AMERICA'S
UTILITY FUND
NINETEEN
NINETY EIGHT
ANNUAL
REPORT
[America Utility Logo]
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AMERICA'S
UTILITY FUND
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[America Utility Logo]
To our shareholders:
On behalf of all the associates at Mentor Investment Group, we would like
to take this opportunity to thank you for your investment in the America's
Utility Fund. This Annual Report reaffirms our commitment to our shareholders
and details the financial performance of these investments for the period ended
December 31, 1998.
Founded in 1970, Mentor Investment Group is an investment advisory firm
with more than $15 billion under management. We pride ourselves on a strong
heritage of providing quality service and a variety of investment choices that
help meet our shareholders' financial objectives by offering mutual funds and
separately-invested portfolios.
In the commentary that follows, Mentor's investment team presents
insightful perspectives on the markets and strategies that shaped their
investment decisions for the past fiscal year. Our investment teams operate
with these priorities:
Focus -- In most money management companies, each investment manager has
multiple responsibilities. At Mentor, our investment managers are singularly
focused on enhancing the value of their portfolios. This means that you can be
assured of a consistent, proven approach to developing a winning financial
strategy.
Opportunities -- By offering six different management styles, portfolio
diversification is simplified. By offering multiple styles, Mentor gives
investors the tools for long-term investment success through diversification
and accommodation of changing investment needs.
Service -- To help serve our shareholders, Mentor has a fully dedicated
Investor Relations Center. Our Relationship Coordinators are professionally
trained and licensed to serve clients' needs.
Technology -- Abreast of the most advanced technology and using the
latest analytical tools, our investment managers have the ability to survey the
financial markets and make informed decisions about where the best place is to
invest.
We at Mentor are honored to be a partner in the management of your
financial assets. Mentor Investment Group provides diversified investment
styles and services to over one million shareholders. We serve individuals,
corporations, endowments, foundations, public funds, and municipalities. To
learn more about Mentor, please contact your consultant or us at (800)
382-0016.
We look forward to making the Mentor formula work for you, and to a
mutually beneficial relationship.
Sincerely,
/s/ Daniel J. Ludeman /s/ Paul F. Costello
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Daniel J. Ludeman Paul F. Costello
Chairman President
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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>
Total
Shares Cumulative Shares Cost of
Month Share Price Purchased Purchased Investment
<S> <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
Investors in medium to larger market capitalization stocks experienced
another year of outstanding returns in 1998. Your America's Utility Fund
provided a total return of 15.5% including capital appreciation and dividend
income, slightly ahead of the 14.8% return of the Standard & Poor's Utility
Index.* The broader, capitalization-weighted S&P 500 Composite** gained a
remarkable 28.6% - a record-breaking achievement as the index was up 20%+ for
four consecutive years. This return, however, is not representative of how the
average stock in the S&P index performed last year. Simply averaging returns of
the 500 individual stocks in the index produces a gain of about one-half that
of the weighted index. By comparison, smaller capitalization stocks, in
general, did not enjoy double-digit gains. In fact, the Russell 2000 index of
smaller capitalization issues actually declined 2.6%.
The widening performance disparity between the largest, most liquid stocks
and smaller capitalization issues is an unhealthy trend last observed in the
early 1970's when the "nifty fifty" phrase described the same anomaly. Valuation
levels have reached similar extremes and evidence of speculative excesses can be
easily observed, as seen in the mania surrounding internet-related stocks and
stock split announcements. How long these frenzied trading patterns can persist
is anybody's guess, but we can observe that the "nifty fifty" era of extremes
was subsequently resolved through a market "correction".
For a brief period during the third quarter of 1998 it appeared that the
broad market had entered a "corrective phase" as the S&P 500 index declined 10%
on emerging market concerns and potential repercussions of the near collapse of
a large hedge fund. (America's Utility Fund gained 2.2% during the quarter).
But the market decline was short-lived. Investors responded enthusiastically
during the fourth quarter to the Federal Reserve's eased monetary policy, lower
interest rates, continued strong economic growth and lower energy prices. The
S&P 500 soared 21.3% during the period - the second strongest quarter in sixty
years - fueled by mutual fund flows into the largest capitalization growth
stocks.
Looking Ahead. . .
In some respects we have entered the New Year in uncharted waters. The
economy's unexpected resiliency has produced the longest peacetime expansion on
record (it will enter its ninth year in April), providing the foundation for
years of phenomenal stock market gains and positive consumer attitudes. At a
time when many foreign economies are either slowing significantly or already in
recession, the U.S. has become the global engine of growth - a condition that
is inherently unsustainable. Excessive debt, which has financed over-capacity
in some emerging and developed countries, still represents a significant
impediment to smooth transactions to economic vitality and financial stability.
Meanwhile, with investors basking in economic bliss, the potential for
negative surprises could easily produce volatile market swings during the New
Year and a re-assessment of what constitutes reasonable value. America's
Utility Fund remains well-positioned in seasoned, good-quality utility and
other undervalued stocks which would benefit from a constructive shift in
investor preferences toward conservative investments.
February 1999
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*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 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 Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the U.S.
market. The indexes are not adjusted for sales charges or other fees.
While the portfolio managers will endeavor to manage the fund 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, 1998
One Year Since Inception (5/5/92)*
15.47% 12.48%
SEC current yield as of December 31, 1998 1.82%**
[graph]
<TABLE>
<CAPTION>
5/92 6/92 9/92 12/92 3/93 6/93 9/93 12/93 3/94 6/94 9/94
<S> <C>
America's
Utility Fund 10,000 10,170 10,892 11,190 12,235 12,642 13,198 12,679 11,290 10,728 11,141
S&P Utilities
Index 9,985.40 10,121.50 10,918.85 11,194.63 12,402.49 12,696.41 13,585.54 12,811.28 11,753.12 11,750.47 11,805.80
12/94 3/95 6/95 9/95 12/95 3/96 6/96 9/96 12/96 3/97
<CAPTION>
America's
Utility Fund 11,019 11,759 12,479 13,485 14,577 14,507 14,839 114,340 15,373 15,158
S&P Utilities Index 11,793.53 12,607.05 13,543.69 15,062.91 16,749.98 15,953.49 16,757.75 16,192.97 17,273.02 16,691.36
6/97 9/97 12/97 3/98 6/98 9/98 12/98
<CAPTION>
America's
Utility Fund 16,149 16,737 18,957 20,521 19,950 20,390 21,889
S&P Utilities Index 17,671.54 18,519.96 21,530.67 22,740.52 23,015.81 24,081.15 24,710.23
</TABLE>
Past performance is not indicative of future performance. 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 are not federally insured.
* Reflects operation of America's Utility Fund from the date of
inception 5/5/92 through 12/31/98.
** SEC current yield is calculated by dividing the net investment income
per share for the 30 days ended 12/31/98 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, 1998
<TABLE>
<CAPTION>
Market Value
Shares Common Stocks - 91.60% (Note 2)
- ---------- --------------------------------------- --------------
<S> <C> <C>
Public Utility - Electric - 42.69%
94,100 Allegheny Energy, Inc. $ 3,246,450
253,800 DPL, Inc. 5,488,425
78,800 Duke Energy Corporation 5,048,125
125,000 Eastern Utilities Associates Company 3,531,250
82,000 Endesa S.A. * 2,214,000
150,600 FirstEnergy Corporation 4,903,912
67,000 FPL Group, Inc. 4,128,875
73,810 Gener S.A.* 1,180,960
77,600 GPU, Inc. 3,428,950
165,700 LG&E Energy Corporation 4,691,381
90,800 New Century Energies, Inc. 4,426,500
120,600 NIPSCO Industries, Inc. 3,670,762
150,800 Northern States Power Company 4,184,700
171,400 Potomac Electric Power Company 4,509,963
89,700 SCANA Corporation 2,892,825
161,500 Southern Company 4,693,594
154,600 TECO Energy, Inc. 4,357,788
156,700 Western Resources, Inc. 5,210,275
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71,808,735
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Public Utility - Natural Gas - 11.26%
30,000 Consolidated Natural Gas Company 1,620,000
74,000 Enron Corporation 4,222,625
93,000 KeySpan Energy Corporation 2,883,000
78,000 NICOR, Inc. 3,295,500
170,000 Questar Corporation 3,293,750
142,710 Sempra Energy 3,621,266
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18,936,141
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Telecommunications - 22.09%
100,000 Ameritech Corporation 6,337,500
112,800 Bell Atlantic Corporation 6,408,450
84,000 GTE Corporation 5,664,750
66,921 MCI WorldCom, Inc. 4,801,582
124,000 SBC Communications, Inc. 6,649,500
49,600 Sprint Corporation 4,172,600
24,800 Sprint Corporation - PCS Group @ 573,500
18,916 Telefonica S.A.* 2,560,740
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37,168,622
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Non-Utility Securities - 15.56%
32,300 BankAmerica Corporation 1,942,037
30,000 Bemis Company, Inc. 1,138,125
15,000 Bristol-Myers Squibb Company 2,007,187
31,000 CarrAmerica Realty Corporation 744,000
43,000 Colonial Properties Trust 1,144,875
24,000 Emerson Electric Company 1,501,500
29,800 Federal National Mortgage Association 2,205,200
28,000 Highwoods Properties, Inc. 721,000
21,500 Johnson & Johnson 1,803,313
76,200 Liberty Property Trust 1,876,425
56,500 Mack-Cali Realty Corporation 1,744,437
20,300 Mobil Corporation 1,768,638
54,000 Nationwide Health Properties, Inc. 1,164,375
23,000 Realty Income Corporation 572,125
53,400 Sherwin-Williams Company 1,568,625
108,600 Sysco Corporation 2,979,713
31,200 W. W. Grainger, Inc. 1,298,700
-----------
26,180,275
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Total Common Stocks
(cost $108,535,312) 154,093,773
-----------
</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 Stock - 0.31%
20,000 BankAmerica Trust (cost $500,000) $ 527,500
------------
Corporate Bonds - 4.25%
$2,000,000 Appalachian Power Company, 7.38%,
8/15/02 2,033,496
1,250,000 Duke Energy Corporation, 8.00%,
11/01/99 1,276,685
2,000,000 Texas Utilities Electric Company,
8.25%, 4/01/04 2,229,906
1,500,000 Wisconsin Public Service, 7.30%,
10/01/02 1,607,705
------------
Total Corporate Bonds
(cost $6,947,630) 7,147,792
------------
Repurchase Agreement - 3.63%
6,098,001 Goldman Sachs & Company Dated
12/31/98, 5.08%, due 1/04/99,
collateralized by $6,059,676 Federal
National Mortgage Association,
7.50%, 11/01/13, market value
$6,233,891 (cost $6,098,001) 6,098,001
------------
Total Investments - 99.79%
(cost $122,080,943) 167,867,066
Other Assets less Liabilities - 0.21% 361,461
------------
Net Assets - 100.00% $168,228,527
============
</TABLE>
* American Depository Receipt.
@ Non-income producing
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $17,044,935 and $26,475,385, respectively.
Income Tax Information
At December 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $122,080,943. Net unrealized appreciation aggregated
$45,786,123, of which $47,395,191, related to appreciated investment securities
and $1,609,068, related to depreciated investment securities.
See notes to financial statements.
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<S> <C>
Assets
Investments, at market value
(cost $122,080,943) (Note 2) $ 167,867,066
Collateral for securities loaned (Note 2) 9,399,808
Receivables
Fund shares sold 21,913
Dividends and interest 532,333
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Total assets 177,821,120
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Liabilities
Payables
Securities loaned (Note 2) 9,399,808
Fund shares redeemed 16,941
Accrued expenses and other liabilities 175,844
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Total liabilities 9,592,593
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Net Assets $ 168,228,527
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Net Assets represented by:
Additional paid-in capital $ 121,286,074
Accumulated undistributed net investment income 5,418
Accumulated net realized gain on investment
transactions 1,150,912
Net unrealized appreciation of investments 45,786,123
-------------
Net Assets $168,228,527
=============
Net Asset Value per Share $ 31.12
=============
Shares Outstanding 5,405,255
</TABLE>
See notes to financial statements.
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America's Utility Fund, Inc.
Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<S> <C>
Investment income
Dividends $ 5,528,460
Interest 785,187
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Total investment income 6,313,647
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Expenses
Administrative fee (Note 3) 619,122
Transfer agent fee 442,614
Management fee (Note 3) 401,554
Shareholder service fee (Note 3) 392,568
Shareholder reports and postage expenses 111,790
Legal fees 30,833
Custodian and accounting fees 27,903
Registration expenses 21,139
Directors' fees and expenses 4,426
Audit fees 3,824
Miscellaneous 5,082
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Total expenses 2,060,855
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Net investment income 4,252,792
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Realized and unrealized gain on investments
Net realized gain on investments (Note 2) 7,218,482
Change in unrealized appreciation on investments 11,651,258
-----------
Net gain on investments 18,869,740
-----------
Net increase in net assets resulting from operations $23,122,532
===========
</TABLE>
See notes to financial statements.
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment income $ 4,252,792 $ 4,921,978
Net realized gain on investments 7,218,482 5,451,642
Change in unrealized appreciation
on investments 11,651,258 20,063,982
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Increase in net assets resulting from
operations 23,122,532 30,437,602
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Distributions to Shareholders
From net investment income (4,247,374) (5,168,432)
From net realized gain on
investments (7,764,700) (4,139,573)
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Total distributions to
shareholders (12,012,074) (9,308,005)
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Capital Share Transactions
(Note 4)
Proceeds from sale of shares 10,490,427 12,123,469
Reinvested distributions 11,341,961 8,532,056
Shares redeemed (21,767,705) (29,147,694)
------------- -------------
Net change in net assets
resulting from capital share
transactions 64,683 (8,492,169)
------------- -------------
Total increase in net assets 11,175,141 12,637,428
Net Assets
Beginning of year 157,053,386 144,415,958
------------- -------------
End of year (including
accumulated undistributed net
investment income of $5,418
and $0, respectively) $ 168,228,527 $ 157,053,386
============= =============
</TABLE>
See notes to financial statements.
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Financial Highlights
Year Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year $ 29.03 $ 25.07 $ 24.72 $ 19.50 $ 23.54
-------- -------- -------- -------- --------
Income from investment operations
Net investment income 0.76 0.92 0.98 0.96 0.96
Net realized and unrealized gain (loss) on investments 3.65 4.79 0.33 5.22 (4.04)
-------- -------- -------- -------- --------
Total from investment operations 4.41 5.71 1.31 6.18 (3.08)
-------- -------- -------- -------- --------
Less distributions
From net investment income (0.76) (0.96) (0.96) (0.96) (0.96)
From net realized capital gains (1.56) (0.79) - - -
--------- --------- --------- --------- --------
Total distributions (2.32) (1.75) (0.96) (0.96) (0.96)
--------- --------- --------- --------- --------
Net asset value, end of year $ 31.12 $ 29.03 $ 25.07 $ 24.72 $ 19.50
========= ========= ========= ========= ========
Total Return* 15.47% 23.31% 5.46% 32.30% (13.10%)
Ratios / Supplemental Data
Net assets, end of year (in millions) $ 168.23 $ 157.05 $ 144.42 $ 162.83 $ 125.01
Ratio of expenses to average net assets 1.31% 1.21% 1.27% 1.21% 1.21%
Ratio of expenses to average net assets excluding waiver 1.31% 1.30% 1.36% 1.34% 1.33%
Ratio of net investment income to average net assets 2.71% 3.46% 3.90% 4.40% 4.66%
Portfolio turnover rate 11.22% 26.47% 24.05% 27.77% 28.85%
</TABLE>
* Total return does not include sales commissions and is not annualized.
See notes to financial statements.
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America's Utility Fund, Inc.
Notes to Financial Statements
December 31, 1998
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 Valuations. 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 last 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.
(e) Dividends. Dividends to shareholders are recorded on the ex-dividend date.
Dividends from net investment income are declared and paid quarterly.
Distributions of capital gains, if any, are made annually.
(f) 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.
(g) 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.
(h) Portfolio Securities Loaned. The Fund is authorized by the Board of
Directors to participate in securities lending transactions.
The Fund may receive fees for participating in securities lending transactions.
During the period that a security is out on loan, the Fund continues to receive
interest or dividends on the securities loaned. The Fund receives collateral in
an amount at least equal to, at all times, the fair value of the securities
loaned plus interest. When cash is received as collateral, the Fund records an
asset and obligation for the market value of that collateral. Cash received as
collateral may be reinvested, in which case that security is recorded as an
asset of the Fund. Variations in the market value of the securities loaned
occurring during the term of the loan are reflected in the value of the Fund.
At December 31, 1998, the Fund had loaned securities to brokers which were
collateralized by cash. Income from securities lending activities amounted to
$31,362 for the year ended December 31, 1998. The risks to the Fund from
securities lending are that the borrower may not provide additional collateral
when required or return the securities when due. At December 31, 1998, the
market value of the securities on loan and the related cash collateral were
$9,182,989 and $9,399,808, respectively.
Note 3: 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
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<PAGE>
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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.
Mentor provides administrative personnel and 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 other financial institutions, provides
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 Fund's
average daily net assets.
Note 4: Capital Share Transactions
As of December 31, 1998 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
12/31/98 12/31/97
------------ ---------------
<S> <C> <C>
Shares sold 350,374 468,044
Shares issued upon reinvestment
of dividends 369,078 310,707
Shares redeemed (724,206) (1,129,220)
-------- ----------
(4,754) (350,469)
======== ==========
</TABLE>
Year 2000 (unaudited)
The Fund receives services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after the
Year 1999 because of the inability of computer software to distinguish the Year
2000 from the Year 1900. Mentor Advisors is taking steps that it believes are
reasonably designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by the Fund's
other major service providers. There can be no assurance, however, that these
steps will be sufficient to avoid any adverse impact on the Fund from this
problem.
Federal Tax Status of Dividends Declared (unaudited)
Of the ordinary income distributions paid during the year ended December 31,
1998, 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>
<S> <C>
Total Long-Term Qualifying Dividends
Capital Gain Dividends $4,952,065 100%
</TABLE>
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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, 1998, and the related statements of operations for the year then
ended, changes in net assets and financial highlights for each of the years in
the two-year period 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 audits. The financial highlights for each of the years in the
three-year period ended December 31, 1996 were audited by other auditors whose
report dated February 4, 1997 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of America's Utility Fund, Inc. as of December 31, 1998, the results
of its operations, changes in its net assets and financial highlights for the
periods specified in the first paragraph above, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 12, 1999
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