Federated Utility Fund, Inc.
11TH SEMI-ANNUAL REPORT
AUGUST 31, 1998
ESTABLISHED 1988
PRESIDENT'S MESSAGE
Dear Fellow Shareholder:
Federated Utility Fund, Inc. was established in 1988, and I am pleased
to present its 11th Semi-Annual Report. The number of fund shareholders
now exceeds 94,000, and the fund's assets totaled $1.4 billion as of
August 31, 1998.
This letter was written just prior to October 15, 1998, and some of my
comments reflect current stock market and economic conditions, while
others refer to the semi-annual reporting period ended August 31, 1998.
Much has happened since July 17, 1998, when various stock market indexes
peaked, and domestic and international economies were subjected to a
great deal of media coverage and comment.
The utility sector is a conservative equity investment with historically
good dividend payments during unsettling times and market uncertainties.
Accompanying this semi-annual report is an additional letter which
highlights reasons for being comfortable with your investment in
Federated Utility Fund, Inc. Please take a few moments to read the
enclosed letter.
This semi-annual report covers the first half of the fund's fiscal year
which is the six-month period from March 1, 1998 to August 31, 1998.
Steven J. Lehman, Vice President, and Linda Duessel, Vice President,
both with Passport Research, Ltd., discuss the current utility industry
environment and the fund's performance, as well as its strategy and
holdings. Following their discussion are three additional items of
shareholder interest. First is a series of graphs showing the fund's
long-term performance. Second is a complete listing of the fund's
58 holdings in dividend-paying utility stocks and 19 convertible bonds
and other securities, and third is the publication of the fund's
financial statements.
During the reporting period, realities and perceptions about foreign
economic distress and domestic political unease caught up with the
exuberant U.S. stock market--taking the market into what is believed to be
a correction. However, the defensive nature of the fund's electric
utility holdings helped it to hold up against the overall stock market
decline. Individual share class total return performance for the
six-month period, as well as income dividends and capital gains
distributions follows.*
TOTAL CAPITAL NET ASSET
RETURN INCOME GAINS VALUE CHANGE
Class A Shares (2.23%) $0.19 $0.79 $14.07 to $12.81 = (8.95%)
Class B Shares (2.59%) $0.14 $0.79 $14.08 to $12.82 = (8.95%)
Class C Shares (2.60%) $0.14 $0.79 $14.07 to $12.81 = (8.95%)
Class F Shares (2.21%) $0.19 $0.79 $14.07 to $12.81 = (8.95%)
The U.S. economy remained relatively strong, inflation fears remained
low, and utility stocks continued to offer very attractive yields versus
the Standard & Poor's ("S&P") 500 Index.** Regardless of how foreign
economic contagions may impact the U.S., utility stocks have a long
tradition of generating strong earnings and dividends. Federated Utility
Fund, Inc. offers the conservative investor a disciplined and
diversified portfolio in the utility sector.
Thank you for participating in the income and growth opportunities of
the many vital utility corporations and services. Remember, reinvesting
your earnings is a convenient way to build the value of your account and
help your shares increase through the benefit of monthly compounding of
earnings.
As always, we welcome your comments and suggestions.
Sincerely,
[Graphic]
Richard B. Fisher
President
October 15, 1998
* Performance quoted is based on net asset value, represents past
performance, and is not indicative of future results. Investment return
and principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Total
returns for the period based on offering price for Class A, B, C, and F
Shares were (7.61%), (7.98%), (3.59%), and (4.16%), respectively.
** The S&P 500 Index is comprised of common stocks in industry,
transportation, and financial and public utility companies. This index is
unmanaged and investments cannot be made in an index.
INVESTMENT REVIEW
Steven J. Lehman
Vice President
Passport Research Ltd.
Linda A. Duessel
Vice President
Passport Research Ltd.
[Graphic]
AFTER A VERY STRONG 1997, THE DEFENSIVE NATURE OF UTILITIES WAS SEVERELY
TESTED AS THE BULL MARKET IN STOCKS RAN SQUARELY INTO A WALL LATE IN THE
FIRST HALF OF THE FUND'S FISCAL YEAR. HOW WELL DID UTILITIES HOLD UP IN
THIS EXTREMELY VOLATILE PERIOD FOR STOCKS?
Utilities--particularly electric companies--held up well. Electric stocks,
which actually rose 4.00% since the market peak on July 17, 1998, outperformed
the S&P 500 Index (which fell 19.20%) by 23.20% through
August 31, 1998. Telecommunications stocks fell 10.50% during this
period, and gas stocks lagged the S&P 500 Index with a return of
(22.50%).
For the six-month reporting period ended August 31, 1998, electric
stocks were up 10.20%, telecommunications rose 0.50%, natural gas stocks
were down 16.30%, and the S&P 500 Index fell 8.10%.
Electric company fundamentals should continue to improve as the industry
undergoes deregulation. Improving earnings prospects, strong cash flows,
share repurchases, and takeovers from industry consolidation may tend to
boost share prices.
Demand for telecommunications services continues to grow. However, if
the market declines further, we expect some telecommunications stocks to
decline with the market.
Gas stocks fell sharply this summer as spot prices were weak. We
continue, however, to like the interim and long-term prospects for gas.
Demand for gas continues to rise, particularly from new gas-fired
utility plants, while supply is constrained. The gas companies are
increasingly well managed, and the companies' asset values are high as
the electric and gas industries "converge" through mergers
and takeovers.
[Graphic]
HOW DID FEDERATED UTILITY FUND, INC. PERFORM COMPARED TO THE OVERALL
MARKET?
For the six-month reporting period ended August 31, 1998, the fund's
Class A, B, C, and F Shares returned (2.23%), (2.59%), (2.60%), and
(2.21%), respectively, based on net asset value.* These returns exceeded
the (2.83%) average total return of the utility funds tracked by Lipper
Analytical Services, Inc.** For the same period, the S&P Utility Index+
was up 4.00%, the S&P Communications Index+ was up 0.50%, and the S&P 500
Index returned (8.10%).
[Graphic]
WHAT WERE THE MAJOR INFLUENCES--POSITIVE AND NEGATIVE--ON THE FUND'S
PERFORMANCE DURING THIS VOLATILE SIX-MONTH PERIOD?
Electric stocks were a clear positive. Gas stocks performed badly, but
we added to them recently because of their fine prospects and cheap
valuations. Real Estate Investment Trusts ("REITs"), which comprise
6.20% of the fund, were weak, though they have recovered in
September 1998.
* Performance quoted is based on net asset value, represents past
performance, and is not indicative of future results. Investment return
and principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Total
returns for the period based on offering price for Class A, B, C, and F
Shares were (7.61%), (7.98%), (3.59%), and (4.16%), respectively.
** Lipper figures represent the average of the total returns reported by all
of the mutual funds designated by Lipper Analytical Services, Inc. as
falling into the category indicated. Lipper figures do not reflect sales
charges.
+ The S&P Utility Index is an unmanaged index comprising electric and
natural gas utilities that tracks daily changes in the price of stocks.
The S&P Communications Index is an unmanaged index comprising telephone
and other communications-oriented utilities that tracks daily changes in
the price of stocks. Investments cannot be made in an index.
[Graphic]
WHAT ARE SOME OF YOUR RECENT PURCHASES IN THE FUND?
Consolidated Natural Gas Co. (2.20% of net assets) has valuable assets
in a consolidating industry, and a new management and employee incentive
compensation plan. Consolidated has a high dividend yield (4.5% when we
bought it last month) and should increase in value in a deregulated
market.
CMS Energy Corp. (1.50% of net assets) has produced earnings per share
growth of almost 10%, but the stock has lagged its peers because of
concerns about its foreign operations. The company's basic electric and
gas utility operations in Michigan are sound, and management is skilled
and owns substantial stock, which now sells at an unwarranted discount
to its electric peers.
Post Properties, Inc. (0.50% of net assets) is a Southeast U.S.
apartment REIT that is highly regarded for its management and asset
quality. The company has produced consistent earnings and dividend
growth of approximately 10%, and management owns 20% of the stock. Post
Properties is innovative in developing pedestrian communities that
combine residential, retail, entertainment, and office space all in one.
[Graphic]
IN THE FUND'S LAST REPORT, YOU DISCUSSED YOUR STRATEGY OF MAINTAINING
LOW EXPOSURE TO NON-UTILITY HOLDINGS AND INTERNATIONAL UTILITY
SECURITIES BECAUSE OF THEIR HIGH VALUATIONS. WITH THE RECENT STOCK
MARKET DECLINES, HAVE VALUATIONS BECOME MORE ATTRACTIVE?
While overall valuations have become somewhat more attractive, the
defensive qualities of electrics and the cheap valuations of gas stocks
continue to support a heavy emphasis on domestic utilities. Our cautious
overall market view further supports this stance.
[Graphic]
HOW WERE THE FUND'S ASSETS ALLOCATED ON AUGUST 31, 1998?
PERCENTAGE OF NUMBER
SECTOR NET ASSETS OF ISSUES
Electrics 49.5% 31
Telecommunications 17.8% 13
Natural Gas 15.8% 13
Non-Utility 8.3% 15
Foreign Utilities 3.3% 6
[Graphic]
WHAT WERE THE FUND'S TOP FIVE HOLDINGS AS OF AUGUST 31, 1998?
PERCENTAGE
OF NET
COMPANY SECTOR ASSETS
Peco Energy Electric 2.88%
GTE Corp. Telecommunications 2.68%
Sprint Corp. Telecommunications 2.67%
Dominion Resources Electric 2.50%
Bell Atlantic Corp. Telecommunications 2.47%
TOTAL 13.20%
[Graphic]
AMID THE CURRENT UNCERTAINTY SURROUNDING THE DIRECTION OF THE STOCK
MARKET, WHERE ARE YOU FINDING OPPORTUNITIES FOR THE FUND?
Gas stocks have become deeply undervalued, and despite hitting new highs
recently, a number of electric stocks have continued to offer defensive
appeal amid market turbulence.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN FEDERATED UTILITY FUND, INC.
INITIAL INVESTMENT:
IF YOU HAD MADE AN INITIAL INVESTMENT OF $11,000 IN THE CLASS A SHARES OF
FEDERATED UTILITY FUND, INC. ON 5/31/88, REINVESTED YOUR DIVIDENDS AND CAPITAL
GAINS, AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD HAVE BEEN WORTH $34,030
ON 8/31/98. YOU WOULD HAVE EARNED A 11.65%* AVERAGE ANNUAL TOTAL RETURN FOR THE
INVESTMENT LIFE SPAN.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 9/30/98, the Class A Shares' average annual 1-year, 5-year, and 10- year
total returns were 13.81%, 10.42%, and 13.01%, respectively. Class B Shares'
average annual 1-year, and since inception (9/28/94) total returns were 13.05%
and 15.51%, respectively. Class C Shares' average annual 1-year, 5-year, and
since inception (4/27/93) total returns were 18.28%, 10.85%, and 11.42%,
respectively. Class F Shares' average annual 1-year and since inception (6/1/96)
total returns were 18.10% and 17.62%, respectively.**
Please see Appendex A1.
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 5.50% sales
charge applicable to an initial investment in Class A Shares.
Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so an investor's shares,
when redeemed, may be worth more or less than their original cost.
** Total return stated takes into account the 5.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge for Class B Shares, the
1.00% contingent deferred sales charge for Class C Shares, and the 1.00%
sales charge and 1.00% contingent deferred sales charge for Class F
Shares.
FEDERATED UTILITY FUND, INC.
ONE STEP AT A TIME:
$1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR
FOR 10 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO
$19,607.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of
Federated Utility Fund, Inc. on 5/31/88, reinvested your dividends and
capital gains, and did not redeem any shares, you would have invested
only $11,000, but your account would have reached a total value of
$19,607* by 8/31/98. You would have earned an average annual total return
of 10.58%.
A practical investment plan helps you pursue long-term performance from
utility securities. Through systematic investing, you buy shares on a
regular basis and reinvest all earnings. An investment plan works for
you when you invest only $1,000 annually. You can take it one step at a
time. Put time, money, and compounding to work.
Please Appendix A2.
* This chart assumes that the subsequent annual investments are made on the
last day of each calendar year. No method of investing can guarantee a
profit or protect against loss in down markets. However, by investing
regularly over time and buying shares at various prices, investors can
purchase more shares at lower prices. All accumulated shares have the
ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
FEDERATED UTILITY FUND, INC.
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--91.4%
BASIC INDUSTRY--0.9%
1,014,700 Barrick Gold Corp. $ 13,191,100
CONSUMER NON-DURABLES--1.2%
189,100 RJR Nabisco Holdings Corp. 4,101,106
489,000 UST, Inc. 12,775,125
Total 16,876,231
ELECTRIC UTILITIES: US CENTRAL--7.1%
502,600 CMS Energy Corp. 21,266,263
225,600 Cinergy Corp. 7,839,600
892,500 Illinova Corp. 23,037,656
1,172,600 NIPSCO Industries, Inc. 34,298,550
531,900 Wisconsin Energy Corp. 15,458,344
Total 101,900,413
ELECTRIC UTILITIES: US EAST--14.1%
523,000 BEC Energy 20,723,875
714,400 DQE, Inc. 25,495,150
697,600 New England Electric System 28,165,600
1,853,700(a)Niagara Mohawk Power Corp. 28,732,350
1,214,100 Peco Energy Co. 41,582,925
1,143,000 Potomac Electric Power Co. 28,003,500
859,400 Public Service Enterprises Group, Inc. 31,475,525
Total 204,178,925
ELECTRIC UTILITIES: US SOUTH--17.7%
867,000 Dominion Resources, Inc. 36,143,063
377,135 Duke Energy Corp. 23,523,796
426,000 Entergy Corp. 12,274,125
439,000 FPL Group, Inc. 29,220,938
422,800 Florida Progress Corp. 17,836,875
980,800 Houston Industries, Inc. 28,259,300
871,600 OGE Energy Corp. 24,023,475
983,700 SCANA Corp. 30,187,294
</TABLE>
FEDERATED UTILITY FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
ELECTRIC UTILITIES: US SOUTH--CONTINUED
613,800 Southern Co. $ 17,263,125
766,000 TECO Energy, Inc. 20,346,875
378,100 Texas Utilities Co. 16,069,250
Total 255,148,116
ELECTRIC UTILITIES: US WEST--8.9%
548,100 Edison International 15,586,594
584,000 Montana Power Co. 22,776,000
387,500 New Century Energies, Inc. 17,873,438
845,100 Pacificorp 19,067,569
352,200 Pinnacle West Capital Corp. 15,210,638
625,700 Puget Sound Energy, Inc. 15,720,713
874,471 Sempra Energy 22,244,366
Total 128,479,318
FINANCE--6.2%
210,000 Apartment Investment & Management Co., Class A 7,192,500
350,800 Archstone Communities Trust 6,796,750
268,021 Avalon Bay Communities, Inc. 8,844,718
368,300 Boston Properties, Inc. 10,519,569
382,000 Brandywine Realty Trust 6,876,000
266,500 Camden Property Trust 6,679,156
362,500 Duke Realty Investments, Inc. 7,521,875
293,400 Equity Office Properties Trust 6,656,513
178,500 Equity Residential Properties Trust 7,128,844
450,600 Liberty Property Trust 10,194,825
187,100 Post Properties, Inc. 7,109,800
176,900 Prentiss Properties Trust 3,958,138
Total 89,478,688
FOREIGN UTILITIES--3.3%
362,000 CPT Telefonica del Peru SA, Class B, ADR 4,660,750
419,000 Compania Telecomunicacion Chile, ADR 6,415,938
1,035,000 Telecom Italia S.P.A. 8,012,366
</TABLE>
FEDERATED UTILITY FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
FOREIGN UTILITIES--CONTINUED
273,800 Telefonica de Argentina SA, ADR $ 6,126,275
254,100 Telefonos de Mexico, Class L, ADR 9,068,194
21,340 Viag AG 13,412,605
Total 47,696,128
MAJOR U.S. TELECOMMUNICATIONS--15.3%
542,300 AT&T Corp. 27,182,788
325,500 Ameritech Corp. 15,339,188
808,800 Bell Atlantic Corp. 35,688,300
169,100 BellSouth Corp. 11,593,919
772,700 GTE Corp. 38,635,000
358,600 MCI Communications Corp. 17,930,000
531,200 SBC Communications, Inc. 20,185,600
575,200 Sprint Corp. 38,574,350
290,900 U.S. West, Inc. 15,126,800
Total 220,255,945
NATURAL GAS DISTRIBUTION--8.9%
375,900 AGL Resources, Inc. 6,883,669
726,700 Consolidated Natural Gas Co. 31,838,544
336,300 K N Energy, Inc. 13,157,738
1,251,800 MCN Corp. 21,984,738
786,900 MarketSpan Corp. 21,541,388
254,500 National Fuel Gas Co. 10,466,313
671,400 Questar Corp. 10,910,250
529,600 UGI Corp. 11,651,200
Total 128,433,840
OIL/GAS TRANSMISSION--6.9%
180,350 Columbia Energy Group 8,972,413
1,152,400 El Paso Energy Corp. 28,593,925
800,376 Enron Corp. 33,865,899
848,900 Sonat, Inc. 22,973,356
255,000 Williams Cos., Inc. (The) 5,865,000
Total 100,270,593
</TABLE>
FEDERATED UTILITY FUND, INC.
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
OTHER TELEPHONE/COMMUNICATIONS--0.9%
201,200 BCE, Inc. $ 6,476,125
108,100(a)IXC Communications, Inc. 2,648,450
109,500(a)Pacific Gateway Exchange, Inc. 3,853,031
Total 12,977,606
TOTAL COMMON STOCKS (IDENTIFIED COST $1,183,448,487) 1,318,886,903
CONVERTIBLE PREFERRED STOCKS--1.7%
ELECTRIC UTILITIES: US SOUTH--1.7%
466,500 Texas Utilities Co., Cumulative PRIDES, $4.63 (IDENTIFIED
COST $23,448,924) 24,520,406
CONVERTIBLE CORPORATE BONDS--1.6%
TELECOMMUNICATIONS--1.6%
22,795,000(b)Bell Atlantic Financial Services, Inc., Conv. Bond, (New
Zealand Telecom) 5.75%, 4/1/2003 (IDENTIFIED COST
$23,390,958) 22,830,560
(C)REPURCHASE AGREEMENTS--4.2%
$60,925,000 BT Securities Corp., 5.80%, dated 8/31/1998, due 9/1/1998
(AT AMORTIZED COST) 60,925,000
TOTAL INVESTMENTS (IDENTIFIED COST $1,291,213,369)(D) $1,427,162,869
</TABLE>
(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At August 31, 1998, these securities amounted to
$22,830,560 which represents 1.6% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/ or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $1,291,213,369.
The net unrealized appreciation of investments on a federal tax basis amounts to
$135,949,500 which is comprised of $221,806,273 appreciation and $85,856,773
depreciation at August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($1,443,022,541) at August 31, 1998.
The following acronyms are used throughout this portfolio:
ADR --American Depositary Receipt
PRIDES--Preferred Redeemable Increased Dividend Equity
Securities
SA --Support Agreement
SPA --Standby Purchase Agreement
(See Notes which are an integral part of the Financial Statements)
FEDERATED UTILITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost
$1,291,213,369) $1,427,162,869
Income receivable 4,274,748
Receivable for investments sold 23,182,835
Receivable for shares sold 570,369
Total assets 1,455,190,821
LIABILITIES:
Payable for investments purchased $9,105,928
Payable for shares redeemed 1,636,094
Income distribution payable 703,491
Payable to Bank 52,270
Accrued expenses 670,497
Total liabilities 12,168,280
NET ASSETS for 112,652,331 shares outstanding $1,443,022,541
NET ASSETS CONSIST OF:
Paid in capital $1,160,783,049
Net unrealized appreciation of investments and translation of assets and
liabilities in foreign currency 135,950,000
Accumulated net realized gain on investments and foreign currency
transactions 141,864,887
Undistributed net investment income 4,424,605
Total Net Assets $1,443,022,541
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($719,224,813 / 56,142,672 shares outstanding) $12.81
Offering Price Per Share (100/94.50 of $12.81)* $13.56
Redemption Proceeds Per Share $12.81
CLASS B SHARES:
Net Asset Value Per Share ($121,823,516 / 9,503,602 shares outstanding) $12.82
Offering Price Per Share $12.82
Redemption Proceeds Per Share (94.50/100 of $12.82)** $12.11
CLASS C SHARES:
Net Asset Value Per Share ($52,943,419 / 4,132,713 shares outstanding) $12.81
Offering Price Per Share $12.81
Redemption Proceeds Per Share (99.00/100 of $12.81)** $12.68
CLASS F SHARES:
Net Asset Value Per Share ($549,030,793 / 42,873,344 shares outstanding) $12.81
Offering Price Per Share (100/99.00 of $12.81)* $12.94
Redemption Proceeds Per Share (99.00/100 of $12.81)** $12.68
</TABLE>
* See "Investing in the Fund" in the Prospectuses.
** See "Contingent Deferred Sales Charge" in the Prospectuses.
(See Notes which are an integral part of the Financial Statements)
FEDERATED UTILITY FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $25,785) $ 29,308,783
Interest 1,920,427
Total income 31,229,210
EXPENSES:
Investment advisory fee $ 5,963,696
Administrative personnel and services fee 599,550
Custodian fees 60,721
Transfer and dividend disbursing agent fees and expenses 795,997
Directors'/Trustees' fees 4,968
Auditing fees 9,016
Legal fees 9,568
Portfolio accounting fees 85,401
Distribution services fee--Class B Shares 484,197
Distribution services fee--Class C Shares 219,049
Shareholder services fee--Class A Shares 982,712
Shareholder services fee--Class B Shares 161,399
Shareholder services fee--Class C Shares 73,016
Shareholder services fee--Class F Shares 770,771
Share registration costs 38,072
Printing and postage 141,128
Insurance premiums 6,256
Taxes 50,700
Miscellaneous 16,615
Total expenses 10,472,832
Waivers and reimbursements--
Waiver of shareholder services fee--Class A Shares $(23,585)
Waiver of shareholder services fee--Class F Shares (92,492)
Total waivers (116,077)
Net expenses 10,356,755
Net investment income 20,872,455
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain on investments and foreign currency transactions 142,639,703
Net change in unrealized appreciation of investments and translation of
assets and liabilities in foreign currency (194,283,805)
Net realized and unrealized loss on investments and foreign currency (51,644,102)
Change in net assets resulting from operations $ (30,771,647)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED UTILITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
AUGUST 31, FEBRUARY 28,
1998 1998
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 20,872,455 $ 44,662,757
Net realized gain on investments and foreign currency transactions
($142,639,703 and $233,067,415, respectively, as computed for federal tax
purposes) 142,639,703 232,780,131
Net change in unrealized appreciation of investments and translation of
assets and liabilities in foreign currency (194,283,805) 34,989,912
Change in net assets resulting from operations (30,771,647) 312,432,800
NET EQUALIZATION CREDITS (DEBITS)-- -- (129,486)
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (10,553,009) (21,703,957)
Class B Shares (1,273,375) (2,300,377)
Class C Shares (568,643) (1,194,406)
Class F Shares (8,345,968) (18,218,120)
Distributions from net realized gains on investments and foreign currency
transactions
Class A Shares (42,981,700) (88,374,637)
Class B Shares (7,041,020) (12,860,900)
Class C Shares (3,206,205) (6,491,544)
Class F Shares (33,829,100) (72,181,134)
Change in net assets resulting from distributions to shareholders (107,799,020) (223,325,075)
SHARE TRANSACTIONS--
Proceeds from sale of shares 133,401,378 211,193,471
Net asset value of shares issued to shareholders in payment of distributions
declared 90,214,291 184,280,449
Cost of shares redeemed (224,782,789) (483,421,097)
Change in net assets resulting from share transactions (1,167,120) (87,947,177)
Change in net assets (139,737,787) 1,031,062
NET ASSETS:
Beginning of period 1,582,760,328 1,581,729,266
End of period (including undistributed net investment income of $4,424,605
and $4,293,145, respectively) $ 1,443,022,541 $ 1,582,760,328
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED UTILITY FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1998 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.07 $13.27 $12.79 $10.98 $12.24 $12.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.19 0.42 0.52 0.48 0.55 0.60
Net realized and unrealized gain (loss) on investments and foreign
currency (0.47 ) 2.52 1.22 1.82 (0.69 ) --
Total from investment operations (0.28 ) 2.94 1.74 2.30 (0.14 ) 0.60
LESS DISTRIBUTIONS
Distributions from net investment income (0.19 ) (0.41 ) (0.52 ) (0.48 ) (0.66 ) (0.61 )
Distributions from net realized gain on investments and foreign currency
transactions (0.79 ) (1.73 ) (0.74 ) -- (0.12 ) (0.04 )
Distributions in excess of net investment income(a) -- -- -- (0.01 ) -- --
Tax return of capital distribution -- -- -- -- (0.34 ) --
Total distributions (0.98 ) (2.14 ) (1.26 ) (0.49 ) (1.12 ) (0.65 )
NET ASSET VALUE, END OF PERIOD $12.81 $14.07 $13.27 $12.79 $10.98 $12.24
TOTAL RETURN(B) (2.23%) 23.05% 14.34% 21.47% (0.98%) 4.93%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.22%* 1.14% 1.15% 1.14% 1.10% 1.12%
Net investment income 2.71%* 3.01% 3.52% 4.09% 4.95% 4.81%
Expense waiver/reimbursement(c) 0.01%* 0.11% 0.12% 0.15% 0.21% 0.17%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $719,225 $778,059 $759,732 $816,687 $742,274 $877,513
Portfolio turnover 50% 118% 44% 76% 55% 24%
</TABLE>
* Computed on an annualized basis.
(a) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED UTILITY FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1998 1998 1997 1996 1995(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.08 $13.28 $12.77 $10.98 $10.92
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.14 0.30 0.44 0.43 0.22
Net realized and unrealized gain (loss) on investments and
foreign currency (0.47 ) 2.53 1.21 1.77 (0.04 )
Total from investment operations (0.33 ) 2.83 1.65 2.20 0.18
LESS DISTRIBUTIONS
Distributions from net investment income (0.14 ) (0.30 ) (0.40 ) (0.41 ) (0.08 )
Distributions from net realized gain on investments and foreign
currency transactions (0.79 ) (1.73 ) (0.74 ) -- --
Tax return of capital distribution -- -- -- -- (0.04 )
Total distributions (0.93 ) (2.03 ) (1.14 ) (0.41 ) (0.12 )
NET ASSET VALUE, END OF PERIOD $12.82 $14.08 $13.28 $12.77 $10.98
TOTAL RETURN(B) (2.59%) 22.10% 13.60% 20.45% 2.16%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.98%* 1.90% 1.90% 1.90% 1.87 %*
Net investment income 1.95%* 2.25% 2.81% 3.19% 4.53%*
Expense waiver/reimbursement -- 0.10% 0.12% 0.14% 0.25%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $121,824 $121,549 $101,619 $85,650 $18,780
Portfolio turnover 50% 118% 44% 76% 55%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 12, 1994 (date of initial
public investment) to February 28, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(See Notes which are an integral part of the Financial Statements)
FEDERATED UTILITY FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1998 1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.07 $13.28 $12.77 $10.98 $12.23 $12.27
Income from investment operations
Net investment income 0.14 0.31 0.42 0.39 0.42 0.48
Net realized and unrealized gain (loss) on investments and foreign
currency (0.47 ) 2.51 1.23 1.80 (0.64 ) (0.07 )
Total from investment operations (0.33 ) 2.82 1.65 2.19 (0.22 ) 0.41
LESS DISTRIBUTIONS
Distributions from net investment income (0.14 ) (0.30 ) (0.40 ) (0.39 ) (0.60 ) (0.41 )
Distributions from net realized gain on investments and foreign currency
transactions (0.79 ) (1.73 ) (0.74 ) -- (0.13 ) (0.04 )
Distributions in excess of net investment income(b) -- -- -- (0.01 ) -- --
Tax return of capital distribution -- -- -- -- (0.30 ) --
Total distributions (0.93 ) (2.03 ) (1.14 ) (0.40 ) (1.03 ) (0.45 )
NET ASSET VALUE, END OF PERIOD $12.81 $14.07 $13.28 $12.77 $10.98 $12.23
TOTAL RETURN(C) (2.60%) 23.03% 13.58% 20.43% (1.66 %) 3.28 %
RATIOS TO AVERAGE NET ASSETS
Expenses 1.98%* 1.90% 1.90% 1.87% 1.86 % 1.87%*
Net investment income 1.95%* 2.25% 2.77% 3.35% 4.19 % 4.02%*
Expense waiver/reimbursement -- 0.10% 0.12% 0.17% 0.21 % 0.17%*
SUPPLEMENTAL DATA
Net assets, end ofperiod (000omitted) $52,943 $58,010 $58,196 $66,864 $56,800 $64,409
Portfolio turnover 50% 118% 44% 76% 55 % 24%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 30, 1993 (date of initial
public investment) to February 28, 1994.
(b) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(See Notes which are an integral part of the Financial Statements)
FEDERATED UTILITY FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS F SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
AUGUST 31, FEBRUARY 28,
1998 1998 1997(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.07 $13.27 $12.37
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.19 0.43 0.42
Net realized and unrealized gain (loss) on investments and
foreign currency (0.47 ) 2.51 1.20
Total from investment operations (0.28 ) 2.94 1.62
LESS DISTRIBUTIONS
Distributions from net investment income (0.19 ) (0.41 ) (0.36 )
Distributions from net realized gain on investments and
foreign currency transactions (0.79 ) (1.73 ) (0.36 )
Total distributions (0.98 ) (2.14 ) (0.72 )
NET ASSET VALUE, END OF PERIOD $12.81 $14.07 $13.27
TOTAL RETURN(B) (2.21%) 23.09% 13.39%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.20%* 1.12% 1.12%*
Net investment income 2.73%* 3.03% 3.79%*
Expense waiver/reimbursement(c) 0.03%* 0.13% 0.15%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $549,031 $625,142 $662,182
Portfolio turnover 50% 118% 44%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 1, 1996 (date of initial
public investment) to February 28, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED UTILITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 (UNAUDITED)
1. ORGANIZATION
Federated Utility Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund offers
four classes of shares: Class A Shares, Class B Shares, Class C Shares,
and Class F Shares. The primary investment objective of the Fund is
current income and long-term growth of income.
On June 1, 1996, the Fund acquired all the net assets of the Fortress
Utility Fund, Inc. ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The
acquisition was accomplished by a tax-free exchange of 59,078,573 shares
of the Fund (valued at $730,686,278) for the 52,727,413 shares of the
Acquired Fund outstanding on June 1, 1996. The Acquired Fund's net
assets of $730,686,278 which consisted of $637,666,831 of Paid in
Capital and $93,019,447 of Unrealized Appreciation, at that date were
combined with those of the Fund. The aggregate net assets of the Fund
and the Acquired Fund immediately before the acquisition were
$925,114,464 and $730,686,278, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. These policies are in conformity with generally accepted
accounting principles.
INVESTMENT VALUATIONS--Listed corporate bonds, other fixed income
securities, unlisted securities and private placement securities are
generally valued at the mean of the latest bid and asked price as
furnished by an independent pricing service. Listed equity securities
are valued at the last sale price reported on a national securities
exchange. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may
be valued at amortized cost, which approximates fair market value. The
Fund's restricted securities are valued at the price provided by the
dealers in the secondary market or, if no market prices are available,
at fair value as determined by the Fund's pricing committee.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under
repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value
of each repurchase agreement's collateral to ensure that the value of
collateral at least equals the repurchase price to be paid under the
repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are
deemed by the Fund's adviser to be creditworthy pursuant to the
guidelines and/or standards reviewed or established by the Board of
Directors (the "Directors"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the repurchase
price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable,
are amortized as required by the Internal Revenue Code, as amended (the
"Code"). Dividend income and distributions to shareholders are recorded
on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute
to shareholders each year substantially all of its income. Accordingly,
no provisions for federal tax are necessary.
Withholding taxes on foreign interest and dividends have been provided
for in accordance with the Fund's understanding of the applicable
country's tax rules and rates.
EQUALIZATION--Effective March 1, 1998, the Fund discontinued its use of
equalization. Equalization is an accounting practice whereby a portion
of the proceeds of sales and costs of redemptions of Fund shares is
credited or charged to undistributed net investment income on a per
share basis, as determined on the date of the transaction. This change
in accounting policy does not effect the Fund's net assets, net asset
value per share, or net investment income. The financial statements
included herein reflect the following reclass entry to close out
accumulated equalization debits as of August 31, 1998.
INCREASE (DECREASE)
UNDISTRIBUTED
PAID IN NET INVESTMENT
CAPITAL INCOME
$(178,607) $178,607
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage
in when-issued or delayed delivery transactions. The Fund records when-
issued securities on the trade date and maintains security positions
such that sufficient liquid assets will be available to make payment for
the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
FOREIGN EXCHANGE CONTRACTS--The Fund may enter into foreign currency
commitments for the delayed delivery of securities or foreign currency
exchange transactions. Purchased contracts are used to acquire exposure
to foreign currencies; whereas, contracts to sell are used to hedge the
Fund's securities against currency fluctuations. Risks may arise upon
entering these transactions from the potential inability of counter-
parts to meet the terms of their commitments and from unanticipated
movements in security prices or foreign exchange rates. The foreign
currency transactions are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded for financial
statement purpose as unrealized until the settlement date. At August 31,
1998, the Fund had no foreign exchange contracts outstanding.
RESTRICTED SECURITIES--Restricted securities are securities that may
only be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale,
at the issuer's expense either upon demand by the Fund or in connection
with another registered offering of the securities. Many restricted
securities may be resold in the secondary market in transactions exempt
from registration. Such restricted securities may be determined to be
liquid under criteria established by the Board of Directors. The Fund
will not incur any registration costs upon such resales. The Fund's
restricted securities are valued at the price provided by dealers in the
secondary market or, if no market prices are available, at the fair
value as determined by the Fund's pricing committee.
Additional information on each restricted security held at August 31,
1998 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Bell Atlantic Financial Services, Inc.,
Conv. Bond, (New Zealand Telecom)
5.75%, 4/1/2003 2/26/1998 - 5/22/1998 $22,390,958
</TABLE>
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets,
liabilities, expenses and revenues reported in the financial statements.
Actual results could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
At August 31, 1998, par value shares ($0.001 per share) authorized were
as follows:
NUMBER OF
PAR VALUE
CAPITAL STOCK CLASS NAME AUTHORIZED Class A Shares 250,000,000
Class B Shares 250,000,000 Class C Shares 250,000,000 Class F Shares 250,000,000
Total 1,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 6,995,747 $ 99,038,049 11,139,849 $ 157,664,167
Shares issued to shareholders in payment of distributions
declared 3,472,712 46,618,856 6,883,799 95,222,748
Shares redeemed (9,615,455) (135,445,763) (19,973,736) (277,807,321)
Net change resulting from Class A Share transactions 853,004 $ 10,211,142 (1,950,088) $ (24,920,406)
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,243,135 $ 17,474,756 1,894,637 $ 26,364,096
Shares issued to shareholders in payment of distributions
declared 535,959 7,170,378 930,693 12,887,739
Shares redeemed (908,471) (12,634,251) (1,845,279) (25,406,190)
Net change resulting from Class B Share transactions 870,623 $ 12,010,883 980,051 $ 13,845,645
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 197,895 $ 2,784,773 409,037 $ 5,630,519
Shares issued to shareholders in payment of distributions
declared 247,333 3,313,788 481,773 6,666,429
Shares redeemed (435,044) (6,067,142) (1,151,464) (15,690,298)
Net change resulting from Class C Share transactions 10,184 $ 31,419 (260,654) $ (3,393,350)
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
CLASS F SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 998,417 $ 14,103,800 1,568,259 $ 21,534,689
Shares issued to shareholders in payment of distributions
declared 2,478,271 33,111,269 5,029,031 69,503,533
Shares redeemed (5,046,299) (70,635,633) (12,056,394) (164,517,288)
Net change resulting from Class F Share transactions (1,569,611) $ (23,420,564) (5,459,104) $ (73,479,066)
Net change resulting from share transactions 164,200 $ (1,167,120) (6,689,795) $ (87,947,177)
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Passport Research Ltd., the Fund's investment
adviser (the "Adviser"), receives for its services an annual investment
advisory fee equal to 0.75% of the Fund's average daily net assets.
SUB-ADVISORY FEE--On May 15, 1997, the Directors approved a sub-
advisory agreement between Passport Research Ltd. and Federated Global
Research Corp. on behalf of the Fund, effective June 1, 1997. For its
services under the Sub-Advisory agreement, the Sub-Adviser receives an
allocable portion of the Fund's advisory fee. Such allocation is based
on the amount of foreign securities which the Sub-Adviser manages for
the Fund. The fee is paid by the Adviser out of its resources and is not
an incremental Fund expense.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors, Inc. for the period. The administrative fee
received during the period of the Administrative Services Agreement
shall be at least $125,000 per portfolio and $30,000 per each additional
class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan
(the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of
the Plan, the Fund will compensate Federated Securities Corp. ("FSC"),
the principal distributor, from the net assets of the Fund to finance
activities intended to result in the sale of the Corporation's Class B
and Class C Shares. The Plan provides that the Fund may incur
distribution expenses according to the following schedule annually, to
compensate FSC.
PERCENTAGE OF AVERAGE
SHARE CLASS DAILY NET ASSETS OF CLASS
Class B Shares 0.75%
Class C Shares 0.75%
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will pay
FSS up to 0.25% of average daily net assets of the Fund shares for the
period. The fee paid to FSS is used to finance certain services for
shareholders and to maintain shareholder accounts. FSS may voluntarily
choose to waive any portion of its fee. FSS can modify or terminate this
voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ,
through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee
paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting
records for which it receives a fee. The fee is based on the level of the
Fund's average daily net assets for the period, plus out-of-pocket
expenses.
GENERAL--Certain of the Officers and Directors of the Corporation are
Officers and Directors or Trustees of the above companies.
5. YEAR 2000
Similar to other financial organizations, the Fund could be adversely
affected if the computer systems used by the Fund's service providers do
not properly process and calculate date-related information and data
from and after January 1, 2000. The Fund's Adviser and Administrator are
taking measures that they believe are reasonably designed to address the
Year 2000 issue with respect to computer systems that they use and to
obtain reasonable assurances that comparable steps are being taken by
each of the Fund's other service providers. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any
adverse impact to the Fund.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities (and
in-kind contributions), for the period ended August 31, 1998, were as
follows:
PURCHASES $756,346,640
SALES $805,926,622
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd, Esq.
Lawrence D. Ellis, M.D.
Richard B. Fisher
Edward L. Flaherty, Jr., Esq.
Peter E. Madden
John E. Murray, Jr., J.D., S.J.D.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Richard B. Fisher
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Nicholas J. Seitanakis
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in mutual funds involves investment
risk, including possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectuses which contain
facts concerning its objective and policies, management fees, expenses,
and other information.
[GRAPHIC]
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 314286105
Cusip 314286204
Cusip 314286303
Cusip 314286402
8092606 (10/98)
A1. The graphic presentation here displayed consists of a mountain chart which
is a visual representation of the narrative text above it. The "x" axis reflects
computation periods from 5/31/88 to 8/31/98. The "y" axis is measured in
increments of $5,000 ranging from $0 to $45,000 and indicates that the ending
value of a hypothetical initial investment of $11,000 in the fund's Class A
Shares, assuming the reinvestment of capital gains and dividends, would have
grown to $34,030 on 8/31/98.
A2. The graphic presentation here displayed consists of a mountain chart which
is a visual representation of the narrative text above it. The "x" axis reflects
computation periods from 5/31/88 to 8/31/98. The "y" axis is measured in
increments of $5,000 ranging from $0 to $25,000 and indicates that the ending
value of hypothetical yearly investments of $1,000 in the fund's Class A Shares,
assuming the reinvestment of capital gains and dividends,would have grown to
$19,607 on8/31/98.
