ANNUAL REPORT
August 31, 1998
LOGO:
Potomac Funds
100 South Royal Street
Alexandria, Virginia 22314
550 Mamaroneck Avenue
Harrison, New York 10528
(800) 851-0511
<PAGE>
Dear Shareholders:
We are pleased to present the initial annual report of the Potomac Funds for the
period ended August 31, 1998. The first year of operation has been a time of
building relationships and maintaining consistent Fund performance in
relationship to the respective indices we have been tracking in a very dynamic
stock market environment. The individual Fund results for the first fiscal year
are as follows:
U.S. PLUS FUND - This Fund uses S&P 500 futures contracts and options on S&P
futures to achieve its objective of 150% exposure to the S&P 500 Index. From the
start of operations in October '97 and through the summer of '98, it
participated in the strong bull market. The S&P 500 Index reflected the optimism
resulting from the first balanced budget in recent memory and with forecasts of
record corporate earnings, the S&P Index reached an all time high in July. By
August the drumbeat of adverse international and political news brought an end
to market euphoria and the S&P 500 Index plunged 14%. The NAV for this Fund
reached a high of $13.47 on July 17th, however, by August 31st, the NAV declined
to $9.76. Thus the Fund declined 2.2% from inception to fiscal year end and lost
4.3% on a 1998 year-to-date basis.
U.S. SHORT FUND - The Fund seeks to inversely correlate to the performance of
the S&P 500 Index. To achieve this end, the Fund held short positions in S&P
futures contracts, options on S&P 500 futures contracts and options on the S&P
500 Index. For the period November 7, 1997 (Fund Inception) through July 20,
1998, the Fund posted a return of -24.4%. During the same period, the S&P 500
Index had a return of 27.7%. From July 20th until August 31st, 1998, the Fund
returned 25.1%, while the S&P 500 Index return was -19.2%, reflecting market
jitters over continued Asian economic instability adversely impacting domestic
corporate profits. From inception to the August 31, 1998 fiscal year end, this
Fund decreased in value by 5.4%. For the period of January 1 through August 31,
1998, the Fund increased by 4%.
OTC PLUS FUND - The Fund is designed to be exposed to 125% of the NASDAQ 100
Index (NDX). The Fund does this by investing in approximately 80 of the 100
stocks in the NDX and options on the NDX. The NDX includes the 100 largest
capitalized companies in the NASDAQ Composite Index exclusive of financial and
utility stocks. The NDX is heavily technology oriented with such important
companies as Microsoft and Intel monopolizing the weights. Although the
technology stocks lost ground after the OTC Plus Fund began operations, they
recovered significantly after the first of this year and by July the NDX had
reached an all time high. However, like every other market, the NDX declined
severely in August. Generally the Asian contagion is considered to be the cause
of most of the woes of these high tech firms. The Fund reached an all time high
on July 20th at $14.22 per share and at that point was running a 1.22 beta to
the NDX. A large percentage of these gains was given back with the broad retreat
of the markets in August. From inception to August 31, 1998, the Fund had a
positive return of 4.1% and the 1998 calendar year-to-date return as of August
31st was an increase of 16.7%.
OTC SHORT FUND - This Fund seeks to provide investment results that inversely
correlate to the performance of the technology-laden NASDAQ 100 Index (NDX). In
order to achieve its objective, the Fund engaged in short sales of stock from
the top 80 companies that comprise the NDX. For purposes of liquidity--
especially for the first several months of its existence--the Fund held NDX
option positions as well. From inception through fiscal year end, the return was
a negative 16.2% and for the period January 1 through August 31, 1998, the
return was a negative 21.8%.
<PAGE>
U.S. GOVERNMENT MONEY MARKET FUND - The Money Market Fund invests in short term
U.S. Treasury and Federal Agency obligations and repurchase agreements backed by
these securities. The Fund has the objective of providing current income with
the highest degree of safety of principal. During the Fund's past fiscal year,
the Federal Reserve kept both the Federal Funds rates unchanged. Only after the
market stress caused by the collapse of Long Term Capital Management L.P. hedge
fund, did the Fed cut both of these rates by a quarter of a point in late
September and mid October. Since the start of operations through August 31,
1998, three month Treasury bills have ranged from a high of 5.47% in December to
a low of 4.83% in August of this year. The return from inception through fiscal
year end was 3.89%.
In summary, we should note that the beta tracking of the stock and futures index
portfolios proved to be a difficult task in the early days of trading the Fund
portfolios due to the small amount of assets in each Fund. As the asset base
grew in size in each Fund, the tracking of the targeted betas improved and
currently results are close to the respective objectives. The entire team of the
Potomac Funds would like to thank all of our investors for their confidence in
our investment products. We shall continue to strive to provide you with
investment performance that follows our stated portfolio objectives and with a
professional level of service on a consistent basis in the future.
Sincerely,
/s/ James Terry Apple /s/ Philip Harding /s/Thomas Mulrooney
- --------------------- -------------------- -------------------
James Terry Apple Philip Harding Thomas Mulrooney
Chief Investment Officer Senior Vice President Chief Operating Officer
<PAGE>
U.S. PLUS FUND
(Graphic Description of Mountain Chart)
October 21, 1997-August 31, 1998
$10,017 S&P 500 Index
$ 9,777 U.S. Plus Fund
U.S. Plus Fund S&P 500 Index
10000 10000
10190 10174.4
10200 10134.8
9980 9948.51
9790 9853.81
9580 9177.28
9590 9646.72
9760 9618.57
9490 9456.58
9620 9571.06
10050 9826.08
9990 9844.6
10030 9865.53
9730 9816.03
9620 9705.95
9550 9639.18
9560 9666.91
9260 9480.44
9430 9592.41
9620 9714.74
9910 9901.53
9790 9818.13
9870 9884.68
10110 10035.3
10220 10078.3
9910 9906.45
9940 9949.87
9990 9958.46
9990 9997.8
10380 10200.5
10310 10168.2
10350 10221.4
10340 10183
10490 10294.9
10460 10280
10370 10211.1
10230 10148.4
9990 9992.99
10020 9976.77
10140 10081.4
10240 10130.1
10150 10103.9
9990 9996.76
9877.5 9907.6
9967.66 9980.01
9687.16 9827.54
9647.09 9760.26
9707.2 9799.6
10007.7 9976.45
10218.1 10159.4
10218.1 10155.1
10308.3 10203.3
10348.3 10224.6
10097.9 10114.8
10148 10087.8
9947.63 10004.6
9456.76 9707.83
9707.2 9828.38
9917.57 9963.48
9977.68 10024.4
9847.45 9948.93
10057.8 10061.7
10318.3 10240.6
10168 10159.1
10027.8 10077.8
10007.7 10020.7
9997.71 10014
10158 10140.3
10298.2 10228.6
10368.4 10312.7
10388.4 10258.2
10648.9 10477.8
10749 10527.3
10739 10536.7
10739 10501.6
10879.3 10594.9
10829.2 10576.9
10969.4 10663.5
10969.4 10673.9
11019.5 10717.1
10949.4 10674.8
11029.5 10702.7
11159.8 10800.2
11089.6 10760.5
11189.8 10822.5
11260 10863.6
11139.7 10784.3
11330.1 10913.5
11430.2 10973.8
11410.2 10980.8
11400.2 10963.7
11490.4 11008.9
11370.1 10959.8
11219.9 10831.3
11520.4 11047.3
11470.3 11011.9
11650.6 11136.9
11710.8 11181
11780.9 11196.2
11730.8 11182.5
11911.1 11294
11951.2 11306.4
12001.3 11359.5
12071.4 11403.6
12231.7 11502.2
12181.6 11464.4
12331.9 11570.1
12271.7 11531.2
12231.7 11519.3
12171.6 11463.2
12151.5 11443.5
12231.7 11529.3
12351.9 11596.3
12572.3 11720.4
12632.4 11748.5
12512.2 11734.7
12371.9 11610.9
12261.7 11528.2
12392 11622.6
12351.9 11612.4
12482.1 11675.8
12532.2 11713.1
12321.8 11596.5
12582.3 11748.7
12552.2 11758.5
12662.4 11790.1
12682.5 11830.6
12512.2 11715.9
12291.8 11593.6
11971.2 11370.1
11921.1 11355.2
12021.3 11454.8
12381.9 11633.9
12552.2 11730.7
12522.2 11741.9
12392 11673.2
12181.6 11562.5
12051.4 11460.1
12331.9 11596.1
12281.8 11580.5
12442 11676.2
12472.1 11708.3
12402 11692.7
12291.8 11602.3
12221.7 11571.9
12341.9 11610.6
12482.1 11710.4
12392 11664.2
12321.8 11620.5
11991.2 11448.4
12041.3 11429.7
12111.5 11485.9
11951.2 11414.9
12021.3 11416.6
12021.3 11440
11740.8 11330.2
12061.4 11456.9
12381.9 11656
12371.9 11675.5
12422 11703.6
12311.8 11639.5
11961.2 11454.2
12101.4 11498.8
11670.7 11270.4
11901.1 11381.1
12261.7 11585.4
12201.6 11577.6
12111.5 11517.8
12181.6 11544.9
12392 11714.9
12652.4 11855
12622.4 11817.4
12692.5 11858.4
12762.6 11913.8
12622.4 11865.1
12842.8 12019.1
12882.8 11996.7
13083.2 12110.7
13043.1 12083
13173.3 12205.5
13053.1 12123.8
13133.3 12184.1
13153.3 12193.1
13363.7 12322.8
13323.6 12293.8
13453.8 12389.9
13493.9 12418.8
13493.9 12391
13143.3 12191.9
13133.3 12181.5
12732.6 11926.9
12722.5 11937.9
12822.7 12005.6
12532.2 11827.4
12432 11774.8
12712.5 11960.4
12331.9 11727.3
12241.7 11641.1
11520.4 11219.2
11760.8 11316.6
11831 11402.5
11871 11400.6
11690.7 11334.5
11410.2 11186.4
11700.7 11345.8
11480.3 11248.4
11219.9 11121.2
11580.5 11340.1
11911.1 11523.5
11851 11490.7
11730.8 11423.1
11610.6 11314
11700.7 11386.9
11730.8 11436.3
11610.6 11345.5
10789.1 10910.2
10678.9 10748.5
9777.32 10017.5
10/20/97-
8/31/98
_____________________________
U.S. Plus Fund (2.23%)
S&P 500 Index 0.17%(1)
_____________________________
- --------------------------------------------------------------------------------
U.S./SHORT FUND
(Graphic Description of Mountain Chart)
November 7, 1997-August 31, 1998
$10,321 S&P 500 Index
$ 9,460 U.S./Short Fund
U.S./Short Fund S&P 500 Index
10000 10000
10140 9931.21
10030 9959.78
10080 9767.66
9800 9883.02
9580 10009.1
9460 10201.5
9410 10115.6
9370 10184.1
9300 10339.3
9300 10383.6
9330 10206.6
9310 10251.3
9290 10260.2
9270 10300.7
9230 10509.5
9220 10476.2
9220 10531.1
9230 10491.5
9140 10606.8
9160 10591.5
9210 10520.4
9300 10455.8
9430 10295.7
9420 10279
9350 10386.8
9290 10437
9340 10410
9440 10299.6
9510 10207.8
9460 10282.4
9630 10125.3
9660 10056
9620 10096.5
9440 10278.7
9310 10467.2
9420 10462.7
9370 10512.5
9350 10534.3
9500 10421.2
9470 10393.4
9600 10307.7
9910 10001.9
9740 10126.1
9600 10265.3
9560 10328.1
9460 10250.4
9340 10366.6
9180 10550.8
9280 10466.8
9370 10383.1
9390 10324.3
9400 10317.4
9310 10447.5
9220 10538.5
9160 10625.1
9150 10568.9
9000 10795.2
8940 10846.2
8950 10856
8950 10819.7
8870 10915.9
8910 10897.4
8830 10986.5
8830 10997.3
8810 11041.8
8830 10998.2
8790 11026.9
8720 11127.4
8760 11086.5
8690 11150.4
8660 11192.8
8720 11111
8620 11244.1
8570 11306.3
8580 11313.5
8580 11295.8
8540 11342.4
8600 11291.9
8680 11159.5
8530 11382
8540 11345.5
8450 11474.3
8420 11519.8
8390 11535.4
8420 11521.3
8340 11636.2
8320 11648.9
8290 11703.6
8270 11749.1
8200 11850.6
8230 11811.7
8140 11920.6
8170 11880.5
8190 11868.3
8220 11810.5
8230 11790.2
8190 11878.6
8140 11947.6
8050 12075.5
8010 12104.5
8070 12090.2
8130 11962.7
8180 11877.5
8130 11974.8
8140 11964.2
8060 12029.5
8040 12068
8050 11947.8
7920 12104.7
7930 12114.7
7890 12147.2
7870 12189
7950 12070.8
8040 11944.9
8180 11714.6
8200 11699.2
8150 11801.8
7990 11986.4
7920 12086.1
7930 12097.7
7990 12026.8
8090 11912.8
8150 11807.3
8020 11947.5
8050 11931.3
7980 12030
7970 12063
8000 12047
8050 11953.8
8080 11922.5
8030 11962.4
7960 12065.2
8010 12017.5
8040 11972.6
8180 11795.2
8170 11775.9
8140 11833.8
8200 11760.7
8180 11762.5
8180 11786.6
8310 11673.5
8160 11804
8010 12009.1
8010 12029.2
7990 12058.2
8030 11992.1
8200 11801.3
8140 11847.2
8340 11611.8
8230 11725.9
8070 11936.4
8090 11928.4
8140 11866.7
8110 11894.6
8000 12069.8
7890 12214.2
7910 12175.4
7880 12217.7
7860 12274.7
7910 12224.6
7820 12383.3
7820 12360.2
7740 12477.6
7750 12449
7700 12575.3
7750 12491.1
7710 12553.3
7720 12562.6
7650 12696.1
7630 12666.3
7580 12765.2
7550 12795
7560 12766.4
7710 12561.3
7710 12550.6
7950 12288.3
7950 12299.6
7910 12369.4
8040 12185.7
8060 12131.5
7940 12322.8
8110 12082.6
8140 11993.8
8440 11559.1
8370 11659.5
8320 11747.9
8310 11746
8360 11677.9
8510 11525.3
8390 11689.6
8440 11589.2
8550 11458.1
8380 11683.6
8220 11872.6
8240 11838.8
8290 11769.1
8350 11656.8
8310 11731.8
8280 11782.7
8350 11689.2
8730 11240.7
8790 11074.2
9460 10321
11/7/97-
8/31/98
_____________________________
U.S./Short Fund (5.40%)
S&P 500 Index 3.21%(1)
_____________________________
The Standard & Poor's 500 Index (S&P 500 Index) is a capital-weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. This chart assumes an initial
gross investment of $10,000 made on the commencement of operations. Past
performance is not predictive of future performance.
1 Return does not include continuous reinvestment of dividends.
<PAGE>
OTC Plus Fund
(Graphic Description of Mountain Chart)
October 20, 1997-August 31, 1998
$10,479 NASDAQ Composite Index
$10,410 OTC Plus Fund
OTC Plus Fund NASDAQ Composite Index
10000 10000
10050 10204.9
9930 10096.1
9800 9875.03
9690 9715.97
9590 8994.72
9710 9619.76
9550 9462.53
9260 9195.5
9490 9369.35
9710 9655.13
9710 9626.65
9720 9620.22
9560 9503.06
9500 9449.3
9410 9295.11
9400 9289.78
9010 9006.57
9310 9237.31
9560 9444.98
9820 9645.76
9650 9522.72
9660 9548.54
9950 9763.29
9880 9709.07
9570 9466.76
9660 9538.8
9740 9595.59
9810 9653.2
10150 9917.11
9830 9667.54
9940 9755.3
9830 9673.88
10040 9834.78
10180 9951.02
9810 9654.67
9610 9494.23
9110 9206.34
8840 8991.41
8870 9045.53
9030 9164.35
8870 9038.64
8670 8883.71
8720 8912.47
8750 8965.68
8460 8725.66
8340 8628.44
8510 8767.01
8790 8991.78
9020 9174.91
8920 9104.53
9100 9264.69
9200 9349.14
9080 9246.86
8910 9108.11
8950 9138.89
8510 8786.49
8670 8924.14
8940 9143.58
8940 9155.71
8920 9148.45
9050 9243
9290 9436.07
9280 9432.76
9220 9378.64
9270 9413.92
9160 9339.77
9400 9517.67
9710 9770
9770 9823.11
9800 9842.68
10140 10117.1
10250 10211.4
10410 10332.5
10280 10244.5
10500 10423.3
10370 10316.8
10570 10473.6
10560 10464.6
10630 10519.6
10520 10445.1
10440 10371
10570 10482.3
10760 10629.5
10800 10656.8
11100 10893.9
10950 10773.3
11280 11030.5
11350 11090.9
11190 10972.9
11000 10821
10980 10803.8
11020 10841.9
10390 10354.5
10790 10687.9
10380 10368.7
10610 10554.6
10660 10603
10770 10689.4
10840 10744.7
10970 10844.7
10830 10731.8
10930 10815.6
11030 10899.7
10830 10746
10950 10835.6
11170 11006.8
11360 11163.1
11400 11191.7
11320 11133.8
11260 11087.9
11420 11216.7
11510 11287.9
11530 11304.2
11570 11336.2
11230 11076.2
10960 10862.7
11060 10944.7
11130 10998.4
11200 11054.2
11310 11147.4
11520 11315
11480 11279.9
11520 11314
11780 11514.9
11980 11667.4
12230 11862.2
11840 11565.2
11730 11487.6
11370 11211.1
11400 11233.6
11600 11390.4
11700 11469.1
11730 11500.4
11780 11539.8
11670 11461.2
11610 11415.1
11400 11235.3
11760 11523.4
11570 11373
11800 11545.2
11880 11606.5
11910 11634.3
11710 11481.6
11630 11417.4
11780 11537.7
11570 11373.8
11390 11244.7
11280 11156.7
11120 11028
11230 11113.8
11290 11163.1
11010 10954
10710 10710.3
10950 10908.8
10660 10695.9
11040 10982.7
11170 11088.4
11170 11091.4
11350 11242.6
11070 11020.5
10910 10890
10940 10907.3
10790 10784
11210 11127
11360 11248.1
11400 11278
11550 11391.8
11840 11614.3
12290 11967.8
12620 12232.1
12380 12050.5
12500 12138.2
12720 12310.7
12690 12288.9
12920 12461.7
12630 12244.7
12750 12337
12790 12371.4
13180 12661.1
13240 12710.5
13340 12783
13700 13053.8
13670 13031.3
14050 13320.3
14080 13348.2
14220 13452.5
14220 13470.2
13800 13157.7
13800 13145.7
13500 12918
13530 12943.7
13750 13107
13340 12802.9
13180 12681.6
13690 13067.3
13150 12655.7
13040 12574.7
12440 12104.2
12590 12220.5
13020 12551.1
12990 12534.5
12970 12523.6
12590 12222.6
12880 12448.1
12690 12298.5
12580 12221.8
13050 12568.7
13440 12876.1
13390 12848.7
13410 12848.1
13130 12632.9
13070 12597.5
13300 12757.6
13130 12626.2
12400 12058.6
11830 11624.5
10410 10478.7
10/20/97-
8/31/98
_________________________________
OTC Plus Fund 4.10%
NASDAQ Composite Index 4.79%(1)
_________________________________
- --------------------------------------------------------------------------------
OTC/Short Fund
(Graphic Description of Mountain Chart
October 16, 1997 - August 31, 1998
$10,373 NASDAQ Composite Index
$ 8,380 OTC/Short Fund
OTC/Short Fund NASDAQ Composite Index
10000 10000
10410 9779.33
10110 9898.76
9720 10101.6
9740 9993.91
9950 9775.06
10170 9617.6
10940 8903.65
10260 9522.37
10430 9366.73
10720 9102.4
10520 9274.5
10200 9557.39
10220 9529.19
10190 9522.82
10290 9406.85
10390 9353.64
10560 9201
10570 9195.73
10890 8915.39
10620 9143.79
10380 9349.36
10150 9548.11
10290 9426.31
10260 9451.87
10020 9664.45
10080 9610.78
10450 9370.92
10360 9442.23
10300 9498.44
10210 9555.48
10040 9816.71
10290 9569.67
10190 9656.53
10270 9575.94
10120 9735.21
9990 9850.28
10280 9556.93
10470 9398.12
10690 9113.14
10890 8900.38
10870 8953.96
10750 9071.57
10900 8947.13
11080 8793.77
11050 8822.25
10980 8874.91
11280 8637.32
11400 8541.09
11220 8678.26
10900 8900.74
10660 9082.03
10710 9012.35
10590 9170.9
10540 9254.49
10600 9153.25
10740 9015.9
10740 9046.37
11130 8697.54
10940 8833.8
10660 9051.01
10750 9063.02
10750 9055.83
10660 9149.43
10440 9340.54
10370 9337.26
10420 9283.69
10370 9318.62
10450 9245.21
10240 9421.31
9970 9671.09
9920 9723.66
9890 9743.04
9620 10014.6
9530 10108.1
9420 10228
8900 10140.8
8740 10317.8
8840 10212.3
8700 10367.6
8710 10358.7
8660 10413.1
8740 10339.4
8800 10266.1
8700 10376.2
8588 10521.8
8620 10549
8440 10783.6
8520 10664.2
8330 10918.8
8250 10978.6
8340 10861.9
8460 10711.4
8470 10694.4
8440 10732.1
8830 10249.7
8550 10579.7
8810 10263.7
8650 10447.8
8620 10495.6
8540 10581.1
8500 10635.9
8420 10734.9
8510 10623.2
8440 10706.1
8370 10789.4
8500 10637.2
8420 10725.9
8290 10895.3
8170 11050
8150 11078.4
8190 11021.1
8220 10975.6
8150 11103.2
8100 11173.7
8090 11189.8
8070 11221.4
8260 10964.1
8420 10752.7
8350 10833.9
8300 10887
8260 10942.3
8190 11034.6
8060 11200.5
8090 11165.7
8070 11199.5
7920 11398.3
7810 11549.2
7670 11742.1
7860 11448.1
7920 11371.3
8110 11097.6
8100 11119.9
7990 11275.1
7940 11352.9
7920 11384
7890 11423
7950 11345.2
7980 11299.5
8110 11121.5
7900 11406.7
8000 11257.9
7870 11428.4
7830 11489
7810 11516.5
7910 11365.4
7950 11301.8
7870 11420.9
7980 11258.6
8070 11130.8
8140 11043.8
8230 10916.3
8160 11001.3
8130 11050.1
8290 10843.1
8470 10601.9
8310 10798.4
8480 10587.6
8250 10871.5
8160 10976.2
8170 10979.1
8060 11128.8
8220 10908.9
8310 10779.8
8300 10796.9
8390 10674.8
8120 11014.4
8030 11134.3
8010 11163.8
7930 11276.5
7760 11496.8
7520 11846.6
7360 12108.3
7470 11928.5
7420 12015.3
7310 12186
7320 12164.5
7210 12335.5
7340 12120.7
7280 12212.2
7260 12246.2
7080 12532.9
7050 12581.8
7010 12653.6
6850 12921.6
6860 12899.4
6700 13185.4
6690 13213.1
6630 13316.3
6640 13333.8
6800 13024.5
6800 13012.6
6920 12787.2
6900 12812.7
6820 12974.3
6980 12673.3
7050 12553.3
6830 12935
7060 12527.6
7100 12447.4
7400 11981.7
7330 12096.8
7120 12424
7140 12407.6
7150 12396.8
7320 12098.9
7190 12322
7270 12174
7320 12098.1
7110 12441.5
6930 12745.7
6950 12718.6
6940 12718.1
7060 12505
7080 12469.9
6990 12628.5
7050 12498.4
7370 11936.5
7630 11506.9
8380 10372.6
10/16/97-
8/31/98
_________________________________
OTC Short Fund (16.20%)
NASDAQ Composite Index 3.73%(1)
_________________________________
The NASDAQ Composite Index is a broad-based capitalization-weighted index of all
NASDAQ stocks. This chart assumes an intitial gross investment of $10,000 made
on the commencement of operations. Past performance is not predictive of future
performance.
1 Return does not include continuous reinvestment of dividends.
<PAGE>
U.S. Plus Fund
Schedule of Investments
- --------------------------------------------------------------------------------
August 31, 1998
- --------------------------------------------------------------------------------
Face Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 128.50%*
$607,049 U.S. Treasury Bill 4.73%, 11/27/98 $ 600,109
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $600,080) 600,109
-----------
- --------------------------------------------------------------------------------
Contracts
- --------------------------------------------------------------------------------
CALL OPTIONS PURCHASED - 0.08%*
1 S&P 500 Index Futures
Expiring September 1998 at 1100
(Cost $6,504) 375
-----------
TOTAL INVESTMENTS - 128.58%*
(Cost of $606,584) $ 600,484
===========
U.S. Plus Fund
Schedule of Options Written
August 31, 1998
- --------------------------------------------------------------------------------
Contracts
- --------------------------------------------------------------------------------
WRITTEN OPTION CONTRACTS
1 S&P 500 Index Futures - Put
Expiring September 1998 at 1100 $ 23,375
-----------
TOTAL OPTIONS WRITTEN
(Premiums received $7,245) $ 23,375
===========
* Calculated as a percentage of net assets.
See notes to the financial statements.
<PAGE>
U.S. Plus Fund
Schedule of Futures Contracts
August 31, 1998
- --------------------------------------------------------------------------------
Unrealized
Contracts Loss
- --------------------------------------------------------------------------------
FUTURES CONTRACTS PURCHASED
2 S&P 500 Index Futures Contracts
Expiring September 1998
(Underlying Face Amount at
Market Value $477,000) $(80,634)
===========
See notes to the financial statements.
<PAGE>
U.S./Short Fund
Schedule of Investments
- --------------------------------------------------------------------------------
August 31, 1998
- --------------------------------------------------------------------------------
Face Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 82.40%*
$6,475,184 U.S. Treasury Bill 4.73%, 11/27/98 $ 6,401,167
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $6,400,855) 6,401,167
-----------
- --------------------------------------------------------------------------------
Contracts
- --------------------------------------------------------------------------------
PUT OPTIONS PURCHASED - 5.99%*
31 S&P 500 Index Futures
Expiring September 1998 at 1100
(Cost $126,099) 465,775
-----------
TOTAL INVESTMENTS - 88.39%*
(Cost of $6,526,954) $ 6,866,942
===========
U.S./Short Fund
Schedule of Options Written
August 31, 1998
- --------------------------------------------------------------------------------
Contracts
- --------------------------------------------------------------------------------
WRITTEN OPTION CONTRACTS
31 S&P 500 Index Futures - Call
Expiring September 1998 at 1100 $ 3,875
-----------
TOTAL OPTIONS WRITTEN
(Premiums received $66,111) $ 3,875
===========
* Calculated as a percentage of net assets.
See notes to the financial statments.
<PAGE>
U.S./Short Fund
Schedule of Short Futures Contracts
August 31, 1998
- --------------------------------------------------------------------------------
Unrealized
Contracts Gain
- --------------------------------------------------------------------------------
SHORT FUTURES CONTRACTS
20 S&P 500 Index Futures Contracts
Expiring September 1998
(Underlying Face Amount at
Market Value $4,770,000) $ 534,660
===========
See notes to the financial statements.
<PAGE>
OTC Plus Fund
Schedule of Investments
- --------------------------------------------------------------------------------
August 31, 1998
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS - 94.57%*
19,656 Microsoft Corporation ** $ 1,885,748
13,343 Intel Corporation 949,855
8,396 Cisco Systems, Inc. ** 687,422
5,139 Dell Computer Corporation ** 513,900
8,493 WorldCom, Inc. ** 347,682
4,668 MCI Communications Corporation 233,400
7,678 Oracle Corporation ** 153,080
3,840 Tele-Communications, Inc. - Class A ** 126,720
2,033 Amgen Inc. ** 123,759
3,004 Sun Microsystems, Inc. ** 119,034
2,673 Comcast Corporation - Special Class A 99,903
4,483 Telefonaktiebolaget LM Ericsson - ADR 96,104
1,708 Costco Companies, Inc. 80,383
3,487 HBO & Company 74,099
2,431 Level 3 Communications, Inc.** 72,398
1,702 BMC Software, Inc. ** 72,016
2,898 Applied Materials, Inc. ** 71,182
1,590 Tellabs, Inc. ** 67,178
2,827 3Com Corporation ** 66,965
2,625 Qwest Communications International Inc. ** 65,625
1,427 Compuware Corporation ** 64,839
2,203 Staples, Inc. ** 59,756
1,537 Ascend Communications, Inc. ** 54,083
1,774 PeopleSoft, Inc. ** 49,894
1,177 PanAmSat Corporation ** 49,875
1,283 Paychex, Inc. 48,754
1,143 Chancellor Media Corporation ** 40,791
2,074 Nextel Communications, Inc. - Class A 37,462
1,198 Nordstrom, Inc. 35,865
1,078 Network Associates, Inc. ** 34,766
821 Cintas Corporation 33,456
1,061 Apple Computer, Inc. 33,090
1,053 Maxim Integrated Products, Inc. ** 28,957
616 Linear Technology Corporation 28,952
2,823 Novell, Inc. ** 26,819
575 Biogen, Inc. ** 26,594
650 Fiserv, Inc. ** 25,350
605 PACCAR Inc. 24,805
550 QUALCOMM Incorporated ** 24,166
886 Biomet, Inc. 23,811
402 Jacor Communications, Inc. ** 23,718
1,055 ADC Telecommunications, Inc. ** 23,408
793 Sigma-Aldrich Corporation 22,006
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
693 Starbucks Corporation ** $ 21,873
597 Quintiles Transnational Corp. ** 21,343
765 Northwest Airlines Corporation 21,277
2,063 Parametric Technology Corporation ** 21,146
717 Altera Corporation ** 20,883
761 American Power Conversion Corporation ** 20,547
1,101 Bed Bath & Beyond Inc. ** 19,887
1,378 Chiron Corporation ** 19,809
610 Apollo Group, Inc. - Class A ** 18,529
565 Centocor, Inc. ** 18,362
793 Gartner Group, Inc. - Class A ** 18,338
383 Reuters Group PLC - ADR 18,240
587 Xilinx, Inc. ** 17,904
460 Electronic Arts Inc. ** 17,537
631 Genzyme Corporation ** 17,037
752 Herman Miller, Inc. 15,416
629 Molex Incorporated 15,253
775 Stewart Enterprises, Inc. - Class A 15,209
459 Cambridge Technology Partners, Inc. ** 14,917
389 Tech Data Corporation ** 14,709
816 Netscape Communications Corporation ** 14,688
504 McCormick & Company, Incorporated 14,647
679 KLA -Tencor Corporation ** 14,429
1,249 Quantum Corporation ** 14,285
536 Adobe Systems Incorporated 14,070
504 Cracker Barrel Old Country Store, Inc. 12,316
563 Rexall Sundown, Inc. ** 10,275
893 Adaptec, Inc. ** 10,269
691 Andrew Corporation ** 10,235
507 First Health Group Corp. ** 10,235
772 Worthington Industries, Inc. 10,036
375 Autodesk, Inc. 8,766
657 General Nutrition Companies, Inc. ** 8,746
356 Dura Pharmaceuticals, Inc. ** 5,874
838 Atmel Corporation ** 5,054
605 Oxford Health Plans, Inc. ** 3,706
-----------
TOTAL COMMON STOCKS
(Cost $6,739,237) $ 7,263,517
-----------
See notes to the financial statements.
<PAGE>
OTC Plus Fund
Schedule of Investments
- --------------------------------------------------------------------------------
August 31, 1998
- --------------------------------------------------------------------------------
Face Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 1.43%*
$111,292 U.S. Treasury Bill
4.73%, 11/27/98 $ 110,020
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $110,015) 110,020
-----------
- --------------------------------------------------------------------------------
Contracts
- --------------------------------------------------------------------------------
CALL OPTIONS PURCHASED - 0.20%*
4 Nasdaq Index
Expiring September 1998 at 1240
(Cost $11,154) 5,600
18 Nasdaq Index
Expiring September 1998 at 1340
(Cost $105,672) 9,450
-----------
TOTAL CALL OPTIONS
(Cost of $116,826) 15,050
-----------
TOTAL INVESTMENTS - 96.20%*
(Cost of $6,966,078) $ 7,388,587
===========
* Calculated as a percentage of net assets.
**Non-income producing security.
OTC Plus Fund
Schedule of Options Written
- --------------------------------------------------------------------------------
August 31, 1998
- --------------------------------------------------------------------------------
Contracts Value
- --------------------------------------------------------------------------------
WRITTEN OPTION CONTRACTS
3 Nasdaq Index - Put
Expiring September 1998
at 1240 $ 32,250
18 Nasdaq Index - Put
Expiring September 1998
at 1340 330,750
-----------
- --------------------------------------------------------------------------------
Contracts Value
- --------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN
(Premiums received $112,562) $ 363,000
===========
See notes to the financial statements.
<PAGE>
OTC/Short Fund
Schedule of Investments
- --------------------------------------------------------------------------------
August 31, 1998
- --------------------------------------------------------------------------------
Face Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 59.54%*
$11,545,052 U.S. Treasury Bill
4.73%, 11/27/98 $ 11,413,080
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $11,412,524) 11,413,080
-----------
TOTAL INVESTMENTS - 59.54%*
(Cost $11,412,524) $ 11,413,080
===========
* Calculated as a percentage of net assets.
See notes to the financial statements.
<PAGE>
OTC/Short Fund
Schedule of Investments
- --------------------------------------------------------------------------------
August 31, 1998
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
51,068 Microsoft Corporation $ 4,899,336
34,613 Intel Corporation 2,464,013
21,817 Cisco Systems, Inc. 1,786,267
13,384 Dell Computer Corporation 1,338,400
22,085 WorldCom, Inc. 904,105
12,177 MCI Communications Corporation 608,850
19,999 Oracle Corporation 398,730
9,970 Tele-Communications, Inc. - Class A 329,010
5,279 Amgen Inc. 321,359
7,813 Sun Microsystems, Inc. 309,590
6,940 Comcast Corporation - Special Class A 259,382
11,641 Telefonaktiebolaget LM Ericsson - ADR 249,554
4,434 Costco Companies, Inc. 208,675
9,028 HBO & Company 191,845
6,339 Level 3 Communications, Inc. 188,784
4,412 BMC Software, Inc. 186,683
7,524 Applied Materials, Inc. 184,808
4,134 Tellabs, Inc. 174,662
7,341 3Com Corporation 173,890
6,920 Qwest Communications International Inc. 173,000
3,716 Compuware Corporation 168,846
5,719 Staples, Inc. 155,128
3,992 Ascend Communications, Inc. 140,468
4,606 PeopleSoft, Inc. 129,544
3,057 PanAmSat Corporation 129,540
3,327 Paychex, Inc. 126,426
2,967 Chancellor Media Corporation 105,885
5,439 Nextel Communications, Inc. - Class A 98,242
3,111 Nordstrom, Inc. 93,136
2,793 Network Associates, Inc. 90,058
2,122 Cintas Corporation 86,471
2,749 Apple Computer, Inc. 85,734
1,600 Linear Technology Corporation 75,200
2,734 Maxim Integrated Products, Inc. 75,185
7,330 Novell, Inc. 69,635
1,499 Biogen, Inc. 69,329
1,692 Fiserv, Inc. 65,968
1,570 PACCAR Inc. 64,370
1,429 QUALCOMM Incorporated 62,787
2,302 Biomet, Inc. 61,866
1,043 Jacor Communications, Inc. 61,537
2,755 ADC Telecommunications, Inc. 61,127
2,059 Sigma-Aldrich Corporation 57,137
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
1,786 Starbucks Corporation $ 56,371
1,551 Quintiles Transnational Corp. 55,448
5,390 Parametric Technology Corporation 55,247
1,986 Northwest Airlines Corporation 55,236
1,865 Altera Corporation 54,318
1,966 American Power Conversion Corporation 53,082
2,857 Bed Bath & Beyond Inc. 51,605
3,578 Chiron Corporation 51,434
1,586 Apollo Group, Inc. - Class A 48,160
1,468 Centocor, Inc. 47,710
2,059 Gartner Group, Inc. - Class A 47,614
993 Reuters Group PLC - ADR 47,292
1,536 Xilinx, Inc. 46,848
1,189 Electronic Arts Inc. 45,331
1,638 Genzyme Corporation 44,226
1,951 Herman Miller, Inc. 39,995
1,633 Molex Incorporated 39,600
2,013 Stewart Enterprises, Inc. - Class A 39,505
1,181 Cambridge Technology Partners, Inc. 38,382
2,126 Netscape Communications Corporation 38,268
1,009 Tech Data Corporation 38,153
1,308 McCormick & Company, Incorporated 38,014
3,277 Quantum Corporation 37,481
1,762 KLA -Tencor Corporation 37,443
1,392 Adobe Systems Incorporated 36,540
1,308 Cracker Barrel Old Country Store, Inc. 31,964
1,808 Andrew Corporation 26,781
1,461 Rexall Sundown, Inc. 26,663
1,317 First Health Group Corp. 26,587
2,307 Adaptec, Inc. 26,530
2,003 Worthington Industries, Inc. 26,039
973 Autodesk, Inc. 22,744
1,701 General Nutrition Companies, Inc. 22,645
924 Dura Pharmaceuticals, Inc. 15,246
2,177 Atmel Corporation 13,130
1,571 Oxford Health Plans, Inc. 9,622
-----------
TOTAL SECURITIES
SOLD SHORT
(Proceeds $22,425,648) $18,875,816
===========
See notes to the financial statements.
<PAGE>
U.S. Government Money Market Fund
Schedule of Investments
August 31, 1998
- --------------------------------------------------------------------------------
Face Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 132.13%*
$12,524,423 U.S. Treasury Bill
4.75%, 11/27/98 $ 12,380,653
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $12,380,653) 12,380,653
-----------
TOTAL INVESTMENTS - 132.13%
(Cost $12,380,653) $12,380,653
===========
* Calculated as a percentage of net assets.
<PAGE>
Statements of Assets and Liabilities
August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potomac Funds U.S. Plus U.S./Short
Fund Fund
<S> <C> <C>
Assets:
Investments, at market value (Note 2).................................. $ 600,484 $6,866,942
Cash .................................................................. 53,883 55,748
Receivable for investments sold........................................ 495 121
Receivable for Fund shares sold........................................ 9,984 57,862
Receivable from broker................................................. -- 307,982
Deposit at broker...................................................... 53,615 589,302
Dividends receivable................................................... -- --
Organization costs, net of accumulated amortization (Note 1)........... 12,906 13,060
Other assets........................................................... 8,478 8,478
---------- ---------
Total assets...................................................... 739,845 7,899,495
---------- ---------
Liabilities:
Securities sold short, at value (Proceeds of $22,425,648 for the OTC/Short Fund) -- --
Written options, at value (Premiums received of $7,245, $66,111,
$112,562, $0, $0)................................................... 23,375 3,875
Payable for investments purchased...................................... -- 15,129
Payable for Fund shares redeemed....................................... 57,003 71,891
Payable to Investment Adviser.......................................... 136,061 21,060
Payable to broker...................................................... 38,500 --
Accrued expenses and other liabilities................................. 17,909 18,888
---------- ---------
Total liabilities................................................. 272,848 130,843
---------- ---------
Net assets............................................................. $ 466,997 $7,768,652
========== =========
Net assets consist of:
Capital stock.......................................................... $ 387,731 $7,726,289
Accumulated undistributed net investment income........................ 15,745 4,928
Accumulated undistributed net realized gain (loss) on investments sold,
securities sold short, written option contracts expired or closed, and
futures............................................................. 166,385 (899,449)
Net unrealized appreciation (depreciation) on:
Investments......................................................... (6,100) 339,988
Short positions..................................................... -- --
Written options..................................................... (16,130) 62,236
Futures............................................................. (80,634) 534,660
---------- ---------
Total Net Assets.................................................. $ 466,997 $7,768,652
========== =========
Shares outstanding
(unlimited shares of beneficial interest authorized, no par value)..... 47,853 821,052
Net Asset Value, Redemption Price and Offering Price Per Share......... $ 9.76 $ 9.46
========== =========
Cost of Investments.................................................... $ 606,584 $6,526,954
========== =========
</TABLE>
See notes to the financial statements.
<PAGE>
Statement of Assets and Liabilities
August 31, 1998
- --------------------------------------------------------------------------------
OTC Plus OTC/Short U.S. Government
Fund Fund Money Market
Fund
$7,388,587 $11,413,080 $12,380,653
88,517 82,491 8,547
32,237 2,293,131 --
1,143,730 2,985,902 3,132,889
-- -- --
500,863 25,518,374 --
1,259 -- --
12,906 12,872 12,906
8,978 56,484 8,978
--------- ---------- ----------
9,177,077 42,362,334 15,543,973
--------- ---------- ----------
-- 18,875,816 --
363,000 -- --
920,882 -- --
65,677 4,208,844 6,127,581
84,953 75,005 22,253
-- -- --
62,019 34,131 23,755
--------- ---------- ----------
1,496,531 23,193,796 6,173,589
--------- ---------- ----------
$7,680,546 $19,168,538 $ 9,370,384
========= ========== ==========
$8,745,588 $21,075,426 $ 9,352,613
-- 11,388 17,771
(1,237,113) (5,468,664) --
422,509 556 --
-- 3,549,832 --
(250,438) -- --
-- -- --
--------- ---------- ----------
$7,680,546 $19,168,538 $ 9,370,384
========= ========== ==========
737,536 2,286,861 9,370,384
$ 10.41 $ 8.38 $ 1.00
========= ========== ==========
$6,966,078 $11,412,524 $12,380,653
========= ========== ==========
<TABLE>
<CAPTION>
See notes to the financial statements.
<PAGE>
Statement of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Potomac Funds U.S. Plus U.S./Short
Fund Fund
October 20, 1997(1) November 7, 1997(1)
to August 31, 1998 to August 31, 1998
<S> <C> <C>
Investment Income:
Dividend income (net of withholding tax of $456 for the OTC Plus Fund). $ -- $ --
Interest income........................................................ 493,377 78,637
--------- --------
Total investment income........................................... 493,377 78,637
--------- --------
Expenses:
Investment advisory fees............................................... 71,062 14,663
Administration fees.................................................... 42,305 6,538
Shareholder servicing and accounting costs............................. 51,579 23,818
Custody fees........................................................... 7,128 5,745
Federal and state registration......................................... 17,135 19,254
Professional fees...................................................... 37,906 8,186
Amortization of organizational expenses................................ 2,701 2,547
Reports to shareholders................................................ 3,444 1,709
Directors' fees and expenses........................................... 1,937 239
Other.................................................................. 3,851 3,553
--------- --------
Total expenses before waiver and reimbursement of expenses and
dividends on short positions.................................... 239,048 86,252
Less: Waiver of expenses and reimbursement from Adviser........... (96,923) (60,726)
--------- --------
Net expenses before dividends on short positions....................... 142,125 25,526
Dividends on short positions (net of withholding tax of $72 for
the OTC/Short Fund)............................................. -- --
--------- --------
Total expenses.................................................... 142,125 25,526
--------- --------
Net investment income (loss)........................................... 351,252 53,111
--------- --------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain (loss) on:
Investments......................................................... 30,999 (100,903)
Short transactions.................................................. -- --
Written option contracts expired or closed.......................... 673,000 (66,762)
Futures contracts................................................... 745,352 (235,746)
--------- --------
1,449,351 (403,411)
--------- --------
Change in unrealized appreciation (depreciation) on:
Investments......................................................... (6,100) 339,988
Short positions..................................................... -- --
Written options..................................................... (16,130) 62,236
Futures............................................................. (80,634) 534,660
--------- --------
(102,864) 936,884
--------- --------
Net realized and unrealized gain (loss) on investments............ 1,346,487 533,473
--------- --------
Net increase (decrease) in net assets resulting from operations........ $1,697,739 $586,584
========= ========
</TABLE>
1 Commencement of Operations.
<PAGE>
Statement of Operations
- --------------------------------------------------------------------------------
OTC Plus OTC/Short U.S. Government
Money Market
Fund Fund Fund
October 20, 1997 (1) October 16, 1997(1) October 20, 1997(1)
to August 31, 1998 to August 31, 1998 to August 31, 1998
$ 15,169 $ -- $ --
18,543 184,794 184,081
--------- ----------- ---------
33,712 184,794 184,081
--------- ----------- ---------
67,763 53,805 17,168
35,193 32,578 13,611
51,339 48,212 47,139
71,665 22,122 3,508
19,107 24,557 20,100
30,482 29,539 15,940
2,701 2,735 2,701
6,307 3,205 2,792
1,988 485 621
3,851 4,044 3,553
--------- ----------- ---------
290,396 221,282 127,133
(154,869) (123,475) (92,798)
--------- ----------- ---------
135,527 97,807 34,335
-- 8,340 --
--------- ----------- ---------
135,527 106,147 34,335
--------- ----------- ---------
(101,815) 78,647 149,746
--------- ----------- ---------
2,415,343 -- --
-- (5,399,382) --
(132,777) 17,525 --
-- -- --
--------- ----------- ---------
2,282,566 (5,381,857) --
--------- ----------- ---------
422,509 556 --
-- 3,549,832 --
(250,438) -- --
-- -- --
--------- ----------- ---------
172,071 3,550,388 --
--------- ----------- ---------
2,454,637 (1,831,469) --
--------- ----------- ---------
$2,352,822 $(1,752,822) $ 149,746
========= =========== =========
<TABLE>
<CAPTION>
See notes to the financial statements.
<PAGE>
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Potomac Funds U.S. Plus U.S./Short
Fund Fund
October 20, 1997(1) November 7, 1997(1)
to August 31, 1998 to August 31, 1998
<S> <C> <C>
Operations:
Net investment income (loss)........................................... $ 351,252 $ 53,111
Net realized gain (loss) on investments sold, securities sold
short, written option contracts expired or closed and futures contracts 1,449,351 (403,411)
Change in unrealized appreciation (depreciation) on investments,
short positions, written options and futures........................ (102,864) 936,884
----------- -----------
Net increase (decrease) in net assets resulting from operations... 1,697,739 586,584
----------- -----------
Distributions to Shareholders:
Net investment income.................................................. (35,123) --
----------- -----------
Capital Share Transactions:
Proceeds from shares sold.............................................. 141,274,188 89,542,327
Proceeds from shares issued to holders in reinvestment of dividends.... 34,225 --
Cost of shares redeemed................................................ (142,504,032) (82,360,259)
----------- -----------
Net increase (decrease) in net assets
resulting from capital share transactions................... (1,195,619) 7,182,068
----------- -----------
Total increase in net assets .......................................... 466,997 7,768,652
----------- -----------
Net Assets:
Beginning of period.................................................... -- --
----------- -----------
End of period (including undistributed net investment
income of $15,745, $4,928, $0, $11,388 and $17,771, respectively)... $ 466,997 $ 7,768,652
=========== ===========
</TABLE>
1 Commencement of Operations.
See note to the financial statements.
<PAGE>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
OTC Plus OTC/Short U.S. Government
Money Market
Fund Fund Fund
October 20, 1997(1) October 16, 1997(1) October 20, 1997(1)
to August 31, 1998 to August 31, 1998 to August 31, 1998
$ (101,815) $ 78,647 $ 149,746
2,282,566 (5,381,857) --
172,071 3,550,388 --
----------- ------------ ------------
2,352,822 (1,752,822) 149,746
----------- ------------ ------------
-- -- (149,746)
----------- ------------ ------------
325,380,424 301,561,469 198,593,087
-- -- 69,908
(320,052,700) (280,640,109) (189,292,611)
----------- ------------ ------------
5,327,724 20,921,360 9,370,384
----------- ------------ ------------
7,680,546 19,168,538 9,370,384
----------- ------------ ------------
-- -- --
----------- ------------ ------------
$ 7,680,546 $ 19,168,538 $ 9,370,384
=========== ============ ============
<TABLE>
<CAPTION>
See notes to the financial statements.
<PAGE>
Financaial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
For a fund share outstanding throughout the period
Potomac Funds U.S. Plus U.S./Short
Fund Fund
October 20, 1997(1) November 7, 1997(1)
to August 31, 1998 to August 31, 1998
<S> <C> <C>
Per Share Data:
Net Asset Value,
Beginning of Period.................................................. $ 10.00 $ 10.00
--------- ---------
Income (Loss) from Investment Operations:
Net investment income (loss)........................................... 0.364 0.234
Net realized and unrealized gain (loss) on investments................. (0.58) (0.77)
--------- ---------
Total from investment operations.................................. (0.22) (0.54)
--------- ---------
Less dividends from net investment income.............................. (0.02) --
--------- ---------
Net Asset Value, End of Period......................................... $ 9.76 $ 9.46
========= =========
Total Return2.......................................................... (2.23%) (5.40%)
Supplemental Data and Ratios:
Net assets, end of period.............................................. $ 466,997 $7,768,652
Ratio of net expenses to average net assets:
Before expense reimbursement3....................................... 2.52% 5.29%
After expense reimbursement3........................................ 1.50% 1.57%
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement3....................................... 2.68% (0.46%)
After expense reimbursement3........................................ 3.70% 3.26%
Portfolio turnover rate5............................................... 0.00% 0.00%
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Net investment income (loss) per share represents net investment income (loss)
using ending balances prior to consideration of adjustments for permanent book
and tax differences for the respective period divided by the daily average
shares of beneficial interest outstanding throughout each period.
5 Portfolio turnover ratio is calculated without regard to short-term securities
having a maturity of less than one year. All of the Funds, with the exception
of the OTC Plus Fund and the OTC/Short Fund, typically hold most of their
investments in options, futures contracts and repurchase agreements, which are
deemed short-term securities.
6 The operating expense ratio excluded dividends on short positions. The ratio
including dividends on short positions for the respective period ended was
1.78%.
7 The net investment income ratio included dividends on short positions. The
ratio excluding dividends on short positions for the respective period ended
was 1.46%.
8 Net investment income before dividends on short positions for the respective
period ended was $0.10.
See notes to the financial statements.
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
For a fund share outstanding throughout the period
OTC Plus OTC/Short U.S. Government
Money Market
Fund Fund Fund
October 20, 1997(1) October 16, 1997(1) October 20, 1997(1)
to August 31, 1998 to August 31, 1998 to August 31, 1998
$ 10.00 $ 10.00 $ 1.00
---------- ----------- ----------
(0.11)4 0.094,8 0.044
0.52 (1.71) --
---------- ----------- ----------
0.41 (1.62) 0.04
---------- ----------- ----------
-- -- (0.04)
---------- ----------- ----------
$ 10.41 $ 8.38 $ 1.00
========== =========== ==========
4.10% (16.20%) 3.89%
$7,680,546 $19,168,538 $9,370,384
3.21% 3.70% 3.70%
1.50% 1.64%6 1.00%
(2.84%) (0.74%) 1.66%
(1.13%) 1.32%7 4.36%
2,324.63% 3,346.25% N/A
See notes to the financial statements.
<PAGE>
Potomac Funds
Notes to the Financial Statements
August 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION
Potomac Funds (the "Trust") was organized as a Massachusetts Business Trust on
June 6, 1997 and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company issuing
its shares in series, each series representing a distinct portfolio with its own
investment objective and policies. The series presently authorized are the U.S.
Plus Fund, U.S./Short Fund, OTC Plus Fund, OTC/Short Fund and the U.S.
Government Money Market Fund (each a "Fund" and collectively, the "Funds"). Each
Fund (other than the U.S. Government Money Market Fund) is a "non-diversified"
series of the Trust pursuant to the 1940 Act. The U.S. Plus Fund, OTC Plus Fund
and U.S. Government Money Market Fund commenced operations on October 20, 1997;
the U.S./Short Fund commenced operations on November 7, 1997 and the OTC/Short
Fund commenced operations on October 16, 1997.
The objective of the U.S. Plus Fund is to provide investment returns that
correspond to 150% of the performance of the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500 Index"). The objective of the U.S./Short Fund is
to provide investment returns that inversely correlate to the performance of the
S&P 500 Index. The objective of the OTC Plus Fund is to provide investment
returns that correspond to 125% of the performance of the Nasdaq 100 Index
("Nasdaq Index"). The objective of the OTC/Short Fund is to provide investment
returns that inversely correlate to the performance of the Nasdaq Index. The
objective of the U.S. Government Money Market Fund is to provide security of
principal, current income and liquidity by investing primarily in money market
instruments issued or guaranteed, as to principal and interest, by the U.S.
government, its agencies or instrumentalities.
Costs incurred by the Trust in connection with the organization, registration
and the initial public offering of shares, aggregating $15,607 for each Fund,
are being deferred and amortized over the period of benefit, but not to exceed
sixty months from the Fund's commencement of operations. These costs were
advanced by the Adviser and will be reimbursed by the Trust. The proceeds of any
redemption of the initial shares by the original shareholder will be reduced by
a pro rata portion of any then unamortized organizational expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
a) Investment Valuation - Securities that are listed on a securities exchange
are valued at the last quoted sales price on the day the valuation is made.
Price information on listed stocks is taken from the exchange where the security
is primarily traded. If no sale is reported at that time, the mean of the last
bid and asked price is used. When market quotations for options and futures
positions held by a Fund are readily available, those positions will be valued
based upon such quotations. Other securities for which no quotations are readily
available or for which the Adviser has reason to question the validity of
quotations received are valued at fair value as determined in good faith under
the supervision of the Board of Trustees. Instruments with a remaining maturity
of 60 days or less are valued at amortized cost, which approximates market
value.
b) Repurchase Agreements - Each Fund may enter into repurchase agreements
with banks that are members of the Federal Reserve System or securities dealers
who are members of a national securities exchange or are primary dealers in U.S.
Government Securities. In connection with transactions in repurchase agreements,
it is the Trust's policy that the Fund receive, as collateral, securities whose
market value, including accrued interest, at all times will be at least equal to
<PAGE>
100% of the amount invested by the Fund in each repurchase agreement. If the
seller defaults, and the value of the collateral declines, realization of the
collateral by the Fund may be delayed or limited.
c) Written Option Accounting - Each Fund, other than the U.S. Government
Money Market Fund, may write (sell) options. When a Fund writes an option, an
amount equal to the premium received is entered in the Fund's accounting records
as an asset and equivalent liability. The amount of the liability is
subsequently marked-to-market to reflect the current value of the option
written. When an option expires, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold).
d) Stock Index Futures Contracts and Options on Futures Contracts - Each
Fund, other than the U.S. Government Money Market Fund, may purchase and sell
stock index futures contracts and options on such futures contracts. Upon
entering into a contract, the Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the Fund
as unrealized gains and losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
e) Short Positions - The U.S./Short Fund and OTC/Short Fund may engage in
short sale transactions. For financial statement purposes, an amount equal to
the settlement amount is included in the Statement of Assets and Liabilities as
an asset and an equivalent liability. The amount of the liability is
subsequently marked-to-market to reflect the current value of the short
position. Subsequent fluctuations in the market prices of securities sold, but
not yet purchased, may require purchasing the securities at prices which may
differ from the market value reflected on the Statement of Assets and
Liabilities. The Fund is liable for any dividends payable on securities while
those securities are in a short position. As collateral for its short positions,
the Fund is required under the 1940 Act to maintain segregated assets consisting
of cash, cash equivalents or liquid securities. These segregated assets are
required to be adjusted daily to reflect changes in the value of the securities
sold short.
f) Risks of Options, Futures Contracts, Options on Futures Contracts and
Short Positions - The risks inherent in the use of options, futures contracts,
options on futures contracts and short positions include 1) adverse changes in
the value of such instruments; 2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the price of
the underlying securities, index or futures contract; 3) the possible absence of
a liquid secondary market for any particular instrument at any time; 4) the
possible need to defer closing out certain positions to avoid adverse tax
consequences; and 5) the possible nonperformance by the counterparty under the
terms of the contract.
g) Federal Income Taxes - Each Fund intends to comply with the requirements
of the Internal Revenue Code necessary to qualify as a regulated investment
company and to make the requisite distributions of income and capital gains to
its shareholders sufficient to relieve it from all or substantially all federal
income taxes.
h) Income and Expenses - The Funds are charged for those expenses that are
directly attributable to each portfolio, such as advisory, custody and certain
shareholder service fees. Expenses that are not directly attributable to a
portfolio are typically allocated among the Trust's portfolios in proportion to
their respective net assets, number of shareholder accounts, or net sales, where
applicable.
i) Distributions to Shareholders - Each Fund, other than the U.S. Government
Money Market Fund, intends to distribute to its shareholders at least annually
any net investment income, net realized capital gains, and net realized capital
gains from foreign currency transactions. The U.S. Government Money Market Fund
<PAGE>
ordinarily will declare dividends from net investment income on a daily basis
and distribute those dividends monthly. Income and capital gain distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are due primarily to
deferred wash sale losses and unrealized gains or losses on Section 1256
contracts, which are realized, for tax purposes, at August 31, 1998. Certain
Funds also utilized earnings and profits distributed to shareholders on
redemption of shares as part of the dividends paid deduction.
j) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
k) Other - Investment and shareholder transactions are recorded on trade
date. The Funds determine the gain or loss realized from investment transactions
by comparing the original cost of the security lot sold with the net sales
proceeds. Dividend income is recognized on the ex-dividend date, and interest
income is recognized on an accrual basis. Generally accepted accounting
principles require that permanent financial reporting and tax differences be
reclassified in the capital accounts.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Funds for the period ended August 31, 1998, were
as follows:
<TABLE>
<CAPTION>
U.S. Plus Fund U.S./Short Fund OTC Plus Fund
-------------- --------------- ------------
<S> <C> <C> <C>
Shares sold 12,380,102 10,631,219 28,545,895
Shares issued to holders in
reinvestment of dividends 3,471 -- --
Shares redeemed (12,335,720) (9,810,167) (27,808,359)
---------- ---------- ----------
Net increase 47,853 821,052 737,536
========== ========== ==========
U.S. Government
Money Market
OTC/Short Fund Fund
------------- ---------------
Shares sold 35,233,130 198,593,087
Shares issued to holders in
reinvestment of dividends -- 69,908
Shares redeemed (32,946,269) (189,292,611)
---------- ----------
Net increase 2,286,861 9,370,384
========== ==========
</TABLE>
<PAGE>
4. INVESTMENT TRANSACTIONS
During the period ended August 31, 1998, the aggregate purchases and sales of
investments (excluding short-term investments, options and futures) were:
<TABLE>
<CAPTION>
U.S. Plus Fund U.S./Short Fund OTC Plus Fund
-------------- --------------- -------------
<S> <C> <C> <C>
Purchases $ -- $ -- $251,620,769
Sales $ -- $ -- $246,488,412
U.S. Government
Money Market
OTC/Short Fund Fund
------------- ---------------
Purchases $232,437,855 $--
Sales $249,468,088 $--
</TABLE>
During the period ended August 31, 1998, the following Funds wrote the following
options:
<TABLE>
<CAPTION>
U.S. Plus Fund U.S./Short Fund
----------------------------- -----------------------------
Number of Premium Number of Premium
contracts amount contracts amount
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of period -- $ -- -- $ --
Options written 546 2,134,348 195 678,752
Options terminated (545) (2,127,103) (164) (612,641)
--------- ---------- --------- ---------
Outstanding at end of period 1 $ 7,245 31 $ 66,111
========= ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
OTC Plus Fund OTC/Short Fund
----------------------------- -----------------------------
Number of Premium Number of Premium
contracts amount contracts amount
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of period -- $ -- -- $ --
Options written 888 2,086,844 120 389,947
Options terminated (867) (1,974,282) (120) (389,947)
--------- ---------- --------- ---------
Outstanding at end of period 21 $ 112,562 -- $ --
========= ========== ========= =========
</TABLE>
<PAGE>
Transactions in futures contracts for the period ended August 31, 1998, for the
following Funds were as follows:
<TABLE>
<CAPTION>
U.S. Plus Fund
-----------------------------
Number of Aggregate face
contracts value of contracts
--------- ------------------
<S> <C> <C>
Outstanding at beginning of period -- $ --
Contracts opened 483 127,091,966
Contracts closed (481) (126,534,332)
--------- ------------------
Outstanding at end of period 2 $ 557,634
========= ==================
</TABLE>
Transactions in short futures contracts for the period ended August 31, 1998,
for the following Funds were as follows:
<TABLE>
<CAPTION>
U.S./Short Fund
-----------------------------
Number of Aggregate face
contracts value of contracts
--------- ------------------
<S> <C> <C>
Outstanding at beginning of period -- $ --
Contracts opened 257 60,204,197
Contracts closed (237) (54,899,537)
--------- ------------------
Outstanding at end of period 20 $ 5,304,660
========= ==================
</TABLE>
At August 31, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
<TABLE>
<CAPTION>
U.S. Plus Fund U.S./Short Fund OTC Plus Fund
-------------- --------------- -------------
<S> <C> <C> <C>
Appreciation $ 29 $ 312 $ 576,384
(Depreciation) -- -- (1,721,663)
-------------- --------------- -------------
Net unrealized appreciation
(depreciation) on investments $ 29 $ 312 $ (1,145,279)
============== =============== =============
U.S. Government
Money Market
OTC/Short Fund Fund
-------------- ---------------
Appreciation $ 556 $ --
(Depreciation) -- --
-------------- ---------------
Net unrealized appreciation
(depreciation) on investments $ 556 $ --
============== ===============
</TABLE>
At August 31, 1998, the cost of investments for federal income tax purposes was
$600,455, $6,866,630, $8,533,866, $11,412,524 and $12,380,653 for the U.S. Plus
Fund, U.S./Short Fund, OTC Plus Fund, OTC/Short Fund and the U.S.
Government Money Market Fund, respectively.
<PAGE>
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into an investment advisory agreement with Rafferty Asset
Management, LLC ("Adviser"). The Adviser receives a fee, computed daily and
payable monthly, at the annual rates presented below as applied to each Fund's
daily net assets. The Adviser has voluntarily agreed to pay all operating
expenses in excess of the annual cap on expenses presented below as applied to
each Fund's daily net assets. The Adviser may recover from the Funds the
expenses paid in excess of the annual cap on expenses for the two previous
years, as long as the recovery does not cause any Fund to exceed its annual cap
on expenses. For the period ended August 31, 1998, the Adviser paid the
following expenses by Fund:
<TABLE>
<CAPTION>
U.S. Plus Fund U.S./Short Fund OTC Plus Fund
-------------- --------------- -------------
<S> <C> <C> <C>
Annual Advisory rate 0.75% 0.90% 0.75%
Annual cap on expenses 1.50% 1.65% 1.50%
Expenses paid in excess of annual cap on expenses $ 96,923 $ 60,726 $ 154,869
U.S. Government
Money Market
OTC/Short Fund Fund
-------------- ---------------
Annual Advisory rate 0.90% 0.50%
Annual cap on expenses 1.65% 1.00%
Expenses paid in excess of annual cap on expenses $ 123,475 $ 92,798
</TABLE>
Effective June 15, 1998, distribution services are performed pursuant to
distribution agreements with Rafferty Capital Markets, Inc., an affiliate of the
Adviser. Prior to this date, distribution services were provided by First Data
Distributors, Inc.
6. INCOME TAX INFORMATION (Unaudited)
The Funds hereby designate the following amounts as 20% rate capital gain
distributions for purposes of the dividends paid deduction. During the fiscal
year ended August 31, 1998, the Funds did not have any amounts that met the
requirements necessary to be designated as a 28% capital gain distribution.
U.S. Plus $ 770,088
U.S./Short 297,621
OTC Plus 189,455
OTC/Short 7,114
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Potomac Funds
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, of options written, of futures contracts, of short
futures contracts and of securities sold short, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Potomac U.S.
Plus Fund, the Potomac U.S./Short Fund, the Potomac OTC Plus Fund, the Potomac
OTC/Short Fund, and the Potomac U.S. Government Money Market Fund (constituting
Potomac Funds, hereafter referred to as the "Funds") at August 31, 1998, the
results of each of their operations, the changes in each of their net assets and
the financial highlights for each of the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
October 28, 1998
<PAGE>
Investment Adviser
Rafferty Asset Management, LLC
550 Mamaroneck Avenue
Harrison, NY 10528
Administrator, Transfer Agent, Dividend
Paying Agent, Shareholder Servicing
Agent & Custodian
Firstar Trust Company
P.O. Box 1993
Milwaukee, WI 53201-1993
Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Independent Accountants
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
