THE FAIRMONT FUND
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
WITH
REPORT OF INDEPENDENT AUDITORS
<PAGE>
COMMENTS FROM MORTON H. SACHS, CHAIRMAN
Remaining true to your investment philosophy and style can be trying at times;
1998 was one of those times. As small- to medium-cap value managers, we find it
particularly difficult to watch the big-cap indices soar to dizzying heights
while our sector of the market gets left behind for the fourth year in a row. As
the S&P 500 finished the year with a total return of 28.57%, the Russell 2000
and Russell 2000 Value indices, more appropriate benchmarks for the Fairmont
Fund, ended up down 2.54% and 6.45% respectively. Though not the kind of return
we like to see, the Fund's loss of 4.88% was in line with peer group indices.
The market's rise was again built on a fairly narrow base. A handful of dominant
stocks drove performance, while many others languished. In particular, the
market's rebound following the mid-year correction proved to be a rising tide
that failed to lift all boats. Our financial sector stocks, for example, never
regained the strength they had exhibited earlier in the year. Even within
sectors, the market's performance was spotty. Though technology related stocks
were the darlings of the market last year, we found the group performed
unevenly. We got good results with Advanced Micro Devices and Computer Learning
Centers, but were hurt by Madge. We missed some nice gains in the incredibly hot
Internet market because of our distrust of stocks that have no earnings and, in
some cases, no revenues. Mixed results characterized the specialty retailing
sector as well. Timberland and Talbots helped us; Heilig-Meyers, Garden Ridge
and Spiegel did not. Elsewhere, we were penalized by shifting economics in the
healthcare and energy areas.
Will we get the long-awaited and overdue move in smaller capitalization stocks
in 1999? No one knows. We continue to believe that growth opportunities abound
for small-cap stocks and that the market is currently ignoring them. While the
wait can be frustrating, we think that patience and a long-term perspective will
ultimately be rewarded.
* * * * *
On a separate note, we think you need to know that the Fund could be adversely
affected if the computer systems used by the Adviser or the Fund's various
service providers do not properly process date-related information on and after
January 1, 2000. The Adviser has taken steps that it believes are reasonably
designed to address the "Year 2000 Issue," including most prominently the
transfer of administrative and transfer agency processing to an outside firm,
Mutual Shareholder Services (MSS). Both MSS and other service providers have
offered reasonable assurances that appropriate measures have been taken to deal
with the Year 2000 problem. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Fund. In
addition, the Adviser cannot make any assurances that the Year 2000 Issue will
not affect the companies in which the Fund invests or worldwide markets and
economies.
* * * * *
As you will note in the chart below, we have included a comparison with the
Russell 2000. This index of small stock performance is constructed from a list
of the 3,000 largest U.S. stocks, minus the top 1,000. Given the size of the
stocks typically found in our portfolio, we believe this is a much more
representative index. The divergence between large and small stock performance
over the last several years has highlighted the need for a benchmark more
appropriate than the S&P 500.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
TEN YEAR COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE FAIRMOND FUND, THE S&P 500 AND THE RUSSELL 2000
Fund S&P 500 Russell 2000
Growth of Growth of Growth of
10,000.00 10,000.00 10,000.00
Year (10 Year) (10 Year) (10 Year)
<S> <C> <C> <C>
1988 10,000.00 10,000.00 10,000.00
1989 10,684.00 13,163.11 11,624.00
1990 8,319.63 12,753.65 9,356.16
1991 11,694.07 16,630.87 13,664.67
1992 13,335.92 17,895.30 16,173.50
1993 15,410.99 19,696.10 19,231.91
1994 16,531.37 19,953.72 18,879.97
1995 21,146.93 27,446.35 24,251.32
1996 23,160.11 33,745.29 28,243.08
1997 26,696.66 45,006.09 34,561.06
1998 25,393.87 57,864.33 33,683.21
</TABLE>
FUND'S AVERAGE ANNUAL TOTAL RETURN
1 Year 5 Year 10 Year
-------- -------- ---------
-4.88% 10.50% 9.77%
- 3 -
<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, 1998, 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, 1998, 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, 1998, 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 19, 1999
- 4 -
<PAGE>
<TABLE>
<CAPTION>
THE FAIRMONT FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
INVESTMENTS IN SECURITIES
COMMON STOCKS (SHARES) VALUE PERCENT
- -----------------------------------------------------------------------------------------------
AIRLINE
<C> <S> <C> <C>
40,000 Northwest Airlines Corporation (a)................. $ 1,022,500
15,000 UAL Corporation (a)................................ 895,313
-------------
1,917,813 8.04%
BANKING
20,000 Republic New York Corporation...................... 911,250
40,000 Texas Regional Bancshares, Inc..................... 1,002,500
40,000 UST Corporation.................................... 942,500
--------------
2,856,250 11.98
BOOKS
10,000 Barnes and Noble, Inc. (a)......................... 425,000 1.78
--------------
BROKER-DEALER
45,000 Raymond James Financial, Inc....................... 950,625 3.99
--------------
BUSINESS SERVICES
118,000 Butler International, Inc. (a)..................... 3,119,625 13.09
--------------
COMPUTER SOFTWARE
65,000 Software Spectrum.................................. 1,031,875 4.33
--------------
EMPLOYMENT AGENCY
250,000 Employee Solutions, Inc. (a)....................... 640,625 2.69
--------------
FERTILIZER
25,000 IMC Global, Inc.................................... 534,375 2.24
--------------
FIRE AND CASUALTY INSURANCE
15,002 St. Paul Companies, Inc............................ 521,320 2.19
--------------
HOUSEHOLD PRODUCTS
20,000 Fortune Brands, Inc................................ 632,500 2.65
--------------
LIFE INSURANCE
22,000 Ohio Casualty Corporation.......................... 904,750 3.79
--------------
PERSONAL SERVICES
45,000 Regis Corporation.................................. 1,800,000 7.55
--------------
PETROLEUM REFINING
5,000 Kerr McGee Corporation............................. 191,250 0.80
--------------
PHARMACEUTICALS
20,000 Novartis AG ADR.................................... 1,967,500 8.25
--------------
See accompanying notes.
- 5 -
<PAGE>
THE FAIRMONT FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
INVESTMENTS IN SECURITIES (CONTINUED)
COMMON STOCKS (SHARES) VALUE PERCENT
- -----------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS
55,000 RFS Hotel Investors, Inc........................... $ 673,750 2.83%
--------------
RETAIL CLOTHING
30,000 Ashworth, Inc. (a)................................. 165,937 0.70
--------------
RETAIL ELECTRONICS
10,000 Circuit City Stores, Inc........................... 499,375 2.09
--------------
RETAIL VARIETY
50,000 K Mart Corporation (a)............................. 765,625 3.21
--------------
SAVINGS INSTITUTIONS
45,000 MECH Financial, Inc................................ 1,248,750
25,000 Webster Preferred Capital Corporation.............. 685,937
--------------
1,934,687 8.12
--------------
VEHICLE RENTAL
50,000 Budget Group, Inc. (a)............................. 793,750 3.33
--------------
WATER SUPPLY
20,000 California Water Service Group Holdings............ 626,250 2.63
-------------- ------
TOTAL COMMON STOCKS (Cost $18,761,238)....................... 22,952,882 96.28
BANK REPURCHASE AGREEMENT
With Star Bank NA of Cincinnati, issued 12/31/98
due 1/4/99, fully collateralized by Government
National Mortgage Association, 5.50% due 3/20/24
(Cost $440,000)............................................ 440,000 1.85
-------------- ------
TOTAL INVESTMENTS (Cost $19,201,238).................. 23,392,882 98.13
OTHER ASSETS LESS LIABILITIES......................... 446,332 1.87
-------------- ------
NET ASSETS....................................... $ 23,839,214 100.00%
============== ======
<FN>
(a) Common stocks which did not declare a dividend in 1998.
</FN>
</TABLE>
- 6 -
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
THE FAIRMONT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
INVESTMENTS IN SECURITIES, At Value (Note 2)
<S> <C> <C>
Common stocks (Cost $18,761,238)......................... $ 22,952,882
Bank repurchase agreement................................ 440,000
-------------
Total investments in securities....................................... $ 23,392,882
CASH ........................................................................... 1,866
RECEIVABLES
Investment securities sold............................... 1,553,948
Dividends ............................................... 24,278
Interest ............................................... 43
-------------
Total receivables..................................................... 1,578,269
--------------
Total assets..................................................... 24,973,017
LIABILITIES
PAYABLES
Investment securities purchased......................... $ 1,050,825
Shares redeemed......................................... 48,629
Management fee (Note 3)................................. 33,777
Other ............................................. 572
------------
Total liabilities..................................................... 1,133,803
--------------
NET ASSETS $ ................................................................. 23,839,214
==============
NET ASSETS CONSIST OF
Capital stock (905,449 shares outstanding) (Note 8)........................ $ 20,792,484
Accumulated net realized losses on investments (Note 6).................... ( 1,144,914)
Net unrealized appreciation on investments (Note 5)........................ 4,191,644
--------------
NET ASSETS $ ................................................................. 23,839,214
===============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
($23,839,214 divided by 905,449 shares).................................... $ 26.33
===============
</TABLE>
See accompanying notes.
- 7 -
<PAGE>
<TABLE>
<CAPTION>
THE FAIRMONT FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME (Note 2)
<S> <C>
Dividends ............................................................... 300,006
Interest ............................................................... 95,102
Other ............................................................... 5,174
------------
Total investment income............................................. 400,282
EXPENSES
Management fee (Note 3).................................................. 449,641
------------
Net investment loss............................................ ( 49,359)
------------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS (Note 2)
Net realized losses from investment transactions......................... ( 632,722)
Net change in unrealized appreciation on investments..................... ( 844,173)
------------
Net realized and unrealized losses on investments................... (1,476,895)
------------
Net decrease in net assets resulting from operations..........$( 1,526,254)
============
</TABLE>
See accompanying notes.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
THE FAIRMONT FUND
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
1998 1997
-------------- ---------------
FROM OPERATIONS
<S> <C> <C>
Net investment loss..................................... $ ( 49,359) $ ( 180,971)
Net realized gains or losses on investments.............. ( 632,722) 2,995,502
Net change in unrealized appreciation
on investments...................................... ( 844,173) 1,557,794
------------- --------------
Net increase or decrease in net assets
resulting from operations........................... ( 1,526,254) 4,372,325
------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS (Note 4)
Distributions from net realized gains on investments....... 0 ( 2,953,085)
-------------- -------------
FROM CAPITAL SHARE TRANSACTIONS (Note 8) SHARES SHARES
---------- --------
Proceeds from sale of shares................... 42,180 1,166,930 52,488 1,494,130
Shares issued in reinvestment
of distributions.......................... 0 0 99,733 2,760,610
Payments for shares redeemed................... ( 287,415) ( 7,657,202) ( 163,215) ( 4,549,244)
Net increase or decrease in net assets
from capital share transactions........... ( 245,235) ( 6,490,272) ( 10,994) 294,504
============ ------------- ========== ------------
Net increase or decrease in net assets...................... ( 8,016,526) 1,124,736
NET ASSETS
Beginning of year................................................ 31,855,740 30,731,004
-------------- --------------
End of period................................................... $ 23,839,214 $ 31,855,740
============== ==============
</TABLE>
See accompanying notes.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
THE FAIRMONT FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout Each Period)
YEARS ENDED
---------------------------------------------------------------------------
December December December December December
31 31 31 31 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $ 27.68 26.45 27.02 24.06 22.43
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss................................... (0.27) ( .16) ( .10) ( .08) ( .16)
Net Gains or Losses on Securities
(both realized and unrealized)................... (1.08) 4.20 2.67 6.80 1.79
---- ----- ----- ----- -----
Total From Investment Operations................... (1.35) 4.04 2.57 6.72 1.63
LESS DISTRIBUTIONS
Dividends (from net investment income)................ .00 .00 .00 .00 .00
Distributions (from capital gains).................... .00 2.81 3.14 3.76 .00
Returns of Capital.................................... .00 .00 .00 .00 .00
----- ----- ----- ----- -----
Total Distributions................................ .00 2.81 3.14 3.76 .00
Net Asset Value, End of Period.......................... $ 26.33 27.68 26.45 27.02 24.06
===== ===== ===== ===== =====
TOTAL RETURN............................................. (4.88)% 15.27% 9.52% 27.92% 7.27%
- ------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s).................... $ 23,839 $ 31,856 $ 30,731 $ 28,191 $ 22,195
Ratio of Expenses to Average Net Assets.................. 1.68% 1.63% 1.66% 1.70% 1.74%
Ratio of Net Income to Average Net Assets................ (0.18)% ( .57)% ( .59)% ( .55)% ( .79)%
Portfolio Turnover Rate.................................. 3.42 1.83 2.37 2.47 2.75
</TABLE>
See accompanying notes.
- 10 -
<PAGE>
THE FAIRMONT FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) Organization
The Fairmont Fund (The Fund) is a no-load, diversified series of The
Camelot Funds, formerly 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, 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 $449,641 for the year ended December 31,
1998.
- 11 -
<PAGE>
THE FAIRMONT FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 $581,836 for
the year ended December 31, 1998.
Certain officers and/or Trustees of The Fund are officers of the Adviser.
(4) Distributions to Shareholders
No distributions to shareholders were declared during the year ended December
31, 1998.
(5) Investments
For the year ended December 31, 1998, the cost of purchases and proceeds from
sales of investments, other than temporary cash investments, were $83,685,873
and $90,001,846, respectively.
Following is information regarding unrealized appreciation (depreciation) and
aggregate cost of securities based upon federal income tax cost at December 31,
1998:
TAX COST
Aggregate gross unrealized appreciation for
all securities with value in excess of cost........ $ 5,060,780
Aggregate gross unrealized depreciation for
all securities with cost in excess of value......... ( 975,487)
------------
Net unrealized appreciation............................. $ 4,085,313
=============
Aggregate cost of securities............................ $ 18,867,569
=============
(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.
(7) There are no reportable financial instruments which have any off-balance
sheet risk as of December 31, 1998.
(8) At December 31, 1998 an indefinite number of capital shares (no par value)
were authorized, and paid-in capital amounted to $20,792,071. Transactions in
capital shares were as follows:
Shares sold...................................... 42,180
Shares redeemed.................................. ( 287,415)
------------
Net decrease..................................... ( 245,235)
============
Shares outstanding:
Beginning of period................... 1,150,684
-------------
Ending of period...................... 905,449
=============
- 12 -
