FEDERATED UTILITY FUND, INC.
(FORMERLY, LIBERTY UTILITY FUND, INC.)
CLASS F SHARES
PROSPECTUS
The shares of Federated 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 to achieve current income and long-term growth of income. Capital
appreciation is a secondary objective.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISK
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class F Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares and Class F Shares dated March 31,
1996, with the Securities and Exchange Commission. The information contained
in the Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Statement of Additional
Information, or a paper copy of this prospectus, if you have received it
electronically, 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 March 31, 1996
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objectives 3
Investment Policies 3
Investment Risks 5
Investment Limitations 8
NET ASSET VALUE 9
INVESTING IN CLASS F SHARES 9
Share Purchases 9
Minimum Investment Required 10
What Shares Cost 10
Eliminating the Sales Charge 11
Systematic Investment Program 13
Exchange Privileges 13
Certificates and Confirmations 13
Dividends 13
Capital Gains 14
REDEEMING CLASS F SHARES14
Through a Financial Institution 14
Redeeming Shares By Telephone 14
Redeeming Shares By Mail14
Contingent Deferred Sales Charge 15
Systematic Withdrawal Program 16
Accounts with Low Balances 17
FUND INFORMATION 17
Management of the Fund 17
Distribution of Class F Shares 18
Administration of the Fund 19
Brokerage Transactions 20
Expenses of the Fund 20
Table of Contents
SHAREHOLDER INFORMATION 20
Voting Rights 20
TAX INFORMATION 21
Federal Income Tax 21
Pennsylvania Personal Property Taxes 21
PERFORMANCE INFORMATION 21
OTHER CLASSES OF SHARES 22
II
SUMMARY OF FUND EXPENSES
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on April
20, 1987. From the date of the Fund's initial public offering in 1987 until
May 27, 1988, the Fund was operated as a closed-end investment company. On
May 16, 1988, the shareholders of the Fund approved the conversion of the
Fund from a closed-end investment company to an open-end investment company.
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. At a meeting of the Board of Directors held on February
26, 1996, the Directors approved an amendment to the Articles of
Incorporation to change the name of Liberty Utility Fund, Inc. to Federated
Utility Fund, Inc. 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 has established four classes of shares, known as Class A
Shares, Class B Shares, Class C Shares and Class F Shares (individually and
collectively as the context requires, "Shares"). This prospectus relates only
to the Class F Shares of the Fund.
The fund is in the process of soliciting the shareholders of Fortress Utility
Fund , Inc., a Maryland corporation, to exchange their shares of capital
stock for Class F Shares of the Fund . Until this transaction is completed,
or until management of the Fund determines that it will abandon its plan to
acquire the assets of Fortress Utility Fund, Inc. in a reorganization
transaction, Class F Shares of the Fund will not be available for public
investment.
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. A minimum
initial investment of $1,500 is required, unless the investment is in a
retirement account, in which case the minimum initial investment is $50.
Shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value; however, a contingent deferred sales charge is
imposed on shares, other than shares purchased through reinvestment of
dividends, which are redeemed within one to four years of their purchase
dates.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES
The primary investment objectives of the Fund is 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,
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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
ACCEPTABLE INVESTMENTS. 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, with
respect to 65% of its assets, the Fund will invest in utility companies that
derive 50% of their revenues from utilities or assets relating to utility
industries. Securities issued by companies in the utilities industry 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 Adviser to
be of investment grade and not rated by either of the aforementioned rating
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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. These subordinated debt securities may be unrated or rated
below investment grade by Moody's or S&P. Securities rated in the lowest
category of investment grade have speculative characteristics. Changes in
economic or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than higher rated bonds. The prices
of fixed income securities fluctuate inversely to the direction of interest
rates.
For temporary or 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
Adviser. The Adviser will determine whether or not the security continues to
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be an acceptable investment. If not, the security will be sold. The Directors
apply this limitation to debt convertible securities.
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
Adviser has determined are creditworthy under guidelines established by the
Directors and will receive collateral in cash or United States government
7
securities that will be maintained in an amount equal to at least 100% of the
current market value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore,
lose the opportunity to sell the securities at a desirable price. In
addition, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.
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
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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 or 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
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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.
INVESTMENT RISKS
The Fund will attempt to meet its investment objectives by being at least 65%
invested in securities issued by companies in the domestic and foreign
utilities industries. There are certain risks associated with the utilities
industries and with foreign securities of which investors in the Fund should
be aware.
CONSIDERATIONS OF UTILITY SECURITIES. There are certain risks and
considerations affecting utility companies, and the holders of utility
company securities, which an investor should take into account when investing
in those securities. Factors which may adversely affect utility companies
10
include: difficulty in financing large construction programs during
inflationary periods; technological innovations which may cause existing
plants, equipment, or products to become less competitive or obsolete; the
impact of natural or man-made disasters (especially on regional utilities);
increased costs or reductions in production due to the unavailability of
appropriate types of fuel; seasonally or occasionally reduced availability or
higher cost of natural gas; and reduced demand due to energy conservation
among consumers. The revenues of domestic and foreign utility companies
generally reflect the economic growth and developments in the geographic
areas in which they do business. Furthermore, utility securities tend to be
interest rate sensitive.
In addition, most utility companies in the United States and in foreign
countries are subject to government regulation. Generally, the purpose of
such regulation is to ensure desirable levels of service and adequate
capacity to meet public demand. To this end, prices are often regulated to
enable consumers to obtain service at what is perceived to be a fair price,
while attempting to provide utility companies with a rate of return
sufficient to attract capital investment necessary for continued operation
and necessary growth. Recently, utility regulators have permitted utilities
to diversify outside of their original geographic regions and their
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traditional lines of business. While the Adviser believes that these
opportunities will permit certain utility companies to earn more than their
traditional regulated rates of return, other companies may be forced to
defend their core business and may be less profitable. Of course, there can
be no assurance that all of the regulatory policies described in this
paragraph will continue in the future.
In addition to the effects of regulation described in the previous paragraph,
utility companies may also be adversely affected by the following regulatory
considerations: the development and implementation of a national energy
policy; the differences between regulatory policies of different
jurisdictions (or different regulators which have concurrent jurisdiction);
shifts in regulatory policies; adequacy of rate increases; and future
regulatory legislation.
Foreign utility companies may encounter different risks and opportunities
than those located in the United States. Foreign utility companies may be
more heavily regulated than their United States counterparts. Many foreign
utility companies currently use fuels which cause more pollution than fuels
used by United States utilities; in the future, it may be necessary for such
foreign utility companies to invest heavily in pollution control equipment or
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otherwise meet pollution restrictions. Rapid growth in certain foreign
economies may encourage the growth of utility industries in those countries.
Although many foreign utility companies are currently government-owned, the
Adviser believes that it is likely that some foreign governments will seek to
"privatize" their utility companies, i.e., transfer ownership to private
investors.
In addition to the foregoing considerations which affect most utility
companies, there are specific considerations which affect specific utility
industries:
ELECTRIC. The electric utility industry is made up of companies that are
engaged in the generation, transmission, and sale of electric energy.
Domestic electric utility companies have generally been favorably affected by
lower fuel and financing costs and the completion of major construction
programs. Some electric utilities are able to sell power outside of their
traditional geographic areas. Electric utility companies have historically
been subject to increases in fuel and other operating costs, high interest
costs on borrowings needed for capital construction programs, compliance with
environmental and safety regulations, and changes in the regulatory climate.
13
In the United States, the construction and operation of nuclear power
facilities is subject to a high degree of regulatory oversight by the Nuclear
Regulatory Commission and state agencies with concurrent jurisdiction. In
addition, the design, construction, licensing, and operation of nuclear power
facilities are often subject to lengthy delays and unanticipated costs due to
changes in regulatory policy, regional political actions, and lawsuits.
Furthermore, during rate authorizations, utility regulators may disallow the
inclusion in electric rates of the higher operating costs and expenditures
resulting from these delays and unanticipated costs, including the costs of a
nuclear facility which a utility company may never be able to use.
TELECOMMUNICATIONS. The telephone industry is large and highly concentrated.
The greatest portion of this segment is comprised of companies which
distribute telephone services and provide access to the telephone networks.
While many telephone utility companies have diversified into other businesses
in recent years, the profitability of telephone utility companies could be
adversely affected by increasing competition, technological innovations, and
other structural changes in the industry.
Cable television companies are typically local monopolies, subject to
scrutiny by both utility regulators and municipal governments. Emerging
14
technologies and legislation encouraging local competition are combining to
threaten these monopolies and may slow future growth rates of these
companies. The radio telecommunications segment of this industry, including
cellular telephone, is in its early developmental phases and is characterized
by emerging, rapidly growing companies.
GAS. Gas transmission and distribution companies are undergoing significant
changes. In the United States, the Federal Energy Regulatory Commission is
reducing its regulation of interstate transmission of gas. While gas utility
companies have in the recent past been adversely affected by disruptions in
the oil industry, increased concentration, and increased competition, the
Adviser believes that environmental considerations should benefit the gas
industry in the future.
WATER. Water utility companies purify, distribute, and sell water. This
industry is highly fragmented because most of the water supplies are owned by
local authorities. Water utility companies are generally mature and are
experiencing little or no per capita volume growth. The Adviser believes that
favorable investment opportunities may result if anticipated consolidation
and foreign participation in this industry occurs.
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REDUCING RISKS OF UTILITY SECURITIES. The 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 risk
include credit research and diversification techniques. The Adviser will
perform its own credit analysis in addition to using recognized rating
agencies and other sources, including discussions with the issuer's
management, the judgment of other investment analysts, and its own informed
judgment. The Adviser's credit analysis will consider the issuer's financial
soundness, its responsiveness to changes in interest rates and business
conditions, and its anticipated cash flow, interest or dividend coverage, and
earnings. In evaluating an issuer, the Adviser places special emphasis on the
estimated current value of the issuer's assets rather than historical costs.
SECURITIES OF FOREIGN ISSUERS. Investing in non-U.S. securities carries
substantial risks in addition to those associated with domestic investments.
In an attempt to reduce some of these risks, the Fund diversifies its
investments broadly among foreign countries, including both developed and
developing countries.
The Fund occasionally takes advantage of the unusual opportunities for higher
returns available from investing in developing countries. These investments,
16
however, carry considerably more volatility and risk because they are
associated with less mature economies and less stable political systems.
EXCHANGE RATES. Foreign securities are denominated in foreign currencies.
Therefore, the value in U.S. dollars of the Fund's assets and income may be
affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not
convert its holding of foreign currencies to U.S. dollars daily.
When the Fund converts its holdings to another currency, it may incur
conversion costs. Foreign exchange dealers realize a profit on the difference
between the prices at which they buy and sell securities.
FOREIGN COMPANIES. Other differences between investing in foreign and U.S.
companies include:
o less publicly available information about foreign companies;
o the lack of uniform financial accounting standards applicable to
foreign companies;
o less readily available market quotations on foreign companies;
17
o differences in government regulation and supervision of foreign
stock exchanges, brokers, listed companies, and banks;
o generally lower foreign stock market value;
o the likelihood that foreign securities may be less liquid or more
volatile;
o foreign brokerage commissions may be higher;
o unreliable mail service between countries; and
o political or financial changes which adversely affect investments in
some countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such as the
Fund. Although the Fund is unaware of any current restrictions, investors are
advised that these policies could be reinstituted.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described below
without approval of shareholders. The Fund will not:
o 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
18
restriction does not apply to cash or cash items and securities
issued or guaranteed by the United States government or its
agencies or instrumentalities;
o 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;
o 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;
o acquire more than 10% of the outstanding voting securities of any
one issuer (at the time of acquisition);
o 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
19
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;
o 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;
o 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;
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o 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
o 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
The Fund's net asset value per Share fluctuates. The net asset value for
Shares is determined by adding the interest of the Class F Shares in the
market value of all securities and other assets of the Fund, subtracting the
interest of the Class F Shares in the liabilities of the Fund and those
attributable to the Class F Shares, and dividing the remainder by the total
number of Class F Shares outstanding. The net asset value for Class F
Shares may differ from that of Class A Shares, Class B Shares, and Class C
Shares due to the variance in daily net income realized by each class. Such
21
variance will reflect only accrued net income to which the shareholders of a
particular class are entitled.
INVESTING IN CLASS F SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased through a financial institution which has a
sales agreement with the distributor or directly from the distributor,
Federated Securities Corp., either by mail or by wire. The Fund reserves the
right to reject any purchase request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial
institution (such as a bank or an investment dealer) to place an order to
purchase Shares. Orders through a financial institution are considered
received when the Fund is notified of the purchase order. 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
22
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. It is
the financial institution's responsibility to transmit orders promptly.
The financial institution which maintains investor accounts with the Fund
must do so on a fully disclosed basis unless it accounts for share ownership
periods used in calculating the contingent deferred sales charge (see
"Contingent Deferred Sales Charge"). In addition, advance payments made to
financial institutions may be subject to reclaim by the distributor for
accounts transferred to financial institutions which do not maintain investor
accounts on a fully disclosed basis and do not account for share ownership
periods (see "Supplemental Payments to Financial Institutions").
DIRECTLY BY MAIL. To purchase Shares by mail directly from Federated
Securities Corp.:
o complete and sign the new account form available from the Fund;
o enclose a check made payable to Federated Utility Fund-- Class F
Shares; and
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o mail both to Federated Services Company, P.O. Box 8600, Boston, MA
02266-8600.
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.
DIRECTLY BY WIRE Once an account has been established, Shares may be
purchased by wire by calling 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:
State Street Bank and Trust Company, Boston, MA; Attention: EDGEWIRE; For
Credit to: (Fund Name) (Fund Class); (Fund Number); Account Number; Trade
Date and Order Number; Group Number or Dealer Number; Nominee or Institution
Name; and ABA Number 011000028. Shares cannot be purchased by wire on
holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the
telephone number listed on your account statement.
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500, except for an IRA
account, which requires a minimum initial investment of $50. Subsequent
investments must be in amounts of at least $100, except for an IRA account,
which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge of 1% of the offering price (which is 1.01% of
the net amount invested). There is no sales charge for purchases of $1
million or more. Shareholders of record in the Fortress Utility Fund on
September 30, 1989, are exempt from the sales charge for purchases of shares
of the Fund in their existing accounts as long as they maintain a $500
balance in the Fund. In addition, no sales charge is imposed for Shares
purchased through bank trust departments or investment advisers registered
under the Investment Advisers Act of 1940, as amended, purchasing on behalf
of their clients, or by sales representatives, Directors, and employees 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., their spouses and children under age 21, or any trusts or
pension or profit-sharing plans for these persons, or retirement plans where
25
the third party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates. Unaffiliated institutions
through whom Shares are purchased may charge fees for services provided which
may be related to the ownership of Fund Shares. This prospectus should,
therefore, be read together with any agreement between the customer and the
institution with regard to services provided, the fees charged for these
services, and any restrictions and limitations imposed.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, 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, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances, described under "Redeeming Class F Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
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DEALER CONCESSION. For sales of Shares, broker/dealers will normally receive
100% of the applicable sales charge. Any portion of the sales charge which is
not paid to a broker/dealer will be retained by the distributor. However,
from time to time, and at the sole discretion of the distributor, all or part
of that portion may be paid to a dealer. The sales charge for Shares sold
other than through registered broker/dealers will be retained by Federated
Securities Corp. Federated Securities Corp. may pay fees to banks out of the
sales charge in exchange for sales and/or administrative services performed
on behalf of the bank's customers in connection with the initiation of
customer accounts and purchases of Shares.
ELIMINATING THE SALES CHARGE
The sales charge can be eliminated on the purchase of Shares through:
o quantity discounts and accumulated purchases;
o signing a 13-month letter of intent;
o using the reinvestment privilege; or
o concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales charge for
purchases of $1 million or more. The Fund will combine purchases made on the
27
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales charge. In addition, the sales charge is eliminated for
purchases of $1 million or mopre made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.
If an additional purchase of Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Shares having current value at the public offering price of
$900,000 and he purchases $100,000 more at the current public offering price,
there will be no sales charge on the additional purchase. The Fund will also
combine purchases for the purpose of reducing the contingent deferred sales
charge imposed on some Share redemptions. For example, if a shareholder
already owns Shares having current value at the public offering price of $1
million and purchases an additional $1 million at the current public offering
price, the applicable contingent deferred sales charge would be reduced to
.50% of those additional Shares. For more information on the levels of
contingent deferred sales charges and holding periods, see the section
entitled "Contingent Deferred Sales Charge."
To receive the sales charge elimination and/or the contingent deferred sales
charge reduction, Federated Securities Corp. must be notified by the
28
shareholder in writing or by the shareholder's financial institution at the
time the purchase is made that Shares are already owned or that purchases are
being combined. The Fund will eliminate the sales charge and/or reduce the
contingent deferred sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $1 million of
Shares over the next 13 months, the sales charge may be reduced by signing a
letter of intent to that effect. This letter of intent includes a provision
for a sales charge elimination depending on the amount actually purchased
within the 13-month period and a provision for the Fund's custodian to hold
1.00% of the total amount intended to be purchased in escrow (in Shares)
until such purchase is completed.
The 1.00% held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of
intent, which must be $1 million or more of Shares, is not purchased. In this
event, an appropriate number of escrowed Shares may be redeemed in order to
realize the 1.00% sales charge.
This letter of intent also includes a provision for reductions in the
contingent deferred sales charge and holding period depending on the amount
29
actually purchased within the 13-month period. For more information on the
various levels of contingent deferred sales charges and holding periods, see
the section entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase Shares.
The letter may be dated as of a prior date to include any purchases made
within the past 90 days (purchases within the prior 90 days may be used to
fulfill the requirements of the letter of intent; however, the sales charge
on such purchases will not be adjusted to reflect a lower sales charge).
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the shareholder has a
one-time right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Federated
Securities Corp. must be notified by the shareholder in writing or by his
financial institution of the reinvestment in order to receive this
elimination of the sales charge. If the shareholder redeems his Shares, there
may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
elimination, a shareholder has the privilege of combining concurrent
30
purchases of two or more funds, the purchase prices of which include a sales
charge. For example, if a shareholder concurrently invested $400,000 in one
of the other Federated Funds and $600,000 in Shares, the sales charge would
be eliminated.
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales
charge after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment
on a regular basis. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account and invested in Shares
at the net asset value next determined after an order is received by the
Fund, plus the 1.00% sales charge for purchases under $1 million. A
shareholder may apply for participation in this program through Federated
Securities Corp. or his financial institution.
31
EXCHANGE PRIVILEGES
Class F shareholders may exchange all or some of their Shares, at net asset
value for Class F Shares of other funds which are advised by subsidiaries or
affiliates of Federated Investors ("Federated Funds"). (Not all Federated
Funds currently offer Class F Shares. Contact your financial institution
regarding the availability of other Federated Class F Shares). Exchanges are
made at net asset value without being assessed a contingent deferred sales
charge on the exchanged Shares. To the extent that a shareholder exchanges
Shares for Class F Shares in other Federated Funds, the time for which the
exchanged-for Shares are to be held will be added to the time for which
exchanged-from Shares were held for purposes of satisfying the applicable
holding period.
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. Shareholders who desire to automatically exchange
Class F Shares of a predetermined amount on a monthly, quarterly, or annual
basis may take advantage of a systematic exchange privilege. Further
information on these exchange privileges is available by calling Federated
Securities Corp. or the shareholder's financial institution. The exchange
32
privilege is available to shareholders residing in any state in which the
shares being acquired may be legally sold.
Before making an exchange, a shareholder must receive a prospectus of the
fund for which the exchange is being made.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued unless requested on the application or by contacting Federated
Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during that
month.
DIVIDENDS
Dividends are declared and paid monthly to all shareholders invested in the
Fund on the record date. Dividends and distributions are automatically
33
reinvested in additional Shares of the Fund on payment dates at the ex-
dividend date net asset value without a sales charge, unless shareholders
request cash payments on the new account form or by writing to the transfer
agent. All shareholders on the record date are entitled to the dividend. If
Shares are redeemed or exchanged prior to the record date or purchased after
the record date, those Shares are not entitled to that quarter's dividend.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed
at least once every twelve months.
REDEEMING CLASS F SHARES
The Fund redeems Shares at their net asset value, less any applicable
contingent deferred sales charge next determined after the Fund receives the
redemption request. Redemptions will be made on days on which the Fund
computes its net asset value. Redemption requests must be received in proper
form and can be made through a financial institution or directly from the
Fund by written request.
34
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares of the Fund by calling his financial
institution (such as a bank or an investment dealer) to request the
redemption. Shares will be redeemed at the net asset value next determined
after the Fund receives the redemption request from the financial
institution. Redemption requests through a registered broker/dealer must be
received by the broker before 4:00 P.M. (Eastern time) and must be
transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 P.M. (Eastern
time) in order for Shares to be redeemed at that day's net asset value. The
financial institution is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to the Fund.
The financial institution may charge customary fees and commissions for this
service. If, at any time, the Fund shall determine it necessary to terminate
or modify this method of redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf
of a shareholder, an authorization form permitting the Fund to accept
redemption requests by telephone must first be completed. In the event of
35
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 Shares by Mail," should be considered.
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 instructions.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund
has a properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire transfer to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from
redeemed Shares purchased by check or through ACH will not be wired until
that method of payment has cleared. Proceeds from redemption requests
received on holidays when wire transfers are restricted will be wired the
following business day. Questions about telephone redemptions on days when
36
wire transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement.
Telephone instructions will 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 this occurs, "Redeeming Shares By Mail" should be considered. If at any
time the Fund shall determine it necessary to terminate or modify the
telephone redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-
8600. If share certificates have been issued, they should be sent unendorsed
with the written request by registered or certified mail to the address noted
above.
The written request should state: the Fund name and the Share Class name ;
the account name as registered with the Fund; the account number; and the
number of shares to be redeemed or the dollar amount requested. All owners of
37
the account must sign the request exactly as the shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.
SIGNATURES. .Shareholders requesting 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 their signatures guaranteed
by:
o a trust company or commercial bank whose deposits are insured by the
Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
o a member of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;
o a savings bank or savings and loan association whose deposits are
insured by the Savings Association Insurance Fund, which is
administered by the FDIC; or
o any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934.
38
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Fund may elect in the
future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Fund and its transfer agent
reserve the right to amend these standards at any time without notice.
RECEIVING PAYMENT. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Class F Shares from their Fund account within certain
periods of the purchase date of those Shares will be charged a contingent
deferred sales charge by the Fund's distributor of the lesser of the original
price or the net asset value of the Shares redeemed as follows:
Amount of Contingent Deferred
Purchase Shares Held Sales Charge
39
Up to $1,999,999................ 4 years or less 1%
$2,000,000 to $4,999,999........ 2 years or less .50%
$5,000,000 or more.............. 1 year or less .25%
To the extent that a shareholder exchanges between or among Class F Shares
in other Federated 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 one-year holding period.
In instances in which Shares have been acquired in exchange for Class F
Shares in other Federated Funds, (i) the purchase price is the price of the
Shares when originally purchased and (ii) the time period during which the
Shares are held will run from the date of the original purchase. The
contingent deferred sales charge will not be imposed on Shares acquired
through the reinvestment of dividends or distributions of long-term capital
gains. In computing the amount of contingent deferred sales charge for
accounts with Shares subject to a single holding period, if any, redemptions
are deemed to have occurred in the following order: 1) first of Shares
acquired through the reinvestment of dividends and long-term capital gains,
2) second of purchases of Shares occurring prior to the number of years
40
necessary to satisfy the applicable holding period, and 3) finally of
purchases of Shares occurring within the current holding period. For accounts
with Shares subject to multiple share holding periods, the redemption
sequence will be determined first, with reinvested dividends and long-term
capital gains, and second, on a first-in, first-out basis.
The contingent deferred sales charge will not be imposed when a redemption
results from a tax-free return under the following circumstances: (i) a total
or partial distribution from a qualified plan, other than an IRA, Keogh Plan,
or a custodial account, following retirement; (ii) a total or partial
distribution from an IRA, Keogh Plan, or a custodial account after the
beneficial owner attains age 59-1/2; or (iii) from the death or disability of
the beneficial owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account does not
extend to account transfers, rollovers, and other redemptions made for
purposes of reinvestment. Contingent deferred sales charges are not charged
in connection with exchanges of Shares for Class F Shares in certain other
Federated Funds, or in connection with redemptions by the Fund of accounts
with low balances. Shares of the Fund originally purchased through a bank
trust department, investment adviser registered under the Investment Advisers
Act of 1940, as amended, or retirement plans where the third party
41
administrator has entered into certain arrangements with Federated Securities
Corp. or its affiliates, are not subject to the contingent deferred sales
charge, to the extent that no payment was advanced for purchases made by such
entities.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal Program.
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder; the minimum withdrawal
amount is $100. 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 the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. To be eligible to participate in this program, a
shareholder must have invested at least $10,000 in the Fund (at current
offering price).
42
A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that Shares are sold with a sales charge and
contingent deferred sales charge, it is not advisable for shareholders to be
purchasing Shares while participating in this program.
A contingent deferred sales charge is charged for Shares redeemed through
this program within four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account 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.
43
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, subject to direction by the
Directors. Passport Research, Ltd. is located at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. 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
44
funds with similar objectives and policies. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for
certain operating expenses. The Adviser can terminate this voluntary
waiver 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. L.P. is the limited partner of the 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.
Passport Research, Ltd. and other subsidiaries of Federated Investors
serve as investment advisers to a number of investment companies and
private accounts. Certain other subsidiaries also provide
administrative services to a number of investment companies. With over
45
$80 billion invested across more than 250 funds under management
and/or administration by its subsidiaries, as of December 31, 1995,
Federated Investors is one of the largest mutual fund investment
managers in the United States. With more than 1,800 employees,
Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through
4,000 financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.
Christopher H. Wiles has been the Fund's portfolio manager since May,
1990. Mr. Wiles joined Federated Investors in 1990 and has been a Vice
President of the Fund's investment adviser since 1992. Mr. Wiles
served as Assistant Vice President of the Fund's investment adviser in
1991. Mr. Wiles is a Chartered Financial Analyst and received his
M.B.A. in Finance from Cleveland State University.
Linda A. Duessel has been the Fund's portfolio manager since April 1,
1995. Ms. Duessel joined Federated Investors in 1991 and has been a
Vice President of the Fund's investment adviser since 1995. Ms.
Duessel was an Assistant Vice President of the Fund's investment
46
adviser from 1991 until 1995. Ms. Duessel is a Chartered Financial
Analyst and received her M.S. in Industrial Administration from
Carnegie Mellon University.
Both the Fund and the Adviser have adopted strict codes of ethics governing
the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to
the Fund's shareholders and must place the interests of shareholders ahead of
the employees' own interest. Among other things, the codes: require
preclearance and periodic reporting of personal securities transactions;
prohibit personal transactions in securities being purchased or sold, or
being considered for purchase or sale, by the Fund; prohibit purchasing
securities in initial public offerings; and prohibit taking profits on
securities held for less than sixty days. Violations of the codes are
subject to review by the Directors and could result in severe penalties.
DISTRIBUTION OF CLASS F SHARES
Federated Securities Corp. is the principal distributor for Class F Shares of
the Fund. Federated Securities Corp. is located at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. It is a Pennsylvania corporation
47
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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
SHAREHOLDER SERVICES. The Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Fund will make payments up to .25 of 1% of the
average daily net asset value of the Fund on behalf of Class F Shares,
computed at an annual rate, to obtain certain personal services for
shareholders and to provide the maintainance of shareholder accounts
("shareholder services'). From time to time and for such periods as deemed
appropriate, the amount stated may be reduced voluntarily. 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 schedule of such fees and the basis upon which such fees will
be paid will be determlined from time to time by the Fund and Federated
Shareholder Services.
48
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor will pay
financial institutions, for distribution and/or administrative services, an
amount equal to 1.00% of the offering price of the Shares acquired by their
clients or customers on purchases up to $1,999,999, .50% of the offering
price on purchases of $2,000,000 to $4,999,999, and .25% of the offering
price on purchases of $5,000,000 or more. (This fee is in addition to the
1.00% sales charge on purchases of less that $1 million.) The financial
institutions may elect to waive the initial payment described above; such
waiver will result in the waiver by the Fund of the otherwise applicable
contingent deferred sales charge.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in 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
type and nature of sales or marketing support furnished by the financial
49
institution. Any payments made by the distributor may be reimbursed by the
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:
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
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.
50
Federated Administrative Services may choose voluntarily to waive a portion
of its fee.
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 use
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 F SHARES
Holders of shares pay their allocable portion of Fund expenses.
The Fund expenses for which holders of Class F Shares pay their allocable
portion include, but are not limited to: the cost of organizing the Fund and
51
continuing its existence; registering the Fund with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings
of Directors; legal fees of theFund; association membership dues; and such
non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Class F Shares pay their allocable
portion include, but are not limited to: registering the Fund and shares of
the Fund; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
At present, no expenses allocated to the Class F Shares as a class. However,
the Directors reserve the right to allocate certain expenses to holders of
Class F Shares as it deems appropriate ("class expenses"). In any case, class
expenses would be limited to: transfer agent fees as identified by the
transfer agent as attributable to holders of shares; 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 registration fees paid to
state securities commissions; expenses related to administrative personnel
and services as required to support holders of shares; legal fees relating
52
solely to shares; and Directors' fees incurred as a result of issues relating
solely to shares.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each shareholder has 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 particular portfolio or
class are entitled to vote. As of February 7, 1996, Merrill Lynch Pierce
Fenner & Smith, Jacksonville, Florida, acting in various capacities for
numerous accounts, was the owner of record of 4,108,589 Class C Shares of
the Fund (32.43%), and therefore, may, for certain purposes be deemed to
control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
As a Maryland Corporation, the Fund is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
53
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-
54
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 PERSONAL PROPERTY TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for Class F
Shares.
Total return represents the change, over a specific period of time, in the
value of an investment in Class F Shares after reinvesting all income and
55
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Class F Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by Class F Shares over a thirty-day period by the maximum offering
price per share of Class F Shares 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 F Shares, and therefore,
may not correlate to the dividends or other distributions paid to
shareholders.
The performance information reflects the effect of the maximum sales charge,
and 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, Class C Shares, and Class F Shares. Because Class B Shares
and Class C Shares are subject to Rule 12b-1 fees, the yield for Class A
Shares and Class F Shares, for the same period, may exceed that of Class B
Shares and Class C Shares. Because Class A Shares are subject to a higher
56
maximum sales charge, the total return for Class B Shares, Class C Shares and
Class F Shares, for the same period, will exceed that of Class A Shares.
From time to time, advertisements for the Class A Shares, Class B Shares,
Class C Shares and Class F Shares of the Fund may refer to ratings,
rankings, and other information in certain financial publications and/or
compare the performance of Class A Shares, Class B Shares, Class C Shares and
Class F Shares to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers other classes of shares called Class A Shares, Class B
Shares and Class C Shares which are all sold primarily to customers of
financial institutions subject to certain differences.
Class A Shares are sold subject to a front-end sales charge and a Shareholder
Services Plan. Investments in Class A Shares 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.
57
Class B Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Plan. Investments
in Class B 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.
Class C Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Plan. Investments
in Class C Shares are subject to a minimum investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment
is $50.
Class A Shares, Class B Shares, Class C Shares and Class F Shares are
subject to certain of the same expenses. Expense differences, however,
between Class A Shares, Class B Shares Class C Shares and Class F Shares,
may affect the performance of each class.
To obtain more information and a combined prospectus for Class A Shares,
Class B Shares and Class C Shares, investors may call 1-800-235-4669 or
contact their financial institution.
58
ADDRESSES
Federated Utility Fund
Class F Shares Federated Investors Tower
Pittsburgh, PA 15222-3779
Distributor
Federated Securities Corp. Federated
Investors Tower
Pittsburgh, PA 15222-3779
Investment Adviser
Passport Research, Ltd. Federated Investors Tower
Pittsburgh, PA 15222-3779
Custodian
State Street Bank and P.O. Box 8600
Trust Company Boston, MA 02266-8600
59
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder P.O. Box 8600
Services Company Boston, MA 02266-8600
Independent Public Accountants
Ernst & Young LLP One Oxford Ceantre
Pittsburgh, PA 15219
60
FEDERATED UTILITY
FUND, INC.
(FORMERLY, LIBERTY UTILITY FUND, INC.)
CLASS F SHARES
Prospectus
An Open-End, Diversified
Management Investment Company
March 31, 1996
FEDERATED UTILITY FUND, INC.
(FORMERLY, LIBERTY UTILITY FUND, INC.)
CLASS A SHARES
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
349561100
9090505A-FS (2/96) PA
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus for Class A Shares, Class B Shares, and Class C Shares, and the
prospectus for Class F Shares of Federated Utility Fund, Inc. (the
"Fund") each dated May 31, 1995 and March 31, 1996, respectively. This
Statement is not a prospectus itself. You may request a copy of either
prospectus or a paper copy of this Statement, if you received it
electronically, free of charge by calling 1-800-235-4669..
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated March 31, 1996
GENERAL INFORMATION ABOUT
THE FUND 1
LXII
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
Table of Contents
INVESTMENT OBJECTIVES AND
POLICIES 1
Temporary Investments 1
Units of Master Limited
Partnerships 2
Converttible Securities 2
Repurchase Agreements 2
Lending of Portfolio
Securities 2
Restricted Securities 2
When-Issued and Delayed
Delivery Transactions 3
Reverse Repurchase
Agreements 3
Covered Call Options 3
Portfolio Turnover 3
Investment Limitations 3
II
Table of Contents
FEDERATED UTILITY FUND, INC.
MANAGEMENT 6
Fund Ownership 9
Directors Compensation 9
INVESTMENT ADVISORY SERVICES
10
Adviser to the Fund 10
Advisory Fees 11
BROKERAGE TRANSACTIONS 11
OTHER SERVICES 11
Fund Administration 11
Custodian and Portfolio
Recordkeeper 11
Transfer Agent 12
Independent Public Accountants
12
III
Table of Contents
PURCHASING SHARES 12
Distribution (Class B
Shares and Class C Shares
only) and Shareholder
Services Plans 10
Conversion to Federal Funds
12
Purchases by Sales
Representatives, Fund
Directors, and Employees
12
Exchanging Securities for
Fund Shares 13
DETERMINING NET ASSET VALUE
13
Determining Market Value of
Securities 13
IV
Table of Contents
EXCHANGE PRIVILEGE 13
Reduced Sales Charge 13
Requirements for Exchange
14
Tax Consequences 14
Making an Exchange 14
REDEEMING SHARES 14
Redemption in Kind 14
MASSACHUSETTS PARTNERSHIP
LAW 15
TAX STATUS 15
The Fund's Tax Status 15
Shareholders' Tax Status15
TOTAL RETURN 15
V
Table of Contents
YIELD 16
PERFORMANCE COMPARISONS 16
ABOUT FEDERATED INVESTORS17
Mutual Fund Market 17
Institutional 17
Trust Organizations 17
Broker/dealers and bank
broker/dealer subsidiaries
17
FINANCIAL STATEMENTS 18
APPENDIX 19
VI
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,
shareholders approved the Fund's name change from "Progressive Income Equity
Fund, Inc." to "Liberty Utility Fund, Inc." On March 31, 1996, the Fund's
name was changed to "Federated Utility Fund, Inc."
Shares of the Fund are offered in four classes, known as Class A Shares,
Class B Shares, Class C Shares, and Class F Shares (individually and
collectively referred to as "Shares," as the context may require). This
Statement of Additional Information relates to all classes of Shares of the
Fund.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is 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:
oinstruments 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
oprime 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:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
othe 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:
oFederal Land Banks;
oCentral Bank for Cooperatives;
oFederal Intermediate Credit Banks;
oFederal Home Loan Banks;
oFarmers Home Administration; and
oFederal 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, Passport Research,
Ltd., (the "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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of potential buyers;
o dealer undertakings to make a market in the security; and
o 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. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These 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 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, 1995, and 1994, the portfolio turnover rates were 55% and 24%,
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 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.
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 deposit in escrow of securities in connection with the writing of
call options or collateralizing loans of securities is not deemed to be
a pledge or hypothecation for any purpose).
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 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; or acquire more than
10% of any class of voting securities of any one issuer (at time of
acquisition).
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 not invest more than 5% of its assets in warrants, not
more than 2% of which can be warrants which are not listed on recognized
exchanges.
INVESTING IN SECURITIES OF FOREIGN ISSUERS
The Fund will not invest more than 15% of its total assets in securities
of foreign issuers not listed on recognized exchanges.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of its total assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice.
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 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.
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.
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 association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash
items."
FEDERATED UTILITY FUND, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Utility Fund, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive
Vice President of the Company .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital
of Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
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
Birthdate: July 4, 1918
Director
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
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Director, Trustee, or Managing General Partner of the
Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; 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.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney-at-law; Shareholder, Henny, Kochuba, 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
Seacliff
562 Bellevue Avenue
New port, RI
Birthdate: March 16, 1942
Director
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.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management
Center; Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; founding Chairman, National
Advisory Council for Environmental Policy and Technology and Federal
Emergency Management Advisory Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Administrative Services, Federated
Shareholder Services Company, and Federated Shareholder Services; Director,
Federated Services Company; President or Executive 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 of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated Services
Company; President and Trustee, Federated Shareholder Services; Director,
Federated Securities Corp.; Executive Vice President and Secretary of the
Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President and Trustee, Federated Investors; Vice President,
Federated Shareholder Services; Executive Vice President, Federated
Securities Corp.; Treasurer of some of the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board between
meetings of the Board.
Officers and Directors own less than 1% of the Fund's outstanding Shares.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FTI Funds;
Federated ARMs Fund; Federated Equity Funds; Federated GNMA Trust; Federated
Government Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-
Term Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; 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; 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 U.S. Government
Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty Utility Fund,
Inc.; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds;
The Planters Funds; RIMCO Monument Funds; Star Funds; The Starburst Funds;
The Starburst Funds II; Stock and Bond Fund, Inc.; Targeted Duration Trust;
Tax-Free Instruments Trust; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities;
Trust for U.S. Treasury Obligations; The Virtus Funds; World Investment
Series, Inc.
FUND OWNERSHIP
As of February 7, 1996, the following shareholder of record owned 5% or
more of the outstanding Class A Shares of the Fund: Merrill Lynch Pierce
Fenner & Smith, Jacksonville, Florida, (as record owner holding Class A
Shares for its clients), owned approximately 4,108,589 Class A Shares
(6.38%).
As of February 7, 1996, the following shareholder of record owned 5% or
more of the outstanding Class B Shares of the Fund: Merrill Lynch Pierce
Fenner & Smith, Jacksonville, Florida, (as record owner holding Class B
Shares for its clients), owned approximately 361,488 Class B Shares
(5.60%).
As of February 7, 1996, the following shareholder of record owned 5% or
more of the outstanding Class C Shares of the Fund: Merrill Lynch Pierce
Fenner & Smith, Jacksonville, Florida, (as record owner holding Class C
Shares for its clients), owned approximately 1,702,658 Class C Shares
(32.43%).
DIRECTORS COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND*# FROM FUND COMPLEX **
John F. Donahue, $0 $0 for the Fund and
Chairman and Director 54 other investment companies in the
Fund Complex
Thomas G. Bigley++ $0 $86,331 for the Fund and
Director 54 other investment companies in the Fund
Complex
John T. Conroy, Jr., $2,064 $115,760 for the Fund and
Director 54 other investment companies in the Fund
Complex
William J. Copeland, $2,064 115,760 for the Fund and
Director 54 other investment companies in the Fund
Complex
James E. Dowd, $2,064 $115,760 for the Fund and
Director 54 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D., $1,872 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
Richard B. Fisher, $0 $0 for the Fund and
President and Director 6 other investment companies in the
Fund Complex
Edward L. Flaherty, Jr., $2,064 $115,760 for the Fund and
Director 54 other investment companies in the Fund
Complex
Peter E. Madden, $1,594 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
Gregor F. Meyer, $1,872 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
John E. Murray, Jr., $0 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
Wesley W. Posvar, $1,872 $104,898 for the Fund and
Director 64 other investment companies in the Fund
Complex
Marjorie P. Smuts, $1,872 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
*Information is furnished for the fiscal year ended February 28, 1995.
#The aggregate compensation is provided for the Fund which is comprised of 1
portfolio.
+The information is provided for the last calendar year.
++Mr. Bigley served on 39 investment companies in the Federated Funds Complex
from January 1 through September 30, 1995. On October 1, 1995, he was
appointed a Trustee on 15 additional Federated Funds.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser, Passport Research, Ltd., 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 "Federated Utility Fund,
Inc. Management."
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, 1995, 1994, and 1993, the Adviser earned $6,347,619,
$6,774,071, and $4,017,913, respectively, which were reduced by $1,683,310,
$1,510,782, and $22,320, respectively.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
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.
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. Research services provided by brokers and dealers may be used by
the adviser or its affiliates in advising the Fund and 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. 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 relationship to the
value of the brokerage and research services provided. During the fiscal
years ended October 31, 1995, 1994, 1993, the Fund paid no brokerage
commissions.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one
or more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained
or disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. Prior to March 1, 1994, Federated Administrative
Services, Inc., also a subsidiary of Federated Investors, served as the
Fund's Administrator. (For purposes of this Statement of Additional
Information, Federated Administrative Services and Federated Administrative
Services, Inc. may hereinafter collectively be referred to as the
"Administrators".) For the fiscal year ended October 31, 1995, Federated
Administrative Services earned $155,000. For the fiscal year ended ended
October 31, 1994, the Administrators collectively earned $203,429. For the
fiscal year ended ended October 31, 1993, Federated Administrative Services,
Inc., earned $292,432. Dr. Henry J. Gailliot, an officer of Federated
Management, 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.
CUSTODIAN AND PORTFOLIO RECORDKEEPER
State Street Bank and Trust Company, Boston, MA, is custodian for the
securities and cash of the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio investments.
TRANSFER AGENT
As transfer agent, Federated Shareholder Services Company, maintains all
necessary shareholder records. For its services, the transfer agent receives
a fee based on the size, type and number of accounts and transactions made by
shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants for the Fund are Ernst & Young LLP,
Pittsburgh, PA.
PURCHASING SHARES
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales charge on Class A
Shares and Class F Shares only) on days the New York Stock Exchange is open
for business. The procedure for purchasing Shares is explained in the
respective prospectuses under "How to Purchase Shares" and "Investing in
Class F Shares."
DISTRIBUTION (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES PLANS
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate 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 Shares 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 period from October 12, 1994 to February 28, 1995, payments in the
amount of $21,567 were made pursuant to the Distribution Plan for Class B
Shares. For the fiscal year ended February 28, 1995, payments in the amount
of $453,766 were made pursuant to the Distribution Plan for Class C Shares.
In addition, for the fiscal year ended February 28, 1995, payments in the
amount of $2,058,688 were made pursuant to a Shareholder Services Plan
adopted by the Fund.
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 charge. Shares may also be sold without a sales charge to
trusts or pension or profit-sharing plans for these persons.
These sales are made with the purchaser's written assurance that the purchase
is for investment purposes and that the securities will not be resold except
through redemption by the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange convertible securities they already own for Shares, or
they may exchange a combination of convertible securities and cash for
Shares. Any securities to be exchanged must meet the investment objective and
policies of the Fund, must have a readily ascertainable market value, must be
liquid, and must not be subject to restrictions on resale.
The Fund will prepare a list of securities which are eligible for acceptance
and furnish this list to brokers upon request. The Fund reserves the right to
reject any security, even though it appears on the list, and the right to
amend the list of acceptable securities at any time without notice to brokers
or investors.
An investment broker acting for an investor should forward the securities in
negotiable form with an authorized letter of transmittal to Federated
Securities Corp. Federated Securities Corp. will determine that transmittal
papers are in good order and forward them to the Fund's custodian, State
Street Bank and Trust Company. The Fund will notify the broker of its
acceptance and valuation of the securities within five business days of their
receipt by State Street Bank.
The Fund values such securities in the same manner as the Fund values its
portfolio securities. The basis of the exchange will depend upon the net
asset value of Shares on the day the securities are valued. One Share will be
issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription,
conversion, or other rights attached to the securities become the property of
the Fund, along with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the cost basis of the securities
exchanged for Shares, a gain or loss may be realized by the investor.
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:
o according to the last sale price on a national securities exchange,
if available;
o 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
o 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.
EXCHANGE PRIVILEGE
This section relates only to Class F Shares of the Fund. For information
regarding the Exchange Privilege for Class A Shares, Class B Shares, and
Class C Shares of the Fund, please see the prospectus for these classes of
Shares.
The Securities and Exchange Commission has issued an order exempting the Fund
from certain provisions of the Investment Company Act of 1940. As a result,
Fund shareholders are allowed to exchange all or some of their Class F
Shares for Class F Shares in other Federated Funds (which are sold with a
sales charge different from that of the Fund or with no sales charge and
which are advised by subsidiaries or affiliates of Federated Investors)
without the assessment of a contingent deferred sales charge on the exchanged
Shares.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset
value of at least $1,500. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders 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 shares of the other fund.
Further information on the exchange privilege and prospectuses for eligible
Federated Funds are available by calling the Fund.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a short-term or long-term
capital gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges with other eligible Federated Funds may be given
in writing or by telephone. Written instructions may require a signature
guarantee.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with
the Fund or its agents. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file
with the Fund or its agents. Shares may be exchanged between two funds
by telephone only if the two funds have identical shareholder
registrations.
Telephoned exchange instructions may be recorded. They must be received
by the transfer agent before 4:00 p.m. (Eastern time) for shares to be
exchanged that day. If reasonable procedures are not followed by the
Fund, it may be liable for losses due to unauthorized or fraudulent
telephone instructions.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions may be subject to a
contingent deferred sales charge. Redemption procedures are explained in the
respective prospectuses under "How to Redeem Shares" or "Redeeming Class F
Shares." Although the transfer agent does not charge for telephone
redemptions, it reserves the right to charge a fee for the cost of wire-
transferred redemptions of less than $5,000.
Class B Shares redeemed within six years of purchase, Class C Shares redeemed
within one year of purchase, and Class F Shares redeemed within four years
of purchase may be subject to a contingent deferred sales charge. The amount
of the contingent deferred sales charge is based upon the amount of the
administrative fee paid at the time of purchase by the distributor to the
financial institutions for services rendered, and the length of time the
investor remains a shareholder in the Fund. Should financial institutions
elect to receive an amount less than the administrative fee that is stated in
the prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular shareholder
will be reduced accordingly.
REDEMPTION IN KIND
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 SEC 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 the Fund's 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.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations
of the Trust. These documents require notice of this disclaimer to be given
in each agreement, obligation, or instrument the Trust or its Trustees enter
into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act
or obligation of the Trust. Therefore, financial loss resulting from
liability as a shareholder will occur only if the Trust itself cannot meet
its obligations to indemnify shareholders and pay judgments against them.
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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from gains on the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o 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
and five-year periods ended February 28, 1995, and for the period from June
5, 1987 to February 28, 1995, were (6.41%), 8.93% and 10.80%, respectively.
The Fund's cumulative total return for Class B Shares, for the period from
October 12, 1994 to February 28, 1995, was (3.42%).
The Fund's average annual total return for Class C Shares for the fiscal year
ended February 28, 1995 and the period from April 30, 1993 (date of initial
public offering), to February 28, 1995, were (2.64%) and 0.85%, respectively.
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 charge, 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.
Cumulative total return reflects Class B Shares' total performance over a
specific period of time. This total return assumes and is reduced by the
payment of the maximum sales charge, if applicable. The Class B Shares' total
return is representative of only six months of investment activity since the
date of initial public offering.
YIELD
The Fund's yields for Class A Shares, Class B Shares, and Class C Shares,
were 4.38%, 3.87% and 3.87%, respectively, for the thirty-day period ended
February 28, 1995.
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
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in 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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or a class of Shares' expenses; and
o various other factors.
The Fund's 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:
o 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.
o 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 index is a
leading economic indicator for the stock market as a whole.
o 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.
o 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.
o 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.
o 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 charge or contingent deferred sales charge, as applicable.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is reflected
in its investment decision making-structured, straightforward, and
consistent. This has resulted in a history of competitive performance with a
range of competitive investment products that have gained the confidence of
thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
J. Thomas Madden, Executive Vice President, oversees Federated Investors'
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed income
management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $2 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional
clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by
John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
*Source: Investment Company Institute
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended February 28, 1995, are
incorporated herein by reference to the Annual Report of the Fund dated
February 28, 1995 (File Nos. 33-13388 and 811-5114). A copy of this report
may be obtained without charge by contacting the Fund.
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:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
o Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
o 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.
531545101
531545309
531545200
