ANNUAL REPORT
SEPTEMBER 30, 1999
Fiduciary
Capital Growth
Fund, Inc.
A NO-LOAD
MUTUAL FUND
Fiduciary
Capital Growth
Fund, Inc.
October 28, 1999
Dear Fellow Shareholder:
After experiencing one of the strongest quarters of the last ten years
during the three months ended June, wherein your portfolio achieved gains in
excess of 20%, the market reverted to the ways of 1998 and the first quarter of
1999, when the average stock declined as the indices were driven by a smaller
and smaller handful of companies. As the September 20 Wall Street Journal
reported, "If you don't own Microsoft, Intel, Dell, Cisco Systems, MCI or
internet stocks, you may be excused for wondering whether the huge gains
published year-to-date for the Nasdaq and S&P are indeed a misprint." The
Journal went on further to report that over 50% of all Nasdaq stocks are down
this year, as were 59% of the American Stock Exchange stocks, and 64% of the New
York Stock Exchange stocks. Even some of Wall Street's blue chip names have
experienced significant price declines in 1999. Companies such as Coca-Cola,
Bank One, and Gillette are down -28.1%, -31.8% and -29.8% respectively through
the first nine months of 1999. Additionally, for the last seven quarters, the
large capitalization companies, which dominate the Standard & Poor's 500 and Dow
Jones Industrial Average, have far outdistanced the more broadly-based Russell
2000 Index, as the following table attests:
NINE MONTHS
CALENDAR ENDED CUMULATIVE
INDEX 1998 SEPTEMBER 1999 7-QUARTER GAIN
----- ---- -------------- --------------
Dow Jones Industrial Average 18.2% 13.9% 33.6%
Standard & Poor's 500 28.8% 5.4% 35.7%
Nasdaq Composite 39.6% 25.2% 74.7%
Russell 2000 Index -2.5% 2.4% 0.0%
Within the Russell 2000 Index, which is for the most part representative of
the types of companies in your portfolio, a major divergence has again occurred
between the growth and value companies. During the third quarter, the growth
component of the Russell 2000 Index declined 4.9%, while the value component
declined 7.8%. The top 50 contributors to performance in the Russell 2000 Index
actually contributed 3.6 percentage points to the Russell's third quarter
performance of -6.3%. The remaining 1,950 companies experienced a negative rate
of return of -10.2% for the third quarter. Also of interest, those 50 companies
collectively lost $907 million during the past 12 months, and the median
price/earnings ratio of those companies which did have earnings is an astounding
69.9. By comparison, over the past 12 months, the companies in your portfolio
earned over $3 billion, and sell at a price/earnings ratio of 17.6!
The divergence could be explained, in part, if the companies we own were not
performing well financially. In fact, however, as we have discussed in the past,
this is not the case, as your companies' earnings growth in 1999 has
accelerated! The following chart depicts the last seven quarters of earnings
growth for both the S&P and your portfolio.
S&P 500 S&P 500 CHANGE FUND CHANGE
PERIOD OPERATING EARNINGS FROM PRIOR YEAR FROM PRIOR YEAR
------ ------------------ --------------- ---------------
1st Quarter 1998 $10.85 .4% 11.11%
2nd Quarter 1998 $11.50 22.2% 9.09%
3rd Quarter 1998 $10.78 -2.6% 4.60%
4th Quarter 1998 $11.77 0.7% 8.00%
1st Quarter 1999 $11.41 5.2% 10.40%
2nd Quarter 1999 $12.81 11.4% 14.70%
3rd Quarter 1999 (Est) $13.02 20.8% 14.50%
For all of 1998, S&P 500 operating earnings declined 1.7%, and while the
growth rate of your companies slowed, they still experienced an 8.5% increase.
Additionally, as 1999 has unfolded, your companies' growth rates began to
rebound well in advance of those of the Standard & Poor's 500. Your portfolio is
currently priced at 14.8x median expected 1999 earnings. The S&P, by comparison,
sells at 34.2x estimated 1999 earnings. Additionally, based upon preliminary
estimates for next year, your portfolio sells at a substantial discount to the
broad market, with a multiple of 12.5x, versus 32.6x for the S&P. The main
source of frustration for your research team is that our companies have
demonstrated superior growth, in fact, accelerating growth -- yet, at this
writing, are currently selling at a 56% discount to the S&P companies.
While times like these seem "unfair," particularly when a few of the glamour
stocks with already lofty multiples sprint ahead, it is important to remember
that eventually the pendulum swings back. We experienced this in the second
quarter with our 20%+ gains, and believe a more sustained move toward true value
cannot be far away.
Many of your stocks declined in the third quarter, despite continuing strong
underlying fundamentals. What made this quarter unusually difficult is that a
few stocks had substantial declines. We have indicated to you on many occasions
that we will sell companies if the long term fundamentals deteriorate markedly.
Below, we address four companies which hurt our performance in the third
quarter, and experienced fundamentals that were modestly altered from our
expectations. In our opinion, however, the market has dramatically overreacted
to these changes; from these levels, these stocks represent great value.
REPUBLIC SERVICES, INC.
Republic Services is the third largest waste management company in the
United States and is the leading player in the Sunbelt markets. Its revenue
model is characterized by a high degree of predictability, and is recession
resistant due to the necessity of the service. The Company is consistently
highly profitable, typically achieving operating margins north of 20%.
When we initially purchased Republic, we expected the Company to achieve 15%
long-term growth, roughly half from internal and half from acquisitions. For
this we paid 15x 1999's estimate of $1.25 and 13x 2000's estimate of $1.47.
Subsequent to our purchases two things happened. First, the largest player in
the industry, Waste Management, announced a series of disappointments. Second,
Republic guided the numbers down to $1.18 this year and $1.35 next. The reasons
for the shortfall were less-than-anticipated synergies from acquisitions
(although all of the acquisitions they made have been accretive to earnings) and
the decision by management to exchange floating rate debt for fixed. The
combination of these events has devastated the stock yet the long-term outlook
for the Company is little changed. Waste Management's problems appear to be
self-inflicted and not industry-wide. Republic has made adjustments in their
acquisition strategy that may result in slightly slower long-term top line
growth. Earnings should continue to advance at approximately a 14-15% clip for
the foreseeable future. The stock currently sells at 9.4x and 8.1x 1999 and 2000
estimates, respectively.
Additionally, many of you may remember Superior Services, which we owned
earlier this year. This Company was subsequently purchased by Vivendi, a French
conglomerate. In acquisitions, companies are often valued on a multiple of
EBITDA (earnings before interest, tax, depreciation and amortization). When
Vivendi bought Superior after a sharp price advance of almost 40% from our
purchase price, they paid approximately 8x EBITDA. We believe that Republic has
a better geographic mix of properties, as well as better growth dynamics than
Superior, and at today's prices sells at only 4.4x 2000's EBITDA. It is a
terrific value, in our opinion.
CONSOLIDATED STORES CORP.
Consolidated Stores is the leading closeout retailer in the country, and
operates KayBee Toys, one of the largest toy retailers in the US. We have a
fairly long-term history with this Company and industry through MacFrugals,
another closeout retailer that was a big winner for the Fund, and which was
acquired by Consolidated. The closeout retail business remains an exceptional
one if run properly, and despite a few recent stumbles, Consolidated has put
together a good long-term record.
After strong first half performance, the stock slid in the third quarter in
reaction to a weak fiscal second quarter and a changed view of the Company's toy
internet initiatives. Putting aside the internet moves for a moment, the core
earnings estimates earlier this year for 1999 and 2000 were $1.45-1.50 and
$1.75-1.80, respectively. They are currently $1.30-1.35 and $1.65-1.70 for 1999
and 2000. The reductions are due to a less than optimal ramp-up of a new
distribution center, higher than expected freight costs and weakness in the
video category in the toy business. The freight issue is diminishing and the
other two issues are fixed.
When Consolidated first announced their new Kbkids.com toy initiative, the
stock moved up sharply, even though the Company was going to spend $.35 net in
1999 and $.40 in 2000. Since the second quarter earnings miss, and perhaps
compounded by a rash of competitive internet toy announcements, the market has
turned on the stock. One of the great ironies of this stock market is how a pure
play internet company can trade at a fantasy multiple, while a similar venture
within a "bricks and mortar" company actually penalizes its multiple. We believe
the combination of Kbkids.com with the retail stores is much more powerful than
a stand-alone internet operation. Furthermore, Consolidated plans to spin the
unit off in 2000 anyway. Either way, we are excited about Consolidated prospects
over the next few years and the stock, at less than 12x next year's estimate, is
very attractively valued.
STERIS CORP.
STERIS is the leading player in the infection control business. The Company
has a very strong franchise in hospital and surgery suite sterilization
equipment and consumables. STERIS also addresses scientific, industrial and food
markets. The business model follows the razor, razor blade model, with
approximately 60% of the revenues coming from consumables and service. The
Company is highly profitable, with operating margins consistently in the mid-to-
high teens.
Salesforce productivity has dogged STERIS for about a year; indeed, it was
the issue that gave us the opportunity to make initial purchases of the stock.
We began purchasing this Company at prices around $18 after the stock declined
from a high of $35, as the sales problems began to surface. Management
implemented a reorganization of the sales force in the spring, but we
underestimated the task in front of them. A disappointing June quarter was the
result. Unfortunately, this is not a quick fix situation as the Company has gone
from a product sale approach to a systems-based, account oriented approach.
Management has indicated that they feel a resumption of double-digit sales
growth can be achieved in the second half of next year and we think this is a
realistic target. Meanwhile, the Company remains on track to earn $1.05 per
share this year. The original target was $1.30. A reasonable goal for next year
is $1.20, although management feels they can do significantly better.
While clearly a disappointment, the long-term thesis remains intact. The
stock, at 10x next year's estimate, appears to reflect a great deal of
skepticism. Given the strong underlying franchise, a market share in excess of
75%, excellent balance sheet and credible recovery plan, we think the stock has
enormous potential.
COVANCE INC.
Covance is one of the world's largest and most comprehensive drug
development services companies, with revenues exceeding $800 million. Covance
works in partnerships with major pharmaceutical and biotechnology companies
doing contract research, clinical trials, central lab services,
biomanufacturing, packaging and regulatory compliance. The Company is solidly
profitable, achieving a 15% return on invested capital over the past five years,
and has grown at approximately 20%.
Over the past several years, pharmaceutical and biotechnology companies,
both large and small, have increasingly sought to "outsource" drug development
activities. With the cost and time to develop a new drug running $300-500
million and 10-15 years, respectively, firms such as Covance help save both
development dollars and time. Our research indicates no diminution in the
appetite of drug companies to outsource. Yet recently there has been a spate of
negative events that have conspired against Covance's stock and the others in
their industry.
We had previously and successfully owned Covance (experiencing a gain of
over 40% on our original investment), but the stock became quite expensive and
we moved to the sidelines. As good as the long term may be, there is still
volatility in the revenue stream due to the inevitable vagaries in the drug
development process, and we felt that the stock did not reflect this risk.
Subsequently the stock did come under pressure, as did others in the group, and
near the $20 level, we felt the risk/reward was once again attractive. In
hindsight this was a mistake, because further fundamental disappointments
occurred and though these issues are not serious from a longer-term perspective,
they have sliced the stock in half.
Fundamentally, the Company has had a couple of drugs that have failed trials
but the two more important issues have to do with new trial wins and a central
lab slowdown, both marketing related. Covance's marketing effort has not been
focused enough on relationship building, but rather a belief that the pharma
world would beat a path to their door because of its broad service offering and
quality reputation. Sales growth has thus slowed, affecting earnings estimates
to the tune of about 10%.
While these issues cannot be minimized, they in no way justify the move in
the stock. Clearly we underestimated the amount of "momentum" money that would
pour out of this security, but the result is a long term growth company with a
price/earnings ratio of 9.5x 1999 earnings, and 8.4x our $1.03 estimate for next
year. We cannot change history, but today the stock represents a chance to
capture 15% earnings growth over the long term and a multiple that could double
from here.
We believe these are but four of the companies in your portfolio which,
while stumbling in the third quarter, have tremendous upside potential for the
next 12-24 months, as do all of the companies you currently own.
We would ask you to consider one final exercise we perform constantly here
at the Fund - looking at the potential expected portfolio returns for your
portfolio versus that of the S&P 500. Feel free to experiment with the following
table, which presents an expected return matrix based upon various assumptions
you may have for the growth rate of S&P earnings, as well as the terminal
multiple at which you expect the S&P to sell, five years out. Keep in mind a
number of things, while the S&P earnings growth rate over the last four years
has been in the mid-teens, its long term growth has consistently been in the 6-
7% range. Additionally, over the last 100 years, the S&P has had an average
multiple of 15.8x. However, you can pick whatever set of assumptions you would
like.
PRICE/ STANDARD & POOR'S 500 - EARNINGS PER SHARE GROWTH
EARNINGS ------------------------------------------------------------------
RATIO 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
----- ------- ------- ------- ------- ------- -------
9 -22.26% -20.74% -19.21% -17.69% -16.16% -14.64%
12 -17.66% -16.04% -14.43% -12.81% -11.20% -9.58%
15 -13.90% -12.21% -10.52% -8.83% -7.15% -5.46%
18 -10.70% -8.95% -7.20% -5.45% -3.70% -1.95%
21 -7.91% -6.10% -4.29% -2.49% -0.68% 1.12%
30 -1.10% 0.84% 2.78% 4.72% 6.66% 8.60%
35 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
The horizontal axis has various earnings growth expectations, while the
vertical axis has assumptions ranging from 9x to 35x earnings five years hence.
For instance, if you expect the growth rate of the S&P earnings to be double
from its historic norm of 6-7%, to 12%, but you feel the multiple might contract
somewhat to 30x earnings, you can see that you would achieve an expected rate of
return of 8.6%. However, if you feel the growth will return to a more normal 6-
8%, for instance, and you believe the multiple might regress toward the long-
term historic mean of 15x, the expected returns would actually be a -10.52% at
the 6% growth rate, and -8.83% at an 8% rate of growth. You can see that there
are many more negative rates of return likely than positive. To get rates of
return anywhere near what the S&P has experienced over the last 15 years, you
have to make some very Herculean assumptions with regard to both long term
earnings growth rates and price/earnings ratios.
We believe your chances for superior rates of return are much greater. As
indicated earlier, at the end of September your portfolio sold at 17x earnings.
Here again, the long term returns we have achieved have been due more to the
underlying strong earnings growth of 13-15% for your companies, versus the
multiple expansion than has been experienced by the S&P. The following table is
the same type of matrix with slightly higher growth rates, because over the long
term, our companies have, in fact, demonstrated significantly high growth.
However, the price/earnings ratio on the vertical axis ranges from 9-21x, much
less than in the aforementioned S&P table.
PRICE/ YOUR PORTFOLIO - EARNINGS PER SHARE GROWTH
EARNINGS ---------------------------------------------------------------
RATIO 6.00% 9.00% 12.00% 14.00% 16.00%
----- ------ ------ ------ ------ ------
9 -6.66% -4.02% -1.38% 0.38% 2.14%
12 -1.13% 1.67% 4.46% 6.33% 8.19%
15 3.38% 6.31% 9.23% 11.18% 13.13%
18 7.22% 10.25% 13.29% 15.31% 17.33%
21 10.58% 13.71% 16.83% 18.92% 21.01%
If you perform the same exercise, you can see that the matrix yields many
more sets of positive investment return possibilities than that of the S&P 500.
We like our chances for achieving positive -- and very possibly, double-digit --
growth rates over the next five years, much better than that of the S&P 500.
As we said at the outset of this letter, the last seven quarters have not
yielded satisfactory rates of return for investors in mid- to small-cap
companies such as those we own in the Fund. We are, however, very satisfied with
our portfolio results on a long term basis, as well as how our companies are
currently fundamentally performing. The underlying fundamentals of your
companies are strong, and getting stronger. The valuations - on a relative basis
- -- are the cheapest we have ever seen in our 32 years of investing. As we
experienced in the second quarter, when the market sentiment changes, it can
change in a hurry, and it can change very positively. We believe we are rapidly
approaching that time. Patience is a virtue, however, it can be very
frustrating. We believe this frustration will be amply rewarded in the months
and years ahead, with outstanding rates of return on your portfolio.
The Board of Directors has declared a distribution of $0.43172 from net
short-term realized capital gains. Your distribution confirmation is enclosed.
Thank you for your continuing confidence in the investment disciplines we
are employing on behalf of the Fund.
Sincerely,
/s/ Ted D. Kellner /s/ Donald S. Wilson /s/ Partick J. English
Ted D. Kellner, C.F.A Donald S. Wilson, C.F.A Patrick J. English, C.F.A.
President Vice President Portfolio Manager
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
Fiduciary Capital Growth Fund, Inc.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
During the fiscal year ended September 30, 1999, corporate earnings showed some
rebound from the slowdown last year, but generally remained below historic
levels. Economic growth remained fairly strong, though inflation continued to be
low. With interest rates rising through the last three quarters, common stock
investors have had an ongoing concern about further Federal Reserve increases in
targeted interest rates, and this has led to extreme volatility in the stock
market. Throughout the fiscal year ended September 30, 1999 there continued to
be a divergence in performance between the very large growth companies, many of
which have a substantial influence on the Nasdaq Composite Index, and most of
the rest of the market. Medium-sized and smaller companies lagged in
performance, and the value sector, where the Fund invests, in particular.
Because of the low level of stock valuations a year ago, the fiscal year total
return of the Fund of 16.4% reflects some rise in valuations, but primarily the
increasing earnings of the Fiduciary Capital Growth Fund's portfolio companies.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FIDUCIARY CAPITAL GROWTH FUND, NASDAQ COMPOSITE
INDEX(1)<F1> AND THE RUSSELL 2000 INDEX(2)<F2>
DATE FIDUCIARY CAPITAL NASDAQ COMPOSITE RUSSELL 2000
GROWTH FUND INDEX INDEX
---- ----------- ----- -----
9/30/89 $10,000 $10,000 $10,000
9/30/90 $7,620 $7,280 $7,290
9/30/91 $10,279 $11,131 $10,563
9/30/92 $11,852 $12,333 $11,514
9/30/93 $14,234 $16,144 $15,325
9/30/94 $14,818 $16,177 $15,555
9/30/95 $18,182 $22,081 $19,195
9/30/96 $20,491 $25,967 $21,709
9/30/97 $28,359 $35,679 $28,917
9/30/98 $23,362 $35,850 $23,417
9/30/99 $27,189 $58,124 $27,882
(1)<F1> NASDAQ Composite Index covers 4,500 stocks traded over the counter.
It represents many small company stocks but is heavily influenced by
about 100 of the largest NASDAQ stocks. It is a value-weighted index
calculated on price change only and does not include income.
(2)<F2> The Russell 2000 Index is an index comprised of 2,000 publicly traded
small capitalization common stocks that are ranked in terms of
capitalization below the large and mid-range capitalization sectors of
the United States equity market. The Russell 2000 Index is a
trademark/service market of the Frank Russell Company.
AVERAGE ANNUAL TOTAL RETURN
1-YEAR 5-YEAR 10-YEAR
- ------ ------ -------
16.4% 12.9% 10.5%
100 East Wisconsin Avenue
Fiduciary Capital Growth Fund, Inc. Suite 1500
REPORT OF INDEPENDENT ACCOUNTANTS Milwaukee, WI 53202
(PRICEWATERHOUSECOOPERS LOGO)
October 28, 1999
To the Shareholders and Board of Directors
of Fiduciary Capital Growth Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Fiduciary Capital Growth Fund, Inc. (the "Fund") at September 30, 1999, 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. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1999 by
correspondence with the custodian and brokers and application of alternative
auditing procedures where confirmations were not received, provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Fiduciary Capital Growth Fund, Inc.
STATEMENT OF NET ASSETS
September 30, 1999
QUOTED
MARKET
SHARES COST VALUE
------ ---- -------
LONG-TERM INVESTMENTS -- 94.2% (A)<F4>
COMMON STOCKS -- 90.0% (A)<F4>
BANKS/SAVINGS & LOANS -- 1.2%
13,000 Associated Banc-Corp. $ 390,000 $ 470,437
CHEMICAL/SPECIALTY MATERIALS -- 7.6%
47,000 Cambrex Corp. 1,124,084 1,242,563
21,700 Minerals Technologies Inc. 828,382 1,053,806
21,000 Sigma-Aldrich Corp. 684,000 666,750
----------- -----------
2,636,466 2,963,119
DISTRIBUTION -- 6.1%
74,000 Arrow Electronics, Inc.*<F3> 1,242,478 1,304,250
74,000 Pioneer-Standard
Electronics, Inc. 739,188 1,068,375
----------- -----------
1,981,666 2,372,625
ELECTRONICS -- 2.1%
43,500 Methode Electronics, Inc. 640,875 821,062
ENERGY/ENERGY SERVICES -- 1.8%
19,000 Burlington Resources Inc. 685,520 698,250
HEALTH INDUSTRIES -- 17.8%
133,000 Covance Inc.*<F3> 2,037,859 1,288,437
68,000 Dentsply International Inc. 1,231,250 1,547,000
27,000 Haemonetics Corp.*<F3> 440,370 531,563
45,000 IDEXX Laboratories, Inc.*<F3> 736,875 774,842
38,500 National Data Corp. 1,402,287 1,001,000
5,000 STERIS Corp.*<F3> 79,050 68,750
65,000 Sybron International Corp.*<F3> 786,870 1,746,875
----------- -----------
6,714,561 6,958,467
INDUSTRIAL SERVICES -- 6.2%
64,000 Casella Waste System, Inc.*<F3> 1,210,094 1,068,000
125,000 Republic Services, Inc.*<F3> 1,885,588 1,359,375
----------- -----------
3,095,682 2,427,375
INSURANCE -- 7.0%
42,500 Delphi Financial
Group, Inc.*<F3> 1,397,729 1,282,969
7,500 Financial Security Assurance
Holdings Ltd. 375,690 387,656
74,000 Old Republic
International Corp. 949,809 1,068,375
----------- -----------
2,723,228 2,739,000
MEDIA/COMMUNICATION -- 1.7%
7,500 Telephone & Data
Systems, Inc. 399,900 666,094
MISCELLANEOUS-BUSINESS SERVICES -- 12.3%
2,600 Grey Advertising Inc. 606,700 956,800
37,000 Keane, Inc.*<F3> 820,279 844,062
87,000 Modis Professional
Services, Inc.*<F3> 1,054,969 1,152,750
40,000 Morrison Management
Specialists, Inc. 760,866 900,000
60,600 NFO Worldwide, Inc.*<F3> 610,909 772,650
24,600 Romac International, Inc.*<F3> 199,112 203,718
----------- -----------
4,052,835 4,829,980
MISCELLANEOUS-TECHNOLOGY
MANUFACTURING -- 3.3%
35,100 Bell & Howell Co.*<F3> 1,047,657 1,287,731
PAPER/PACKAGING -- 3.3%
48,000 AptarGroup, Inc. 1,273,405 1,284,000
PRINTING/PUBLISHING/FORMS -- 2.0%
39,000 Wallace Computer
Services, Inc. 829,316 789,750
PRODUCER MANUFACTURING -- 2.9%
55,500 Regal-Beloit Corp. 662,894 1,151,625
REAL ESTATE -- 0.6%
15,000 Security Capital Group
Inc. CL B*<F3> 189,650 220,313
RETAIL TRADE -- 7.5%
119,000 Casey's General
Stores, Inc. 952,437 1,595,338
57,000 Consolidated Stores Corp.*<F3> 948,983 1,257,562
10,000 Stein Mart, Inc.*<F3> 79,375 71,250
----------- -----------
1,980,795 2,924,150
SOFTWARE/SERVICES -- 6.6%
29,000 NOVA Corp./Georgia*<F3> 756,664 725,000
19,000 Reynolds & Reynolds Co. 320,559 387,125
56,500 SunGard Data Systems Inc.*<F3> 1,656,855 1,486,656
----------- -----------
2,734,078 2,598,781
----------- -----------
Total common stocks 32,038,528 35,202,759
REITS -- 4.2% (A)<F4>
86,400 Prologis Trust 1,797,684 1,630,800
----------- -----------
Total long-term
investments 33,836,212 36,833,559
PRINCIPAL
AMOUNT COST VALUE
- --------- ---- -----
SHORT-TERM INVESTMENTS -- 9.3% (A)<F4>
VARIABLE RATE DEMAND NOTES
$ 179,000 American Family
Financial Services $ 179,000 $ 179,000
2,000,000 Firstar Bank U.S.A., N.A. 2,000,000 2,000,000
905,720 Pitney Bowes Credit Corp. 905,720 905,720
249,000 Warner-Lambert Co. 249,000 249,000
136,000 Wisconsin Electric Power Co. 136,000 136,000
166,000 Wisconsin Corporate Central
Credit Union 166,000 166,000
----------- -----------
Total short-term
investments 3,635,720 3,635,720
----------- -----------
Total investments $37,471,932 40,469,279
-----------
-----------
Liabilities, less cash and
receivables (3.5%) (A)<F4> (1,354,483)
-----------
NET ASSETS $39,114,796
-----------
-----------
Net Asset Value Per Share
($0.01 par value, 10,000,000
shares authorized), offering
and redemption price
($39,114,796 / 2,396,586
shares outstanding) $16.32
------
------
*<F3> Non-income producing security.
(a)<F4> Percentages for the various classifications relate to net assets.
The accompanying notes to financial statements are an integral part of this
statement.
Fiduciary Capital Growth Fund, Inc.
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
INCOME:
Dividends $ 343,475
Interest 98,655
----------
Total income 442,130
----------
EXPENSES:
Management fees 384,046
Administrative services 35,603
Professional fees 23,157
Registration fees 18,994
Transfer agent fees 18,671
Printing and postage expense 15,418
Custodian fees 10,242
Board of Directors fees 1,800
Other expenses 11,318
----------
Total expenses 519,249
----------
NET INVESTMENT LOSS (77,119)
----------
NET REALIZED GAIN ON INVESTMENTS 857,097
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 5,355,880
----------
NET GAIN ON INVESTMENTS 6,212,977
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,135,858
----------
----------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 1999 and 1998
1999 1998
-------- --------
OPERATIONS:
Net investment loss $ (77,119) $ (30,600)
Net realized gain on investments 857,097 10,326,329
Net increase (decrease) in unrealized
appreciation on investments 5,355,880 (18,869,020)
----------- -----------
Net increase (decrease) in net
assets resulting from operations 6,135,858 (8,573,291)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividend from net investment income
($0.01248 per share) -- (24,737)
Distributions from net realized gains
($4.71103 and $3.85996 per share,
respectively) (9,979,348) (7,692,320)
----------- -----------
Total distributions (9,979,348)*<F5> (7,717,057)
----------- -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (110,952 and
107,186 shares, respectively) 1,867,672 2,444,856
Net asset value of shares issued in
distributions (597,484 and 332,984 shares,
respectively) 8,836,792 7,128,996
Cost of shares redeemed (423,064 and 314,365
shares, respectively) (6,792,793) (6,914,398)
----------- -----------
Net increase in net assets derived
from Fund share activities 3,911,671 2,659,454
----------- -----------
TOTAL INCREASE (DECREASE) 68,181 (13,630,894)
NET ASSETS AT THE BEGINNING OF THE YEAR 39,046,615 52,677,509
----------- -----------
NET ASSETS AT THE END OF THE YEAR $39,114,796 $39,046,615
----------- -----------
----------- -----------
*<F5> See Note 7.
The accompanying notes to financial statements are an integral part of these
statements.
Fiduciary Capital Growth Fund, Inc.
FINANCIAL HIGHLIGHTS
(Selected Data for each share of the Fund outstanding throughout each year)
<TABLE>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year $18.49 $26.53 $21.76 $21.58 $19.52
Income from investment operations:
Net investment (loss) income (0.03) (0.02) 0.03 0.13 0.11
Net realized and unrealized
gains (losses) on investments 2.57 (4.15) 7.39 2.24 3.87
------ ------ ------ ------ ------
Total from investment operations 2.54 (4.17) 7.42 2.37 3.98
Less distributions:
Dividends from net investment income -- (0.01) (0.15) (0.12) (0.04)
Distributions from net realized gains (4.71) (3.86) (2.50) (2.07) (1.88)
------ ------ ------ ------ ------
Total from distributions (4.71) (3.87) (2.65) (2.19) (1.92)
------ ------ ------ ------ ------
Net asset value, end of year $16.32 $18.49 $26.53 $21.76 $21.58
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL INVESTMENT RETURN 16.4% (17.6%) 38.4% 12.7% 22.7%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 39,115 39,047 52,678 45,835 42,197
Ratio of expenses to average net assets 1.3% 1.2% 1.2% 1.2% 1.2%
Ratio of net investment (loss) income
to average net assets (0.2%) (0.1%) 0.1% 0.6% 0.5%
Portfolio turnover rate 75.9% 54.3% 60.7% 43.7% 28.6%
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
Fiduciary Capital Growth Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
The following is a summary of significant accounting policies of the
Fiduciary Capital Growth Fund, Inc. (the "Fund"), which is registered as a
diversified, open-end management investment company under the Investment
Company Act of 1940. The Fund was incorporated under the laws of Wisconsin
on July 29, 1981. The investment objective of the Fund is to produce long-
term capital appreciation principally through investing in common stocks.
(a) Each security, excluding short-term investments, is valued at the last
sale price reported by the principal security exchange on which the
issue is traded, or if no sale is reported, the latest bid price.
Securities which are traded over-the-counter are valued at the latest
bid price. Securities for which quotations are not readily available
are valued at fair value as determined by the investment adviser under
the supervision of the Board of Directors. Short-term investments
(securities with maturities of 60 days or less) are valued at
amortized cost which approximates quoted market value. For financial
reporting purposes, investment transactions are recorded on trade
date. Cost amounts as reported on the statement of net assets are
substantially the same for Federal income tax purposes.
(b) Net realized gains and losses on common stock are computed on the
identified cost basis.
(c) Provision has not been made for Federal income taxes since the Fund
has elected to be taxed as a "regulated investment company" and
intends to distribute substantially all net investment company taxable
income and net capital gains to its shareholders and otherwise comply
with the provisions of the Internal Revenue Code applicable to
regulated investment companies. The Fund has $244,219 of post-October
losses, which may be used to offset capital gains in future years to
the extent provided by tax regulations.
(d) Dividend income is recorded on the ex-dividend date. Interest income
is recorded on the accrual basis.
(e) The Fund has investments in short-term variable rate demand notes,
which are unsecured instruments. The Fund may be susceptible to
credit risk with respect to these notes to the extent the issuer
defaults on its payment obligation. The Fund's policy is to monitor
the creditworthiness of the issuer and the Fund does not anticipate
nonperformance by these counterparties.
(f) Generally accepted accounting principles require that permanent
differences between income for financial reporting and tax purposes be
reclassified in the capital accounts.
(g) 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 the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES --
The Fund has a management agreement with Fiduciary Management, Inc.
("FMI"), with whom certain officers and directors of the Fund are
affiliated, to serve as investment adviser and manager. Under the terms of
the agreement, the Fund will pay FMI a monthly management fee at the annual
rate of 1% of the daily net assets up to and including $30,000,000 and
0.75% of the daily net assets of the Fund in excess of $30,000,000. The
Fund has an administrative agreement with FMI to supervise all aspects of
the Fund's operations except those performed by FMI pursuant to the
management agreement. Under the terms of the agreement, the Fund will pay
FMI a monthly administrative fee at the annual rate of 0.1% of the daily
net assets up to and including $30,000,000 and 0.05% of the daily net
assets of the Fund in excess of $30,000,000.
(3) DISTRIBUTION TO SHAREHOLDERS --
Net investment income and net realized gains, if any, are distributed
to shareholders. On October 28, 1999, the Fund distributed $1,033,400 from
net short-term realized gains ($0.43172 per share). The distribution was
declared on October 27, 1999, to shareholders of record on October 26,
1999.
(4) INVESTMENT TRANSACTIONS --
For the year ended September 30, 1999, purchases and proceeds of sales
of investment securities (excluding short-term investments) were
$29,714,741 and $37,067,345, respectively.
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
As of September 30, 1999, liabilities of the Fund included the
following:
Payable to brokers for investments purchased $ 1,315,871
Payable to FMI for management and administrative fees 33,393
Other liabilities 32,552
(6) SOURCES OF NET ASSETS --
As of September 30, 1999, the sources of net assets were as follows:
Fund shares issued and outstanding $35,337,476
Net unrealized appreciation on investments 2,997,347
Accumulated net realized gains on investments 779,973
-----------
$39,114,796
-----------
-----------
Aggregate net unrealized appreciation as of September 30,1999,
consisted of the following:
Aggregate gross unrealized appreciation $ 5,778,693
Aggregate gross unrealized depreciation (2,781,346)
-----------
Net unrealized appreciation $ 2,997,347
-----------
-----------
(7) REQUIRED FEDERAL INCOME TAX DISCLOSURES (UNAUDITED) --
In early 1999, shareholders received information regarding all
distributions paid to them by the Fund during the fiscal year ended
September 30, 1999. The Fund hereby designates the following amounts as
long-term capital gains distributions.
Capital gains taxed at 20% $ 7,780,616
The percentage of ordinary income which is eligible for the corporate
dividend received deduction for the fiscal year ended September 30, 1999
was 17%.
FIDUCIARY CAPITAL GROWTH FUND, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
414-226-4555
BOARD OF DIRECTORS
BARRY K. ALLEN
GEORGE D. DALTON
PATRICK J. ENGLISH
TED D. KELLNER
THOMAS W. MOUNT
DONALD S. WILSON
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
FIRSTAR MUTUAL FUND SERVICES, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
800-811-5311
or
414-765-4124
CUSTODIAN
FIRSTAR BANK MILWAUKEE, NA
615 East Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of Fiduciary Capital Growth Fund unless accompanied or
preceded by the Fund's current prospectus. Past performance is not indicative of
future performance. Investment return and principal value of an investment may
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
