LEPERCQ-ISTEL FUND
ANNUAL
REPORT
DECEMBER 31, 1997
LEPERCQ-ISTEL FUND
FEBRUARY 15, 1998
DEAR SHAREHOLDERS:
The year 1997 saw an increase in volatility in the stock market. During the year
there were two corrections of about 10% and several additional ones of slightly
lesser magnitude. The year also ended on a note of concern over the potential
impact of the economic problems of Asia on the U.S. economy.
In 1997 the net asset value of your Fund, adjusted for distributions, increased
by 9%. The downdraft of the market at the end of the year on concerns over Asia
resulted in a loss of a substantial portion of the earlier gains of your Fund.
As has been our custom, at the occasion of the start of the year let us briefly
revisit the objectives and policies of your Fund, review the past year, and
share with you some of our current thoughts.
INVESTMENT OBJECTIVES AND POLICIES
Your Fund has a primary objective of long-term capital appreciation. Investment
income is a secondary consideration. The managers of your Fund pursue these
objectives through investment in companies undergoing a transformation that is
not properly recognized by the market. Our investment philosophy rests on the
belief that as managers we best bring value to our clients through the early
identification of change.
REVIEW OF 1997
Near ideal economic conditions in the U.S. consisting of strong growth and low
inflation resulted in declining interest rates and another strong year for the
U.S. stock market. Large-capitalization growth stocks outperformed all other
segments of the market.
Sectors of the Fund that positively contributed to performance were its
investments in insurance, medical supplies, semiconductors and pharmaceuticals.
Sectors that were a drag on performance were the Fund's investments in specialty
finance, pollution management and media.
OUR CURRENT OUTLOOK
1997 was a powerful witness to the success of the U.S. economic model. The U.S.
has enjoyed the strongest growth among industrialized nations over the past six
years while experiencing benign inflation. The recent problems in Asia have
accelerated the region's shift from its quasi-industrial -policy model to one
that more closely mimics the U.S.
The current expansion in the U.S. is closing in on a record for longevity while
still demonstrating little signs of undue strain. Corporate profit growth is,
however, clearly slowing. Profits are expected to grow at a mid-single digit
rate this year after growing at a 11.5% rate in 1997. The slowdown in the rate
of profit growth is likely to result in continued volatility in the stock market
as uncertainty increases over corporate earnings.
We look forward to the rest of 1998 committed to staying focused on stock
selection and in investing in companies that are undergoing dynamic change.
Thank you for your continued support.
Sincerely,
/s/ Tsering Ngudu
Tsering Ngudu
President
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN LEPERCQ-ISTEL FUND AND THE S&P 500
1 YEAR
date Lepercq-Istel Fund S&P 500
12/96 $10,000 $10,000
3/97 $8,812 $10,268
6/97 $9,842 $12,061
9/97 $11,823 $12,964
12/97 $10,895 $13,336
5 YEARS
date Lepercq-Istel Fund S&P 500
12/92 $10,000 $10,000
6/93 $10,819 $10,487
12/93 $11,355 $11,007
6/94 $11,071 $10,634
12/94 $10,785 $11,152
6/95 $12,709 $13,406
12/95 $13,707 $15,343
6/96 $15,516 $16,892
12/96 $17,307 $18,865
6/97 $17,033 $22,754
12/97 $18,854 $25,161
AVERAGE ANNUAL RATE OF RETURN (%)
for Periods Ended December 31, 1997
One Year 8.95
Five Years 13.52
Ten Years 11.01
10 YEARS
date Lepercq-Istel Fund S&P 500
12/87 $10,000 $10,000
12/88 $10,715 $11,661
12/89 $13,055 $15,356
12/90 $12,182 $14,880
12/91 $14,290 $19,414
12/92 $15,072 $20,894
12/93 $17,114 $23,000
12/94 $16,255 $23,303
12/95 $20,659 $32,061
12/96 $26,084 $39,422
12/97 $28,418 $52,573
Returns shown include the reinvestment of all dividends. Past performance is not
predictive of future performance. Investment return and principal value will
fluctuate, so that your shares, when redeemed, may be worth more or less than
the original cost.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
NUMBER MARKET
OF SHARES VALUE
---------- -------
COMMON STOCKS - 81.81%
AUTO PARTS - 2.85%
20,000 Federal - Mogul $810,000
----------
BANKS - 5.74%
15,000 Bank of New York 867,188
7,000 Chase Manhattan 766,500
----------
1,633,688
----------
COMMUNICATIONS - 23.34%
30,000 Ascend Communications*<F1> 736,875
35,000 Bay Networks*<F1> 894,687
30,000 Comverse Technology *<F1> 1,162,500
65,000 Digital Microwave*<F1> 942,500
40,000 Loral Space &
Communications*<F1> 857,500
15,000 Motorola 855,937
40,000 Orbital Sciences*<F1> 1,190,000
----------
6,639,999
----------
COMPUTERS/INFORMATION - 1.56%
12,000 Digital Equipment*<F1> 444,000
----------
ENERGY/OIL SERVICES - 2.19%
42,000 Tesco*<F1> 623,681
----------
INDUSTRIAL/COMMERCIAL
SERVICES - 4.67%
30,000 First Data 877,500
16,000 IKON Office Solutions 450,000
----------
1,327,500
----------
INSURANCE - 5.59%
35,000 Conseco 1,590,312
----------
MEDIA-BROADCASTING - 2.59%
25,000 CBS 735,938
----------
MEDICAL SUPPLIES - 4.15%
45,000 CONMED*<F1> 1,181,250
----------
PHARMACEUTICALS - 6.68%
20,000 Forest Laboratories*<F1> 986,250
25,000 Pharmacia & Upjohn 915,625
----------
1,901,875
----------
RETAILERS - 4.09%
15,000 Borders Group* <F1> 469,687
60,000 Kmart* <F1> 693,750
----------
1,163,437
----------
SEMICONDUCTOR - 7.44%
25,000 Adaptec*<F1> 928,125
43,000 Integrated Circuit
Systems*<F1> 1,187,875
----------
2,116,000
----------
SOFTWARE/PROCESSING - 10.92%
16,000 BMC Software* <F1> 1,048,000
20,835 Network Associates* <F1> 1,097,744
25,000 Sterling Commerce* <F1> 960,937
----------
3,106,681
----------
Total Common Stocks
(Cost $16,287,997) 23,274,361
----------
RESTRICTED
SECURITIES+<F2> - 0.00% (NOTE 2)
38,020 Westfed Holdings, Class B,
Common*<F1> 1
128,290 Westfed Holdings, 15.50%,
Convertible Preferred* <F1> 1
----------
Total Restricted Securities
(Cost $11,126,810) 2
----------
PRINCIPAL
AMOUNT
---------
U.S. TREASURY NOTES - 0.09%
$25,000 U.S. Treasury Notes,
9.00%, due 5/15/98 25,313
----------
Total U.S. Treasury Notes
(Cost $24,961) 25,313
----------
U.S. TREASURY BILLS - 18.06%
$2,010,000 U.S. Treasury Bills,
due 1/29/98 $2,002,179
1,095,000 U.S. Treasury Bills,
due 3/19/98 1,083,049
2,080,000 U.S. Treasury Bills,
due 4/02/98 2,052,908
----------
Total U.S. Treasury Bills
(Cost $5,138,404) 5,138,136
----------
Total Investments - 99.96%
(Cost $32,578,172) 28,437,812
----------
Other Assets
Less Liabilities - 0.04% 11,401
----------
NET ASSETS - 100.00% $28,449,213
===========
*<F1>Non-income producing security.
+<F2>The Westfed Holdings securities were acquired for a total cost of
$2 in conjunction with the Agreement on Transfer of Assets between
Lepercq, de Neuflize & Co. Incorporated and Pilgrim Management
Corporation. As part of the Agreement on Transfer, the Fund acquired net
tax operating loss carryforwards which are further explained in Note 5.
See accompanying notes to financial statements.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS:
Investments, at market value
(Cost $32,578,172)
(Note 2) $28,437,812
Receivable for investments
sold 376,125
Cash 35,111
Dividend and Interest
receivable 6,947
Other assets 21,225
-----------
Total Assets 28,877,220
-----------
LIABILITIES:
Payable to Adviser 54,027
Payable for investments
purchased 316,348
Accrued expenses and
other liabilities 57,632
-----------
Total Liabilities 428,007
-----------
NET ASSETS $28,449,213
===========
NET ASSETS CONSIST OF:
Capital stock $31,384,151
Accumulated undistributed
net realized gains on
investments 1,205,422
Net unrealized (depreciation)
on investments (Note 2) (4,140,360)
-----------
Total Net Assets $28,449,213
===========
Shares outstanding
(unlimited shares of $1.00
par value authorized) 1,481,018
Net Asset Value, offering
and redemption price $19.21
======
See accompanying notes to financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
INVESTMENT INCOME:
Dividend income $128,561
Interest income 149,463
Other income 38
-----------
Total income 278,062
-----------
EXPENSES:
Investment advisory fee 186,157
Administration fee 28,377
Shareholder servicing fees
and expense 30,006
Fund accounting fee 24,896
Custody fees 12,007
Federal and state registration 13,667
Professional fees 42,272
Reports to shareholders 6,570
Trustee fees and expenses 11,463
Distribution expenses 15,183
Other 5,627
-----------
Total expenses 376,225
-----------
NET INVESTMENT (LOSS) (98,163)
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain
on investments 3,520,945
Change in unrealized
depreciation on investments (1,714,017)
-----------
Net realized and unrealized
gain on investments 1,806,928
-----------
NET INCREASE IN
NET ASSETS RESULTING
FROM OPERATIONS $1,708,765
===========
See accompanying notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
OPERATIONS:
Net investment (loss) $(98,163) $(145,100)
Net realized gain on investments 3,520,945 1,413,250
Change in unrealized depreciation
on investments (1,714,017) 3,920,329
------------ ------------
Net increase in net assets
resulting from operations 1,708,765 5,188,479
------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net realized gains (2,035,270) (1,160,547)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 6,225,042 779,689
Proceeds from shares issued to holders in
reinvestment of dividends 1,089,556 968,529
Cost of shares redeemed (2,693,972) (1,852,021)
------------ ------------
Net increase (decrease) in net assets from
capital share transactions 4,620,626 (103,803)
------------ ------------
TOTAL INCREASE
IN NET ASSETS 4,294,121 3,924,129
------------ ------------
NET ASSETS:
Beginning of year 24,155,092 20,230,963
------------ ------------
End of year (including undistributed
net investment income of
$0 and $25,000, respectively) $28,449,213 $24,155,092
============ ===========
See accompanying notes to financial statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA: 1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Net asset value, beginning of period $19.03 $15.83 $13.17 $14.84 $14.17
------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss) (0.07)(1) (0.11)(1) 0.14(1) 0.18 0.29
Net realized and unrealized gains <F3> <F3> <F3>
(losses) on investments 1.69 4.26 3.42 (0.93) 1.62
------ ------ ------ ------ ------
Total from investment operations 1.62 4.15 3.56 (0.75) 1.91
------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income -- -- (0.13) (0.18) (0.29)
Dividends in excess of net
investment income -- -- -- (0.03) (0.03)
Distributions from capital gains (1.44) (0.95) (0.77) (0.71) (0.92)
------ ------ ------ ------ ------
Total distributions (1.44) (0.95) (0.90) (0.92) (1.24)
------ ------ ------ ------ ------
Net asset value, end of period $19.21 $19.03 $15.83 $13.17 $14.84
====== ====== ====== ====== ======
Total return 9.0% 26.3% 27.1% (5.1)% 13.5%
Supplemental data and ratios:
Net assets (in millions)
end of period $28.4 $24.2 $20.2 $18.5 $16.6
Ratio of expenses to
average net assets 1.51% 1.65%(2)<F4> 1.50% 1.56% 1.51%
Ratio of net investment income
(loss) to average net assets (0.40)%(0.65)%(2)<F4> 0.89% 1.36% 2.00%
Portfolio turnover rate 71.20% 54.13% 59.72% 70.66% 19.88%
Average commission rate
per share(3)<F5> $0.0825 $0.0917 -- -- --
(1)<F3>Net investment income per share is calculated using ending balances prior
to consideration or adjustment for permanent book and tax differences.
(2)<F4>Without voluntary expense reimbursements of $13,000 for the year ended
December 31, 1996,the ratio of expenses to average net assets would have been
1.71% and the ratio of net investment loss to average net assets would have
been (0.71)%.
(3)<F5>Average per share amounts of brokerage commissions on portfolio
transactions. Required by regulations first effective for the fiscal year ended
December 31, 1996.
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Lepercq-Istel Trust (the "Trust") is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end investment company,
established under a Declaration of Trust dated April 8, 1986. The Trust was
formerly a Delaware corporation established in 1953 known as Istel Fund, Inc.
On April 8, 1986, the shareholders of Istel Fund, Inc. (the Trust's
predecessor) approved a plan of reorganization (the "Reorganization") under
which Istel Fund, Inc. converted its corporate structure to change from a
Delaware corporation to a Massachusetts business trust. In accordance with the
terms and conditions of the Reorganization, Istel Fund, Inc. changed its name
to Lepercq-Istel Trust. The Trust currently consists of one series, Lepercq-
Istel Fund (the "Fund"). The principal investment objective of the Fund is
long-term capital appreciation. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of
its financial statements. These policies are in conformity with generally
accepted accounting principles for investment companies.
a) Investment Valuation--Investments in securities traded on a national
securities exchange are valued at the last reported sale on the primary
exchange on which they are traded. Investments not listed on a securities
exchange and exchange-listed securities for which no sale was reported for
that date are valued at the last reported bid price. Once short-term
securities have a maturity of 60 days or less, they are valued at amortized
cost which approximates market value; prior to that they are marked to
market. Restricted securities for which quotations are not readily available
are valued at fair value as determined by the Adviser under the supervision
of the Board of Trustees.
b) Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income as well as any net
realized gains to its shareholders. Therefore, no federal income tax
provision is required. Generally accepted accounting principles require that
permanent differences between financial reporting and tax reporting be
reclassified between various components of net assets. On the statement of
assets and liabilities, as a result of permanent book-to-tax differences,
accumulated undistributed net investment income has been increased by
$73,163, and accumulated undistributed net realized gain on investments has
been decreased by $162,567, resulting in a net reclassification adjustment
to increase capital stock by $89,404.
c) Distributions to Shareholders--Dividends from net investment income are
declared and paid semi-annually. Distributions of net realized capital
gains, if any, will be declared at least annually.
d) Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principals 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 those
estimates.
e) Other--Investment and shareholder transactions are recorded on trade date.
The Fund determines the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold with
the net sales proceeds. Dividend income is recognized on the ex-dividend
date or as soon as information is available to the Fund, and interest income
is recognized on an accrual basis. Discounts on securities purchased are
amortized over the life of the respective security.
2. RESTRICTED SECURITIES
On December 31, 1997, the Fund held certain restricted securities (i.e.,
securities which may not be publicly sold without registration under the
federal Securities Act of 1933, as amended, or without an exemption under such
Act). These securities were acquired from the Pilgrim Corporate Utilities Fund
on July 29, 1994, under an Agreement on Transfer of Assets between Lepercq, de
Neuflize &Co. Incorporated and Pilgrim Management Corporation. On December 31,
1997 and on the date these restricted securities were acquired, there were no
market quotations available for unrestricted securities of the same class. In
the opinion of the Fund's Adviser these securities are worthless.
Consequently, each position has been valued at $1 for a total value for all
restricted securities of $2. The value at which these securities were acquired
by the Fund, the original cost of these securities to Pilgrim Corporate
Utilities Fund and the net unrealized loss that accrues to the Fund from the
acquisition of these securities are as follows:
ACQUISITION ORIGINAL COST NET UNREALIZED LOSS
COST TO FUND TO PILGRIM ACCRUED TO FUND
------------ ------------ ------------------
Westfed Holdings, Class B,
Common $1 $1,148 $1,147
Westfed Holdings,15.50%,
Convertible Preferred 1 11,125,662 11,125,661
---------- ----------
Total restricted securities
(Market Value of $2 at
December 31, 1997) $11,126,810 $11,126,808
=========== ===========
3. AGREEMENTS
The Fund has entered into an investment advisory agreement with Lepercq, de
Neuflize &Co. Incorporated (the "Adviser"). The Adviser is entitled to receive
a fee, computed and accrued daily and payable quarterly, at the annual rate of
0.75% of the Fund's average daily net assets.
For the year ended December 31, 1997, the Fund paid Lepercq, de Neuflize
Securities Inc., a wholly owned subsidiary of the Adviser $15,950 of brokerage
commissions.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held
bank-holding company, serves as the Fund's custodian, transfer agent,
administrator and accounting services agent.
The Board of Trustees, on behalf of the Fund, has adopted a distribution plan
(the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Pursuant to the Plan, the Fund may incur distribution expenses of up to 0.75%
per annum of its average daily net assets. The Plan provides that the Fund may
finance activities which are primarily intended to result in the sale of the
Fund's shares. In accordance with the Shareholder Servicing Plan, the Fund may
enter into Shareholder Service Agreements under which it pays fees of up to
0.25% of the average daily net assets for fees incurred in connection with the
personal service and maintenance of accounts holding the shares of the Fund.
The Fund incurred $15,183 pursuant to the Plans for the year ended December
31, 1997.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of beneficial interest were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------
Shares subscribed 289,992 44,196
Shares issued to holders in
reinvestment of dividends 59,965 51,131
Shares redeemed (138,328) (103,880)
-------- --------
Net increase (decrease) 211,629 (8,553)
======= ========
5. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Fund for the year ended December 31, 1997, were as
follows:
U.S. GOVERNMENT OTHER
--------------- ------
Purchases -- $15,754,224
Sales -- 17,109,758
At December 31, 1997, gross unrealized appreciation and depreciation of
investments for federal income-tax purposes were as follows:
Appreciation $7,400,587
(Depreciation) (11,540,739)
-----------
Net unrealized depreciation
on investments $(4,140,152)
===========
At December 31, 1997, the cost of investments for federal income-tax purposes
was $32,577,964.
The Fund acquired a tax capital loss carryforward from the Pilgrim
CorporateUtilities Fund on July 29, 1994 under an Agreement on Transfer of
Assets between the Adviser and Pilgrim Management Corporation. The Fund is
limited to recognizing $332,593 of this loss per year until December 31, 2001.
Net unrealized gains and losses may also differ for book and tax purposes as a
result of disallowance for tax purposes of built-in losses that were acquired
under the Agreement on Transfer of Assets.
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND
BOARD OF TRUSTEES OF
LEPERCQ-ISTEL TRUST:
We have audited the accompanying statement of assets and liabilities of Lepercq-
Istel Fund (the "Fund"), including the schedule of investments, as of December
31, 1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented. 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 and financial highlights. 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 the
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 periods presented, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Milwaukee, Wisconsin
January 16, 1998
TRUSTEES
Bruno Desforges Chairman of the Board; Managing Director, Lepercq, de
Neuflize & Co. Incorporated; Director and Chairman of the
Board, Lepercq, de Neuflize Securities Inc.
Francois Letaconnoux Director, President and Chief Executive Officer,
Lepercq Inc., Lepercq, de Neuflize &Co. Incorporated
and Lepercq, de Neuflize Securities Inc.
Jean-Louis Milin Managing Director, Banque de Neuflize, Schlumberger, Mallet
Dr. Marvin Schiller*<F6> Former Managing Director, A.T. Kearney, Inc.
Franz Skryanz*<F6> Financial Consultant; formerly, Treasurer, Chief Financial
Officer, Schenkers International
*<F6>Member of Audit, Ethics and Nominating Committees
OFFICERS
Tsering Ngudu President
Stephen T. Murphy Secretary & Treasurer
Peter Hartnedy Controller
Investment Adviser Lepercq, de Neuflize & Co. Incorporated, New York
Underwriter & Distributor Lepercq, de Neuflize Securities Inc., New York
Dividend Paying Agent,
Transfer Agent, Custodian,
Administrator and
Accounting Services Agent Firstar Trust Company, Wisconsin
Legal Counsel Kramer, Levin, Naftalis & Frankel, New York
Independent Auditors KPMG Peat Marwick LLP, Wisconsin
Lepercq-Istel Fund
1675 Broadway, New York, N.Y. 10019
Telephone:(212) 698-0749
Shareholder Services: (800) 497-1411
This report is issued for the information of shareholders of Lepercq-Istel Fund,
and is not authorized for distribution to prospective investors in the Fund
unless it is preceded or accompanied by a current prospectus.
</TABLE>
