Report of Independent Auditors
Board of Directors and Stockholder
Lernoult Investment Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Lernoult Investment Fund, Inc. as
of December 31, 1998, and the related statement of operations, the statement
of changes in net assets, and the financial highlights for the period
March 24, 1998 (commencement of operations) to December 31, 1998. 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.
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. Our procedures included verification of investments
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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1998 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Lernoult Investment Fund, Inc., at December 31, 1998, the results
of its operations, changes in its net assets, and its financial highlights for
the period March 24, 1998 (commencement of operations) to December 31, 1998,
in conformity with generally accepted accounting principles.
February 12, 1999
Lernoult Investment Fund, Inc.
Statement of Assets and Liabilities
December 31, 1998
Assets
Investments, at fair value (cost $573,490,527) 642,493,996
Dividends receivable 801,708
Interest receivable 20,008
Total assets 643,315,712
Liabilities
Accrued expenses 101,417
Notes payable (Note 5) 472,500
Accrued interest payable 13,913
Total liabilities 587,830
Net assets 642,727,882
Net assets are represented by:
Common stock at par value, $.01 per share, 199,997,500 shares
authorized, 32,172,007.45 shares issued and outstanding 321,720
Additional paid-in capital 573,402,693
Net unrealized appreciation of investments 69,003,469
Net assets 642,727,882
Net asset value per common shares outstanding 19.98
See accompanying notes.
Lernoult Investment Fund, Inc.
Statement of Operations
For the period from March 24, 1998 (commencement of operations) to
December 31, 1998
Investment income:
Dividend income 7,747,985
Interest income 48,965
Total investment income 7,796,950
Expenses:
Administration fee (Note 2) 246,201
Investment management fee (Note 2) 44,574
Broker dealer fee on AMPS 440,465
Rating agencies fees 75,000
Legal fees 49,522
Auction agent fee 13,250
Independent accountants 24,271
Interest expense 36,882
Insurance 6,112
Directors fees and expenses 8,954
Other expenses 437
Total expenses 945,668
Net investment income 6,851,282
Net realized and unrealized gains on
investments:
Net realized gain on investments 551,655
Net unrealized appreciation of
investments 69,003,469
Net increase in net assets resulting from
operations $ 76,406,406
See accompanying notes.
Lernoult Investment Fund, Inc.
Statement of Changes in Net Assets
For the period from March 24, 1998 (commencement of operations) to
December 31, 1998
From operations:
Net investment income 6,851,282
Net realized gain on investments 551,655
Net change in unrealized appreciation
of investments 69,003,469
Increase in net assets resulting from operations 76,406,406
Dividends from net investment income:
Auction market preferred stock (6,851,282)
Dividends from net realized gains:
Auction market preferred stock (547,316)
Common stock (4,339)
(551,655)
Decrease in net assets resulting from
distributions to stockholders (7,402,937)
Increase (decrease) from capital transactions:
Issuance of auction market preferred stock 250,000,000
Issuance of common stock 321,720
Additional paid-in capital 573,402,693
Redemption of auction market preferred
stock (250,000,000)
Capital contribution from common
stockholders 252,004,339
573,724,413
Total increase in net assets 642,727,882
Net assets:
Beginning of period -
End of period 642,727,882
See accompanying notes.
Lernoult Investment Fund, Inc.
Notes to Financial Statements
December 31, 1998
1. Organization and Significant Accounting Policies
On January 7, 1999 the Board of Directors approved a Plan of Liquidation and
Dissolution for the Funds. Management is in the process of liquidating and
winding-up the Fund.
The Lernoult Investment Fund, Inc. (the "Fund") is registered as a
diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended. The Fund commenced investment operations on
March 24, 1998.
The Fund's objective is long-term capital appreciation with income as a
secondary objective. The Fund's investments consist primarily of common stocks
of large and medium capitalization U.S. companies. The Fund's investment
portfolio must conform to certain rating agency asset coverage tests so long
as the Fund has preferred stock outstanding.
On the date of commencement, the Fund issued $250 million of Auction Market
Preferred Stock ("AMPS") and received securities with an aggregate fair value
of $571,720,074 from a collective trust fund for employee benefit plans in
exchange for 32,192,007.45 shares of common stock and $250,000,000 in cash.
The following is a summary of significant accounting policies consistently
followed by the Fund in preparation of its financial statements.
Security Valuation
Investments in securities traded on a national securities exchange (or
reported on the Nasdaq National Market) are valued at the last reported sales
price on the primary exchange on which the securities are traded. Temporary
investments are valued at amortized cost which approximates fair value.
Security Transactions
Security transactions are accounted for on a trade date plus one business day
basis which does not differ materially from a trade date basis. The cost of
securities sold is determined using the identified cost method. Dividend
income is recorded on ex-dividend date and interest income is recorded on the
accrual basis.
1. Organization and Significant Accounting Policies (continued)
Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and distribute its
taxable income to stockholders. Therefore, no provision for Federal income
tax is required.
Distribution of Income and Gains
The Fund distributes substantially all of its taxable income in excess of the
dividends paid to the preferred stockholders to the common stockholder.
Dividends to the common stockholder are declared and paid at least annually.
Net realized capital gains, if any, are generally distributed annually.
The character of income and gains distributed is determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. Amounts distributed in excess of taxable income and net realized
capital gains, if any, are considered a return of capital.
Use of Estimates
Estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial
markets and any other parameters used in determining these estimates could
cause actual results to differ from these amounts.
2. Related Party Transactions
A collective trust fund for employee benefit plans is the sole common
stockholder of the Fund. Certain officers and directors of the Fund are
affiliated with the common stockholder. No fees or expenses were paid to the
affiliated officers and directors.
For the period from March 24, 1998 (commencement of operations) to December
31, 1998, dividend and capital gain distributions to the common stockholder
amounted to $4,339.
2. Related Party Transactions (continued)
Comerica Bank serves as both custodian and administrator for the Fund and
receives a fee based on a percentage of net assets outstanding at the end of
the fiscal year. The annual fee as a percentage of net assets at December 31,
1998 was 0.06%. An affiliate of Comerica Bank serves as investment advisor to
the Fund. The annual investment management fee is 0.01% of average equity
investments. The administration and management fees are calculated, accrued
and paid on a monthly basis.
3. Investment Transactions
The aggregate cost of securities purchased and the aggregate proceeds of
securities sold excluding short-term securities, for the year ended December
31, 1998 were $188,924 and $5,775,706, respectively.
As of December 31, 1998, the net unrealized appreciation of $69,003,469 is
comprised of aggregate gross unrealized appreciation and depreciation of
investments of $99,144,349 and $30,140,880, respectively.
4. Auction Market Preferred Stock ("AMPS")
During 1998, the Fund issued and redeemed 750 shares of Series A, 750 shares
of Series B and 1000 shares of Series C AMPS.
Each series of AMPS was redeemable at the option of the Fund in whole, but not
in part, at a price of $100,000 per share plus accumulated and unpaid
dividends. Dividends were cumulative from the date of original issue and were
paid every 49 days at a rate set through Dutch Auction. The Fund was subject
to certain asset coverage tests, and the AMPS were subject to mandatory
redemption if the tests were not met.
In addition, the AMPS were subject to mandatory redemption if the Fund ceased
to qualify as a regulated investment company or if Merrill Lynch, Pierce,
Fenner & Smith Incorporated ceased to be the broker dealer. The liquidation
value under mandatory redemption of the AMPS was $100,000 per share plus
accumulated and unpaid dividends.
5. Notes Payable
As of December 31, 1998, the Fund had $472,500 of principal notes outstanding
to investors. The notes are due on March 24, 2023 and bear interest at a
floating rate. As of December 31, 1998, the Fund was paying interest at 10.00%
per annum.
6. Year 2000 (Unaudited)
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the advisor/administrator and other service providers do not properly
process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem". The
advisor/administrator is taking steps that it believes are reasonably designed
to address the Year 2000 Problem with respect to computer systems that it uses
and to obtain reasonable assurances that comparable steps are being taken by
the Fund's other major 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.
Lernoult Investment Fund, Inc.
Financial Highlights
For the period from March 24, 1998 (commencement
of operation) to December 31, 1998
For a share of common stock outstanding
throughout the period:
Net asset value, beginning of period $10.00
Net investment income 0.21
Net realized and unrealized gains
on investments 2.16
Total from investment operations 2.37
Capital contribution 7.83
Less distributions from net investment income:
Common stock equivalent of dividends
paid to AMPS holders (0.21)
Less distributions from net realized gains:
Common stock equivalent of distributions
paid to AMPS holders (0.01)
Distribution to common stockholder -
Total distributions (0.22)
Net asset value, end of period $19.98
Total investment return 23.70%(1)
Ratios/supplemental data:
Net assets at end of period (000s) 642,728
Average net assets (000s) 576,679
Ratio of expenses to average net assets
applicable to common stock (3) 0.16%(2)
Ratio of net investment income to average net
assets applicable to common stock (3) 1.18%(2)
Portfolio turnover 0.03%
Asset coverage per AMPS share, end of period -
AMPS shares outstanding -
Asset coverage for notes payable, end of period 136027%
Notes payable, end of period 472,500
(1)Total investment return for the period, not annualized.
(2)Annualized.
(3)Ratios are calculated on the basis of income and expenses applicable to
both the common and preferred stock relative to the average net assets
of the common stockholder. Ratios do not reflect the effect of dividend
payments to AMPS holders.
See accompanying notes.
LERNOULT INVESTMENT FUND, INC.
Portfolio of Investments
December 31, 1998
No. of
Shares Market Value
COMMON STOCK
BUILDING AND CONSTRUCTION 1.69%
BUILDING MATERIALS
8,800 GEORGIA PACIFIC CORP 515,350.00
138,200 HOME DEPOT 8,456,112.50
31,200 MASCO CORP 897,000.00
INDUSTRIAL CHEMICALS
16,800 PPG INDUS INC 978,600.00
TOTAL BUILDING AND CONSTRUCTION $10,847,062.50
CHEMICALS AND DRUGS 15.82%
CHEMICALS
21,400 DOW CHEMICAL CO 1,946,062.50
107,000 DUPONT DENEMOURS & CO 5,677,687.50
7,400 EASTMAN CHEMICAL 331,150.00
DRUGS
144,600 ABBOT LABS 7,085,400.00
8,100 ALZA CORP CL A 423,225.00
122,800 AMERICAN HOME PRODUCTS 6,915,175.00
94,000 BRISTOL MYERS SQUIBB CO 12,578,375.00
104,900 LILLY ELI & CO 9,322,987.50
113,300 MERCK & CO., INC 16,732,993.75
122,200 PFIZER INC 15,328,462.50
48,000 PHARMACIA & UPJOHN INC 2,718,000.00
138,400 SCHERING PLOUGH 7,646,600.00
77,100 WARNER-LAMBERT 5,796,956.25
COSMETICS
25,000 AVON PRODUCTS INC 1,106,250.00
10,300 INTL FLAVORS & FRAGRANCES 455,131.25
HEALTH PRODUCTS/CARE
26,500 BAXTER INTL INC. 1,704,281.25
105,800 GILLETTE CO 5,111,462.50
28,900 TENET HEALTHCARE CORP 758,625.00
TOTAL CHEMICALS AND DRUGS $101,638,825.00
CONSUMER PRODUCTS 12.82%
CONFECTIONS AND BEVERAGES
46,300 ANHEUSER-BUSCH COS 3,038,437.50
233,800 COCA COLA CO 15,635,375.00
143,400 PEPSICO INC 5,870,437.50
PACKAGED FOOD
43,100 CAMPBELL SOUP CO 2,370,500.00
44,900 CONAGRA 1,414,350.00
34,500 HEINZ H J CO 1,953,562.50
38,800 KELLOGG CO 1,324,050.00
229,200 PHILLIP MORRIS CO INC 12,262,200.00
13,100 QUAKER OATS CO 779,450.00
89,400 SARA LEE CORP 2,519,962.50
4,310 VLASIC FOODS INTL 102,631.88
PAPER
28,600 INTERNATIONAL PAPER CO 1,281,637.50
52,500 KIMBERLY CLARK CORP 2,861,250.00
18,900 WEYERHAEUSER CO 960,356.25
PRINTING AND PUBLISHING
26,800 GANNETT CO., INC 1,728,600.00
9,400 MCGRAW-HILL COMPANIES INC 957,625.00
103,800 TIME WARNER INC 6,442,087.50
OTHER CONSUMER PRODUCTS
28,000 COLGATE PALMOLIVE CO 2,600,500.00
38,600 MINNESOTA MNG & MFR 2,745,425.00
126,900 PROCTER & GAMBLE CO 11,587,556.25
17,400 UST INC 606,825.00
PHOTOGRAPHY
30,700 EASTMAN KODAK CO. 2,210,400.00
APPAREL
27,500 NIKE INC CL B 1,115,468.75
TOTAL CONSUMER PRODUCTS $82,368,688.13
DURABLE GOODS 22.17%
AEROSPACE-AIRCRAFT
94,500 BOEING CO 3,083,062.50
18,400 LOCKHEED MARTIN CORP 1,559,400.00
15,500 TEXTRON INC 1,177,031.25
22,000 UNITED TECHNOLOGIES CORP 2,392,500.00
AGRICULTURAL MACHINERY
35,200 CATERPILLAR INC 1,619,200.00
23,600 DEERE & CO 781,750.00
AUTOMOBILE AND PARTS
23,320 DAIMLERCHRYSLER AG 2,240,177.50
113,400 FORD MTR CO 6,655,162.50
65,000 GENERAL MTRS CORP 4,651,562.50
16,900 GENUINE PARTS CO 565,093.75
16,100 TENNECO INC 548,406.25
11,600 TRW INC 651,775.00
ELECTRICAL
20,800 AMP INC 1,082,900.00
41,900 EMERSON ELEC CO 2,534,950.00
12,000 HONEYWELL INC 903,750.00
ELECTRONICS
7,300 EATON CORP 516,018.75
309,300 GENERAL ELECTRIC CO 31,567,931.25
15,000 GENERAL MILLS INC 1,166,250.00
154,600 INTEL CORP 18,329,762.50
56,400 MOTOROLA INC 3,443,925.00
INDUSTRIAL MACHINERY
11,400 COOPER INDUS INC 543,637.50
OFFICE EQUIPMENT AND SUPPLIES
91,900 IBM COMMON 16,978,525.00
27,400 PITNEY BOWES INC 1,810,112.50
30,800 XEROX CORP. 3,634,400.00
RUBBER
14,800 GOODYEAR TIRE & RUBBER 746,475.00
OTHER DURABLE GOODS
53,300 ALLIED-SIGNAL INC 2,361,856.25
21,800 CORNING INCORPORATED 981,000.00
COMPUTERS AND SOFTWARE
28,300 AUTOMATIC DATA PROC 2,269,306.25
143,100 COMPAQ COMPUTER CORP 6,001,256.25
98,300 HEWLETT PACKARD CO 6,715,118.75
20,200 UNISYS CORP 695,637.50
TELECOMMUNICATIONS
123,000 LUCENT TECHNOLOGIES INC 13,530,000.00
31,200 SPRINT CORP PCS GROUP 721,500.00
TOTAL DURABLE GOODS $142,459,433.75
FINANCIAL 17.99%
BANKS
71,200 BANK NEW YORK INC 2,865,800.00
27,400 BANKBOSTON CORPORATION 1,066,887.50
9,300 BANKERS TR NY CORP 794,568.75
79,600 CHASE MANHATTAN CORP NEW 5,417,775.00
79,994 FIRST UNION CORP 4,864,635.13
51,600 FLEET FINANCIAL GROUP INC 2,305,875.00
19,910 HUNTINGTON BANCSHARES INC 598,544.38
41,500 KEYCORP 1,328,000.00
71,100 MBNA CORP 1,773,056.25
24,100 MELLON BANK CORP 1,656,875.00
16,800 MORGAN J P & CO 1,765,050.00
20,000 NATIONAL CITY CORP 1,450,000.00
19,900 SUNTRUST BANKS INC 1,522,350.00
69,600 U.S. BANCORP 2,470,800.00
17,600 WACHOVIA CORP 1,538,900.00
36,450 WASHINGTON MUTUAL INC 1,391,934.38
153,400 WELLS FARGO COMPANY NEW 6,126,412.50
FINANCE COMPANIES
43,900 AMERICAN EXPRESS CO 4,488,775.00
59,440 ASSOCIATES FIRST CAPITAL 2,518,770.00
65,700 FED HOME LN MTG CORP 4,233,543.75
100,300 FEDERAL NATL MTGE ASSN 7,422,200.00
30,300 HOUSEHOLD INTL CORP 1,200,637.50
56,000 MORGAN ST DE WTR DISC 3,976,000.00
28,800 PNC FINANCIAL 1,558,800.00
HOLDING COMPANY
105,550 BANK ONE CORP 5,389,646.88
163,019 BANKAMERICA CORP NEW 9,801,517.38
216,400 CITIGROUP INC 10,711,800.00
FIRE AND CASUALTY INSURANCE
16,100 CHUBB CORP 1,044,487.50
13,300 SAFECO CORP 571,068.75
INSURANCE
81,000 ALLSTATE CORP. 3,128,625.00
99,450 AMERICAN INTL GROUP 9,609,356.25
15,900 AON CORP 880,462.50
21,000 CIGNA CORP 1,623,562.50
22,400 HARTFORD FINANCIAL SVCS 1,229,200.00
24,150 MARSH & MCLENNAN CO. 1,411,265.63
15,800 ST PAUL COS INC 549,050.00
LIFE INSURANCE
24,000 AMERICAN GENERAL CORP 1,872,000.00
9,700 LINCOLN NATL CORP IND 793,581.25
BROKERAGE
31,500 MERRILL LYNCH & CO 2,102,625.00
MISCELLANEOUS
16,100 DUN & BRADSTREET CORP NEW 508,156.25
TOTAL FINANCIAL $115,562,595.03
METALS AND MINING 0.21%
ALUMINUM
15,300 ALUMINUM CO AMER 1,140,806.25
OTHER METALS
18,300 FREEPORT-MCMORAN COPPER-B 191,006.25
TOTAL METALS AND MINING $1,331,812.50
OIL-ENERGY 6.78%
OIL & GAS PRODUCERS
92,000 AMOCO CORP 5,428,000.00
32,000 OCCIDENTAL PETROLEUM 540,000.00
27,300 USX-MARTHON GROUP COM NEW 822,412.50
NATURAL RESOURCES
30,200 WILLIAMS COS INC-DEL 941,862.50
OIL - DOMESTIC
24,900 PHILLIPS PETE CO 1,061,362.50
23,300 UNOCAL CORP 680,068.75
OIL - INTERNATIONAL
30,300 ATLANTIC RICHFIELD CO 1,977,075.00
62,100 CHEVRON CORP 5,150,418.75
233,100 EXXON CORP. 17,045,437.50
74,100 MOBIL CORP 6,455,962.50
51,800 TEXACO INC 2,738,925.00
MISCELLANEOUS
21,800 FIRSTENERGY CORP 709,862.50
TOTAL OIL-ENERGY $43,551,387.50
RETAIL 4.00%
DEPARTMENT STORES
41,400 DAYTON HUDSON CORP 2,245,950.00
46,100 K MART 705,906.25
21,900 MAY DEPT STORES CO 1,322,212.50
23,600 PENNEY JC INC 1,106,250.00
37,100 SEARS ROEBUCK & CO 1,576,750.00
GROCERY
23,200 ALBERTSON'S INC 1,477,550.00
OTHER RETAIL
212,300 WAL MART STORES INC 17,289,181.25
TOTAL RETAIL $25,723,800.00
UTILITIES 11.45%
ELECTRIC
17,900 AMERICAN ELEC PWR INC 842,418.75
14,000 BALTIMORE GAS & ELEC 432,250.00
14,200 CAROLINA PWR & LT CO 668,287.50
20,100 CENTRAL & SOUTH WEST CORP 551,493.75
14,900 CINERGY CORP 512,187.50
22,200 CONSOLIDATED EDISON INC 1,173,825.00
18,300 DOMINION RES INC-VA 855,525.00
13,700 DTE ENERGY CO 587,387.50
34,000 DUKE POWER CO 2,178,125.00
36,100 EDISON INTERNATIONAL 1,006,287.50
23,100 ENTERGY CORP NEW 718,987.50
17,200 FPL GROUP INC 1,059,950.00
12,000 GPU INC 530,250.00
26,700 HOUSTON INDS INC 857,737.50
13,700 NIAGARA MOHAWK PWR 220,912.50
14,000 NORTHERN STS PWR CO 388,500.00
14,300 P P & L RESOURCES INC 398,612.50
28,000 PACIFICORP 589,750.00
21,000 PECO ENERGY CO 874,125.00
41,400 PG&E CORP 1,304,100.00
21,900 PUBLIC SVC ENTERPRISE GRP 876,000.00
65,200 SOUTHERN CO 1,894,875.00
20,500 UNICOM CORPORATION 790,531.25
GAS
9,000 CONSOLIDATED NATL GAS 486,000.00
23,300 TEXAS UTILITIES CO 1,087,818.75
TELEPHONE
153,500 A T & T 11,550,875.00
17,400 ALLTEL CORP 1,040,737.50
103,500 AMERITECH CORP NEW 6,559,312.50
146,800 BELL ATLANTIC CORP 7,780,400.00
187,400 BELLSOUTH CORP 9,346,575.00
29,400 ENRON CORP 1,677,637.50
15,500 FRONTIER CORP 527,000.00
90,500 GTE CORP 5,882,500.00
40,600 SPRINT CORP 3,415,475.00
45,700 US WEST INC (NEW) 2,953,362.50
WASTE DESPOSAL
18,300 BROWNING FERRIS IND 520,406.25
31,175 WASTE MANAGEMENT INC NEW 1,453,534.38
TOTAL UTILITIES $73,593,753.13
MISCELLANEOUS 6.01%
BROADCAST/COMMUNICATIONS
67,200 CBS CORP 2,200,800.00
191,400 DISNEY WALT CO 5,742,000.00
BUSINESS SERVICES
76,600 CENDANT CORP 1,460,187.50
FOOD SERVICE
65,100 MCDONALDS CORP 4,988,287.50
MED SERV & SUPPLIES
15,500 HUMANA INC 276,093.75
TRANSPORTATION
17,200 AMR CORP 1,021,250.00
44,400 BURLINGTON NRTHN SANTA FE 1,498,500.00
20,600 CSX CORP 854,900.00
35,600 NORFOLK SOUTHERN CORP 1,128,075.00
23,400 UNION PACIFIC CORP 1,054,462.50
MISCELLANEOUS
127,100 JOHNSON & JOHNSON 10,660,512.50
3,220 RH DONNELLEY CORP 46,891.25
TELECOMMUNICATIONS
143,200 SBC COMMUNICATIONS INC 7,679,100.00
TOTAL MISCELLANEOUS $38,611,060.00
TOTAL COMMON STOCK $635,688,417.54
OTHER
1.06%
CASH EQUIVALENTS
6,805,578 AIM SHORT TERM INV SER 2 6,805,578.18
TOTAL $6,805,578.18
TOTAL OTHER $6,805,578.18
TOTAL INVESTMENTS - 100.00% $642,493,995.72
(cost $573,490,527)
See accompanying notes
