<PAGE>
TO THE SHAREHOLDERS OF FOCUS TRUST, INC.:
In 1997, the net asset value (with the dividends reinvested) of Focus Trust
gained 29.10%. During the year, we added $3.31 in per share value of which
$0.47 per share represented a realized and paid capital gain dividend ($0.08
short-term gain and $0.39 long-term gain).
On a comparative basis, the Standard & Poor's 500 Index (S&P 500 Index), with
dividend income included, gained 33.36% in 1997 while the Lipper Growth Index,
an index of growth equity mutual funds, gained 25.30%. Since inception, on
April 17, 1995, Focus Trust has increased in value 69.8%, a 21.6% annualized
return.
AFTER-TAX PERFORMANCE
At year end, 97% of the shares owned in Focus Trust had their capital gain
dividend reinvested into more shares of the Fund. Each shareholder has already
received their annual statement showing the amount of dividend paid and, where
applicable, the subsequent purchase of additional shares of Focus Trust.
Before April 15th, many of you will forward to the Internal Revenue Service
(IRS) Form 1099-Dividend indicating the receipt of dividends, whether paid
directly to you or reinvested back into the Fund. Of course, investments in
tax-free accounts like Individual Retirement Accounts, are not subject to tax.
For taxable accounts, the IRS does not care whether you receive your dividends
in cash or whether you reinvest the dividends into additional fund shares.
They want their tax paid regardless. You may wish to postpone your reward but
the IRS seldom postpones its due.
On a brighter note, the Taxpayer Relief Act of 1997 contains a number of
provisions that will work to reduce the tax burden for shareholders of Focus
Trust. Effective May 7, 1997, the maximum capital gains tax rate for
individuals was lowered from 28% to 20% (or to 10% for persons in the 15%
bracket) for assets held at least 18 months. For assets held from 12 months to
18 months the maximum rate remains 28%. For assets held less than 12 months,
the tax rate is your ordinary tax rate.
Today, from a tax standpoint, we are being further rewarded for holding our
positions long-term. It has always been our belief that a concentrated low-
turnover strategy is the optimal way to grow capital. Now we have the extra
benefit of growing capital in a more tax-efficient manner as well.
In 1997, the before-tax return for Focus Trust was 29.10%. The after-tax
return for Focus Trust (taxing the long-term gain at 20% and the short-term
gain at 42%) was 28.2% or 97% of our gross return. This is the second year in
a row we have been able to generate a 97% after-tax return for our
shareholders. It is something we are very proud of.
There is a great deal of attention being given to the upcoming year 2000. But
I am especially excited as well because any asset purchased after 2000 and
held for at least five years will be taxed at an even lower 18% rate (an 8%
rate for persons taxed at the 15% rate). Bring on the new millennium. I can't
wait!
PERFORMANCE ANALYSIS
In our 1997 Semi-Annual Report to shareholders, we separated Focus Trust into
two portfolios to illustrate the effects of owning big capitalization stocks
and small capitalization stocks. If repeated at year end, this analysis would
reveal much the same. Forty-two percent of our portfolio remains invested in
small and mid-capitalization stocks while fifty percent is invested in large
capitalization stocks. This past year, 1997, big "cap" stocks continued to
perform on a price basis far better than the small and mid "cap" stocks
evidenced by the yearly return of the Russell 2000 (+20.5%) and the NASDAQ
Composite (+21.6%).
However, as you well know, we place very little importance on short-term price
performance. There are simply too many variables, other than business value,
that affect short-term prices. We also are disinclined to manufacture some
hybrid index to justify our price performance. For long-term owners of stocks,
there is only one performance index that matters and that is the economic
performance of the companies we own.
-1-
<PAGE>
PORTFOLIO OF BUSINESSES
The common stocks held in Focus Trust are a group of high quality companies
invested in four major industry categories: (1) amusement & recreation; (2)
consumer products & service; (3) newspapers, cable service & television
stations and (4) financial services.
Our financial services division includes shares in three companies that we
have owned since our first year of operation. Last year, American Express,
Berkshire Hathaway, and Federal Home Loan Mortgage Corporation contributed
both outstanding economic numbers as well as price appreciation. In 1997, both
American Express and Federal Home Loan Mortgage generated 15% growth in
earnings and, although we have not seen Berkshire's numbers, I am sure Warren
and Charlie reached their internal goal of 15% growth in "look-through"
earnings.
Harley-Davidson reported their twelfth consecutive year of record sales and
earnings. In 1997 earnings increased 21%, out pacing sales growth of 15%.
Sotheby's reported a 17% increase in earnings from operations while Hasbro
generated a 15% gain. Johnson & Johnson reported a 13% increase in earnings.
The only company in our consumer products and services division to report
below market results was McDonald's. We purchased McDonald's when pessimism
about this global franchise was at its height. Since the start of 1998, shares
of McDonald's have risen better than 10% far out pacing the S&P 500 Index.
Why? It now appears that McDonald's advertising campaign has been righted and
significant steps have been taken to improve the food quality.
We have been rewarded by the impressive results at both Gannett and The
Washington Post Company. In 1997, Gannett reported earnings from operations
rose 33% on 10% revenue growth. Profits at USA Today were up better than 18%.
Over at the Post, operating profits from the newspaper gained 39% with
improving margins brought about by lower newsprint prices and higher ad-linage
rates.
The entertainment business has historically generated above average returns
and, because so, has attracted a great deal of capital and competition. The
competition has become so fierce that some industry analysts suggest we are
facing an "entertainment glut". This may be true. However, I do not believe
the entertainment industry is becoming a commodity business. Unlike a
commodity business, the victors in entertainment will not be the low cost
operators but rather the high quality providers. In this vain, we are
fortunate to own two great companies.
The Walt Disney Company holds a franchise in both family and sports
entertainment. This past year, Disney increased earnings 25% on 6% revenue
growth. Set to open this year will be Disney's largest theme park, Animal
Kingdom, as well as the launch of a new cruise ship to be christened Disney
Magic.
The popularity of NASCAR Winston Cup racing is at record levels. Attendance at
these stock car events now averages better than 185,000--a nine percent
increase from 1996. Revenues for International Speedway (the home of the
Daytona 500, Talladega Superspeedway, and Darlington Raceway) jumped 44% with
42% increase in earnings. The company has recently signed an agreement to
build a race track which is scheduled to open in Kansas City in 1999.
We are very impressed with the economics of NASCAR racing. The fact became
crystal clear to me after completing research for my second book called--THE
NASCAR WAY, THE BUSINESS THAT DRIVES THE SPORT. When we started the book,
there were very few analysts covering track operators. Since then, the number
has doubled. We believe the future looks very bright for NASCAR so much so
that we recently purchased Action Performance. Action Performance designs and
markets licensed motorsports products including die-cast scaled replicas of
motorsports vehicles, apparel, and souvenirs. Action has exclusive licensing
agreements with NASCAR's top stars including Jeff Gordon, Dale Earnhardt, Dale
Jarrett and Rusty Wallace. They are the leading company in this business
generating high returns on capital while growing cash at a 40% rate.
-2-
<PAGE>
FOCUS TRUST BENCHMARK
In 1997, the S&P 500 Index grew earnings at 11% on revenue growth of 6%.
During this same period, the weighted average return of businesses in Focus
Trust saw earnings growth of better than 15% on 10% revenue growth. In general
terms, we own shares of businesses that generate economics far greater than
the market average. Over time, we expect the price gains of our shares held to
reflect this underlying fact. Until then, we will be patient and intensely
monitor our holdings to ensure our investments operate at an above-average
level and that management continues to allocate the capital of our companies
in a responsible manner. Lastly, as portfolio manager, I will work diligently
to raise the economic bar of Focus Trust.
MR. MARKET
Discussions about the future direction of the stock market have officially
reached a new high. Yes, the investment community has always been interested
in market behavior and certainly a day does not go by before a television
commentator, newspaper reporter, or magazine writer ventures a guess. But what
I consider noteworthy is that the list of stock market worriers now includes
Warren Buffett, Bill Ruane, Alan Greenspan, and the President of the United
States.
"Our enthusiasm for stocks is not unconditional", confesses Warren Buffett.
Warren has been cautioning shareholders about the general high level of stock
prices since last year's Berkshire Annual Meeting. Bill Ruane (co-manager of
Sequoia Fund) writes in his most recent letter to shareholders "our portfolio
is showing a speculative component" and Sequoia may "sell its holdings if
prices rise considerably faster than their businesses underlying economics."
The White House is equally concerned. The recent Economic Report of the
President warns investors that the market's "continuing high valuation
relative to earnings is a concern". Of course, we have all heard Alan
Greenspan's recommendation to avoid "irrational exuberance".
So what does this all mean? Quite plainly, the stock market's advance has
broken through the boundary of general expectation. Since 1982, the market's
average annual return is close to 19%, far outstripping the historical norm of
10% average annual gains. For the first time in the Dow's 101 year history,
the market has risen 20% or more in three consecutive years. For those keeping
record, there have now been seven consecutive years of positive returns with
only one down year in the last fifteen years.
On top of record high stock prices, the market has seen a demonstrated
increase in price volatility. According to Paine Webber, the average absolute
daily price change in the Dow Jones Industrial average last year was 0.87%--
the highest level since 1973-1974 and 1987. Some investors took note of this
statistic to forecast an imminent drop in share prices. But there appears to
be no correlation between volatility and the direction of the stock market. In
other words, just because volatility increased in one year did not mean the
following year posted widely negative or positive results.
Normally, a prolonged period of rising stock prices creates a positive feeling
among participants (only portfolio managers searching for value are disgusted
by high prices). Indeed, consumer confidence today is at record levels and it
should be. The dollar price of investment portfolios is going up while
interest rates, inflation, and unemployment are going down. But while some
investors are blissfully caught up in the good times, our most respected
financial leaders are sounding alarms. I suspect the reason is because at this
point in time, a severe stock market correction could have a more debilitating
effect on our country.
After three extraordinary years of rising stock prices, Americans now have
more money invested in the stock market than invested in their homes. For the
first time in fifty years, stocks have become the single most valued asset for
families. Because Americans have so much riding on the Dow Jones Industrial
Average, the impact of a steep market decline will have both financial and
emotional repercussions. This is what worries Washington, D.C., "A rapid asset
price decline in equity prices", explains Greenspan, "can be a virulently
negative force in the economy."
-3-
<PAGE>
Stock market declines occur most often when excesses build up in the system.
How does this happen? Very simply it starts with an asset that generates above
average returns. Capital naturally flows to this outperforming asset causing
prices to rise. Rising prices in turn attract even more capital as investors
succumb to a herd mentality. At some future point, the economic return of the
asset can no longer justify its price level. When this occurs, capital begins
to flow away from the asset.
In the most recent fifty years, when capital flowed away from an
underperforming asset, it was predicated upon the attractiveness of a
competing asset. For example, when stock prices reached an unjustifiably high
level in 1972 and 1987, rising interest rates made fixed-income securities an
immediately attractive alternative for stocks. Investors then quickly
exchanged poor performing stocks for better performing bonds. Today, however,
interest rates are very low leaving investors uninspired. But can stock prices
decline without the stimulus of higher interest rates? It is certainly
possible and with today's global marketplace, investors are no longer limited
to U.S. securities.
This brief lesson is in no way meant to be a market call. I have stated
repeatedly and unequivocally--we do not have the ability to judge short-term
market directions. What I can tell you is this--if you anticipate needing
money sometime in the next three years, that money should be invested in
short-term fixed income securities and money markets. If you may need money in
the next three to five years, then it would be responsible to adjust your
asset allocation to include some short-term fixed income securities. If you
plan on investing money in the stock market for five years or longer, continue
to own Focus Trust and we promise to do our best to purchase shares of
outstanding businesses at rational prices.
CONCLUSION
On April 17, 1998, Focus Trust will celebrate its third year anniversary. I
have been very pleased with the economic progress of our business and
relatively pleased by the rise in our share price. My only disappointment lies
in the asset value of our fund.
The mutual fund business is a very competitive marketplace. Today, there are
very large organizations with resources that allow them to aggressively market
and advertise their products. The adage now is that mutual funds are sold not
bought. I believe this is true. In order for Focus Trust to grow in both the
number of shareholders and assets, I am convinced we must position ourselves
to take advantage of the new marketplace.
I wish to thank all Focus Trust shareholders for their confidence and support.
A special thanks to our Board of Directors and Officers for their continued
guidance.
If you have any questions, please do not hesitate to contact me. Also, if you
know investors who think similarly to us, send them our way. We want to grow
Focus Trust, but only with a core group of individuals who appreciate the
investment approach. If you need a quick reminder, read our Investment
Adviser-Shareholder Principles listed on the following page.
Sincerely,
/s/ Robert G. Hagstrom
Robert G. Hagstrom, CFA
Portfolio Manager
-4-
<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 partners of Focus
Capital Advisory, L.P. (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 partners of the Adviser also invest a portion of
their 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 a long-term holder of these outstanding businesses. The Adviser is
not, nor will it 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 a 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, the Fund's
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 the Fund's shareholders.
-5-
<PAGE>
[FOCUS TRUST PERFORMANCE GRAPH APPEARS HERE]
AVERAGE ANNUAL TOTAL RETURN
1 Year: 29.10% Since Inception: 21.59%
Past performance is not indicative of future results.
FOCUS TRUST S&P 500 INDEX LIPPER GROWTH INDEX
04/17/95 $10,000 $10,000 $10,000
06/95 10,140 10,764 11,070
12/95 11,229 12,169 12,263
06/96 11,983 13,250 13,266
12/96 13,154 14,636 14,533
06/97 14,913 17,490 16,771
12/97 16,982 19,176 18,614
[1997 QUARTERLY PERFORMANCE GRAPH APPEARS HERE]
Past performance is not indicative of future results.
FOCUS TRUST S&P 500 INDEX LIPPER GROWTH INDEX
1st Quarter 0.92% 2.21% -0.34%
2nd Quarter 12.34% 16.92% 15.80%
3rd Quarter 4.95% 7.03% 10.25%
4th Quarter 8.50% 2.44% 0.67%
-6-
<PAGE>
FOCUS TRUST, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
COMMON STOCKS (91.37%)
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 1)
- ------ ---------- ----------
<S> <C> <C> <C>
AMUSEMENT/RECREATION (18.61%)
42,800 International Speedway Corp., Class B........ $ 743,671 $1,011,150
5,000 The Walt Disney Company...................... 289,380 495,313
---------- ----------
1,033,051 1,506,463
---------- ----------
BUSINESS SERVICES (4.96%)
21,700 Sotheby's Holdings Inc., Class A............. 323,739 401,450
---------- ----------
COLLECTIBLES (5.62%)
12,000 Action Performance Companies, Inc. * ........ 312,449 454,500
---------- ----------
GAMES/TOYS (4.67%)
12,000 Hasbro, Inc.................................. 251,338 378,000
---------- ----------
INSURANCE (9.66%)
17 Berkshire Hathaway, Inc., Class A *.......... 479,130 782,000
---------- ----------
MOTORCYCLES/BICYCLES (6.43%)
19,000 Harley-Davidson, Inc......................... 375,056 520,125
---------- ----------
NEWSPAPER (10.70%)
8,500 Gannett Company.............................. 228,752 525,406
700 Washington Post Company, Class B............. 186,560 340,550
---------- ----------
415,312 865,956
---------- ----------
PHARMACEUTICALS (5.21%)
6,400 Johnson & Johnson............................ 232,327 421,600
---------- ----------
RESTAURANTS/LODGING (4.13%)
7,000 McDonald's Corp.............................. 320,575 334,250
---------- ----------
SECURITY BROKER (11.41%)
10,350 American Express Company..................... 390,811 923,737
---------- ----------
SERVICES (6.53%)
12,600 Federal Home Loan Mortgage Corp.............. 216,330 528,412
---------- ----------
SUGAR PRODUCTS (3.44%)
3,500 Wrigley (WM) Jr. Company..................... 155,568 278,469
---------- ----------
TOTAL COMMON STOCKS.......................... 4,505,686 7,394,962
---------- ----------
SHORT-TERM INVESTMENTS (8.10%)
655,324 Bank of New York Cash Reserve................ 655,324 655,324
---------- ----------
TOTAL INVESTMENTS (99.47%)................... $5,161,010# 8,050,286
========== ----------
OTHER ASSETS IN EXCESS OF LIABILITIES (0.53%) 42,939
----------
NET ASSETS (100.00%)......................... $8,093,225
==========
</TABLE>
# Also represents cost for Federal income tax purposes
* Non-income producing security
See Notes to Financial Statements.
-7-
<PAGE>
FOCUS TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (cost $5,161,010) (Note 1).... $8,050,286
Dividends and interest receivable................................. 6,510
Deferred organization costs (Note 1).............................. 29,772
Reimbursement due from Adviser.................................... 56,618
Other assets...................................................... 4,792
----------
Total assets.................................................... 8,147,978
----------
LIABILITIES:
Accrued expenses.................................................. 24,981
Payable to Adviser................................................ 29,772
----------
Total liabilities............................................... 54,753
----------
NET ASSETS:
Applicable to 495,840 shares of capital stock outstanding (Note
1)............................................................... $8,093,225
==========
NET ASSETS CONSIST OF:
Paid-in capital................................................... $4,980,946
Accumulated net realized gain on investments...................... 223,003
Net unrealized appreciation of investments........................ 2,889,276
----------
Net assets...................................................... $8,093,225
==========
NET ASSET VALUE AND OFFERING PRICE PER SHARE:
($8,093,225/495,840 shares)....................................... $ 16.32
==========
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE>
FOCUS TRUST, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
INVESTMENT INCOME:
<TABLE>
<S> <C>
Dividends........................................................ $ 74,910
Interest......................................................... 21,042
-----------
Total income................................................... 95,952
-----------
EXPENSES:
Investment advisory fees (Note 2)................................ 53,248
Administration fees.............................................. 67,033
Registration fees................................................ 20,579
Transfer agent fees.............................................. 43,326
Accounting fees.................................................. 24,000
Legal fees....................................................... 14,073
Custody fees..................................................... 5,532
Insurance........................................................ 15,170
Amortization of organization costs (Note 1)...................... 13,001
Audit fees....................................................... 26,300
Directors fees................................................... 14,600
Printing fees.................................................... 9,973
Other expenses................................................... 644
-----------
Total expenses................................................. 307,479
Less expenses waived and reimbursed by Adviser (Note 2).......... (155,343)
-----------
Net expenses................................................... 152,136
-----------
NET INVESTMENT LOSS................................................ (56,184)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions..................... 503,863
Net change in unrealized appreciation on investments............. 1,547,574
-----------
Net realized and unrealized gain on investments.................. 2,051,437
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $ 1,995,253
===========
</TABLE>
See Notes to Financial Statements.
-9-
<PAGE>
FOCUS TRUST, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/97 12/31/96
---------- ----------
<S> <C> <C>
OPERATIONS:
Net investment loss.................................. $ (56,184) $ (24,610)
Net realized gain on investments..................... 503,863 44,537
Net change in unrealized appreciation on investments. 1,547,574 952,975
---------- ----------
Net increase in net assets from operations......... 1,995,253 972,902
---------- ----------
DIVIDENDS TO SHAREHOLDERS FROM:
Net realized gains on investments.................... (224,676) (40,853)
---------- ----------
CAPITAL STOCK TRANSACTIONS (NET)--NOTE 1............... (1,004,784) 1,334,394
---------- ----------
Total increase in net assets......................... 765,793 2,266,443
---------- ----------
NET ASSETS:
Beginning of year.................................... 7,327,432 5,060,989
---------- ----------
End of year.......................................... $8,093,225 $7,327,432
========== ==========
</TABLE>
See Notes to Financial Statements.
-10-
<PAGE>
FOCUS TRUST, INC.
NOTES TO FINANCIAL STATEMENT
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 in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the period could differ
from these 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 year ended
December 31, 1997. 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. Focus Capital Advisory, L.P. (the "Adviser"), has
agreed that in the event it redeems any of its shares during the five year
period, it will reimburse the Fund on a pro rata basis for any unamortized
organization costs in the same proportion as the number of shares being
redeemed.
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 trade
date. Interest income is recorded on the accrual basis and dividend income
on the ex-dividend date.
-11-
<PAGE>
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 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Shares sold................... 96,836 $ 1,421,730 181,792 $2,164,827
Shares issued through
reinvestment of dividends.... 13,635 218,033 3,120 39,553
Shares redeemed *............. (177,687) (2,644,547) (75,076) (869,986)
-------- ----------- ------- ----------
Net Increase (Decrease)....... (67,216) ($1,004,784) 109,836 $1,334,394
======== =========== ======= ==========
</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.
NOTE 2 -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
Prior to June 28, 1997, Lloyd, Leith & Sawin, Inc. ("LLS") served as the
Fund's investment adviser. Effective June 28, 1997, Focus Capital Advisory,
L.P. (the "Adviser") serves as the investment adviser to the Fund. The Adviser
provides the Fund with investment advice, administrative services and
facilities. As compensation for these services, the Fund pays the Adviser a
monthly fee based on the Fund's average daily net assets. From January 1, 1997
to June 27, 1997, LLS voluntarily agreed to reduce its fees and reimburse the
Fund to the extent total annualized expenses exceeded 2.00% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to continue to
reduce its fees and reimburse the Fund to the extent total annualized expenses
exceed 2.00%. Any reductions made by the Adviser in its fees are subject to
reimbursement by the Fund within the following three years provided the Fund
is able to effect such reimbursement and remain in compliance with applicable
expense limitations. As of December 31, 1997, the amount of expenses subject
to reimbursement by the Fund is $454,777. Investment advisory fees for the
year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
EXPENSES WAIVED
ADVISORY ADVISORY AND REIMBURSED
FEE FEE BY ADVISER
-------- -------- ---------------
<S> <C> <C> <C>
LLS...................................... 0.70% $26,527 $58,453
Focus Capital Advisory, L.P.............. 0.70% $26,721 $96,890
</TABLE>
Certain officers of the Fund are also officers and directors of the 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.
NOTE 3 -- PRINCIPAL SHAREHOLDERS:
As of December 31, 1997, a single non-affiliated institutional shareholder
owned of record or beneficially 8.70% of the outstanding voting shares of the
Fund.
NOTE 4 -- INVESTMENT TRANSACTIONS:
Investment transactions for the Fund for the year ended December 31, 1997,
excluding temporary short-term investments, are as follows:
<TABLE>
<CAPTION>
PROCEEDS
PURCHASES FROM SALES
---------- ----------
<S> <C>
$1,020,071 $2,621,566
</TABLE>
-12-
<PAGE>
NOTE 5 -- UNREALIZED APPRECIATION AND DEPRECIATION:
At December 31, 1997, the net unrealized appreciation of securities for
Federal income tax purposes consisted entirely of gross unrealized
appreciation of $ 2,889,276.
NOTE 6 -- SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED):
A special meeting of shareholders was held on June 27, 1997 to vote on a
proposed new investment advisory agreement between Focus Capital Advisory,
L.P. and the Fund. The results were as follows:
<TABLE>
<CAPTION>
SHARES SHARES SHARES
FOR AGAINST ABSTAINED
------- ------- ---------
<S> <C> <C>
366,882 6,332 54,763
</TABLE>
-13-
<PAGE>
FOCUS TRUST, INC.
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95**
-------- -------- ----------
<S> <C> <C> <C>
Net Asset Value, beginning of period....... $ 13.01 $ 11.17 $10.00
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)........... (0.11) (0.05) 0.06
Net realized and unrealized gain on
investments........................... 3.89 1.96 1.17
------- ------- ------
Total from investment operations..... 3.78 1.91 1.23
------- ------- ------
DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income... -- -- (0.06)
Dividends from net realized gains on
investments........................... (0.47) (0.07) --
------- ------- ------
Total from dividends to shareholders. (0.47) (0.07) (0.06)
------- ------- ------
Net Asset Value, end of period............. $ 16.32 $ 13.01 $11.17
======= ======= ======
TOTAL RETURN............................... 29.10% 17.14% 12.29% (2)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)..... $ 8,093 $ 7,327 $5,061
Ratio of expenses to average net assets
after reimbursement of expenses by
Adviser................................. 2.00% 2.00% 1.92% (1)(3)
Ratio of expenses to average net assets
before reimbursement of expenses by
Adviser................................. 4.04% 4.96% 7.89% (1)
Ratio of net investment income to average
net assets after reimbursement of
expenses by Adviser..................... (0.74%) (0.40%) 1.19% (1)
Ratio of net investment income to average
net assets before reimbursement of
expenses by Adviser..................... (2.78%) (3.36%) (4.78%) (1)
Portfolio turnover....................... 14.47% + 8.47% 0.00%
Average commission rate paid *........... $0.1006 $0.0979 N/A
</TABLE>
(1) Annualized
(2) Not Annualized
(3) Prior to September 1, 1995, the annualized expenses were capped at 1.75%.
+ Portfolio turnover was higher than anticipated due to fund share
redemptions.
* Computed by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charged. This disclosure is required by the U.S. Securities and
Exchange Commission beginning 1996.
** The Fund commenced investment operations on April 17, 1995.
See Notes to Financial Statements.
-14-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Focus Trust, Inc.
We have audited the accompanying statement of assets and liabilities of
Focus Trust, Inc., (the "Fund"), including the schedule of investments as of
December 31, 1997 and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of December 31, 1997, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Focus Trust, Inc. as of December 31, 1997 and the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended and its financial highlights for each of the
periods presented, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA
January 14, 1998
-15-
<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
Ericka M. Merluzzi, Vice President & Treasurer
Carolyn F. Mead, Esq., Vice President & Secretary
INVESTMENT ADVISER
Focus Capital Advisory, L.P.
100 West Lancaster Ave.
Wayne, PA 19087
UNDERWRITER
FPS Broker Services, Inc.
3200 Horizon Drive
King of Prussia, PA 19406
SHAREHOLDER SERVICES
FPS Services, Inc.
3200 Horizon Drive
King of Prussia, PA 19406
CUSTODIAN
The Bank of New York
48 Wall Street
New York, NY 10286
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.
FOCUS TRUST, INC. SM
ANNUAL
REPORT
DECEMBER 31, 1997
Visit the Focus Trust, Inc. web site on the Internet at
WWW.FOCUSTRUST.COM
