<PAGE>
SEMI-ANNUAL REPORT
FEBRUARY 28, 1999
POTOMAC FUNDS
----------------
----------------
Dear Shareholders:
During the last quarter of 1998, the financial markets shook off the twin
worries of the President's impeachment and continued instability in emerging
markets to post impressive gains. Spurred on by another Federal Reserve rate
cut, the S&P 500 Index rose 21.3% during the fourth quarter to close up 28.6%
for the year. The technology-laden Nasdaq 100 Index rose 36.5% during the fourth
quarter to close out 1998 with a stunning 85.5% gain. Uncertainty swept the
markets during the first two months of 1999, however the S&P 500 gained 0.9%,
while the Nasdaq 100 gained 4.9%.
The Potomac U.S. Plus Fund, which attempts to provide 150% of the performance of
the Standard & Poor's 500 Index, provided a return of 39.4% from August 31, 1998
through February 28, 1999 compared to a return of 29.4% for the index. This fund
reflects the continued strength and dominance of the large American corporations
in our economy. The Potomac U.S. Short Fund seeks to provide returns inverse to
the S&P 500. It provided a return of -22.8% during the six month period.
The Potomac OTC Plus continued its outstanding performance during this period.
This was due to the stellar performance of high-tech stocks contained in the
Nasdaq 100. During the period, this index added three new internet stocks to its
list--Yahoo, Amazon.Com and America At Home. Internet stocks have commanded very
high price/ earnings multiples due to the widespread interest in the Internet as
a growing consumer marketplace. Also, during this period the Nasdaq Stock Market
changed its methodology for calculating the weights for the components of the
index. This change had the effect of lessening the impact of Microsoft and Intel
in particular. For the six months ended February 28, 1999 the Potomac OTC Plus
Fund returned 84.6% compared to an increase in the Nasdaq 100 Index of 68.8%.
The OTC Plus Fund seeks returns equal to 125% of the index. The Potomac OTC
Short Fund, which provides returns inverse to the Nasdaq 100 Index, had a return
of -45.5% during the six month period.
Late in February, the Potomac Small Cap Plus Fund was introduced. This fund is
designed to provide returns equivalent to 125% of the Russell 2000 Index. Small
cap stocks have been notably out of favor with investors during recent years.
Many investors believe that this sector of the market is over-due for a major
upward move.
Sincerely,
[LOGO]
[LOGO]
[LOGO]
<TABLE>
<S> <C> <C>
James Terry Apple Philip Harding Thomas Mulrooney
Chief Investment Officer Senior Vice President Chief Operating Officer
</TABLE>
<PAGE>
U.S. PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Face Amount Value
<C> <S> <C>
U.S. TREASURY OBLIGATIONS - 75.87%*
U.S. Treasury Bill
4.52%, 5/27/99 $17,456,644
$17,649,429
------------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $17,456,824) 17,456,644
------------
Contracts
CALL OPTIONS PURCHASED - 1.64%*
S&P 500 Index
Expiring March 1999
at 1225
(Cost $504,045) 378,000
105
------------
TOTAL INVESTMENTS -
77.51%*
(Cost $17,960,869) $17,834,644
------------
------------
</TABLE>
U.S. PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF OPTIONS WRITTEN
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<C> <S> <C>
Contracts
WRITTEN OPTION CONTRACTS
S&P 500 Index - Put
Expiring March 1999
at 1225 $ 262,500
105
------------
TOTAL OPTIONS WRITTEN
(Premiums received
$302,195) $ 262,500
------------
------------
</TABLE>
* Calculated as a percentage of net assets.
See notes to the financial statements.
2
<PAGE>
U.S. PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF FUTURES CONTRACTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Unrealized
Contracts Loss
<C> <S> <C>
FUTURES CONTRACTS PURCHASED
S&P 500 Index Future
Contracts Expiring
March 1999
(Underlying Face
Amount at Market
Value $21,621,250) $ (132,276 )
70
------------
------------
</TABLE>
See notes to the financial statements.
3
<PAGE>
U.S./SHORT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Face Amount Value
<C> <S> <C>
U.S. TREASURY OBLIGATIONS - 85.07%*
U.S. Treasury Bill
4.52%, 5/27/99 $ 4,751,809
$4,804,286
------------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $4,751,858) 4,751,809
------------
Contracts
PUT OPTIONS PURCHASED - 4.82%*
S&P 500 Index
Expiring March 1999
at 1300 109,600
16
S&P 500 Index
Expiring March 1999
at 1350 159,950
14
------------
TOTAL PUT OPTIONS
PURCHASED
(Cost $313,920) 269,550
------------
TOTAL INVESTMENTS -
89.89%*
(Cost $5,065,778) $ 5,021,359
------------
------------
</TABLE>
* Calculated as a percentage of net assets.
See notes to the financial statements.
4
<PAGE>
U.S./SHORT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF OPTIONS WRITTEN
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<C> <S> <C>
Contracts Value
WRITTEN OPTION CONTRACTS
S&P 500 Index - Call
Expiring March 1999
at 1300 $ 7,200
16
S&P 500 Index - Call
Expiring March 1999
at 1350 1,050
14
------------
TOTAL OPTIONS WRITTEN
(Premiums received
$24,879) $ 8,250
------------
------------
</TABLE>
U.S./SHORT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF SHORT FUTURES CONTRACTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Unrealized
Contracts Gain
<C> <S> <C>
SHORT FUTURES CONTRACTS
S&P 500 Index Future
Contracts Expiring
March 1999
(Underlying Face
Amount at Market
Value $1,853,250) $ 26,673
6
------------
------------
</TABLE>
See notes to the financial statements.
5
<PAGE>
OTC PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
COMMON STOCKS - 95.05%*
Microsoft Corporation** $ 6,639,729
44,228
Intel Corporation 3,632,787
30,289
Cisco Systems, Inc.** 2,841,355
29,049
MCI WorldCom, Inc.** 2,815,808
34,131
Dell Computer Corporation** 1,942,230
24,240
Oracle Corporation** 1,157,004
20,707
Sun Microsystems, Inc.** 839,710
8,629
Yahoo! Inc.** 758,904
4,944
Amgen Inc.** 757,741
6,068
Tele-Communications,
Inc. - Class A** 700,862
11,158
Amazon.com, Inc.** 691,234
5,395
Level 3 Communications, Inc.** 607,656
10,851
Comcast Corporation - Special
Class A 593,605
8,368
Qwest Communications
International, Inc.** 557,975
9,082
Applied Materials, Inc.** 555,861
9,993
Nextel Communications, Inc. -
Class A** 532,707
17,720
Netscape Communications
Corporation** 493,587
6,374
Ascend Communications, Inc.** 473,012
6,148
Costco Companies, Inc.** 472,398
5,882
Staples, Inc.** 469,442
15,964
Linear Technology Corporation 463,273
10,574
Cintas Corporation 458,885
6,486
Nordstrom, Inc. 452,410
11,240
Tellabs, Inc.** 452,033
5,646
Biogen, Inc.** 449,384
4,675
Novell, Inc.** 424,390
21,904
Telefonaktiebolaget LM Ericsson -
ADR 414,882
15,957
Immunex Corporation** 405,539
2,866
Maxim Integrated Products, Inc.** 400,867
9,616
Chancellor Media Corporation** 392,788
8,978
Xilinx, Inc.** 373,232
5,351
PanAmSat Corporation** 366,894
10,227
Intuit Inc.** 362,309
3,662
<CAPTION>
Shares Value
<C> <S> <C>
Altera Corporation** $ 355,060
7,302
BMC Software, Inc.** 353,691
8,653
ADC Telecommunications, Inc.** 353,646
8,732
Network Associates, Inc.** 338,870
7,210
Paychex, Inc. 337,432
7,963
Apple Computer, Inc.** 335,871
9,648
Starbucks Corporation** 334,540
6,327
Compuware Corporation** 326,899
5,844
QUALCOMM Incorporated** 320,689
4,393
PeopleSoft, Inc.** 318,289
16,863
3Com Corporation** 298,562
9,497
USA Networks, Inc.** 290,692
7,313
Parametric Technology
Corporation** 289,527
18,831
Bed Bath & Beyond, Inc.** 288,105
9,787
Biomet, Inc. 282,824
7,709
KLA-Tencor Corporation** 280,254
5,409
Chiron Corporation** 271,327
12,882
NTL Incorporated** 251,785
3,241
Fiserv, Inc.** 248,489
5,287
Quintiles Transational Corp.** 247,753
5,745
American Power Conversion
Corporation** 234,730
6,543
Genzyme Corporation (General
Division)** 234,000
5,200
Citrix Systems, Inc.** 202,685
2,628
Synopsys, Inc.** 196,932
4,258
Smurfit-Stone Container
Corporation** 194,732
10,781
Jacor Communications, Inc.** 190,139
2,726
PACCAR Inc. 189,191
4,518
Vitesse Semiconductor
Corporation** 186,828
4,067
Concord EFS, Inc.** 182,363
5,710
VERITAS Software Corporation** 175,938
2,478
Quantum Corporation** 174,550
10,619
Comverse Technology, Inc.** 171,411
2,389
Sanmina Corporation** 160,616
3,074
Centocor, Inc.** 147,173
3,541
</TABLE>
See notes to the financial statements.
6
<PAGE>
OTC PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
Sigma-Aldrich Corporation $ 143,612
5,445
Electronic Arts Inc.** 125,965
3,159
Adobe Systems Incorporated 123,970
3,080
Reuters Group PLC - ADR 123,089
1,483
Apollo Group, Inc.** 112,374
3,738
Dollar Tree Stores, Inc.** 111,440
2,786
COMAIR Holdings, Inc. 106,291
2,825
PacifiCare Health Systems, Inc. -
Class B** 104,184
1,442
Molex Incorporated 103,924
3,885
Food Lion, Inc. - Class B 103,857
10,652
McLeodUSA Incorporated** 101,486
2,636
Adaptec, Inc.** 92,071
4,618
Lincare Holdings, Inc.** 89,633
2,516
Northwest Airlines Corporation** 85,950
3,438
Ross Stores, Inc. 85,918
1,878
Autodesk, Inc. 81,373
2,028
McCormick & Company, Incorporated 78,089
2,728
Electronics for Imaging, Inc.** 74,696
2,138
Stewart Enterprises, Inc. - Class
A 72,240
4,816
FORE Systems, Inc.** 69,325
4,781
Atmel Corporation** 66,653
3,878
Microchip Technology,
Incorporated** 60,658
2,226
Herman Miller, Inc. 59,704
3,512
Micron Electronics, Inc.** 56,364
3,921
Cambridge Technology Partners,
Inc.** 55,451
2,207
Fastenal Company 55,328
1,456
<CAPTION>
Shares Value
<C> <S> <C>
Andrew Corporation** $ 50,986
3,371
CBRL Group, Inc. 42,975
2,292
Worthington Industries, Inc. 40,092
3,160
Tech Data Corporation** 38,862
2,286
Rexall Sundown, Inc.** 33,434
2,336
First Health Group Corp.** 33,344
2,084
Corporate Express, Inc.** 17,942
3,338
Momentum Business Applications,
Inc.** 4,640
538
Genzyme Molecular Oncology** 732
192
------------
TOTAL COMMON STOCKS (Cost
$29,869,457) $44,322,738
------------
Contracts
CALL OPTIONS PURCHASED - 0.75%*
Nasdaq Index Expiring March 1999
at 1980
(Cost $387,996) 347,800
74
------------
TOTAL CALL OPTIONS
(Cost $387,996) 347,800
------------
TOTAL INVESTMENTS - 95.80% *
(Cost $30,257,453) $44,670,538
------------
------------
</TABLE>
* Calculated as a percentage of net assets.
** Non-income producing security.
OTC PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF OPTIONS WRITTEN
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Contracts Value
<C> <S> <C>
WRITTEN OPTION CONTRACTS
Nasdaq Index - Put
Expiring March 1999
at 1980 $ 688,200
74
------------
<CAPTION>
Contracts Value
<C> <S> <C>
TOTAL OPTIONS WRITTEN
(Premiums received
$947,572) $ 688,200
------------
------------
</TABLE>
See notes to the financial statements.
7
<PAGE>
OTC/SHORT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Face Amount Value
<C> <S> <C>
U.S. TREASURY OBLIGATIONS - 65.89% *
U.S. Treasury Bill
4.52%, 5/27/99 $ 5,377,046
$5,436,429
------------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $5,377,101) 5,377,046
------------
Contracts
PUT OPTIONS PURCHASED - 0.59%*
Nasdaq Index Expiring
March 1999 at 2100 36,200
2
Nasdaq Index Expiring
March 1999 at 2020 12,000
1
------------
TOTAL PUT OPTIONS
PURCHASED
(Cost $36,612) 48,200
------------
TOTAL INVESTMENTS -
66.48%*
(Cost $5,413,713) $ 5,425,246
------------
------------
</TABLE>
* Calculated as a percentage of net assets.
See notes to the financial statements.
8
<PAGE>
OTC/SHORT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
Microsoft Corporation $ 1,106,571
7,371
Intel Corporation 602,086
5,020
Cisco Systems, Inc. 473,951
4,846
MCI WorldCom, Inc. 467,426
5,666
Dell Computer
Corporation 322,824
4,029
Oracle Corporation 194,501
3,481
Sun Microsystems,
Inc. 138,378
1,422
Amgen Inc. 127,248
1,019
Yahoo! Inc. 125,102
815
Tele-Communications,
Inc. - Class A 116,517
1,855
Amazon.com, Inc. 115,697
903
Level 3
Communications,
Inc. 102,592
1,832
Comcast Corporation -
Special Class A 98,390
1,387
Qwest Communications
International, Inc. 92,771
1,510
Applied Materials,
Inc. 91,169
1,639
Nextel
Communications,
Inc. - Class A 89,676
2,983
Netscape
Communications
Corporation 82,858
1,070
Ascend
Communications,
Inc. 80,323
1,044
Costco Companies,
Inc. 79,188
986
Staples, Inc. 78,191
2,659
Cintas Corporation 76,552
1,082
Tellabs, Inc. 76,139
951
Linear Technology
Corporation 75,620
1,726
Nordstrom, Inc. 75,348
1,872
Biogen, Inc. 74,689
777
Novell, Inc. 70,254
3,626
Telefonaktiebolaget
LM Ericsson - ADR 69,108
2,658
Immunex Corporation 66,647
471
Maxim Integrated
Products, Inc. 65,616
1,574
Chancellor Media
Corporation 65,450
1,496
Intuit Inc. 63,815
645
PanAmSat Corporation 61,956
1,727
Xilinx, Inc. 61,310
879
ADC
Telecommunications,
Inc. 58,563
1,446
<CAPTION>
Shares Value
<C> <S> <C>
BMC Software, Inc. $ 57,593
1,409
Altera Corporation 57,134
1,175
Network Associates,
Inc. 56,612
1,205
Paychex, Inc. 56,486
1,333
Starbucks Corporation 56,259
1,064
Apple Computer, Inc. 56,153
1,613
Compuware Corporation 54,427
973
QUALCOMM Incorporated 53,509
733
PeopleSoft, Inc. 53,378
2,828
3Com Corporation 49,137
1,563
Parametric Technology
Corporation 48,831
3,176
USA Networks, Inc. 48,336
1,216
Biomet, Inc. 47,584
1,297
Bed Bath & Beyond,
Inc. 47,188
1,603
KLA-Tencor
Corporation 47,149
910
Chiron Corporation 45,200
2,146
NTL Incorporated 41,718
537
Fiserv, Inc. 41,431
882
Quintiles
Transational Corp. 40,451
938
Genzyme Corporation
(General Division) 39,105
869
American Power
Conversion
Corporation 38,781
1,081
Citrix Systems, Inc. 33,549
435
Smurfit-Stone
Container
Corporation 32,693
1,810
Synopsys, Inc. 32,329
699
Jacor Communications,
Inc. 32,015
459
PACCAR Inc. 31,490
752
Vitesse Semiconductor
Corporation 31,283
681
Concord EFS, Inc. 30,277
948
VERITAS Software
Corporation 29,607
417
Quantum Corporation 28,749
1,749
Comverse Technology,
Inc. 28,557
398
Sanmina Corporation 26,595
509
Centocor, Inc. 24,522
590
Sigma-Aldrich
Corporation 23,975
909
Electronic Arts Inc. 21,054
528
Reuters Group PLC -
ADR 20,501
247
Adobe Systems
Incorporated 20,487
509
Apollo Group, Inc. 18,684
622
</TABLE>
See notes to the financial statements.
9
<PAGE>
OTC/SHORT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
Dollar Tree Stores,
Inc. $ 18,520
463
PacifiCare Health
Systems, Inc. -
Class B 17,412
241
COMAIR Holdings, Inc. 17,345
461
Food Lion, Inc. -
Class B 17,277
1,772
Molex Incorporated 17,227
644
McLeodUSA
Incorporated 16,902
439
Adaptec, Inc. 15,232
764
Lincare Holdings,
Inc. 14,927
419
Northwest Airlines
Corporation 14,400
576
Ross Stores, Inc. 14,045
307
Autodesk, Inc. 13,442
335
McCormick & Company,
Incorporated 13,053
456
Electronics for
Imaging, Inc. 12,543
359
Stewart Enterprises,
Inc. - Class A 11,985
799
FORE Systems, Inc. 11,455
790
Atmel Corporation 11,017
641
Microchip Technology,
Incorporated 10,001
367
<CAPTION>
Shares Value
<C> <S> <C>
Herman Miller, Inc. $ 9,911
583
Micron Electronics,
Inc. 9,689
674
Fastenal Company 9,234
243
Cambridge Technology
Partners, Inc. 9,171
365
Andrew Corporation 8,470
560
CBRL Group, Inc. 7,200
384
Worthington
Industries, Inc. 6,953
548
Tech Data Corporation 6,426
378
First Health Group
Corp. 5,568
348
Rexall Sundown, Inc. 5,539
387
Corporate Express,
Inc. 2,989
556
Genzyme Molecular
Oncology 80
21
Momentum Business
Applications, Inc. 34
4
------------
TOTAL SECURITIES SOLD
SHORT (Proceeds
$7,794,250) $ 7,377,402
------------
------------
</TABLE>
OTC/SHORT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF OPTIONS WRITTEN
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Contracts Value
<C> <S> <C>
WRITTEN OPTION CONTRACTS
Nasdaq Index - Call
Expiring March 1999
at 2100 $ 2,625
2
Nasdaq Index - Call
Expiring March 1999
at 2020 2,850
1
------------
TOTAL OPTIONS WRITTEN
(Premiums received
$25,037) $ 5,475
------------
------------
</TABLE>
See notes to the financial statements.
10
<PAGE>
SMALL CAP PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Face Amount Value
<C> <S> <C>
U.S. TREASURY OBLIGATIONS - 90.31%*
U.S. Treasury Bill
4.52%, 5/27/99 $ 4,451,694
$4,500,857
------------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $4,451,740) 4,451,694
------------
Contracts
CALL OPTIONS PURCHASED - 0.56%*
Russell 2000 Index
Expiring March 1999
at 390
(Cost $38,496) 27,600
24
------------
TOTAL INVESTMENTS -
90.87%*
(Cost $4,490,236) $ 4,479,294
------------
------------
</TABLE>
* Calculated as a percentage of net assets.
See notes to the financial statements.
11
<PAGE>
SMALL CAP PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF OPTIONS WRITTEN
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Contracts Value
<C> <S> <C>
WRITTEN OPTION CONTRACTS
Russell 2000 Index -
Put Expiring March
1999 at 390 $ 21,600
24
------------
TOTAL OPTIONS WRITTEN
(Premiums received
$13,104) $ 21,600
------------
------------
</TABLE>
SMALL CAP PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF FUTURES CONTRACTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Unrealized
Contracts Loss
<C> <S> <C>
FUTURE CONTRACTS PURCHASED
Russell 2000 Index
Futures Contracts
Expiring March 1999
(Underlying Face
Amount at Market
Value $5,310,225) $ (6,888 )
27
------------
------------
</TABLE>
See notes to the financial statements.
12
<PAGE>
U.S. GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
Face Amount Value
<C> <S> <C>
U.S. TREASURY OBLIGATIONS - 66.02% *
U.S. Treasury Bill
4.52%, 5/27/99 $37,989,849
$38,409,000
------------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $37,989,849) 37,989,849
------------
------------
TOTAL INVESTMENTS -
66.02%*
(Cost $37,989,849) $37,989,849
------------
------------
</TABLE>
* Calculated as a percentage of net assets.
See notes to the financial statements.
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Plus U.S./Short OTC Plus
Potomac Funds Fund Fund Fund
<S> <C> <C> <C>
Assets:
Investments, at market value (Note
2)............................... $ 17,834,644 $ 5,021,359 $ 44,670,538
Cash............................... 2,390,454 35,834 --
Receivable for investments sold.... -- -- 2,094,616
Receivable for Fund shares sold.... 446,642 68,842 115,671
Receivable from broker............. -- 9,000 --
Deposit at broker.................. 2,794,116 494,536 2,373,215
Dividends receivable............... -- -- 9,371
Organization costs, net of
accumulated amortization (Note
1)............................... 11,350 11,504 11,350
Other assets....................... 13,481 5,734 10,063
------------- ------------- -------------
Total assets................... 23,490,687 5,646,809 49,284,824
------------- ------------- -------------
Liabilities:
Written options, at value (Premiums
received of $302,195, $24,879,
$947,572)........................ 262,500 8,250 688,200
Payable for investments
purchased........................ -- -- 42,336
Payable for Fund shares redeemed... 67,065 19,061 261,197
Payable to Investment Adviser...... 10,234 23,801 13,909
Payable to broker.................. 102,009 -- --
Payable to custodian............... -- -- 1,553,242
Accrued expenses and other
liabilities...................... 38,789 9,697 94,934
------------- ------------- -------------
Total liabilities.............. 480,597 60,809 2,653,818
------------- ------------- -------------
Net assets......................... $ 23,010,090 $ 5,586,000 $ 46,631,006
------------- ------------- -------------
------------- ------------- -------------
Net assets consist of:
Capital stock...................... $ 17,318,075 $ 7,962,204 $ 30,351,017
Accumulated undistributed net
investment income (loss)......... 367,629 91,102 (309,420 )
Accumulated undistributed net
realized gain (loss) on
investments sold, securities sold
short, written option contracts
expired or closed, and futures... 5,543,192 (2,466,189 ) 1,916,952
Net unrealized appreciation
(depreciation) on:
Investments...................... (126,225 ) (44,419 ) 14,413,085
Written options.................. 39,695 16,629 259,372
Futures.......................... (132,276 ) 26,673 --
------------- ------------- -------------
Total Net Assets............... $ 23,010,090 $ 5,586,000 $ 46,631,006
------------- ------------- -------------
------------- ------------- -------------
Shares outstanding
(unlimited shares of beneficial
interest authorized, no par
value)........................... 1,704,863 770,376 2,435,233
Net Asset Value, Redemption Price
and Offering Price Per Share..... $ 13.50 $ 7.25 $ 19.15
------------- ------------- -------------
------------- ------------- -------------
Cost of Investments................ $ 17,960,869 $ 5,065,778 $ 30,257,453
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to the financial statements.
14
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Government
OTC/Short Small Cap Money Market
Potomac Funds Fund Plus Fund
Fund
<S> <C> <C> <C>
Assets:
Investments, at market value (Note
2)............................... $ 5,425,246 $ 4,479,294 $ 37,989,849
Cash............................... 18,583 -- 12,145
Receivable for investments sold.... 2,846 -- --
Receivable for Fund shares sold.... 175,285 -- 20,054,139
Receivable from broker............. -- 18,225 --
Deposit at broker.................. 9,980,419 497,913 --
Dividends receivable............... -- 3,486 --
Organization costs, net of
accumulated amortization (Note
1)............................... 11,316 -- 11,350
Other assets....................... 53,148 19,098 3,900
------------- ------------- -------------
Total assets................... 15,666,843 5,018,016 58,071,383
------------- ------------- -------------
Liabilities:
Securities sold short, at value
(Proceeds of $7,794,250, $0,
$0).............................. 7,377,402 -- --
Written options, at value (Premiums
received of $25,037, $13,104,
$0).............................. 5,475 21,600 --
Payable for investments
purchased........................ 12,004 -- --
Payable for Fund shares redeemed... 89,676 -- 495,064
Payable to Investment Adviser...... 15,906 -- 1,711
Payable to custodian............... -- 43,710 --
Accrued expenses and other
liabilities...................... 5,116 23,480 28,223
------------- ------------- -------------
Total liabilities.............. 7,505,579 88,790 524,998
------------- ------------- -------------
Net assets......................... $ 8,161,264 $ 4,929,226 $ 57,546,385
------------- ------------- -------------
------------- ------------- -------------
Net assets consist of:
Capital stock...................... $ 14,335,049 $ 5,288,794 $ 57,544,440
Accumulated undistributed net
investment income................ 49,756 2,193 1,945
Accumulated undistributed net
realized gain (loss) on
investments sold, securities sold
short, written option contracts
expired or closed, and futures... (6,671,484 ) (335,435 ) --
Net unrealized appreciation
(depreciation) on:
Investments...................... 11,533 (10,942 ) --
Short positions.................. 416,848 -- --
Written options.................. 19,562 (8,496 ) --
Futures.......................... -- (6,888 ) --
------------- ------------- -------------
Total Net Assets............... $ 8,161,264 $ 4,929,226 $ 57,546,385
------------- ------------- -------------
------------- ------------- -------------
Shares outstanding
(unlimited shares of beneficial
interest authorized, no par
value)........................... 1,789,385 499,083 57,546,385
Net Asset Value, Redemption Price
and Offering Price Per Share..... $ 4.56 $ 9.88 $ 1.00
------------- ------------- -------------
------------- ------------- -------------
Cost of Investments................ $ 5,413,713 $ 4,490,236 $ 37,989,849
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to the financial statements.
15
<PAGE>
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Plus U.S./Short OTC Plus
Potomac Funds Fund Fund Fund
<S> <C> <C> <C>
Investment income:
Dividend income.................... $ -- $ -- $ 31,653
Interest income.................... 574,595 152,196 39,103
------------- ------------- -------------
Total investment income........ 574,595 152,196 70,756
------------- ------------- -------------
Expenses:
Investment advisory fees........... 103,426 33,324 190,088
Administration fees................ 17,834 5,022 31,171
Shareholder servicing and
accounting costs................. 38,294 10,836 67,949
Custody fees....................... 25,279 7,597 45,231
Federal and state registration..... 6,408 1,720 6,955
Professional fees.................. 19,591 5,338 36,289
Amortization of organizational
expenses......................... 1,556 1,556 1,556
Reports to shareholders............ 3,690 1,006 6,836
Directors' fees and expenses....... 903 246 1,673
Other.............................. 3,867 1,053 7,162
------------- ------------- -------------
Total expenses before waiver
and reimbursement of
expenses..................... 220,848 67,698 394,910
Less: Waiver of expenses and
reimbursement from Adviser... (13,882 ) (6,604 ) (14,734 )
------------- ------------- -------------
Net expenses................... 206,966 61,094 380,176
------------- ------------- -------------
Net investment income (loss)....... 367,629 91,102 (309,420 )
------------- ------------- -------------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on:
Investments...................... 440,206 (322,550 ) 1,381,230
Short transactions............... -- -- --
Written option contracts expired
or closed...................... 1,564,616 (108,745 ) 2,045,828
Futures contracts................ 3,562,043 (1,098,274 ) (86,088 )
------------- ------------- -------------
5,566,865 (1,529,569 ) 3,340,970
------------- ------------- -------------
Change in unrealized appreciation
(depreciation) on:
Investments...................... (120,125 ) (384,407 ) 13,990,576
Short positions.................. -- -- --
Written options.................. 55,825 (45,607 ) 509,810
Futures.......................... (51,642 ) (507,987 ) --
------------- ------------- -------------
(115,942 ) (938,001 ) 14,500,386
------------- ------------- -------------
Net realized and unrealized
gain (loss) on investments... 5,450,923 (2,467,570 ) 17,841,356
------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations....................... $ 5,818,552 $(2,376,468 ) $ 17,531,936
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to the financial statements.
16
<PAGE>
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap
Plus
Fund
FEBRUARY 22,
1999(1) U.S.
OTC/Short TO FEBRUARY Government
Potomac Funds Fund 28, 1999 Money Market
Fund
<S> <C> <C> <C>
Investment income:
Dividend income.................... $ -- $ 3,487 $ --
Interest income.................... 103,339 3,088 283,013
------------- ------------- -------------
Total investment income........ 103,339 6,575 283,013
------------- ------------- -------------
Expenses:
Investment advisory fees........... 28,035 2,191 29,337
Administration fees................ 4,449 1,221 7,919
Shareholder servicing and
accounting costs................. 9,547 2,695 17,216
Custody fees....................... 6,825 2,015 12,166
Federal and state registration..... 2,507 1,701 13,664
Professional fees.................. 4,457 1,792 8,463
Organizational expenses............ 1,556 14,975 1,556
Reports to shareholders............ 840 338 1,594
Directors' fees and expenses....... 205 82 390
Other.............................. 880 353 1,671
------------- ------------- -------------
Total expenses before waiver
and reimbursement of expenses
and dividends on short
positions.................... 59,301 27,363 93,976
Less: Waiver of expenses and
reimbursement from Adviser... (7,903 ) (22,981 ) (38,338 )
------------- ------------- -------------
Net expenses before dividends
on short positions........... 51,398 4,382 55,638
Dividends on short positions... 2,185 -- --
------------- ------------- -------------
Total expenses................. 53,583 4,382 55,638
------------- ------------- -------------
Net investment income.............. 49,756 2,193 227,375
------------- ------------- -------------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on:
Investments...................... -- (67,732 ) --
Short transactions............... (1,141,227 ) -- --
Written option contracts expired
or closed...................... (49,800 ) (34,528 ) --
Futures contracts................ -- (233,175 ) --
------------- ------------- -------------
(1,191,027 ) (335,435 ) --
------------- ------------- -------------
Change in unrealized appreciation
(depreciation) on:
Investments...................... 10,977 (10,942 ) --
Short positions.................. (3,132,984 ) -- --
Written options.................. 19,562 (8,496 ) --
Futures.......................... -- (6,888 ) --
------------- ------------- -------------
(3,102,445 ) (26,326 ) --
------------- ------------- -------------
Net realized and unrealized
gain (loss) on investments... (4,293,472 ) (361,761 ) --
------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations....................... $(4,243,716 ) $ (359,568 ) $ 227,375
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
See notes to the financial statements.
17
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potomac Funds U.S. Plus U.S. Plus U.S./Short U.S./Short
Fund Fund Fund Fund
SIX MONTHS OCTOBER 20, SIX MONTHS NOVEMBER 7,
ENDED 1997(1) ENDED 1997(1)
FEBRUARY 28, TO AUGUST 31, FEBRUARY 28, TO AUGUST 31,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operations:
Net investment income.............. $ 367,629 $ 351,252 $ 91,102 $ 53,111
Net realized gain (loss) on
investments sold, securities sold
short, written option contracts
expired or closed and futures.... 5,566,865 1,449,351 (1,529,569 ) (403,411 )
Change in unrealized appreciation
(depreciation) on investments,
short positions, written options
and futures...................... (115,942 ) (102,864 ) (938,001 ) 936,884
------------- ------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations................... 5,818,552 1,697,739 (2,376,468 ) 586,584
------------- ------------- ------------- -------------
Distributions to shareholders:
Net investment income.............. -- (35,123 ) -- --
Net realized gains................. (189,978 ) -- (26,273 ) --
------------- ------------- ------------- -------------
Total distributions............ (189,978 ) (35,123 ) (26,273 ) --
------------- ------------- ------------- -------------
Capital share transactions:
Proceeds from shares sold.......... 250,404,344 141,274,188 188,465,972 89,542,327
Proceeds from shares issued to
holders in reinvestment of
dividends........................ 187,760 34,225 25,407 --
Cost of shares redeemed............ (233,677,585 ) (142,504,032 ) (188,271,290 ) (82,360,259 )
------------- ------------- ------------- -------------
Net increase (decrease) in net
assets resulting from capital
share transactions........... 16,914,519 (1,195,619 ) 220,089 7,182,068
------------- ------------- ------------- -------------
Total increase (decrease) in net
assets........................... 22,543,093 466,997 (2,182,652 ) 7,768,652
------------- ------------- ------------- -------------
Net assets:
Beginning of period................ 466,997 -- 7,768,652 --
------------- ------------- ------------- -------------
End of period (including
undistributed net investment
income of $367,629, $15,745,
$91,102 and $4,928,
respectively).................... $ 23,010,090 $ 466,997 $ 5,586,000 $ 7,768,652
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
See notes to the financial statements.
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potomac Funds OTC Plus OTC Plus OTC/Short OTC/Short
Fund Fund Fund Fund
SIX MONTHS OCTOBER 20, SIX MONTHS OCTOBER 16,
ENDED 1997(1) ENDED 1997(1)
FEBRUARY 28, TO AUGUST 31, FEBRUARY 28, TO AUGUST 31,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ (309,420 ) $ (101,815 ) $ 49,756 $ 78,647
Net realized gain (loss) on
investments sold, securities sold
short, written option contracts
expired or closed and futures.... 3,340,970 2,282,566 (1,191,027 ) (5,381,857 )
Change in unrealized appreciation
(depreciation) on investments,
short positions, written options
and futures...................... 14,500,386 172,071 (3,102,445 ) 3,550,388
------------- ------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations................... 17,531,936 2,352,822 (4,243,716 ) (1,752,822 )
------------- ------------- ------------- -------------
Distributions to shareholders:
Net investment income.............. -- -- -- --
Net realized gains................. (171,078 ) -- (7,355 ) --
------------- ------------- ------------- -------------
Total distributions............ (171,078 ) -- (7,355 ) --
------------- ------------- ------------- -------------
Capital share transactions:
Proceeds from shares sold.......... 427,636,726 325,380,424 160,098,355 301,561,469
Proceeds from shares issued to
holders in reinvestment of
dividends........................ 161,538 -- 6,530 --
Cost of shares redeemed............ (406,208,662 ) (320,052,700 ) (166,861,088 ) (280,640,109 )
------------- ------------- ------------- -------------
Net increase (decrease) in net
assets resulting from capital
share transactions........... 21,589,602 5,327,724 (6,756,203 ) 20,921,360
------------- ------------- ------------- -------------
Total increase (decrease) in net
assets........................... 38,950,460 7,680,546 (11,007,274 ) 19,168,538
------------- ------------- ------------- -------------
Net assets:
Beginning of period................ 7,680,546 -- 19,168,538 --
------------- ------------- ------------- -------------
End of period (including
undistributed net investment
income (loss) of ($309,420), $0,
$49,756 and $11,388,
respectively).................... $ 46,631,006 $ 7,680,546 $ 8,161,264 $ 19,168,538
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
See notes to the financial statements.
19
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potomac Funds Small Cap U.S. U.S.
Plus Government Government
Fund Money Market Money Market
Fund Fund
FEBRUARY 22,
1999(1) SIX MONTHS OCTOBER 20,
TO FEBRUARY ENDED 1997(1)
28, 1999 FEBRUARY 28, TO AUGUST 31,
(UNAUDITED) 1999 1998
(UNAUDITED)
<S> <C> <C> <C>
Operations:
Net investment income.............. $ 2,193 $ 227,375 $ 149,746
Net realized loss on investments
sold, securities sold short,
written option contracts expired
or closed and futures............ (335,435 ) -- --
Change in unrealized depreciation
on investments, short positions,
written options and futures...... (26,326 ) -- --
------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations................... (359,568 ) 227,375 149,746
------------- ------------- -------------
Distributions to shareholders:
Net investment income.............. -- (227,375 ) (149,746 )
Net realized gains................. -- -- --
------------- ------------- -------------
Total distributions............ -- (227,375 ) (149,746 )
------------- ------------- -------------
Capital share transactions:
Proceeds from shares sold.......... 26,887,977 274,207,017 198,593,087
Proceeds from shares issued to
holders in reinvestment of
dividends........................ -- 168,301 69,908
Cost of shares redeemed............ (21,599,183 ) (226,199,317 ) (189,292,611 )
------------- ------------- -------------
Net increase in net assets
resulting from capital share
transactions................. 5,288,794 48,176,001 9,370,384
------------- ------------- -------------
Total increase in net assets....... 4,929,226 48,176,001 9,370,384
------------- ------------- -------------
Net assets:
Beginning of period................ -- 9,370,384 --
------------- ------------- -------------
End of period (including
undistributed net investment
income of $2,193, $1,945, and
$17,771, respectively)........... $ 4,929,226 $ 57,546,385 $ 9,370,384
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
See notes to the financial statements.
20
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potomac Funds For a fund share outstanding throughout the period
U.S. Plus U.S. Plus U.S./Short U.S./Short
Fund Fund Fund Fund
SIX MONTHS OCTOBER 20, SIX MONTHS ENDED NOVEMBER 7,
ENDED 1997(1) FEBRUARY 28, 1999 1997(1)
FEBRUARY 28, TO AUGUST 31, (UNAUDITED) TO AUGUST 31, 1998
1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Per share data:
Net asset value,
beginning of period.............. $ 9.76 $ 10.00 $ 9.46 $ 10.00
-------------- -------------- ------------------ ------------------
Income (loss) from investment
operations:
Net investment income.............. 0.16(4) 0.36(4) 0.10(4) 0.23(4)
Net realized and unrealized gain
(loss) on investments............ 3.68 (0.58) (2.26) (0.77)
-------------- -------------- ------------------ ------------------
Total from investment
operations................... 3.84 (0.22) (2.16) (0.54)
-------------- -------------- ------------------ ------------------
Less distributions:
Dividends from net investment
income........................... -- (0.02) -- --
Distributions from realized
gains............................ (0.10) -- (0.05) --
-------------- -------------- ------------------ ------------------
Total distributions............ (0.10) (0.02) (0.05) --
-------------- -------------- ------------------ ------------------
Net asset value, end of period..... $ 13.50 $ 9.76 $ 7.25 $ 9.46
-------------- -------------- ------------------ ------------------
-------------- -------------- ------------------ ------------------
Total return(2).................... 39.43% (2.23%) (22.81%) (5.40%)
Supplemental data and ratios:
Net assets, end of period.......... $ 23,010,090 $ 466,997 $ 5,586,000 $ 7,768,652
Ratio of net expenses to average
net assets:
Before expense
reimbursement(3)............... 1.60% 2.52% 1.83% 5.29%
After expense reimbursement(3)... 1.50% 1.50% 1.65% 1.57%
Ratio of net investment income
(loss) to average net assets:
Before expense
reimbursement(3)............... 2.57% 2.68% 2.28% (0.46%)
After expense reimbursement(3)... 2.67% 3.70% 2.46% 3.26%
Portfolio turnover rate(5)......... 0.00% 0.00% 0.00% 0.00%
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)NOT ANNUALIZED.
(3)ANNUALIZED.
(4)NET INVESTMENT INCOME PER SHARE REPRESENTS NET INVESTMENT INCOME 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.
See notes to the financial statements.
21
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potomac Funds For a fund share outstanding throughout the period
OTC Plus OTC Plus OTC/Short OTC/Short
Fund Fund Fund Fund
SIX MONTHS OCTOBER 20, SIX MONTHS ENDED OCTOBER 16,
ENDED 1997(1) FEBRUARY 28, 1999 1997(1)
FEBRUARY 28, TO AUGUST 31, (UNAUDITED) TO AUGUST 31, 1998
1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Per share data:
Net asset value,
beginning of period.............. $ 10.41 $ 10.00 $ 8.38 $ 10.00
-------------- -------------- ------------------ ------------------
Income (loss) from investment
operations:
Net investment income (loss)....... (0.10)(4) (0.11)(4) 0.05(4) 0.09(4),(7)
Net realized and unrealized gain
(loss) on investments............ 8.90 0.52 (3.86) (1.71)
-------------- -------------- ------------------ ------------------
Total from investment
operations................... 8.80 0.41 (3.81) (1.62)
-------------- -------------- ------------------ ------------------
Less distributions:
Dividends from net investment
income........................... -- -- -- --
Distributions from realized
gains............................ (0.06) -- (0.01) --
-------------- -------------- ------------------ ------------------
Total distributions............ (0.06) -- (0.01) --
-------------- -------------- ------------------ ------------------
Net asset value, end of period..... $ 19.15 $ 10.41 $ 4.56 $ 8.38
-------------- -------------- ------------------ ------------------
-------------- -------------- ------------------ ------------------
Total return(2).................... 84.63% 4.10% (45.53%) (16.20%)
Supplemental data and ratios:
Net assets, end of period.......... $ 46,631,006 $ 7,680,546 $ 8,161,264 $ 19,168,538
Ratio of net expenses to average
net assets:
Before expense
reimbursement(3)............... 1.56% 3.21% 1.90% 3.70%
After expense reimbursement(3)... 1.50% 1.50% 1.65%(5) 1.64%(5)
Ratio of net investment income
(loss) to average net assets:
Before expense
reimbursement(3)............... (1.28%) (2.84%) 1.35% (0.74%)
After expense reimbursement(3)... (1.22%) (1.13%) 1.60%(6) 1.32%(6)
Portfolio turnover rate............ 615.89% 2,285.83% 2,143.96% 3,346.25%
</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)THE OPERATING EXPENSE RATIO EXCLUDED DIVIDENDS ON SHORT POSITIONS. THE RATIO
INCLUDING DIVIDENDS ON SHORT POSITIONS FOR THE SIX MONTHS ENDED FEBRUARY 28,
1999 AND THE PERIOD ENDED AUGUST 31, 1998 WAS 1.72% AND 1.78%, RESPECTIVELY.
(6)THE NET INVESTMENT INCOME RATIO INCLUDED DIVIDENDS ON SHORT POSITIONS. THE
RATIO EXCLUDING DIVIDENDS ON SHORT POSITIONS FOR THE SIX MONTHS ENDED FEBRUARY
28, 1999 AND THE PERIOD ENDED AUGUST 31, 1998 WAS 1.67% AND 1.46%, RESPECTIVELY.
(7)NET INVESTMENT INCOME BEFORE DIVIDENDS ON SHORT POSITIONS FOR THE RESPECTIVE
PERIOD ENDED WAS $0.10.
See notes to the financial statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potomac Funds For a fund share outstanding throughout the period
Small Cap U.S. U.S.
Plus Government Government
Fund Money Market Money Market
FEBRUARY 22, Fund Fund
1999(1)
TO FEBRUARY SIX MONTHS OCTOBER 20,
28, 1999 ENDED 1997(1)
(UNAUDITED) FEBRUARY 28, TO AUGUST 31,
1999 1998
(UNAUDITED)
<S> <C> <C> <C>
Per share data:
Net asset value,
beginning of period.............. $ 10.00 $ 1.00 $ 1.00
-------------- -------------- --------------
Income (loss) from investment
operations:
Net investment income.............. --(4) 0.02(4) 0.04(4)
Net realized and unrealized gain
(loss) on investments............ (0.12) -- --
-------------- -------------- --------------
Total from investment
operations................... (0.12) 0.02 0.04
-------------- -------------- --------------
Less distributions:
Dividends from net investment
income........................... -- (0.02) (0.04)
Distributions from realized
gains............................ -- -- --
-------------- -------------- --------------
Total distributions............ -- (0.02) (0.04)
-------------- -------------- --------------
Net asset value, end of period..... $ 9.88 $ 1.00 $ 1.00
-------------- -------------- --------------
-------------- -------------- --------------
Total return(2).................... (1.20%) 1.90% 3.89%
Supplemental data and ratios:
Net assets, end of period.......... $ 4,929,226 $ 57,546,385 $ 9,370,384
Ratio of net expenses to average
net assets:
Before expense
reimbursement(3)............... 9.37% 1.60% 3.70%
After expense reimbursement(3)... 1.50% 0.95% 1.00%
Ratio of net investment income
(loss) to average net assets:
Before expense
reimbursement(3)............... (7.12%) 3.22% 1.66%
After expense reimbursement(3)... 0.75% 3.87% 4.36%
Portfolio turnover rate(5)......... 0.00% N/A N/A
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)NOT ANNUALIZED.
(3)ANNUALIZED.
(4)NET INVESTMENT INCOME PER SHARE REPRESENTS NET INVESTMENT INCOME 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.
See notes to the financial statements.
23
<PAGE>
POTOMAC FUNDS
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1999 (Unaudited)
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, Small Cap Plus 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; the OTC/Short Fund commenced operations on October 16, 1997; and the Small
Cap Plus Fund commenced operations on February 22, 1999.
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 Small Cap Plus Fund is to provide investment returns that
correspond to 125% of the performance of the Russell 2000 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, it
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
(other than the Small Cap Plus 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. Costs incurred by the Trust in connection with the
organization, registration and the initial public offering of shares of the
Small Cap Plus Fund are expensed as incurred. These costs were advanced by the
Adviser and will be reimbursed by the Trust.
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
24
<PAGE>
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
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 FUTURESCONTRACTS 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 contracts;
25
<PAGE>
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 fees and registration
costs. Expenses that are not directly attributable to a portfolio are allocated
among the Trust's portfolios in proportion to their respective net assets.
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 and net realized capital gains. The U.S. Government
Money Market Fund 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.
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 the 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 February 28, 1999, were
as follows:
<TABLE>
<CAPTION>
U.S. Plus U.S./Short
Fund Fund OTC Plus Fund
------------- -------------- -------------
<S> <C> <C> <C>
Shares sold 20,541,115 24,077,855 27,266,089
Shares issued to holders in reinvestment
of dividends 15,022 3,339 9,821
Shares redeemed (18,899,127) (24,131,870) (25,578,213)
------------- -------------- -------------
Net increase (decrease) 1,657,010 (50,676) 1,697,697
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
U.S. Government
OTC/Short Small Cap Money Market
Fund Plus Fund Fund
------------- ---------- ---------------
<S> <C> <C> <C>
Shares sold 26,630,077 2,660,002 274,207,017
Shares issued to holders in reinvestment of
dividends 1,189 -- 168,301
Shares redeemed (27,128,742) (2,160,919) (226,199,317)
------------- ---------- ---------------
Net increase (decrease) (497,476) 499,083 48,176,001
------------- ---------- ---------------
------------- ---------- ---------------
</TABLE>
Transactions in shares of the Funds for the period ended August 31, 1998, were
as follows:
<TABLE>
<CAPTION>
U.S. Plus U.S./Short
Fund 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
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
U.S. Government
OTC/Short Money Market
Fund Fund
------------- ---------------
<S> <C> <C>
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>
4. INVESTMENT TRANSACTIONS
During the period ended February 28, 1999, the aggregate purchases and sales of
investments (excluding short-term investments, options and futures contracts)
were:
<TABLE>
<CAPTION>
U.S. Plus Fund U.S./Short Fund OTC Plus Fund
----------------- ------------------ -------------
<S> <C> <C> <C>
Purchases $ -- $ -- $325,670,708
Sales $ -- $ -- $301,872,600
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
U.S. Government
OTC/Short Small Cap Money Market
Fund Plus Fund Fund
------------- ---------- -------------------
<S> <C> <C> <C>
Purchases $135,859,522 $13,361,408 $ --
Sales $120,136,784 $13,367,159 $ --
</TABLE>
During the period ended February 28, 1999, 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 1 $ 7,245 31 $ 66,111
Options written 1,105 3,128,911 394 992,278
Options terminated (1,001) (2,833,961) (395) (1,033,510)
------ --------- ------ ----------
Outstanding at end of period 105 $ 302,195 30 $ 24,879
------ --------- ------ ----------
------ --------- ------ ----------
</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 21 $ 112,562 -- $ --
Options written 1,183 5,577,694 35 328,549
Options terminated (1,130) (4,742,684) (32) (303,512)
------ --------- ------ ----------
Outstanding at end of period 74 $ 947,572 3 $ 25,037
------ --------- ------ ----------
------ --------- ------ ----------
</TABLE>
<TABLE>
<CAPTION>
Small Cap Plus Fund
------------------------
Number of Premium
contracts amount
------------ ----------
<S> <C> <C>
Outstanding at beginning of period -- $ --
Options written 146 79,713
Options terminated (122) (66,609)
------ ----------
Outstanding at end of period 24 $ 13,104
------ ----------
------ ----------
</TABLE>
28
<PAGE>
Transactions in futures contracts for the period ended February 28, 1999, for
the following Funds were as follows:
<TABLE>
<CAPTION>
U.S. Plus Fund OTC Plus Fund
----------------------------- -----------------------------
Aggregate face Aggregate face
Number of value of Number of value of
contracts contracts contracts contracts
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
period 2 $ 557,634 -- $ --
Contracts opened 846 244,298,740 30 6,153,135
Contracts closed (778) (223,102,848) (30) (6,153,135)
------ --------------- ------ ---------------
Outstanding at end of period 70 $ 21,753,526 -- $ --
------ --------------- ------ ---------------
------ --------------- ------ ---------------
</TABLE>
<TABLE>
<CAPTION>
Small Cap Plus Fund
-----------------------------
Aggregate face
Number of value of
contracts contracts
------------ ---------------
<S> <C> <C>
Outstanding at beginning of period -- $ --
Contracts opened 125 24,760,038
Contracts closed (98) (19,442,925)
------ ---------------
Outstanding at end of period 27 $ 5,317,113
------ ---------------
------ ---------------
</TABLE>
Transactions in short futures contracts for the period ended February 28, 1999,
for the following Fund was as follows:
<TABLE>
<CAPTION>
U.S./Short Fund
-----------------------------
Aggregate face
Number of value of
contracts contracts
------------ ---------------
<S> <C> <C>
Outstanding at beginning of period 20 $ 5,304,660
Contracts opened 479 135,588,832
Contracts closed (493) (139,013,569)
------ ---------------
Outstanding at end of period 6 $ 1,879,923
------ ---------------
------ ---------------
</TABLE>
At February 28, 1999, 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 $ -- $ -- $14,835,127
(Depreciation) (126,225) (44,419) (422,042)
------------- --------------- -------------
Net unrealized appreciation (depreciation)
on investments ($126,225) ($ 44,419) $14,413,085
------------- --------------- -------------
------------- --------------- -------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
U.S. Government
Small Cap Money Market
OTC/Short Fund Plus Fund Fund
--------------- ---------- -------------------
<S> <C> <C> <C>
Appreciation $ 11,592 $ -- $ --
(Depreciation) (59) (10,942) --
------- ---------- -----
Net unrealized appreciation (depreciation)
on investments $ 11,533 ($ 10,942) $ --
------- ---------- -----
------- ---------- -----
</TABLE>
At February 28, 1999, the cost of investments for federal income tax purposes
was $17,960,869, $5,065,778, $30,257,453, $5,413,713, $4,490,236 and $37,989,849
for the U.S. Plus Fund, U.S./Short Fund, OTC Plus Fund,
OTC/Short Fund, Small Cap Plus Fund and U.S. Government Money Market Fund,
respectively.
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 February 28, 1999, 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% 1.00%
Expenses paid in excess of annual cap on
expenses $ 13,882 $ 6,604 $ 14,734
</TABLE>
<TABLE>
<CAPTION>
U.S. Government
Small Cap Money Market
OTC/Short Fund Plus Fund Fund
---------------- ----------- ----------------
<S> <C> <C> <C>
Annual Advisory rate 0.90% 0.75% 0.50%
Annual cap on expenses 1.65% 1.50% 1.00%
Expenses paid in excess of annual cap on
expenses $ 7,903 $ 22,981 $ 38,338
</TABLE>
30
<PAGE>
Investment Adviser
Rafferty Asset Management, LLC
550 Mamaroneck Avenue
Harrison, NY 10528
Administrator, Transfer Agent, Dividend
Paying Agent & Shareholder Servicing Agent
Firstar Mutual Fund Services, LLC
P.O. Box 1993
615 East Michigan Street
Milwaukee, WI 53202
Custodian
Firstar Bank Milwaukee, N.A.
615 East Michigan Street
Milwaukee, WI 53202
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
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
S E M I - A N N U A L
R E P O R T
February 28, 1999
[LOGO]
100 South Royal Street
Alexandria, Virginia 22314
550 Mamaroneck Avenue
Harrison, New York 10528
(800) 851-0511