May 31, 1999
Dear Fellow Shareholder,
The last eleven months, since the inception of the PUGET SOUND MARKET
NEUTRAL PORTFOLIO (the "Fund"), have been an exceptionally difficult period.
Active stock-picking strategies, especially market neutral, have done poorly.
This recent period represents one of the most volatile in stock market history.
Through the first part of 1999, large-capitalization growth stocks provided much
of the market leadership. To us, it appeared that little or no relationship
existed between historical measures of value and stock performance. Given our
emphasis on a disciplined investment approach, with special attention to
valuation and company fundamentals, we are disappointed--but not surprised--that
our Fund did not do well in this type of environment.
We know that, as investors, you have many choices regarding the mutual fund
that you select. We appreciate your confidence and patience during this period
of under-performance. We continue to have the utmost confidence in the market
neutral approach and believe that in the long-term this strategy will deliver
consistent positive returns. We continue to work hard to minimize Fund expenses
for shareholders. Since the Fund's inception in June 1998, we have deferred a
portion of our management fee on the PUGET SOUND MARKET NEUTRAL PORTFOLIO. In
addition, we have put in place an Expense Reimbursement Plan to maintain the
Fund's stated expense ratios.
THE IDEA BEHIND THE PUGET SOUND ALTERNATIVE INVESTMENT SERIES TRUST
In constructing this Series of alternative investment mutual funds, we seek
to provide you with a vehicle to obtain non-traditional investment in a
convenient, accessible structure. Our first fund, the PUGET SOUND MARKET NEUTRAL
PORTFOLIO, offers you the potential to diversify your investment portfolio while
reducing its overall level of risk. Market neutral investing can be a more
efficient strategy than long-only investing, since it allows the portfolio
manager to make use of both under- and over-priced securities. Potentially, a
portfolio manager's ability to produce attractive returns depends less on the
direction of the market and more on the portfolio manager's skill in selecting
individual stocks in the long and short sub-portfolios.
To meet our objective, we designed the PUGET SOUND MARKET NEUTRAL PORTFOLIO
using the following guidelines:
* Select "niche" managers with considerable expertise and clearly
defined investment strategies as the Fund's Sub-Advisers.
* Construct a fund that is well diversified by industry and number of
stocks in both the long and short portfolios.
* Pay special attention to obtaining trading efficiencies and decreasing
portfolio transaction costs.
<PAGE>
To enhance diversification further, we plan to add additional sub-advisers
with investment management styles that complement the Fund's existing
sub-adviser.
FUND REVIEW
We believe that you must consider alternative investment performance,
including market neutral investing, on an absolute basis. Over the long-term, we
seek to outperform the "risk-free rate," as measured by the 90-day T-bill, by
6%-8%. Historically, large pension funds have achieved low double-digit returns
with low levels of risk by using an equity market neutral strategy.
During calendar year 1998, and the first part of calendar year 1999, equity
investors experienced a volatile market environment. Since the Fund's inception
on June 29, 1998, returns have been disappointing on both an absolute basis and
relative to its benchmark, the risk free rate. For the quarter ended May 31,
1999, the Fund's Institutional Shares and Investor Shares returned -5.57% and
- -8.52%, respectively, while the 3 month Treasury Bill returned 1.13% over the
same period. The Fund's return since inception is presented below.
PUGET SOUND MARKET NEUTRAL PORTFOLIO
VALUE OF $10,000 VS 3 MONTH TREASURY BILL
MARKET NEUTRAL FUND-INSTITUTIONAL
<TABLE>
<CAPTION>
6/29/98 7/31/98 8/31/98 9/30/98 10/31/98 11/30/98
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Market Neutral Portfolio - Institutional 10,000 10,030 10,050 9,800 10,330 10,200
Market Neutral Portfolio - Investor 9,700 9,729 9,739 9,487 10,001 9,865
3 Month T-Bill 10,000 10,042 10,084 10,125 10,159 10,198
12/31/98 1/31/99 2/28/99 3/31/99 4/30/99 5/31/99
-------- ------- ------- ------- ------- -------
Market Neutral Portfolio - Institutional 10,073 9,806 9,981 9,898 9,558 9,424
Market Neutral Portfolio - Investor 9,751 9,481 9,651 9,561 9,241 9,101
3 Month T-Bill 10,236 10,274 10,313 10,352 10,390 10,429
MARKET NEUTRAL FUND-INVESTOR
6/29/98 7/31/98 8/31/98 9/30/98 10/31/98 11/30/98
------- ------- ------- ------- -------- --------
Market Neutral Portfolio - Investor 9,700 9,729 9,739 9,487 10,001 9,865
3 Month T-Bill 10,000 10,042 10,084 10,125 10,159 10,198
12/31/98 1/31/99 2/28/99 3/31/99 4/30/99 5/31/99
-------- ------- ------- ------- ------- -------
Market Neutral Portfolio - Investor 9,751 9,481 9,651 9,561 9,241 9,101
3 Month T-Bill 10,236 10,274 10,313 10,352 10,390 10,429
</TABLE>
This graph compares a $10,000 investment in the Puget Sound Market Neutral
Portfolio Institutional Shares (no load) and Investor Shares (front load) with a
similar investment in the 3 Month Treasury Bill. Performance returns reflect all
fees and expenses and include the reinvestment of all distributions.
The minimum initial investment to purchase Institutional Shares is $1,000,000.
Performance figures include the maximum applicable sales charge of 3.00% for
Investor Shares.
Past performance is not a guarantee of future performance. Investment returns
and the principal value of an investment will fluctuate so that shares held may
be worth more or less than their original cost.
Given the recent disappointing performance of the Fund, and market neutral
investing in general, you might wonder if we still have confidence in this
strategy. Our response: Absolutely. In fact, during June, 1999, the
Institutional Shares returned 5.68% and the Investor Shares returned 2.43%, both
significantly outpacing the 3 month Treasury Bill's 0.38%.
2
<PAGE>
FACTORS AFFECTING THE FUND'S PERFORMANCE
We attribute the Fund's recent period of under-performance to three
factors. First, the PUGET SOUND MARKET NEUTRAL PORTFOLIO contains two
sub-portfolios: a long portfolio and a short portfolio. The Fund's current
portfolio manager, John Dorian, employs a quantitative model to construct a long
portfolio of stocks he perceives as undervalued and a short portfolio of stocks
he perceives as overvalued. According to Mr. Dorian, historically most of his
market neutral model's value-added derived from the short side of the portfolio.
However, over the last several months, the short portfolio comprised the
majority of his model's under-performance. Thus, even though historically his
model's short portfolio was able to add value in a rising market, this has not
been the case over the last several months.
Secondly, the Fund represents a broadly diversified portfolio of stocks.
For example, on May 31, 1999, the Fund held 280 names in the long and short
portfolio divided among 57 industries. In a market environment characterized by
a very narrow segment, such as Internet stocks, that performs extremely well,
and other segments showing only lackluster returns, a broadly diversified
portfolio may not perform especially well. In fact, this has been the case. This
does not imply that the current environment will remain unchanged.
Finally, we believe that the most recent period represents a perverse and
irrational environment. We believe that all markets move in cycles and that
other cycles more favorable to our approach will replace this one. With
valuations "stretched," we believe that it is only a matter of time before a
major correction occurs. If this occurs, we believe that a market neutral
strategy is an excellent way to diversify your risk in what could turn out to be
a very negative environment for stocks.
IN CONCLUSION
As the Fund enters the 21st century, we look forward to a successful year
of investment performance and continued growth in the PUGET SOUND MARKET NEUTRAL
PORTFOLIO. We appreciate your continuing participation in the Fund. During this
period of unpredictable market cycles and themes, we continue to believe the key
to success with any investment approach is patience.
As always, I am available to discuss any aspect of the Fund with you, so
please do not hesitate to call or write.
Sincerely,
/s/ Margaret M. Towle
Margaret M. Towle, Chairperson
Puget Sound Alternative Investment Series Trust
3
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Portfolio Investments
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - 79.6%
AEROSPACE - 2.5%
AlliedSignal, Inc. 5,000 $ 290,313
General Dynamics Corp. 7,000 460,250
-----------
750,563
-----------
AIRLINES - 2.9%
Alaska Airgroup, Inc.* 6,000 249,000
AMR Corp.* 2,000 130,125
Delta Air Lines, Inc. 5,000 286,875
UAL Corp.* 3,000 201,750
-----------
867,750
-----------
AUTO MANUFACTURING - 1.2%
Ford Motor Co. 6,000 342,375
-----------
AUTOMOTIVE PARTS & EQUIPMENT - 3.7%
AutoZone Inc.* 2,000 57,875
Cooper Tire & Rubber Co. 8,000 190,000
Dana Corp. 4,000 206,500
Goodyear Tire & Rubber Co. 2,000 119,375
ITT Industries, Inc. 4,000 151,000
Johnson Controls Inc. 4,000 252,249
Rockwell International Corp. 2,000 110,375
-----------
1,087,374
-----------
BANKING - 3.0%
CCB Financial Corp. 3,000 161,813
Hibernia Corp. - Class A 11,000 156,750
National City Corp. 2,000 132,375
Northern Trust Corp. 3,000 271,125
SouthTrust Corp. 4,000 155,750
-----------
877,813
-----------
BIOTECHNOLOGY - 3.1%
Amgen Inc.* 6,000 379,500
IDEC Pharmaceuticals Corp.* 3,000 151,313
Immunex Corp.* 3,000 393,374
-----------
924,187
-----------
CHEMICALS - 4.7%
Air Products and Chemicals, Inc. 5,000 205,000
FMC Corp.* 6,000 397,124
Great Lakes Chemical Corp. 2,000 90,375
Minerals Technologies Inc. 2,000 106,500
Nalco Chemical Co. 3,000 100,500
Rohm & Haas Co. 6,000 240,750
Sigma-Aldrich Corp. 2,000 64,000
Solutia, Inc. 8,000 179,500
-----------
1,383,749
-----------
COMMERCIAL SERVICES - 0.2%
Comdisco, Inc. 2,000 48,750
-----------
See notes to financial statements.
4
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Portfolio Investments - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
COMPUTER SOFTWARE - 1.3%
CSG Systems International, Inc.* 2,000 $ 63,875
Network Appliance, Inc.* 3,000 141,468
Peregrine Systems, Inc.* 3,000 68,813
Rational Software Corp.* 3,000 101,438
-----------
375,594
-----------
COMPUTERS - 1.3%
Comverse Technology, Inc.* 4,000 270,250
ISS Group, Inc.* 4,000 112,000
-----------
382,250
-----------
CONSTRUCTION - 0.2%
Clayton Homes, Inc. 5,000 57,188
-----------
CONSUMER GOODS & SERVICES - 1.1%
American Greetings Corp. - Class A 2,000 57,250
VF Corp. 4,000 184,000
York International Corp. 2,000 84,375
-----------
325,625
-----------
COSMETICS - 1.5%
Avon Products, Inc. 3,000 148,313
Kimberly-Clark Corp. 5,000 293,437
-----------
441,750
-----------
ELECTRICAL & ELECTRONIC - 0.4%
Teradyne, Inc.* 2,000 105,625
-----------
ELECTRONIC COMPONENTS & INSTRUMENTS - 2.2%
Emerson Electric Co. 3,000 191,625
Honeywell, Inc. 3,000 283,875
Solectron Corp.* 3,000 164,250
-----------
639,750
-----------
ENGINEERING - 1.0%
Fluor Corp. 4,000 149,000
Jacobs Engineering Group, Inc.* 4,000 148,750
-----------
297,750
-----------
FINANCIAL SERVICES - 1.9%
A.G. Edwards, Inc. 5,000 168,125
Bear Stearns Cos., Inc. 3,000 133,125
E*TRADE Group, Inc.* 6,000 267,000
-----------
568,250
-----------
FOOD DISTRIBUTORS - 0.3%
IBP, Inc. 4,000 85,750
-----------
FOOD PRODUCTS - 0.4%
Interstate Bakeries Corp. 2,000 43,750
Universal Foods Corp. 3,000 68,813
-----------
112,563
-----------
See notes to financial statements.
5
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Portfolio Investments - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
HEALTH CARE - 0.5%
Oxford Health Plans, Inc.* 8,000 $ 152,500
-----------
INSURANCE - 4.9%
Aetna, Inc. 1,000 90,813
Aflac, Inc. 1,000 51,000
Allmerica Financial Corp. 3,000 175,687
Allstate Corp. 8,000 291,499
Everest Reinsurance Holdings, Inc. 5,000 164,374
Fremont General Corp. 2,000 42,375
Horace Mann Educators Corp. 4,000 103,500
Old Republic International Corp. 7,000 127,313
The PMI Group, Inc. 2,000 117,000
ReliaStar Financial Corp. 3,000 124,688
Travelers Property Casualty Corp. - Class A 4,000 158,000
-----------
1,446,249
-----------
INTERNET - 2.8%
Go2Net, Inc.* 3,000 311,813
Infoseek Corp.* 2,000 83,750
Yahoo!, Inc.* 3,000 444,000
-----------
839,563
-----------
LEISURE & RECREATION/GAMING - 0.8%
Brunswick Corp. 7,000 168,000
GTECH Holdings Corp.* 3,000 74,063
-----------
242,063
-----------
MACHINERY - 1.0%
Applied Materials, Inc.* 3,000 164,812
Parker Hannifin Corp. 3,000 131,063
-----------
295,875
-----------
MANUFACTURED HOUSING - 0.3%
Fleetwood Enterprises, Inc. 3,000 76,313
-----------
MANUFACTURING-CONSUMER GOODS - 1.8%
Cooper Industries, Inc. 3,000 148,688
Corning, Inc. 4,000 218,500
Minnesota Mining and Manufacturing Co. 2,000 171,500
-----------
538,688
-----------
MEDIA - 1.8%
Comcast Corp. 5,000 192,500
Time Warner Inc. 5,000 340,313
-----------
532,813
-----------
MEDICAL SUPPLIES - 2.4%
Allergan, Inc. 3,000 279,000
C.R. Bard, Inc. 8,000 365,500
Mallinckrodt Inc. 2,000 69,250
-----------
713,750
-----------
METALS & MINING - 0.4%
Barrick Gold Corp. 7,000 120,750
-----------
See notes to financial statements.
6
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Portfolio Investments - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
OIL & GAS - EXPLORATION & PRODUCTION SERVICES - 0.3%
Seacor Smit Inc.* 2,000 $ 99,250
-----------
PAPER PRODUCTS - 1.0%
Mead Corp. 8,000 299,000
-----------
PHARMACEUTICALS - 5.2%
Abbott Laboratories 3,000 135,563
American Home Products Corp. 2,000 115,250
Bristol-Myers Squibb Co. 5,000 343,124
Gilead Sciences, Inc.* 2,000 87,250
Ivax Corp.* 5,000 67,188
Merck & Co., Inc. 7,000 472,499
Pharmacia & Upjohn, Inc. 2,000 110,875
Schering-Plough Corp. 5,000 225,313
-----------
1,557,062
-----------
PIPELINES - 0.9%
El Paso Energy Corp. 7,000 252,438
-----------
RAILROADS - 0.5%
Trinity Industries Inc. 5,000 155,938
-----------
RETAIL - 7.0%
BJ's Wholesale Club, Inc.* 4,000 104,000
Dayton-Hudson Corp. 3,000 189,000
Family Dollar Stores 4,000 89,250
Intimate Brands, Inc. 3,000 155,438
Lowe's Cos., Inc. 2,000 103,875
May Department Stores Co. 6,000 259,874
Nordstrom, Inc. 7,000 248,500
Sears, Roebuck and Co. 13,000 621,562
Toys "R" Us, Inc.* 3,000 69,188
Wal-Mart Stores, Inc. 6,000 255,750
-----------
2,096,437
-----------
SAVINGS & LOANS - 1.9%
Commercial Federal Corp. 3,000 68,438
Dime Bancorp, Inc. 2,000 40,750
Golden State Bancorp Inc.* 2,000 49,125
Golden West Financial Corp. 2,000 189,749
Greenpoint Financial Corp. 3,000 103,500
Washington Mutual, Inc. 3,000 114,563
-----------
566,125
-----------
SEMICONDUCTORS - 3.4%
Intel Corp. 2,000 108,125
KLA-Tencor Corp.* 5,000 227,499
Lam Research Corp.* 2,000 55,500
LSI Logic Corp.* 5,000 185,313
Micron Technology, Inc.* 3,000 113,813
Xilinx, Inc.* 7,000 311,062
-----------
1,001,312
-----------
See notes to financial statements.
7
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Portfolio Investments - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES OR
PRINCIPAL VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
SOFTWARE & COMPUTER SERVICES - 1.3%
CNet, Inc.* 3,000 $ 324,750
Novell, Inc.* 3,000 70,500
-----------
395,250
-----------
TELECOMMUNICATIONS-SERVICES AND EQUIPMENT - 2.1%
Metromedia Fiber Network, Inc.* 4,000 161,500
Qualcomm, Inc.* 3,000 291,750
RCN Corp.* 4,000 166,250
-----------
619,500
-----------
TELEPHONE - 3.8%
AT&T Corp. 7,000 388,500
Bell Atlantic Corp. 9,000 492,749
BellSouth Corp. 3,000 141,563
SBC Communications Inc. 2,000 102,250
-----------
1,125,062
-----------
TOBACCO & TOBACCO PRODUCTS - 1.4%
Universal Corp. 3,000 78,375
UST, Inc. 11,000 335,500
-----------
413,875
-----------
TOOLS - 1.2%
Stanley Works 3,000 97,688
W.W. Grainger, Inc. 5,000 265,312
-----------
363,000
-----------
TOTAL COMMON STOCKS (COST $23,429,844) 23,577,469
-----------
REPURCHASE AGREEMENTS - 16.6%
Bear Stearns Repurchase Agreement, 4.82%,
6/1/99 (Collateralized by $4,076,000, U.S.
Treasury Bonds, 9.375%-11.125%,
08/15/03-02/15/06, Market Value- $5,011,627) 4,911,137 4,911,137
-----------
TOTAL DAILY SWEEP VEHICLE (COST $4,911,137) 4,911,137
-----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENTS
(COST $28,340,981) (A) - 96.2% 28,488,606
-----------
DEPOSITS WITH BROKERS FOR SECURITIES
SOLD SHORT - 83.6%
Bear Stearns Deposit Account 24,751,444 24,751,444
-----------
TOTAL DEPOSITS WITH BROKERS FOR SECURITIES
SOLD SHORT (COST $24,751,444) 24,751,444
-----------
SECURITIES SOLD SHORT (PROCEEDS $22,655,970)
(A) - (79.4%) (23,502,806)
LIABILITIES IN EXCESS OF OTHER ASSETS - (0.4%) (123,876)
-----------
TOTAL NET ASSETS - 100.0% $29,613,368
===========
* Non-income producing security.
(a) Represents cost for financial reporting purposes and differs from value
by unrealized appreciation/(depreciation) of securities as follows:
Unrealized appreciation- Investments $ 1,111,121
Unrealized appreciation- Short Sales 1,228,047
Unrealized depreciation- Investments (963,496)
Unrealized depreciation- Short Sales (2,074,883)
-----------
Net unrealized depreciation $ (699,211)
===========
See notes to financial statements.
8
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Securities Sold Short
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS
ADVERTISING - 1.2%
Interpublic Group Cos., Inc. 2,000 $ 151,500
Snyder Communications, Inc. 5,000 122,188
True North Communications, Inc. 3,000 70,125
-----------
343,813
-----------
AEROSPACE - 1.4%
Orbital Sciences Corp. 3,000 67,875
Raytheon Co. 5,000 340,313
-----------
408,188
-----------
AIRLINES - 1.1%
Northwest Airlines Corp. 10,000 332,500
-----------
AUTOMOTIVE PARTS & EQUIPMENT - 1.6%
Federal-Mogul Corp. 7,000 322,875
Lear Corp. 3,000 147,563
-----------
470,438
-----------
BEVERAGES - 1.5%
Coca-Cola Co. 5,000 341,563
Coca-Cola Enterprises 3,000 108,750
-----------
450,313
-----------
BIOTECHNOLOGY - 3.0%
Centocor, Inc. 3,000 130,313
Genentech Inc. 2,000 175,125
Genzyme Corp. 2,000 81,125
Monsanto Co. 12,000 497,999
-----------
884,562
-----------
COMMERCIAL SERVICES - 3.0%
Avis Rent A Car, Inc. 4,000 114,750
Gartner Group, Inc. - Class A 4,000 92,000
McKesson HBOC Inc. 10,000 340,624
Metzler Group, Inc. 3,000 98,250
Pittston Brink's Group 3,000 85,500
Prepaid Legal Services, Inc. 3,000 79,688
United Rentals, Inc. 3,000 90,000
-----------
900,812
-----------
COMPUTER SOFTWARE - 5.1%
Autodesk, Inc. 4,000 110,500
Computer Associates International, Inc. 5,000 236,562
I2 Technologies, Inc. 2,000 63,250
Intuit, Inc. 3,000 244,124
Keane, Inc. 5,000 145,000
Legato Systems, Inc. 4,000 219,000
Sterling Commerce, Inc. 4,000 155,500
Sterling Software, Inc. 3,000 72,938
Symantec Corp. 4,000 98,000
Veritas Software Corp. 2,000 176,500
-----------
1,521,374
-----------
See notes to financial statements.
9
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Securities Sold Short - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
COMPUTERS - 2.2%
Affiliated Computer Services Inc. - Class A 3,000 $ 130,125
Ceridian Corp. 2,000 66,000
Compaq Computer Corp. 11,000 260,563
Diebold, Inc. 4,000 112,500
Quantum Corp. 4,000 79,250
-----------
648,438
-----------
CONSTRUCTION - 0.2%
Pulte Corp. 2,000 47,625
-----------
CONSUMER GOODS & SERVICES - 2.1%
Clorox Co. 5,000 504,687
Zale Corp. 3,000 115,688
-----------
620,375
-----------
DISTRIBUTION - 1.1%
Aviation Sales Co. 2,000 77,000
Ingram Micro, Inc. - Class A 3,000 87,000
Tech Data Corp. 4,000 147,125
-----------
311,125
-----------
ELECTRIC UTILITY - 4.6%
Allegheny Energy, Inc. 4,000 139,500
Alliant Energy Corp. 5,000 150,937
Ameren Corp. 3,100 126,906
Consolidated Edison Inc. 2,000 97,125
Dominion Resources Inc. 2,800 120,925
Duke Energy Corp. 3,000 180,937
Illinova Corp. 5,000 135,938
Ipalco Enterprises, Inc. 3,000 74,063
LG & E Energy Corp. 3,000 68,438
Unicom Corp. 4,000 169,249
Wisconsin Energy Corp. 4,000 111,000
-----------
1,375,018
-----------
ELECTRONIC COMPONENTS & INSTRUMENTS - 0.9%
American Power Conversion 2,000 77,875
Waters Corp. 2,000 197,250
-----------
275,125
-----------
FINANCIAL SERVICES - 3.3%
Capital One Financial Corp. 4,000 602,749
Citigroup, Inc. 2,000 132,500
Merrill Lynch & Co. 3,000 252,000
-----------
987,249
-----------
FOOD PRODUCTS - 0.3%
Keebler Foods Co. 3,000 100,500
-----------
GROCERY STORES - 2.4%
Safeway, Inc. 2,000 93,000
Suiza Foods Corp. 13,000 476,125
See notes to financial statements.
10
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Securities Sold Short - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
GROCERY STORES - (CONTINUED)
U.S. Foodservice 3,000 $ 133,500
-----------
702,625
-----------
HEALTH CARE - 2.8%
Boston Scientific Corp. 3,000 113,813
Columbia/HCA Healthcare Corp. 2,000 47,125
HCR Manor Care, Inc. 3,000 80,250
Pacificare Health Systems 3,000 259,124
St. Jude Medical Inc. 2,800 94,675
Tenet Healthcare Corp. 4,000 98,000
Universal Health Services, Inc. 3,000 149,625
-----------
842,612
-----------
HOME FURNISHINGS - 0.5%
Ethan Allen Interiors, Inc. 4,500 143,438
-----------
HOTELS & LODGING - 0.5%
Mirage Resorts Inc. 3,000 61,500
Promus Hotel Corp. 3,000 75,000
-----------
136,500
-----------
INSURANCE - 4.9%
CNA Financial Corp. 3,000 130,313
Lincoln National Corp. 3,000 305,249
Loews Corp. 2,000 162,625
Progressive Corp. 5,000 701,874
Unum Corp. 3,000 161,438
-----------
1,461,499
-----------
LEISURE & RECREATION/GAMING - 0.6%
Harrah's Entertainment Inc. 3,000 64,875
Premier Parks, Inc. 3,000 106,875
-----------
171,750
-----------
MEDIA - 1.0%
AT&T Corp.- Liberty Media Group 3,000 199,313
CBS Corp. 2,000 83,500
-----------
282,813
-----------
MEDICAL SUPPLIES - 0.7%
Beckman Coulter, Inc. 4,000 203,000
-----------
METALS & MINING - 0.9%
Phelps Dodge Corp. 2,000 103,625
Reynolds Metals Co. 3,000 159,563
-----------
263,188
-----------
OFFICE EQUIPMENT & SERVICES - 1.0%
Avery Dennison Corp. 2,000 119,750
Xerox Corp. 3,000 168,563
-----------
288,313
-----------
OIL & GAS - EXPLORATION & PRODUCTION SERVICES - 7.6%
Amerada Hess Corp. 4,000 239,750
Bakers Hughes, Inc. 4,000 124,500
See notes to financial statements.
11
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Securities Sold Short - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
OIL & GAS - EXPLORATION & PRODUCTION
SERVICES - (CONTINUED)
BJ Services Co. 4,000 $ 110,250
Exxon Corp. 3,000 239,625
Halliburton Co. 8,000 330,999
Kerr-McGee Corp. 3,000 139,500
Murphy Oil Corp. 4,000 196,250
Newfield Exploration Co. 3,000 76,125
Noble Affiliates, Inc. 8,000 212,000
Occidental Petroleum Corp. 3,100 65,488
Schlumberger Ltd. 5,000 300,937
Tosco Corp. 2,000 51,125
USX-Marathon Group 3,000 89,813
Weatherford International Inc. 2,000 66,000
-----------
2,242,362
-----------
PACKAGING & CONTAINERS - 2.4%
Ball Corp. 4,000 194,750
Owens-Illinois Inc. 3,000 91,500
Sealed Air Corp. 7,000 434,875
-----------
721,125
-----------
PAPER PRODUCTS - 2.6%
Boise Cascade Corp. 4,000 158,500
Bowater, Inc. 3,000 154,500
Champion International Corp. 3,000 153,750
Fort James Corp. 3,000 109,875
International Paper Co. 1,000 50,000
Temple-Inland Inc. 2,000 134,000
-----------
760,625
-----------
PHARMACEUTICALS - 1.2%
Alza Corp. 2,000 71,375
Mylan Laboratories 3,000 76,125
Omnicare, Inc. 4,000 95,750
Watson Pharmaceuticals, Inc. 3,000 114,938
-----------
358,188
-----------
PHOTOGRAPHY - 0.4%
Polaroid Corp. 5,000 105,625
-----------
PIPELINES - 2.8%
Columbia Energy Group 3,000 160,500
Enron Corp. 2,000 142,750
Williams Cos., Inc. 10,000 518,125
-----------
821,375
-----------
PRINTING & PUBLISHING - 1.1%
Gannett Co., Inc. 2,000 144,500
Houghton Mifflin Co. 2,000 92,000
World Color Press, Inc. 3,000 76,500
-----------
313,000
-----------
See notes to financial statements.
12
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Securities Sold Short - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
RESTAURANTS - 0.8%
Brinker International, Inc. 3,000 $ 84,188
CEC Entertainment Inc. 3,000 113,437
Foodmaker, Inc. 2,000 54,000
-----------
251,625
-----------
RETAIL - 5.7%
Consolidated Stores Corp. 7,000 240,625
Federated Department Stores 5,000 272,499
Harcourt General Inc. 3,000 147,563
J.C. Penney Co., Inc. 8,000 413,499
Pacific Sunwear of California, Inc. 3,000 112,500
Rite Aid Corp. 3,000 75,000
Saks, Inc. 3,000 82,875
Sherwin-Williams Co. 3,000 92,438
Staples, Inc. 4,000 115,000
Williams-Sonoma, Inc. 5,000 149,063
-----------
1,701,062
-----------
SEMICONDUCTORS - 0.2%
Atmel Corp. 3,000 59,250
-----------
TELECOMMUNICATIONS-SERVICES AND EQUIPMENT - 0.9%
Commscope Inc. 2,000 52,500
ICG Communications, Inc. 5,600 106,750
Vitesse Semiconductor Corp. 2,000 109,875
-----------
269,125
-----------
TELEPHONE - 2.4%
Nextlink Communications - Class A 3,000 229,500
Telephone and Data Systems, Inc. 3,000 201,750
US West, Inc. 5,000 270,313
-----------
701,563
-----------
TEXTILES - 1.0%
Jones Apparel Group, Inc. 3,000 92,250
Shaw Industries, Inc. 5,000 84,375
Warnaco Group 4,000 118,000
-----------
294,625
-----------
TOOLS - 0.5%
SPX Corp. 2,000 155,250
-----------
TOYS - 0.4%
Mattel, Inc. 5,000 132,188
-----------
TRANSPORTATION - 0.6%
Atlas Air, Inc. 2,000 53,750
CNF Transportation, Inc. 3,000 124,500
-----------
178,250
-----------
See notes to financial statements.
13
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Schedule of Securities Sold Short - (continued)
May 31, 1999
- --------------------------------------------------------------------------------
SHARES VALUE
----------- -----------
COMMON STOCKS - (CONTINUED)
WASTE MANAGEMENT - 0.9%
Waste Management, Inc. 5,000 $ 264,375
-----------
TOTAL COMMON STOCKS (PROCEEDS $22,655,970) 23,502,806
-----------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $22,655,970) - 79.4% $23,502,806
===========
Percentages indicated are based on net assets of $29,613,368.
See notes to financial statements.
14
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $23,429,844) $ 23,577,469
Repurchase agreements, at cost 4,911,137
Deposits with brokers for securities sold short 24,751,444
Interest and dividends receivable 79,278
Receivable from brokers for securities sold 1,187,789
Prepaid expenses and other assets 47,107
Deferred organization costs 71,063
------------
Total Assets 54,625,287
LIABILITIES:
Securities sold short (Proceeds: $22,655,970) 23,502,806
Payable for dividends on securities sold short 19,656
Payable for investments purchased 1,312,532
Investment advisory fees payable 100,061
Administration fees payable 4,614
Distribution and service fees, Investor Shares 3,729
Other accrued expenses 68,521
------------
Total Liabilities 25,011,919
------------
NET ASSETS $ 29,613,368
============
NET ASSETS CONSIST OF:
Capital $ 32,785,074
Accumulated net investment income 447,844
Accumulated net realized losses on investments and
securities sold short (2,716,795)
Distributions in excess of realized gains (203,544)
Net unrealized depreciation of investments and
securities sold short (699,211)
------------
TOTAL NET ASSETS $ 29,613,368
============
INSTITUTIONAL SHARES
Net Assets $ 20,959,355
Shares Outstanding 2,289,831
------------
Maximum Offering and Redemption price per share $ 9.15
============
INVESTOR SHARES
Net Assets $ 8,654,013
Shares Outstanding 949,320
------------
Net Asset Value- Redemption price per share $ 9.12
------------
Maximum Sales Charge 3.00%
------------
Maximum Offering Price (100%/(100%-maximum sales
charge) of net asset value adjusted to nearest cent.) $ 9.40
============
See notes to financial statements.
15
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MAY 31, 1999(A)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest income $ 951,709
Dividend income (net of foreign withholding tax of $99) 196,008
-----------
1,147,717
-----------
EXPENSES:
Investment advisory fees 413,227
Dividend expense for securities sold short 167,922
Administration fees 30,992
Shareholder servicing fees- Investor Shares 19,835
12b-1 fees- Investor Shares 39,669
Fund accounting fees 37,582
Transfer agent fees 35,713
Custodian fees 35,170
Legal fees 53,769
Audit fees 13,496
Printing fees 32,842
Registration and filing fees 42,379
Trustees fees 27,126
Amortization of organization costs 16,084
Other fees 27,342
-----------
Total expenses before waivers/ reimbursements 993,148
Less expenses waived (28,365)
Less expenses reimbursed by Investment Advisor (308,840)
-----------
Net expenses 655,943
-----------
NET INVESTMENT INCOME 491,774
-----------
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS:
Net realized losses on investment transactions and
securities sold short (2,654,172)
Net change in unrealized depreciation of investments and
securities sold short (699,211)
-----------
Net realized and unrealized losses on investments and
securities sold short (3,353,383)
===========
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,861,609)
===========
(a) Commencement of operations was June 29, 1998.
See notes to financial statements.
16
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Period
Ended
May 31, 1999(a)
--------------
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 491,774
Net realized losses on investment transactions and
securities sold short (2,654,172)
Net change in unrealized depreciation of investments and
securities sold short (699,211)
------------
Change in net assets resulting from operations (2,861,609)
------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (106,553)
In excess of realized gains (203,544)
------------
Change in net assets from shareholder transactions (310,097)
------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 63,936,895
Dividends reinvested 233,015
Cost of shares redeemed (31,484,836)
------------
Change in net assets from share transactions 32,685,074
------------
Change in net assets 29,513,368
NET ASSETS:
Beginning of period 100,000
------------
End of period $ 29,613,368
============
(a) Commencement of operations was June 29, 1998.
See notes to financial statements.
17
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Institutional Investor
-------------------- --------------------
For the Period Ended For the Period Ended
May 31, 1999(A) May 31, 1999(A)
-------------------- --------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
---------- ----------
Net investment income 0.18 0.16
Net realized and unrealized loss (0.73) (0.74)
---------- ----------
Total income from investment operations (0.55) (0.58)
---------- ----------
LESS DISTRIBUTIONS FROM:
Net investment income (0.04) (0.04)
In excess of realized gains (0.26) (0.26)
---------- ----------
Total distributions (0.30) (0.30)
---------- ----------
Net change in net asset value per share (0.85) (0.88)
---------- ----------
NET ASSET VALUE, END OF PERIOD $ 9.15 $ 9.12
========== ==========
TOTAL RETURN (EXCLUDING SALES CHARGE) (5.76%)(b) (6.07%)(b)
RATIOS TO AVERAGE NET ASSETS, AND SUPPLEMENTAL DATA:
Net assets at end of period (000) $ 20,959 $ 8,654
Net expenses (excluding dividend expense) 2.17% (c) 2.67% (c)
Net expenses (including dividend expense) 3.05% (c) 3.37% (c)
Gross expense* (excluding dividend expense) 3.71% (c) 4.45% (c)
Gross expense* (including dividend expense) 4.58% (c) 5.16% (c)
Net Investment Income (including dividend expense) 2.57% (c) 2.07% (c)
PORTFOLIO TURNOVER RATE (D) 630.18% (d) 630.18% (d)
</TABLE>
- ----------
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratio would have
been as indicated.
(a) Commencement of operations was June 29, 1998.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares. Percentage indicated
represents only the long transactions. ( i.e., excludes short sales).
See notes to financial statements.
18
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Notes to Financial Statements
May 31, 1999
- --------------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION
Puget Sound Alternative Investment Series Trust (the "Trust") was organized as a
Massachusetts business trust on April 14, 1998 and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. As of the date of this report, the Trust offered
one managed investment portfolio, Puget Sound Market Neutral Portfolio (the
"Fund"). The Fund commenced operations on June 29, 1998. The Fund offers
Institutional Shares and Investor Shares. Each class is substantially the same,
except that Investor Shares are sold with a sales charge and bear the fees that
are payable under the Trust's Distribution Plan and Shareholder Servicing Plan,
which relate only to the Investor Shares.
Puget Sound Asset Management Co., LLC ("PSAM") serves as the investment adviser
of the Fund. The sub-adviser is Fiduciary Asset Management Co. ("FAMCO").
The Fund's investment objective is to seek long-term capital appreciation while
maintaining minimal exposure to general equity market risk. The Fund seeks to
achieve its objective through a diversified portfolio using a non-traditional,
"market neutral" investment strategy.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
SECURITIES VALUATION
Equity securities held or sold short by the Fund are valued at the last
reported sales price on the securities exchange or in the principal
over-the-counter market in which such securities are traded, as of the close
of business on the day the securities are being valued. If there is no such
reported sale, the most recently quoted bid price is used for long securities
and for securities sold short.
REPURCHASE AGREEMENTS
The Fund may purchase instruments from financial institutions, such as banks
and broker-dealers, subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). The seller under a
repurchase agreement is required to maintain collateral for the value of the
securities subject to the agreement at not less than 102% of the repurchase
price. Default by the seller would, however, expose the Fund to possible loss
because of adverse market action or delay in connection with the disposition
of the underlying obligations. Risks may arise from the potential inability
of counterparties to honor the terms of the repurchase agreements.
Accordingly, the Fund could receive less than the carrying value upon the
sale of the underlying collateral securities.
SHORT SALES
The Fund is authorized to engage in the short-selling of securities. Short
selling obligates the Fund to replace borrowed securities by purchasing them
some time in the future at the then current market value. These transactions
result in off-balance-sheet risk. (i.e., the risk that the ultimate
obligation may exceed the amount shown in the accompanying statement of
assets and liabilities.) The Fund will incur a loss if the price of the
security increases between the date of the short sale and the date on which
the fund replaces the borrowed security. The Fund will realize a gain if the
price of the security declines between those dates. Until the Fund replaces
the borrowed security, the Fund will maintain a segregated account with cash
and/or U.S. Government Securities sufficient to cover its short position on a
daily basis. At May 31, 1999, the value of securities sold short in the Fund
amounted to $23,502,806 against which cash collateral of $24,751,444 was held
in a Bear Stearns Deposit Account.
19
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Notes to Financial Statements (Continued)
May 31, 1999
- --------------------------------------------------------------------------------
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date. Net realized gains
and losses are recorded on the basis of identified cost. Interest income is
recorded on the accrual basis and includes, where applicable, the
amortization of premiums or accretion of discounts. Dividend income is
recorded on the ex-dividend date.
CLASS ALLOCATION
The investment income and expenses of the Fund (other than class specific
expenses) and realized and unrealized gains and losses on investments of the
Fund are allocated to each class of shares based upon the relative net assets
of each class.
ORGANIZATION COSTS
Costs incurred in connection with the organization and initial registration
of the Fund have been deferred and are being amortized over a sixty-month
period, beginning with the Fund's commencement of operations. In the event
that any of the initial shares are redeemed during such period by any holder
thereof, the Fund will be reimbursed by such holder for any unamortized
organization costs in the proportion as the number of initial shares being
redeemed bears to the number of initial shares outstanding at the time of
redemption.
DIVIDENDS TO SHAREHOLDERS
Dividends from the Fund's net investment income, if any, are declared and
paid annually. Net realized gains on portfolio securities, if any, are
declared and distributed at least annually. Dividends and distributions
payable to shareholders are recorded by the Fund on the ex-dividend date.
Dividends from net investment income and from net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences
are either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
composition of net assets based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions to shareholders which exceed net investment income and net
realized gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions in
excess of net realized gains. To the extent they exceed net investment income
and net realized gains for tax purposes, they are reported as distributions
of capital.
As of May 31, 1999, the following reclassifications, primarily relating to
book/tax differences in the treatment of expense from short sale dividends,
have been made to increase (decrease) such accounts with offsetting
adjustments made, as follows:
Undistributed Net Realized
Net Investment Income Losses
--------------------- ------------
$ 62,623 $(62,623)
FEDERAL INCOME TAXES
It is the Fund's policy to comply with requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute timely,
all of its net investment company taxable income and net capital gains to
shareholders. Therefore, no federal income tax provision is required.
20
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Notes to Financial Statements (Continued)
May 31, 1999
- --------------------------------------------------------------------------------
EXPENSE LIMITATIONS
PSAM and the Trust have undertaken to limit the Fund's expenses through the
use of certain waivers and reimbursements, so that the Fund's annual expenses
will not exceed certain levels, as described below under "Related Party
Transactions."
NOTE 3 - RELATED PARTY TRANSACTIONS
The Trust has entered into an investment advisory agreement with PSAM. Under the
terms of the investment advisory agreement, PSAM is entitled to receive a fee
that is calculated daily and paid quarterly at the annual rate of 2.00% of the
average daily net assets of the Fund. PSAM, and not the Trust, pays FAMCO a fee
at the annual rate of 1.50% of the average daily net assets of the Fund for its
services under the sub-advisor contract.
For the period June 29, 1998 (commencement of operations) through September 30,
1998, PSAM agreed to reduce its advisory fee from the annual rate of 2.00% of
the average daily net asset value of the Fund to 1.75% of the average daily net
asset value of the Fund. Such reduction resulted in a permanent waiver of $8,530
of PSAM's fee.
PSAM voluntarily agreed, effective October 1, 1998, and for an indefinite
period, to reduce its advisory fees and pay other Fund expenses to the extent
necessary to limit total operating expenses of the Fund's classes (exclusive of
brokerage costs, interest, taxes, dividends payable with respect to securities
sold short and extraordinary expenses) to the annual rate of 2.17% of the
average daily net assets of the Fund's Institutional Shares and 2.67% of the
average daily net assets of the Fund's Investor Shares.
Each class is obligated to pay PSAM such class' deferred amount in future years,
if any, when such class' expenses fall below the stated percentage rate, but
only to the extent that such payment would not cause such class' expenses in any
such future year to exceed the stated percentage rate, and provided that such
class is not obligated to pay the deferred amount for any fiscal year more than
two years after the end of the fiscal year in which they were incurred. This
agreement by PSAM to reduce its fees and to pay other Fund expenses may be
changed or terminated by PSAM at any time. The cumulative unreimbursed amount of
operating expenses paid by PSAM on behalf of the Fund during the period June 29,
1998 (commencement of operations) through May 31, 1999 was $308,840.
Prior to July 1, 1999, BISYS Fund Services Ohio, Inc., a wholly owned subsidiary
of The BISYS Group, Inc. ("BISYS"), served as the administrator for the Trust
pursuant to an administration agreement. Under the administration agreement,
BISYS was entitled to a fee calculated daily and paid monthly at an annual rate
of 0.15% of the average daily net assets of the Trust. Effective July 1, 1999,
Investment Company Administration, L.L.C. ("ICA") became the administrator for
the Trust and will receive a fee calculated daily and paid monthly at an annual
rate of .10% of average net assets up to $200 million, .05% of average net
assets from $200 to $500 million and .03% of average net assets in excess of
$500 million, subject to an annual minimum fee of $40,000 per Fund and $15,000
for each additional class of shares. ICA has agreed to reduce its fees for
eighteen months starting July 1, 1999, to 0.05% of the Fund's average net assets
up to $500 million and 0.03% of average net assets in excess of $500 million,
subject to an annual minimum fee of $30,000 per Fund and $5,000 for each
additional class of shares.
Prior to July 1, 1999, BISYS Fund Services, L.P., a wholly owned subsidiary of
BISYS, served as the Trust's principal underwriter and distributor. The Trust
adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act with
respect to Investor Shares. Under the Distribution Plan, the Trust will pay the
distributor a fee that is calculated daily and paid monthly at the annual rate
of 0.50% of the average daily net assets of the Investor Shares of the Fund. The
distributor agreed to voluntarily reduce the amount of its fee and, during the
period ended May 31, 1999, permanently waived distribution fees of $19,835.
Effective July 1, 1999, First Fund Distributors, Inc., an affiliate of ICA,
became the distributor for the Trust and will receive fees substantially the
same as those discussed above.
21
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Notes to Financial Statements (Continued)
May 31, 1999
- --------------------------------------------------------------------------------
The Fund was advised that the distributor received $33,231 of sales charge on
purchases of Investor Class Shares for the period June 29, 1998 (commencement of
operations) through May 31, 1999. The distributor paid $8,141 in concessions to
authorized dealers and retained $25,090.
The Trust has entered into a Shareholder Servicing Plan with its distributor for
services provided to holders of Investor Shares. Pursuant to the Shareholder
Servicing Plan, the Trust will pay its distributor a fee at an annual rate up to
0.25% of the average daily net assets of the Investor Shares of the Fund.
BISYS Fund Services, Inc., also a wholly owned subsidiary of BISYS, served as
fund accountant and transfer and dividend disbursing agent of the Fund through
June 30, 1999. Subsequently, Investors Fiduciary Trust Company serves as fund
accountant and National Financial Data Services serves as transfer and dividend
disbursing agent to the Fund.
Certain officers of the Trust are affiliated with PSAM or the distributor and
its affiliates. Such persons are not paid by the Trust for serving in those
capacities.
NOTE 4 - SHARES OF BENEFICIAL INTEREST
The following is a summary of transactions in Institutional Shares and Investor
Shares for the period ending May 31, 1999:
CAPITAL TRANSACTIONS:
Shares Amount
------------ ------------
INSTITUTIONAL SHARES:
Shares issued 3,288,291 $ 32,016,395
Shares reinvested 16,018 158,346
Shares redeemed (1,014,488) (9,570,321)
============ ============
Net increase 2,289,821 $ 22,604,420
============ ============
Shares Amount
------------ ------------
INVESTOR SHARES:
Shares issued 3,272,456 $ 31,920,500
Shares reinvested 7,677 74,669
Shares redeemed (2,340,803) (21,914,515)
------------ ------------
Net increase 939,330 $ 10,080,654
============ ============
NOTE 5 - INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities and
transactions relating to short sales activity) for the period ended May 31,
1999, were as follows:
Purchases Sales
------------ ------------
$157,650,303 $137,676,587
The cost of investments purchased to cover short sales and the proceeds from
investments sold short for the period ended May 31, 1999 were $128,218,740 and
$144,688,082, respectively.
22
<PAGE>
PUGET SOUND MARKET NEUTRAL PORTFOLIO
Notes to Financial Statements (Continued)
May 31, 1999
- --------------------------------------------------------------------------------
NOTE 6 - FEDERAL INCOME TAX INFORMATION
POST OCTOBER LOSS DEFERRAL:
Capital losses incurred after October 31, (within the Fund's fiscal year) are
deemed to arise on the first business day of the following fiscal year for tax
purposes. The Fund has incurred and will elect to defer such capital losses in
the amount of $2,860,189.
DIVIDEND RECEIVED DEDUCTION:
For corporate shareholders 17.73% of the total ordinary income distributions
paid during the fiscal year ended May 31,1999, qualify for the corporate
dividends received deduction.
TAX COST OF SECURITIES:
The aggregate cost of investments owned at May 31, 1999 for federal income tax
purposes is $24,938,083. The aggregate cost of securities sold short at year end
for federal income tax purposes is $24,932,901. Gross unrealized appreciation
and depreciation of investments for federal income tax purposes is $350,383 and
$1,710,996, respectively. Gross unrealized appreciation and depreciation for
securities sold short for federal income tax purposes is $460,512 and
$2,737,442, respectively.
23
<PAGE>
To the Shareholders and Board of Trustees
Puget Sound Market Neutral Portfolio:
We have audited the accompanying statement of assets and liabilities of Puget
Sound Market Neutral Portfolio (the "Fund"), which comprises the Puget Sound
Alternative Investment Series Trust, including the schedules of portfolio
investments and securities sold short, as of May 31, 1999, and the related
statement of operations, statement of changes in net assets, and financial
highlights for the period June 29, 1998 (commencement of operations) to May 31,
1999. 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 May 31, 1999, by
correspondence with the Fund's 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 May 31, 1999, the results of its operations, changes in its net
assets, and financial highlights for the period June 29, 1998 (commencement of
operations) to May 31, 1999, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Francisco, California
June 30, 1999
