STATEMENT OF ADDITIONAL INFORMATION
Federated Utility Fund, Inc.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectuses for Federated Utility Fund,
Inc. (Fund), dated May 31, 1999.
This SAI incorporates by reference the Fund's Annual Report. Obtain the
prospectuses or the Annual Report without charge by calling 1-800-341-
7400.
MAY 31, 1999
(REVISED MARCH 28, 2000)
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Federated
World-Class Investment Manager
Federated Utility Fund, Inc.
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
G01154-02 (3/00)
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CONTENTS
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
What Do Shares Cost? 9
How is the Fund Sold? 10
Subaccounting Services 11
Redemption in Kind 11
Account and Share Information 11
Tax Information 11
Who Manages and Provides Services to the Fund? 12
How Does the Fund Measure Performance? 15
Who is Federated Investors, Inc.? 17
Financial Information 18
Investment Ratings 18
Addresses 20
How is the Fund Organized?
The Fund is a diversified open-end, management investment company that was
established under the laws of the State of Maryland on April 20, 1987. The
Fund changed its name from "Liberty Utility Fund, Inc." to "Federated
Utility Fund, Inc." on March 30, 1996.
The Board of Directors (the Board) has established four classes of shares
of the Fund, known as Class A Shares, Class B Shares, Class C Shares, and
Class F Shares (Shares). This SAI relates to all classes of the above-
mentioned Shares. The Fund's investment adviser is Passport Research, Ltd.
(Adviser).
Securities in Which the Fund Invests
SECURITY DESCRIPTIONS AND TECHNIQUES
In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment
objective.
EQUITY SECURITIES
Equity securities represent a share of an issuer's earnings and assets,
after the issuer pays its liabilities. The Fund cannot predict the income
it will receive from equity securities because issuers generally have
discretion as to the payment of any dividends or distributions. However,
equity securities offer greater potential for appreciation than many other
types of securities, because their value increases directly with the value
of the issuer's business. The following describes the types of equity
securities in which the Fund invests.
COMMON STOCKS
Common stocks are the most prevalent type of equity security. Common stocks
receive the issuer's earnings after the issuer pays its creditors and any
preferred stockholders. As a result, changes in an issuer's earnings
directly influence the value of its common stock.
PREFERRED STOCKS
Preferred stocks have the right to receive specified dividends or
distributions before the issuer makes payments on its common stock. Some
preferred stocks also participate in dividends and distributions paid on
common stock. Preferred stocks may also permit the issuer to redeem the
stock. The Fund may also treat such redeemable preferred stock as a fixed
income security.
INTERESTS IN OTHER LIMITED LIABILITY COMPANIES
Entities such as limited partnerships, limited liability companies,
business trusts and companies organized outside the United States may issue
securities comparable to common or preferred stock.
REAL ESTATE INVESTMENT TRUSTS (REITS)
REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income tax
if they limit their operations and distribute most of their income. Such
tax requirements limit a REIT's ability to respond to changes in the
commercial real estate market.
WARRANTS
Warrants give the Fund the option to buy the issuer's equity securities at
a specified price (the exercise price) at a specified future date (the
expiration date). The Fund may buy the designated securities by paying the
exercise price before the expiration date. Warrants may become worthless if
the price of the stock does not rise above the exercise price by the
expiration date. This increases the market risks of warrants as compared to
the underlying security. Rights are the same as warrants, except companies
typically issue rights to existing stockholders.
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a
specified rate. The rate may be a fixed percentage of the principal or
adjusted periodically. In addition, the issuer of a fixed income security
must repay the principal amount of the security, normally within a
specified time. Fixed income securities provide more regular income than
equity securities. However, the returns on fixed income securities are
limited and normally do not increase with the issuer's earnings. This
limits the potential appreciation of fixed income securities as compared to
equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease
depending upon whether it costs less (a discount) or more (a premium) than
the principal amount. If the issuer may redeem the security before its
scheduled maturity, the price and yield on a discount or premium security
may change based upon the probability of an early redemption. Securities
with higher risks generally have higher yields.
The following describes the types of fixed income securities in which the
Fund invests.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the
lowest credit risks.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The
United States supports some GSEs with its full faith and credit. Other GSEs
receive support through federal subsidies, loans or other benefits. A few
GSEs have no explicit financial support, but are regarded as having implied
support because the federal government sponsors their activities. Agency
securities are generally regarded as having low credit risks, but not as
low as treasury securities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by
businesses. Notes, bonds, debentures and commercial paper are the most
prevalent types of corporate debt securities. The Fund may also purchase
interests in bank loans to companies. The credit risks of corporate debt
securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on
its priority for repayment. For example, higher ranking (senior) debt
securities have a higher priority than lower ranking (subordinated)
securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust
preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies
issue securities known as surplus notes that permit the insurance company
to defer any payment that would reduce its capital below
regulatory requirements.
Commercial Paper
Commercial paper is an issuer's obligation with a maturity of less than
nine months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and
use the proceeds (or bank loans) to repay maturing paper. If the issuer
cannot continue to obtain liquidity in this fashion, its commercial paper
may default. The short maturity of commercial paper reduces both the
interest rate and credit risks as compared to other debt securities of the
same issuer.
Demand Instruments
Demand instruments are corporate debt securities that the issuer must repay
upon demand. Other demand instruments require a third party, such as a
dealer or bank, to repurchase the security for its face value upon demand.
The Fund treats demand instruments as short-term securities, even though
their stated maturity may extend beyond one year.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final
maturity unlike debt securities that provide periodic payments of interest
(referred to as a coupon payment). Investors buy zero coupon securities at
a price below the amount payable at maturity. The difference between the
purchase price and the amount paid at maturity represents interest on the
zero coupon security. Investors must wait until maturity to receive
interest and principal, which increases the market and credit risks of a
zero coupon security.
There are many forms of zero coupon securities. Some are issued at a
discount and are referred to as zero coupon or capital appreciation bonds.
Others are created from interest bearing bonds by separating the right to
receive the bond's coupon payments from the right to receive the bond's
principal due at maturity, a process known as coupon stripping. In
addition, some securities give the issuer the option to deliver additional
securities in place of cash interest payments, thereby increasing the
amount payable at maturity. These are referred to as pay-in-kind or
PIK securities.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities that the Fund has the
option to exchange for equity securities at a specified conversion price.
The option allows the Fund to realize additional returns if the market
price of the equity securities exceeds the conversion price. For example,
the Fund may hold fixed income securities that are convertible into shares
of common stock at a conversion price of $10 per share. If the market value
of the shares of common stock reached $12, the Fund could realize an
additional $2 per share by converting its fixed income securities.
Convertible securities have lower yields than comparable fixed income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity
securities. Thus, convertible securities may provide lower returns than
non-convertible fixed income securities or equity securities depending
upon changes in the price of the underlying equity securities. However,
convertible securities permit the Fund to realize some of the potential
appreciation of the underlying equity securities with less risk of losing
its initial investment.
The Fund treats convertible securities as both fixed income and equity
securities for purposes of its investment policies and limitations,
because of their unique characteristics.
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based
upon the credit ratings given by one or more nationally recognized rating
services. For example, Standard and Poor's, a rating service, assigns
ratings to investment grade securities (AAA, AA, A, and BBB) based on their
assessment of the likelihood of the issuer's inability to pay interest or
principal (default) when due on each security. Lower credit ratings
correspond to higher credit risk. If a security has not received a rating,
the Fund must rely entirely upon the Adviser's credit assessment that the
security is comparable to investment grade.
FOREIGN SECURITIES
Foreign securities are securities of issuers based outside the United
States. The Fund considers an issuer to be based outside the United States
if:
* it is organized under the laws of, or has a principal office located in,
another country;
* the principal trading market for its securities is in another country; or
* it (or its subsidiaries) derived in its most current fiscal year at least
50% of its total assets, capitalization, gross revenue or profit from
goods produced, services performed, or sales made in another country.
Foreign securities are primarily denominated in foreign currencies. Along
with the risks normally associated with domestic securities of the same
type, foreign securities are subject to currency risks and risks of foreign
investing. Trading in certain foreign markets is also subject to liquidity
risks.
DEPOSITARY RECEIPTS
Depositary receipts represent interests in underlying securities issued by
a foreign company. Depositary receipts are not traded in the same market as
the underlying security. American Depositary Receipts (ADRs) provide a way
to buy shares of foreign-based companies in the United States rather than
in overseas markets. ADRs are also traded in U.S. dollars, eliminating the
need for foreign exchange transactions. The foreign securities underlying
European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs),
and International Depositary Receipts (IDRs), are traded globally or
outside the United States. Depositary receipts involve many of the same
risks of investing directly in foreign securities, including currency
risks and risks of foreign investing.
HEDGING
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a
derivative contract that would normally increase in value under the same
circumstances. The Fund may also attempt to hedge by using combinations of
different derivatives contracts, or derivatives contracts and securities.
The Fund's ability to hedge may be limited by the costs of the derivatives
contracts. The Fund may attempt to lower the cost of hedging by entering
into transactions that provide only limited protection, including
transactions that: (1) hedge only a portion of its portfolio; (2) use
derivatives contracts that cover a narrow range of circumstances; or
(3) involve the sale of derivatives contracts with different terms.
Consequently, hedging transactions will not eliminate risk even if they
work as intended. In addition, hedging strategies are not always
successful, and could result in increased expenses and losses to the Fund.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based
upon changes in the values of designated (or underlying) securities,
currencies, commodities, financial indices or other assets. Some
derivative contracts (such as futures, forwards and options) require
payments relating to a future trade involving the underlying asset. Other
derivative contracts (such as swaps) require payments relating to the
income or returns from the underlying asset. The other party to a
derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities
exchanges. In this case, the exchange sets all the terms of the contract
except for the price. Investors make payments due under their contracts
through the exchange. Most exchanges require investors to maintain margin
accounts through their brokers to cover their potential obligations to the
exchange. Parties to the contract make (or collect) daily payments to the
margin accounts to reflect losses (or gains) in the value of their
contracts. This protects investors against potential defaults by the
counterparty. Trading contracts on an exchange also allows investors to
close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset
on the same date. If the offsetting sale price is more than the original
purchase price, the Fund realizes a gain; if it is less, the Fund realizes
a loss. Exchanges may limit the amount of open contracts permitted at any
one time. Such limits may prevent the Fund from closing out a position. If
this happens, the Fund will be required to keep the contract open (even if
it is losing money on the contract), and to make any payments required
under the contract (even if it has to sell portfolio securities at
unfavorable prices to do so). Inability to close out a contract could also
harm the Fund by preventing it from disposing of or trading any assets it
has been using to secure its obligations under the contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty.
OTC contracts do not necessarily have standard terms, so they cannot be
directly offset with other OTC contracts. In addition, OTC contracts with
more specialized terms may be more difficult to price than exchange traded
contracts.
Depending upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to
interest rate and currency risks, and may also expose the Fund to liquidity
and leverage risks. OTC contracts also expose the Fund to credit risks in
the event that a counterparty defaults on the contract.
The Fund may trade in the following types of derivative contracts:
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified
price, date, and time. Entering into a contract to buy an underlying asset
is commonly referred to as buying a contract or holding a long position in
the asset. Entering into a contract to sell an underlying asset is commonly
referred to as selling a contract or holding a short position in the asset.
Futures contracts are considered to be commodity contracts. Futures
contracts traded OTC are frequently referred to as forward contracts.
The Fund will enter into futures contracts directly only when it desires to
exercise a financial futures put option in its portfolio rather than either
closing out the option or allowing it to expire. The Fund will only
purchase puts on financial futures contracts which are traded on a
nationally recognized exchange.
OPTIONS
Options are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period. A call
option gives the holder (buyer) the right to buy the underlying asset from
the seller (writer) of the option. A put option gives the holder the right
to sell the underlying asset to the writer of the option. The writer of the
option receives a payment, or premium, from the buyer, which the writer
keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
* buy put options on financial futures contracts, including index futures, in
anticipation of a decrease in the value of the underlying asset;
* buy put options, including OTC options, on portfolio securities in
anticipation of a decrease in the value of the underlying asset;
* buy or write options to close out existing options positions; and
* The Fund may also write call options on portfolio securities to generate
income from premiums, and in anticipation of a decrease or only limited
increase in the value of the underlying asset. If a call written by the
Fund is exercised, the Fund foregoes any possible profit from an increase
in the market price of the underlying asset over the exercise price plus
the premium received.
When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts.
Although the Fund reserves the right to write covered call options on its
entire portfolio, it will not write such options on more than 25% of its
total assets unless a higher limit is authorized by the Board.
SPECIAL TRANSACTIONS
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually
agreed upon time and price. The repurchase price exceeds the sale price,
reflecting the Fund's return on the transaction. This return is unrelated
to the interest rate on the underlying security. The Fund will enter into
repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the
Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor
the value of the underlying security each day to ensure that the value of
the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund
is the seller (rather than the buyer) of the securities, and agrees to
repurchase them at an agreed upon time and price. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund. Reverse
repurchase agreements are subject to credit risks. In addition, reverse
repurchase agreements create leverage risks because the Fund must
repurchase the underlying security at a higher price, regardless of the
market value of the security at the time of repurchase.
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with
payment and delivery of the securities scheduled for a future time. During
the period between purchase and settlement, no payment is made by the Fund
to the issuer and no interest accrues to the Fund. The Fund records the
transaction when it agrees to buy the securities and reflects their value
in determining the price of its shares. Settlement dates may be a month or
more after entering into these transactions so that the market values of
the securities bought may vary from the purchase prices. Therefore, delayed
delivery transactions create interest rate risks for the Fund. Delayed
delivery transactions also involve credit risks in the event of a
counterparty default.
SECURITIES LENDING
The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from
the borrower as collateral. The borrower must furnish additional
collateral if the market value of the loaned securities increases. Also,
the borrower must pay the Fund the equivalent of any dividends or interest
received on the loaned securities.
The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to
the borrower for the use of cash collateral.
Loans are subject to termination at the option of the Fund or the borrower.
The Fund will not have the right to vote on securities while they are on
loan, but it will terminate a loan in anticipation of any important vote.
The Fund may pay administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash
collateral to a securities lending agent or broker.
Securities lending activities are subject to market risks, interest rate
risks and credit risks.
ASSET COVERAGE
In order to secure its obligations in connection with derivatives contracts
or special transactions, the Fund will either own the underlying assets,
enter into an offsetting transaction or set aside readily marketable
securities with a value that equals or exceeds the Fund's obligations.
Unless the Fund has other readily marketable assets to set aside, it cannot
trade assets used to secure such obligations without entering into an
offsetting derivative contract or terminating a special transaction. This
may cause the Fund to miss favorable trading opportunities or to realize
losses on derivative contracts or special transactions.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient
means of carrying out its investment policies and managing its uninvested
cash.
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The
Fund's principal risks are described in its prospectus. Additional risk
factors are outlined below.
EQUITY SECURITIES INVESTMENT RISKS
SECTOR RISKS
* Sector risk is the possibility that a certain sector, such as the utility
sector, may under perform other sectors or the market as a whole. Utility
securities pose certain risks to investors. For instance, technological
innovations may cause existing plants, equipment or products to become
less competitive or obsolete. Energy conservation and environmental
concerns may reduce demand for services of utility companies or may
impede planned growth by such companies. Utilities which own nuclear
facilities may be susceptible to environmental and regulatory issues that
could cause litigation or result in fines being levied against the
company. In addition, most utility companies in the United States and in
foreign countries are subject to government regulation which seeks 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. Utility companies may, therefore, be adversely affected by shifts
in regulatory policies, the adequacy of rate increases, and future
regulatory initiatives.
RISKS RELATED TO INVESTING FOR VALUE
* Due to their relatively low valuations, value stocks are typically less
volatile than growth stocks. For instance, the price of a value stock may
experience a smaller increase on a forecast of higher earnings, a
positive fundamental development, or positive market development.
Further, value stocks tend to have higher dividends than growth stocks.
This means they depend less on price changes for returns and may lag
behind growth stocks in an up market.
RISKS RELATED TO COMPANY SIZE
* Generally, the smaller the market capitalization of a company, the fewer
the number of shares traded daily, the less liquid its stock and the more
volatile its price. Market capitalization is determined by multiplying
the number of its outstanding shares by the current market price per
share.
* Companies with smaller market capitalizations also tend to have unproven
track records, a limited product or service base and limited access to
capital. These factors also increase risks and make these companies more
likely to fail than companies with larger market capitalizations.
RISKS OF FOREIGN INVESTING
* Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable than those of the United
States. Securities in foreign markets may also be subject to taxation
policies that reduce returns for U.S. investors.
* Foreign companies may not provide information (including financial
statements) as frequently or to as great an extent as companies in the
United States. Foreign companies may also receive less coverage than
United States companies by market analysts and the financial press. In
addition, foreign countries may lack uniform accounting, auditing and
financial reporting standards or regulatory requirements comparable to
those applicable to U.S. companies. These factors may prevent the Fund
and its Adviser from obtaining information concerning foreign companies
that is as frequent, extensive and reliable as the information available
concerning companies in the United States.
* Foreign countries may have restrictions on foreign ownership of
securities or may impose exchange controls, capital flow restrictions or
repatriation restrictions which could adversely affect the liquidity of
the Fund's investments.
CURRENCY RISKS
* Exchange rates for currencies fluctuate daily. The combination of
currency risk and market risk tends to make securities traded in foreign
markets more volatile than securities traded exclusively in the U.S.
* The Adviser attempts to manage currency risk by limiting the amount the
Fund invests in securities denominated in a particular currency. However,
diversification will not protect the Fund against a general increase in
the value of the U.S. dollar relative to other currencies.
EURO RISKS
* The Fund may make significant investments in securities denominated in
the Euro, the new single currency of the European Monetary Union (EMU).
Therefore, the exchange rate between the Euro and the U.S. dollar will
have a significant impact on the value of the Fund's investments.
* With the advent of the Euro, the participating countries in the EMU can
no longer follow independent monetary policies. This may limit these
countries' ability to respond to economic downturns or political
upheavals, and consequently reduce the value of their foreign government
securities.
RISKS OF INVESTING IN EMERGING MARKET COUNTRIES
* Securities issued or traded in emerging markets generally entail greater
risks than securities issued or traded in developed markets. For example,
their prices may be significantly more volatile than prices in developed
countries. Emerging market economies may also experience more severe
downturns (with corresponding currency devaluations) than developed
economies.
* Emerging market countries may have relatively unstable governments and
may present the risk of nationalization of businesses, expropriation,
confiscatory taxation or, in certain instances, reversion to closed
market, centrally planned economies.
* The Adviser is seeking information regarding the Year 2000 readiness of
issuers or Fund service providers located in emerging markets. The Year
2000 problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after
December 31, 1999, or experience other date-related problems. However,
this information may not exist, or may be incomplete, inaccurate or
difficult to obtain. As a result, the Adviser might not be able to assess
accurately or avoid the potential effects of the Year 2000 problem on
these companies, and these problems could result in material losses to
the Fund.
CREDIT RISKS
* Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.
FIXED INCOME INVESTMENT RISKS
INTEREST RATE RISKS
* Prices of fixed income securities rise and fall in response to changes in
the interest rate paid by similar securities. Generally, when interest
rates rise, prices of fixed income securities fall. However, market
factors, such as the demand for particular fixed income securities, may
cause the price of certain fixed income securities to fall while the
prices of other securities rise or remain unchanged.
* Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity
of a fixed income security to changes in interest rates.
CREDIT RISKS
* Credit risk is the possibility that an issuer will default on a security
by failing to pay interest or principal when due. If an issuer defaults,
the Fund will lose money.
* Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. These services
assign ratings to securities by assessing the likelihood of issuer
default. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment.
* Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's
rating is lowered, or the security is perceived to have an increased
credit risk. An increase in the spread will cause the price of the
security to decline.
* Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.
CALL RISKS
* Call risk is the possibility that an issuer may redeem a fixed income
security before maturity (a call) at a price below its current market
price. An increase in the likelihood of a call may reduce the security's
price.
* If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates,
higher credit risks, or other less favorable characteristics.
LIQUIDITY RISKS
* Trading opportunities are more limited for fixed income securities that
have not received any credit ratings, have received ratings below
investment grade or are not widely held. Trading opportunities are more
limited for CMOs that have complex terms or that are not widely held.
These features may make it more difficult to sell or buy a security at a
favorable price or time. Consequently, the Fund may have to accept a lower
price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on
the Fund's performance. Infrequent trading of securities may also lead to
an increase in their price volatility.
* Liquidity risk also refers to the possibility that the Fund may not be
able to sell a security or close out a derivative contract when it wants
to. If this happens, the Fund will be required to continue to hold the
security or keep the position open, and the Fund could incur losses.
* OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.
SECTOR RISKS
* Utility securities pose certain risks to investors. For instance,
technological innovations may cause existing plants, equipment or
products to become less competitive or obsolete. Energy conservation and
environmental concerns may reduce demand for services of utility
companies or may impede planned growth by such companies. Utilities which
own nuclear facilities may be susceptible to environmental and regulatory
issues that could cause litigation or result in fines being levied
against the company. In addition, most utility companies in the United
States and in foreign countries are subject to government regulation
which seeks 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. Utility companies may, therefore, be adversely affected
by shifts in regulatory policies, the adequacy of rate increases, and
future regulatory initiatives.
LEVERAGE RISKS
* Leverage risk is created when an investment exposes the Fund to a level
of risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
Securities rated below investment grade, also known as junk bonds,
generally entail greater market, credit and liquidity risks than
investment grade securities. For example, their prices are more volatile,
economic downturns and financial setbacks may affect their prices more
negatively, and their trading market may be more limited.
FUNDAMENTAL INVESTMENT POLICIES
The following investment policies cannot be changed without shareholder
approval.
The Fund will seek to achieve its investment objectives by investing
primarily in common stocks, preferred stocks, units of participation in
master limited partnerships which are traded on national securities
exchanges, securities convertible into stock, and debt securities issued
by companies in the utilities industry. Under normal conditions, the Fund
will invest at least 65% of its total assets in securities issued by
companies in the utilities industry, which include companies engaged in the
production, transmission, or distribution of electric energy or gas, or in
communications facilities such as telephone or telegraph services.
Debt obligations in the portfolio, at the time they are purchased, shall be
limited to those which fall in one or the following categories: (i) rated
investment grade by either Moody's Investor Services, Inc. (Moody's) or
Standard & Poor's (S&P); or (ii) determined by the Investment Adviser to be
of investment grade and not rated by either of the aforementioned rating
services; or (iii) the subordinated debt of issuers whose senior debt
obligations are deemed to be investment grade by either of the
aforementioned rating services. These subordinated debt securities may be
unrated or rated below investment grade by Moody's or S&P.
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 they 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.
INVESTMENT LIMITATIONS
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. 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.
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
With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities of any one issuer (other than cash,
cash items, securities issued or guaranteed by the government of the United
States or its agencies or instrumentalities and repurchase agreements
collateralized by such U.S. government securities, and securities of other
investment companies) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer, or it would own
more than 10% of the outstanding voting securities of that issuer.
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.
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.
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 COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts.
The above limitations cannot be changed unless authorized by the "vote of a
majority of its outstanding voting securities," as defined by the
Investment Company Act. The following limitation, however, may be changed
by the Board without shareholder approval. Shareholders will be notified
before any material change in this limitation becomes effective.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not invest for the purpose of exercising control over or
management of any company.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities that are subject to restrictions on resale under federal
securities law. Under criteria established by the Directors certain
restricted securities are determined to be liquid. To the extent that
restricted securities are not determined to be liquid the Fund will limit
their purchase, together with other illiquid securities, to 15% of its net
assets.
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.
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 association having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items." In addition, consistent with its policies
and limitations, the Fund may purchase put options on financial futures
contracts including index futures.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined
as follows:
* for equity securities, according to the last sale price in the market in
which they are primarily traded (either a national securities exchange or
the over-the-counter market), if available;
* in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;
* for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by
an independent pricing service;
* futures contracts and options are valued at market values established by
the exchanges on which they are traded at the close of trading on such
exchanges. Options traded in the over-the-counter market are valued
according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial
institution that deals in the option. The Board may determine in good
faith that another method of valuing such investments is necessary to
appraise their fair market value;
* for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that short-
term obligations with remaining maturities of less than 60 days at the
time of purchase may be valued at amortized cost or at fair market value
as determined in good faith by the Board; and
* for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional
trading in similar groups of securities, yield, quality, stability, risk,
coupon rate, maturity, type of issue, trading characteristics, and other
market data or factors. From time to time, when prices cannot be obtained
from an independent pricing service, securities may be valued based on
quotes from broker-dealers or other financial institutions that trade the
securities.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange (NYSE). In computing its NAV, the
Fund values foreign securities at the latest closing price on the exchange
on which they are traded immediately prior to the closing of the NYSE.
Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the NYSE. Foreign securities quoted in
foreign currencies are translated into U.S. dollars at current rates.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the NYSE.
If such events materially affect the value of portfolio securities, these
securities may be valued at their fair value as determined in good faith by
the Fund's Board, although the actual calculation may be done by others.
What Do Shares Cost?
The Fund's net asset value (NAV) per Share fluctuates and is based on the
market value of all securities and other assets of the Fund.
The NAV for each class of Shares may differ due to the variance in daily
net income realized by each class. Such variance will reflect only accrued
net income to which the shareholders of a particular class are entitled.
REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE
You can reduce or eliminate the applicable front-end sales charge, as
follows:
QUANTITY DISCOUNTS
Larger purchases of the same Share class reduce or eliminate the sales
charge you pay. You can combine purchases of Shares made on the same day by
you, your spouse and your children under age 21. In addition, purchases
made at one time by a trustee or fiduciary for a single trust estate or a
single fiduciary account can be combined.
ACCUMULATED PURCHASES
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales
charge on the additional purchase.
CONCURRENT PURCHASES
You can combine concurrent purchases of the same share class of two or more
Federated Funds in calculating the applicable sales charge.
LETTER OF INTENT - CLASS A SHARES AND CLASS F SHARES
You can sign a Letter of Intent committing to purchase a certain amount of
the same class of Shares within a 13-month period to combine such purchases
in calculating the sales charge. The Fund's custodian will hold Shares in
escrow equal to the maximum applicable sales charge. If you complete the
Letter of Intent, the Custodian will release the Shares in escrow to your
account. If you do not fulfill the Letter of Intent, the Custodian will
redeem the appropriate amount from the Shares held in escrow to pay the
sales charges that were not applied to your purchases.
REINVESTMENT PRIVILEGE
You may reinvest, within 120 days, your Share redemption proceeds at the
next determined NAV without any sales charge.
PURCHASES BY AFFILIATES OF THE FUND
The following individuals and their immediate family members may buy Shares
at NAV without any sales charge because there are nominal sales efforts
associated with their purchases:
* the Directors, employees and sales representatives of the Fund, the
Adviser, the Distributor and their affiliates;
* Employees of State Street Bank Pittsburgh who started their employment on
January 1, 1998, and were employees of Federated Investors, Inc.
(Federated) on December 31, 1997;
* any associated person of an investment dealer who has a sales agreement
with the Distributor; and
* trusts, pension or profit-sharing plans for these individuals.
FEDERATED LIFE MEMBERS
Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:
* through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family
of Funds are no longer marketed); or
* as Liberty Account shareholders by investing through an affinity group
prior to August 1, 1987.
REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
These reductions or eliminations are offered because: no sales commissions
have been advanced to the investment professional selling Shares; the
shareholder has already paid a Contingent Deferred Sales Charge (CDSC); or
nominal sales efforts are associated with the original purchase of Shares.
Upon notification to the Distributor or the Fund's transfer agent, no CDSC
will be imposed on redemptions:
* following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;
* representing minimum required distributions from an Individual
Retirement Account or other retirement plan to a shareholder who has
attained the age of 70-1/2;
* representing a total or partial distribution from a qualified plan. A
total or partial distribution does not include an account transfer,
rollover or other redemption made for purposes of reinvestment. A
qualified plan does not include an Individual Retirement Account, Keogh
Plan, or a custodial account, following retirement;
* which are involuntary redemptions processed by the Fund because the
accounts do not meet the minimum balance requirements;
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
* of Shares that represent a reinvestment within 120 days of a previous
redemption;
* of Shares held by the Directors, employees, and sales representatives of
the Fund, the Adviser, the Distributor and their affiliates; employees of
any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the
above persons; and
* of Shares originally purchased through a bank trust department, a
registered investment adviser or retirement plans where the third party
administrator has entered into certain arrangements with the Distributor
or its affiliates, or any other investment professional, to the extent
that no payments were advanced for purchases made through these entities.
How is the Fund Sold?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.), located at Federated Investors Tower, 1001 Liberty
Avenue, Pittsburgh, PA 15222-3779, offers Shares on a continuous, best-
efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales.
The Distributor generally pays up to 90% (and as much as 100%) of this
charge to investment professionals for sales and/or administrative
services. Any payments to investment professionals in excess of 90% of the
front-end sales charge are considered supplemental payments. The
Distributor retains any portion not paid to an investment professional.
RULE 12B-1 PLAN (CLASS B AND C SHARES)
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment
advisers) for marketing activities (such as advertising, printing and
distributing prospectuses, and providing incentives to investment
professionals) to promote sales of Shares so that overall Fund assets are
maintained or increased. This helps the Fund achieve economies of scale,
reduce per share expenses, and provide cash for orderly portfolio
management and Share redemptions. In addition, the Fund's service providers
that receive asset-based fees also benefit from stable or increasing Fund
assets.
The Fund may compensate the Distributor more or less than its actual
marketing expenses. In no event will the Fund pay for any expenses of the
Distributor that exceed the maximum Rule 12b-1 Plan fee.
For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be
paid in any one year may not be sufficient to cover the marketing related
expenses the Distributor has incurred. Therefore, it may take the
Distributor a number of years to recoup these expenses. Federated and its
subsidiaries may benefit from arrangements where the Rule 12b-1 Plan fees
related to Class B Shares may be paid to third parties who have advanced
commissions to investment professionals.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated, for providing shareholder services and maintaining shareholder
accounts. Federated Shareholder Services Company may select others to
perform these services for their customers and may pay them fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the
Distributor and/or Federated Shareholder Services Company (but not out of
Fund assets). The Distributor and/or Federated Shareholder Services
Company may be reimbursed by the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution-
related or shareholder services such as sponsoring sales, providing sales
literature, conducting training seminars for employees, and engineering
sales-related computer software programs and systems. Also, investment
professionals may be paid cash or promotional incentives, such as
reimbursement of certain expenses relating to attendance at informational
meetings about the Fund or other special events at recreational-type
facilities, or items of material value. These payments will be based upon
the amount of Shares the investment professional sells or may sell and/or
upon the type and nature of sales or marketing support furnished by the
investment professional.
When an investment professional's customer purchases shares, the
investment professional may receive:
* an amount equal to 0.50% of the NAV of Class A Shares under certain
qualified retirement plans as approved by the Distributor. (Such payments
are subject to a reclaim from the investment professional should the
assets leave the program within 12 months after purchase.)
* an amount up to 5.50% and 1.00%, respectively, of the NAV of Class B and
C Shares.
* an amount on the NAV of Class F Shares purchased as follows: up to 1% on
purchases below $2 million; 0.50% on purchases from $2 million but below
$5 million; and 0.25% on purchases of $5 million or more.
In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class A and Class F Shares that its
customer has not redeemed over the first year.
CLASS A SHARES
Investment professionals purchasing Class A Shares for their customers are
eligible to receive an advance payment from the Distributor based on the
following breakpoints:
<TABLE>
<CAPTION>
ADVANCE PAYMENTS
AS A PERCENTAGE OF
AMOUNT PUBLIC OFFERING PRICE
<S> <C>
First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%
</TABLE>
For accounts with assets over $1 million, the dealer advance payments reset
annually to the first breakpoint on the anniversary of the first purchase.
Class A Share purchases under this program may be made by Letter of Intent
or by combining concurrent purchases. The above advance payments will be
paid only on those purchases that were not previously subject to a front-
end sales charge and dealer advance payments. Certain retirement accounts
may not be eligible for this program.
A contingent deferred sales charge of 0.75% of the redemption amount
applies to Class A Shares redeemed up to 24 months after purchase. The CDSC
does not apply under certain investment programs where the investment
professional does not receive an advance payment on the transaction
including, but not limited to, trust accounts and wrap programs where the
investor pays an account level fee for investment management.
CLASS F SHARES
Investment professionals purchasing Class F Shares for their customers are
eligible to receive an advance payment from the distributor of 0.25% of the
purchase price.
Subaccounting Services
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping
requirements. The transfer agent may charge a fee based on the level of
subaccounting services rendered. Investment professionals holding Shares
in a fiduciary, agency, custodial, or similar capacity may charge or pass
through subaccounting fees as part of or in addition to normal trust or
agency account fees. They may also charge fees for other services that may
be related to the ownership of Shares. This information should, therefore,
be read together with any agreement between the customer and the investment
professional about the services provided, the fees charged for those
services, and any restrictions and limitations imposed.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part
by a distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940, the Fund is obligated to pay Share
redemptions to any one shareholder in cash only up to the lesser of
$250,000 or 1% of the net assets represented by such Share class during any
90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such
a case, the Fund will pay all or a portion of the remainder of the
redemption in portfolio securities, valued in the same way as the Fund
determines its NAV. The portfolio securities will be selected in a manner
that the Fund's Board deems fair and equitable and, to the extent
available, such securities will be readily marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving the portfolio securities and selling
them before their maturity could receive less than the redemption value of
the securities and could incur certain transaction costs.
Account and Share Information
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections
and other matters submitted to shareholders for vote. All Shares of the
Fund have equal voting rights, except that in matters affecting only a
particular class, only Shares of that class are entitled to vote.
Directors may be removed by the Board or by shareholders at a special
meeting. A special meeting of shareholders will be called by the Board upon
the written request of shareholders who own at least 10% of the Fund's
outstanding shares.
As of May 11, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class B Shares: Merrill
Lynch Pierce Fenner & Smith (as record owner holding Class B Shares for its
clients), Jacksonville, Florida, owned approximately 1,070,558 Shares
(9.34%).
As of May 11, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class C Shares: Merrill
Lynch Pierce Fenner & Smith (as record owner holding Class C Shares for its
clients), Jacksonville, Florida, owned approximately 1,278,653 Shares
(27.20%).
As of May 11, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class F Shares: Merrill
Lynch Pierce Fenner & Smith (as record owner holding Class F Shares for its
clients), Jacksonville, Florida, owned approximately 9,507,305 Shares
(21.91%).
Shareholders owning 25% or more of outstanding Shares may be in control and
be able to affect the outcome of certain matters presented for a vote of
shareholders.
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies. If these
requirements are not met, it will not receive special tax treatment and
will pay federal income tax.
FOREIGN INVESTMENTS
If the Fund purchases foreign securities, their investment income may be
subject to foreign withholding or other taxes that could reduce the return
on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject. The effective rate of foreign tax cannot
be predicted since the amount of Fund assets to be invested within various
countries is uncertain. However, the Fund intends to operate so as to
qualify for treaty-reduced tax rates when applicable.
Distributions from a Fund may be based on estimates of book income for the
year. Book income generally consists solely of the coupon income generated
by the portfolio, whereas tax-basis income includes gains or losses
attributable to currency fluctuation. Due to differences in the book and
tax treatment of fixed-income securities denominated in foreign
currencies, it is difficult to project currency effects on an interim
basis. Therefore, to the extent that currency fluctuations cannot be
anticipated, a portion of distributions to shareholders could later be
designated as a return of capital, rather than income, for income tax
purposes, which may be of particular concern to simple trusts.
If the Fund invests in the stock of certain foreign corporations, they may
constitute Passive Foreign Investment Companies (PFIC), and the Fund may be
subject to Federal income taxes upon disposition of PFIC investments.
If more than 50% of the value of the Fund's assets at the end of the tax
year is represented by stock or securities of foreign corporations, the
Fund intends to qualify for certain Code stipulations that would allow
shareholders to claim a foreign tax credit or deduction on their
U.S. income tax returns. The Code may limit a shareholder's ability to
claim a foreign tax credit. Shareholders who elect to deduct their portion
of the Fund's foreign taxes rather than take the foreign tax credit must
itemize deductions on their income tax returns.
Who Manages and Provides Services to the Fund?
BOARD OF DIRECTORS
The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the
shareholders. Information about each Board member is provided below and
includes each person's: name, address, birth date, present position(s) held
with the Fund, principal occupations for the past five years and positions
held prior to the past five years, total compensation received as a
Director from the Fund for its most recent fiscal year, and the total
compensation received from the Federated Fund Complex for the most recent
calendar year. The Fund is comprised of one fund and the Federated Fund
Complex is comprised of 54 investment companies, whose investment advisers
are affiliated with the Fund's Adviser.
As of May 11, 1999, the Fund's Board and Officers as a group owned less
than 1% of the Fund's outstanding Class A, B, C and F Shares.
An asterisk (*) denotes a Director who is deemed to be an interested person
as defined in the Investment Company Act of 1940. The following symbol (#)
denotes a Member of the Board's Executive Committee, which handles the
Board's responsibilities between its meetings.
<TABLE>
<CAPTION>
NAME
BIRTH
DATE
AGGREGATE TOTAL
ADDRESS PRINCIPAL
OCCUPATIONS COMPENSATION COMPENSATION FROM
POSITION WITH FUND FOR PAST FIVE
YEARS FROM FUND FUND AND FUND COMPLEX
<S>
<C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive
Officer $0 $0 for the
Birth Date: July 28, 1924 and Director or
Trustee Fund and 54 other
Federated Investors Tower of the Federated
Fund investment companies
1001 Liberty Avenue Complex; Chairman
and in the Fund Complex
Pittsburgh, PA Director,
Federated
CHAIRMAN AND DIRECTOR Investors,
Inc.;
Chairman and
Trustee,
Federated
Investment
Management
Company;
Chairman and
Director,
Federated
Investment
Counseling,
and
Federated
Global
Investment
Management
Corp.;
Chairman,
Passport Research,
Ltd.
THOMAS G. BIGLEY Director or Trustee of the Federated
Fund $2,028.42 $113,860.22 for the
Birth Date: February 3, 1934 Complex; Director, Member of
Executive Fund and 54 other
15 Old Timber Trail Committee, Children's Hospital
of investment companies
Pittsburgh, PA Pittsburgh; formerly: Senior Partner, Ernst
& in the Fund Complex
DIRECTOR Young LLP; Director, MED 3000 Group,
Inc.;
Director, Member of Executive
Committee,
University of
Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the Federated
Fund $2,231.59 $125,264.48 for the
Birth Date: June 23, 1937 Complex; President, Investment
Properties Fund and 54 other
Wood/IPC Commercial Dept. Corporation; Senior Vice
President, investment companies
John R. Wood Associates, Inc. Realtors John R. Wood and Associates, Inc.,
Realtors; in the Fund Complex
3255 Tamiami Trail North Partner or Trustee in private real
estate
Naples, FL ventures in Southwest Florida;
formerly:
DIRECTOR President, Naples Property
Management,
Inc. and Northgate Village
Development
Corporation.
NICHOLAS P. CONSTANTAKIS Director or Trustee of the Federated
Fund $0 $47,958.02 for the
Birth Date: September 3, 1939 Complex; formerly: Partner,
Andersen Fund and 39 other
175 Woodshire Drive Worldwide
SC. investment companies
Pittsburgh,
PA
in the Fund Complex
DIRECTOR
<CAPTION>
NAME
BIRTH
DATE
AGGREGATE TOTAL
ADDRESS PRINCIPAL
OCCUPATIONS COMPENSATION COMPENSATION FROM
POSITION WITH FUND FOR PAST FIVE
YEARS FROM FUND FUND AND FUND COMPLEX
<S>
<C> <C> <C>
JOHN F. CUNNINGHAM++ Director or Trustee
of $0 $0 for the
Birth Date: March 5, 1943 some of the
Federated Fund and 43 other
353 El Brillo Way Fund Complex;
Chairman, investment companies
Palm Beach, FL President and
Chief in the Fund Complex
DIRECTOR Executive
Officer,
Cunningham & Co., Inc.
;
Trustee
Associate,
Boston
College;
Director,
EMC
Corporation;
formerly:
Director,
Redgate
Communications.
Previous
Positions:
Chairman of the Board
and
Chief Executive
Officer,
Computer Consoles,
Inc.;
President and
Chief
Operating Officer,
Wang
Laboratories;
Director,
First National Bank
of
Boston; Director,
Apollo
Computer,
Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated
Fund $2,028.42 $113,860.22 for the
Birth Date: October 11, 1932 Complex; Professor of Medicine,
University Fund and 54 other
3471 Fifth Avenue of Pittsburgh; Medical Director, University
of investment companies
Suite 1111 Pittsburgh Medical Center -
Downtown; in the Fund Complex
Pittsburgh, PA Hematologist, Oncologist, and
Internist,
DIRECTOR University of Pittsburgh Medical
Center;
Member, National Board of
Trustees,
Leukemia Society of
America.
PETER E. MADDEN Director or Trustee of the Federated
Fund $2,077.88 $113,860.22 for the
Birth Date: March 16, 1942 Complex; formerly:
Representative, Fund and 54 other
One Royal Palm Way Commonwealth of Massachusetts
General investment companies
100 Royal Palm Way Court; President, State Street Bank and
Trust in the Fund Complex
Palm Beach, FL Company and State Street
Corporation.
DIRECTOR Previous Positions: Director, VISA USA
and
VISA International; Chairman and
Director,
Massachusetts Bankers
Association;
Director, Depository Trust
Corporation.
CHARLES F. MANSFIELD, JR.++ Director or Trustee of some of the
Federated $0 $0 for the
Birth Date: April 10, 1945 Fund Complex; Management
Consultant. Fund and 43 other
80 South Road Previous Positions: Chief Executive
Officer, investment companies
Westhampton Beach, NY PBTC International Bank; Chief
Financial in the Fund Complex
DIRECTOR Officer of Retail Banking Sector,
Chase
Manhattan Bank; Senior Vice
President,
Marine Midland Bank; Vice
President,
Citibank; Assistant Professor of
Banking
and Finance, Frank G. Zarb School
of
Business, Hofstra
University.
JOHN E. MURRAY, JR., J.D., S.J.D. Director or Trustee of the Federated
Fund $2,077.88 $113,860.22 for the
Birth Date: December 20, 1932 Complex; President, Law
Professor, Fund and 54 other
President, Duquesne University Duquesne University; Consulting
Partner, investment companies
Pittsburgh, PA Mollica &
Murray. in the Fund Complex
DIRECTOR Previous Positions: Dean and Professor
of
Law, University of Pittsburgh School of
Law;
Dean and Professor of Law,
Villanova
University School of
Law.
MARJORIE P. SMUTS Director or Trustee of the Federated
Fund $2.028.42 $113,860.22 for the
Birth Date: June 21, 1935 Complex; Public
Relations/Marketing/ Fund and 54 other
4905 Bayard Street Conference
Planning. investment companies
Pittsburgh, PA Previous Positions: National
Spokesperson, in the Fund Complex
DIRECTOR Aluminum Company of America;
business
owner.
JOHN S. WALSH++ Director or Trustee of some of the
Federated $0 $0 for the
Birth Date: November 28, 1957 Fund Complex; President and Director,
Heat Fund and 40 other
2007 Sherwood Drive Wagon, Inc.; President and
Director, investment companies
Valparaiso, IN Manufacturers Products, Inc.;
President, in the Fund Complex
DIRECTOR Portable Heater Parts, a division
of
Manufacturers Products, Inc.;
Director,
Walsh & Kelly, Inc.; formerly: Vice
President,
Walsh & Kelly,
Inc.
J. CHRISTOPHER DONAHUE+* President or Executive Vice President of
the $0 $0 for the
Birth Date: April 11, 1949 Federated Fund Complex; Director
or Fund and 22 other
Federated Investors Tower Trustee of some of the Funds in
the investment companies
1001 Liberty Avenue Federated Fund Complex; President
and in the Fund Complex
Pittsburgh, PA Director, Federated Investors, Inc.;
President
EXECUTIVE VICE PRESIDENT and Trustee, Federated
Investment
AND DIRECTOR Management Company; President
and
Director, Federated Investment
Counseling
and Federated Global
Investment
Management Corp.; President,
Passport
Research, Ltd.; Trustee,
Federated
Shareholder Services Company;
Director,
Federated Services
Company.
<CAPTION>
NAME
BIRTH
DATE
AGGREGATE TOTAL
ADDRESS PRINCIPAL
OCCUPATIONS COMPENSATION COMPENSATION FROM
POSITION WITH FUND FOR PAST FIVE
YEARS FROM FUND FUND AND FUND COMPLEX
<S>
<C> <C> <C>
EDWARD C. GONZALES Trustee or Director
of $0 $0 for the
Birth Date: October 22, 1930 some of the Funds in
the Fund and 1 other
Federated Investors Tower Federated Fund
Complex; investment company
1001 Liberty Avenue President,
Executive in the Fund Complex
Pittsburgh, PA Vice President
and
EXECUTIVE VICE PRESIDENT Treasurer of some of
the
Funds in the
Federated
Fund Complex;
Vice
Chairman,
Federated
Investors, Inc.;
Vice
President,
Federated
Investment
Management
Company and
Federated
Investment
Counseling,
Federated
Global
Investment
Management
Corp. and
Passport
Research,
Ltd.;
Executive Vice
President
and Director,
Federated
Securities
Corp.;
Trustee,
Federated
Shareholder
Services
Company.
JOHN W. MCGONIGLE Executive Vice President and Secretary
of $0 $0 for the
Birth Date: October 26, 1938 the Federated Fund Complex; Executive
Vice Fund and 54 other
Federated Investors Tower President, Secretary, and Director,
Federated investment companies
1001 Liberty Avenue Investors, Inc.; Trustee,
Federated in the Fund Complex
Pittsburgh, PA Investment Management
Company;
EXECUTIVE VICE PRESIDENT Director, Federated Investment
Counseling
AND SECRETARY and Federated Global
Investment
Management Corp.; Director,
Federated
Services Company; Director,
Federated
Securities
Corp.
RICHARD J. THOMAS Treasurer of the Federated Fund
Complex; $0 $0 for the
Birth Date: June 17, 1954 Vice President - Funds Financial
Services Fund and 54 other
Federated Investors Tower Division, Federated Investors, Inc.;
formerly: investment companies
1001 Liberty Avenue various management positions within
Funds in the Fund Complex
Pittsburgh, PA Financial Services Division of
Federated
TREASURER Investors,
Inc.
RICHARD B. FISHER President or Vice President of some of
the $0 $0 for the
Birth Date: May 17, 1923 Funds in the Federated Fund
Complex; Fund and 6 other
Federated Investors Tower Director or Trustee of some of the Funds
in investment companies
1001 Liberty Avenue the Federated Fund Complex; Executive
Vice in the Fund Complex
Pittsburgh, PA President, Federated Investors,
Inc.;
PRESIDENT Chairman and Director, Federated
Securities
Corp.
J. THOMAS MADDEN Chief Investment Officer of this Fund
and $0 $0 for the
Birth Date: October 22, 1945 various other Funds in the Federated
Fund Fund and 12 other
Federated Investors Tower Complex; Executive Vice
President, investment companies
1001 Liberty Avenue Federated Investment
Counseling, in the Fund Complex
Pittsburgh, PA Federated Global Investment
Management
CHIEF INVESTMENT OFFICER Corp., Federated Investment
Management
Company and Passport Research, Ltd.;
Vice
President, Federated Investors,
Inc.;
formerly: Executive Vice President
and
Senior Vice President, Federated
Investment
Counseling Institutional
Portfolio
Management Services Division; Senior
Vice
President, Federated
Investment
Management Company and
Passport
Research,
Ltd.
STEVEN J. LEHMAN Steven J. Lehman has been the
Fund's $0 $0 for the
Birth Date: June 16, 1957 portfolio manager since July 1997. He is
Vice Fund and 1 other
Federated Investors Tower President of the Fund. Mr. Lehman
joined investment company
1001 Liberty Avenue the Fund's Adviser in May 1997 as
a in the Fund Complex
Pittsburgh, PA Portfolio Manager and Vice President.
He
VICE PRESIDENT has been a Senior Portfolio Manager
since
1998. From 1986 to May 1997, Mr.
Lehman
served as a Portfolio Manager, then
Vice
President/Senior Portfolio Manager, at
First
Chicago NBD. Mr. Lehman is a
Chartered
Financial Analyst; he received his M.A.
from
the University of
Chicago.
</TABLE>
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Fund.
++ Messrs. Cunningham, Mansfield and Walsh became members of the Board of
Directors on April 1, 1999. They did not earn any fees for serving the
Fund Complex since these fees are reported as of the end of the last
calendar year. They did not receive any fees as of the fiscal year end of
the Company.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions
for the Fund.
Passport Research, Ltd. is a Pennsylvania limited partnership. Its general
partner is Federated Advisers, a wholly owned investment advisory
subsidiary of Federated, with a 50.5% interest. Its limited partner is
Edward D. Jones & Co. L.P., with a 49.5% interest.
The Adviser shall not be liable to the Fund or any Fund 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.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain
electronic equipment and software to institutional customers in order to
facilitate the purchase of Fund Shares offered by the Distributor.
CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING
As required by SEC rules, the Fund, its Adviser, and its Distributor have
adopted codes of ethics. These codes govern securities trading activities
of investment personnel, Fund Directors, and certain other employees.
Although they do permit these people to trade in securities, including
those that the Fund could buy, they also contain significant safeguards
designed to protect the Fund and its shareholders from abuses in this area,
such as requirements to obtain prior approval for, and to report, particular
transactions.
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. 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. The Adviser may
select brokers and dealers based on whether they also offer research
services (as described below). 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
the Distributor and its affiliates. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by
the Fund's Board.
RESEARCH SERVICES
Research services 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 may be used by the Adviser or by affiliates of
Federated in advising other accounts. To the extent that receipt of these
services may replace 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
those 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.
For the fiscal year ended February 28, 1999, the Fund's Adviser directed
brokerage transactions to certain brokers due to research services they
provided. The total amount of these transactions was $2,055,544,860.69 for
which the Fund paid $3,621,144.61 in brokerage commissions.
Investment decisions for the Fund are made independently from those of
other accounts managed by the Adviser. When the Fund and one or more of
those accounts invests in, or disposes of, the same security, available
investments or opportunities for sales will be allocated among the Fund and
the account(s) in a manner believed by the Adviser to be equitable. While
the coordination and ability to participate in volume transactions may
benefit the Fund, it is possible that this procedure could adversely impact
the price paid or received and/or the position obtained or disposed of by
the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides
administrative personnel and services (including certain legal and
financial reporting services) necessary to operate the Fund. Federated
Services Company provides these at the following annual rate of the average
aggregate daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and
may reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio investments
for a fee based on Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian
for the securities and cash of the Fund. Foreign instruments purchased by
the Fund are held by foreign banks participating in a network coordinated
by State Street Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent
subsidiary, Federated Shareholder Services Company, maintains all
necessary shareholder records. The Fund pays the transfer agent a fee based
on the size, type, and number of accounts and transactions made by
shareholders.
INDEPENDENT PUBLIC AUDITORS
Ernst & Young LLP is the independent public auditor for the Fund.
FEES PAID BY THE FUND FOR SERVICES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FEBRUARY 28 1999 1998 1997
<S> <C> <C> <C>
Advisory Fee Earned $11,803,339 $11,382,447 $10,761,268
Advisory Fee Reduction 0 1,543,801 1,691,837
Brokerage Commissions 4,322,325 3,580,504 1,371,490
Administrative Fee 1,186,629 1,145,447 1,084,280
12B-1 FEE
Class B Shares 1,003,367 - -
Class C Shares 437,867 - -
SHAREHOLDER SERVICES FEE
Class A Shares 1,905,509 - -
Class B Shares 334,456 - -
Class C Shares 145,956 - -
Class F Shares 1,321,468 - -
</TABLE>
Fees are allocated among classes based on their pro rata share of Fund
assets, except for marketing (Rule 12b-1) fees and shareholder services
fees, which are borne only by the applicable class of Shares.
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the Securities and
Exchange Commission's (SEC's) standard method for calculating performance
applicable to all mutual funds. The SEC also permits this standard
performance information to be accompanied by non-standard performance
information.
Unless otherwise stated, any quoted Share performance reflects the effect
of non-recurring charges, such as maximum sales charges, which, if
excluded, would increase the total return and yield. The performance of
Shares depends upon such variables as: portfolio quality; average
portfolio maturity; type and value of portfolio securities; changes in
interest rates; changes or differences in the Fund's or any class of
Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors
in the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns given for the one-year, five-year and ten-year or Start of
Performance periods ended February 28, 1999.
<TABLE>
<CAPTION>
Yield given for the 30-day period ended February 28, 1999.
30-DAY
SHARE CLASS PERIOD 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
CLASS A
Total Return NA 1.15% 11.36% 12.60%
Yield 3.19% NA NA NA
START OF
30-DAY PERFORMANCE
SHARE CLASS PERIOD 1 YEAR 5 YEARS 10 YEARS ON 9/28/94
<S> <C> <C> <C> <C> <C>
CLASS B
Total Return NA 1.33% NA NA 14.11%
Yield 2.43% NA NA NA NA
<CAPTION>
START OF
30-DAY PERFORMANCE
SHARE CLASS PERIOD 1 YEAR 5 YEARS 10 YEARS ON 4/27/93
<S> <C> <C> <C> <C> <C>
CLASS C
Total Return NA 5.37% 11.77% NA 10.60%
Yield 2.43% NA NA NA NA
<CAPTION>
START OF
30-DAY PERFORMANCE
SHARE CLASS PERIOD 1 YEAR 5 YEARS 10 YEARS ON 6/1/96
<S> <C> <C> <C> <C> <C>
CLASS F
Total Return NA 5.07% NA NA 15.02%
Yield 3.22% NA NA NA NA
</TABLE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value
of Shares over a specific period of time, and includes the investment of
income and capital gains distributions.
The average annual total return for Shares 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 NAV 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 annual reinvestment of all dividends and distributions.
YIELD
The yield of Shares is calculated by dividing: (i) the net investment
income per Share earned by the Shares over a 30-day period; by (ii) the
maximum offering price per Share on the last day of the period. This number
is then annualized using semi-annual compounding. This means that the
amount of income generated during the 30-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
Shares because of certain adjustments required by the SEC and, therefore,
may not correlate to the dividends or other distributions paid to
shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in
Shares, the Share performance is lower for shareholders paying those fees.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
* discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views
on how such developments could impact the Funds; and
* information about the mutual fund industry from sources such as the
Investment Company Institute.
The Fund may compare its performance, or performance for the types of
securities in which it invests, to a variety of other investments,
including federally insured bank products such as bank savings accounts,
certificates of deposit, and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete
view of Share performance. When comparing performance, you should consider
all relevant factors such as the composition of the index used, prevailing
market conditions, portfolio compositions of other funds, and methods used
to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC.
Lipper Analytical Services, Inc., for example, makes comparative
calculations for one-month, three-month, one-year, and five-year periods
which assume the reinvestment of all capital gains distributions and income
dividends.
DOW JONES INDUSTRIAL AVERAGE
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.
STANDARD & POOR'S RATINGS GROUP DAILY STOCK PRICE INDEX OF 500 COMMON
STOCKS
Standard & Poor's Ratings Group Daily Stock Price Index of 500 Common
Stocks, a composite index of common stocks in industry, transportation,
financial, and public utility companies, compares total returns of funds
whose portfolios are invested primarily in common stocks. In addition, the
Standard & Poor's index assumes reinvestment of all dividends paid by
stocks listed on its index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated in Standard & Poor's
figures.
STANDARD & POOR'S RATINGS GROUP UTILITY INDEX
Standard & Poor's Ratings Group Utility Index is an unmanaged index of
common stocks from 40 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 12-month
period.
DOW JONES UTILITY INDEX
Dow Jones Utility Index is an unmanaged index comprised of 15 utility
stocks that tracks changes in price daily and over a
6-month period. The index also provides the highs and lows for each of the
past five years.
MORNINGSTAR, INC.,
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.
Who is Federated Investors, Inc.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual
investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a
single portfolio manager. It is a fusion of individual talents and state-
of-the-art industry tools and resources. Federated's investment process
involves teams of portfolio managers and analysts, and investment
decisions are executed by traders who are dedicated to specific market
sectors and who handle trillions of dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds
with approximately $12.5 billion in total assets. In 1976, Federated
introduced one of the first municipal bond mutual funds in the industry and
is now one of the largest institutional buyers of municipal securities. The
Funds may quote statistics from organizations including The Tax Foundation
and the National Taxpayers Union regarding the tax obligations of
Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling
approximately $14.9 billion in assets across growth, value, equity income,
international, index and sector (i.e., utility) styles. Federated's value-
oriented management style combines quantitative and qualitative analysis
and features a structured, computer-assisted composite modeling system
that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9
money market funds and 15 bond funds with assets approximating
$22.8 billion and $7.1 billion, respectively. Federated's corporate bond
decision making-based on intensive, diligent credit analysis-is backed by
over 26 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the
industry. In 1983, Federated was one of the first fund managers to
participate in the asset backed securities market, a market totaling more
than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated manages 9
mortgage backed, 5 government/agency and 19 government money market mutual
funds, with assets approximating $5.3 billion, $1.8 billion and
$41.6 billion, respectively. Federated trades approximately $425 million
in U.S. government and mortgage backed securities daily and places
approximately $25 billion in repurchase agreements each day. Federated
introduced the first U.S. government fund to invest in U.S. government
bond securities in 1969. Federated has been a major force in the short- and
intermediate-term government markets since 1982 and currently manages
approximately $43.2 billion in government funds within these maturity
ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market
fund. Simultaneously, the company pioneered the use of the amortized cost
method of accounting for valuing shares of money market funds, a principal
means used by money managers today to value money market fund shares. Other
innovations include the first institutional tax-free money market fund. As
of December 31, 1998, Federated managed more than $76.7 billion in assets
across 52 money market funds, including 19 government, 9 prime and 23
municipal with assets approximating $41.6 billion, $22.8 billion and
$12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield -
J. Thomas Madden; U.S. fixed income - William D. Dawson, III; and global
equities and fixed income - Henry A. Frantzen. The Chief Investment Officers
are Executive Vice Presidents of the Federated advisory companies.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $5 trillion to the more than 7,300 funds
available, according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety
of investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for
a variety of purposes, 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
advisers. The marketing effort to these institutional clients is headed by
John B. Fisher, President, Institutional Sales Division, Federated
Securities Corp.
BANK MARKETING
Other institutional clients include more than 1,600 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 Timothy C. Pillion, Senior
Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated Funds are available to consumers through major brokerage firms
nationwide-we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country-supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in several
surveys performed by DALBAR, Inc. DALBAR is recognized as the industry
benchmark for service quality measurement. The marketing effort to these
firms is headed by James F. Getz, President, Broker/Dealer Sales Division,
Federated Securities Corp.
Financial Information
The Financial Statements for the Fund for the fiscal year ended
February 28, 1999 are incorporated herein by reference to the Annual Report
to Shareholders of Federated Utility Fund dated February 28, 1999.
Investment Ratings
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 effects 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.
BB-Debt rated BB has less near-term, vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating.
B-Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC-Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC-The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC debt rating.
C-The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
MOODY'S INVESTORS SERVICE, INC. LONG-TERM 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.
BA-Bonds which are BA are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA-Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA-Bonds which are rated CA represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated F-
1+.
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
BB-Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B-Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC-Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C-Bonds are imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1-Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
* Leading market positions in well established industries.
* High rates of return on funds employed.
* Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
* Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
* Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2-Issuers rated Prime-1 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-This designation 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.
A-2-Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1-(Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.
FITCH-2-(Very Good Grade) Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than the strongest issues.
Addresses
FEDERATED UTILITY FUND, INC.
Class A Shares
Class B Shares
Class C Shares
Class F Shares
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Passport Research, Ltd.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
SUB-ADVISER
Federated Global Investment Management Corp.
175 Water Street
New York, NY 10038-4965
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT PUBLIC AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
