UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-4204
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PC&J Preservation Fund
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(Exact name of registrant as specified in charter)
120 West Third Street, Suite 300, Dayton, Ohio 45402-1819
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(Address of principal executive offices) (Zip code)
PC&J Service Corp., 120 West Third Street, Suite 300, Dayton, Ohio
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45402-1819
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(Name and address of agent for service)
Registrant's telephone number, including area code: 937-223-0600
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Date of fiscal year end: December 31
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Date of reporting period: June 30, 2008
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
Page 1
PC&J PRESERVATION
FUND
Semi-Annual Report to Shareholders
June 30, 2008
The PC&J Preservation Fund is a registered investment company under the
Investment Company Act of 1940 and is regulated by the Securities and Exchange
Commission. The enclosed Semi-Annual Report is for your information and is
provided to you in compliance with ongoing Securities and Exchange Commission
regulations. This report requires no action on your part. Please give us a
call if you have any questions (888-223-0600).
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PC&J PRESERVATION FUND
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FINANCIAL HIGHLIGHTS
The information contained in the table below for the years ended December 31,
2007, 2006, 2005, 2004, and 2003, has been derived from data contained in
financial statements examined by Deloitte & Touche, independent certified public
accountants. The information for the six months ended June 30, 2008, has been
derived from data contained in the unaudited financial statements but which are
believed to include all adjustments necessary for a fair presentation. Such
information should be read in conjunction with the enclosed financial
statements.
Period Ended
June 30,
Years Ended December 31,
Selected Data for Each Share of Capital 2008 2007 2006 2005 2004 2003
Stock Outstanding Throughout the Period (Unaudited)
NET ASSET VALUE-BEGINNING OF PERIOD $ 10.48 $ 10.39 $ 10.52 $ 10.74 $ 10.88 $ 11.06
Income from investment operations:
Net investment income 0.24 0.52 0.53 0.49 0.44 0.47
Net realized and unrealized
gain (loss) on securities (0.19) 0.09 (0.12) (0.23) (0.14) (0.18)
TOTAL FROM INVESTMENT OPERATIONS 0.05 0.61 0.41 0.26 0.30 0.29
Less distributions:
From net investment income (0.00) (0.52) (0.54) (0.48) (0.44) (0.47)
TOTAL DISTRIBUTIONS (0.00) (0.52) (0.54) (0.48) (0.44) (0.47)
NET ASSET VALUE-END OF PERIOD $ 10.53 $ 10.48 $ 10.39 $ 10.52 $ 10.74 $ 10.88
TOTAL RETURN 0.48% 5.83% 3.86% 2.44% 2.72% 2.63%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.09%* 1.10% 1.10% 1.10% 1.02% 1.00%
Net investment income 4.51%* 4.58% 4.49% 4.04% 3.83% 4.19%
Portfolio turnover rate 117.64%* 31.76% 5.99% 16.10% 37.75% 30.80%
Net assets at end of period (000's) $11,829 $12,078 $12,923 $15,444 $17,328 $18,081
* Annualized
See notes to financial statements.
PC&J PRESERVATION FUND
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SCHEDULE OF INVESTMENTS
JUNE 30, 2008
(UNAUDITED)
PERCENT
OF NET PRINCIPAL MARKET
SECURITY ASSETS AMOUNT VALUE
- --------------------------------------- -------- ---------- ----------
U.S. AGENCY OBLIGATIONS:
Maturity of 10 - 15 years: 10.0%
Federal Home Ln Mtg. Corp. Step-up, 1
5.000%, due 04-10-23 $ 300,000 $ 292,441
Federal Home Ln Banks Range Note, 2
7.250%, due 05-08-23 500,000 495,000
Federal Home Ln Mtg. Corp. Step-up, 1
5.250%, due 06-12-23 400,000 395,832
TOTAL U.S. AGENCY OBLIGATIONS
(Cost $1,200,000) 1,183,273
U.S. CORPORATE OBLIGATIONS:
Maturity of 1 - 5 years: 4.8
Oneok Inc.,
7.125%, due 04-15-11 105,000 109,862
AOL Time Warner Inc.,
6.875%, due 05-01-12 210,000 215,177
Alcoa Inc.,
5.375%, due 01-15-13 250,000 244,945
569,984
Maturity of 5 - 10 years: 12.5
Lehman Bros Holdings Inc.,
4.800%, due 03-13-14 148,000 132,881
HSBC Finance Corp.,
6.000%, due 08-15-14 275,000 278,367
Bear Stearns Cos. Inc.,
5.700%, due 11-15-14 162,000 156,089
OGE Energy Corp.,
5.000%, due 11-15-14 250,000 239,908
Alltel Corp.,
7.000%, due 03-15-16 100,000 101,000
Goldman Sachs Group Inc.,
5.625%, due 01-15-17 350,000 325,939
Terex Corp.,
8.000%, due 11-15-17 250,000 248,125
1,482,309
See notes to financial statements.
PC&J PRESERVATION FUND
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SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2008
(UNAUDITED)
PERCENT
OF NET PRINCIPAL MARKET
SECURITY ASSETS AMOUNT VALUE
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U.S. CORPORATE OBLIGATIONS (Cont'd):
Maturity of 10 - 20 years: 13.3%
Merrill Lynch Co. Inc.,
6.500%, due 07-15-18 $ 230,000 $ 213,822
Toyota Motor Credit Corp. Range Note 2,
8.000%, due 09-21-21 350,000 348,250
General Electric Capital Corp. Step-Up 1,
4.875%, due 10-28-21 200,000 194,093
Toyota Motor Credit Corp. Curve Accr'l 2,
8.000%, due 12-21-21 125,000 123,750
Toyota Motor Credit Corp. Curve Accr'l 2,
8.000%, due 01-18-22 50,000 49,500
Toyota Motor Credit Corp. Curve Accr'l 2,
8.000%, due 02-01-22 175,000 173,250
Dow Chemical Co.,
7.375%, due 03-01-23 200,000 222,016
Morgan Stanley Curve Accrual 2,
8.375%, due 04-25-23 250,000 243,750
1,568,431
TOTAL U.S. CORPORATE OBLIGATIONS
(Cost $3,678,582) 30.6 3,620,724
TAXABLE MUNICIPAL OBLIGATIONS: 3
Maturity of less than 1 year: 3.1
Maricopa County, AZ Indl. Dev. Taxable
Bonds, 6.000%, due 07-01-08 50,000 50,000
Oklahoma City, OK Airport Taxable
Bonds, 6.950%, due 07-01-08 80,000 80,000
Dayton, OH Taxable Hsng. Improvement
Bonds, 6.250%, due 11-01-08 140,000 140,000
West Haven, CT Go
6.125%, due 02-01-09 100,000 100,787
370,787
Maturity of 1 - 5 years: 1.2
Dayton, OH Econ. Dev. Taxable
Bonds, 6.380%, due 12-01-09 140,000 144,012
See notes to financial statements.
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PC&J PRESERVATION FUND
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SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2008
(UNAUDITED)
PERCENT
OF NET PRINCIPAL MARKET
SECURITY ASSETS AMOUNT VALUE
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TAXABLE MUNICIPAL OBLIGATIONS (Cont'd): 3
Maturity of 5 - 10 years: 6.8%
Dayton, OH Taxable Bonds,
6.500%, due 11-01-13 $ 250,000 $ 250,000
Nebraska Public Power Dist. Rev.,
5.140%, due 01-01-14 310,000 306,640
Reeves County TX COP,
6.550%, due 12-01-16 115,000 104,008
Hazelwood MO ID Authority Rev.,
5.640%, due 02-01-18 150,000 146,313
806,961
Maturity of 10 - 15 years: 14.0
Maryland Heights MO Tax Incremnt Rev,
7.000%, due 09-01-18 200,000 196,040
Portland OR Weekly Auction Notes,
0.000%, due 06-01-19 150,000 150,000
Hudson County NJ Lease Rev.,
7.950%, due 09-01-19 300,000 312,567
Dekalb Cnty. GA Dev. Auth. Rev.,
6.875%, due 03-01-20 275,000 281,672
Hopkins MN GO,
7.100%, due 02-01-21 150,000 152,969
Minneapolis & St. Paul Met. GO Rev.,
6.850%, due 01-01-22 295,000 315,508
KFW Frankfurt Bank Range Notes,
7.000%, due 05-07-23 2 250,000 242,500
1,651,256
Maturity of 15 - 25 years: 6.9
San Bernardino Cnty. CA Pension Oblig.,
6.020%, due 08-01-23 250,000 246,065
Alameda Corridor Trans. Auth. CA,
6.600%, due 10-01-29 200,000 203,544
Frisco TX COP,
6.375%, due 02-15-33 360,000 366,311
815,920
TOTAL TAXABLE MUNICIPAL
OBLIGATIONS (Cost $3,828,141) 32.0 3,788,936
See notes to financial statements.
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2008
(UNAUDITED)
PERCENT
OF NET PRINCIPAL MARKET
SECURITY ASSETS AMOUNT VALUE
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TOTAL U.S. AGENCY, U.S. CORPORATE
AND TAXABLE MUNICIPAL
OBLIGATIONS
(Cost $8,706,723) 72.6% $8,592,933
PREFERRED STOCK: 6.8 SHARES
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Annaly Cap. Mgt. Inc. Pfd. A, 7.875% 5,000 107,150
FPL Group Cap. Tr. I Pfd., 5.875% 5,300 125,239
Georgia Power Cap. Tr. VII Pfd., 5.875% 5,200 124,540
J P Morgan Chase Cap. XVI Pfd., 5,200 115,024
6.350%
Lincoln Natl. Cap. Vi. Pfd. F, 6.750% 5,200 114,140
Metlife Inc. Pfd. B, 6.500% 5,200 111,280
Powershares ETF Trust Finl. Pfd. 5,900 110,507
TOTAL PREFERRED STOCK
(Cost $860,447) 807,880
EXCHANGE TRADED DEBT: 5.1
AT&T Inc. Sr. Note, 6.375% 5,000 125,050
Comcast Corp. New Note 5,400 116,262
General Elec. Cap. Corp. Pines, 6.100% 5,000 123,750
Metlife Inc. Sr. Note, 5.875% 5,175 121,354
Viacom Inc. New Note Sr. 6.850% 5,544 121,136
TOTAL EXCHANGE TRADED DEBT
(Cost $615,586) 607,552
INVESTMENT COMPANIES: 12.2
Highland Floating Rate A 35,270 299,445
Oppenheimer Sr. Floating Rate A 36,400 305,397
Vanguard Money Market Reserves 650,000 650,000
First American Treasury Obligations 182,949 182,949
TOTAL INVESTMENT COMPANIES
(Cost $1,517,949) 1,437,791
See notes to financial statements.
PC&J PRESERVATION FUND
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SCHEDULE OF INVESTMENTS (Concluded)
JUNE 30, 2008
(UNAUDITED)
PERCENT
OF NET PRINCIPAL MARKET
SECURITY ASSETS AMOUNT VALUE
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LEASE ASSIGNMENTS: 2.3%
PHS Indian Health Service Lease 2, 4
7.013%, due 05-01-10 $ 114,978
Ford Motor Co. ESA Lease 2, 4
12.524%, due 06-01-13 153,914
TOTAL LEASE ASSIGNMENTS:
(Cost $300,020) 268,892
TOTAL INVESTMENTS
(Cost $12,000,725) 5 99.0 11,715,048
OTHER ASSETS LESS LIABILITIES 1.0 113,565
NET ASSETS 100.0% $11,828,613
1 Interest rates listed for step-up bonds are the rates as of June 30, 2008.
2 Security valued according to "good faith pricing" guidelines. (See Note A)
3 Some municipal obligations have a credit enhancement feature which produces a
credit quality comparable to that of a same-rated corporate bond.
4 Security has been deemed illiquid.
5 Represents cost for federal income tax and book purposes and differs from
market value by net unrealized appreciation (depreciation). (See Note D)
See notes to financial statements.
PC&J PRESERVATION FUND
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STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2008
(UNAUDITED)
ASSETS:
Investments in securities, at market value
(Cost basis - $12,000,725) (Notes A & D) $11,715,048
Receivables - Dividend and Interest 143,791
Receivables - Fund shares sold 1,810
Total assets 11,860,649
LIABILITIES:
Accrued expenses (Note B) (10,756)
Payables - Fund shares redeemed (21,280)
Total liabilities (32,036)
NET ASSETS $11,828,613
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SHARES OUTSTANDING (Unlimited authorized shares - no par value):
Beginning of period 1,152,637
Net decrease (Note C) (29,227)
End of period 1,123,410
NET ASSET VALUE, offering price and redemption price per share $ 10.53
NET ASSETS CONSIST OF:
Paid in capital $12,283,148
Net unrealized depreciation on investments (285,677)
Undistributed net investment income 279,529
Accumulated net realized loss on investments (448,387)
Net Assets $11,828,613
See notes to financial statements.
PC&J PRESERVATION FUND
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STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
INVESTMENT INCOME (Note A):
Interest $ 257,881
Dividends 82,229
Total Investment Income 340,110
EXPENSES (Note B):
Investment advisory fee 30,077
Management fee 36,092
Total expenses 66,169
NET INVESTMENT INCOME 273,941
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note D):
Net realized gain on investments 5,516
Change in unrealized depreciation of investments (220,906)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (215,390)
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 58,551
See notes to financial statements.
PC&J PRESERVATION FUND
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STATEMENTS OF CHANGES IN NET ASSETS
For The Six Months For the Year
Ended Ended
June 30, 2008 December 31, 2007
(Unaudited)
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 273,941 $ 566,985
Net realized gain (loss) on investments 5,516 (17,582)
Change in unrealized depreciation of investments (220,906) 157,633
Net increase in net assets from operations 58,551 707,036
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income 0 (566,481)
Net decrease in assets from distributions to shareholders 0 (566,481)
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
CAPITAL SHARE TRANSACTIONS (Note C) (308,191) (985,102)
Total decrease in net assets (249,640) (844,547)
NET ASSETS:
Beginning of year 12,078,253 12,922,800
End of period $11,828,613 $12,078,253
UNDISTRIBUTED NET INVESTMENT INCOME $ 279,529 $ 5,588
See notes to financial statements.
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PC&J PRESERVATION FUND
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NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PC&J Preservation Fund (the "Fund") commenced operations on April 30, 1985, as a
no-load, open-end, diversified investment company. It is organized as an Ohio
business trust and is registered under the Investment Company Act of 1940 ("1940
Act"). The investment objective of the Fund is the generation of income and the
preservation of capital.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates or assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(1) Security Valuations - Fixed income securities are generally valued by
using market quotations, or a matrix methodology (including prices furnished by
a pricing service) when Parker Carlson & Johnson, Inc. (the "Adviser") believes
such prices accurately reflect the fair market value of such securities. The
matrix pricing methodology utilizes yield spreads relating to securities with
similar characteristics to determine prices for normal institutional-size
trading units of debt securities without regard to sale or bid prices. If the
Adviser decides through the due diligence process that the market quotation does
not accurately reflect current value or that prices cannot be readily estimated
using the matrix methodology, or when restricted or illiquid securities are
being valued, or when unique investment structures have no widely adopted
benchmarks, securities are valued at fair value as determined in good faith by
the Adviser, in conformity with guidelines adopted by and subject to review by
the Board of Trustees ("Trustees"). It is incumbent upon the Adviser to
consider all appropriate factors relevant to the value of securities for which
market quotations are not readily available. No single standard for determining
fair value can be established, since fair value depends upon the circumstances
of each individual case. As a general principle, the current fair value of an
issue of securities being valued by the Adviser would appear to be the amount
which the owner might reasonably expect to receive for them upon their current
sale. Methods which are in accordance with this principle may, for example, be
based on a multiple of earnings, or a discount from market of a similar freely
traded security (including a derivative security or a basket of securities
traded on other markets, exchanges or among dealers), or yield to maturity with
respect to debt issues, or a combination of these and other methods.
In September 2006, the Financial Accounting Standards Board issued
Interpretation No. 157 ("FAS 157"), Fair Value Measurements. FAS 157
establishes a framework for measuring fair value and expands disclosures about
fair value measurements in financial statements, effective for the Fund's
current fiscal period.
Various inputs may be used to determine the value of the Fund's investments.
These inputs are summarized in three broad levels:
Level 1 - quoted prices in active markets for identical securities
Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3 - significant unobservable inputs (including the fund's own assumptions
used to determine the fair value of investments).
The inputs or methodologies used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities.
PC&J PRESERVATION FUND
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NOTES TO FINANCIAL STATEMENTS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
The following table summarizes the inputs used to value the Fund's net assets as
of June 30, 2008.
Valuation Inputs Investments in Securities ($000)
Level 1 - Quoted Prices $ 8,505
Level 2 - Other Significant Observable Inputs 3,095
Level 3 - Significant Unobservable Inputs 115
Total $ 11,715
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Measurements
Using Unobservable Inputs
in 000s (Level 3)
Securities
Beginning Balance 12-31-2007 $ 142
Total gains or losses (realized/unrealized) included in earnings 1
Purchases, sales, issuances, settlements and return of capital
(net) -28
Transfers in and/or out of Level 3 0
Ending Balance 6-30-2008 $ 115
The amount of total gains or losses for the period included in
earnings (or changes in net assets) attributable to the change
in unrealized gains or losses relating to assets still held at the
reporting date $ 1
=================================
Gains and losses (realized and unrealized) included in earnings
(or changes in net assets) for the period are reported in trading
revenues as follows:
Total gains or losses included in earnings (or changes in net
assets) for the period $ 1
Change in unrealized gains or losses relating to assets still held
at reporting date $ 1
PC&J PRESERVATION FUND
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NOTES TO FINANCIAL STATEMENTS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
(2) Federal Income Taxes - The Fund has elected to be treated as a regulated
investment company and intends to continue to comply with the requirements under
Subchapter M of the Internal Revenue Code and to distribute all, or
substantially all, of its net investment income and net realized gains on
security transactions. Accordingly, no provision for federal income or excise
taxes has been made in the accompanying financial statements. As of December
31, 2007, the Fund has a capital loss carry forward of $453,902, of which
$152,270 can be carried forward through 2008, $98,440 through 2011, $35,450
through 2012, $29,688 through 2013, $120,473 through 2014 and $17,581 through
2015. These losses can be used to offset future gains. See Note E for further
disclosure regarding FASB Interpretation 48 ("FIN 48").
(3) Other - Security transactions are accounted for on the date the
securities are purchased or sold, (trade date). All premiums and discounts are
amortized or accreted for financial and tax reporting purposes using the
effective interest rate method. Realized gains and losses on sales are
determined using the specific lot method. Dividends to shareholders from net
investment income and net realized capital gains are declared and paid annually.
Interest income is accrued daily. Dividend income is recorded on the
ex-dividend date. Paydown gains and losses on mortgage and asset-backed
securities are presented as interest income.
The Fund indemnifies the Trustees and officers of the Fund for certain
liabilities that might arise from the performance of their duties to the Fund.
B. INVESTMENT ADVISORY AGREEMENT AND MANAGEMENT AGREEMENT
The Fund has an investment advisory agreement (the "Agreement") with the
Adviser, whereby the Fund pays the Adviser a monthly advisory fee, accrued
daily, based on an annual rate of 0.5% of the daily net assets of the Fund.
Investment advisory fees were $30,077 for the six months ended June 30, 2008.
The Fund has a management agreement with PC&J Service Corp. ("Service Corp."),
which is wholly owned by the shareholders of the Adviser. The Fund pays Service
Corp. for the overall management of the Fund's business affairs, exclusive of
the services provided by the Adviser, and functions as the Fund's transfer and
dividend disbursing agent. Service Corp. pays all expenses of the Fund (with
certain exclusions), including Trustee fees of $2,500 for the six months ended
June 30, 2008.
Service Corp. is entitled to a monthly fee, accrued daily, based on an annual
rate of 0.6% of the daily net assets of the Fund. Management fees were $36,092
for the six months ended June 30, 2008.
Certain officers and Trustees of the Fund are officers and directors, or both,
of the Adviser and of Service Corp.
PC&J PRESERVATION FUND
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NOTES TO FINANCIAL STATEMENTS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
C. CAPITAL SHARE TRANSACTIONS
For the Six Months Ended
June 30, 2008 For the Year Ended
(Unaudited) December 31, 2007
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Shares Dollars Shares Dollars
-------------- ---------- --------- ------------
Subscriptions 59,908 $ 631,559 103,358 $ 1,102,488
Reinvestment of distributions 0 0 54,105 566,481
59,908 631,559 157,463 1,668,969
Redemptions (89,135) (939,750) (248,847) (2,654,071)
Net decrease (29,227) $(308,191) (91,384) $ (985,102)
D. INVESTMENT TRANSACTIONS
Securities purchased and sold (excluding short-term obligations and long-term
U.S. Government securities) for the six months ended June 30, 2008, aggregated
$12,374,881 and $7,848,750, respectively. Purchases and sales of long-term U.S.
Government Securities for the six months ended June 30, 2008, aggregated
$1,399,600 and $4,165,000, respectively.
At June 30, 2008, gross unrealized appreciation on investments was $26,814 and
gross unrealized depreciation on investments was $312,491 for a net unrealized
depreciation of $285,677 for financial
reporting and federal income tax purposes.
E. FEDERAL TAX DISCLOSURE
Tax Character of Distributions Paid
F For the Year Ended December 31, 2007 For the Year Ended December 31, 2006
-------------------------------------
Ordinary Income Capital Gains Total Distribution Ordinary Income Capital Gains Total Distribution
- ------------------------------------- ------------------------------------- ------------------- ----------------
$ 566,481 $ 0 $ 566,481 $ 633,838 $ 0 $ 633,838
Tax Basis of Distributable Earnings
As of December 31, 2007
Undistributed
Ordinary Undistributed Unrealized
Income Capital Gains Appreciation
- ------------------------------------ --------------- --------------
$ 5,588 $ (453,903) $ (64,771)
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PC&J PRESERVATION FUND
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NOTES TO FINANCIAL STATEMENTS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
The Financial Accounting Standards Board ("FASB") issued FASB Interpretation 48
("FIN 48"), Accounting for Uncertainty in Income Taxes, which sets forth a
threshold for financial statement recognition, measurement and disclosure of a
tax position taken or expected to be taken on a tax return. Management has
analyzed the Fund's tax positions taken on federal income tax returns for all
open tax years (tax years ended December 31, 2004-2007) for purposes of
implementing FIN 48, and has concluded that as of December 31, 2007, no
provision for income tax would be required in the Fund's financial statements.
F. RENEWAL OF INVESTMENT ADVISORY AGREEMENT
The investment advisory agreement between the Fund and the Adviser (the
"Agreement") was renewed by the Board of Trustees at a meeting held on February
18, 2008. In determining whether to approve the Agreement, the Trustees
reviewed the following: the nature of the Adviser's business; the performance of
the Fund and the Adviser; the Adviser's personnel and operations; the nature,
quality and extent of the investment advisory services provided by the Adviser
to the Fund; the cost of the services and the profit to be realized by the
Adviser; a comparison of the fees paid by other funds and accounts; and
economies of scale and other benefits to the Funds and the Adviser.
The Trustees reviewed a description of the Adviser's business and a copy of the
Adviser's most recent registration statement on Form ADV. The Trustees noted
that the Fund is used as an investment vehicle for the Adviser's management
clients, not as a stand-alone product. The Fund was created in order to
efficiently manage the assets of the Adviser's smaller account relationships and
Fund shareholders receive many of the same advice and planning services, at no
additional cost, as the Adviser's non-Fund clients. The Adviser explained that
understanding the nature of its business is important in reviewing the Fund's
performance and advisory fees. The Trustees also reviewed the Adviser's balance
sheet dated as of December 31, 2007, and income statement for the year ended
December 31, 2007, and concluded that the Adviser had adequate financial
resources to provide the necessary services to the Fund. The Trustees also
considered the services provided by PC&J Service Corp. ("Service Corp."), a
wholly owned subsidiary of the Adviser. The Adviser explained that Service
Corp., the Fund's transfer agent, fund accountant, and dividend disbursing
agent, was formed to provide transfer agency services to the Fund in a cost
efficient manner.
Next, the Trustees reviewed the Adviser's personnel and operations. The
organizational chart of all professional personnel performing services for the
Fund was next reviewed, as well as a breakout of the amount of time spent on the
Fund's activities as compared to the amount of time spent on other activities.
Following this review, the Trustees concluded that the Adviser's personnel
staffing was adequate to provide the necessary services to the Fund, and that
the quality of the services provided by the Adviser to the Fund are excellent.
The Trustees then compared the Fund's average total returns with comparable
benchmarks. The Trustees noted that, unlike mutual funds that have a specific
investment style, the Fund does not have a pre-defined peer group. The Adviser
explained that because the Adviser often is the sole investment adviser for a
client/shareholder and the Fund serves as the investment vehicle for the
Adviser's clients, the Adviser takes a broader view than a specific investment
mandate. The Adviser stated the Fund is designed to meet the client/shareholder
need for positive investment returns that exceed returns available from money
market funds as opposed to outperforming a static benchmark. The Adviser stated
that positive returns are more important to the Fund's shareholders than
performance against a benchmark. The Fund, with its heavy
exposure to high-quality credit instruments, provided a 5.83% return for the
fiscal year ended December 31, 2007. However, the Fund was positioned more for
a rising interest rate environment than a declining one. To preserve principal
in a rising rate market, the Fund's effective average maturity (average based on
expected bond call dates) was lower than the Lehman Intermediate Bond Index. It
also held a number of issues with limited price appreciation (the security would
be called if interest rates dropped); therefore, the price could not climb much
above par. To compensate the Fund for the price limitation, the securities
PC&J PRESERVATION FUND
- ----------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
provided above-average coupon payments and offered some downside price
protection from a rising rate environment. The higher coupon payments and
quality orientation helped the Fund's return exceed the 4.38% return of the
Morningstar group of comparable funds. But, holding issues with price caps
caused the return to fall below the 7.39% return of the Lehman Index. In its
opinion, the Adviser believes we could experience a prolonged period of low
interest rates. The Adviser is continuing to evaluate an expanding universe of
investment options. The objectives of the Fund continue to be income
production and preservation of capital. The Adviser reviewed the performance of
the Fund compared to other short and intermediate term mutual funds of similar
asset size, noting that the Fund outperformed this group in the last three
years. The Trustees concluded that the Fund has performed very well,
particularly in the last three years.
The Trustees then turned their attention to the nature, quality and extent of
the services provided to the Fund. In addition to reviewing the professional
personnel involved in providing advisory services to the Fund, the Trustees
reviewed (i) the Adviser's compliance programs, including the Adviser's
practices for monitoring compliance with the Fund's investment limitations; (ii)
the business background and experience of the Adviser's Chief Compliance
Officer; (iii) examinations of the Adviser by state or Federal regulators during
the period since the last renewal of the Agreement; (iv) any material litigation
or administrative actions involving the Adviser or its affiliates, of which
there were none; and (v) the Adviser's currently effective Code of Ethics
adopted pursuant to Rule 17j-1. The Trustees reviewed the certification from
the Adviser that the employees of the Adviser have complied with the Adviser's
Code of Ethics and that the Adviser has procedures in place to prevent
violations of its Code of Ethics. The Trustees concluded that they were
satisfied with the compliance programs of the Adviser. Based on the materials
presented and their experiences with the Adviser, the Trustees concluded that
the nature, quality and extent of the services provided by the Adviser are
excellent in light of the objective and strategy of the Fund, and were
consistent with the Board's expectations.
The Trustees also considered the cost to the Adviser and Service Corp. of
providing the services and the profits realized by the Adviser and Service Corp.
In reviewing the Adviser's profitability, the Trustees considered and reviewed
the information in the Board materials which included the allocation of expenses
to the Adviser, including the method of allocating indirect and overhead costs
with respect to the Fund; a comparison of the Adviser's overall profitability
with the profitability of other investment advisers; and material payments by
the Fund to the Adviser, other than the fees paid pursuant to the Agreement.
After this review, the Trustees concluded that the allocation of expenses was
reasonable, the profitability of the Adviser consolidated with the profitability
of Service Corp. was below the average of other investment advisers, and the
service provider fees charged by Service Corp. were reasonable in light of other
high level of services provided.
Next, the Trustees considered whether the compensation payable to the Adviser
was reasonable in comparison to fees paid by other funds in the Fund's peer
group and in absolute terms. In doing so, the Trustees reviewed (i) the current
advisory fee schedule, actual dollar payments and any proposed changes; (ii) an
advisory fee comparison with the advisory fee of similar sized funds; (iii) a
comparison of advisory fees paid by the Fund under the Agreement with fees paid
to the Adviser by other comparable accounts managed by the Adviser; and (iv) a
comparison of the expense ratio of the Fund with the expense ratio of funds in
the peer group. The Adviser informed the Trustees that, because of the nature
of the relationship between it and the shareholder/clients, the level of service
received by shareholders, in its opinion, exceeded the "average service"
provided by advisers to other mutual funds. The Adviser stated that it provides
shareholder reporting tailored to specific client needs, provides performance
and cost information,
and makes the Fund's manager available for shareholder questions. The Adviser
explained that these services are embodied in its advisory fee. In addition,
the Adviser noted that small, individually managed accounts would be subject to
a minimum fee that would exceed the advisory fees charged through the
PC&J PRESERVATION FUND
- ----------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
Fund. The Trustees noted that a better fee/expense comparison is total expenses
paid by comparable funds, since the Fund's advisory fee is all-inclusive with no
front-end, deferred or redemption fees. Based on the information presented, the
Trustees concluded that the Adviser's fees were reasonable. It was the
consensus of the Trustees that the Fund's expense ratio of 1.10% was in line
with the 1.26% average expense ratio of the other funds of similar size and
objective. It was also noted that the 1.26% average expense ratio does not
include front-end fees (average of 1.12%), deferred load (average of 0.88%) and
12b-1 fees (average of 0.45%) charged by the other funds of similar size and
objective.
Next, the Trustees reviewed the economies of scale associated with managing the
Fund, the appropriateness of fee breakpoints, and benefits that accrue to the
Adviser as a result of its relationship with the Fund. The Trustees concluded
that as the Fund grows, adding breakpoints to benefit from realized economies of
scale could be appropriate, but that such considerations are not yet relevant
due to the size of the Fund and no excessive profits. They noted that current
structure allows for lower fees overall, rather that an initial higher fee for
the first step before a breakpoint. In addition, the Trustees concluded that
investment analysis done on behalf of the Fund may benefit some of the Adviser's
other accounts, but investment ideas utilized in other accounts also may benefit
the Fund. Finally, the Trustees reviewed a report on the use of the Performance
Fund brokerage as a "soft dollar" payment for research and discussed the
benefits of the soft dollar arrangements to the Adviser, as well as the benefits
to the shareholders.
Based upon the information provided, the Board concluded that the fees paid, and
to be paid, to the Adviser pursuant to the Agreement was reasonable, that the
overall arrangement provided under the terms of the Agreement was a reasonable
business arrangement, and that the renewal of the Agreement was in the best
interest of the Fund's shareholders. Therefore, the Agreement was renewed for
an additional one year term.
G. MATTERS SUBMITTED FOR SHAREHOLDER VOTE
A special meeting of the Shareholders of the PC&J Preservation Fund was held on
May 14, 2008 at 10:00 a.m. Eastern time.
The matters to be considered and voted upon by the Shareholders of the PC&J
Preservation Fund were the election of John W. Lohbeck and Laura B. Pannier as
Trustees of the Board of Trustees of the PC&J Preservation Fund.
Votes cast for the election of John W. Lohbeck as Trustee of the Board of
Trustees for the PC&J Preservation Fund:
For Approval: 830,973.184
--------------
Against Approval: 0
--
Abstain:300,309.361
-----------
PC&J PRESERVATION FUND
- ----------------------
NOTES TO FINANCIAL STATEMENTS (Concluded)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
Votes cast for the election of Laura B. Pannier as Trustee of the Board of
Trustees for the PC&J Preservation Fund:
For Approval:830,973.184
-----------
Against Approval: 0
--
Abstain:300,309.361
-----------
After tabulating the votes, it was concluded that the Shareholders had approved
the election of John W. Lohbeck and Laura B. Pannier as Trustees of the PC&J
Preservation Fund.
In addition to the election of John W. Lohbeck and Laura B. Pannier as Trustees,
James M. Johnson and Kathleen A. Carlson continued their terms as Trustees of
the PC&J Preservation Fund.
PC&J PRESERVATION FUND
- ------------------------
ADDITIONAL INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
FUND EXPENSES
As a shareholder of the Fund, you incur ongoing costs, including management fees
and investment advisory fees. This Example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period (January 1, 2008) and held for the six months ended June 30, 2008.
Actual Expenses
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Beginning Account Ending Account
Value Value Expenses Paid
January 1, 2008 June 30, 2008 During Period*
Actual
$ 1,000.00 $ 1,004.77 $ 5.48
Hypothetical (5% return $ 1,000.00 $ 1,019.41 $ 5.52
before expenses)
* Expenses are equal to the Fund's annualized expense ratio of 1.1%, multiplied
by the average account value over the period, multiplied by the number of days
in the most recent six-month period, then divided by the number of days in the
current fiscal year.
PC&J PRESERVATION FUND
- ------------------------
ADDITIONAL INFORMATION (Concluded)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
PORTFOLIO CHARACTERISTICS
% OF NET
TYPE OF SECURITY ASSETS
---------
U.S. Agency Obligations 10.0%
- ----------------------------- ---------
U.S. Corporate Obligations 30.6
Taxable Municipal Obligations 32.0
Preferred Stock 6.8
Exchange Traded Debt 5.1
Investment Companies 12.2
Lease Assignments 2.3
Other Assets Less Liabilities 1.0
Total 100.0%
---------
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities and information regarding how
the Fund voted those proxies during the most recent 12-month period ended June
30 are available without charge: (1) upon request by calling toll free at (888)
223-0600 or (2) from the Fund's documents filed with the Securities and Exchange
Commission ("SEC") on the SEC's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's web site at www.sec.gov. The Fund's Forms N-Q may
also be reviewed and copied at the SEC's Public Reference Room in Washington,
DC. Information on the operation of the Public Reference Room may be obtained
by calling 1-800-SEC-0330.
ITEM 2. CODE OF ETHICS. Not Applicable
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not Applicable
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not Applicable
ITEM 5. AUDIT COMMITTEE OF LISTED COMPANIES. Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS. Not applicable - schedule filed with Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END FUNDS.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END FUNDS. Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant has not adopted procedures by which shareholders may recommend
nominees to the registrant's board of trustees.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the registrant's disclosure controls and
procedures as of July 24, 2008, the disclosure controls and procedures are
reasonably designed to ensure that the information required in filings on Forms
N-CSR is recorded, processed, summarized, and reported on a timely basis.
(b) There were no significant changes in the registrant's internal control
over financial reporting that occurred during the registrant's last fiscal
half-year that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PC&J Preservation Fund
- ----------------------
By
/s/
- ---
Kathleen Carlson, Treasurer
Date August 6, 2008
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By
/s/
- ---
James M. Johnson, President
Date August 6, 2008
--------------
By
/s/
- ---
Kathleen Carlson, Treasurer
Date August 6, 2008
--------------