November 4, 1998
Dear Shareholder.
The first four months of the Veredus Growth Fund's existence were met with
tremendous volatility, as was the overall market. That notwithstanding, October
was a remarkable month given the horrible start which we experienced. From the
low of October 8, 1998 to October 31, 1998 our portfolio returned 27.5% versus
21.9% for the Russell 2000 and versus 14.5% for the S&P 500. Given what we have
seen over the past three weeks, we feel that the bear market has run its course
for the average stock. This does not mean that we will no longer be held captive
by the volatility of world markets and their currencies, but the volatility is
subsiding and we are becoming more focused on earnings once again. The
overriding positive in our mind is the slope of the yield curve. While it has
contracted somewhat in the last three weeks from 125 basis points to 90 basis
points, we view this as normal, as the market becomes less obsessed with flight
to quality.
Since the Fund's commencement of investment operations on July 2, 1998 we are
now down 13.8% versus -17.6% for the Russell 2000 and -18.3% for the Russell
2000 Growth Index. Small capitalization stocks were punished more severely
during this downturn for liquidity reasons and flight to perceived safety;
however, the rally which commenced in mid October is following through into
November. As the economy continues to slow, the FED will most likely cut rates a
fourth time early in 1999 further driving multiples for earnings stories even
higher.
One sector which is really providing the portfolio with some leadership is
biotechnology. Healthcare now accounts for 14% of our portfolio, and a great
proportion of that percentage is biotechnology. The demographics are outstanding
and the number of compounds that are in stage III of clinical trials dwarfs that
of several years ago. Viruses and infections are building up immunities to our
current regimen of antibiotics, which provides an additional avenue of growth,
and most important of all, most of these companies are now earning real money as
opposed to the early 1990's. Current holdings include BioChem Pharma, Centocor,
Genzyme and Sepracor.
One of our database vendors, Holt Value Associates. supplies us with an
extensive database which focuses on the cash flow valuation of over 8000
companies. Holt calculates the cost of capital, or discount rate, for each
company and the market, which is a combination of both debt and equity capital.
The discount rate for large cap stocks is approximately 4.7% while the rate for
small cap stocks is 6.8%. The spread between the two of 250 basis points has
absolutely exploded since the beginning of 1997. This same spread spiked to
almost 150 basis points in late 1990, the bottom of the last small-cap cycle,
which marked the beginning of a four and one-half year bull market in small-cap
stocks versus their large counterparts. We strongly feel that October 8th marked
the bottom of this cycle.
B. Anthony Weber
Vice President, Fund Manager
<PAGE>
Change of Independent Auditors in Conjunction with Reorganization
In connection with the contemplated reorganization of Veredus Growth Fund into
Alleghany/Veredus Aggressive Growth Fund, Arthur Andersen LLP resigned as
independent auditors for the Veredus Funds (the "Trust") effective on
shareholder approval of the reorganization and shareholder ratification of the
selection of KPMG Peat Marwick LLP ("KPMG") as independent auditors. The Board
of Trustees of the Trust approved KPMG as independent auditors for the Veredus
Growth Fund on October 26, 1998, subject to shareholder approval. The
shareholders approved the reorganization and ratified the selection of KPMG as
independent auditors on November 25, 1998. The engagement of KPMG as the
independent auditors for the Veredus Growth Fund for the fiscal year ended
October 31, 1998 was effective on that date.
In connection with the audit of the balance sheet of the Veredus Growth Fund
dated June 18, 1998, and the interim period preceding the resignation, the Trust
had no disagreements with Arthur Andersen LLP on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Arthur
Andersen LLP, would have caused it to make reference to the subject matter of
the disagreement in connection with its report. The report of Arthur Andersen
LLP on the balance sheet dated as of June 18, 1998 did not contain an adverse
opinion or disclaimer of opinion nor were any reports qualified or modified as
to uncertainty, audit scope, or accounting principles.
<PAGE>
VEREDUS GROWTH FUND
- -------------------
SCHEDULE OF INVESTMENTS
- -----------------------
As of October 31, 1998
Number Market
of Shares Value
--------- -----
Common Stocks - 94.68%
- ----------------------
Apparel - 8.11%
Cutter & Buck, Inc. * 13,300 $ 345,800
Genesco, Inc. * 56,000 336,000
Polo Ralph Lauren Corporation * 7,900 164,423
Russell Corporation 7,400 181,766
Banks - 3.38%
Bank Plus * 12,500 50,788
Commercial Federal Bank 12,800 290,406
Republic Bank 6,300 86,625
Communications - 4.28%
Intervoice Inc. * 5,900 168,150
Tekelec Corporation * 20,900 374,904
Computers/Technology -14.76%
Ascend Communication, Inc. * 12,400 598,300
Macromedia, Inc. * 12,700 254,000
Netscape Communications Corporation * 14,000 300,132
Novell, Inc. * 20,800 309,400
Segue Software, Inc. * 12,800 244,006
Xircom, Inc. * 5,600 165,200
Financial Services -6.69%
Morgan Keegan, Inc 11,600 216,050
Riggs National Corporation 14,200 342,575
Webster Financial Corporation 11,700 288,850
Food & Beverage -3.63%
Hain Food Group Inc. * 7,400 148,925
Landry's Seafood Restaurants, Inc. * 31,300 262,138
Total Entertainment Restaurant* 17,700 48,675
Medical Products/Pharmaceutical -13.57%
ADAC Laboratories * 7,600 225,150
Biochemical Pharmactical* 11,200 258,087
Centocor Inc. * 5,600 249,200
Forest Laboratories Inc. * 4,200 175,615
Genzyme Corporation * 7,100 298,647
LaserSight Inc. * 27,600 120,750
*Non-income producing security.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Number Market
of Shares Value
--------- -----
Medical Products/Pharmaceutical -(Continued)
Sepracor Inc. * 3,700 $ 253,913
Vencor, Inc. * 29,800 137,825
Manufacturing -4.03%
American Power Convrsn. Corporation * 6,700 284,334
C-COR Electronics, Inc. * 8,600 112,875
TurboChef Technologies, Inc. * 16,000 114,000
Oil & Gas -1.45%
Cooper Cameron Corporation * 5,300 184,175
Other Consumer Goods & Service -7.22%
FilNET Corporation * 20,200 186,850
Fresh Del Monte Produce Inc. * 13,800 246,675
Jones Intercable, Inc. * 11,600 325,531
Westpoint Stevens Inc. * 5,500 156,409
Retail -18.26%
Abercombie & Fitch Company * 7,100 281,785
Ames Department Stores * 9,300 170,887
Ann Taylor Stores Corporation * 12,900 374,100
DM Management Company * 18,200 197,925
Eagle Hardware & Garden, Inc. * 12,700 295,275
Just For Feet, Inc. * 19,500 330,291
Musicland Stores Corporation * 33,600 443,117
Pacific Sunwear of California, Inc.* 10,200 220,575
Telecommunications -9.30%
Gemstar International Group Limited* 4,300 234,887
Transwitch Corporation * 10,600 258,375
Uniphase Corporation * 10,200 504,900
Vitesse Semiconductor* 5,600 180,600
---------
Total Common Stocks
(Cost $11,802,897) 11,999,866
----------
Money Market - 8.67%
Star Treasury Money Market
(Cost $1,098,754) 1,098,754
---------
Total Investments
(Cost $12,901,651) 13,098,620
Other Assets and Liabilities, Net - (3.35%) (425,081)
- ------------------------------------------- ---------
Net Assets - 100% $12,673,539
===========
<PAGE>
VEREDUS GROWTH FUND
- -------------------
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------
As of October 31, 1998
ASSETS
Investments, at value (cost $12,901,651) ................ $ 13,098,620
Receivables:
Dividends ......................................... 1,711
Interest........................................... 5,417
Investments sold .................................. 303,313
Deferred organization costs........................ 22,743
-----------
Total assets ......................................... 13,431,804
LIABILITIES
Payable for investments purchased ....................... 745,517
Accrued expenses ........................................ 12,748
------
Total liabilities........................................ 758,265
-------
NET ASSETS ................................................... $ 12,673,539
Net assets consist of:
Paid-in capital ......................................... 14,051,911
Accumulated undistributed net realized loss on investments (1,575,341)
Net unrealized appreciation on
investments......................................... 196,969
-------
Net assets ................................................... $ 12,673,539
Shares of capital stock
outstanding (no par value,
unlimited shares authorized)............................. 1,469,832
Net asset value, offering
and redemption price per share .......................... $ 8.62
The accompanying notes are an integral part of these financial statements.
<PAGE>
VEREDUS GROWTH FUND
- -------------------
STATEMENT OF OPERATIONS
- -----------------------
For the period July 2, 1998 (commencement of investment operations)
to October 31, 1998
INVESTMENT INCOME:
Interest ................................................ $ 44,214
Dividends ............................................... 4,728
-------
Total investment income ............................ 48,942
------
EXPENSES:
Investment adviser fees.................................. 49,425
Amortization of organization expenses ................... 1,631
-----
Total expenses......................................... 51,056
------
Less: Expense reimbursement from adviser..................... 1,631
-----
Total net expenses.................................. 49,425
NET INVESTMENT INCOME ....................................... (483)
-------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss on investments ........................ (1,575,341)
Net change in unrealized
appreciation on investments ........................ 196,969
-----------
Net realized and unrealized loss on investments ......... (1,378,372)
-----------
DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...............................$ (1,378,855)
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
VEREDUS GROWTH FUND
- -------------------
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------
For the period July 2, 1998 (commencement of investment operations)
to October 31, 1998
INCREASE IN NET ASSETS
Operations:
Net investment loss ..................................... $ (483)
Net realized loss on investments ........................ (1,575,341)
Net change in unrealized appreciation on investments 196,969
-------
Decrease in net assets from operations .................. (1,378,855)
------------
Capital share transactions:
Proceeds from shares sold ............................... 14,223,208
Value of shares issued to shareholders in
reinvestment of distributions ..................... ---
Cost of shares repurchased............................... (170,814)
-----------
Net increase in net assets from
capital share transactions ......................... 14,052,394
----------
TOTAL INCREASE IN NET ASSETS ................................. 12,673,539
----------
NET ASSETS:
Beginning of period ..................................... ---
End of period............................................ $ 12,673,539
==========
OTHER INFORMATION:
Share transactions:
Sold .................................................... 1,490,149
Issued to shareholders in reinvestment of
distributions........................................... ---
Repurchased ............................................. (20,317)
----------
NET INCREASE IN SHARES OUTSTANDING ........................... 1,469,832
==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
VEREDUS GROWTH FUND
- -------------------
FINANCIAL HIGHLIGHTS
- --------------------
1998(a)
-------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period.......................... $ 10.00
Income from investment operations:
Net investment income ................................... 0.00
Net realized and unrealized
loss on investments................................. (1.38)
------
Total from investment operations.............................. (1.38)
Less distributions:
Distributions from net
investment income ...................................... 0.00
Distributions from net realized
gains on investments.................................... 0.00
----
Total distributions .......................................... 0.00
----
Net asset value, end of period ............................... $ 8.62
====
TOTAL RETURN ................................................. (13.80)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ............................... $12,673,539
Ratio of expenses to average net assets:
Before reimbursement of expenses by Adviser (b)... 1.54%
After reimbursement of expenses by Adviser (b).... 1.50%
Ratio of net investment income to average net assets:
Before reimbursement of expenses by Adviser (b)... (0.06)%
After reimbursement of expenses by Adviser (b).... (0.02)%
Portfolio turnover ...................................... 111.52%
(a) For the period July 2, 1998 (commencement of investment operations) to
October 31, 1998.
(b) Annualized.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 1 - General
The Veredus Growth Fund (the "Fund") was organized as a series of Veredus Funds,
an Ohio business trust (the "Trust") on April 13, 1998. Veredus Growth Fund is a
diversified, open-end mutual fund whose investment objective is to provide
capital appreciation. Veredus Asset Management LLC, the Fund's investment
adviser, seeks to achieve this objective by investing primarily in equity
securities of companies whose earnings are growing at an accelerating rate.
Note 2 - Significant Accounting Policies
The following is a summary of the significant accounting policies followed by
the Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles.
A) Security Valuations
Securities, which are traded on any exchange or on the NASDAQ over-the-counter
market, are valued at the last quoted sale price. Lacking a last sale price, a
security is valued at its last bid price except when, in the Adviser's opinion,
the last bid price does not accurately reflect the current value of the
security. All other securities, for which over-the-counter market quotations are
readily available, are valued at their last bid price. When market quotations
are not readily available, when the Adviser determines the last bid price does
not accurately reflect the current value or when restricted securities are being
valued, such securities are valued as determined in good faith by the Adviser,
subject to review of the Board of Trustees of the Trust.
B) Securities Transactions and Investment Income
Securities transactions are recorded on a trade basis. The cost of securities
sold is determined using the first-in-first-out method. Interest income is
recorded on the accrual basis and dividend income is recorded on the ex-dividend
date.
C) Dividends and Distributions to Shareholders
The Fund intends to distribute substantially all of its net investment income as
dividends to its shareholders on a quarterly basis, and intends to distribute
its net capital gains at least once a year. However, to the extent that net
realized gains of the Fund could be reduced by any capital loss carry-overs,
such gains will not be distributed.
The Fund had a net operating loss for tax purposes of $483 for the period ended
October 31, 1998. This amount was reclassified from undistributed net investment
income to paid-in capital as a permanent difference.
D) Federal Income Taxes
The Fund has elected to be treated as a "regulated investment company" under
Sub-chapter M of the Internal Revenue Code and to distribute substantially all
of its respective net taxable income. Accordingly, no provisions for federal
income taxes have been made in the accompanying financial statements. The Fund
intends to utilize provisions of the federal income tax laws which allows it to
carry a realized capital loss forward for eight years following the year of the
loss and offset such losses against any future realized capital gains. At
October 31, 1998, the losses amounted to $1,539,354, which will expire October
31, 2006.
Net realized gains or losses may differ for financial and tax reporting purposes
for the Fund primarily as a result of losses from wash sales which are not
recognized for tax purposes until the corresponding shares are sold.
E) Organizational Costs
Organizational costs represent costs incurred in connection with the
organization and the initial public offering of the shares of the Fund. The Fund
has reimbursed the Adviser for these organizational costs in the amount of
$24,374. Organizational costs are amortized on a straight-line basis over five
years commencing on July 2, 1998. In the event that the original shareholder (or
any subsequent transferee) redeems any of its original capital (seed capital)
prior to these organizational costs being fully amortized, the redemption
proceeds will be reduced by a pro-rata portion of any then unamortized
organizational costs.
F) 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.
Note 3 - Agreements and Other Transactions with Affiliates
The Fund retains Veredus Asset Management (the "Adviser") to manage the Fund's
investments. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund. The
Fund is authorized to pay the Adviser a monthly fee equal to an annual average
rate of 1.50% of its average daily net assets, minus the amount by which the
Fund's total expenses (including organizational expenses, but excluding
brokerage, taxes, interest and extraordinary expenses) exceeds 1.50%. The
Adviser pays all of the operating expenses except brokerage, taxes, interest,
fees and expenses of non-interested person trustees and extraordinary expenses.
The Fund retains Unified Fund Services, Inc. ("the Administrator") to manage the
Fund's business affairs and provide the Fund with fund accounting and
administrative services, including all regulatory reporting and necessary office
equipment, personnel and facilities. The Fund also retains Unified Fund
Services, Inc. (the "Transfer Agent") to serve as transfer agent, dividend
paying agent and shareholder service agent. For its services as Administrator
(including its fund accounting services), Unified Fund Services, Inc. receives a
monthly fee from the Adviser equal to an annual average rate of 0.16% of the
Fund's average daily net assets. The Fund retains Unified Management
Corporation, (the "Distributor") to act as principal distributor of the Fund's
shares. The services of the Administrator, Transfer Agent, and Distributor are
operating expenses paid by the Adviser.
Note 4- Investment Transactions
For the period ended October 31, 1998, the cost of purchases and proceeds from
the sales of investments, excluding short-term investments, were $21,294,567 and
$7,916,330, respectively.
Note 5- Unrealized Appreciation (Depreciation)
At October 31, 1998, the composition of gross unrealized appreciation
(depreciation) of investment securities is as follows:
Appreciation Depreciation Net Appreciation
------------ ------------ ----------------
The Veredus Growth Fund $ 1,069,235 ($872,266) $ 196,969
At October 31, 1998, the composition of gross unrealized appreciation
(depreciation) of investment securities for federal income tax purposes is as
follows:
Appreciation Depreciation Net Appreciation
------------ ------------ ----------------
The Veredus Growth Fund $ 1,037,045 ($876,063) $ 160,982
At October 31, 1998, the aggregate cost of investment securities for federal
income tax purposes is $12,937,637.
Note 6- Shares of Beneficial Interest
The Fund is authorized to issue an unlimited number of shares of beneficial
interest with no par value. At October 31, 1998, Veredus Asset Management and
its affiliates owned 46,090 shares of the Fund.
Note 7- Subsequent Events
Effective November 25, 1998, the shareholders of the Fund approved a plan of
reorganization from the Veredus Growth Fund to the Alleghany/Veredus Aggressive
Growth Fund to be completed on December 4, 1998.
Effective December 4, 1998, Allegheny Asset Management, Inc. holds a 40%
minority interest in Veredus Asset Management with certain options to acquire up
to a 70% interest over the next 9 years.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of
Veredus Growth Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Veredus Growth Fund (the "Fund") as of
October 31, 1998, and the related statement of operations, the statement of
changes in net assets and the financial highlights for the period from July 2,
1998 (commencement of investment operations) to October 31, 1998. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1998, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of October 31, 1998, the results of its operations, the changes in its
net assets and financial highlights for the period from July 2, 1998
(commencement of investment operations) to October 31, 1998, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
December 4, 1998
