(The Jensen Portfolio Logo)
ANNUAL REPORT
May 31, 1998
LETTER FROM THE INVESTMENT ADVISER
Dear Fellow Shareholders:
According to Fortune Magazine, Bill Gates and Warren Buffett addressed 350
business students from the University of Washington following Microsoft's annual
conference for CEO's last May. Apart from being among the world's wealthiest
people, the two have a number of interests in common as evidenced by their
month-long trip to China and frequent games of bridge. Interestingly Mr.
Buffett's investment company, Berkshire Hathaway, does not own any shares in
Microsoft -- especially after having said Mr. Gates explained the company to
him. (The article did not disclose whether or not Mr. Gates owned shares in
Berkshire.)
The reason why Microsoft is not in the Berkshire portfolio came up during the
question and answer period. Mr. Buffett was asked to describe his investment
strategy. He replied it was simple. Financial assets are expected to return cash
to the investor over time. Hence any investment is worth the cash that it
returns to the investor, discounted to its present value. A 30-year Treasury
bond is worth the present value of all future interest payments plus the
eventual return of principal. A share of common stock is worth all future
dividend payments plus the value received upon the liquidation of shares of the
company. This is not new to Warren Buffett nor unique to him. Investment bankers
use this type of appraisal in their merger and acquisition work; it is simple
because it applies to any financial asset from The Jensen Portfolio to the mom
and pop grocery store down the street.
That said, it is not a wildly popular way to select securities because the
investor must find companies whose future business performance can be reasonably
estimated. That is, businesses that will not significantly change over the next
five or ten years. Microsoft, as Mr. Gates admits, must change significantly --
perhaps several times during the next decade. Even so, the process is arduous.
For example, the investor must estimate how many drinks of Coca-Cola will be
poured each year going forward and deduce the company's revenues and net income
from those estimates. While a company's past business performance may give clues
to future performance, the cold truth is that Coca-Cola's market price today
will have to be earned by its future business performance and its past
performance belongs to history.
Using a discounted cash flow basis for investment involves some disciplines:
o The investor must select companies whose businesses are reasonably
predictable in order to calculate future cash flows. This eliminates investment
in industries that are notably cyclical such as chemicals, autos and papers. The
complexity of estimating future business conditions in companies that are
rapidly changing, which is Mr. Buffett's problem with Microsoft, make the
calculation too improbable. In estimating future cash flows, for example, it is
more likely that estimates will be more rational with the Coca-Cola's of the
world rather than the Internet's Yahoo.
o A belief that in the long-term the cash earnings a business generates will
be reflected in its share price. Using earnings per share as a proxy for cash
earnings, according to Value Line Investment Survey, Merck's earnings have
increased annually at a 19% rate over the past ten years. Based on average
annual prices plus dividends, an investor in Merck shares would have earned a
22.7% return. (The somewhat higher market return may reflect investor's
exuberance for common stocks in 1997.)
This should not suggest that forecasting business performance produces
precise answers. During the past year, the strength of the dollar against
foreign currencies, the Asian crisis, and the under-$1,000 computer all are
among today's laundry list of worries. They are important because in the short
term they may affect business performance and in turn market performance.
Worries determine how well investors sleep at night. In their depression,
investors often forget that the function of corporate management is to react and
plan around the inevitable shocks and surprises. It is also likely that many of
these concerns are temporal (remember the Gulf War, OPEC and Japan) and will be
replaced by others which will be inevitably considered more dire in due course.
The three best and worst Portfolio performers help illustrate how current events
affected market values.
NORDSON (-14.1%) has averaged an 18.0% annual return (including dividends)
during the ten-year period from 1988-1997. The company has recently been
affected by twin concerns: the weak economy in Japan and the strength of the
dollar. Nordson's products are principally manufactured in the United States --
equipment that applies sealant, coatings and paints to everything from
automobiles to disposable diapers. Since Japan is the world's second largest
economy and therefore an important customer to Nordson, its current economic
malaise has negatively effected the company's revenues. Secondly, since most of
Nordson's products are purchased outside of North America, the strong dollar
resulted in their products being more expensive. To illustrate, the table below
shows Nordson's earnings as reported compared to their earnings on a "currency
neutral" basis. As disappointing as Nordson's market performance was, there is a
flip side: owning an outstanding company at a reasonable price when Japan's
economy and the currency cycle turns in their favor.
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
Earnings
as reported 2.45 2.84 2.92 2.85 Est. 3.05
Earnings,
currency
neutral 2.45 2.64 3.02 3.22 Est. 3.45
NIKE'S (-13%) difficulties -- other than with the unfortunate press provided
by the local newspaper, The Oregonian -- stemmed from the company's past
success. Demand by retailers globally (including Japan) for their products in
1995 and 1996 was intense and the company attempted to fulfill their orders. The
consumer demand unfortunately did not meet the retailers' hopes. One example of
the ensuing glut of product on the market was in Japan where there was an excess
of 2,000,000 pairs of shoes. Nike has reported that the excess supply of shoes
is diminishing rapidly and the press has reported that Nike's new lines are very
exciting. Nike continues to be the industry leader and has a tradition of
creating value for its long-term holders. Over the past ten years, its average
annual total return is 46 percent.
INTEL (-5.5%) During the past 12 months, the Asian crisis and the under-
$1,000 computer effected Intel's performance. Some 25 percent of all personal
computers are purchased in Asia where the devaluation of currencies resulted in
pricing personal computers out of reach. Although Intel supplies the under-
$1,000 computer market, the company's strengths and profit margins rest in the
higher-end microprocessors needed to operate new software programs and speed-up
Internet functions. Intel's financial position and market share indicate that it
will continue to dominate its rapidly growing industry.
In a way, the market performance of the three issues rising the most
represent as much concern as the poorest performing three. Discounting future
cash flows relies upon the relationship between increasing net income and
increases in price. Over-performance, as well as under-performance, is
disconcerting. For the record:
MEDTRONICS (+50.9%) is the world's largest manufacturer of implantable
biomedical devices. Demographics and a very productive research and development
program are hallmarks of the company. Although Medtronics is a large company
with $2 1/2 billion in sales, the company is rumored to be an acquisition target
of Johnson and Johnson.
SARA LEE (+46.3%) markets branded consumer products including Hillshire
Farms, Jimmy Dean, Ball Park, L'Eggs, Kiwi, Bali, Champion, Playtex and Coach.
In late December, the Company decided to restructure by selling off a
substantial number of its capital-intensive manufacturing facilities. In turn it
will contract production from outside vendors. The cash generated from facility
sales will be used to repurchase shares.
GANNETT (+45.4%) continues to narrow its focus on newspaper and TV stations.
Last year, Gannett acquired Metromedia and sold its billboard operations and
home security systems. The company publishes 87 daily newspapers including the
now profitable USA Today; 20 network affiliated TV stations and serves 476,000
subscribers with Cable TV. Increasing subscription and advertising revenues
offset increasing newsprint prices.
Looking forward, the year ahead will offer investment challenges beyond the
normal fare. The independent Congressional Budget Office just projected a
federal surplus of $63 billion for the current year, up from a January 1998
projected deficit of $8 billion. The 1998 surplus will be the first since 1969
that turned out to be only a nominal, one-year respite. If policies stay
unchanged, the CBO projected that the surplus will rise each year to $251
billion by 2008. The CBO's projections are all the more interesting because they
used conservative estimates of growth, inflation and interest rates.
As the economy stands now, inflation is nominal, unemployment near a 30-year
low and the economy cooking along at a 3.6 percent growth rate. With such good
news, there are excesses. It is a time when an Internet bookseller's shares rose
from $12 to $143 in 52 weeks; at its $113 current price, the company is selling
at 8 times 1999's estimated sales. In the first quarter, the company lost $9
million, up $3 million loss of the year-earlier comparable quarter. According to
The Wall Street Journal, it is a time when there is a parallel trend among US
lenders to discard caution and embrace risk. The Journal cited that outstanding
loans to 'subprime' borrowers with subprime credit histories surpassed a record
$300 billion last year. Our strategy in this environment is to continue to
select companies of high quality and earnings consistency. While they may not
offer the excitement of the next new idea, we believe they offer the best
opportunity to survive the next unknown economic turn down the road.
Sincerely,
/s/ Val Jensen
Val Jensen
President, Jensen Investment Management
THE JENSEN PORTFOLIO
TOTAL RETURNS VS. THE S&P 500
DATE THE JENSEN PORTFOLIO S&P 500 STOCK INDEX
8/3/92 $10,000 $10,000
11/30/92 10,360 10,283
5/31/93 9,428 10,885
11/30/93 9,233 11,321
5/31/94 8,991 11,348
11/30/94 9,115 11,440
5/31/95 10,325 13,640
11/30/95 11,643 15,671
5/31/96 12,818 17,519
11/30/96 14,611 20,037
5/31/97 15,709 22,672
11/30/97 17,340 25,751
5/31/98 18,581 29,629
FOR THE PERIOD ENDING MAY 31, 1998
ANNUALIZED
ONE YEAR SINCE INCEPTION
THE JENSEN PORTFOLIO: 18.28% 11.21%
S&P 500 STOCK INDEX: 30.68% 20.48%
THE S&P 500 STOCK INDEX IS AN UNMANAGED BUT COMMONLY USED MEASURE OF COMMON
STOCK TOTAL RETURN PERFORMANCE. THIS CHART ASSUMES AN INITIAL GROSS INVESTMENT
OF $10,000 MADE ON 8/3/92 (INCEPTION). RETURNS SHOWN INCLUDE THE REINVESTMENT OF
ALL DIVIDENDS. PAST PERFORMANCE IS NOT PREDICATIVE 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.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE DIRECTORS AND SHAREHOLDERS OF THE JENSEN PORTFOLIO, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, 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 The Jensen Portfolio, Inc. (the
Fund), an investment company, at May 31, 1998, and the results of its operations
and the changes in its net assets for the years ended May 31, 1998 and 1997, and
the financial highlights for each of the three years in the period ended May 31,
1998, 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. The financial statements of the Fund as of May 31, 1995, were
audited by other auditors whose report dated June 21, 1995, expressed an
unqualified opinion on those statements. 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 owned as of May 31, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS, LLP
Portland, Oregon
July 2, 1998
STATEMENT OF ASSETS & LIABILITIES
May 31, 1998
ASSETS:
Investments, at value (cost $13,156,341) $19,932,030
Income receivable 14,108
Prepaid expenses 871
---------------------------------------------
TOTAL ASSETS 19,947,009
----------
LIABILITIES:
Payable to investment adviser 8,502
Payable to directors 15,988
Accrued expenses 22,146
---------------------------------------------
TOTAL LIABILITIES 46,636
----------
NET ASSETS $19,900,373
-----------
-----------
NET ASSETS CONSIST OF:
Capital stock $13,215,364
Unrealized appreciation on investments 6,775,689
Undistributed net investment income 12,485
Undistributed net realized loss (103,165)
---------------------------------------------
TOTAL NET ASSETS $19,900,373
-----------
-----------
NET ASSET VALUE PER SHARE, 1,179,441
SHARES OUTSTANDING (100,000,000 SHARES
AUTHORIZED, $.001 PAR VALUE) $16.87
-------
-------
See notes to financial statements.
SCHEDULE OF INVESTMENTS
May 31, 1998
Number of Shares Market Value
- ---------------- ------------
COMMON STOCK 97.55%
BANKS 7.30%
7,000 State Street Corporation $ 482,563
16,000 Wilmington Trust Corporation 970,000
------------
1,452,563
------------
BEVERAGES 3.94%
10,000 The Coca-Cola Company 783,750
------------
CHEMICAL SPECIALTY 6.22%
12,500 Nalco Chemical Company 468,750
28,000 WD-40 Company 768,250
------------
1,237,000
------------
COMPUTER SOFTWARE SERVICES 7.64%
11,000 Adobe Systems Incorporated 439,312
17,000 Automatic Data Processing, Inc. 1,081,625
------------
1,520,937
------------
DRUGS 4.53%
7,700 Merck & Company, Inc. 901,381
------------
ELECTRICAL EQUIPMENT 5.45%
13,000 General Electric Company 1,083,875
------------
FOOD PROCESSING 4.59%
15,500 Sara Lee Corporation 912,563
------------
HOUSEHOLD PRODUCTS 5.03%
12,000 Clorox Company 1,002,000
------------
INDUSTRIAL SERVICES 9.14%
50,000 Equifax Inc. 1,818,750
------------
MACHINERY 3.54%
15,500 Nordson Corporation 705,250
------------
MEDICAL SUPPLIES 17.72%
18,000 Abbott Laboratories 1,335,375
24,000 Medtronic, Inc. 1,335,000
21,000 Stryker Corporation 855,750
------------
3,526,125
------------
NEWSPAPERS 4.97%
15,000 Gannett Company, Inc. 989,062
------------
PRECISION INSTRUMENTS 4.20%
16,000 Dionex Corporation # <F1> 836,000
------------
SEMICONDUCTORS 3.59%
10,000 Intel Corporation 714,375
------------
SHOE INDUSTRY 4.62%
20,000 Nike, Inc. -- Class B 920,000
------------
TELECOMMUNICATIONS 5.07%
14,733 Reuters Holdings
PLC -- ADR 1,009,210
------------
Total Common Stock
(Cost $12,637,152) 19,412,841
------------
Principal Amount
- ----------------
SHORT-TERM INVESTMENTS 2.61%
VARIABLE RATE DEMAND NOTES* <F2> 2.61%
$283,588 Johnson Controls, Inc.,
5.2534% 283,588
235,601 Pitney Bowes, Inc.,
5.2534% 235,601
------------
Total Short-Term Investments
(Cost $519,189) 519,189
------------
Total Investments 100.16%
(Cost $13,156,341) 19,932,030
------------
Liabilities, Less Other
Assets (0.16%) (31,657)
------------
NET ASSETS 100.00% $19,900,373
------------
------------
#<F1>Non income producing security.
*<F2>Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rate changes periodically on specified dates. The
rate is as of May 31, 1998.
See notes to financial statements.
STATEMENT OF OPERATIONS
Year Ended May 31, 1998
INVESTMENT INCOME:
Dividends (net of foreign taxes
withheld of $2,729) $ 392,597
Interest 37,911
-----------
430,508
-----------
EXPENSES:
Investment advisory fees 87,402
Shareholder servicing and accounting 28,464
Professional fees 13,844
Directors' fees and expenses 16,910
Amortization of deferred organizational expenses 2,454
Administration fees 16,736
Reports to shareholders 3,432
Federal and state registration fees 4,948
Custody fees 4,002
Other 1,079
-----------
Total expenses 179,271
-----------
NET INVESTMENT INCOME 251,237
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investment transactions 592,609
Change in unrealized appreciation
on investments 1,930,938
-----------
Net gain on investments 2,523,547
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $2,774,784
-----------
-----------
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
May 31, '98 May 31, '97
------------ ------------
OPERATIONS:
Net investment income $ 251,237 $ 75,658
Net realized gain on
investment transactions 592,609 48,074
Change in unrealized appreciation
on investments 1,930,938 2,435,266
----------- -----------
Net increase in net assets
resulting from operations 2,774,784 2,558,998
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 4,033,672 2,414,861
Shares issued to holders in
reinvestment of dividends 482,999 79,511
Shares redeemed (1,247,161) (1,699,617)
----------- -----------
Net increase 3,269,510 794,755
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (250,304) (89,436)
In excess of net investment income #<F3> -- (10,260)
From net realized gains (404,704) --
----------- -----------
Total dividends and distributions (655,008) (99,696)
----------- -----------
INCREASE
IN NET ASSETS 5,389,286 3,254,057
NET ASSETS:
Beginning of year 14,511,087 11,257,030
----------- -----------
End of year (including undistributed
net investment income of $12,485
and $9,098, respectively) $19,900,373 $14,511,087
----------- -----------
----------- -----------
#<F3>On a tax basis, this is not a return of capital.
See notes to financial statements.
FINANCIAL HIGHLIGHTS
<TABLE>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
Per Share Data: MAY 31, '98 MAY 31, '97 MAY 31, '96 MAY 31, '95 MAY 31, '94
-------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.78 $12.16 $9.94 $8.80 $9.36
Income from investment
operations:
Net investment income 0.23 0.10 0.15 0.14 0.13
Net realized and unrealized
gains (losses) on investments 2.46 2.63 2.23 1.15 (0.56)
------ ------ ------ ------ ------
Total from investment
operations 2.69 2.73 2.38 1.29 (0.43)
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income (0.23) (0.10) (0.15) (0.15) (0.13)
Distribution in excess of net
investment income -- (0.01) (0.01) -- --
From net realized gains (0.37) -- -- -- --
------ ------ ------ ------ ------
(0.60) (0.11) (0.16) (0.15) (0.13)
------ ------ ------ ------ ------
Net asset value,
end of period $16.87 $14.78 $12.16 $9.94 $8.80
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 18.28% 22.56% 24.14% 14.84% (4.64)%
Supplemental data and ratios:
Net assets,
end of period $19,900,373 $14,511,087 $11,257,030 $9,859,630 $8,808,717
Ratio of expenses to
average net assets(1)<F4> 1.02% 1.32% 1.20% 1.20% 1.13%
Ratio of net investment income to
average net assets(1)<F4> 1.44% 0.61% 1.23% 1.48% 1.36%
Portfolio turnover rate 20.80% 24.50% 47.93% 11.27% 5.26%
Average commission rate paid $0.0185 $0.0196 $0.0198
</TABLE>
(1)<F4> Without expense waivers or voluntary reimbursements of $4,043 for the
year ended May 31, 1997, $30,602 for the year ended May 31, 1996, $50,889 for
the year ended May 31, 1995 and $54,481 for the year ended May 31, 1994, the
ratio of expenses to average net assets would have been 1.35%, 1.49%, 1.75% and
1.72%, respectively, and the ratio of net income to average net assets would
have been 0.58%, 0.94%, 0.93% and 0.77%, respectively. For the year ended May
31, 1998 the ratio of expenses to average net assets was less than the annual
expense limit.
See notes to financial statements.
NOTES TO THE FINANCIAL STATEMENTS
May 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Jensen Portfolio, Inc. (the "Fund") was organized as an Oregon Corporation
on April 17, 1992, and is registered as an open-end, nondiversified management
investment company under the Investment Company Act of 1940. The principal
investment objective of the Fund is long-term capital appreciation. The Fund
issued and sold 10,000 shares of its capital stock at $10 per share on June 29,
1992 ("initial shares"). The Fund commenced operations on August 3, 1992.
Jensen Investment Management, Inc. (the "Investment Adviser") has advanced the
Fund $56,604 to cover costs in connection with the organization, initial
registration and public offering of shares. The Fund has reimbursed these costs
under a five-year amortization schedule. The total organizational costs of
$57,854 (which includes both costs advanced by the Investment Adviser and costs
paid directly by the Fund) were completely amortized in August 1997.
The following is a summary of significant accounting policies consistently
followed by the Fund.
a) Investment Valuation - Securities that are listed on United States stock
exchanges are valued at the last sale price on the day the securities are valued
or, if there has been no sale on that day, then at the average of the last
available bid and ask prices. Quotations are taken from the market in which the
security is primarily traded. Over-the-counter securities are valued at the last
sale price on the day the securities are valued, or if there has been no sale on
that day, then at the average of the current bid and ask prices. Securities for
which market quotations are not readily available are valued at fair value as
determined by the Investment Adviser at or under the direction of the Fund's
Board of Directors. There were no securities valued by the Board of Directors
for the fiscal year ending May 31, 1998. Variable rate demand notes are valued
at cost which approximates market value. Notwithstanding the above, fixed-income
securities may be valued on the basis of prices provided by an established
pricing service when the Board believes that such prices reflect market values.
b) Federal Income Taxes - No provision for federal income taxes has been made
since the Fund has complied to date with the provisions of the Internal Revenue
Code applicable to regulated investment companies and intends to continue to so
comply in the future and to distribute substantially all of its net investment
income and realized capital gains in order to relieve the Fund from all federal
income taxes.
c) Distributions to Shareholders - Dividends from net investment income are
declared and paid quarterly by the Fund. Distributions of net realized capital
gains, if any, will be declared and paid at least annually. Income and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. The Fund's
primary financial reporting and tax difference relates to the differing
treatment for the amortization of deferred organization expenses. Permanent
financial reporting and tax differences are reclassified to capital stock.
d) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and 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.
Gains or losses from the investment transactions are determined on the basis of
identified carrying value. Dividend income is recognized on the ex-dividend date
and interest income is recognized on an accrual basis. The Fund has investments
in short-term variable rate demand notes, which are unsecured instruments. These
notes may present credit risk to the extent the issuer defaults on its payment
obligation. The credit-worthiness of the issuer is monitored, and these notes
are considered to present minimal credit risk in the opinion of the Investment
Adviser.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
Year Ended Year Ended
May 31, '98 May 31, '97
-------------- -------------
Shares sold 245,342 178,249
Shares issued to holders in
reinvestment of dividends 29,293 6,168
Shares redeemed (77,187) (128,324)
-------- --------
Net increase 197,448 56,093
-------- --------
-------- --------
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, by the Fund for the year ended May 31, 1998, were $6,061,379 and
$3,509,982, respectively.
At May 31, 1998, gross unrealized appreciation and depreciation of investments
were as follows:
Appreciation $7,377,391
(Depreciation) (601,702)
----------
Net appreciation on investments $6,775,689
----------
----------
At May 31, 1998, the cost of investments for federal income tax purposes was
$13,156,341.
At May 31, 1998, the Fund had an accumulated net realized capital loss carryover
of $103,165 expiring in 2003. To the extent the Fund realizes future net capital
gains, taxable distributions to its shareholders will be offset by any unused
capital loss carryover.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an Investment Advisory and Service Contract with
Jensen Investment Management, Inc. Pursuant to its advisory agreement with the
Fund, the Investment Adviser is entitled to receive a fee, calculated daily and
payable monthly, at the annual rate of 0.50% as applied to the Fund's daily net
assets.
Certain officers and directors of the Fund are also officers and directors of
the Investment Adviser.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held bank
holding company, serves as custodian, transfer agent, administrator and
accounting services agent for the Fund.
5. EXPENSE GUARANTEE
In order to limit the Fund's expenses, the Investment Adviser has guaranteed
that certain expenses payable by the Fund (including, but not limited to,
management fees, legal, audit, custodial, printing and other regular Fund
expenses, but excluding brokerage commissions, taxes, interest, organizational
costs and other expenses that are capitalized, and all extraordinary items such
as litigation or indemnification expenses) will not exceed specified levels in
any fiscal year. If the Fund's regular operating expenses exceed the applicable
limit specified below (expressed as a percentage of average daily net assets on
an annual basis), the Investment Adviser will reduce its management fee, or
reimburse the Fund, in an amount equal to the excess:
Average Daily Net Annual
Assets for the Year Expense Limit
------------------- -------------
$100,000 - $10,000,000 2.00%
$10,000,001 - $15,000,000 1.75%
$15,000,001 - $25,000,000 1.50%
$25,000,001 - $50,000,000 1.25%
$50,000,001 - $100,000,000 1.00%
$100,000,001 and above 0.75%
In addition, the Investment Adviser has voluntarily agreed to reimburse the Fund
for its expenses or waive management fees during fiscal 1998 in order to keep
regular operating expenses at no more than 1.40%. Any reduction in management
fees or reimbursement of expenses by the Investment Adviser required pursuant to
the above expense guarantee will be computed and accrued daily, paid monthly and
adjusted annually on the basis of the Fund's average daily net assets for the
year.
6. DISTRIBUTIONS
On June 30, 1998 an ordinary income dividend of $0.01340547 per share
aggregating $15,942 was declared. The distribution was paid on June 30, 1998 to
shareholders of record on June 29, 1998.
END OF NOTES TO THE FINANCIAL STATEMENTS
Effective December 13, 1995, Deloitte & Touche, L.L.P. ("Deloitte") resigned as
the Fund's independent accountants. For the years ended May 31, 1994 and 1995,
Deloitte expressed an unqualified opinion on the Fund's financial statements.
There were no disagreements between Fund management and Deloitte prior to their
resignation. On December 13, 1995, the Board of Directors of the Fund approved
the appointment of Coopers & Lybrand L.L.P (effective July 1, 1998
PricewaterhouseCoopers LLP) as the Fund's independent accountants. The Fund has
received a letter from Deloitte addressed to the Securities and Exchange
Commission stating that Deloitte agrees with the above statements (other than
the statement with respect to the approval of the Board of Directors, as to
which Deloitte expresses no knowledge).
(Jesnsen Investment Management logo)
430 Pioneer Tower
888 SW Fifth Avenue
Portland, OR 97204-2018
503-274-2044
800-221-4384
Fax 503-274-2031
