PINNACLE FUND
Indianapolis, Indiana
Dear Pinnacle Fund Shareholders:
The Pinnacle Fund had another great year rising 35.4% in 1997. The
Fund's return easily beat the nation's inflation rate of 1.7%. More
significantly, the Fund also bested the return of the S&P 500
(33.4%), the Dow Jones Industrial Average (24.9%), and the average
growth stock mutual fund as reported by Lipper Analytical (25.3%).
For the third year in a row, the Fund has now posted a return of
20% or better. Cumulatively, Pinnacle Fund investors earned a
return of 124.5% over these past three years. This has truly been
an exciting period for growth stock investors.
Important contributors to the Fund's performance were several
financial stocks that had significant gains (Heritage Financial,
+104%, MGIC Corp, +75%, Federal National Mortgage Corp, +51%). Just
as important to the performance was what the Fund did not own. Many
smaller companies, particularly in the technology sector, posted
poor performance in the wake of the turmoil from Southeast Asia.
The Fund continues to invest in high quality companies with
established market leadership and strong earnings growth. These
companies performed well in last year's volatile environment.
An initial investment of $10,000 in the Pinnacle Fund at inception
of 1985 was worth $67,380 as of December 31, 1997, assuming the
reinvestment of dividends.
As always we appreciate your support of the Fund.
Sincerely,
Thomas F. Maurath
President
Robert D. Markley
Secretary/ Treasurer
February 26, 1998
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C> <C>
ASSETS
Investments at value:
Common stock (cost $13,763,509) . $21,275,909
Short-term notes (cost $1,022,153) 1,022,153
-----------
$22,298,062
Dividends and interest receivable 21,147
-----------
TOTAL ASSETS 22,319,209
LIABILITIES
Payables:
Investment advisory fee-Note 2. . . 14,792
Custodian fee . . . . . . . . . . . 3,918
Accrued expenses. . . . . . . . . . 28,147
Other payable . . . . . . . . . . . 687
----------
TOTAL LIABILITIES 47,544
-----------
NET ASSETS - equivalent to $27.71 per share for
803,800.525 shares outstanding (unlimited
authorization, no par value; offering price
equal to net asset value per share) $22,271,665
===========
See notes to financial statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT AND OTHER INCOME
Income:
Dividends . . . . . . . . . . . . $192,393
Interest. . . . . . . . . . . . . 72,398
Other . . . . . . . . . . . . . . 41,446
----------
Total income. . . . . . . . . . $306,237
Expenses:
Investment advisory fee - Note 2. 157,344
Custodian fees. . . . . . . . . . 24,078
Legal and audit . . . . . . . . . 19,655
Trustees' fees. . . . . . . . . . 400
Printing and postage. . . . . . . 1,519
Gross income taxes. . . . . . . . 3,047
Other . . . . . . . . . . . . . . 11,200
----------
Total expenses. . . . . . . . . 217,243
-----------
Net investment income . . . . . 88,994
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Realized gain from security transactions
(excluding short-term notes):
Proceeds from sales . . . . . . 9,394,862
Cost of securities sold . . . . 6,288,506
----------
Net realized gain from security
transactions. . . . . . . . 3,106,356
Unrealized appreciation of investments:
End of year . . . . . . . . . . 7,512,400
Beginning of year . . . . . . . 4,865,253
----------
Change in unrealized apprec-
iation of investments . . . . 2,647,147
-----------
Net gain on investments . . . 5,753,503
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . $5,842,497
===========
See notes to financial statements.
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31
------------------------
1997 1996
------- --------
<S> <C> <C>
Operations:
Net investment income . . . . . . . $88,994 $28,446
Net realized gain from security
transactions. . . . . . . . . . . 3,106,356 2,141,592
Change in unrealized appreciation of
investments . . . . . . . . . . . 2,647,147 968,996
---------- -----------
Increase in net assets from oper-
ations. . . . . . . . . . . . . 5,842,497 3,139,034
---------- -----------
Distributions to shareholders from:
Net investment income . . . . . . . (89,031) (30,714)
Net realized gains from security
transactions. . . . . . . . . . . (3,104,362) (2,139,158)
---------- -----------
Decrease in net assets from distr-
ibutions to shareholders. . . . (3,193,393) (2,169,872)
---------- -----------
Capital share transactions:
Proceeds from sales of shares . . . 2,806,673 1,009,745
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions . . . 3,056,448 2,075,804
Cost of shares redeemed . . . . . . (2,731,501) (2,236,681)
---------- -----------
Increase in net assets from
capital share transactions. . . 3,131,620 848,868
---------- -----------
Total increase in net assets. . . 5,780,724 1,818,030
Net assets:
Beginning of year . . . . . . . . . 16,490,941 14,672,911
---------- -----------
End of year - including undistributed
(excess of distributions over) net
investment income of $(2,587) and
$(2,549), respectively. . . . . . $22,271,665 $16,490,941
=========== ===========
See notes to financial statements.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
December 31, 1997
Shares or Market
COMMON STOCKS Principal Value
Amount (Note 1)
---------- ---------
<S> <C> <C>
BANKS & FINANCE (9.29%)
BankAmerica Corporation . . . . . . 7,300 $532,900
Federal National Mortgage Association 12,000 684,750
Heritage Financial Services, Inc. . 15,000 435,000
Mercantile Bancorporation . . . . . 6,800 418,200
---------
2,070,850
---------
BUSINESS SERVICES (2.10%)
*Ceridian Corporation . . . . . . . 10,200 467,288
---------
CAPITAL GOODS (9.94%)
Emerson Electric Company . . . . . 9,600 541,800
General Electric Company . . . . . 8,000 587,000
Tyco International Ltd. . . . . . . 13,800 621,862
United Technologies Corporation . . 6,400 466,000
---------
2,216,662
---------
CHEMICALS (4.46%)
Dupont E I De Nemours & Company . . 7,000 420,437
Monsanto Company . . . . . . . . . 13,675 574,350
---------
994,787
---------
COMMUNICATIONS (7.86%)
*Air Touch Communications . . . . . 14,300 594,344
BellSouth Corporation . . . . . . . 11,000 619,437
*Worldcom, Inc. . . . . . . . . . . 17,800 538,450
---------
1,752,231
---------
COMPUTER SYSTEMS & SOFTWARE (14.05%)
Computer Associates Int'l, Inc. . . 11,700 618,637
Intel Corporation . . . . . . . . . 5,200 365,300
International Business Machines . . 4,700 491,444
Lucent Technologies, Inc. . . . . . 8,200 654,975
*Microsoft Corporation . . . . . . 4,400 568,700
*Sun Microsystems, Inc. . . . . . . 10,900 434,638
---------
3,133,694
---------
CONSUMER DURABLES (2.60%)
Masco Corporation . . . . . . . . . 11,400 579,975
---------
CONSUMER SERVICES (13.09%)
*Cendant Corporation . . . . . . . 20,085 690,422
CVS Corporation . . . . . . . . . . 9,100 582,969
Gannett, Inc. . . . . . . . . . . . 8,800 543,950
*Kroger Company . . . . . . . . . . 13,700 506,044
Service Corporation International . 16,100 594,694
---------
2,918,079
---------
CONSUMER STAPLES (2.58%)
Quaker Oats Company . . . . . . . . 10,900 $574,975
---------
ENERGY (7.63%)
Baker Hughes, Inc. . . . . . . . . 10,800 471,150
Mobil Corporation . . . . . . . . . 6,800 490,875
Schlumberger Ltd. . . . . . . . . . 9,200 740,600
---------
1,702,625
---------
HEALTH CARE (8.62%)
Bristol Myers Squibb Company . . . 4,900 463,663
Healthsouth Corporation . . . . . . 16,800 466,200
Merck & Company, Inc. . . . . . . . 4,200 446,250
Warner Lambert Company . . . . . . 4,400 545,600
---------
1,921,713
---------
INSURANCE (10.45%)
American International Group, Inc. 6,975 758,531
Conseco, Inc. . . . . . . . . . . . 13,800 627,038
MGIC Investment Corporation Wisconsin 14,200 944,300
---------
2,329,869
---------
TRANSPORTATION (2.75%)
Southwest Airlines Company . . . . 24,900 613,161
---------
TOTAL COMMON STOCKS (95.42%). . . . . 21,275,909
---------
SHORT TERM NOTES (4.58%)
American Family Financial Services (5.74%) 121,380 121,380
Johnson Controls, Inc. (5.58%) . . 62,357 62,357
Warner Lambert (5.74%) . . . . . . 150,221 150,221
Wisconsin Electric Power Corp. (5.74%) 688,195 688,195
---------
1,022,153
---------
TOTAL SHORT TERM NOTES . . . . . . . 1,022,153
---------
TOTAL INVESTMENTS . . . . . . . . . . $22,298,062
---------
*Non-income producing security.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
Year Ended December 31
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Selected data for each share outstanding
throughout the period is as follows:
Net asset value, beginning of period $23.96 $22.47 $18.83 $21.15 $21.83
-----------------------------------------------
Income from Investment Operations
Net investment income .13 .05 .11 .09 .10
Net gains or losses on securities
(both realized and unrealized) 8.25 5.04 6.54 (.34) .62
-----------------------------------------------
Total from investment operations 8.38 5.09 6.65 (.25) .72
-----------------------------------------------
Dividends (from net investment income) (.13) (.05) (.11) (.09) (.10)
-----------------------------------------------
Distributions (from capital gains) (4.50) (3.55) (2.90) (1.98) (1.30)
-----------------------------------------------
Net Asset Value, End of Period $27.71 $23.96 $22.47 $18.83 $21.15
================================================
Total Return 35.4% 22.5% 35.4% (1.1%) 3.3%
Ratios/Supplemental Data (in thousands)
Net assets, end of period $22,272 $16,491 $14,673 $13,014 $15,135
================================================
Ratio of expenses to average net assets 1.12% 1.16% 1.14% 1.15% 1.17%
================================================
Ratio of net income to average net asset .46% .18% .44% .41% .46%
================================================
Portfolio turnover rate 50.45% 44.07% 68.48% 91.01% 85.35%
================================================
Average commission rate paid $ .0600 $ .0606 $ .0590
================================================
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization: Pinnacle Fund (the "Fund") was formed as a business
trust under the laws of the state of Indiana on December 19, 1984,
and is registered under the Investment Company Act of 1940 as an
open-end diversified investment company. The Fund invests primarily
in common stocks as well as some money market and fixed income
investments. The Fund is licensed to sell shares in Indiana, Ohio
and Michigan. The following is a summary of significant accounting
policies followed by the Fund in the preparation of its financial
statements.
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 the revenues, expenses, gains, losses and other
changes in net assets during the reporting period. Actual results
could differ from those estimates.
Investment Valuation: Securities traded on a national exchange are
valued at their last reported sales price on the primary exchange
on which they are traded. Securities traded in the over-the-counter
market, and listed securities for which no sale was reported on
that date, are valued at the last reported bid price. Securities
for which there are no readily available market quotations are
valued at their fair value as determined in good faith by the Board
of Trustees.
Short-term securities which mature in more than 60 days are valued
at current market quotations. Short-term securities which mature in
60 days or less are valued at amortized cost, which approximates
current market value. The cost of investments is the same for
financial reporting and federal income tax purposes.
Securities transactions are recorded on the trade date. Realized
gains and losses on sales of investments are determined on the
specific-identification method for financial reporting and federal
income tax purposes. Dividends from equity securities are recorded
as income on the ex-dividend date. Investment income from debt
securities is accrued on a daily basis.
Federal Income Taxes: It is the Fund's policy to meet the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. On such basis, the Fund has not incurred and,
under present law, will not incur any liabilities for income taxes
on such income.
Distributions to Shareholders: Distributions in cash or shares of
the Fund are recorded on the ex-dividend date. Distributions
payable in shares of the Fund are made at net asset value on the
ex-dividend date.
NOTE 2 - INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH
AFFILIATES:
Under an investment advisory agreement with the Fund, Heartland
Capital Management, Inc. (the Advisor) provides investment advisory
services and certain other services and facilities required by the
Fund to conduct its business. For such services, the Fund pays an
annual investment advisory fee equal to .80% of the average daily
net assets of the Fund. The fee is computed daily and payable
monthly. For the year ended December 31, 1997, the Fund incurred
investment advisory fees of $157,344.
The Advisor has agreed to reimburse the Fund to the extent annual
operating expenses, including the investment advisory fee but
excluding interest, taxes, and brokerage commissions, exceed the
sum of (i) 2% of the first $10 million of the Fund's average net
assets, (ii) 1 1/2% of the next $20 million of such assets, and
(iii) 1% of any excess over $30 million. Reimbursement was not
required for the year ended December 31, 1997.
Three officers/trustees of the Fund are also officers, directors,
and principal shareholders of the Advisor. The Advisor's profit
sharing trust is a shareholder of the fund.
NOTE 3 - PURCHASE OF SECURITIES:
For the year ended December 31, 1997, the aggregate cost of
securities purchased, exclusive of short-term notes, amounted to
$9,133,230.
NOTE 4 - SHARE AND OTHER CAPITAL TRANSACTIONS:
At December 31, 1997, paid-in capital aggregated $14,771,217.
Transactions in shares of the Fund were as follows:
<TABLE>
Shares Amount
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Shares sold 102,302.391 40,025.901 $2,806,673 $1,009,745
Shares issued in reinvestment
of dividends and distributions 112,992.556 85,424.031 3,056,448 2,075,804
------------ ------------ ----------- -----------
215,294.947 125,449.932 5,863,121 3,085,549
Shares redeemed 99,806.940 90,239.226 2,731,501 2,236,681
------------ ------------ ----------- -----------
Net increase 115,488.007 35,210.706 3,131,620 $848,868
</TABLE>
On December 26, 1997, the Board of Trustees declared a dividend
from net investment income and a distribution of net realized gains
from security transactions. The dividend of $.129 and the
distribution of $4.498 were paid December 29, 1997 to each
shareholder of record on December 26, 1997.
NOTE 5 - SUBSEQUENT EVENT:
On March 6, 1998, the shareholders of Pinnacle Fund will consider
approval of a Reorganization Agreement pursuant to which shares of
Pinnacle Fund will be exchanged pro rata for shares of Fountain
Square Pinnacle Fund (the "New Pinnacle Fund"), a newly organized
series portfolio of the Fountain Square Funds. The New Pinnacle
Fund will continue to be managed by Heartland Capital Management
and will operate with essentially the same investment objectives,
policies, and procedures. The reorganization will be tax free and
will not dilute the interest of shareholders. Because the
investment objectives of Pinnacle and the New Fund are identical
and their policies are substantially similar, an investment in the
New Fund will present similar investment risks as investing in
Pinnacle.
INDEPENDENT AUDITOR'S REPORT
To the Board of Trustees
and Shareholders of
Pinnacle Fund
We have audited the accompanying statement of assets and
liabilities of Pinnacle Fund, including the schedule of portfolio
investments, as of December 31, 1997, the related statement of
operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian
and a broker. 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 Pinnacle 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 five years in the
period then ended, in conformity with generally accepted accounting
principles.
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
January 27, 1998
<TABLE>
HISTORICAL RECORD
Growth of An
Net Asset Capital Gains Dividend Initial
Value Distributions Distributions $10,000
Per Share Per Share Per Share Investment**
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
March 4, 1985* $10.00 $10,000
December 31, 1985 11.54 11,545
December 31, 1986 12.85 0.653 0.059 13,557
December 30, 1987 14.02 0.553 0.223 15,623
December 31, 1988 14.53 0.228 0.215 16,676
December 29, 1989 18.23 0.548 0.252 21,841
December 31, 1990 16.87 0.431 0.352 21,155
December 31, 1991 22.14 1.208 0.246 29,589
December 31, 1992 21.83 0.020 0.129 29,374
December 31, 1993 21.15 1.303 0.101 30,347
December 31, 1994 18.83 1.980 0.095 30,009
December 29, 1995 22.47 2.902 0.107 40,633
December 31, 1996 23.96 3.552 0.051 49,751
December 31, 1997 27.71 4.498 0.129 67,380
*Date of Initial Public Offering
**Assuming reinvestment of all distributions
</TABLE>
PINNACLE
FUND
- ---------------------------------------------------------------
Investment Advisor
HEARTLAND CAPITAL MANAGEMENT, INC.
Indianapolis, 317/633-4080
Custodian, Transfer Agent and
Disbursing Agent
FIRSTAR TRUST COMPANY
Milwaukee, 414/765-4124
Auditors
GEO. S. OLIVE & CO. LLC
Indianapolis
Counsel
SOMMER & BARNARD, PC
Indianapolis
This report has been prepared primarily for the benefit of existing
shareholders of the Fund and is not intended as an offer to sell
the Fund's shares. When used otherwise, it must be accompanied or
preceded by the current prospectus.
ANNUAL REPORT
DECEMBER 31, 1997
