To Our Shareholders:
Thank you for investing in The Michigan Heritage Fund. We believe the 32 stocks
that make up the Fund's portfolio as of December 31, 1997 provide a strong group
of core holdings for our shareholders. We will continue to look for innovative
new Michigan companies to add to our portfolio as well as established Michigan
companies going through dynamic changes.
The Markets
The stock market's bull run continued in 1997 with the S&P 500, Dow Jones
Industrial Average and Bloomberg Michigan Index all posting exceptional returns.
There have been a few stumbles however, in world markets since the Fund
commenced operations in July. In August, several widely-held companies announced
earnings disappointments and, in October, currency devaluations in southeast
Asia rumbled through markets worldwide. The U.S. market rebounded after each
period of distress, as the underlying strength of the economy supported a
continued advance in stock prices. Despite fallout from Asian markets, there are
many reasons to believe strong stock performance will continue. Fundamental
indicators of the U.S. economy's health remain solid, providing an environment
for Michigan companies to maintain strong profit growth. Michigan's economy also
continued advancing on a torrid pace. The State's unemployment levels were the
lowest in decades while Michigan continued to attract new businesses, ranking
first in the nation in new office and industrial development in 1997.
While we avoid analyzing and forecasting the overall stock market and prefer to
focus on the fundamental attributes of Michigan companies, we see nothing on the
horizon to change the long-term upward march of U.S. stocks. The next two
decades will continue to prove the benefits of owning a diversified portfolio of
equities.
The Michigan Heritage Fund Portfolio
We believe the Fund portfolio gives our shareholders a diverse mix of
outstanding small and large Michigan companies. What kind of stocks do we own?
Small firms like Neogen, Capitol Bancorp, Franklin Bank, Cade Industries and
Penske Motorsports are small and nimble enough to be leaders in their niche
markets and are experiencing strong growth. Larger, "old-line industrial"
companies like SPX, in Muskegon, and Herman Miller, in Zeeland, are being
reinvigorated and recreated by new management with a new vision.
Another group of stocks, CMS Energy, MCN Energy, Borders Group and Williams
Companies are following a growth pattern we look for often when searching for
good investments. They are using cash flow from mature businesses to invest in
growth businesses in their special area of expertise. MCN Energy and CMS Energy
are maintaining strong operations in regulated gas and electricity markets but
are investing new assets in unregulated areas like oil and gas production,
transportation, and trading, as well as international energy production. Borders
Group owns and operates Waldenbooks but puts most of its new cash and capital
into opening new Borders Books stores. Williams Companies owns miles and miles
of gas pipelines and large regulated energy operations, but has used its cash
flow to create a large communications company by stringing fiber-optic cable
through the pipelines.
We close this report, very confident in the long-term profitability of equities
in general and Michigan stocks in particular. We believe the Fund's portfolio is
well positioned to endure the ups and downs of the stock market and help you
achieve your financial goals.
C. David Dickinson
Portfolio Manager
NOTE: The views expressed in this report reflect those of the Portfolio Manager,
only through the end of the period of this report as stated on the cover. The
Manager's views are subject to change at any time based on market and other
conditions.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and
Board of Trustees of the
Michigan Heritage Fund
We have audited the accompanying statement of assets and liabilities assets
of The Michigan Heritage Fund including the schedule of investments as of
December 31, 1997, and the related statements of operations, and the financial
highlights for the period July 27, 1997 (commencement of investment operations)
to December 31, 1997. 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 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. 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 financial statements, schedule, and financial
highlights referred to above present fairly, in all material respects, the
financial position of The Michigan Heritage Fund as of December 31, 1997, the
results of its operations and the changes in net assets, and the financial
highlights for the period July 27, 1997 (commencement of investment operations)
to December 31, 1997, in conformity with generally accepted accounting
principles.
Abington, Pennsylvania
February 13, 1998 Certified Public Accountants
<PAGE>
THE MICHIGAN HERITAGE FUND
--------------------------
Schedule of Investments
-----------------------
December 31, 1997
-----------------
COMMON STOCKS Shares Value
-------- -------
BASIC INDUSTRIES (4.7%)
- -----------------------
Dow Chemical Co. 85 $ 8,628
Rouge Industries, Inc. Cl A* 470 5,699
--------
14,327
--------
HEALTH CARE (14.8%)
- -------------------
Novartis A.G., ADR* 100 8,125
Pharmacia & Upjohn, Inc.* 220 8,058
Perrigo Co.* 985 13,174
Neogen Corp.* 700 7,963
Stryker Corp. 200 7,450
--------
44,770
--------
MANUFACTURING (24.1%)
- ---------------------
Whirlpool Corp. 125 6,875
Ford Motor Co. 170 8,277
General Motors Corp. 120 7,275
Gentex Corp.* 320 8,600
SPX Corp.* 134 9,246
Champion Enterprises, Inc.* 420 8,636
Phillip Morris Cos., Inc. 180 8,156
United Technologies Corp. 97 7,063
Raytheon Co.* 8 378
Masco Corp. 175 8,903
--------
73,409
--------
TECHNOLOGY (5.4%)
- -----------------
Intel Corp.* 105 7,376
Perceptron Inc.* 420 9,083
--------
16,459
--------
ENERGY (12.4%)
- --------------
Williams Cos., Inc. 330 9,364
Ultramar Diamond Shamrock Corp.* 250 7,969
CMS Energy Corp. 220 9,694
MCN Energy Group, Inc. 260 10,498
--------
37,525
--------
See notes to financial statements.
<PAGE>
THE MICHIGAN HERITAGE FUND
--------------------------
Schedule of Investments
-----------------------
December 31, 1997
-----------------
COMMON STOCKS (CONTINUED) Shares Value
-------- -------
FINANCIAL (9.6%)
- ----------------
Capitol Bancorp Ltd. 385 11,839
Old Kent Financial Corp. 240 9,510
Taubman Centers, Inc. 600 7,800
--------
29,149
SERVICES (15.7%)
- ----------------
LCI International Inc.* 307 9,440
Worldcom, Inc.* 225 6,806
Kelly Services Inc. Cl A 210 6,300
Arbor Drugs Inc. 450 8,325
Borders Group, Inc.* 283 8,861
Dayton Hudson Corp.* 115 7,763
--------
47,495
LEISURE/AMUSEMENT (4.3%)
- ------------------------
Penske Motorsports Inc.* 525 13,059
--------
Total Common Stocks (91.0%) 276,193
(Cost $270,133)
Other assets - Net (9.0%) 26,844
--------
NET ASSETS (100%) $303,037
========
* Non - Income Producing.
See notes to financial statements.
<PAGE>
THE MICHIGAN HERITAGE FUND
--------------------------
Statement of Assets and Liabilities
-----------------------------------
December 31, 1997
-----------------
ASSETS
Investment in securities, at current value (cost $270,130) $ 276,190
Cash 29,579
Receivables:
Dividends 336
Due from Advisor 17,614
Prepaid insurance 310
---------
Total assets 324,029
LIABILITIES
Accounts payable and accrued expenses 20,992
---------
Total liabilities 20,992
---------
NET ASSETS $ 303,037
=========
Net assets consist of:
Paid-in capital $ 298,290
Accumulated net realized gain from investments 10
Net unrealized appreciation on investments 6,060
Accumulated net investment loss (1,324)
---------
NET ASSETS (for 29,880 shares outstanding) $ 303,037
=========
NET ASSET VALUE PER SHARE $ 10.14
=========
See notes to financial statements.
<PAGE>
THE MICHIGAN HERIGATE FUND
--------------------------
Statement of Operations
-----------------------
For the period July 27, 1997 (commencement of investment operations) to
-----------------------------------------------------------------------
December 31, 1997
-----------------
INVESTMENT INCOME
Dividend income $ 1,116
Interest Income 639
--------
Total Income 1,754
--------
EXPENSES
Investment advisory fees (Note 2) 854
Administrative fees 18,804
Accounting service fees 9,402
Transfer agent fees 7,694
Registration fees 749
Custodian fees 1,538
Legal fees 2,137
Audit fees 5,199
Trustees' fees and expenses 157
12 B-1 Fees 213
Insurance expense 8
Miscellaneous 1,992
--------
Total expenses before reimbursement 48,747
Expense reimbursement by advisor (Note 2) (45,669)
--------
Net expenses 3,078
--------
NET INVESTMENT INCOME (1,324)
--------
NET REALIZED AND UNREALIZED GAIN FROM INVESTMENTS:
Net realized gain on investments 10
Net change in unrealized appreciation of investments 6,060
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 6,070
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,746
========
See notes to financial statements.
<PAGE>
THE MICHIGAN HERITAGE FUND
--------------------------
Statement of Changes in Net Assets
----------------------------------
For the period July 27, 1997 (commencement of operations) to
------------------------------------------------------------
December 31, 1997
-----------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment loss $ (1,324)
Net realized gain from investments 10
Net change in unrealized appreciation
of investments 6,061
---------
Net increase in net assets resulting
from operations 4,747
---------
From capital share transactions* 298,290
---------
Net increase in net assets 303,037
Net assets at beginning of period --
---------
Net assets at end of period $ 303,037
=========
* Analysis of fund share transactions
Shares Amount
------ --------
Share Sold 29,880 $298,290
Reinvestment of dividends -- --
Shares Redeemed -- --
------ --------
Net increase 29,880 $298,290
====== ========
See notes to financial statements.
<PAGE>
THE MICHIGAN HERITAGE FUND
--------------------------
Financial Highlights
--------------------
(Selected data for a share of capital stock outstanding through each period)
----------------------------------------------------------------------------
For the period
July 27, 1997
(commencement
of Investment
operations) to
December 31,
1997
--------------
Net asset value, beginning of period $ 10.00
-------
Income from investment operations:
Net investment income (.04)
Net realized and unrealized gain
on investments 0.18
-------
Total from investment operations 0.14
-------
Less Distributions to shareholders:
Net realized gain on investments sold --
-------
Total distributions --
-------
Net asset value, end of period $ 10.14
=======
Total investment return 1.40%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 303
Ratio of expenses to average net assets** 2.18%*
Ratio of net investment income to average net assets** -0.94%*
Portfolio turnover rate 0.00%
* Ratios for period of less than one year are annualized.
** Net investment income is net of expenses reimbursements and fee waivers
$1.52 share Had such reimbursements not been made, the annualized expense
ratio would have been 34.48% and the annualized net investment income ratio
would have been (35.73%).
See notes to financial statements.
<PAGE>
THE MICHIGAN HERTIAGE FUND
--------------------------
Notes to Financial Statements
-----------------------------
December 31, 1997
-----------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES
Organization: The Michigan Heritage Fund is a newly organized, diversified
investment company that consists of one portfolio (the "Fund") and is a
series of The Declaration Fund, a Pennsylvania business trust. The Fund is
registered under the Investment Company Act of 1940. The policies described
below are followed consistently by the Fund in the preparation of its
financial statements in conformity with generally accepted accounting
principles for regulated investment companies.
The following is a summary of accounting policies followed by the Fund.
Security Valuation: Securities are valued at the last reported sales price,
in the case of securities where there is no reported last sale, the closing
bid price. Securities for which market quotations are not readily available
are valued at their fair values as determined in good faith by or under the
supervision of the Company's Board of Trustees in accordance with methods
have been authorized by the Board. Short term debt obligations with with
maturities of 60 days or less are valued at amortized cost which
approximates market value.
Security Transactions and Investment Income: Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost bases. Dividend income is recorded on the ex-dividend date
Interest income is determined on the accrual basis. Discount on fixed
income securities is amortized.
Dividends and Distributions to Shareholders: The Fund records all dividends
and distributions payable to shareholders on the ex-dividend date.
Federal Income Taxes: It is the Fund's intention to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for federal income taxes is required in the financial
statements.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management 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 reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
2. MANAGEMENT FEE
Under the terms of the investment management agreement, the Adviser has
agreed to provide the Fund investment management services and be
responsible for the day to day operations of the fund. The Advisor will
receive a fee, for the performance of its services at an annual rate of 1%
of the average daily net assets. The fee will be accrued daily and paid
monthly. The Advisor had agreed to limit the Fund's expenses to 3.50% of
the Fund's average daily net assets. The actual expense ratio for the
period ended December 31, 1997 was 2.18%. The Advisor reimbursed the Fund
and waived fees and expenses totaling $45,669 for the period ended December
31, 1997.
<PAGE>
THE MICHIGAN HERTIAGE FUND
--------------------------
Notes to Financial Statements
-----------------------------
December 31, 1997
-----------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term
securities) for the period ended December 31, 1997 were $270,130 and $0,
respectively.
At December 31, 1997 net unrealized appreciation for Federal income tax
purposes aggregated $6,060 of which $20,444 related to unrealized
appreciation and $14,384 related to unrealized depreciation. The cost of
investments at December 31, 1997 for Federal income tax purposes was
$270,130.
