Annual Report
(The JENSEN PORTFOLIO Logo)
ANNUAL REPORT
May 31, 1999
LETTER FROM THE INVESTMENT ADVISER
Dear Fellow Shareholders:
Our most recent report to you commented upon the stock market's volatility
due to the implosion of Long-Term Capital Management. Internet issues appear
to have redefined the meaning of volatility in the final six months of The
Jensen Portfolio's fiscal year. An example may help serve the point. One of
the net's more popular issues is e-bay, an on-line auctioneer. The company's
shares sold at $27 in November, reached $224 by April, and are currently
available for $146. If analysts' expectations are met, e-bay will report
earnings of 18 cents a share this year.
The process traders use to value Internet shares has not reached the
traditional, (hidebound, if you will) equity markets. Nonetheless, all the
companies in The Jensen Portfolio have web sites and some are actively
providing products and services to Internet companies. These include Adobe
Systems, Equifax, Gannett, Intel, Mattel and Omnicom.
According to Intel's chairman, Michael Grove, businesses will either serve
their customers on the Internet or "be dead." While the impact of the Internet
on commerce will no doubt be significant, we would defend Peter Drucker's
argument that the first order in business is survival, Internet or no Internet.
And survival first requires getting cash to the bottom line.
Producing these cash earnings is, of course, the essence of the fund's
strategy. (While it is becoming more difficult to substantiate, we suspect
there are still more investment strategies than mutual funds.) In any event,
we always look forward to expounding on our strategy; the Internet shares'
hieroglyphics many without earnings or any prospect of them provide that
opportunity.
The attributes the fund's strategies seek to identify:
o Companies that have created barriers to entry in their principal business;
o Companies that dominate, or are clearly leaders, in their principal
business;
o Firms that consistently report high margins and increasing cash flows;
o Warrant at least a 15 percent total return (dividends and appreciation)
going forward; and,
o Businesses with managers that have the vision to turn problems into
opportunities.
These are attributes all businesses would prefer having, and the firms that
meet or exceed them are highly prized by investors. Hence, the few companies
that meet these criteria are often richly appraised in the market. Since their
performance is rarely disappointing, markets often treat disappointments
severely until the companies return to their traditional ways.
Disappointments, i.e. problems, often provide investors the opportunity to
buy one of these outstanding companies at a fair price. This "fair price" is
a company's market price in relation to what we calculate as its intrinsic
value that is, a company's net worth if there were no equity markets. By
acquiring companies for the fund whose market price is a significant discount
to intrinsic value, we hope to negate the inherent volatility of markets.
Adobe Systems is an example of one of these companies. In the heyday of
computer software firms, Adobe reached $74 a share. Then, two potential
firm-wrecking disappointments occurred. First was the ascendancy of the PC at
the expense of the Mac. Adobe's products are software programs for the
publishing industry. These programs were written for the Mac, since their
machines totally dominated the publishing industry. The firm needed time to
rewrite their software for the PC, giving a special opportunity for competitors
to enter the market. The second was the loss of their "razor blade" business.
Adobe had approximately 2,000 fonts for desktop printers incorporated in their
software and the company received a royalty for each new desktop printer that
was sold. Hewlett Packard, the leading printer manufacturer, then decided to
design some of the fonts themselves rather than continue to employ Adobe's
package.
This all culminated in an earnings drop-off and a market value of $23 per
share in 1998. Meanwhile Adobe continued to upgrade their electronic publishing
programs as well as edit them for the PC. Also, the company was able to remain
debt-free during the transition. Today, PC programs account for more than half
of Adobe's business. Significantly, Adobe was in the right place at the right
time with the products of choice. Because the Internet is publishing, it now
accounts for over 35 percent of the company's revenues. Adobe's Acrobat, for
instance, allows Internet users the ability to print documents available on the
Net.
Today, Adobe has grown to become one of the fund's largest positions.
Best regards,
/s/Val Jensen
Val Jensen
President, Jensen Investment Management
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
11/30/98 $20,456 $31,843
5/31/99 $21,464 $35,859
FOR THE PERIOD ENDING MAY 31, 1999
ANNUALIZED
ONE YEAR SINCE INCEPTION
THE JENSEN
PORTFOLIO: 15.51% 11.83%
S&P 500
STOCK INDEX: 21.03% 20.56%
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, 1999, and the results of its
operations and the changes in its net assets for the years ended May 31, 1999
and 1998, and the financial highlights for each of the four years in the period
ended May 31, 1999, 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 out 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, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICEWATERHOUSECOOPERS, LLP
Portland, Oregon
June 18, 1999
STATEMENT OF ASSETS & LIABILITIES
May 31, 1999
ASSETS:
Investments, at value (cost $14,403,980) $24,580,086
Income receivable 12,949
-----------
TOTAL ASSETS 24,593,035
-----------
LIABILITIES:
Payable to investment adviser 10,629
Payable to directors 15,754
Accrued expenses 23,808
-----------
TOTAL LIABILITIES 50,191
-----------
NET ASSETS $24,542,844
-----------
-----------
NET ASSETS CONSIST OF:
Capital stock ......... $14,751,455
Unrealized appreciation on
investments ......... 10,176,106
Accumulated undistributed net
realized loss......... (384,717)
-----------
TOTAL NET ASSETS 24,542,844
-----------
-----------
NET ASSET VALUE PER SHARE, 1,263,762
SHARES OUTSTANDING (100,000,000 SHARES
AUTHORIZED, $.001 PAR VALUE) $19.42
-----------
-----------
See notes to financial statements.
SCHEDULE OF INVESTMENTS
May 31, 1999
Number of Shares Market Value
- ---------------- ------------
COMMON STOCK 98.12%
ADVERTISING 3.99%
14,000 Omnicom Group Inc. $ 980,000
------------
BANKS 4.97%
16,000 State Street Corporation 1,220,000
------------
BEVERAGES 4.18%
15,000 The Coca-Cola Company 1,024,688
------------
CHEMICAL SPECIALTY 4.19%
40,000 WD-40 Company 1,027,500
------------
COMPUTER SOFTWARE SERVICES 12.35%
22,000 Adobe Systems
Incorporated 1,630,750
34,000 Automatic Data
Processing, Inc. 1,400,375
------------
3,031,125
------------
DRUGS 5.50%
15,400 Merck & Company, Inc. 1,039,500
5,000 Warner-Lambert Company 310,000
------------
1,349,500
------------
ELECTRICAL EQUIPMENT 5.39%
13,000 General Electric Company 1,321,937
------------
FOOD PROCESSING 3.91%
40,000 Sara Lee Corporation 960,000
------------
HOUSEHOLD PRODUCTS 4.94%
12,000 Clorox Company 1,211,250
------------
INDUSTRIAL SERVICES 7.33%
50,000 Equifax Inc. 1,800,000
------------
MACHINERY 1.79%
7,500 Nordson Corporation 440,625
------------
MEDICAL SUPPLIES 13.57%
36,000 Abbott Laboratories 1,626,750
24,000 Medtronic, Inc. 1,704,000
------------
3,330,750
------------
NEWSPAPERS 4.41%
15,000 Gannett Company, Inc. 1,083,750
------------
PRECISION INSTRUMENTS 6.67%
40,000 Dionex Corporation #<F1> 1,637,500
------------
RECREATION 5.12%
47,500 Mattel, Inc. 1,255,781
------------
SEMICONDUCTORS 4.85%
22,000 Intel Corporation 1,189,375
------------
SHOE INDUSTRY 4.96%
20,000 Nike, Inc. -- Class B 1,218,750
------------
Total Common Stock
(Cost $13,906,425) 24,082,531
------------
Principal Amount
- ----------------
SHORT-TERM INVESTMENTS 2.03%
VARIABLE RATE DEMAND NOTES*<F2> 2.03%
$119,132 General Mills, Inc.,
4.5238% 119,132
31,000 Pitney Bowes, Inc.,
4.5237% 31,000
800 Warner-Lambert Company,
4.5200% 800
346,623 Wisconsin Corporate Central
Credit Union, 4.5887% 346,623
-----------
Total Short-Term Investments
(Cost $497,555) 497,555
-----------
Total Investments 100.15%
(Cost $14,403,980) 24,580,086
-----------
Liabilities, Less Other
Assets (0.15%) (37,242)
-----------
NET ASSETS 100.00% $24,542,844
-----------
-----------
#<F1>Non income producing security.
*<F2>Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates shown are as of May 31, 1999.
See notes to financial statements.
STATEMENT OF OPERATIONS
Year Ended May 31, 1999
INVESTMENT INCOME:
Dividends (net of foreign taxes
withheld of $931) $ 250,788
Interest 21,908
------------
272,696
------------
EXPENSES:
Investment advisory fees 111,145
Shareholder servicing and accounting 35,904
Administration fees 23,449
Directors' fees and expenses 16,955
Professional fees 13,634
Custody fees 4,780
Reports to shareholders 3,582
Federal and state registration fees 2,190
Other 1,095
------------
Total expenses 212,734
------------
NET INVESTMENT INCOME 59,962
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized loss on investment
transactions (281,552)
Change in unrealized appreciation
on investments 3,400,417
------------
Net gain on investments 3,118,865
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $3,178,827
------------
------------
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
May 31, '99 May 31, '98
----------- -----------
OPERATIONS:
Net investment income $ 59,962 $ 251,237
Net realized gain (loss) on
investment transactions (281,552) 592,609
Change in unrealized
appreciation on
investments 3,400,417 1,930,938
-------------- -------------
Net increase in net assets
resulting from operations 3,178,827 2,774,784
-------------- -------------
CAPITAL SHARE TRANSACTIONS:
Shares sold 2,502,390 4,033,672
Shares issued to holders in
reinvestment of dividends 45,090 482,999
Shares redeemed (1,011,162) (1,247,161)
-------------- -------------
Net increase ........ 1,536,318 3,269,510
-------------- -------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
Net investment income (59,962) (250,304)
In excess of net investment
income #<F3> (12,712) --
From net realized gains -- (404,704)
-------------- ------------
Total dividends and
distributions (72,674) (655,008)
-------------- ------------
INCREASE
IN NET ASSETS 4,642,471 5,389,286
NET ASSETS:
Beginning of year 19,900,373 14,511,087
-------------- ------------
End of year (including
undistributed net investment
income of $0 and
$12,485, respectively) $24,542,844 $19,900,373
----------- ------------
----------- ------------
#<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,'99 May 31,'98 May 31,'97 May 31,'96 May 31,'95
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $16.87 $14.78 $12.16 $9.94 $8.80
Income from investment
operations:
Net investment income 0.05 0.23 0.10 0.15 0.14
Net realized and
unrealized gains on
investments 2.56 2.46 2.63 2.23 1.15
------ ------ ------ ------ ------
Total from investment
operations 2.61 2.69 2.73 2.38 1.29
------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income (0.05) (0.23) (0.10) (0.15) (0.15)
Distribution in
excess of net
investment income (0.01) -- (0.01) (0.01) --
From net realized gains -- (0.37) -- -- --
------ ------ ------ ------ ------
(0.06) (0.60) (0.11) (0.16) (0.15)
------ ------ ------ ------ ------
Net asset value,
end of period $19.42 $16.87 $14.78 $12.16 $9.94
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 15.51% 18.28% 22.56% 24.14% 14.84%
Supplemental data and ratios:
Net assets,
end of period $24,542,844 $19,900,373 $14,511,087 $11,257,030 $9,859,630
Ratio of expenses
to average net
assets(1)<F4> 0.96% 1.02% 1.32% 1.20% 1.20%
Ratio of net
investment income
to average net
assets(1)<F4> 0.27% 1.44% 0.61% 1.23% 1.48%
Portfolio turnover
rate 13.87% 20.80% 24.50% 47.93% 11.27%
</TABLE>
<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 and $50,889 for the
year ended May 31, 1995, the ratio of expenses to average net assets would have
been 1.35%, 1.49% and 1.75%, respectively, and the ratio of net income to
average net assets would have been 0.58%, 0.94% and 0.93%, respectively. For
the years ended May 31, 1998 and May 31, 1999 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, 1999
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.
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, 1999. 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 to shareholders are recorded on
ex-dividend date. 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. 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, '99 May 31, '98
----------- ------------
Shares sold 138,587 245,342
Shares issued to holders in
reinvestment of dividends 2,605 29,293
Shares redeemed (56,871) (77,187)
--------- ---------
Net increase 84,321 197,448
Shares outstanding:
Beginning of period 1,179,441 981,993
--------- ---------
End of period 1,263,762 1,179,441
--------- ---------
--------- ---------
3.INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, by the Fund for the year ended May 31, 1999, were $4,557,545 and
$3,006,720, respectively.
At May 31, 1999, gross unrealized appreciation and depreciation of investments
were as follows:
Appreciation .........$10,469,125
(Depreciation) ......... (293,019)
-----------
Net appreciation on
investments .........$10,176,106
-----------
-----------
At May 31, 1999, the cost of investments for federal income tax purposes was
$14,403,980.
At May 31, 1999, the Fund had an accumulated net realized capital loss carryover
of $16,593 expiring in 2007. To the extent the Fund realizes future net capital
gains, taxable distributions to its shareholders will be offset by any unused
capital loss carryover. Additionally, for tax purposes, the Fund has elected to
treat $368,124 of net capital losses incurred in the seven month period ended
May 31, 1999 as having been incurred in the following fiscal year.
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.
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%
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 23, 1999 an ordinary income dividend of $0.00783103 per share
aggregating $9,863 was declared. The distribution was paid on June 23, 1999 to
shareholders of record on June 22, 1999.
(Jensen Investment Management Logo)
430 Pioneer Tower
888 SW Fifth Avenue
Portland, OR 97204-2018
503-274-2044
800-221-4384
Fax 503-274-2031
