THE FAIRMONT FUND
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
WITH
REPORT OF INDEPENDENT AUDITORS
<PAGE>
COMMENTS FROM MORTON H. SACHS, CHAIRMAN
1997 demonstrated once again that not all stocks move in lockstep with the major
market indexes. Though the Fund had a decent year, finishing up 15.27%, it, like
many of its peers, could not match the blistering pace set by the S&P 500 Index
which was up 33.37%. Though we have felt for some time that the large
capitalization stocks that dominate the Index are overvalued and ripe for a
price correction, they continued to attract substantial interest during the
year.
When the market started its slide in early March, we anticipated that the large
caps would be more vulnerable than the smaller cap, undervalued stocks we
emphasize. Apparently, nervous investors felt more comfortable with "big name"
stocks and the ensuing flight to quality propped up this sector. The persistence
of a low interest rate, low inflation economic forecast helped the market shrug
off any bad news and surge higher. The Fund rebounded dramatically (+38%) in the
six months following the April lows as our financial services, insurance and
specialty retailer stocks did well, but year-to-date performance still lagged
the S&P at the end of October.
The 4th quarter proved to be the most vexing of the year. Worry over the crisis
in Asia and slowing corporate earnings brought the broad market advance to a
screeching halt on October 27. Some of the S&P 500 stocks recovered rather
quickly, leading the Index to a strong close. The Fund's holdings have been
slower to respond. Our financial sector stocks (e.g. CFX Corp., Imperial
Bankcorp, North Fork Bancorporation) were stellar performers, but our specialty
retailers (e.g. Timberland Co., Corporate Express), which had done so well
earlier in the year, could not regain their momentum. Some of the technology
stocks (e.g. Software Spectrum) were hard hit due to weaker demand and shrinking
profit margins. Several healthcare stocks (e.g. Staff Builders, Maxicare,
MedPartners) suffered declines as well.
As we head into 1998, we foresee that the market will continue to be volatile
and unlikely to generate the high returns of the last several years.
Nevertheless, we expect that the undervalued, out-of-favor type of stock that
populates our portfolio will offer less risk and more potential than that of the
S&P 500. We will continue to exercise caution and discipline as we weigh our
alternatives.
TEN YEAR COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FAIRMONT
FUND AND THE S&P 500
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEAR 10 YEAR
------- ------ -------
15.27% 14.89% 10.66%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
[Graph omitted here]
Graph depicts the comparison of a $10,000 investment between the Fairmont Fund
and the S&P 500 from 1987 through 1997.
FUND S&P 500
GROWTH OF GROWTH OF
$10,000 $10,000
(10 YEAR) (10 YEAR)
--------- ---------
1987 $ 10,000 $ 10,000
1988 10,312 11,656
1989 11,017 15,343
1990 8,579 14,866
1991 12,059 19,385
1992 13,752 20,859
1993 15,892 22,958
1994 17,047 23,258
1995 21,807 31,992
1996 23,883 39,334
1997 27,530 52,460
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Shareholders and
Board of Directors:
Fairmont Fund
We have audited the accompanying statement of assets and liabilities of Fairmont
Fund, including the schedule of investments, as of December 31, 1997, and the
related statements of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the 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.
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, 1997, by correspondence with the custodian and brokers. 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
Fairmont Fund as of December 31, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio 44145
January 13, 1998
<PAGE>
THE FAIRMONT FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENTS IN SECURITIES
COMMON STOCKS (SHARES) VALUE PERCENT
------- -------
<C> <S> <C> <C>
AIRLINE
20,000 Japan Airlines Co. Ltd. (a) ........... $ 105,000 0.33
----------
AUTOMOBILE PARTS
175,000 TBC Corporation (a) ................... 1,673,43 5.25
----------
BANKING
25,000 North Fork Bancorporation, Inc. ....... 839,063
75,000 UST Corporation ....................... 2,081,250
----------
2,920,313 9.17
----------
BUSINESS SERVICES
130,000 Butler International, Inc. (a) ........ 2,275,00 7.14
----------
CHEMICALS
6,000 Pioneer Companies Inc. Class A Stock (a) 78,750 0.25
----------
COMPUTER SOFTWARE AND PERIPHERAL EQUIPMENT
50,000 Software Spectrum (a) .................. 593,750
15,000 ACT Manufacturing, Inc. (a) ............ 211,875
85,000 Madge N.V. (a) ......................... 329,375
----------
1,135,000 3.56
----------
EMPLOYMENT AGENCY
130,000 Employee Solutions Inc. (a) ............ 560,625 1.76
----------
ENGINEERING
20,000 Fluor Corporation ...................... 747,500 2.35
----------
HOME HEALTH CARE
250,000 Staff Builders, Inc. New Class A (a) ... 523,438 1.64
----------
HOSPITAL AND MEDICAL SERVICE PLANS
55,000 Maxicare Healthcare Plans, Inc. (a) .... 598,125
15,000 Medpartners, Inc. (a) .................. 335,625
----------
933,750 2.93
HOUSEHOLD PRODUCTS
15,000 Fortune Brands, Inc. ................... 555,937 1.75
----------
MORTGAGE BANKER/BROKER
85,000 Southern Pacific Funding Corporation (a) 1,115,625 3.50
----------
MULTILINE INSURANCE
50,000 USF&G Company .......................... 1,103,125 3.46
----------
NONFERROUS METALS
15,000 Cominco, Ltd. .......................... 231,563 0.73
----------
OFFICE SUPPLIES
60,000 BT Office Products International, Inc.(a). 465,000 1.46
----------
See accompanying notes.
<PAGE>
THE FAIRMONT FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
INVESTMENTS IN SECURITIES (CONTINUED)
COMMON STOCKS (SHARES) VALUE PERCENT
----- -------
OIL AND GAS EXPLORATION
100,000 Oryx Energy Company (a) ................ $2,550,000 8.00%
-----------
PAPER PRODUCTS
80,000 Corporate Express, Inc. (a) ............ 1,030,000 3.23
-----------
PERSONAL SERVICES
70,000 Regis Corporation ...................... 1,758,750 5.52
-----------
PHARMACEUTICALS
31,000 Novartis AG ADR ........................ 2,522,625 7.92
-----------
RETAIL
105,000 Spiegel, Inc., Class A (a) ............. 518,437
40,000 Heilig-Meyers Company .................. 480,000
45,000 Garden Ridge Corporation (a) ........... 641,250
-----------
1,639,687 5.15
-----------
SAVINGS INSTITUTIONS
50,000 CFX Corporation ........................ 1,525,000
70,000 Dime Financial Corporation ............. 2,135,000
55,000 Mechanics Savings Bank (a) ............. 1,433,437
-----------
5,093,437 15.99
-----------
SHOES
25,000 Timberland Company (a) ................. 1,451,563 4.56
-----------
TELEPHONE COMMUNICATIONS
70,000 Empresas Telex-Chile SA ADR ............ 275,625 0.87
----------- ------
TOTAL COMMON STOCKS (Cost $25,709,932) ........... 30,745,750 96.52
BANK REPURCHASE AGREEMENT
With Star Bank NA of Cincinnati, issued
12/31/97 due 1/2/98, fully collateralized by
Government National Mortgage Association, 6.00%
due 5/20/22 (Cost $2,504,000) ........................ 2,504,000 7.86
----------- ------
TOTAL INVESTMENTS (COST $28,213,932) ............. 33,249,750 104.38
OTHER ASSETS LESS LIABILITIES .................... ( 1,394,010) ( 4.38)
----------- ------
NET ASSETS .................................. $ 31,855,740 100.00%
=========== ======
<FN>
(a) Common stocks which did not declare a dividend in 1997.
</FN>
</TABLE>
See accompanying notes.
<PAGE>
THE FAIRMONT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS
INVESTMENTS IN SECURITIES, At Value (Note 2)
Common stocks (Cost $25,709,932) ...... $ 30,745,750
Bank repurchase agreement ............. 2,504,000
-------------
Total investments in securities ............. $ 33,249,750
CASH .......................................................... 3,661
RECEIVABLES
Investment securities sold ............ 1,785,640
Dividends ............................. 26,000
Interest .............................. 383
-------------
Total receivables ........................... 1,812,023
------------
Total assets ....................... 35,065,434
LIABILITIES
PAYABLES
Investment securities purchased .......... $ 2,969,876
Distributions to shareholders (Note 4).... 192,475
Management fee (Note 3) .................. 44,417
Shares redeemed .......................... 2,353
Other .................................... 573
------------
Total liabilities ........................... 3,209,694
------------
NET ASSETS .................................................... $ 31,855,740
============
NET ASSETS CONSIST OF
Capital stock (1,150,684 shares outstanding) (Note 8).... $ 27,332,115
Accumulated net realized losses on investments (Note 6).. ( 512,192)
Net unrealized appreciation on investments (Note 5)...... 5,035,817
------------
NET ASSETS .................................................... $ 31,855,740
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
($31,855,740 divided by 1,150,684 shares) ............ $ 27.68
============
See accompanying notes.
<PAGE>
THE FAIRMONT FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
INVESTMENT INCOME (Note 2)
Dividends ...................................................... $ 224,793
Interest ....................................................... 91,365
Other .......................................................... 18,427
---------
Total investment income .................................... 334,585
EXPENSES
Management fee (Note 3) ........................................ 515,556
---------
Net investment loss ........................................ (180,971)
---------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS (Note 2)
Net realized gains from investment transactions ................ 2,995,502
Net change in unrealized appreciation on investments ........... 1,557,794
---------
Net realized and unrealized gains on investments ........... 4,553,296
---------
Net increase in net assets resulting from operations .. $4,372,325
==========
See accompanying notes.
<PAGE>
THE FAIRMONT FUND
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
FROM OPERATIONS
<S> <C> <C> <C> <C>
Net investment loss ................................ $ (180,971) $ (178,912)
Net realized gains on investments .................. 2,995,502 3,637,050
Net change in unrealized appreciation
on investments ............................ 1,557,794 (765,433)
--------- --------
Net increase in net assets
resulting from operations ................. 4,372,325 2,692,705
--------- ---------
DISTRIBUTIONS TO SHAREHOLDERS (Note 4)
Distributions from net realized gains on investments (2,953,085) (3,273,575)
--------- ---------
FROM CAPITAL SHARE TRANSACTIONS (Note 8) ........ Shares Shares
------ ------
Proceeds from sale of shares ........... 52,488 1,494,130 90,818 2,591,421
Shares issued in reinvestment
of distributions .............. 99,733 2,760,610 119,600 3,163,405
Payments for shares redeemed ........... (163,215) (4,549,244) (92,010) (2,633,953)
-------- ---------- ------- ----------
Net increase or decrease in net assets
from capital share transactions (10,994) (294,504) 118,408 3,120,873
======== ---------- ======= ----------
Net increase in net assets ................ 1,124,736 2,540,003
NET ASSETS
Beginning of year .................................. 30,731,004 28,191,001
---------- ----------
End of period ...................................... $31,855,740 $ 30,731,004
=========== ============
</TABLE>
See accompanying notes.
<PAGE>
THE FAIRMONT FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Years Ended
-----------
December December December December December
31 31 31 31 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 26.45 27.02 24.06 22.43 19.41
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss ............................ (.16) (.10) (.08) (.16) (.14)
Net Gains or Losses on Securities
(both realized and unrealized) 4.20 2.67 6.80 1.79 3.16
-------- ----- ----- ----- -----
Total From Investment Operations ...... 4.04 2.57 6.72 1.63 3.02
LESS DISTRIBUTIONS
Dividends (from net investment income) ......... .00 .00 .00 .00 .00
Distributions (from capital gains) ............. 2.81 3.14 3.76 .00 .00
Returns of Capital ............................. .00 .00 .00 .00 .00
-------- ----- ----- ----- -----
Total Distributions ................... 2.81 3.14 3.76 .00
.00
Net Asset Value, End of Period .......................... $ 27.68 26.45 27.02 24.06 22.43
======== ===== ===== ===== =====
TOTAL RETURN ............................................ 15.27% 9.52% 27.92% 7.27% 15.56%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s) ..................... $ 31,856 $ 30,731 $ 28,191 22,195 $ 18,884
Ratio of Expenses to Average Net Assets ................. 1.63% 1.66% 1.70% 1.74%
1.78%
Ratio of Net Income to Average Net Assets ............... (.57)% (.59)% (.55)% (.79)% (.66)%
Portfolio Turnover Rate ................................. 1.83 2.37 2.47 2.75 1.55
Average Commission Rate ................................. .057 .057
</TABLE>
See accompanying notes.
<PAGE>
THE FAIRMONT FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) Organization
The Fairmont Fund (The Fund) is a no-load, diversified series of The
Fairmont Fund Trust (The Trust), which is a Kentucky Business Trust and an
open-end investment company registered under the Investment Company Act of 1940.
The Fund was established under a declaration of trust dated December 29, 1980
and began offering its shares publicly on September 2, 1981. The Fund's
objective is capital appreciation which it seeks to achieve by investing in
equity securities that its Adviser believes are undervalued.
(2) Summary of Significant Accounting Policies
(a) Valuation of Investment Securities - Purchases and sales of
securities are recorded on a trade date basis. Portfolio securities which are
traded on stock exchanges or in the over-the-counter markets are valued at the
last sale price as of 4:00 P.M. Eastern time on the day the securities are being
valued or, lacking any sales, at the mean between the closing bid and asked
prices. Fixed income securities are valued by using market quotations, or
independent pricing services which use prices provided by market makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Securities and other assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
(b) Gains and Losses on Investment Securities - Gains and losses from
sales of investments are calculated on the "identified cost" method. Upon
disposition of a portion of the investment in a particular security, it is The
Fund's general practice to first select for sale those securities which qualify
for long-term capital gain or loss treatment for tax purposes.
(c) Repurchase Agreements - The Fund may acquire repurchase agreements
from banks or security dealers (the Seller) which the Board of Trustees and the
Adviser have determined creditworthy. The Seller of the repurchase agreement is
required to maintain the value of collateral at not less than the repurchase
price, including accrued interest. Securities pledged as collateral for
repurchase agreements are held by The Fund's custodian in the Federal
Reserve/Treasury book-entry system.
(d) Capital Shares - The Fund records purchases of its capital shares
at the daily net asset value next determined after receipt of a shareholder's
check or wire and application in proper form. Redemptions are recorded at the
net asset value next determined following receipt of a shareholder's written
request in proper form.
(e) Estimates and Assumptions - The preparation of financial statements
in conformity with generally accepted accounting principles requires The Fund to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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) Investment Advisory Agreement, Commissions and Related Party Transactions
The Investment Advisory Agreement (the Agreement) provides that The
Sachs Company (the Adviser) will pay all of The Trust's operating expenses,
including fees to disinterested trustees, but excluding brokerage fees and
commissions, taxes, interest and extraordinary expenses. Under the terms of the
Agreement, The Fund pays the Adviser a fee at the rate of 2% of the first
$10,000,000 of average daily net assets, 1-1/2% of the next $20,000,000, and 1%
of the average daily net assets over $30,000,000. The management fee is accrued
daily and paid monthly. The Adviser received management fees of $515,556 for the
year ended December 31, 1997.
<PAGE>
THE FAIRMONT FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Morton H. Sachs, a trustee of The Fund, is the president and sole
shareholder of the Adviser. The Adviser, as a registered broker-dealer of
securities, effected substantially all of the investment portfolio transactions
for The Fund. For this service the Adviser received commissions of $372,542 for
the year ended December 31, 1997.
Certain officers and/or Trustees of The Fund are officers of the
Adviser.
(4) Distributions to Shareholders
The following is a summary of distributions to shareholders for the years ended
December 31, 1997 and December 31, 1996.
PERIOD PAID PER SHARE
ENDED DATE DECLARED IN CASH REINVESTED TOTAL AMOUNT
----- ------------- ------- ---------- ----- ------
12/31/97 December 31, 1997 $192,475 $2,760,610 $2,953,085 $ 2.81
12/31/96 December 31, 1996 $110,169 $3,163,405 $3,273,574 $ 3.14
(5) Investments
For the year ended December 31, 1997, the cost of purchases and proceeds from
sales of investments, other than temporary cash investments, were $54,316,345
and $57,731,165, respectively.
Following is information regarding unrealized appreciation (depreciation) and
aggregate cost of securities based upon federal income tax cost at December 31,
1997:
TAX COST
--------
Aggregate gross unrealized appreciation for
all securities with value in excess of cost $ 7,478,569
Aggregate gross unrealized depreciation for
all securities with cost in excess of value (2,954,944)
----------
Net unrealized appreciation $ 4,523,625
============
Aggregate cost of securities $ 26,222,125
============
(6) Income Taxes
It is The Fund's policy to comply with the special provisions of the Internal
Revenue Code available to investment companies and, in the manner provided
therein, to distribute substantially all of its income to shareholders.
Therefore no tax provision is required. The accumulated net realized loss is due
only to temporary timing differences caused by wash sales and does not represent
a capital loss carryforward for income tax purposes.
(7) There are no reportable financial instruments which have any off-balance
sheet risk as of December 31, 1997.
(8) At December 31, 1997 an indefinite number of capital shares (no par value)
were authorized, and paid-in capital amounted to $27,332,115. Transactions
in capital shares were as follows:
Shares sold 152,221
Shares redeemed (163,215)
--------
Net decrease (10,994)
Shares outstanding:
Beginning of period 1,161,678
---------
Ending of period 1,150,684
=========
