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FOCUS TRUST, INC./SM/
1995 ANNUAL REPORT
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FOCUS TRUST, INC. ("Focus Trust" or the "Fund") is a no-load, non-diversified
open-end management investment company, commonly known as a mutual fund. The
Fund seeks to attain maximum long-term capital appreciation with minimum risk
to principal by investing primarily in common stocks. The selection of common
stocks will be made through an investment strategy known as focus investing.
Focus investing is an investment strategy whereby companies (businesses) are
identified and selected as eligible for investment by the examination of all
fundamental quantitative and qualitative aspects of a company. We are
interested in investing in businesses which have a consistent operating
history and possess favorable long-term prospects. We like to be associated
with management that is rational in their actions, candid with their
shareholders, and have the ability to think independently. In addition, we are
attracted to businesses that generate high returns on invested capital,
possess high profit margins, and have the ability to produce cash profits for
its owners. Lastly, we are only interested in purchasing companies which are
for sale at prices demonstrably less than their calculated value.
If a stock is chosen for investment, focus investors then become long-term
owners of that business knowing that over time a shareholder's return from
owning a stock is ultimately determined by the fundamental economics of the
underlying business. As such, focus investors concentrate their efforts on a
select few outstanding businesses and spend zero time and energy forecasting
the general direction of the stock market or the economy.
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TABLE OF CONTENTS
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Focus Trust Investment Objective............................. Inside Front Cover
Investment Performance....................................... 2
Letter to Shareholders....................................... 3
Schedule of Investments...................................... 16
Statement of Assets and Liabilities.......................... 17
Statement of Operations...................................... 18
Statement of Changes in Net Assets........................... 19
Notes to Financial Statements................................ 20
Financial Highlights......................................... 22
Independent Auditors Report.................................. 23
Investment Adviser-Shareholder Principles.................... 24
Directors and Officers....................................... Inside Back Cover
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(ART TO COME)
2
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TO THE SHAREHOLDERS OF FOCUS TRUST, INC.:
On April 17, 1995, Focus Trust commenced operations. From inception through
December 31, 1995, the total return of Focus Trust was 12.29%. On an annualized
basis, the total return of Focus Trust was equivalent to 17.74%.
In the first year of operation our return, both total and annualized,
underperformed the Standard & Poor's 500 Index and the Lipper Growth Index. For
the year, the S&P 500 Index including dividends rose 37.57%. The Lipper Growth
Index, an index of comparable growth funds rose 30.79%. Whichever index you
choose to measure us against, and we use both, we came up short.
The reason we underperformed in 1995, plainly speaking, is because we
invested too much in cash and too little in common stocks. As you can see from
the graph on the opposite page, our cash balance throughout 1995 averaged more
than 45%. You can also observe that as our cash balance declined our
performance generally improved. For example, in the fourth quarter Focus Trust
gained 3.9%, even with 24% average cash weighting, outperforming the Lipper
Growth Index which gained 2.4%.
If we isolate the price performance of our common stock investments our
returns are respectable. On an equity only basis, Focus Trust gained 21% which
was the comparable return of the S&P 500 Index during this same operating
period. But make no mistake, what is important to us as shareholders is not the
equity only return but the total return.
It is important to understand that the Fund's above-average weighting in
cash this past year was in no way a prediction on our part regarding the near
term direction of the stock market. Because we believe that short-term changes
in the stock market are unpredictable, we invest no time or effort in this
area. The cash weighting in the Fund was more a result of our investing
personality. When clients or shareholders hand us a lot of money in a short
period of time we have the tendency to be cautious and work the money into the
market slowly always hoping for cheaper prices. Of course in a bull market this
does not make for great short-term performance, but it suits the way we think
about investing.
Our job is to identify and invest in superior businesses which possess great
economics and are run by outstanding managers. If we get this part right and
purchase shares of these businesses at reasonable prices, the net asset value
of Focus Trust should advance, over time, quite nicely.
On the following pages we outline the businesses we own and the rationale
for the investment. Lastly, we share with you our thoughts on our portfolio of
businesses and our capital allocation strategy going forward.
3
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AMERICAN EXPRESS COMPANY
Harvey Golub, Chairman and Chief Executive Officer of American Express,
along with his management team continued their outstanding work in 1995. The
American Express Company posted record earnings this past year with Travel
Related Services and American Express Financial Advisors both delivering their
best results ever.
American Express reported net income in 1995 was a record $1.56 billion, a
11% gain from a year ago. At first glance, 11% may not appear exceptional in
lieu of our hopes for the company. Indeed, Mr. Golub himself has stated that
his goal for American Express is for income to rise between 12% and 15%
annually and achieve return on equity of 18%-20%. But if we look closer, the
facts reveal that Mr. Golub not only met his target but exceeded it for the
year.
Income from operations at American Express actually rose 13% year over year.
The net income in 1994 included $33 million, or 7 cents a share, in profit from
Lehman Brothers before it was spun off in May 1994. If we were to exclude the
profits of the discontinued operations of Lehman and report on the "apples to
apples" business, or what is commonly referred to as income from continuing
operations, we see that income from operations rose from $1.38 billion to $1.56
billion, a 13% increase.
Next we can see that on a per share basis, and that is what is important to
us, the rise year over year is actually 16%, exceeding Mr. Golub's target. But
if income from operations gained only 13%, how did earnings per share grow at a
16% rate? The answer is that during this past year, Mr. Golub allocated some of
the company's excess cash flow to the purchase of American Express stock in the
open market. At year end 1995 there were 498 million shares outstanding, 10
million shares less than were outstanding at this time last year.
Of course growth in earnings is only one of several statistics we use to
measure management. Knowing that Mr. Golub is working with a larger equity base
this past year as compared to the previous year (in 1994, American Express paid
out $0.90 per share in dividends and retained $1.85 per share) we did expect
American Express to earn more money. But how successful was management given a
larger equity base? I am happy to report that American Express' 1995 return on
equity was 24.6% far surpassing Mr. Golub's stated goal.
There have been a few rumors circulating about a possible takeover of
American Express. Although we have no idea whether such an event will ever
occur, my first instinct is to hope not. We would much rather be an owner of
this outstanding business for the next several years than receive a short-term
taxable gain or possibly be stuck with a company that would have trouble
matching American Express' economic returns.
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BERKSHIRE HATHAWAY, INC.
Neither Berkshire Hathaway nor Warren Buffett should be a stranger to Focus
Trust shareholders. Many of you, I suspect, are shareholders because of your
attraction to Mr. Buffett's investment approach and portfolio strategy. It is
no secret that the Focus Trust is based on the methodology outlined in THE
WARREN BUFFETT WAY.
It is important to understand that Berkshire Hathaway is primarily an
insurance company. It does own other non-insurance businesses including See's
Candies, Buffalo News, Nebraska Furniture Mart, Kirby vacuum cleaners, World
Book Encyclopedia, as well as the impressive Scott Fetzer Manufacturing Group.
These businesses contributed, in 1994, approximately $215 million in cash
profits for Berkshire. But the real economic story to Berkshire, and the source
of its greatest earnings leverage, lies with its insurance businesses.
Berkshire's property casualty business is conducted by 14 separate insurance
subsidiaries, including the most recent acquisition of GEICO, one of the most
profitable and best run property casualty companies in the country. Berkshire
also provides reinsurance to other property casualty insurers and is quickly
becoming the largest provider of supercatastrophe insurance. Supercatastrophes
are events like earthquakes, hurricanes, floods, and windstorms.
Berkshire Hathaway, a AAA rated company, and its insurance group maintains
capital strength at levels unheard of in the insurance industry. For example,
the insurance industry premium-to-surplus average is customarily over 100%. In
sharp contrast, Berkshire's net premiums written in 1994 were only 7.5% of its
capital surplus. As such, Berkshire writes only a small fraction of the
insurance it could potentially issue.
The reason why Berkshire does not aggressively write insurance is that the
market price for most policies is inadequate. Although some managers might be
unable to resist the temptation to write more insurance and thus report short-
term earnings gains, Mr. Buffett will not allow Berkshire to take on risk for
which it does not receive, in return, adequate compensation. Mr. Buffett has
stated on several occasions that Berkshire stands ready to write significantly
more insurance but only at prices which make sense. If and when that time
comes, Berkshire's earnings will be impressive. Until then, we own a
financially superior insurance company managed by one of the most rational
individuals in the marketplace at a price we consider reasonable.
5
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FEDERAL NATIONAL MORTGAGE ASSOCIATION
FEDERAL HOME LOAN MORTGAGE CORPORATION
Both Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac") continue to enjoy the economic
benefits afforded a duopoloy that operates in a fast-growing market with high
barriers to entry.
Fannie Mae and Freddie Mac earn profits in basically the same manner. Both
companies purchase mortgages from lenders then pool these mortgages into
securities ("mortgage backed securities") and finally sell the securitized
mortgages in the marketplace. For this service both Fannie Mae and Freddie Mac
earn a fee. Occasionally Fannie Mae and Freddie Mac retain some mortgages for
their own portfolio and earn income from the difference in borrowing and
lending rates. In addition, both companies are able to generate revenue by
investing mortgage payments in the short-term money market before passing
through the income to mortgage backed security holders.
Fannie Mae and Freddie Mac have distinct economic advantages over other
competitors including the ability to borrow money at below market rates. This
advantage, along with their below average operating costs, helps both companies
grow their earnings at a 15% average annual rate and earn better than 20%
return on equity.
JOHNSON & JOHNSON
With the cost of healthcare skyrocketing, both governmental and private
agencies have actively sought ways to limit price increases within this
industry. So how does a 110 year-old healthcare company, with revenues
approaching $20 billion, compete in this changed environment? By increasing
unit volume growth worldwide and actively introducing new products. The
successful implementation of this strategy, over the past five years, has
helped Johnson & Johnson ("J&J") increase earnings at a 17% compounded rate and
earn better than 32% return on equity. Not bad considering that J&J only
carries 20% debt to equity.
Ralph Larsen, Chairman of J&J, views the company not as one large monolith
but as a composite of 160 different small companies each challenged to grow
their markets and introduce new products. Indeed, new products, defined as
products introduced within the last five years, now account for 36% of the
company's sales.
J&J has also earned the reputation as being a well managed company that
continually seeks to reduce costs and eliminate unnecessary expenses. This is a
trait we greatly admire. As a testament in 1989, J&J employed 82,000 workers
and produced $9 billion in sales. Today, the company employs roughly the same
number of individuals and yet generates over twice the dollar amount of sales.
6
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HASBRO INCORPORATED
Hasbro is one of the country's largest toy manufacturers; Mattel is the
other. For a short-period this past January it appeared that both companies
were destined to merge and become the world's largest toy company. A
Mattel/Hasbro combination would have created a company with $6 billion in
worldwide sales, a prospect we admittedly found intriguing.
It is becoming increasing clear that for a company to compete on a global
scale it needs size. By that we mean any company which seeks to compete for
customers worldwide will require significant capital to afford necessary
investments. A Mattel/Hasbro combination, in our judgement, stands a better
chance of competing for markets worldwide than either company can individually.
To say we were confused by events that unfolded following Mattel's announced
merger plans for Hasbro is an understatement. Hasbro's reaction to Mattel's
intention was cool to say the least. So much that the company's unwillingness
to entertain a merger forced Mattel to withdraw its offer.
However, as reported by the press, and as yet not disputed by either
company, both Hasbro and Mattel held detailed talks for some period before the
merger announcement. These talks included negotiations that resulted in an
increase in Mattel's offer that Hasbro shareholders would receive 1.67 shares
of Mattel stock up from the original offer of 1.5 shares of Mattel stock. This
alone indicates to us that a merger was not only seriously contemplated but
appreciated by both companies.
On the day the proposed merger was announced, Hasbro's share price gained
$15.87 per share to $46.50. This 50% gain in price was still well below the 73%
premium that Mattel's offer reflected. Since the termination of the merger
talks, Hasbro's share price has declined to $36. In the interim, I am sure some
traders have sold Hasbro shares and it appears that more than a few speculators
have since purchased those shares.
However, as owners we have an obligation to play our hand differently. Since
we are not traders, and we are certainly not speculators, our challenge is to
first gather additional information about this proposed merger and then
ultimately question management about the event.
We became owners of Hasbro because we were attracted to the company's brand
products, its economic advantages, and because Hasbro's management was, in our
opinion, genuinely concerned about shareholder value. As owners, we will of
course attend the company's annual meeting for shareholders this spring. At the
meeting, I am sure management will have adequate time to explain to its owners
the rationale for its decision.
7
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INTERNATIONAL SPEEDWAY CORPORATION
International Speedway produces and conducts stock car, sports car,
motorcycle, and go-kart racing events for spectators at Daytona International
Speedway, Talladega Superspeedway, Darlington Raceway, Tucson Raceway Park and
Watkins Glen International racetrack. The company derives its revenues from
ticket sales, parking fees, program sales and advertising, concession sales,
promotional advertising, and the sale of television and radio broadcast rights.
The company conducts car races sanctioned by the National Association for
Stock Car Auto Racing (NASCAR) as well as events sanctioned by the
International Motor Sports Association (IMSA), the American Motorcycle
Association (AMA), the Automobile Racing Club of America (ARCA), and the Sports
Car Club of America (SCCA).
Auto racing is one of our country's fastest growing sports. Stock car races,
in particular the popular races sanctioned by NASCAR, are witnessing a boom in
fan attendance. Since 1990, attendance at NASCAR's Winston Cup racing series
has grown 47% far outdistancing the attendance gains for Major League Baseball,
National Football, National Basketball, PPG Indy Car races, and National
Hockey. As an example, the 1996 Daytona 500 was seen by over 150,000 spectators
and shown live on CBS television.
The surge in popularity of stock car racing has not been lost on advertisers
nor network broadcasters. Fortune 500 companies are scrambling to sponsor
racing teams and to become the principal sponsor of individual races. Networks
such as CBS, ABC, ESPN, Turner Broadcasting, and The Nashville Network compete
vigorously for the opportunity to broadcast a race knowing that companies are
just as anxious to advertise their products and services during the race.
As the operator and promoter of several of NASCAR's most popular races,
International Speedway is enjoying the benefits that accrue to a franchise.
Cash earnings for the company have grown better than 20% annually over the last
several years with return on equity averaging 21% while employing little or no
debt.
Despite "mouth-watering" economics, it is important to understand that
International Speedway is not without its risks. Bad weather can and has caused
races to be canceled. Although ticket prices have generally been rising over
the years there is a price point were returns diminish. Advertisers have been
generous but this too can change. Lastly, as investors we must remember that to
be successful requires us to purchase businesses at reasonable prices. A too
high purchase price can turn even the best business into an ordinary
investment.
8
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NEWSPAPERS
Focus Trust has made significant investments in four different newspaper
companies. The Fund owns shares in Gannett Company, The Washington Post
Company, Lee Enterprises, and the Daily Journal Corporation. As a group,
Newspapers account for 18% of the Fund's assets, the single largest industry
bet made by your portfolio manager.
Over the past two years, newspapers have underperformed, on a price basis,
the average return of the stock market. Because this industry group is
weathering a secular change in its economics, Wall Street has steered clear of
the group thereby forcing the prices of several high quality companies to
levels we find attractive. However, a low price in itself is not enough to
warrant a purchase. Before we make a purchase, we must be convinced that a
company can generate above-average economic results and stand a chance of
maintaining those results going forward.
Much has been written regarding the changing landscape for newspaper
companies. Generally speaking, subscription growth rates are flat or declining,
advertisers are finding cost effective alternatives for reaching their
customers (cable television and direct mail), newsprint prices have escalated
forcing profit margins downward, and the popularity of the Internet suggests
that newspapers are quickly becoming dinosaurs.
We acknowledge all of the above. However, as owners of newspapers, our
economic returns have been greater than the gloomy predictions surrounding this
industry. In several cases our companies are generating return on equity at
rates far greater than the market's average. The average annual return on
equity for Gannett has been 23%, for The Washington Post Company 15%, for Lee
Enterprises 21%, and for the Daily Journal 24%. This industry group has and
continues to generate cash earnings for its owners thereby allowing companies
to repurchase their own shares and/or make strategic acquisitions.
Each of our newspaper companies is led by individuals we respect and admire.
Jack Curley, Chairman of Gannett, Don Graham, Chairman of The Washington Post
Company, Richard Gottlieb, Chairman of Lee Enterprises, and Charlie Munger,
Chairman of Daily Journal Corporation are all top flight managers who are
acutely aware of their responsibility to shareholders. Each has a demonstrated
track record of rational thought, candid behavior, and the ability to think
independently.
We recognize the challenges that lay ahead for newspaper companies. But we
are quick to remind shareholders that this group has faced several challenges
throughout its history including the advent of radio and television. Lastly, of
all the industry groups we follow at Focus Trust, the margin of safety is most
aptly demonstrated in our newspaper holdings.
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WILLIAM WRIGLEY, JR. COMPANY
In our 1995 semi-annual report to shareholders we discussed our attraction
to the William Wrigley, Jr. Company ("Wrigley"). Wrigley is the world's largest
manufacturer and seller of chewing gum with name brand products that include
Doublemint, Spearmint, Juicy Fruit, Big Red, WinterFresh, and Freedent.
The gum business is a very simple and understandable business. Wrigley has
been a consistent performer having manufactured gum since 1893 and its long-
term prospects going forward appear favorable. We have also confessed our
admiration for William Wrigley, President and Chief Executive of the company.
Mr. Wrigley manages the company with extreme care and operates this fast
growing internationally recognized company by maintaining high profit margins
and generating average annual returns on equity in excess of 30%. All this has
been accomplished without the use of long-term debt.
During the 1980s, consumer goods companies, notably beverage, food and
tobacco companies, enjoyed a spectacular period of profitability by
consistently raising prices on their products. Yet despite this lucrative
period, Wrigley, in 1987, decided to chart a different path. Instead of using
annual price increases to increase profit margins, Wrigley decided to enact a
strategy of holding prices firm and rededicate itself to growing unit volume
worldwide.
This strategic corporate decision has ultimately worked in Wrigley's favor.
For example, in the late 1980s, a pack of gum cost 80% of the price of a candy
bar. Today, the consumer receives the same pack of gum for half of what it
costs to purchase that same candy bar. When consumers finally balked at price
increases in the early 1990s, Wrigley was already far ahead of the industry
implementing a strategy of growing units.
Marketing a consumer product that appeals to billions of customers and is
also affordable to customers is an exciting proposition. Still the business of
selling gum in international markets is not without its periodic setbacks.
Currency devaluations, high import duties, and the significant capital
expenditures that are required to manufacture gum overseas can penalize near
term earnings. This economic penalty is more profound when you consider that
Wrigley does not raise its prices to offset temporary declines in short-term
earnings.
We recognize the reality of Wrigley's international business strategy and
are not the least concerned when the company's earnings fall below Wall
Street's forecasts. As owners we believe short-term earnings games are
irrelevant particularly when the stakes include penetrating untapped markets
and earning significant profits that come from ultimately dominating these same
markets.
10
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THE WALT DISNEY COMPANY & CAPITAL CITIES/ABC
On July 31, 1995, The Walt Disney Company ("Disney") offered to purchase
Capital Cities/ABC ("Cap Cities") for $19 billion. The terms of the acquisition
call for Cap Cities shareholders to receive for each of their shares $65 in
cash and one share of Disney stock. At present, the deal is worth approximately
$127 a share for Cap Cities shareholders.
Cap Cities was one of the first stocks purchased by Focus Trust (average
price $97 per share). Although we owned the stock for only a short period, I
have admired the company and Tom Murphy, Chairman of Capital Cities/ABC, for
some time. While researching and writing THE WARREN BUFFETT WAY I had the
opportunity to study Cap Cities in depth. What I learned made me not only
appreciate the company but what Tom Murphy has accomplished over the last forty
years.
Cap Cities' initial public offering occurred in 1957 at a price of $5.75.
Thirty-eight years later, that single share, adjusted for stock splits, is 80
shares worth over $10,000. That is better than a 22% average annual rate of
return.
In turning over the keys to Michael Eisner, Chairman of The Walt Disney
Company, Tom Murphy has handed over the number one television network, ABC;
eight television and twenty-one radio stations; seven daily and seventy-one
weekly newspapers; sixty-one specialty magazines; 80 percent ownership of ESPN,
America's largest cable network; and stakes in two other cable networks, A&E
and Lifetime. In addition, Cap Cities has formed alliances and purchased equity
interests in several international television and film production companies as
well as international television broadcasters.
Tom Murphy is also leaving something else for Michael Eisner. Something else
that perhaps says more about the management skills and rational thinking of Tom
Murphy than all of Cap Cities' combined acquisitions. Tom Murphy has left $400
million, net of all debt, in the company safe. This alone is an admirable feat
in an industry that is littered with companies that, by overpaying for
acquisitions, have hobbled themselves with enormous debt. It is all the more
remarkable when you consider Tom Murphy started in 1954, with one television
station and one AM radio station in Albany, New York.
If it sounds like we are a bit sentimental about the acquisition of Cap
Cities it is because we are. Cap Cities and Tom Murphy were both outstanding
role models for Focus Trust. We often found ourselves measuring other managers
and other companies against Cap Cities' accomplishments. These comparisons
inevitably eliminated several potential purchases; decisions which, in
hindsight, we do not regret.
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So how do we proceed? Tom Murphy has agreed to join the Board of Directors
of The Walt Disney Company. He has also publicly stated it is his intention to
convert as many of his personal shares into Disney stock as possible. At Focus
Trust, we too have the same option. The terms of the acquisition allow us to
receive at least one share of Disney plus $65 per share of cash. Our two other
options include the possibility of receiving, based on availability, all cash
or all Disney stock.
If we elect to receive all cash, our monetary gain will be taxable for those
shareholders with taxable accounts. If we elect to receive all stock, our
Disney shares will be adjusted to reflect our cost basis in Cap Cities and
hence will not be a taxable event for shareholders. Plainly speaking, we will
receive Disney stock and owe no tax.
We pay close attention to both realized and unrealized capital gains taxes
knowing its effect on shareholders with taxable accounts. But our decision on
whether to buy, sell, or merge will always be based on the economic advantages
that accrue to Focus Trust. If it makes sense from a business standpoint, we
will likely proceed.
We have examined the business combination of Disney and Cap Cities. We have
also examined the pro forma economic benefits that will likely accrue to us as
shareholders of this combined company. It is our decision to proceed with the
merger, and like Tom Murphy, we intend to request as many shares of Disney as
possible in exchange for our shares of Cap Cities. For those of you who have
already skipped to the Schedule of Investments on page 16, I am sure this
announcement is no surprise to you.
Focus Trust, since the announced merger, has acquired shares of Disney.
Whether we receive all Disney stock for our shares of Cap Cities or the minimum
of one share and the balance in cash, The Walt Disney Company will become a top
five holding in our Fund.
To become a top five holding in the Fund, a company has to clearly
demonstrate many if not all of the tenets we look for in an outstanding
business with favorable long-term prospects. The company must have strong
financials and the ability to steadily improve its economic position. The
company must also be run by individuals whose passion for managing the company
can only lead to improving shareholder returns and most importantly the company
must sell at a price below its value.
In each examination, Disney comes up a winner. There will no doubt be
occasions over the next several years whereby Wall Street will find reason to
criticize or praise the company. These distractions will not bother us in the
least. We are confident that going into the next century, we own the best media
and entertainment company in the world.
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PORTFOLIO OF BUSINESSES
The Focus Trust is an unusual mutual fund. Out of the thousands of equity
funds in the country, you will be hard pressed to find many other funds that
compare easily to the Focus Trust. In fact, there are very few mutual funds
that own less than twenty stocks in their portfolio and probably no fund
experienced, as we did, a 0% turnover ratio last year. For whatever reason, the
idea of a concentrated buy-and-hold investment strategy has not become a
popular tactic within the mutual fund industry.
However, Focus investing is not without its heros. Warren Buffett, Phil
Fisher, Bob Kirby, Charlie Munger, Bill Ruane, and Lou Simpson have all applied
a concentrated buy-and-hold strategy to common stock investing and all have
achieved spectacular results. If we were to draw-out the commonality that
unites these outstanding investors it would be their unique attitude towards
portfolio management.
Focus investors understand that optimal investment results are achieved not
by placing bets in every industry and owning hundreds of stocks but rather by
owning just a few great businesses. Focus investors further understand that the
probability of sustaining these optimal returns diminishes over time to the
degree one attempts to actively trade a portfolio.
If you get the sense that Focus investors think about portfolio management
differently than most, you're very right. And if we are going to be successful,
we too have to think about managing our portfolio differently.
Our stock selection process is not difficult to comprehend. In fact, many
have pointed out that the investment tenets outlined in THE WARREN BUFFETT WAY
make perfect sense. The difficulty of focus investing, we have learned, comes
not from how we choose stocks but how we decide to put them together in a
portfolio and then how we decide to manage the portfolio going forward.
Warren Buffett explains so well that to be successful, an investor must
ultimately think like a business person. That is, the strategy an individual
uses in business applies equally to the investor. Now take a moment and think
about that statement. Think about the companies we own; not as an investor who
thinks about stocks that can be traded in a moments notice but as a business
person who is generating cash returns at a rate far greater than what can be
achieved by investing in risk-free securities.
Imagine if you were the business owner of Wrigley or Johnson & Johnson or
Disney or any other company owned by the Focus Trust. As that business owner
you are aware that your company is generating above-average cash returns and
you believe that your company's long-term prospects remain excellent. Now if
someone came along and offered to buy your ownership in Wrigley at a price
slightly favorable to the original price you paid, would you jump at the
chance? Or would you pass knowing that your net worth will likely increase over
time as Wrigley continues to provide above-average returns?
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If you heard that gold, oil, or technology companies were poised to go up in
price would you be quick to sell your ownership in Disney and buy these
companies? Would you be willing to give up ownership in Disney which has a high
probability of generating above-average economic returns over the next several
years just for the chance to profit from a quick price bounce in business with
economic returns which may generate but a fraction of Disney's economic
returns?
The answers to these questions come easily, almost naturally to the
individual who thinks like a business person. However, the individual who still
thinks in terms of trading stocks has to stop and ponder. What we have learned
is that decisions made from a business perspective will ultimately dictate a
different portfolio than one designed by a trader and because we consider
ourselves business owners not traders, our portfolio will be different than
most.
Focus Trust owns a group of outstanding businesses with economic returns far
greater that the returns generated by most companies. Collectively these
businesses have helped us establish an average economic benchmark or a hurdle
rate for our portfolio. For a business to be added to our portfolio it must
possess economics that meet our benchmark or preferably exceed it. This is the
only way to add long-term value to our portfolio.
It would be dilutive to our economic return to simply add businesses that
are able to outperform money markets but unable to raise our economic bar. One
of the lessons we learned from Tom Murphy is that we should seek combinations
within our portfolio of businesses "that make the train run faster and better
(and not) just be a longer train". This approach to portfolio management
necessarily limits the list of qualified applicants. Knowing the economic
strength of our businesses you now begin to appreciate the challenges of
reducing our cash weighting.
We are convinced that Focus investing leads to superior long-term returns.
However, studies have proven that although limiting the number of stocks in a
portfolio increases the probability of outperforming the broad index, it will
also increase the probability of underperforming the index. But there is a
major difference between underperforming an index on a price basis and
underperforming an index on economic terms.
As long as we concentrate our purchases on superior businesses with strong
economics run by managers who think rationally, we are confident the price of
our companies will, over time, march ahead of the major indices. We also know
there will be occasions when our portfolio will, in the short run, underperform
the major indices. This is inevitable.
The best mutual fund in the country is, in our opinion, the Sequoia Fund
managed by Bill Ruane, Rick Cunniff, and Bob Goldfarb. The Sequoia Fund has had
an outstanding long-term track record and is managed in the same concentrated
buy-and-hold strategy as the Focus Trust. You might be interested to know that
the Sequoia Fund has generated long-term returns far better than the S&P 500
Index while underperforming this same index five out of the last twelve years.
Each time the Sequoia Fund lagged the stock market, the bright people at Ruane
Cunniff & Company did nothing to alter their investment strategy. At Focus
Trust we promise to do no less. And if twelve years from now, we can look back
and compare ourselves favorably to the Sequoia Fund, I know our results will be
outstanding and our job for you will be considered a success.
14
<PAGE>
CONCLUSION
Organizing and launching a mutual fund is a significant challenge. Over the
past year, there were countless things we learned for the first time. But our
relative inexperience was more than compensated by the talents of many hard
working individuals with whom we have had the good fortune to surround
ourselves.
Fund/Plan Services, under the leadership of Ken Kempf, has done a great job for
Focus Trust. Each individual at Fund/Plan Services has always been eager to
help us and without question I know Ken and his crew are rooting for our
success. As shareholders, we owe them a great deal of thanks.
Lloyd, Leith & Sawin is, by most comparisons, a small investment advisory firm.
However, our history dates back over twenty-five years and one of the lessons
we have learned is that a small partnership has certain advantages over larger
organizations. Even so, launching Focus Trust has required much of our firm's
time and it is safe to say the Fund would have never gotten off the ground
without the help of my two partners, John Lloyd and Virginia Leith. Both John
and Virginia serve as officers for Focus Trust and generously give their time
to the Fund.
What Lloyd, Leith & Sawin lacks in personnel is more than made up by the
contribution of our Board of Directors. At some organizations, a board is
merely a figure which rarely has to work. I knew that for Focus Trust to be
successful we would need not only smart individuals but individuals who would
never hesitate to give their time and, just as important, would be willing to
work hard for us. That said, I am deeply grateful for the advice and generous
help given by our board including Joan Lamm-Tennant, Professor of Finance at
Villanova University and Allan Mostoff, a Partner at Dechert Price & Rhoads. We
have also benefitted from the hard work provided by Pat Turley, Allan's
associate at Dechert.
Lastly, I want to thank Bob Coleman, at Combined Capital Management. On the day
Bob agreed to join the Board, I knew Focus Trust was set to succeed. Bob is the
kind of individual who brings out the best in people. I can honestly admit that
I am a better portfolio manager and analyst because of Bob and for that I will
always be grateful.
We end the year with $5 million in assets and 625 shareholders. Our challenge
going forward is to generate good performance and add assets. As the Fund grows
in size, our expense ratio should decline thus increasing the total return for
our shareholders. If you know investors who think similarly to us, send them
our way. But first ask them to read our Investment Adviser-Shareholder
Principles on page 24. If these principles make sense to them, then they are
the kind of shareholders we seek to attract.
As always we appreciate your support. If you have any questions about our Fund
never hesitate to contact us at 1-800-665-9644.
Sincerely,
/s/ Robert G. Hagstrom, Jr.
Robert G. Hagstrom, Jr.
Portfolio Manager
15
<PAGE>
FOCUS TRUST, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
COMMON STOCKS (79.40%)
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 1)
------ ---------- ----------
<C> <S> <C> <C>
AMUSEMENT & RECREATION (15.13%)
2,120 International Speedway Corp. ................ $ 520,040 $ 500,320
4,500 The Walt Disney Company...................... 263,637 265,500
---------- ----------
783,677 765,820
---------- ----------
BROADCASTING (4.39%)
1,800 Capital Cities/ABC, Inc. .................... 175,703 222,075
---------- ----------
GAMES/TOYS (4.90%)
8,000 Hasbro, Inc. ................................ 251,338 248,000
---------- ----------
INSURANCE (9.52%)
15 Berkshire Hathaway, Inc. .................... 415,055 481,575
---------- ----------
NEWSPAPER (18.37%)
3,290 Daily Journal Corp........................... 124,950 125,020
7,650 Gannett Company, Inc......................... 415,111 469,518
6,000 Lee Enterprises, Inc. ....................... 127,775 138,000
700 Washington Post Company, Class B............. 186,560 197,400
---------- ----------
854,396 929,938
---------- ----------
PHARMACEUTICALS (4.57%)
2,700 Johnson & Johnson............................ 187,715 231,188
---------- ----------
SECURITY BROKER (8.17%)
10,000 American Express Company..................... 375,682 413,750
---------- ----------
SERVICES (9.16%)
2,800 Federal Home Loan Mortgage Corp. ............ 184,358 233,800
1,850 Federal National Mortgage Association........ 175,484 229,631
---------- ----------
359,842 463,431
---------- ----------
SUGAR PRODUCTS (5.19%)
5,000 Wrigley (WM) Jr. Company..................... 226,055 262,500
---------- ----------
TOTAL COMMON STOCKS.......................... 3,629,463 4,018,277
---------- ----------
U.S. GOVERNMENT AGENCY OBLIGATIONS (17.66%)
<CAPTION>
PAR AMORTIZED
AMOUNT COST
------ ----------
<C> <S> <C> <C>
$100,000 Federal National Mortgage Association disc.
note, 5.530%, due 01/17/96.................. 99,770 99,770
200,000 Federal Mortgage Corporation disc. note,
5.520%, due 02/02/96........................ 199,049 199,049
200,000 Federal National Mortgage Association disc.
note, 5.450%, due 02/12/96.................. 198,759 198,759
200,000 Federal National Mortgage Association disc.
note, 5.500%, due 02/28/96.................. 198,258 198,258
200,000 Federal National Mortgage Association disc.
note, 5.400%, due 03/12/96.................. 197,900 197,813
---------- ----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS..... 893,736 893,649
---------- ----------
TOTAL INVESTMENTS (COST $4,523,199)
#(97.06%)................................... 4,911,926
OTHER ASSETS IN EXCESS OF LIABILITIES
(2.94%)..................................... 149,063
----------
NET ASSETS (100.00%)......................... $5,060,989
==========
</TABLE>
# Also represents cost for Federal income tax purposes
See Notes to Financial Statements.
16
<PAGE>
FOCUS TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $4,523,199) (Note 1).... $ 4,911,926
Cash.............................................................. 372,387
Receivable for capital stock sold................................. 4,400
Dividends and interest receivable................................. 4,678
Deferred organization costs (Note 1).............................. 55,810
Reimbursement due from Adviser.................................... 32,220
Other assets...................................................... 9,739
-----------
Total assets.................................................... 5,391,160
-----------
LIABILITIES:
Payable for investment securities purchased....................... 249,000
Accrued expenses.................................................. 15,622
Payable to Adviser................................................ 65,549
-----------
Total liabilities............................................... 330,171
-----------
NET ASSETS:
Applicable to 453,220 shares of capital stock outstanding
(Note 1)......................................................... $ 5,060,989
===========
NET ASSETS CONSIST OF:
Paid-in capital................................................... $ 4,672,262
Net unrealized appreciation of investments........................ 388,727
-----------
Net assets...................................................... $ 5,060,989
===========
NET ASSET VALUE AND OFFERING PRICE PER SHARE:
($5,060,989/453,220 shares)....................................... $ 11.17
===========
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
FOCUS TRUST, INC.
STATEMENT OF OPERATIONS
PERIOD ENDED DECEMBER 31, 1995*
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends......................................................... $ 20,533
Interest.......................................................... 47,809
----------
Total income..................................................... 68,342
----------
EXPENSES:
Investment advisory fees (Note 2)................................. 15,371
Administration fees............................................... 46,982
Registration fees................................................. 24,761
Transfer agent fees............................................... 27,772
Accounting fees................................................... 17,000
Amortization of organization costs (Note 1)....................... 9,190
Audit fees........................................................ 4,000
Legal fees........................................................ 8,588
Directors fees.................................................... 7,800
Custodian fees.................................................... 4,220
Printing expense.................................................. 6,804
Other expenses.................................................... 848
----------
Total expenses................................................... 173,336
Less expenses reimbursed by Adviser and waived by Administrator
(Note 2)......................................................... (131,196)
----------
Net expenses..................................................... 42,140
----------
NET INVESTMENT INCOME.............................................. 26,202
----------
UNREALIZED GAIN ON INVESTMENTS:
Net change in unrealized appreciation on investments.............. 388,727
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $ 414,929
==========
</TABLE>
* The Fund commenced investment operations on April 17, 1995.
See Notes to Financial Statements.
18
<PAGE>
FOCUS TRUST, INC.
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED DECEMBER 31, 1995*
<TABLE>
<S> <C>
OPERATIONS:
Net investment income............................................. $ 26,202
Net change in unrealized appreciation on investments.............. 388,727
-----------
Net increase in net assets from operations....................... 414,929
-----------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income............................................. (26,252)
-----------
CAPITAL STOCK TRANSACTIONS (NET)--NOTE 1........................... 4,572,312
-----------
Total increase in net assets...................................... 4,960,989
-----------
NET ASSETS:
Beginning of period............................................... 100,000
-----------
End of period..................................................... $ 5,060,989
===========
</TABLE>
* The Fund commenced investment operations on April 17, 1995.
See Notes to Financial Statements.
19
<PAGE>
FOCUS TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
Focus Trust, Inc. (the "Fund") is a no-load, non-diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended. The Fund was incorporated under the laws of Maryland on
January 27, 1995 and commenced operations on April 17, 1995. The following is
a summary of significant accounting policies consistently followed by the Fund
in the preparation of its financial statements. The preparation of financial
statements includes the use of management estimates.
A. SECURITY VALUATION: The Fund calculates the net asset value and
completes orders to purchase, exchange or repurchase Fund shares on each
business day as of 4:00 p.m. Eastern time, with the exception of those days
on which the New York Stock Exchange is closed.
The Fund's securities are valued based on market quotations or, when no
market quotations are available, at fair value as determined in good faith
by or under direction of the Board of Directors. Securities listed on any
national securities exchange are valued at their last sale price on the
exchange where the securities are principally traded or, if there has been
no sale on that date, at the mean between the last reported bid and asked
prices. Securities traded over-the-counter are priced at the mean of the
last bid and asked price. Short-term investments having a maturity of 60
days or less are valued at amortized cost, which the Board of Directors
believes represents fair value.
B. FEDERAL INCOME TAXES: It is the policy of the Fund to comply with all
requirements of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders. The Fund has met the requirements of
the Code applicable to regulated investment companies for the period ended
December 31, 1995. Therefore, no federal income or excise tax provision is
required.
C. DETERMINATION OF GAINS OR LOSSES ON SALES OF SECURITIES: Gains or losses
on the sale of securities are determined on the identified cost basis.
D. ORGANIZATION COSTS: Costs incurred by the Fund in connection with their
organization and initial registration and public offering of shares have
been deferred by the Fund. Organization costs are being amortized on a
straight-line basis for a five-year period beginning at the commencement of
operations of the Fund. The principals of Lloyd, Leith & Sawin, Inc., (the
"Investment Adviser") have agreed that in the event it redeems any of its
shares during such period, it will reimburse the Fund for any unamortized
organization costs in the same proportion as the number of shares to be
redeemed bears to the number of shares that were initially purchased by the
Investment Adviser and remain outstanding at the time of redemption.
E. DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of the Fund to
distribute net investment income in December and capital gains, if any,
annually. Distributions to shareholders are recorded on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles.
F. OTHER: Securities transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the
accrual basis and dividend income on the ex-dividend date.
G. CAPITAL SHARE TRANSACTIONS: The Fund is authorized to issue one hundred
million shares of capital stock with a par value of $0.001 per share.
Transactions in shares of capital stock from the commencement of investment
operations through December 31, 1995 were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
------- ----------
<S> <C> <C>
Shares sold........................................... 454,998 $4,696,237
Shares issued through
reinvestment of dividends............................ 2,249 25,148
Shares redeemed *..................................... (14,027) (149,073)
------- ----------
Net Increase.......................................... 443,220 $4,572,312
======= ==========
</TABLE>
* Redemptions are subject to a 1.00% fee if redeemed within two years of
purchase. Thus, the redemption price may differ from the net asset value per
share.
20
<PAGE>
NOTE 2 -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
The Fund retains Lloyd, Leith & Sawin, Inc., as its Investment Adviser. The
Investment Adviser provides the Fund with investment advice, administrative
services and facilities. As compensation for these services, the Fund pays the
Investment Adviser a monthly fee based on the Fund's average daily net assets.
For the period April 17, 1995 (commencement of operations) through August 31,
1995, the Investment Adviser had voluntarily agreed to reduce its fees and
reimburse the Fund to the extent total annualized expenses exceed 1.75% of the
Fund's average daily net assets. Effective September 1, 1995 the Investment
Adviser has agreed to reduce its fees and reimburse the Fund to the extent
total annualized expenses exceed 2.00% of the Fund's average daily net assets.
Certain officers of the Fund are also officers and directors of the Investment
Adviser. All officers serve without direct compensation from the Fund during
the period. There were no directors' fees paid to affiliated directors of the
Fund. Robert G. Hagstrom, Jr., Chairman, is considered an affiliated director
of the Fund, but receives no compensation. Investment advisory fees, for the
period ended December 31, 1995, are as follows:
<TABLE>
<CAPTION>
EXPENSES
ADVISORY ADVISORY REIMBURSED
FEE FEE FROM ADVISER
-------- -------- ------------
<S> <C> <C>
0.70% $15,371 $128,696
</TABLE>
Other transactions with affiliates, for the period ended December 31, 1995,
are as follows:
<TABLE>
<CAPTION>
EXPENSES
WAIVED
FEE BY ADMINISTRATOR
------- ----------------
<S> <C> <C>
Administration..................................... $46,982 $1,500
Transfer agent..................................... 27,772 500
Accounting......................................... 17,000 500
</TABLE>
NOTE 3 -- INVESTMENT TRANSACTIONS:
Investment transactions for the Fund for the period ended December 31, 1995,
excluding temporary short-term investments, are as follows:
<TABLE>
<CAPTION>
PROCEEDS
PURCHASES FROM SALES
--------- ----------
<S> <C>
$3,629,463 $ 0
</TABLE>
NOTE 4 -- UNREALIZED APPRECIATION AND DEPRECIATION:
At December 31, 1995, the net unrealized appreciation of securities for
Federal income tax purposes consisted of:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Gross unrealized appreciation................................. $411,872
Gross unrealized depreciation................................. (23,145)
--------
Net unrealized appreciation................................... $388,727
========
</TABLE>
21
<PAGE>
FOCUS TRUST, INC.
FINANCIAL HIGHLIGHTS
FOR THE PERIOD ENDED DECEMBER 31, 1995*
The table below sets forth financial data for one share of capital stock
outstanding throughout the period presented.
<TABLE>
<S> <C>
Net Asset Value, beginning of period................................. $ 10.00
---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................... 0.06
Net realized and unrealized gain on investments..................... 1.17
---------
Total from investment operations.................................. 1.23
Dividend from net investment income................................. (0.06)
---------
Net Asset Value, end of period....................................... $ 11.17
=========
TOTAL RETURN (2)..................................................... 12.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)................................ $ 5,061
Ratio of expenses to average net assets
before reimbursement of expenses by Adviser (1).................... 7.89%
Ratio of expenses to average net assets
after reimbursement of expenses by Adviser (1)..................... 1.92%
Ratio of net investment income to average net assets
before reimbursement of expenses by Adviser (1).................... (4.78%)
Ratio of net investment income to average net assets
after reimbursement of expenses by Adviser (1)..................... 1.19%
Portfolio turnover (2).............................................. 0.00%
</TABLE>
(1) Annualized
(2) Not Annualized
* The Fund commenced investment operations on April 17, 1995.
See Notes to Financial Statements.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Boards of Directors of
Focus Trust, Inc.
We have audited the accompanying statement of assets and liabilities of Focus
Trust, Inc., including the schedule of investments as of December 31, 1995 and
the related statements of operations and changes in net assets and the
financial highlights for the period from April 17, 1995 (commencement of
operations) to December 31, 1995. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit 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, 1995, by correspondence with the custodian and 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 audit provides 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 Focus
Trust, Inc. as of December 31, 1995 and the results of its operations, the
changes in its net assets and its financial highlights for the period from
April 17, 1995 (commencement of operations) to December 31, 1995, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA
January 30, 1996
23
<PAGE>
INVESTMENT ADVISER--SHAREHOLDER PRINCIPLES
You should read carefully the following Investment Adviser--Shareholder
Principles before making an investment in the Fund.
. Although the Fund is organized as a mutual fund, the principals of Lloyd,
Leith & Sawin, Inc. (the "Adviser") take the view that it is a managing
partner with you, the shareholders of this Fund. This commitment is
reinforced by having the principals of the Adviser also invest a portion of
its assets in the Fund and thus become co-owners of the Fund.
. As managing partners, the Adviser will attempt to locate and invest in a
few outstanding businesses which it believes possess favorable long-term
prospects with superb underlying economics run by trustworthy and able
management and finally, are available at sensible prices.
. Once invested in a particular security, the Adviser looks forward to
becoming long-term holders of these outstanding businesses. The Adviser is
not, nor will they ever be, interested in constantly buying and selling
mediocre businesses where economic gain depends more on profiting from
short-term price changes rather than the economic gain afforded by
companies that are able to grow their long-term intrinsic value.
. Because long-term maximum growth of intrinsic value, not profits from
short-term price changes, is the Adviser's prime objective, the Adviser
expects that the Fund may, from time to time, underperform various stock
market indices. This fact does not cause the Adviser any alarm. However,
the Adviser would be disappointed if the gain in the intrinsic value of the
companies selected for investment by the Fund, and hence the long-term rise
in their respective stock prices, did not advance at a rate greater than
the average large American company.
. It would be unfair to ask you, the shareholder, to ignore short-term price
movements as a way to measure investment results unless the Adviser offers
an alternative means by which to judge the Fund's progress. As managing
partner, the Adviser is continually focused on, and will communicate to
you, the economic progress of the companies selected for investment by the
Fund. The Adviser believes that if a company is advancing economically at a
satisfactory rate, over time, the price of the company will correlate to
this change in value.
. The Adviser promises to be honest and forthcoming with you, our co-
shareholders. The Adviser promises to check periodic successes with an
equally hard look at any investment failures. The Adviser believes that
this public self-examination will be a benefit to shareholders and to the
Adviser over the long term. The Adviser's goal in reporting is to be as
forthright with you as it would like if the roles were reversed.
. STOP!!! If, after reading these principles, you have any reservation about
investing in the Fund, please don't. We would much prefer that you not
invest with us if the slightest short-term disruption in the markets or
individual stock prices will cause you to sell your shares. The Adviser
believes that long-term investment results should approximate the value of
the underlying businesses and not be affected by the excessive trading of
any of our co-shareholders.
24
<PAGE>
FOCUS TRUST, INC.
(800) 665-2550
DIRECTORS
Robert J. Coleman, Jr.
Robert G. Hagstrom, Jr.
Joan Lamm-Tennant
Allan S. Mostoff
OFFICERS
Robert G. Hagstrom, Jr., President
Virginia B. Leith, Vice President & Treasurer
John S. Lloyd, Vice President & Secretary
INVESTMENT ADVISER
Lloyd, Leith & Sawin, Inc.
Two Penn Center Plaza, Suite 1810
Philadelphia, PA 19102
UNDERWRITER
Fund/Plan Broker Services, Inc.
2 W. Elm Street
Conshohocken, PA 19428
SHAREHOLDER SERVICES
Fund/Plan Services, Inc.
2 W. Elm Street
Conshohocken, PA 19428
CUSTODIAN
Citibank, N.A.
111 Wall Street
New York, New York 10005
LEGAL COUNSEL
Dechert Price & Rhoads
1500 "K" Street, N.W.
Washington, DC 20005
AUDITORS
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
This report is submitted for general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus which includes
details regarding the Fund's objectives, policies, expenses and other
information.
