AMERICA'S
UTILITY FUND
NINETEEN
NINETY-SEVEN
ANNUAL
REPORT
[AMERICA'S
UTILITY FUND
LOGO]
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[LOGO]
Dear Shareholder:
It is our privilege to send you the 1997 Annual Report for America's
Utility Fund.
Favorable market conditions produced attractive returns for the utility
sector and your Fund during 1997. Although utility stocks did not keep pace
with the extraordinary gains of the broader market indexes such as the Dow
Jones Industrial Average and Standard & Poor's 500,* that is to be expected
from stocks that have more conservative characteristics. These defensive
qualities should serve the Fund well in a more volatile market environment,
such as the one produced by the Asian crisis late last year.
During the year your Fund's investment manager continued to diversify
holdings away from a heavy emphasis on traditional utility companies and into
industry groups with greater growth potential. These efforts, for example,
raised the percentage of stocks outside the traditional domestic utility sector
to 21.6% of total Fund assets at December 31, 1997, up from 6.2% a year
earlier.
America's Utility Fund appears well-positioned for the coming year. Stock
selection methods should continue to accent stable, high-quality companies in
both the utility and non-utility sectors. Furthermore, a constructive process
of deregulating electric utility companies and an attractive interest-rate
environment may provide opportunities for favorable returns.
The Annual Report that follows provides market and investment commentary
from the managers of America's Utility Fund. Please review the information
carefully.
We encourage you if you have not done so already to take advantage of the
enhanced services that we now provide to our shareholders. They include
o Direct investment into the Fund via ACH automatic direct deposit from
your bank account;
o Automatic dividend and capital gain reinvestment;
o New Roth IRA and Educational IRA account services;
o 24-hour-a-day access to information about your account including
account balances, daily price updates, current yield, and
market-closings by calling (800) 487-3863.
Thank you for your investment in America's Utility Fund.
Sincerely,
/s/ Daniel J. Ludeman /s/ Paul F. Costello
Daniel J. Ludeman Paul F. Costello
Chairman President
*The S&P Utilities Index recorded a 24.6% gain. The S&P Utilities Index
is one of the four broad sectors in the S&P 500 Index and includes all the
utility stocks in the S&P 500 Index. It is a market-value weighted index (stock
price times shares outstanding), with each stock affecting the Index in
proportion to its market value. This Index, calculated by Standard & Poor's, is
a total return index with dividends reinvested. Investors may not invest in an
index. The S&P Utilities Index is used as the benchmark for the performance of
America's Utility Fund (AUF) because it is identified by the investment advisor
as the index that most accurately reflects the management style and portfolio
composition of AUF. The Dow Jones Industrial Average posted a 25.0% return. The
Dow Jones Industrial Average is a price-weighted index of 30
large-capitalization stocks traded on the New York stock exchange. The Dow is
computed by adding the total value of the 30 stocks and dividing by a factor
that adjusts for distortions caused by stock splits over the years. It is
considered to be a barometer of how shares of the largest U.S. companies are
performing. The Standard & Poor's Index posted a 33.4% return. The Standard &
Poor's Index (S&P 500) is an unmanaged, market-value-weighted index of 500
widely held domestic common stocks. An unmanaged index does not reflect
expenses and may not correspond to the performance of a managed portfolio in
which expenses are incurred. Investors cannot invest in the indexes.
America's Utility Fund provided a rewarding total return of 23.3%. Past
performance is no guarantee of future results. Shares, when redeemed, may be
worth more or less than their original cost.
For more information and prospectuses for America's Utility Fund, please
call us at (800) 487-3863. The prospectuses contain complete information
regarding fees, sales charges, and expenses. Please read them carefully before
investing or sending money.
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Dollar-Cost Averaging
More and more, investors are using dollar-cost averaging to avoid trying
to time investment purchases or sales.
America's Utility Fund, with its dollar-cost averaging installment
payment option, has provided shareholders with a way to turn market uncertainty
to their advantage.*
Dollar-cost averaging means you simply invest the same amount of money at
evenly spaced time periods. It doesn't matter whether the market moves up or
down while you're investing.
The chart below illustrates how dollar-cost averaging works.** Assume you
decide to invest $30 a month in a mutual fund over the next 12 months and the
fund price fluctuates.
When the price of the fund is low, you buy more shares; when the price is
high you buy fewer shares. This can potentially result in an average cost per
share that is less than the average share price.
In the illustration provided below, the average cost of shares purchased
is $10.88. Had you made a lump-sum investment in January, the cost would have
been $15 per share.
So rather than trying to figure out the best time to buy and sell, you
may want to invest on a periodic basis and avoid the highs and lows.
America's Utility Fund offers investors this option through our monthly
installment plan with a $40 per month minimum.
<TABLE>
<CAPTION>
Shares Cumulative Shares Total
Month Share Price Purchased Purchased Investment
<S> <C> <C> <C> <C> <C> <C>
January $ 15.00 2.0 2.0 $ 30.00
February $ 20.00 1.5 3.5 $ 60.00
March $ 15.00 2.0 5.5 $ 90.00
April $ 12.00 2.5 8.0 $ 120.00
May $ 10.00 3.0 11.0 $ 150.00
June $ 8.00 3.8 14.8 $ 180.00
July $ 10.00 3.0 17.8 $ 210.00
August $ 10.00 3.0 20.8 $ 240.00
September $ 10.00 3.0 23.8 $ 270.00
October $ 8.00 3.8 27.6 $ 300.00
November $ 10.00 3.0 30.6 $ 330.00
December $ 12.00 2.5 33.1 $ 360.00
Average Price Per
Share $ 11.67
Average Dollar Cost
of Shares Purchases $ 10.88
Cost of Lump-Sum
Purchase in January $ 15.00
</TABLE>
* This method of investing involves continous investment in a security
regardless of fluctuating price levels and you should consider your financial
ability to continue purchases through periods of low price levels. It won't
assure a profit or protect you from loss in declining markets or against loss
if you stop the program when the value of your account is less than the cost of
the shares you bought.
** This hypothetical example does not represent the results of an
installment purchase in America's Utility Fund. America's Utility Fund may
perform better or worse than this example.
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Management Discussion and Analysis
by John G. Davenport, CFA and Richard L. Rice, CFA,
Portfolio Managers
The year 1997 provided outstanding returns for U.S. investors. For the
first time in its 101-year history, the Dow Jones Industrial Average (DJIA)
gained more than 20% in three consecutive years, posting a 25.0% return last
year.* The broader, market capitalization-weighted Standard and Poor's 500 Index
produced an extraordinary 33.4% return, while the more conservative S&P
Utilities Index recorded a 24.6% gain.** Fixed-income investors also had a good
year as the Lehman Brothers Aggregate Bond Index returned 9.7%.(dagger)
America's Utility Fund ("Fund") provided a rewarding total return of 23.3%
including capital appreciation and dividend income.(dagger) (dagger)
Full-year results mask a dramatic change in investor psychology during
the period, however, as fourth-quarter returns were almost a mirror-image of
what occurred during the first nine months.
Through September, the S&P 500's 30% rise, versus 7% for S&P Utilities
and 9% for the Fund, was fueled by a continuation of positive economic signals
and expectations of strong corporate earnings growth. Then, in October, the
Asian currency crises spread to Hong Kong, triggering worldwide declines in
equity prices and renewed interest in more defensive investments (following a
long absence). True to their traditional form, utilities performed well during
the more volatile fourth quarter as the S&P Utilities Index rose 16.3%, the
Fund advanced 13.3%, and the S&P 500 struggled to achieve a 2.9% gain, surging
4% in the final week. International mutual funds were notably impacted by
broadening market turmoil in the Far East, plunging 7.7%, on average, during
the final quarter.~
Diversification efforts during 1997 brought the proportion of stocks
outside the traditional domestic utility sector to 21.6% of total Fund assets,
up 15.4% from the beginning of the year. Industries represented by these stocks
include real estate investment trusts, pharmaceuticals, financial services,
specialty chemicals, and packaging, among others. Although the lower proportion
of utilities in the later part of 1997 hurt the Fund's fourth-quarter relative
performance, we continue to feel that this diversification process enhances the
Fund's growth characteristics and, in turn, its longer-term total return
potential. Non-utility stocks tend to provide lower dividend income, however,
which necessitates a slight reduction in the Fund's indicated dividend for
1998, beginning with the March payout.
Looking Ahead
Continued market volatility appears likely in coming months. Despite
favorable sentiment surrounding recent International Monetary Fund loans and
reform agreements with weak Asian economies, regional problems are structural,
rooted in years of over-investment and economic mismanagement resulting in
cumulative bad debts, weak currencies and prospects of deep economic hardship.
There are no quick fixes for these imbalances - just witness Japan's continuing
struggle to recover from its bubble economy of the late 1980s. The process of
unwinding these excesses has deflationary characteristics which will dampen the
earnings outlook of U.S. companies through reduced export demand, intense
pricing competition and currency translations. With corporate profit margins
having reached historically high levels, the potential for earnings
disappointments in a slowing economy has risen.
Your Fund is well-positioned for this environment. Stock selection has
continued to emphasize well-managed, stable, above-average quality companies in
utility and non-utility industries. Utility deregulation is proceeding in a
constructive manner, valuations of our holdings are attractive relative to the
broad market and the interest rate outlook is favorable. These are attractive
attributes for conservative long-term investors.
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* The Dow Jones Industrial Average is a price-weighted index of 30
large-capitalization stocks traded on the New York stock exchange. The Dow is
computed by adding the total value of the 30 stocks and dividing by a factor
that adjusts for distortions caused by stock splits over the years. It is
considered to be a barometer of how shares of the largest U.S. companies are
performing.
** The Standard & Poor's Index (S&P 500) is an unmanaged,
market-value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. Investors
cannot invest in the S&P Index.
The S&P Utilities Index is one of the four broad sectors in the S&P 500
Index and includes all the utility stocks in the S&P 500 Index. It is a
market-value weighted index (stock price times shares outstanding), with each
stock affecting the Index in proportion to its market value. This Index,
calculated by Standard & Poor's, is a total return index with dividends
reinvested. Investors may not invest in an index. The S&P Utilities Index is
used as the benchmark for the performance of America's Utility Fund (AUF)
because it is identified by the investment advisor as the index that most
accurately reflects the management style and portfolio composition of AUF.
(dagger) The Lehman Brothers Aggregate Bond Index is commonly used to
compare performance of fixed-income securities. It is the broadest of the Lehman
fixed-income indexes, covering the U.S. investment grade fixed rate bond market,
with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities. It is comprised of
securities that are U.S. domestic, taxable, and dollar denominated.
(dagger) (dagger) Past performance is no guarantee of future results. Your
investment return and principal value will fluctuate so that when shares are
redeemed, they may be worth more or less than the original cost. Mutual funds
are not obligations of, or guaranteed by, any bank, and they are not federally
insured.
~ Source: Lipper Analytical Services, an independent rating company,
groups funds by investment objectives and calculates performance figures for
each group. Performance does not include sales charges and does include
reinvestment of all distributions.
While the portfolio managers will endeavor to manage the portfolio in
accordance with the process described, there are no guarantees that they will
be successful.
This material must be preceded or accompanied by a current prospectus for
America's Utility Fund, which contains complete information regarding fees,
sales charges, and expenses. Please read it carefully before you invest or send
money.
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Average Annual Total Returns
for the Periods Ended December 31, 1997
One Year Since Inception (5/5/92)*
23.31% 11.96%
SEC current yield as of December 31, 1997 3.34%**
<TABLE>
<CAPTION>
5/92 6/92 12/92 6/93 12/93 6/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97
<S> <C>
America's Utility Fund 10,000 10,170 11,190 12,642 12,679 10,728 11,019 12,479 14,577 14,839 15,373 16,149 18,957
S&P Utilities Index~ 9,985 10,122 11,195 12,696 12,811 11,750 11,794 13,544 16,750 16,758 17,273 17,672 21,531
</TABLE>
Past performance is not indicative of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than the original cost. Mutual funds are not obligations
of or guaranteed by any bank and are not federally insured.
* Reflects operation of America's Utility Fund from the date of
inception 5/5/92 through 12/31/97.
** SEC current yield is calculated by dividing the net investment income
per share for the 30 days ended 12/31/97 by the offering price per
share on that date. The figure is then compounded and annualized.
*** Represents a hypothetical investment of $10,000 in America's Utility
Fund. Performance assumes the reinvestment of all dividends and
distributions.
~ The S&P Utilities Index is one of four broad sectors in the S&P 500
Index and includes all the utility stocks in the S&P 500 Index. It is a
market-value weighted index (stock price times shares outstanding),
with each stock affecting the Index in proportion to its market value.
This Index, calculated by Standard & Poor's, is a total return index
with dividends reinvested. Investors may not invest in an index. The
S&P Utilities Index is used as the benchmark for the performance of
America's Utility Fund (AUF) because it is identified by the investment
advisor as the index that most accurately reflects the management style
and portfolio composition of AUF.
This material must be preceded or accompanied by a current Prospectus for
America's Utility Fund, which contains complete information regarding fees,
sales charges, and expenses. Please read it carefully before you invest or send
money.
America's Utility Fund, Inc.
Portfolio of Investments
December 31, 1997
<TABLE>
<CAPTION>
Market Value
Shares Common Stocks - 90.92% (Note 2)
- ---------- --------------------------------------- --------------
<S> <C> <C>
Public Utility - Electric 44.57%
---------------------------------------
66,100 Allegheny Energy, Inc. $ 2,148,250
73,810 Chilgener S.A.* 1,808,345
169,200 DPL, Inc. 4,864,500
69,950 DQE, Inc. 2,456,994
113,500 DTE Energy Company 3,937,031
78,800 Duke Energy Corporation 4,363,550
125,000 Eastern Utilities Associates Company 3,281,250
82,000 Endesa S.A.* 1,491,375
150,600 FirstEnergy Corporation 4,367,400
67,000 FPL Group, Inc. 3,965,563
77,600 GPU, Inc. 3,268,900
165,700 LG&E Energy Corporation 4,101,075
90,800 New Century Energies 4,352,725
60,300 NIPSCO Industries, Inc. 2,981,081
75,400 Northern States Power Company 4,392,050
89,700 SCANA Corporation 2,685,394
186,000 Southern Company 4,812,750
154,600 TECO Energy, Inc. 4,348,125
86,100 Tucson Electric Power Company # 1,560,562
111,700 Western Resources, Inc. 4,803,100
-----------
69,990,020
-----------
Public Utility - Natural Gas - 10.92%
---------------------------------------
74,000 Enron Corporation 3,075,625
93,000 Keyspan Energy Corporation 3,423,563
78,000 Nicor, Inc. 3,290,625
94,900 Pacific Enterprises 3,570,612
85,000 Questar Corporation 3,793,125
-----------
17,153,550
-----------
Telecommunications - 18.84%
---------------------------------------
65,000 Ameritech Corporation 5,232,500
63,300 Bell Atlantic Corporation 5,760,300
5,800 British Telecom PLC* 465,813
106,000 GTE Corporation 5,538,500
53,800 MCI Communications Corporation 2,303,312
79,500 SBC Communications, Inc. 5,823,375
49,600 Sprint Corporation 2,907,800
17,000 Telefonica De Espana S.A.* 1,548,062
-----------
29,579,662
-----------
Non-Utility Securities - 16.59%
---------------------------------------
30,000 Bemis Company 1,321,875
7,500 Bristol Myers Squibb 709,687
43,000 Colonial Properties Trust 1,295,375
24,000 Emerson Electric Company 1,354,500
29,800 Federal National Mortgage Association 1,700,463
15,600 Grainger (W.W.), Inc. 1,516,125
21,500 Johnson & Johnson 1,416,313
51,200 Liberty Property Trust 1,462,400
39,300 Mack Cali Realty Corporation 1,611,300
53,700 Nalco Chemical Company 2,124,506
54,000 Nationwide Health Properties, Inc. 1,377,000
60,700 Philip Morris Companies, Inc. 2,750,469
23,000 Realty Income Corporation 585,063
21,000 Schering - Plough Corporation 1,304,625
53,400 Sherwin Williams Company 1,481,850
45,400 Sonoco Products Company 1,574,813
54,300 Sysco Corporation 2,474,043
-----------
26,060,407
-----------
Total Common Stocks
(cost $108,747,319) 142,783,639
-----------
</TABLE>
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America's Utility Fund, Inc.
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Shares or
Principal Market Value
Amount (Note 2)
- ------------- ---------------
<S> <C> <C>
Preferred Stocks - 1.59%
----------------------------------------
20,000 BankAmerica Trust 0.75% $ 516,250
38,000 Newell Financial Trust 5.25%,
Convertible (a) 1,985,500
------------
Total Preferred Stocks (cost
$2,499,750) 2,501,750
------------
Corporate Bonds - 4.52%
----------------------------------------
$2,000,000 Appalachian Power Company, 7.38%,
8/15/02 2,044,402
1,250,000 Duke Energy Corporation, 8.00%,
11/1/99 1,294,386
2,000,000 Texas Utilities Electric Company,
8.25%, 4/1/04 2,182,662
1,500,000 Wisconsin Public Service, 7.30%,
10/1/02 1,576,706
------------
Total Corporate Bonds
(cost $7,001,611) 7,098,156
------------
Repurchase Agreements - 2.96%
----------------------------------------
4,651,580 Goldman Sachs & Company Dated
12/31/97, 6.80%, due 1/2/98,
collateralized by $4,545,243 Federal
Home Loan Mortgage Corporation,
8.50%, 10/1/26, market value
$4,746,938 (cost $4,651,580) 4,651,580
------------
Total Investments - 99.99%
(cost $122,900,260) 157,035,125
Other Assets less Liabilities - 0.01% 18,261
------------
Net Assets - 100.00% $157,053,386
============
</TABLE>
* American Depository Receipts.
# Non-income producing.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Directors.
See notes to financial statements.
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C>
Assets
Investments, at market value
(cost $122,900,260) (Note 2) $157,035,125
Cash 23,082
Receivables
Dividends and interest 604,215
Fund shares sold 17,414
------------
Total assets 157,679,836
------------
Liabilities
Payables
Fund shares redeemed 80,522
Dividends 452,905
Accrued expenses and other liabilities 93,023
------------
Total liabilities 626,450
------------
Net Assets $157,053,386
============
Net Assets represented by:
Paid-in capital $121,221,392
Accumulated net realized gain on investment
transactions 1,697,129
Net unrealized appreciation on investments 34,134,865
------------
Net Assets $157,053,386
============
Net Asset Value per Share $ 29.03
============
Shares Outstanding 5,410,009
</TABLE>
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America's Utility Fund, Inc.
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
Investment income (Note 2)
Interest $ 936,466
Dividends * 5,706,167
-----------
Total investment income 6,642,633
-----------
Expenses
Administrative service fees (Note 4) 596,068
Shareholder service fees (Note 5) 354,802
Transfer agent fees 337,598
Management fee (Note 4) 371,906
Shareholder reports and postage expenses 61,265
Directors' fees and expenses 48,841
Legal fees 26,991
Custodian fees 21,575
Registration expenses 12,853
Audit fees 9,425
Miscellaneous 3,855
-----------
Total expenses 1,845,179
-----------
Deduct
Reimbursement from manager (Note 4) 124,524
-----------
Net expenses 1,720,655
-----------
Net investment income 4,921,978
-----------
Realized and unrealized gain on investments
Net realized gain on investments (Note 2) 5,451,642
Change in unrealized appreciation of investments 20,063,982
-----------
Net realized and unrealized gain on investments 25,515,624
-----------
Net increase in net assets resulting from operations $30,437,602
===========
</TABLE>
*Net of foreign withholding taxes of $51,120.
See notes to financial statements.
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Net Increase (Decrease) in Net
Assets
Operations
Net investment income $ 4,921,978 $ 5,849,419
Net realized gain on investments 5,451,642 5,267,015
Change in unrealized appreciation
(depreciation) of investments 20,063,982 (4,116,828)
------------- -------------
Increase in net assets resulting from
operations 30,437,602 6,999,606
Distributions to Shareholders
Net investment income (5,168,432) (5,725,433)
Net realized gain on investments (4,139,573) -
------------- -------------
Net decrease from distributions (9,308,005) (5,725,433)
Capital Share Transactions (Note 5)
Proceeds from sale of shares 12,123,469 15,469,548
Reinvested distributions 8,532,056 5,280,490
Shares redeemed (29,147,694) (40,438,611)
------------- -------------
Change in net assets resulting
from capital share transactions (8,492,169) (19,688,573)
------------- -------------
Increase (decrease) in net assets 12,637,428 (18,414,400)
Net Assets
Beginning of year 144,415,958 162,830,358
------------- -------------
End of year (including accumulated
undistributed net investment
income of $0 and $170,657 for
the years ended 1997 and 1996) $ 157,053,386 $ 144,415,958
============= =============
</TABLE>
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Financial Highlights
For the Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year $ 25.07 $ 24.72
--------- ---------
Income from investment operations
Net investment income 0.92 0.98
Net realized and unrealized gain (loss) on investments 4.79 0.33
--------- ---------
Total from investment operations 5.71 1.31
--------- ---------
Less distributions from:
Net investment income (0.96) (0.96)
Net realized capital gains (0.79) -
-------- ----------
Total distributions (1.75) (0.96)
-------- ----------
Net asset value, end of year $ 29.03 $ 25.07
========= ==========
Total Return 23.31% 5.46%
Ratios / Supplemental Data
Net assets, end of year (in millions) $ 157.05 $144.42
Ratio of expenses to average net assets 1.21% 1.27%
Ratio of expenses to average net assets before expense reimbursement 1.30% 1.36%
Ratio of net investment income to average net assets 3.46% 3.90%
Portfolio turnover rate 26.47% 24.05%
Average commission rate paid per share $ 0.0689 $0.0680
<CAPTION>
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year $ 19.50 $ 23.54 $ 21.95
-------- --------- --------
Income from investment operations
Net investment income 0.96 0.96 0.91
Net realized and unrealized gain (loss) on investments 5.22 (4.04) 2.00
-------- --------- --------
Total from investment operations 6.18 (3.08) 2.91
-------- --------- --------
Less distributions from:
Net investment income (0.96) (0.96) (0.92)
Net realized capital gains - - (0.40)
-------- --------- -------
Total distributions (0.96) (0.96) (1.32)
-------- --------- -------
Net asset value, end of year $ 24.72 $ 19.50 $ 23.54
======== ========= ========
Total Return 32.30% (13.10%) 13.26%
Ratios / Supplemental Data
Net assets, end of year (in millions) $ 162.83 $ 125.01 $ 133.53
Ratio of expenses to average net assets 1.21% 1.21% 1.21%
Ratio of expenses to average net assets before expense reimbursement 1.34% 1.33% 1.41%
Ratio of net investment income to average net assets 4.40% 4.66% 4.19%
Portfolio turnover rate 27.77% 28.85% 21.20%
Average commission rate paid per share
</TABLE>
See notes to financial statements.
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America's Utility Fund, Inc.
Notes to Financial Statements
December 31, 1997
Note 1: Organization
America's Utility Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Fund was organized as a Maryland corporation on January 28, 1992. On
February 14, 1992 (initial investment date), the Fund sold 500,000 shares of
common stock to Dominion Resources, Inc., for $10,000,000. The Fund commenced
sales to the public on May 5, 1992.
The Fund's investment objective is to seek current income and moderate capital
growth by investing primarily in securities issued by utility companies. The
Fund's investments in utility companies may include equity securities, (common
and preferred stocks) and debt securities.
Note 2: Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates,
any such differences are expected to be immaterial to the net assets of the
Fund.
(a) Security Valuation. Investments in securities traded on a national
securities exchange and over-the-counter securities quoted on the NASDAQ
National Market System are valued at the last reported sales price or, lacking
any sales, at the mean between the bid and asked prices. If a mean cannot be
determined, then the securities are valued at the best available current bid
price. Securities traded in the over-the-counter market, other than those
quoted on the NASDAQ National Market System, are valued at the last available
bid price. Short-term investments with remaining maturities of 60 days or less
are carried at amortized cost, which approximates market value. Securities for
which market quotations are not readily available are valued at fair value as
determined in good faith under procedures approved by the Board of Directors.
(b) Repurchase Agreements. It is the policy of the Fund to require that
repurchase agreement investments be fully collateralized at all times.
Procedures have been established by the Fund to monitor, on a daily basis, the
market value of each repurchase agreement's underlying securities to ensure the
existence of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Fund's advisor to be creditworthy pursuant to guidelines established by the
Fund's Board of Directors. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly, the
Fund could receive less than the repurchase price on the sale of collateral
securities.
(c) Federal Income Taxes. No provision for federal income taxes has been made
since it is the Fund's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to
distribute to its shareholders within the allowable time limit substantially
all taxable income and realized capital gains.
(d) Distributions. Distributions from net investment income are declared and
paid quarterly. Distributions of capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of income and gains on various investment securities held by the
Fund, and other timing differences and differing characterization of
distributions made by the Fund as a whole. As of December 31, 1997, the Fund
reclassified $75,797 of accumulated net realized gains to undistributed
accumulated net investment income primarily to reflect the treatment of
short-term capital gains as ordinary income for federal income tax purposes.
This reclassification has no impact on net investment income, realized
gain/loss and net asset value of the Fund.
(e) Security Transactions. The Fund records security transactions on the trade
date. Gains and losses on securities sold are determined on the first-in,
first-out (FIFO) method. Dividends to shareholders are recorded on the
ex-dividend date. Discounts and premiums on securities purchased are amortized
over the life of the respective securities.
(f) Investment Income. Dividend income is recognized on the ex-dividend date.
Interest income is recognized daily on an accrual basis and includes
amortization of premiums and discounts.
Note 3: Investment Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were $36,545,931 and $50,469,261, respectively. Net
unrealized appreciation at December 31, 1997, based on the cost of securities
for federal income tax purposes of $122,900,260 is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $34,484,676
Gross unrealized depreciation (349,811)
-----------
Net unrealized appreciation $34,134,865
===========
</TABLE>
Note 4: Administrative Services Fees and Other Transactions With Affiliates
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as investment
manager to the Fund under an Investment Advisory Agreement. Pursuant to this
Agreement, Mentor Advisors receives for its services an annual investment
management fee expressed as a percentage of the average daily net assets of the
Fund as follows: 0.75% of the first $5 million of average daily net assets,
0.50% of the next $5 million, 0.25% of the next $90 million, 0.20% of the next
$100 million, 0.15% of the next $100 million and 0.10% of the average daily net
assets in excess of $300 million. Mentor Advisors is a wholly owned subsidiary
of Mentor Investment Group, LLC, ("Mentor") which is in turn a partially owned
subsidiary of Wheat First Union. EVEREN Capital Corporation owns 20% of the
outstanding interest in Mentor. (See "Acquisition of Advisor" below.)
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<PAGE>
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Notes to Financial Statements (continued)
Mentor provides administrative services to the Fund under an Administrative
Services Agreement. Pursuant to the Agreement, the Fund pays Mentor a fee at
the annual rate of 0.65% of the Fund's average daily net assets, less the
amount of any management fees paid to Mentor Advisors pursuant to the
Investment Advisory Agreement.
The Fund entered into a Shareholder Services Agreement with Mentor, pursuant to
which Mentor, itself, through America's Utility Fund Service Company ("AUFSC"),
or through other financial institutions, provided shareholder support services
to the Fund and its shareholders. The Fund paid fees to Mentor under that
Agreement at an annual rate of 0.25% of the Funds average daily net assets.
Prior to October 31, 1997, pursuant to a Sub-Shareholder Services Agreement
between Mentor and AUFSC, Mentor paid fees to AUFSC at the same annual rate of
the Fund's assets in respect of which AUFSC provided specified shareholder
services. Effective October 31, 1997, the Sub-Shareholder Services Agreement
was terminated.
Prior to December 15, 1997, AUFSC also received fees from the Fund's transfer
agent for services performed under a Sub-Transfer Agency Agreement. Pursuant to
that Agreement, the transfer agent paid AUFSC a fee at the annual rate of 0.10%
of the Fund's average daily net assets attributable to shares held by the
shareholders to whom the AUFSC provided such sub-transfer agency services.
Effective December 15, 1997, the Sub-Transfer Agency Agreement was terminated.
Mentor agreed, for the year ended December 31, 1997, to bear the expenses of
the Fund to the extent total Fund operating expenses exceeded 1.21% of the
Fund's average daily net assets. As a result of this expense limitation, Mentor
incurred expenses of $124,524 during the year ended December 31, 1997.
Acquisition of Advisor
On August 20, 1997, Wheat First Butcher Singer, Inc. ("Wheat") entered into an
Agreement and Plan of Merger ("Merger") with First Union Corporation ("First
Union"), pursuant to which Wheat would be merged into First Union. First Union
is a bank holding company that as of December 31, 1997, had assets of $157
billion. On February 2, 1998, the Merger was consummated and, First Union
became the owner of a majority of the beneficial interest in Mentor Advisors.
At a meeting held on October 14, 1997, the Board of Directors of America's
Utility Fund approved new Investment Advisory, and Administration Agreements
which replaced the existing agreements. Each of the existing agreements by its
terms terminated upon the consummation of the Merger, since the Merger
constituted a change in control of Mentor Advisors for purposes of the
Investment Company Act of 1940, as amended ("1940 Act"). The shareholders of
the Fund at a meeting held on December 22, 1997, voted to approve the new
Investment Advisory Agreements with Mentor Advisors. Each new agreement is
substantially identical to the existing agreements it replaced, other than its
effective and termination date.
Note 5: Capital Share Transactions
As of December 31, 1997 there were 500,000,000 shares of $0.0001 par value
capital stock authorized. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/97 12/31/96
--------------- ---------------
<S> <C> <C>
Shares sold 468,044 631,957
Shares issued upon reinvestment of
dividends 310,707 215,954
Shares redeemed (1,129,220) (1,674,189)
---------- ----------
(350,469) (826,278)
========== ==========
</TABLE>
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<PAGE>
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
America's Utility Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
America's Utility Fund, Inc., including the portfolio of investments, as of
December 31, 1997, and the related statements of operations, changes in net
assets and financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of
changes in net assets for the year ended December 31, 1996 and the financial
highlights for each of the years in the four-year period ended December 31,
1996 were audited by other auditors whose report dated February 4, 1997
expressed an unqualified opinion on those financial statements and financial
highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of America's Utility Fund, Inc. as of December 31, 1997, the results
of its operations, changes in its net assets and financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 6, 1998
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<PAGE>
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Additional Information (unaudited)
Shareholders of the Fund considered and acted upon the proposals listed below
at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
<TABLE>
<CAPTION>
Affirmative Withheld
------------- ---------
<S> <C> <C>
Daniel J. Ludeman 2,847,956 77,479
Troy A. Peery, Jr. 2,847,956 77,479
Arnold H. Dreyfuss 2,847,956 77,479
Thomas F. Keller 2,847,956 77,479
Peter J. Quinn, Jr. 2,847,956 77,479
Louis W. Moelchert, Jr. 2,847,956 77,479
Arch T. Allen, III 2,847,956 77,479
Weston E. Edwards 2,847,956 77,479
Jerry R. Barrentine 2,847,956 77,479
J. Garnett Nelson 2,847,956 77,479
</TABLE>
2. To approve a new management contract between the Fund and Mentor Investment
Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer,
Inc., with First Union Corporation:
<TABLE>
<S> <C>
Affirmative 2,720,542
Against 100,021
Abstain 104,872
</TABLE>
3. To approve a new management contract between the Fund and Mentor Investment
Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
<TABLE>
<S> <C>
Affirmative 2,700,689
Against 107,074
Abstain 117,672
</TABLE>
4. To ratify the selection of independent auditors by the Board of Directors:
<TABLE>
<S> <C>
Affirmative 2,800,330
Against 37,124
Abstain 87,981
</TABLE>
Federal Tax Status of Dividends Declared (unaudited)
Of the ordinary income distributions paid during the year ended December 31,
1997, the Fund is designating 100% as eligible for the dividends-received
exclusion for corporations. Long-term capital gain dividends paid during the
period are presented below. For federal income tax purposes, dividends from
short-term capital gains are classified as ordinary income. All net investment
income dividends were ordinary income. The percentage of qualifying dividends
eligible for the corporate dividends received deduction are also listed below.
<TABLE>
<CAPTION>
Total Long-Term Capital Qualifying Dividends
<S> <C> <C>
Gain Dividends $ 4,139,574 100%
Long Term 28% 2,609,587 100%
Long Term 20% 1,529,987 100%
</TABLE>
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