THE MALLARD FUND, INC.
Arthur Andersen LLP
2100 One PPG Place
Pittsburgh, PA 15222
FINANCIAL STATEMENTS
September 30, 1998
Directors
William S. Dietrich II
Jennings R. Lambeth
Evans Rose, Jr.
Thomas Marshall
Officers
William S. Dietrich II
President and Chief Investment Officer
Richard F. Berdik
Secretary and Treasurer
Legal Counsel
Kirkpatrick & Lockhart LLP
Independent Auditors
THE MALLARD FUND, INC.
Investments / September 30, 1998 (Unaudited)
(Showing Percentage of Total Value of Net Assets)
_______________________________________________________________________________
Shares Value
MUTUAL FUNDS - 56.2%
American Funds - EuroPacfic Growth Fund 274,802 $6,845,322
Emerging Markets Growth Fund, Inc. # 332,466 11,958,792
Morgan Stanley Emerging Markets Portfolio 1,200,169 10,129,428
Templeton Institutional Emerging Markets Fund 1,444,087 9,891,998
Tweedy Browne American Value Fund 373,130 7,567,081
Tweedy Browne Global Value Fund 668,160 10,456,706
TOTAL MUTUAL FUNDS (COST $89,545,432) $56,849,327
LIMITED PARTNERSHIPS - 55.7% #
Bain Capital Fund VI, L.P. 1 300,000
BC European Capital 1 27,086
Blackstone Capital Partners III, L.P. 672,277
Brookside Capital Partners 496,793
Bulldog Capital Partners Limited Partnership 2,711,515
Delphi Ventures IV, L.P. 934,884
Dorchester Partners, L.P. 2,695,717
Doughty Hanson & Co. III, L.P. 243,722
Everest Capital Frontier, L.P. 3,307,099
Feirstein Partners, L.P. 6,602,850
Forum Capital Partners 1,031,504
Highfields Capital Ltd. 5,000,000
J.H. Whitney Mezzanine Fund 240,000
J.W. Childs Equity Partners II, L.P. 76,001
Lone Redwood, L.P. 3,249,172
Maverick Fund USA, Ltd. 6,511,709
Millgate Partners, L.P. 1,880,785
Mt. Everest QP Fund, L.P. 1,843,964
Oppenheimer Emerging Markets, L.P. 734,314
Oracle Partners, L.P. 3,405,100
Peak Investments, L.P. 2,014,821
Recap Partners, L.P. 2,202,674
Sankaty High Yield Partners, L.P. 1 666,800
Sevin Rosen Fund VI, L.P. 1 90,157
Spinnaker Technology Fund, L.P. 4,025,700
Summit Ventures V, L.P. 431,549
The Varde Fund IV-A, L.P. 3,016,201
Tontine Partners, L.P. 1,652,710
Whitney Equity Partners III, L.P. 241,505
TOTAL LIMITED PARTNERSHIPS (COST $60,673,730) 56,306,609
FUND OF FUNDS -- 1.6 %
Knightsbridge Integrated Holdings III-Limited #
(COST $1,562,070) 3,000 1,637,340
TOTAL INVESTMENTS (COST $151,781,232)* -- 113.5% 114,793,276
OTHER ASSETS AND LIABILITIES, NET -- (13.5)% (13,633,673)
NET ASSETS - 100.00% $101,159,603
* Cost for federal income tax purposes is $142,562,440. At September 30,
1998, net unrealized depreciation was $27,769,164.
# See Note 7.
1. The valuations for Bain Capital and BC European Capital were not available
at 9/30/98. These investments are valued at cost.
2. The valuations for Sankaty High Yield Partners and Sevin Rosen Fund VI are
estimates as of 9/30/98. Final valuations were not available, however the
Fund's management is unaware of any significant factors which would
materially affect the estimated value.
The Mallard Fund, Inc.
Statement of Assets and Liabilities
as of 9/30/98
(Unaudited)
Assets:
Cash $2,234
Investments, at value (Cost $151,781,232) (Note 2) 114,793,276
Total Assets 114,795,510
Liabilities:
Bank loan 13,086,188
Accrued advisory fees 144,101
Other accrued expenses 405,618
Total Liabilities 13,635,907
Commitments (Note 7)
Net Assets $ 101,159,603
Net assets:
Common Stock, $0.001 par value
Authorized 100,000,000 shares; 8,312,636 shares
issued and outstanding $ 8,313
Paid-in capital 143,208,217
Accumulated net investment loss (491,438)
Accumulated net realized loss on investments (4,577,533)
Net unrealized depreciation on investments (36,987,956)
Net Assets $ 101,159,603
Net Asset Value Per Share
($101,159,603 / 8,312,636 shares of common stock) $12.17
The Mallard Fund, Inc.
Statement of Operations
For the Period April 1, 1998 through September 30, 1998
(Unaudited)
INVESTMENT INCOME
Income:
Interest Income $ 6,449
Dividend Income 532,943
Total Income 539,392
Expenses:
Investment advisory fee (Note 4) 180,000
Administration fee (Note 4) 39,057
Custodian fees (Note 4) 4,893
Legal fees 122,755
Audit fees 11,632
Directors fees and expenses 10,685
Insurance 1,392
Interest on bank loan 644,950
Miscellaneous expenses 15,466
Total Expenses 1,030,830
NET INVESTMENT LOSS (491,438)
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments during the period (4,577,533)
Net unrealized depreciation of investments during the period (33,007,336)
Net realized and unrealized loss on investments (37,584,869)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(38,076,307)
The Mallard Fund, Inc.
Statement of Changes in Net Assets
For the Period April 1, 1998 through September 30, 1998
(Unaudited)
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss $ (491,438)
Net realized loss on investments (4,577,533
Net increase in unrealized depreciation of investment (33,007,336)
Net decrease in net assets resulting from operations (38,076,307)
NET ASSETS:
Beginning of period 139,235,910
End of period $ 101,159,603
Financial Highlights
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements
and notes thereto. Per share information has been determined based
on weighted average shares outstanding.
For the Period For the Period
May 30, 1997+ to April 1, 1998 to
March 31, 1998 September 30, 1998
Net Asset Value - Beginning of Period $ 19.97** $ 16.75
Investment Operations:
Net investment income.... .97 (.06)
Net realized and unrealized loss on
investments .......................... (.59) (4.52)
Total from investment operations...... .38 (4.58)
Distributions:
From net investment income .... .. (0.97) 0
In excess of net investment income.. (0.05) 0
In excess of capital gain ......... (0.54) 0
Return of capital ... (2.04) 0
Total distributions .. ($3.60) 0
Net Asset Value - End of Period... $ 16.75 $ 12.17
Total Return (a).................. 0.85% (26.73%)
Ratios (to average net assets)/Supplemental
Expenses (excludes loan interest
expenses)........ 1.06% .76%*
Net investment income...... 5.05% (.97%)*
Portfolio turnover rate ......... 28.87% 9.03%
Net assets at end of period
(000 omitted)........ $139,236 $101,160
Number of shares outstanding at end of
period .................. 8,312,616 8,312,616
Amount of bank loans outstanding at end
of the period (000 omitted)............ $24,170 $13,086
Average amount of bank loans outstanding
during the period (000 omitted)........ $17,713 $15,092
Amount of maximum month-end bank loans
during the period (000 omitted)........ $24,170 $16,099
Average amount of bank loans per share
during the period..................... $2.13 $1.82
Weighted average interest rate of bank loans
during the period....................... 6.04% 6.01%
* Annualized
** Initial public offering price of $20.00 per share less offering expenses of
$0.03 per share.
+ Commencement of Operations
(a) Based on per share net asset value. Per share market price is not readily
determinable since fund shares are not currently sold to the public. Total
return assumes reinvestment of dividends at the most recent quarterly net
asset value.
The accompanying notes are an integral part of the financial statements.
The Mallard Fund, Inc.
Statement of Cash Flows
For the Period April 1, 1998 through September 30, 1998
(Unaudited)
INCREASE IN CASH FROM:
Operating Activities
Net decrease in net assets resulting from operations ...... ($38,076,307)
Adjustments:
Increase in accrued advisory expenses ................... 26,202
Increase in accrued other expenses ..................... 272,177
Net realized and unrealized loss on investments............ 37,584,869
Net decrease in cash from operating activities ............. (193,059)
Investing Activities
Purchases of portfolio investments ........................ (24,008,683)
Proceeds from disposition of portfolio investments ....... 29,398,458
Net increase in cash from investing activities ........... 5,389,775
Financing Activities
Decrease in Bank loan ......................... .......... (11,084,259)
Net decrease in cash ...................................... (5,887,543)
Cash at beginning of year ................................ 5,889,777
Cash at end of year ................................... .. $ 2,234
Supplemental cash flow information:
Cash paid for interest $ 540,034
The accompanying notes are an integral part of the financial statements.
The Mallard Fund, Inc.
Notes to Financial Statements (unaudited)
1. Organization: The Mallard Fund, Inc. (the "Fund") was organized on October
15, 1996 as a Maryland corporation. The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified, closed-end, management investment company. The Fund
commenced operations, on May 30,1997, with the sale of 6,927,197 shares of
common stock (the "initial shares") through a private placement to the
William S. Dietrich II Charitable Remainder Annuity Trust and the William S.
Dietrich II Charitable Remainder Unit Trust on May 30, 1997. For federal
income tax purposes, the Fund qualifies as a non-publicly held regulated
investment company. Accordingly, certain investment expenses will not be
deductible by the Fund, but will instead be allocated to the shareholders
for purposes of determining the shareholder's taxable income.
Since the private placement was treated as a tax-free exchange, securities
received by the Fund maintained the cost basis and holding period as
reflected by the trusts prior to the private placement.
Since the Fund's stock will not be readily marketable and may be considered
illiquid, the Board of Directors will consider, on an annual basis, the
possibility of making tender offers to repurchase all of the stock of the
Fund from stockholders at the net asset value per share. There can be no
assurance, however, that the Board of Directors will decide to make any
tender offers. If the Board of Directors does not make a tender offer to
repurchase all of the stock of the Fund by December 31, 2000, the fund
will be liquidated as soon as practical thereafter unless the Fund obtains
unanimous approval from all stockholders not to liquidate the Fund. Refer
to prospectus for full disclosure.
2. Significant Accounting Policies
A. Portfolio Valuation: Investments are stated at value in the accompanying
financial statements. Shares of open-end funds are valued at their
respective net asset values under the 1940 Act. An open-end fund values
securities in its portfolio for which market quotations are readily available at
their current market value (generally the last reported sales price) and all
other securities and assets at fair value pursuant to methods established in
good faith by the board of directors of the underlying fund. Shares of
closed-end funds that are listed on U.S. exchanges are valued at the last sales
price on the day the securities are valued or, lacking any sales on such day,
at the last available bid price. Shares of closed-end funds traded in the
OTC market and listed on NASDAQ are valued at the last trade price on NASDAQ
at 4:00 p.m., New York Time; other shares traded in the OTC market are valued
at the last bid price available prior to valuation. Other Fund assets are
valued at current market value or, where unavailable, at fair value as
determined in good faith by or under the direction of the Board of Directors.
The Board of Directors has established general guidelines for calculating fair
value of non-publicly traded securities. At September 30, 1998, the Fund
held 57.3% of its net assets in securities valued in good faith by the Board
of Directors with an aggregate cost of $62,235,800 and fair value of
$57,943,949. The net asset value of the Fund is calculated quarterly and at
any other times determined by the Board of Directors.
In determining fair value, management considers all relevant qualitative and
quantitative information available. These factors are subject to change over
time and are reviewed periodically. The values assigned to fair value
investments are based on available information and do not necessarily
represent amounts that might ultimately be realized, since such amounts
depend on future developments inherent in long-term investments. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market of the investment existed, and the differences could be material.
The Mallard Fund, Inc.
Notes to Financial Statements (unaudited) - continued
B. Determination of Gains or Losses on Sale of Securities: Gains or losses on
the sale of securities are calculated for accounting and tax purposes on the
identified cost basis.
C. Federal Income Taxes: The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
D. Other: Security transactions are accounted for on trade date. The Fund
records interest income on the accrual basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
E. Distributions to Shareholders: The policy of the Fund will be to pay a
dividend, commencing after April 1, 1998, annually of at least 10% of the
Fund's net asset value based on the most recent net asset value calculated
prior to the dividend declaration date and at a higher rate, if necessary, to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), or to avoid incurring any tax
liability under the excise tax provisions of Section 4982 of the Code.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization
for U.S. federal income tax purposes due to U.S. generally accepted
accounting principles/tax differences in the character of income and expense
recognition.
F. Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. Portfolio Transactions: The following is a summary of the security
transactions for the period ended September 30, 1998:
Proceeds
Cost of from Sales
Purchases or Maturities
Long Term Securities $ 12,508,683 $ 23,632,040
4. Investment Advisory Services and Payments to Affiliated Persons: The Fund
receives investment consulting services from Cambridge Associates, Inc.
("Cambridge") pursuant to an investment consulting agreement dated July 1,
1997 (the "Agreement"). Cambridge provides the Fund, on a non-
discretionary basis, investment consulting services regarding the Fund's
purchase, sale and holding of investment securities. Under the terms of the
Agreement, Cambridge receives $87,500 per quarter.
For the period April 1 to August 31, 1998, Rodney Square Management Corporation
("RSMC") served as administrator for the Fund. Beginning on September 1,
1998, Arthur Andersen, L.L.P.("AA") will serve as administrator. As
administrator, AA provides office facilities, supplies and administrative
services and also assists in the preparation of reports to shareholders, proxy
statements and filings with the SEC and state securities authorities. AA
also performs certain accounting services (including determining the Fund's
net asset value per share), financial reporting, and compliance monitoring
activities. For the services provided as Administrator, AA receives an
annual fee equal to $70,000 from the Fund.
The Mallard Fund, Inc.
Notes to Financial Statements (unaudited) - continued
American Stock Transfer and Trust Company serves as the Fund's Transfer Agent
and Dividend Disbursing Agent on an as needed basis.
Mellon Bank, N.A. ("Mellon") serves as custodian of the Fund's assets. The
Fund pays Mellon an annual fee equal to 0.01% of the average daily net assets
of the Fund for all assets held in domestic custody. In addition, the Fund
reimburses Mellon for its out-of-pocket expenses.
None of the directors affiliated with the Fund receives compensation for his
services as a Director of the Fund. Similarly, none of the Fund's officers
receives compensation from the Fund.
5. Transactions with Affiliates: The William S. Dietrich II Charitable
Remainder Annuity Trust and the William S. Dietrich II Charitable Remainder
Unit Trust, affiliates of William S. Dietrich II, the Fund's President and
Chief Investment Officer, hold 6,629,327 (79.75%) and 1,683,309 (20.25%),
respectively, of the 8,312,636 shares of common stock of the Fund.
6. Credit Agreement: The Fund is authorized to borrow money to make
investments in amounts up to 33 1/3% of the value of its total assets
(including the amount borrowed) at the time of such borrowings. The Fund has
obtained an uncommitted line of credit for up to $50 million from Boston Safe
Deposit & Trust Company. Interest is paid on such borrowings generally at a
rate equal to the interest rate announced by the Federal Reserve Bank of New
York as the average rate on overnight Federal funds transactions plus
one-half of 1%. As of September 30, 1998, the Fund had outstanding
borrowings of $13,086,188 from the line of credit at an annualized average
interest rate of 6.01%.
The Mallard Fund, Inc.
Notes to Financial Statements (unaudited) - continued
7. Restricted Securities: Certain of the Fund's investments are restricted as
to resale and are valued at the direction of the Fund's Board of Directors in
good faith, at fair value, after taking into consideration appropriate
indications of value. The table below shows the number of shares held, the
acquisition dates, aggregate costs, fair value as of September 30, 1998,
per share value of the securities, percentage of net assets which the
securities comprise and future capital commitments.
% Future
# of Acq. Fair Value Cost of of Net Capital
Security Shares Dates at 09/30/98 Investment Assets Commitments
Emerging Markets
Growth Fund, Inc. 332,466 05/30/97 $11,958,792 $21,486,632 11.82% --
Bain Capital -- 06/11/98 300,000 300,000 0.30%$ 1,200,000
BC European
Capital -- 08/04/98 27,086 27,086 0.03% 1,972,914
Blackstone Capital
Ptns. III, L.P. -- 11/03/97 672,277 707,977 0.66% 4,327,723
Brookside Capital -- 07/31/98 496,793 500,000 0.49% 1,500,000
Bulldog Capital
Partners L.P. -- 05/30/97 2,711,515 1,959,124 2.68% --
Delphi Ventures
IV, L.P. -- 01/28/98 934,884 1,000,000 0.92% 4,000,000
Dorchester
Partners, L.P. -- 05/30/97 2,695,717 2,609,678 2.66% --
Doughty Hanson -- 10/31/97 243,722 284,844 0.24% 2,215,156
Everest Capital
Frontier, L.P. -- 05/30/97 3,307,099 10,200,180 3.27% --
Feirstein
Partners, L.P. -- 05/30/97 6,602,850 4,880,315 6.53% --
Forum Capital
Partners -- 05/30/97 1,031,504 1,069,985 1.02% --
Highfields Capital -- 09/30/98 5,000,000 5,000,000 4.94% --
J.H. Whitney
Mezzanine -- 09/24/98 240,000 240,000 0.24% 1,260,000
J.W. Childs
Equity Ptns. -- 06/28/98 76,001 86,291 0.08% 1,913,709
Lone Redwood -- 12/29/97 3,249,172 3,000,000 3.21% --
Maverick Fund
USA, Ltd. -- 05/30/97 6,511,709 5,077,543 6.44% --
Millgate Ptns. -- 02/01/98 1,880,785 2,000,000 1.86% --
Mt. Everest
QP, L.P. -- 10/02/97 1,843,964 2,000,000 1.82% --
Murray Ptns -- 05/30/97 2,202,674 2,139,197 2.18% --
Oppenheimer Emerging
Market, L.P. -- 03/31/98 734,314 2,000,000 0.73% --
Oracle Ptns. LP -- 05/30/97 3,405,100 3,940,600 3.37% --
Peak Investment,
L.P. -- 09/30/97 2,014,821 2,000,000 1.99% --
Sankaty High Yield
Partners, L.P. -- 01/12/98 666,800 835,000 0.66% 165,000
Sevin Rosen
Fund VI, L.P. -- 03/20/98 90,157 97,500 0.09% 652,500
Spinnaker Technology
Fund, L.P. -- 07/01/97 4,025,700 3,000,000 3.98% --
Summit Ventures
V, L.P. -- 03/09/98 431,549 437,500 0.43% 2,062,500
The Varde Fund
IV-A, L.P. -- 05/30/97 3,016,201 3,001,508 2.97% --
Tontine Ptns., L.P -- 10/01/97 1,652,710 2,000,000 1.63% --
Whitney Equity
Partners III, L.P. -- 03/12/98 241,505 279,402 0.24 2,220,598
Knightsbridge Integrated
Holdings III-Ltd. 3,000 05/30/97 1,637,340 1,562,070 1.62% 1,437,930
Totals $69,902,741 $83,722,432 69.10% $24,928,030
The Fund may incur certain costs in connection with the disposition of the
above securities.
8. Year 2000- Similar to other financial organizations, the Fund could be
adversely affected if the computer systems used by the Fund's service
providers do not properly process and calculate date-related information
and data from and after January 1, 2000. The Fund's Advisor and Administrator
are taking measures that they believe are reasonably designed to address
the Year 2000 issue with respect to computer systems that they use and to
obtain reasonable assurances that comparable steps are being taken by the
Fund's other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact
to the Fund.
