[LOGO] FEDERATED
LIBERTY
UTILITY
FUND, INC.
7th ANNUAL REPORT
February 28, 1995
Established 1988
President's Message
Dear Fellow Shareholder:
I am pleased to present the 7th Annual Report for Liberty Utility Fund, Inc.
(the ``Fund'') for the 12-month period ended February 28, 1995. This report
includes an interview with the Fund's portfolio manager, Christopher H. Wiles,
Vice President of Federated Advisers. A listing of the Fund's Portfolio of
Investments and Financial Statements follows the interview. In the past 12
months, short-term interest rates were raised seven times by the Federal
Reserve Board. These interest rate increases impacted the entire utility
sector and affected the Fund's net asset value ("NAV") per share. The Fund's
Class A Share NAVdecreased from $12.24 to $10.98, Class B Share NAV increased
from $10.92 to $10.98, and Class C Share NAV declined from $12.23 to $10.98
during the 12-month period. The Fund's distributions were as follows: Class A
Shares paid $0.12 per share in short-term capital gains and $0.66 per share in
dividends for a total distribution of $0.78 per share. Class B Shares paid
$0.08 per share in dividends. Class C Shares paid $0.13 per share in short-term
capital gains and $0.60 per share in dividends for a total distribution of
$0.73 per share. On February 28, 1995, the Fund's total net assets were $820
million.
This utility fund is managed to reduce the interest rate risk in owning good
dividend-paying utility stocks. Utility securities are sensitive to interest
rate movement and, as interest rates rise, the value of utility securities can
fall. The Fund performed relatively well in relation to its peers, the S&P
Utility Index, and the Dow Jones Utility Index.* The Fund's investments are
broadly diversified with approximately 68% of assets in utilities and other
common stocks, 24% in adjustable rate preferred stocks and convertible
securities, and a 7% allocation in repurchase agreements. As a result of the
past year's market environment, it is a particularly good time to review the
history and the purpose of this income investment. Since 1988, when Liberty
Utility Fund, Inc. was created, the Fund's Class A Shares total return has
been positive for each fiscal year except the most recent annual reporting
period. The total return of Class A Shares since inception (May 27, 1988) and
for the one-year and five-year periods ended February 28, 1995 were 10.80%,
(6.41%), and 8.93%, respectively. The total return for Class B shares since
inception (September 28, 1994) to February 28, 1995 was (3.42%). Class C
Shares total return since inception (April 27, 1993) and for the one-year
period ended February 28, 1995 were 0.85% and (2.64%), respectively.**
I draw these performance numbers to your attention so that all present
shareholders can see the potential value of long-term investing in this utility
income fund. The Fund's performance year after year has come about through the
ownership of good dividend-paying utility stocks and ownership of
adjustable-rate preferred stocks and convertible securities. This broad
diversification has added to the Fund's long-term investment accomplishment.
We believe that utilities in this country and around the world represent good
conservative investments. Regardless of the short-term changes in the economy,
these corporations and their services will be in demand as they provide vital
services and living standards rise. The Fund remains a convenient way for
investors to pursue income with moderate growth potential over the long term.
Thank you for your continued confidence in this utility fund. I encourage
shareholders to consider adding to their accounts. Any questions or comments
you may have are most welcome.
Very sincerely yours,
Richard B. Fisher
President
April 15, 1995
*These indices are unmanaged.
**Performance quoted represents past performance. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost. Total returns quoted reflect
all applicable sales charges.
Investment Review
Christopher H. Wiles, CFA
Vice President,
Federated Advisers
Q. In 1994, the average utility stock declined 15%. What factors caused the
U.S. utility market to fall?
A. There are two main reasons for the sell-off in utility stocks last year.
First, and by far the largest factor, is rising interest rates. As long-term
interest rates rose nearly 2% (from 6.35% to 7.87%), utility stocks declined.
Because of the high dividend yields available for utility investors, utility
stocks are often used as bond surrogates and are therefore very interest rate
sensitive.
The second factor was the perceived threat of "re-regulation" and the added
competitive pressures that would result when regulatory agencies make changes
affecting the way many utility companies would conduct business, thereby
leveling the playing field for many companies.
Q. How did the average utility fund and the indices perform in this
environment?
A. The average utility fund, and there are now over 80 utility funds in the
U.S., was down approximately 9%.+ The Dow Jones Utility Index,* which does not
include telecommunications companies, was down 15.35%. The S&P Utility Index,*
which consists primarily of telecommunications and electric companies, was
down 7.91%. Electric utilities were the hardest hit group in the utility
sector in 1994.
Q. How did Liberty Utility Fund, Inc. perform?
A. The Fund's performance was respectable in 1994. Although the Fund's Class A
shares were down 7.96%** (based on NAV) for the year ended December 31, 1994,
the Fund outperformed the Dow Jones Utility Index and its peers. The Dow Jones
Utility Index total return was (15.35%), and the average utility fund tracked
by Lipper Analytical was (8.99%) for the same period.*** The Funds total
return based on offering price was (13.05%) as of December 31, 1994. Of course,
past performance is not indicative of future results.
+Source: Lipper Analytical Services, February, 1995.
*This index is unmanaged.
**Class B Shares total return for the period from September 28, 1994 to
December 31, 1994 was (7.33%). Class C Shares total return for the year ended
December 31, 1994 was (9.44%).
***These indices do not reflect sales charges.
Q. What strategy did you employ that helped the Fund perform better than other
utility funds?
A. I would like to point out the Fund is not 100% invested in utility stocks.
Assets are broadly diversified_approximately 68% in utility and other common
stocks; 24% in adjustable rate preferred stocks and convertible securities; and
7% in repurchase agreements.
We strive to take out some of the interest rate risk associated with investing
in utility stocks and still pursue income for shareholders.
Q. How have you structured the portfolio for the near future?
A. First, let's look at the portfolio's breakdown as of February 28, 1995.
SEE APPENDIX A
Of these assets, approximately 12% are invested in international holdings for
growth potential. To help guard against volatility in electrics, we're
continuing to diversify among other types of utilities as well as focusing on
those electric companies with both financial and management flexibility. We
believe the Fund is a broadly diversified portfolio with emphasis on pursuing
above-average current yield and total return.
Q. In December 1994, the utility sector began to show some improvement. How
should investors react to this market?
A. What investors need to focus on is the long-term valuation and growth
potential of equities. Utility stocks have historically provided investors
with respectable dividend income and dividend growth, which should lead to low
volatility over time.
Liberty Utility Fund, Inc. (Class A Shares)
Growth of $10,000 Invested in Liberty Utility Fund, Inc. (Class A Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Liberty Utility Fund, Inc. (Class A Shares) (the "Fund'') from May 27, 1988
(start of performance) to February 28, 1995, compared to the Standard & Poor's
500 Index (S&P500)+, the Standard & Poor's Utility Index (S&PUI)+ and the Dow
Jones Utility Average (DJUA)+.
SEE APPENDIX B
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they
may be worth more or less than original cost. Mutual funds are not obligations
of or guaranteed by any bank and are not federally insured.
*Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales load of 5.50% ($10,000 investment minus $550 sales load =
$9,450). The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P500, the S&PUI and the DJUA have been adjusted to
reflect reinvestment of dividends on securities in the indices.
**Represents a hypothetical investment of $10,000 in the Fund after decucting
the maximum sales load of 4.50% ($10,000 investment minus $450 sales load =
$9,550) that was in effect prior to October 1, 1994. As of October 1, 1994, the
maximum sales load was 5.50%. The Fund's performance assumes the reinvestment
of all dividends and distributions. The S&P500, The S&PUI and the DJUA have
been adjusted to reflect reinvestment of dividends on securities in the
indices.
***Total return quoted reflects all applicable sales loads.
+The S&P500, the S&PUI and the DJUA are not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. These indices are unmanaged.
Liberty Utility Fund, Inc. (Class B Shares)
Growth of $10,000 Invested in Liberty Utility Fund, Inc. (Class B Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Liberty Utility Fund, Inc. (Class B Shares) (the "Fund'') from September 28,
1994 (start of performance) to February 28, 1995, compared to the Standard &
Poor's 500 Index (S&P500)+, the Standard & Poor's Utility Index (S&PUI)+ and
the Dow Jones Utility Average (DJUA)+.
SEE APPENDIX C
Past Performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they
may be worth more or less than original cost. Mutual funds are not obligations
of or guaranteed by any bank and are not federally insured.
*Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 5.50% contingent deferred sales charge on any
redemption made within 1 full year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions. The
S&P500, the S&PUI and the DJUA have been adjusted to reflect reinvestment of
dividends on securities in the indices.
**Total return quoted reflects all applicable contingent deferred sales charges.
+The S&P500, the S&PUI and the DJUA are not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. These indices are unmanaged.
Liberty Utility Fund, Inc. (Class C Shares)
Growth of $10,000 Invested in Liberty Utility Fund, Inc. (Class C Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Liberty Utility Fund, Inc. (Class C Shares) (the "Fund'') from April 27, 1993
(start of performance) to February 28, 1995, compared to the Standard & Poor's
500 Index (S&P500)+, the Standard & Poor's Utility Index (S&PUI)+ and the Dow
Jones Utility Average (DJUA)+.
Past Performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they
may be worth more or less than original cost. Mutual funds are not obligations
of or guaranteed by any bank and are not federally insured.
SEE APPENDIX D
*Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 1.00% contingent deferred sales charge on any
redemption made within 1 full year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions. The
S&P500, the S&PUI and the DJUA have been adjusted to reflect reinvestment of
dividends on securities in the indices.
**Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P500, the S&PUI and the DJUA are not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. These indices are unmanaged.
Two Ways You May Seek to Invest for Success in
Liberty Utility Fund, Inc.
Initial Investment
If you had made an initial investment of $7,000 in the Class A Shares of
Liberty Utility Fund, Inc. on 5/27/88, reinvested your dividends and capital
gains, and didn't redeem any shares, your account would be worth $14,002 on
2/28/95. You would have earned a 10.80%* average annual total return for the
7-year investment lifespan_quite attractive for a utility stock fund,
especially during a time when the economic markets went through several cycles.
One key to investing wisely is to reinvest all distributions in Fund shares.
This increases the number of shares on which you can earn future dividends,
and you gain the benefit of compounding.
As of 3/31/95, the Class A Shares' average annual one-year, five-year, and
since inception (5/27/88) total returns were (1.76%), 8.99%, and 10.76%,
respectively. Class B Shares total return since inception (9/28/94) was
(3.04%). Class C Shares' average annual one-year and since inception (4/27/93)
total returns were 2.09% and 1.03%, respectively.
SEE APPENDIX E
* Total return represents the change in the value of an investment in Class A
Shares after reinvesting all income and capital gains, and takes into account
the 5.5% sales load applicable to an initial investment in Class A Shares. Data
quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so an investor's shares,
when redeemed, may be worth more or less than their original cost.
Liberty Utility Fund, Inc.
One Step at a Time
$1,000 invested each year for 7 years (reinvesting all dividends and capital
gains) grew to $9,571.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of Liberty
Utility Fund, Inc. on 5/27/88, reinvested your dividends and capital gains,
and didn't redeem any shares, you would have invested only $7,000, but your
account would have reached a total value of $9,571* by 2/28/95. You would have
earned an average annual total return of 8.31%.
A practical investment plan helps you pursue long-term performance from utility
securities. Through systematic investing, you buy shares on a regular basis
and reinvest all earnings. This investment plan works for you even if you
invest only $1,000 annually. You can take it one step at a time. Put time and
compounding to work!
SEE APPENDIX F
*No method of investing can guarantee a profit or protect against loss in down
markets. However, by investing regularly over time and buying shares at
various prices, investors can purchase more shares at lower prices. All
accumulated shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
Liberty Utility Fund, Inc._Hypothetical Investor Profile:
Investing for Quarterly Income
Ed and Jill Sanders are a fictional retired couple who invested in Liberty
Utility Fund, Inc. to provide them with quarterly income. On May 27, 1988,
they invested $50,000_part of Ed's lump sum retirement_in Class A Shares of the
Fund. Since that time, their investment of $50,000 has generated quarterly
income averaging $1,102 or an average total income of $4,253 per year. This
represents a 9.11% average annual total return.
This couple has paid a lifetime of utility bills. Now, through Liberty Utility
Fund, Inc., utilities are paying them!
SEE APPENDIX G
Liberty Utility Fund, Inc.-
Serving a Wide Range of Investors
Liberty Utility Fund, Inc. appeals to a broad range of investors seeking
current income. The Fund invests primarily in a diversified portfolio of
quality equity securities of utility companies. Fund shares are not
guaranteed, and the value of your investment may fluctuate in value. Mutual
funds involve risk, including possible loss of principal.
SEE APPENDIX H
Liberty Utility Fund, Inc.
Portfolio Update
SEE APPENDIX I
Liberty Utility Fund, Inc.
Portfolio of Investments
- --------------------------------------------------------------------------------
February 28, 1995
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
COMMON STOCKS--68.0%
- -------------------------------------------------------------------------------------------------
UTILITIES--54.5%
----------------------------------------------------------------------------------
400,000 AT&T Corp. $ 20,700,000
----------------------------------------------------------------------------------
46,500 BCE, Inc. 1,435,688
----------------------------------------------------------------------------------
525,000 Baltimore Gas & Electric Co. 12,928,125
----------------------------------------------------------------------------------
300,000 British Telecommunication PLC, ADR 17,925,000
----------------------------------------------------------------------------------
776,000 CMS Energy Corp. 18,624,000
----------------------------------------------------------------------------------
800,000 Cinergy Corp. 19,800,000
----------------------------------------------------------------------------------
400,000 Consolidated Natural Gas Co. 14,800,000
----------------------------------------------------------------------------------
650,000 DPL, Inc. 13,568,750
----------------------------------------------------------------------------------
500,000 DQE, Inc. 16,812,500
----------------------------------------------------------------------------------
300,000 Duke Power Co. 11,775,000
----------------------------------------------------------------------------------
300,000 FPL Group, Inc. 10,762,500
----------------------------------------------------------------------------------
350,000 Florida Progress Corp. 10,981,250
----------------------------------------------------------------------------------
450,000 GTE Corp. 15,018,750
----------------------------------------------------------------------------------
550,000 General Public Utilities 16,637,500
----------------------------------------------------------------------------------
600,000 Hong Kong Telecommunications, Ltd., ADR 10,950,000
----------------------------------------------------------------------------------
467,600 Illinova Corp. 10,930,150
----------------------------------------------------------------------------------
620,000 MCN Corp. 11,392,500
----------------------------------------------------------------------------------
493,200 NIPSCO Industries, Inc. 15,597,450
----------------------------------------------------------------------------------
800,000 Pacific Enterprises 19,600,000
----------------------------------------------------------------------------------
300,000 Pacific Telesis Group 9,000,000
----------------------------------------------------------------------------------
780,000 Pacificorp 14,917,500
----------------------------------------------------------------------------------
600,000 Peco Energy Co. 16,050,000
----------------------------------------------------------------------------------
741,700 Pinnacle West Capital Corp. 15,946,550
----------------------------------------------------------------------------------
750,000 Southern Co. 15,468,750
----------------------------------------------------------------------------------
400,000 Southern New England Telecommunications 13,250,000
----------------------------------------------------------------------------------
396,500 Southwestern Bell Corp. 16,504,313
----------------------------------------------------------------------------------
225,000 Telefonica de Espana, ADR 8,437,500
----------------------------------------------------------------------------------
</TABLE>
Liberty Utility Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------------------------------
UTILITIES--CONTINUED
----------------------------------------------------------------------------------
350,000 U.S. West, Inc. $ 13,562,500
----------------------------------------------------------------------------------
420,000 UGI Corp. 8,505,000
----------------------------------------------------------------------------------
550,000 Utilicorp United, Inc. 15,881,250
----------------------------------------------------------------------------------
750,000 Westcoast Energy, Inc. 11,437,500
----------------------------------------------------------------------------------
550,000 Western Resources, Inc. 17,462,500
---------------------------------------------------------------------------------- --------------
Total 446,662,526
---------------------------------------------------------------------------------- --------------
CONSUMER DURABLES--0.5%
----------------------------------------------------------------------------------
335,000 South West Property Trust, Inc., REIT 4,061,875
---------------------------------------------------------------------------------- --------------
CONSUMER SERVICES--1.8%
----------------------------------------------------------------------------------
255,000 CBL & Associates Properties, Inc. 5,100,000
----------------------------------------------------------------------------------
400,000 Simon Property Group, Inc., REIT 9,750,000
---------------------------------------------------------------------------------- --------------
Total 14,850,000
---------------------------------------------------------------------------------- --------------
ENERGY MINERALS--1.1%
----------------------------------------------------------------------------------
100,000 Mobil Corp. 8,700,000
---------------------------------------------------------------------------------- --------------
HEALTH SERVICES--1.9%
----------------------------------------------------------------------------------
499,400 Meditrust, REIT 15,980,800
---------------------------------------------------------------------------------- --------------
OIL/GAS TRANSMISSION--6.8%
----------------------------------------------------------------------------------
450,000 Enron Corp. 14,850,000
----------------------------------------------------------------------------------
344,400 Enron Global Power & Pipelines, L.L.C. 8,050,350
----------------------------------------------------------------------------------
113,200 Panhandle Eastern Corp. 2,547,000
----------------------------------------------------------------------------------
750,000 Sonat, Inc. 21,750,000
----------------------------------------------------------------------------------
300,000 Williams Companies, Inc. (The) 8,625,000
---------------------------------------------------------------------------------- --------------
Total 55,822,350
---------------------------------------------------------------------------------- --------------
PRODUCER MANUFACTURING--1.4%
----------------------------------------------------------------------------------
600,000 Hanson, PLC, ADR 11,250,000
---------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $518,838,099) 557,327,551
---------------------------------------------------------------------------------- --------------
</TABLE>
Liberty Utility Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
PREFERRED STOCKS--21.7%
- -------------------------------------------------------------------------------------------------
ADJUSTABLE RATE PREFERRED STOCKS--6.3%
----------------------------------------------------------------------------------
173,000 Enserch Corp., ARPS, Series E $ 15,699,750
----------------------------------------------------------------------------------
335,000 Niagara Mohawk Power Corp., ARPS, Series C 8,123,750
----------------------------------------------------------------------------------
60,700 Sunamerica, Inc., ARPS, Series C 6,088,969
----------------------------------------------------------------------------------
100,000 Texas Utilities Electric Co., ARPS, Series A 8,500,000
----------------------------------------------------------------------------------
52,000 Texas Utilities Electric Co., ARPS, Series B 4,732,000
----------------------------------------------------------------------------------
251,850 Toledo Edison Co., ARPS, Series B 5,351,813
----------------------------------------------------------------------------------
66,508 USX Corp., ARPS 3,258,892
---------------------------------------------------------------------------------- --------------
Total 51,755,174
---------------------------------------------------------------------------------- --------------
CONVERTIBLE PREFERRED STOCKS--15.4%
----------------------------------------------------------------------------------
700,000 Citicorp, PERCS, Series 15, $1.22 13,475,000
----------------------------------------------------------------------------------
245,000 *Cointel/Telefonica de Argentina SA, PRIDES, $5.04 9,187,500
----------------------------------------------------------------------------------
225,000 *Freeport McMoRan, Inc., Conv. Pfd., $4.38 10,575,000
----------------------------------------------------------------------------------
593,900 James River Corp. of Virginia, DECS, Series P, $1.55 13,511,225
----------------------------------------------------------------------------------
407,600 Kaufman & Broad Homes, Inc., Conv. Pfd., Series B, $1.52 6,521,600
----------------------------------------------------------------------------------
200,000 *Occidental Petroleum Corp., Conv. Pfd., $3.88 10,125,000
----------------------------------------------------------------------------------
260,000 Reynolds Metals Co., PRIDES, $3.30 12,415,000
----------------------------------------------------------------------------------
2,367,400 RJR Nabisco Holdings Corp., Conv. Pfd., Series C, $.60 13,908,475
----------------------------------------------------------------------------------
323,000 Sunamerica, Inc., Conv. Pfd., Series D, $2.78 12,798,875
----------------------------------------------------------------------------------
1,533,000 *Westinghouse Electric Corp., PEPS, Series C, $1.30 23,569,875
---------------------------------------------------------------------------------- --------------
Total 126,087,550
---------------------------------------------------------------------------------- --------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST, $177,737,757) 177,842,724
---------------------------------------------------------------------------------- --------------
CORPORATE BONDS--2.7%
- -------------------------------------------------------------------------------------------------
CONSUMER SERVICES--0.8%
----------------------------------------------------------------------------------
$ 12,505,000 *Rogers Communications, Inc., Conv. Deb., 2.00%, 11/26/2005 6,533,862
---------------------------------------------------------------------------------- --------------
FINANCE--0.4%
----------------------------------------------------------------------------------
3,120,000 Equitable Cos., Inc., Conv. Sub. Deb., 6.125%, 12/15/2024 3,209,045
---------------------------------------------------------------------------------- --------------
</TABLE>
Liberty Utility Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
NON-U.S. UTILITIES--1.3%
----------------------------------------------------------------------------------
$ 12,000,000 *Telekom Malaysia Berhad, Conv. Bond, 4.00%, 10/3/2004 $ 10,462,560
---------------------------------------------------------------------------------- --------------
PRODUCER MANUFACTURING--0.2%
----------------------------------------------------------------------------------
1,410,000 Grand Metropolitan PLC, Conv. Deb., 6.50%, 1/31/2000 1,450,537
---------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST, $23,009,517) 21,656,004
---------------------------------------------------------------------------------- --------------
**REPURCHASE AGREEMENT--7.4%
- -------------------------------------------------------------------------------------------------
60,755,000 J.P. Morgan Securities, Inc., 6.13%, dated 2/28/95, due 3/1/95
(at amortized cost) 60,755,000
---------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $780,340,373)(A) $ 817,581,279
---------------------------------------------------------------------------------- --------------
</TABLE>
*Restricted securities--Investment in securities not registered under the
Securities Act of 1933. At the end of the period, these securities amounted to
8.6% of net assets.
**The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(a)The cost of investments for federal tax purposes amounts to $780,680,274. The
net unrealized appreciation on a federal tax cost basis amounts to
$36,901,005, which is comprised of $59,640,766 appreciation and $22,739,761
depreciation at February 28, 1995.
Note: The categories of investments are shown as a percentage of net assets
($819,854,158) at February 28, 1995.
The following abbreviations are used throughout this portfolio:
ADR--American Depositary Receipt
ARPS--Adjustable Rate Preferred Stock
DECS--Dividend Enhanced Convertible Stock
PEPS--Participating Equity Preferred Stock
PERCS--Preferred Equity Redemption Cumulative Stock
PRIDES--Preferred Redeemable Increased Dividend Equity Securities
REIT--Real Estate Investment Trust
(See Notes which are an integral part of the Financial Statements)
Liberty Utility Fund, Inc.
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
February 28, 1995
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost, $780,340,373, and tax cost, $780,680,274) $ 817,581,279
- ---------------------------------------------------------------------------------------------------
Cash 3,047
- ---------------------------------------------------------------------------------------------------
Income receivable 4,118,893
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 17,858,241
- ---------------------------------------------------------------------------------------------------
Receivable for shares sold 2,991,854
- --------------------------------------------------------------------------------------------------- -------------
Total assets 842,553,314
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for investments purchased $ 20,970,531
- ------------------------------------------------------------------------------------
Payable for shares redeemed 1,365,550
- ------------------------------------------------------------------------------------
Accrued expenses and other liabilities 363,075
- ------------------------------------------------------------------------------------ -------------
Total liabilities 22,699,156
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 74,647,123 shares outstanding $ 819,854,158
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 802,759,990
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (and foreign currency transactions) 37,241,906
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (and foreign currency transactions) (20,147,738)
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 819,854,158
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE, Offering Price and Redemption Proceeds per Share:
- ---------------------------------------------------------------------------------------------------
A CLASS SHARES:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Shares ($742,274,091 / 67,578,481 shares outstanding) $ 10.98
- --------------------------------------------------------------------------------------------------- -------------
Offering Price Per Share (100/94.50 of $10.98)* $ 11.62
- --------------------------------------------------------------------------------------------------- -------------
Redemption Proceeds Per Share (100.00/100 of $10.98)** $ 10.98
- --------------------------------------------------------------------------------------------------- -------------
B CLASS SHARES:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($18,779,934 / 1,711,022 shares outstanding) $ 10.98
- --------------------------------------------------------------------------------------------------- -------------
Offering Price Per Share (100/100.00 of $10.98)* $ 10.98
- --------------------------------------------------------------------------------------------------- -------------
Redemption Proceeds Per Share (94.50/100 of $10.98)** $ 10.38
- --------------------------------------------------------------------------------------------------- -------------
C CLASS SHARES:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($58,800,133 / 5,357,620 shares outstanding) $ 10.98
- --------------------------------------------------------------------------------------------------- -------------
Offering Price Per Share (100/100.00 of $10.98)* $ 10.98
- --------------------------------------------------------------------------------------------------- -------------
Redemption Proceeds Per Share (99.00/100 of $10.98)** $ 10.87
- --------------------------------------------------------------------------------------------------- -------------
</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, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest $ 3,261,445
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax withheld of $219,051) 47,928,315
- -------------------------------------------------------------------------------------------------- --------------
Total income 51,189,760
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee $ 6,347,619
- -----------------------------------------------------------------------------------
Administrative personnel and services fee 640,686
- -----------------------------------------------------------------------------------
Custodian fees 163,731
- -----------------------------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and expenses 1,060,365
- -----------------------------------------------------------------------------------
Directors/Trustees fees 18,391
- -----------------------------------------------------------------------------------
Auditing fees 20,913
- -----------------------------------------------------------------------------------
Legal fees 59,593
- -----------------------------------------------------------------------------------
Portfolio accounting fees 68,362
- -----------------------------------------------------------------------------------
Distribution services fee--B Class Shares 21,567
- -----------------------------------------------------------------------------------
Distribution services fee--C Class Shares 453,766
- -----------------------------------------------------------------------------------
Shareholder services fee--A Class Shares 1,900,244
- -----------------------------------------------------------------------------------
Shareholder services fee--B Class Shares 7,189
- -----------------------------------------------------------------------------------
Shareholder services fee--C Class Shares 151,255
- -----------------------------------------------------------------------------------
Share registration costs 116,258
- -----------------------------------------------------------------------------------
Printing and postage 254,502
- -----------------------------------------------------------------------------------
Insurance premiums 17,886
- -----------------------------------------------------------------------------------
Taxes 180,393
- -----------------------------------------------------------------------------------
Miscellaneous 1,559
- ----------------------------------------------------------------------------------- -------------
Total expenses 11,484,279
- -----------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee 1,683,310
- ----------------------------------------------------------------------------------- -------------
Net expenses 9,800,969
- -------------------------------------------------------------------------------------------------- --------------
Net investment income 41,388,791
- -------------------------------------------------------------------------------------------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (and foreign currency transactions) (19,441,678)
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (and foreign currency
transactions) (34,280,851)
- -------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain (loss) on investments (and foreign currency transactions) (53,722,529)
- -------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ (12,333,738)
- -------------------------------------------------------------------------------------------------- --------------
</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,
1995 1994
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------
Net investment income $ 41,388,791 $ 43,175,133
- ----------------------------------------------------------------------------------
Net realized gain/loss on investments ($7,917,809 net loss and $11,416,757 net
gain, respectively, as computed for federal income tax purposes) (19,441,678) 12,441,016
- ----------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation (and foreign currency
transactions) (34,280,851) (18,342,651)
- ---------------------------------------------------------------------------------- -------------- --------------
Change in assets resulting from operations (12,333,738) 37,273,498
- ---------------------------------------------------------------------------------- -------------- --------------
NET EQUALIZATION CREDITS/DEBITS (855,673) 1,150,284
- ---------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS
- ----------------------------------------------------------------------------------
Distributions from net investment income:
- ----------------------------------------------------------------------------------
Class A Shares (46,462,395) (41,477,441)
- ----------------------------------------------------------------------------------
Class B Shares (67,769) --
- ----------------------------------------------------------------------------------
Class C Shares (3,044,848) (965,765)
- ----------------------------------------------------------------------------------
Distributions from net realized gains:
- ----------------------------------------------------------------------------------
Class A Shares (8,786,234) (2,715,075)
- ----------------------------------------------------------------------------------
Class B Shares -- --
- ----------------------------------------------------------------------------------
Class C Shares (689,533) (101,609)
- ----------------------------------------------------------------------------------
Tax return of capital distribution:
- ----------------------------------------------------------------------------------
Class A Shares (23,589,376) --
- ----------------------------------------------------------------------------------
Class B Shares (34,407) --
- ----------------------------------------------------------------------------------
Class C Shares (1,545,897) --
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from distributions to shareholders (84,220,459) (45,259,890)
- ---------------------------------------------------------------------------------- -------------- --------------
SHARE TRANSACTIONS--
- ----------------------------------------------------------------------------------
Proceeds from sale of shares 97,809,978 327,197,815
- ----------------------------------------------------------------------------------
Net asset value of Shares issued to shareholders
in payment of distributions declared 62,775,867 31,818,829
- ----------------------------------------------------------------------------------
Cost of Shares redeemed (185,244,140) (149,769,576)
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from share transactions (24,658,295) 209,247,068
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets (122,068,165) 202,410,960
- ----------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------
Beginning of period 941,922,323 739,511,363
- ---------------------------------------------------------------------------------- -------------- --------------
End of period (including undistributed net investment income of
$0 and $14,298,106, respectively) $ 819,854,158 $ 941,922,323
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Liberty Utility Fund, Inc.
Financial Highlights--Class A Shares
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 27.
<TABLE>
<CAPTION>
PERIOD ENDED FEBRUARY 28, OR 29,
1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.24 $ 12.29 $ 11.03 $ 10.13 $ 9.82 $ 9.15 $ 9.15
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.55 0.60 0.58 0.68 0.71 0.71 0.72
- -----------------------------------------------------
Net realized and unrealized gain (loss) on
investments (0.69) -- 1.44 0.92 0.43 0.79 (0.02)
- ----------------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations (0.14) 0.60 2.02 1.60 1.14 1.50 0.70
- -----------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Distributions from net investment income (0.66) (0.61) (0.66) (0.64) (0.70) (0.76) (0.70)
- -----------------------------------------------------
Distributions from net realized gain on investment
transactions (0.12) (0.04) (0.10) (0.06) (0.13) (0.07) --
- -----------------------------------------------------
Tax return of capital distribution (0.34) -- -- -- -- -- --
- ----------------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
Total distributions (1.12) (0.65) (0.76) (0.70) (0.83) (0.83) (0.70)
- ----------------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.98 $ 12.24 $ 12.29 $ 11.03 $ 10.13 $ 9.82 $ 9.15
- ----------------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN(B) (0.98%) 4.93% 19.26% 16.48% 12.41% 16.72% 8.00%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 1.10% 1.12% 1.04% 1.05% 1.02% 1.02% 1.00%
- -----------------------------------------------------
Net investment income 4.95% 4.81% 5.98% 6.31% 7.41% 7.17% 8.04%
- -----------------------------------------------------
Expense waiver/reimbursement (d) 0.21% 0.17% 0.01% 0.19% 0.51% 0.74% 0.40%
- -----------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $742,274 $877,513 $739,511 $375,656 $125,599 $48,050 $410,575
- -----------------------------------------------------
Portfolio turnover rate 55% 24% 18% 35% 45% 37% 34%
- -----------------------------------------------------
<CAPTION>
1988(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.30
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.55
- -----------------------------------------------------
Net realized and unrealized gain (loss) on
investments (0.31)
- ----------------------------------------------------- -----
Total from investment operations 0.24
- -----------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Distributions from net investment income (0.39)
- -----------------------------------------------------
Distributions from net realized gain on investment
transactions --
- -----------------------------------------------------
Tax return of capital distribution --
- ----------------------------------------------------- -----
Total distributions (0.39)
- ----------------------------------------------------- -----
NET ASSET VALUE, END OF PERIOD $ 9.15
- ----------------------------------------------------- -----
TOTAL RETURN(B) 3.25%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 1.56%(c)
- -----------------------------------------------------
Net investment income 8.24%(c)
- -----------------------------------------------------
Expense waiver/reimbursement (d) 0.38%(c)
- -----------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $52,947
- -----------------------------------------------------
Portfolio turnover rate 17 %
- -----------------------------------------------------
</TABLE>
(a) Reflects operations for the period from June 5, 1987 (date of initial
public investment) to February 29, 1988.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Liberty Utility Fund, Inc.
Financial Highlights--Class B Shares
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 27.
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1995(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.92
- ------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------
Net investment income 0.22
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04)
- ------------------------------------------------------------------------------------------------ -------
Total from investment operations 0.18
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------
Distributions from net investment income (0.08)
- ------------------------------------------------------------------------------------------------
Tax return of capital distribution (0.04)
- ------------------------------------------------------------------------------------------------ -------
Total distributions (0.12)
- ------------------------------------------------------------------------------------------------ -------
NET ASSET VALUE, END OF PERIOD $ 10.98
- ------------------------------------------------------------------------------------------------ -------
TOTAL RETURN(B) 2.16%
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 1.87%(c)
- ------------------------------------------------------------------------------------------------
Net investment income 4.53%(c)
- ------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.25%(c)
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 18,780
- ------------------------------------------------------------------------------------------------
Portfolio Turnover 55%
- ------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 12, 1994 (date of initial
public investment) to February 28, 1995.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Liberty Utility Fund, Inc.
Financial Highlights--Class C Shares
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 27.
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1995 1994(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.23 $ 12.27
- --------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------
Net investment income 0.42 0.48
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.60) (0.07)
- -------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations (0.22) 0.41
- --------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------
Distributions from net investment income (0.60) (0.41)
- --------------------------------------------------------------------------------------------
Distributions from net realized gain on investment transactions (0.13) (0.04)
- --------------------------------------------------------------------------------------------
Tax return of capital distribution (0.30) --
- -------------------------------------------------------------------------------------------- --------- -----------
Total distributions (1.03) (0.45 )
- -------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.98 $ 12.23
- -------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN(B) (1.66)% 3.28 %
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------
Expenses 1.86% 1.87 %(c)
- --------------------------------------------------------------------------------------------
Net investment income 4.19% 4.02 %(c)
- --------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.21% 0.17 %(c)
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 58,800 $ 64,409
- --------------------------------------------------------------------------------------------
Portfolio Turnover 55% 24 %
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from April 30, 1993 (date of initial
public investment) to February 28, 1994.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Liberty Utility Fund, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
February 28, 1995
(1) ORGANIZATION
Liberty Utility Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company.
The Fund offers three classes of shares; Class A Shares, Class B Shares and
Class C Shares. Effective September 27, 1994, the Fund added Class B 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. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Listed corporate bonds (and other fixed income and
asset-backed securities), unlisted securities and short-term obligations
and private placement securities are generally valued at the prices
provided by an independent pricing service. Listed equity securities are
valued at the last sale price reported on national securities exchanges.
Short-term securities with remaining maturities of sixty days or less at
the time of purchase may be stated at amortized cost, which approximates
value.
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 transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying collateral to ensure that the value
of collateral at least equals the repurchase price to be paid under the
repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines established
by the Board of Directors (the "Directors"). Risks may arise from the
potential inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the repurchase
price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code").
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially
all of its taxable income. Accordingly, no provisions for federal tax are
necessary. Withholding taxes on foreign dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax
rules and rates. At February 28, 1995, the Fund, for federal tax purposes,
had a capital loss carryforward of ($7,917,809), which will reduce the
Fund's taxable income arising from future net realized gain on investments,
if any, to the extent permitted by the Code, and thus will reduce the
amount of the distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal tax. Pursuant to
the Code, such capital loss carryforward will expire in 2003. Additionally,
net capital losses of $11,890,028 attributable to security transactions
incurred after October 31, 1994 are treated as arising on March 1, 1995,
the first day of the Fund's next taxable year.
EQUALIZATION--The Fund follows the accounting practice known as
equalization, in which a portion of the proceeds from sales and costs of
redemptions of fund shares equivalent, on a per share basis, to the amount
of undistributed net investment income on the date of the transaction, is
credited or charged to undistributed net investment income. As a result,
undistributed net investment income per share is unaffected by sales or
redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
OTHER--Investment transactions are accounted for on the trade date.
RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon
registration under federal securities laws or in transactions exempt from
such registration. In some cases, the issuer of restricted securities has
agreed to register such securities for resale, at the issuer's expense
either upon demand by the Fund or in connection with another registered
offering of the securities. Many restricted securities may be resold in the
secondary market in transactions exempt from registration. Such restricted
securities may be determined to be liquid under criteria established by the
Directors. The Fund will not incur any registration costs upon such
resales. The Fund's restricted securities are valued at the prices provided
by dealers in the secondary market or, if not market prices are available,
at the fair value as determined by the Fund's pricing committee.
Additional information on each restricted security held at February 28,
1995 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Cointel/Telefonica de Argentina SA 2/24/94-11/7/94 $17,033,106
Freeport McMoRan, Inc. 6/28/93-11/15/94 9,763,359
Occidental Petroleum Corp. 2/11/93-9/2/94 10,337,500
Westinghouse Electric Corp. 3/22/94 22,136,520
Rogers Communications, Inc. 1/20/95-2/2/95 6,377,550
Telekom Malaysia Berhad 9/22/94-1/5/95 11,885,000
</TABLE>
FOREIGN CURRENCY--The accounting records of the Fund are maintained in U.S.
dollars. All assets and liabilities denominated in foreign currencies
("FC") are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases
and sales of securities, income and expenses are translated at the rate of
exchange quoted on the respective date that such transactions are recorded.
Differences between income and expense amounts recorded and collected or
paid are adjusted when reported by the custodian bank. The Fund does not
isolate that portion of the results of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from
changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of FCs, currency gains or losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
(3) CAPITAL STOCK
At February 28, 1995, 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, 250,000,000 as Class B Shares of the Fund and 375,000,000 as Class C
Shares of the Fund. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
1995 1994
------------------------------ ------------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- ------------------------------------------------- ------------- --------------- ------------- ---------------
Shares sold 5,157,127 $ 57,323,665 20,606,339 $ 255,156,993
- -------------------------------------------------
Shares issued to shareholders
in payment of dividends declared 5,418,083 60,027,990 2,539,366 31,371,725
- -------------------------------------------------
Shares redeemed (14,669,198) (161,671,999) (11,621,645) (143,855,060)
- ------------------------------------------------- ------------- --------------- ------------- ---------------
Net change resulting from
share transactions (4,093,988) $ (44,320,344) 11,524,060 $ 142,673,658
- ------------------------------------------------- ------------- --------------- ------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,*
CLASS B SHARES SHARES DOLLARS
<S> <C> <C>
- ------------------------------------------------- ------------- ---------------
Shares sold 1,728,390 $ 18,557,302
- -------------------------------------------------
Shares issued to shareholders
in payment of dividends declared 4,400 46,586
- -------------------------------------------------
Shares redeemed (21,768) (233,240)
- ------------------------------------------------- ------------- ---------------
Net change resulting from
share transactions 1,711,022 $ 18,370,648
- ------------------------------------------------- ------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
1995 1994**
--------------------------- ----------------------------
CLASS C SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- ----------------------------------------------------- ----------- -------------- ------------ --------------
Shares sold 1,960,855 $ 21,929,011 5,706,191 $ 72,040,822
- -----------------------------------------------------
Shares issued to shareholders
in payment of dividends declared 243,585 2,701,291 35,769 447,104
- -----------------------------------------------------
Shares redeemed (2,114,688) (23,338,901) (474,092) (5,914,516)
- ----------------------------------------------------- ----------- -------------- ------------ --------------
Net change resulting from
share transactions 89,752 $ 1,291,401 5,267,868 $ 66,573,410
- ----------------------------------------------------- ----------- -------------- ------------ --------------
Net change resulting from
Fund share transactions (2,293,214) $ (24,658,295) 16,791,928 $ 209,247,068
- ----------------------------------------------------- ----------- -------------- ------------ --------------
</TABLE>
* For the period from September 19, 1994 (start of business) to February 28,
1995.
** For the period from April 24, 1993 (start of business) to February 28, 1994.
(4) 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 may voluntarily
choose to waive a portion of its fee. The Adviser can modify or terminate
this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the
Fund with administrative personnel and services. The FAS fee is based on
the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall
be at least $125,000 per portfolio and $30,000 per each additional class of
shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended
to result in the sale of the Fund's Class B and Class C Shares. The Plan
provides that the Fund may incur distribution expenses up to .75 of 1% of
the average daily net assets of the B and C shares, annually, to compensate
FSC.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will pay
FSS up to .25 of 1% of average net assets of the Fund for the period. This
fee is to obtain certain personal services for shareholders and to maintain
the shareholder accounts.
TRANSFER AGENT FEES--Federated Services Company ("FServ") serves as
transfer and dividend disbursing agent for the Fund. The fee is based on
the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records.
The fee is based on the level of the Fund's average net assets for the
period plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Directors of the Fund are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended February 28, 1995, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 444,827,880
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 536,445,437
- -------------------------------------------------------------------------------------------------- --------------
</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,
1995, 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 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, 1995, 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 18, 1995
Directors Officers
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Richard B. Fisher
James E. Dowd President
Lawrence D. Ellis, M.D. Daniel A. Burkhardt
Richard B. Fisher Vice President
Edward L. Flaherty, Jr. J. Christopher Donahue
Peter E. Madden Vice President
Gregor F. Meyer Edward C. Gonzales
John E. Murray, Jr. Vice President and Treasurer
Wesley W. Posvar John W. McGonigle
Marjorie P. Smuts Vice President and Secretary
David M. Taylor
Assistant Treasurer
Charles H. Field
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the FDIC, the Federal Reserve Board,
or any other government agency. Investment in mutual funds involves risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus, which contains facts
concerning its objective and policies, management fees, expenses and other
information.
[LOGO] FEDERATED SECURITIES CORP.
---------------------------
Director
A subsidiary of Federated Investors
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
531545101
531545309
531545200
G01049-01 (4/95)
APPENDIX
A. The graphic presentation here displayed consists of a pie chart
giving a breakdown of the Liberty Utility Fund, Inc. (the "Fund")
portfolio. As of February 28, 1995, the Fund had 35% of its assets in
invested in electric companies, 20% in telecommunications, 17% in
natural gas, 23% in non-utilities, and 5% in cash.
B. The graphic presentation here displayed consists of a boxed legend
in the bottom center indicating the components of the corresponding line
graph. Class A Shares of the Fund having a sales load of 5.50%
(effective October 1, 1994) are represented by a solid line. Class A
Shares of the Fund having a sales load of 4.50% (prior to October 1,
1994) are represented by two broken lines. The Standard & Poor's 500
Index is represented by a broken line, the Standard & Poor's Utility
Index is represented by three broken lines, and the Dow Jones Utility
Average is represented by five broken lines. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and the Standard & Poor's 500 Index ("S&P
500"), the Standard & Poor's Utility Index ("S&PUI"), and the Dow Jones
Utility Average ("DJUA"). The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's
Class A Shares start of business, 5/27/88 through 2/28/95. The right
margin reflects the ending value of the hypothetical investment in the
Fund as compared to the S&P 500, S&PUI, and DJUA; the ending values for
the S&P500, S&PUI, and DJUA were $23,036, $21,894, and $17,257,
respectively. The ending values for the Fund were $20,003 and $20,225,
using the 5.50% and 4.50% sales load, respectively. There is also a
legend located at the bottom of the graphic presentation which indicates
the Average Annual Total Return for the period ended February 28, 1995;
beginning with (5/27/88), and the one-year and five-year periods; the
Average Annual Total Returns were (6.41%), 8.93%, and 10.80%,
respectively.
C. The graphic presentation here displayed consists of a boxed legend
in the bottom center indicating the components of the corresponding line
graph. Class B Shares of the Fund are represented by a solid line. The
S&P500 is represented by a broken line, the S&PUI is represented by
three broken lines, and the DJUA is represented by five broken lines.
The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 purchase in the Fund and S&P500, S&PUI,
and DJUA. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's Class B Shares start
of business, 9/28/94 through 2/28/95. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to
the S&P 500, S&PUI, and DJUA; the ending values were $9,658, $10,686,
$10,810, and $10,877, respectively. There is also a legend located at
the bottom of the graphic presentation indicating the Average Annual
Total Return of Class B Shares for the period from September 28, 1994 to
February 28, 1995 was (3.42%).
D. The graphic presentation here displayed consists of a boxed legend
in the bottom center indicating the components of the corresponding line
graph. Class C Shares of the Fund are represented by a solid line. The
S&P500 is represented by a broken line, the S&PUI is represented by
three broken lines, and the DJUA is represented by five broken lines.
The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 purchase in the Fund and S&P500, S&PUI,
and DJUA. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's Class C Shares start
of business, 4/27/93 through 2/28/95. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to
the S&P 500, S&PUI, and DJUA; the ending values were $10,157, $11,638,
$10,406, and $9,056, respectively. There is also a legend located at
the bottom of the graphic presentation indicating the Average Annual
Total Return of Class C Shares for the one year period ended February
28, 1995 and the period from April 27, 1993 to February 28, 1995 were
(2.64%) and 0.85%, respectively.
E. The graphic presentation here displayed consists of a boxed
legend in the lower left quadrant indicating the components of the
corresponding mountain chart. The color-coded mountain chart is a
visual representation of the narrative text above it, which shows that
an initial investment of $7,000 in the Fund's Class A Shares on May 27,
1988 would have grown to $14,002. The "x" axis reflects the cost of
investment, the "y" axis reflects computation periods from May 27, 1988
to February 28, 1995, and the right margin reflects a total investment
range from $0 to $15,000. The chart further indicates the ending market
value attributable to principal, as well as the ending market value
attributable to reinvested income.
F. The graphic presentation is a visual representation of yearly
investments of $1,000 per year from May 27, 1988 to February 28, 1995 in
the Fund's Class A Shares. This graphic presentation includes a boxed
legend in the upper left quadrant indicating the components of the
corresponding mountain chart. The legend establishes the shading
variations as representations of the following:
1. Principal Value of Annual $1000 Investments
2. Reinvested Income
The "x" axis reflects a total investment range from $0 to $12,000 and
the "y" axis reflects annual computation intervals from May 27, 1988
through February 28, 1995. The color-coded chart assumes an initial
investment of $1,000 on 5/27/88 and six subsequent investments of $1,000
on each anniversary date for a total of $7,000. The chart concludes
that the investment would have grown to $9,571.
G. The graphic representation is a visual representation of the
growth in quarterly income on an investment of $50,000 in the Fund's
Class A Shares. This graphic presentation includes a boxed legend
directly above the corresponding chart indicating the annual dividend
payments. The "x" axis reflects a total dividend range from $0 to
$7,000 and the "y" axis reflects annual computation intervals from 1988
through 1994.
H. The graphic presentation here displayed consists of a chart
listing some of the Fund's Major Shareholder Groups and the respective
amounts of their holdings. The list is as follows: individual and joint
tenants - $230,778,028, IRAs- $129,936,957, Trusts - $47,606,292,
Custodians (under Uniform Gift to Minors Act) - 8,168,713, Corporations
- - $5,176,792, Pensions - $3,745,895, and Clubs/Fraternal Organizations -
$1,978,572.
I. The graphic presentation here displayed consists of a chart
listing the Fund's Top Ten Holdings as of 2/28/95. The list is as
follows: Westinghouse PEPS 9% - 2.87%, SONAT, Inc. Common - 2.65%, AT&T
Corp. Common - 2.52%, Cinergy Corp. Common - 2.42%, Pacific Telesis
Group Common - 2.39%, CMS Energy Corp. - 2.27%, British Telecom, PLC ADR
- - 2.19%, Western Resources, Inc. Common - 2.13%, DQE, Inc. Common -
2.05%, and General Public Utilities Common - 2.03%.
