(Lepercq-Istel Fund Logo)
Lepercq-Istel Fund
ANNUAL
REPORT
December 31, 1998
FEBRUARY 15, 1999
FELLOW SHAREHOLDERS:
We are pleased to report to you the performance of your Fund for the fourth
quarter and for the full year 1998. For comparative purposes, we have also
provided performance information for some relevant benchmarks.
FOURTH QUARTER 1998 YEAR ENDED 1998
------------------ ---------------
Lepercq-Istel Fund 28.49% 15.38%
Lipper Capital Appreciation Average 22.59% 19.96%
Lipper General Equity Average 20.22% 14.52%
Standard & Poor's 500 21.30% 28.58%
REVIEW OF 1998
The year 1998 saw more than its fair share of drama. The U.S. stock market
soared early in the year, swooned in the summer and then rallied to new highs at
year-end. A handful of stocks performed handsomely while the bulk of the market
struggled. Small capitalization stocks suffered through a severe bear market
declining 37% from peak to trough before ending the year with a decline of about
2%. It was a highly challenging investment environment characterized by
extremes in performance with little in the way of the safe middle ground.
U.S. economic growth in 1998 once again surpassed expectations. The performance
was particularly impressive considering the weakness of many economies abroad.
Inflation remained remarkably well-behaved and allowed interest rates to stay
stock-market friendly.
However, the year saw a further deceleration for the rate of corporate profit
growth. As the number of companies generating strong earnings growth dwindled,
the attention they attracted from investors further increased resulting in
highly divergent stock market performance and a chasm in valuations between the
market leaders and the rest.
OUR CURRENT OUTLOOK
The U.S. is likely to continue to see moderate growth and low inflation in 1999.
While interest rates are no longer declining, they appear to have stabilized at
historically low levels. Concerns over potential weakness in Latin American
economies triggered by the devaluation of the Brazilian currency are somewhat
mitigated by an apparent stabilization in those of Japan and the rest of Asia.
A key risk for the stock market this year arises from the potential increase of
short-term interest rates by the Federal Reserve.
The overarching focus of investors on a small group of stocks has left ample
opportunities among the vast number that have been neglected. The robustness of
the U.S. economy and unprecedented gains in the U.S. stock market during the
past eight years are a testament to the flexibility of the American system that
permits speedier renewal in a fast changing world. The investment approach of
your Fund is focused on finding specific situations of corporate renewal which
we refer to as transformations. Because we believe the character and quality of
a company emanates from the top, we view the caliber of a company's management
as an essential consideration in our investment review process.
Thank you for your continued support.
Sincerely,
/S/Tsering Ngudu /s/Jerry Getsos
Tsering Ngudu Jerry Getsos
President and Portfolio Manager Executive Vice President and Portfolio
Manager
Past performance is not predictive of future performance.
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
12/97 10,000 10,000
3/98 11,374 11,395
6/98 11,307 11,771
9/98 8,980 10,600
12/98 11,538 12,858
5 YEARS
AVERAGE ANNUAL RATE OF RETURN (%)
for Periods Ended December 31, 1998
------------------------------------
ONE YEAR 15.38
FIVE YEARS 13.89
TEN YEARS 11.83
date Lepercq-Istel Fund S&P 500
12/93 10,000 10,000
6/94 9,750 9,661
12/94 9,498 10,131
6/95 11,193 12,179
12/95 12,072 13,939
6/96 13,665 15,347
12/96 15,242 17,139
6/97 15,001 20,672
12/97 16,605 22,859
6/98 18,775 26,907
12/98 19,160 29,391
10 YEARS
date Lepercq-Istel Fund S&P 500
12/88 10,000 10,000
12/89 12,184 13,169
12/90 11,369 12,761
12/91 13,337 16,649
12/92 14,066 17,918
12/93 15,972 19,724
12/94 15,171 19,984
12/95 19,280 27,494
12/96 24,343 33,807
12/97 26,522 45,085
12/98 30,601 57,970
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, 1998
NUMBER MARKET
OF SHARES VALUE
--------- -----
COMMON STOCKS - 86.64%
BANKS - 9.97%
40,000 Bank of New York $ 1,610,000
14,000 Chase Manhattan 952,875
20,000 U.S. Bancorp 710,000
------------
3,272,875
------------
CLOTHING - 1.86%
30,000 Russell 609,375
------------
COMMUNICATIONS - 16.30%
20,000 Comverse Technology*<F1> 1,420,000
70,000 Loral Space &
Communications*<F1> 1,246,875
10,000 Motorola 610,625
45,000 Newbridge Networks*<F1> 1,366,875
14,000 Northern Telecom 701,750
------------
5,346,125
------------
COMPUTERS/INFORMATION - 4.47%
35,000 Compaq Computer 1,467,812
------------
ENERGY - 1.44%
75,000 Seagull Energy*<F1> 473,437
------------
INDUSTRIAL/COMMERCIAL SERVICES - 2.90%
30,000 First Data 950,625
------------
INSURANCE - 2.79%
30,000 Conseco 916,875
------------
MEDIA/BROADCASTING - 12.49%
35,000 CBS 1,146,250
40,000 CD Radio*<F1> 1,370,000
50,000 IMAX*<F1> 1,581,250
------------
4,097,500
------------
MEDICAL SUPPLIES - 4.57%
25,000 Bausch & Lomb 1,500,000
------------
PHARMACEUTICALS - 4.31%
25,000 Pharmacia & Upjohn 1,415,625
------------
RETAILERS - 3.50%
46,000 Borders Group*<F1> 1,147,125
------------
SOFTWARE/PROCESSING - 22.04%
20,000 BMC Software*<F1> 891,250
27,000 Computer Associates International 1,150,875
28,500 Network Associates*<F1> 1,888,125
120,000 Novell*<F1> 2,175,000
25,000 Sterling Commerce*<F1> 1,125,000
------------
7,230,250
------------
Total Common Stocks
(Cost $20,055,867) 28,427,624
------------
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 BILL - 12.14%
$4,000,000 U.S. Treasury Bill, due 2/4/99 3,983,541
------------
Total U.S. Treasury Bill
(Cost $3,983,541) 3,983,541
------------
VARIABLE RATE DEMAND NOTES - 1.49%
62,035 American Family Financial Services 62,035
146,372 General Mills, Inc. 146,372
280,742 Sara Lee Corporation 280,742
------------
Total Variable Rate Demand Notes
(Cost $489,149) 489,149
------------
Total Investments -
100.27%
(Cost $35,655,367) 32,900,316
------------
Other Assets Less
Liabilities - (0.27%) (87,027)
------------
NET ASSETS - 100.00% $32,813,289
------------
------------
*<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, 1998
ASSETS:
Investments, at market value
(Cost $35,655,367) $32,900,316
Dividend and interest
receivable 22,476
Other assets 8,275
-----------
Total Assets 32,931,067
-----------
LIABILITIES:
Payable to Adviser 55,604
Accrued expenses and
other liabilities 62,174
-----------
Total Liabilities 117,778
-----------
NET ASSETS $32,813,289
-----------
-----------
NET ASSETS CONSIST OF:
Capital stock $35,039,867
Accumulated undistributed
net realized gains on
investments 528,473
Net unrealized (depreciation)
on investments (Note 2) (2,755,051)
-----------
Total Net Assets $32,813,289
-----------
-----------
Shares outstanding
(unlimited shares of $1.00
par value authorized) 1,648,277
Net Asset Value, offering
and redemption price $19.91
------
------
See accompanying notes to financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME:
Dividend income (net of taxes
withheld of $691) $ 149,839
Interest income 176,221
Other income 2,427
-----------
Total income 328,487
-----------
EXPENSES:
Investment advisory fee 227,951
Administration fee 31,426
Shareholder servicing fees
and expense 31,192
Fund accounting fee 23,250
Custody fees 9,720
Federal and state registration 16,991
Professional fees 71,194
Reports to shareholders 3,610
Trustee fees and expenses 21,986
Distribution expenses 4,776
Other 8,983
-----------
Total expenses 451,079
-----------
NET INVESTMENT (LOSS) (122,592)
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain
on investments 3,024,353
Change in unrealized
depreciation on investments 1,385,309
-----------
Net realized and unrealized
gain on investments 4,409,662
-----------
NET INCREASE IN
NET ASSETS RESULTING
FROM OPERATIONS $4,287,070
-----------
-----------
See accompanying notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
OPERATIONS:
Net investment income (loss) $ (122,592) $ (98,163)
Net realized gain on investments 3,024,353 3,520,945
Change in unrealized depreciation
on investments 1,385,309 (1,714,017)
------------ ------------
Net increase in net assets
resulting from operations 4,287,070 1,708,765
------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net realized gains (3,246,117) (2,035,270)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares subscribed 2,654,631 6,225,042
Shares issued to holders in
reinvestment of dividends 2,487,870 1,089,556
Cost of shares redeemed (1,819,378) (2,693,972)
------------ ------------
Net increase in net assets from
capital share transactions 3,323,123 4,620,626
------------ ------------
TOTAL INCREASE IN NET ASSETS 4,364,076 4,294,121
------------ ------------
NET ASSETS:
Beginning of year 28,449,213 24,155,092
------------ ------------
End of year (including undistributed
net investment income of $0 and
$0, respectively) $32,813,289 $28,449,213
------------ ------------
------------ ------------
See accompanying notes to financial statements.
FINANCIAL HIGHLIGHTS
<TABLE> DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $19.21 $19.03 $15.83 $13.17 $14.84
------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss) (0.07)(1)<F3> (0.07)(1)<F3> (0.11)(1)<F3> 0.14(1)<F3> 0.18
Net realized and unrealized gains
(losses) on investments 2.90 1.69 4.26 3.42 (0.93)
------ ------ ------ ------ ------
Total from investment operations 2.83 1.62 4.15 3.56 (0.75)
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income -- -- -- (0.13) (0.18)
Dividends in excess of net
investment income -- -- -- -- (0.03)
Distributions from capital gains (2.13) (1.44) (0.95) (0.77) (0.71)
------ ------ ------ ------ ------
Total distributions (2.13) (1.44) (0.95) (0.90) (0.92)
------ ------ ------ ------ ------
Net asset value, end of period $19.91 $19.21 $19.03 $15.83 $13.17
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 15.4% 9.0% 26.3% 27.1% (5.1)%
Supplemental data and ratios:
Net assets (in millions) end of period $32.8 $28.4 $24.2 $20.2 $18.5
Ratio of expenses to average net assets 1.48% 1.51% 1.65%(2)<F4> 1.50% 1.56%
Ratio of net investment income (loss)
to average net assets (0.40)% (0.40%) (0.65)%(2)<F4> 0.89% 1.36%
Portfolio turnover rate 83.06% 71.20% 54.13% 59.72% 70.66%
(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)%.
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1998
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. As a result of
permanent book-to-tax differences, accumulated undistributed net investment
loss has been increased by $122,592, and accumulated undistributed net
realized gain on investments has been decreased by ($455,185), resulting in
a net reclassification adjustment to increase capital stock by $332,593.
c) Distributions to Shareholders--Dividends from net investment income, if any,
are declared and paid semi-annually. Distributions of net realized capital
gains, if any, are declared at least annually. For the year ended December
31, 1998, the Fund declared and paid $3,246,117 representing a long-term
capital gain distribution which is taxable at a 20% rate.
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 31,1998, 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, 1998 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:
<TABLE>
ACQUISITION ORIGINAL COST NET UNREALIZED LOSS
COST TO FUND TO PILGRIM ACCRUED TO FUND
----------- ------------ ------------------
<S> <C> <C> <C>
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, 1998) $11,126,810 $11,126,808
------------ ------------
------------ ------------
</TABLE>
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, 1998, the Fund paid Lepercq, de Neuflize
Securities Inc., a wholly owned subsidiary of the Adviser $10,173 of brokerage
commissions.
Firstar Mutual Fund Services, LLC serves as the Fund's transfer agent,
administrator and accounting services agent. Firstar Bank Milwaukee, N.A.
serves as the Fund's custodian.
The Board of Trustees, on behalf of the Fund, has adopted a Distribution Plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940 and a
Shareholder Servicing Plan. Pursuant to the Distribution Plan, the Fund may
incur distribution expenses of up to 0.75% per annum of its average daily net
assets. The Distribution 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 $4,826 pursuant to the Plans for the year ended December 31, 1998.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of beneficial interest were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
Shares subscribed 127,807 289,992
Shares issued to holders in
reinvestment of dividends 132,263 59,965
Shares redeemed (92,811) (138,328)
------- --------
Net increase 167,259 211,629
------- --------
------- --------
5. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Fund for the year ended December 31, 1998, were as
follows:
U.S. GOVERNMENT OTHER
--------------- -----
Purchases -- $22,887,260
Sales $25,000 22,141,527
At December 31, 1998, gross unrealized appreciation and depreciation of
investments for federal income-tax purposes were as follows:
Appreciation $ 9,150,858
(Depreciation) (11,913,112)
-------------
Net unrealized depreciation
on investments $ (2,762,254)
-------------
-------------
At December 31, 1998, the cost of investments for federal income-tax purposes
was $35,662,570.
The Fund acquired a tax capital loss carryforward from the Pilgrim Corporate
Utilities 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, 1998, 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, 1998, 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 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, 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 periods presented, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Milwaukee, Wisconsin
January 15, 1999
TRUSTEES
+<F7>Bruno Desforges Chairman of the Board; Managing Director,
Lepercq, de Neuflize & Co. Incorporated;
Director and Chairman of the Board,
Lepercq, de Neuflize Securities Inc.
Stanley A. Deitch Principal, CPI Associates, Inc., Member, American
Institute of CPA's.
+<F7>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
*<F8>Marvin Schiller, Ph.D. Director, Salant Corporation; Director, Tutor Time
Learning Systems, Inc.; General Partner, Reprise
Capital Corp.; Former Managing Director, A.T.
Kearney, Inc.
*<F8>Franz Skryanz Financial Consultant; prior thereto, Vice
President, Sutton & Edwards; prior thereto,
Treasurer, Chief Financial
Officer, Schenkers International
Marie-Monique Steckel President, France Telecom North America; Director,
Microcard Technologies Inc.; Director, GlobeCast
North America Inc.; Director, C&P Press, Inc.
Dennis Tarzian President and Chief Executive Officer, New Century
Education Corp.; Director, National Registered
Agents, Inc.; prior thereto, Vice President
and Chief Operating Officer, Paramount
Communications Business,
Technical and Professional Group.
*<F6> Member of Audit, Ethics and Nominating Committees
+<F7> Interested Trustees
OFFICERS
Tsering Ngudu President
Jerry Getsos Executive Vice President
Peter Hartnedy Secretary and Treasurer
Investment Adviser Lepercq, de Neuflize & Co. Incorporated,
New York
Underwriter and Distributor Lepercq, de Neuflize Securities Inc., New
York
Dividend Paying Agent, Transfer
Agent,Administrator and Accounting
Services Agent Firstar Mutual Fund Services, LLC
Custodian Firstar Bank Milwaukee, N.A.
Legal Counsel Kramer, Levin, Naftalis & Frankel, New York
Independent Auditors KPMG LLP, Wisconsin
Lepercq-Istel Fund
(Lepercq-Istel Fund Logo)
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.
