effective date for the Class C Shares), Liberty
Utility Fund, Inc. (the "Fund") provides two classes of shares Class A Shares
and Class C Shares. Class A Shares and Class C Shares are identical in all
respects except that Class A Shares are subject to a sales load, and Class C
Shares are sold pursuant to a distribution plan ("Plan") adopted in accordance
with Investment Company Act Rule 12b-1. Under the Plan, the Fund may pay
Federated Securities Corp. (the "distributor") a fee at an annual rate of up to
.75 of 1% of the average daily net asset value of Class C Shares to finance any
activity which is principally intended to result in the sale of Class C Shares.
(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. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Equity securities listed on the New York Stock Exchange or any other national
securities exchange are valued at the last sale price or, if there has been no sale on that day, at the
mean between bid and asked prices. Unlisted equity securities are valued at the latest mean prices.
Bonds and other fixed income portfolio securities (which may trade on a national securities exchange
and/or over the counter) are valued at the last sale price on a national securities exchange on that
day, if available; otherwise they shall be valued on the basis of prices provided by an independent
pricing service, when such prices are believed to reflect the fair market value of such securities.
Short-term obligations shall ordinarily be valued at the mean between bid and asked prices as furnished
by an independent pricing service. However, short-term obligations with maturities of 60 days or less
are valued at amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take possession, to
have legally segregated in the Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to monitor, on a daily basis,
the market value of each repurchase agreement's underlying securities to ensure the existence of a
proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be creditworthy pursuant
to guidelines established by the Directors. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual
basis. Interest income includes interest, and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including original issue discount as
required by the Internal Revenue Code, as amended. Dividends to shareholders and capital gain
distributions, if any, are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Internal Revenue Code, as
amended, applicable to regulated investment companies and to distribute to shareholders each year all of
its taxable income. Accordingly, no provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or delayed delivery
transactions. To the extent the Fund engages in such transactions, it will do so for the purpose of
acquiring portfolio securities consistent with its investment objective and policies and not for the
purpose of investment leverage. The Fund will record a when-issued security and the related liability on
the trade date. Until the securities are received and paid for, the Fund will maintain 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.
F. 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.
G. RESTRICTED SECURITIES--The Fund is permitted to invest in privately placed restricted securities. These
securities may be resold in transactions exempt from registration or to the public if the securities are
registered. Disposal of these securities may involve time-consuming negotiations and expenses, and
prompt sale at an acceptable price may be difficult. Additional information on each restricted security
held at February 28, 1994, is as follows:
</TABLE>
LIBERTY UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACQUISITION
COST
SECURITY ACQUISITION DATE PER UNIT
------------------------------------------------------- -------------------- ------------
<S> <C> <C>
Cointel/Telefonica De Argentina Prides 2/24/94 $ 72
-------------------------------------------------------
National Power 10/4/93 163
-------------------------------------------------------
Occidental Petroleum 2/11/93 50
-------------------------------------------------------
Phillipine Long Distance 10/9/92 25
-------------------------------------------------------
Potomac Electric Power Co. 10/15/91 and 8/3/92 110,630
-------------------------------------------------------
H. OTHER--Investment transactions are accounted for on the trade date of the transaction.
</TABLE>
(3) DIVIDENDS
Dividends are declared and paid quarterly, and the Fund intends to distribute
net realized capitals gains, if any, at least annually. Shareholders may elect
to have all distributions of dividends and capital gains automatically
reinvested in additional shares of the Fund.
(4) CAPITAL STOCK
At February 28, 1994, there were 1,000,000,000 shares of $.001 par value stock
authorized. Of these shares, 375,000,000 have been designated Class A Shares of
the Fund and 375,000,000 as Class C Shares of the Fund. Transactions in capital
stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------------
1994 1993
---------------------------- --------------------------
SHARES DOLLARS SHARES DOLLARS
- ---------------------------------------------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Class A Shares:
- ----------------------------------------------------
Shares outstanding, beginning of period 60,148,409 $ 637,379,125 34,048,199 $345,190,917
- ----------------------------------------------------
Shares sold 20,606,339 255,156,993 29,234,867 327,761,325
- ----------------------------------------------------
Shares issued to shareholders in payment
of dividends declared 2,539,366 31,371,725 2,064,175 22,789,102
- ----------------------------------------------------
Shares redeemed (11,621,645) (143,855,060) (5,198,832) (58,362,219)
- ---------------------------------------------------- ----------- ------------- ---------- ------------
Shares outstanding, end of period 71,672,469 $ 780,052,783 60,148,409 $637,379,125
- ---------------------------------------------------- ----------- ------------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
---------------------------------------------------------
1994 1993
-------------------------- --------------------------
SHARES DOLLARS SHARES DOLLARS
- ---------------------------------------------------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Class C Shares:
- ----------------------------------------------------
Shares outstanding, beginning of period -- -- -- --
- ----------------------------------------------------
Shares sold 5,706,191 $72,040,822 -- --
- ----------------------------------------------------
Shares issued to shareholders in payment
of dividends declared 35,769 447,104 -- --
- ----------------------------------------------------
Shares redeemed (474,092) (5,914,516) -- --
- ---------------------------------------------------- --------- -----------
Shares outstanding, end of period 5,267,868 $66,573,410 -- --
- ---------------------------------------------------- --------- -----------
</TABLE>
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Passport Research, Ltd., 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 has voluntarily agreed to waive a
portion of its fee. The Adviser can modify or terminate this voluntary waiver of
expense at any time at its sole discretion. For the year ended February 28,
1994, the advisory fee amounted to $6,774,071 of which $1,510,782 was
voluntarily waived.
LIBERTY UTILITY FUND, INC.
- --------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Class C Shares of the Fund, to finance activities intended to result in the sale
of the Fund's Class C Shares. The Plan provides that the Fund may incur
distribution expenses of up to .75 of 1% of the average daily net assets of the
Class C Shares, annually, to compensate FSC. For the year ended February 28,
1994, the Fund paid distribution service fees of $230,438.
Under the terms of a shareholder service agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS a fee to obtain certain personal
services for shareholders and the maintenance of shareholder accounts. The fee
is based on the level of average net assets for the period.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Effective March 1, 1994, Federated
Administrative Services, ("FAS") will provide administrative personnel and
services. The fee is based on the level of average aggregate net assets of the
total Federated Funds 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.
Certain of the officers and Directors of the Fund are officers and Directors of
the above corporations.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term obligations) for the
year ended February 28, 1994, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
PURCHASES $403,461,899
- -------------------------------------------------------------------------------------------- ------------
SALES $212,389,251
- -------------------------------------------------------------------------------------------- ------------
</TABLE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
LIBERTY UTILITY FUND, INC.:
We have audited the accompanying statement of assets and liabilities of Liberty
Utility Fund, Inc. including the portfolio of investments, as of February 28,
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 the respective prospectuses for Class A
Shares and Class C Shares) for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 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
Liberty Utility Fund, Inc. at February 28, 1994, the results of its operations
for the year then ended, 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 periods
indicated therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, PA
April 13, 1994
APPENDIX
- --------------------------------------------------------------------------------
DESCRIPTION OF BOND RATINGS
A rating by a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer.
Consequently, the Adviser believes that the quality of fixed income securities
in which the Fund invests should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell, or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than one
service, each rating is evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
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-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD AND POOR'S RATINGS GROUP LONG TERM DEBT RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. 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 effect 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.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- - Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
- - Well-established access to a range of financial markets and assured sources of
alternate liquidity.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
531545309
0011102B (9/94)
