<PAGE> 1
PORTFOLIO STRUCTURE AND OUR COMPANIES
Dear Fellow and Future Shareholders:
We are pleased to present for your review the annual report for the
Trainer, Wortham Funds. Contained herein are our views on investment
opportunities and our general market outlook.
Our current portfolio is structured with an emphasis in the
Broadcasting, Pharmaceutical and Financial sectors of the market. These
three groups continue to offer high returns on invested capital, increased
cash flow and have provided excellent returns for the Fund over the last
full market cycle.
The Asian flu, as it is now referred to, continues to create investment
opportunities in the communication and technology sectors. We have reduced
our exposure in the oil services companies due to our disappointment in
OPEC's efforts to limit oil production. We will continue to monitor this
group and look for opportunities since energy demand worldwide continues to
increase and oil supplies are being depleted.
Our portfolios should continue to benefit from the long term positive
trend of the markets. We have modified our outlook for the trading range of
the Dow Jones Industrial Average with an expected range of 8400 to 9800.
Although there will be additional consolidation along the way, we look for
stable earnings for our companies, continued growth and stable to lower
interest rates, as we enter the new year. The Total Return Bond Fund remains
fully invested in quality issues and is offering a competitive yield to its
shareholders.
THE MARKETS & ECONOMY
As we formulate our expectations for the remainder of 1998 and look to
1999, we expect the markets will experience some added volatility as
investors and institutions continue to monitor the Asian situation and the
uncertain political condition of some of our economic allies.
In an environment of low inflation and declining interest rates,
financial assets grow in value. Much continues to be said about Market
volatility! Remember, the most volatile markets in history were realized
during 1973 - 1974 and 1987 - 1988 when the economic and financial landscape
was not at all similar to what we have today. We realize that there may be
consolidation, however we do not expect a "correction" as there are not many
economic problems to correct. Main Street and Corporate America are strong
and positive about the condition of the American economy.
We continue our pursuit of finding those companies that offer high
return on capital, where market expectations are unreasonable and therefore
the companies will offer greater reward and lower risk profiles.
Respectfully,
/s/ DAVID P. COMO
DAVID P. COMO, President
Trainer, Wortham Funds
August 4, 1998
<PAGE> 2
TRAINER, WORTHAM FIRST MUTUAL FUND
SCHEDULE OF INVESTMENTS JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- ------- -----------
<C> <S> <C>
COMMON STOCKS - 97.97%
CONSUMER PRODUCTS - 2.91%
27,700 PepsiCo, Inc. .............................................. $ 1,140,894
-----------
DIVERSIFIED OPERATIONS - 6.03%
35,000 Federal-Mogul Corp. ........................................ 2,362,500
-----------
FINANCIAL - 23.86%
26,700 Banc One Corp. ............................................. 1,490,194
35,000 BankBoston Corp. ........................................... 1,946,875
14,000 Citicorp.................................................... 2,089,500
31,000 Federal National Mortgage Association....................... 1,883,250
17,000 Hartford Financial Services Group, Inc. .................... 1,944,375
-----------
9,354,194
-----------
MEDIA - RADIO/TV - 19.01%
68,000 CBS Corp.*.................................................. 2,159,000
12,500 Clear Channel Communications, Inc.*......................... 1,364,062
23,000 General Electric Co. ....................................... 2,093,000
17,500 The Walt Disney Co. ........................................ 1,838,594
-----------
7,454,656
-----------
MEDICAL - PHARMACEUTICAL - 19.22%
32,500 Amgen, Inc.*................................................ 2,124,688
30,000 Johnson & Johnson........................................... 2,212,500
15,000 Lilly (Eli) & Co. .......................................... 990,937
16,500 Merck & Co., Inc. .......................................... 2,206,875
-----------
7,535,000
-----------
OIL & GAS SERVICES - 6.44%
100,000 Queen Sand Resources, Inc.*................................. 737,500
26,200 Schlumberger, Ltd. ......................................... 1,789,788
-----------
2,527,288
-----------
TECHNOLOGY & COMPUTERS - 12.47%
10,000 Cisco Systems, Inc.*........................................ 920,625
22,500 Computer Associates International, Inc. .................... 1,250,156
22,500 Intel Corp. ................................................ 1,667,812
25,000 Solectron Corp.*............................................ 1,051,563
-----------
4,890,156
-----------
TELECOMMUNICATIONS SERVICES & EQUIPMENT - 8.03%
12,000 Lucent Technologies, Inc. .................................. 998,250
37,000 MCI Communications Corp..................................... 2,150,625
-----------
3,148,875
-----------
TOTAL COMMON STOCKS (COST $30,326,666)...................... 38,413,563
-----------
</TABLE>
<PAGE> 3
TRAINER, WORTHAM FIRST MUTUAL FUND
SCHEDULE OF INVESTMENTS JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- ------- -----------
<C> <S> <C>
SHORT TERM INVESTMENTS - 2.33%
912,617 UMB Bank, Money Market Fiduciary, 4.44%
(Cost $912,617)............................................. $ 912,617
-----------
TOTAL INVESTMENTS (COST $31,239,283**) - 100.30%............ 39,326,180
OTHER LIABILITIES LESS OTHER ASSETS - (0.30)%............... (115,582)
-----------
NET ASSETS - 100.00%........................................ $39,210,598
===========
* Non-income producing security
** Cost for Federal income tax purposes is $31,239,283 and net unrealized appreciation
consists of:
Gross unrealized appreciation............................... $ 8,571,703
Gross unrealized depreciation............................... (484,806)
-----------
Net unrealized appreciation................................. $ 8,086,897
===========
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE> 4
TRAINER, WORTHAM TOTAL RETURN BOND FUND
SCHEDULE OF INVESTMENTS JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
FIXED INCOME SECURITIES - 98.68%
U.S. GOVERNMENT TREASURY - 45.15%
$ 50,000 U.S. Treasury Notes, 8.000%, 08/15/99....................... $ 51,359
50,000 U.S. Treasury Notes, 7.750%, 11/30/99....................... 51,500
500,000 U.S. Treasury Notes, 6.375%, 09/30/01....................... 512,050
400,000 U.S. Treasury Notes, 7.500%, 11/15/01....................... 423,652
650,000 U.S. Treasury Notes, 6.375%, 08/15/02....................... 669,948
750,000 U.S. Treasury Notes, 6.250%, 02/15/03....................... 772,005
700,000 U.S. Treasury Notes, 5.500%, 05/31/03....................... 699,958
650,000 U.S. Treasury Notes, 7.250%, 05/15/04....................... 705,348
700,000 U.S. Treasury Notes, 6.500%, 10/15/06....................... 743,148
650,000 U.S. Treasury Notes, 7.250%, 08/15/22....................... 778,225
-----------
TOTAL U.S. GOVERNMENT TREASURY (COST $5,340,971)............ 5,407,193
-----------
U.S. GOVERNMENT AGENCY - 23.68%
434,568 Federal Home Loan Mortgage Corp. Gold Pool #E65534, 6.500%,
10/01/11.................................................... 437,827
3,930 Federal National Mortgage Association Pool #041474, 7.500%,
04/01/17.................................................... 4,035
10,785 Federal Home Loan Mortgage Corp. Pool #141248, 7.500%,
07/01/17.................................................... 11,155
3,678 Federal National Mortgage Association Pool #134195, 7.500%,
10/01/21.................................................... 3,777
641,813 Federal Home Loan Mortgage Corp. Gold Pool #D72664, 7.000%,
07/01/26.................................................... 651,841
193,222 Federal Home Loan Mortgage Corp. Gold Pool #C80442, 7.000%,
10/01/26.................................................... 196,241
493,161 Government National Mortgage Association Pool #372399,
6.500%, 02/15/27............................................ 492,391
491,356 Government National Mortgage Association Pool #407955,
6.500%, 10/15/27............................................ 490,588
550,235 Federal National Mortgage Association Pool #251568, 6.500%,
03/01/28.................................................... 548,172
-----------
TOTAL U.S. GOVERNMENT AGENCY (COST $2,747,670).............. 2,836,027
-----------
CORPORATE BONDS - 29.85%
150,000 Associates Corp. of North America, 6.740%, 08/13/99......... 151,203
110,000 General Motors Acceptance Corp., 8.400%, 10/15/99........... 113,450
160,000 Ford Motor Credit Co., 7.020%, 10/10/00..................... 163,600
200,000 Sears Roebuck Acceptance Corp., 5.870%, 01/08/01............ 199,250
150,000 Morgan Stanley Group, Inc., 9.375%, 06/15/01................ 163,313
200,000 WFS Financial Owner Trust, 1997-B A3, 6.300%, 07/20/01...... 201,917
500,000 Olympic Automobile Receivables Trust, 1997-A A3, 6.400%,
09/15/01.................................................... 501,937
250,000 WFS Financial Owner Trust, 1998-A A3, 5.900%, 05/20/02...... 250,677
200,000 Scholastic Corp., 7.000%, 12/15/03.......................... 206,000
267,814 Province Of Tucuman, 9.450%, 08/01/04 (Note 4).............. 248,397
250,000 Hydro-Quebec, 6.720%, 03/16/05.............................. 257,188
</TABLE>
<PAGE> 5
TRAINER, WORTHAM TOTAL RETURN BOND FUND
SCHEDULE OF INVESTMENTS JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
$200,000 Salomon Smith Barney Holdings, Inc., 7.125%, 10/01/06....... $ 210,500
100,000 Union Pacific Resources Corp., 7.000%, 10/15/06............. 105,250
500,000 Comp De Desarollo Aeropu, 10.190%, 05/31/11 (Note 4)........ 486,250
200,000 Empresa Nacional Electric, 7.875%, 02/01/27................. 208,750
105,999 BA Mortgage Securities, Inc., 1997-2 1A3, 7.400%,
10/25/27.................................................... 106,601
-----------
TOTAL CORPORATE BONDS (COST $3,606,810)..................... 3,574,283
-----------
TOTAL FIXED INCOME SECURITIES (COST $11,695,451)............ 11,817,503
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
- --------
<C> <S> <C>
SHORT TERM INVESTMENTS - 0.22%
26,422 UMB Bank, Money Market Fiduciary, 4.44% (Cost $26,422)...... 26,422
-----------
TOTAL INVESTMENTS (COST $11,721,873**) - 98.90%............. 11,843,925
OTHER ASSETS LESS OTHER LIABILITIES - 1.10%................. 132,005
-----------
NET ASSETS - 100.00%........................................ $11,975,930
===========
** Cost for Federal income tax purposes is $11,721,873 and net unrealized appreciation
consists of:
Gross unrealized appreciation............................... $ 210,631
Gross unrealized depreciation............................... (88,579)
-----------
Net unrealized appreciation................................. $ 122,052
===========
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE> 6
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIRST TOTAL RETURN
MUTUAL BOND
----------- ------------
<S> <C> <C>
ASSETS
Investments in securities at market value (identified cost
$31,239,283 and $11,721,873, respectively)
(Notes 1 and 4)......................................... $39,326,180 $11,843,925
Receivables:
Investment securities sold.............................. 1,004,704 201,293
Dividends and interest.................................. 24,758 137,364
Reimbursement due from Advisor............................ 0 2,727
Deferred organizational costs (Note 1).................... 0 7,822
Other assets.............................................. 6,051 1,751
----------- -----------
TOTAL ASSETS............................................ 40,361,693 12,194,882
----------- -----------
LIABILITIES
Payables:
Investment securities purchased......................... 1,027,000 200,994
Capital stock redeemed.................................. 82,000 0
Distributions payable................................... 0 6,013
Accrued expenses.......................................... 42,095 11,945
----------- -----------
TOTAL LIABILITIES....................................... 1,151,095 218,952
----------- -----------
NET ASSETS
(applicable to outstanding shares of 3,143,600 and
1,168,205 respectively; unlimited shares of $0.001 par
value authorized)....................................... $39,210,598 $11,975,930
=========== ===========
Net asset value, offering and redemption price per
share................................................... $ 12.47 $ 10.25
=========== ===========
SOURCE OF NET ASSETS
Paid-in capital........................................... $27,682,758 $11,808,226
Undistributed net investment income....................... 0 1,648
Accumulated net realized gain on investments.............. 3,440,943 44,004
Net unrealized appreciation of investments................ 8,086,897 122,052
----------- -----------
NET ASSETS.............................................. $39,210,598 $11,975,930
=========== ===========
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE> 7
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
FIRST RETURN
MUTUAL BOND
---------- --------
<S> <C> <C>
INVESTMENT INCOME
Dividends................................................. $ 378,159 $ 0
Interest.................................................. 34,852 659,688
---------- --------
TOTAL INCOME............................................ 413,011 659,688
---------- --------
EXPENSES
Advisory fees (Note 3).................................... 280,113 45,382
Distribution expense (Note 3)............................. 93,371 0
Administrator expense..................................... 59,915 15,476
Transfer agent fees....................................... 33,198 24,602
Bookkeeping and pricing................................... 34,734 30,540
Insurance expense......................................... 13,509 3,126
Custodian fees............................................ 10,081 8,800
Legal expense............................................. 9,625 2,930
Registration expense...................................... 20,810 19,520
Organizational expense (Note 1)........................... 0 2,398
Independent accountants................................... 11,000 5,000
Other..................................................... 24,358 7,384
Trustees' fees and expenses............................... 22,953 2,129
Reports to shareholders................................... 7,713 1,860
---------- --------
TOTAL EXPENSES.......................................... 621,380 169,147
Expenses waived and reimbursed (Note 3)................. 0 (48,128)
---------- --------
NET EXPENSES............................................ 621,380 121,019
---------- --------
NET INVESTMENT INCOME (LOSS)............................ (208,369) 538,669
---------- --------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from security transactions.............. 4,703,647 134,091
Net change in unrealized appreciation of investments...... 3,903,311 71,363
---------- --------
Net realized and unrealized gain on investments........... 8,606,958 205,454
---------- --------
Net increase in net assets resulting from operations...... $8,398,589 $744,123
========== ========
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIRST MUTUAL TOTAL RETURN BOND
-------------------------- --------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997(1)
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)....... $ (208,369) $ (302,382) $ 538,669 $ 283,800
Net realized gain (loss) on
investments...................... 4,703,647 6,971,549 134,091 (11,462)
Net change in unrealized
appreciation (depreciation) of
investments...................... 3,903,311 (4,283,207) 71,363 50,689
----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations........ 8,398,589 2,385,960 744,123 323,027
----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment
income........................... 0 0 (550,088) (280,953)
Distributions from realized gains
on investments................... (6,718,173) (5,294,139) (70,764) 0
Distributions in excess of realized
gains on investments............. 0 0 0 (1,820)
----------- ----------- ----------- -----------
Total Distributions.............. (6,718,173) (5,294,139) (620,852) (282,773)
----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS
Receipt from shares sold........... 6,953,881 2,803,809 4,528,818 9,697,178
Receipt from shares issued on
reinvestment of distributions.... 6,279,709 4,863,382 585,608 270,553
Shares redeemed.................... (9,352,149) (3,257,407) (1,741,170) (1,528,582)
----------- ----------- ----------- -----------
Net increase in net assets
resulting from capital share
transactions(a).................. 3,881,441 4,409,784 3,373,256 8,439,149
----------- ----------- ----------- -----------
Total increase in net assets..... 5,561,857 1,501,605 3,496,527 8,479,403
NET ASSETS
Beginning of period................ 33,648,741 32,147,136 8,479,403 0
----------- ----------- ----------- -----------
End of period...................... $39,210,598 $33,648,741 $11,975,930 $ 8,479,403
=========== =========== =========== ===========
(a) Transactions in capital stock
were:
Shares sold.................... 576,681 228,710 439,159 965,600
Shares issued on reinvestment
of distributions............ 600,355 431,151 57,284 26,973
Shares redeemed................ (757,177) (263,223) (169,442) (151,369)
----------- ----------- ----------- -----------
Net increase................... 419,859 396,638 327,001 841,204
Beginning balance.............. 2,723,741 2,327,103 841,204 0
----------- ----------- ----------- -----------
Ending balance................. 3,143,600 2,723,741 1,168,205 841,204
=========== =========== =========== ===========
</TABLE>
- -------------------------------------------
(1) The Total Return Bond Fund commenced operations on October 1, 1996.
The notes to financial statements are an integral part of these statements.
<PAGE> 9
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table below sets forth financial data for a share of capital stock
outstanding throughout each year presented.
<TABLE>
<CAPTION>
FIRST MUTUAL
----------------------------------------------------
YEARS ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR........................... $12.35 $13.81 $10.03 $ 8.21 $ 9.29
------- ------- ------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
- ---------------
Net investment loss............ (0.07) (0.11) (0.09) (0.09) (0.09)
Net gains (losses) on
securities (both realized and
unrealized).................. 2.72 0.95 4.79 2.10 (0.13)
------- ------- ------- -------- -------
Total from investment
operations................. 2.65 0.84 4.70 2.01 (0.22)
------- ------- ------- -------- -------
LESS DISTRIBUTIONS
---------------------
Dividends from net investment
income....................... 0.00 0.00 0.00 0.00 0.00
Distributions from capital
gains........................ (2.53) (2.30) (0.92) (0.19) (0.86)
------- ------- ------- -------- -------
Total distributions.......... (2.53) (2.30) (0.92) (0.19) (0.86)
------- ------- ------- -------- -------
NET ASSET VALUE, END OF YEAR..... $12.47 $12.35 $13.81 $10.03 $ 8.21
======= ======= ======= ======== =======
TOTAL RETURN..................... 25.40% 7.67% 49.12% 25.04% (3.91%)
RATIOS/SUPPLEMENTAL DATA
- ----------------------------
Net assets, end of year (in
000's)....................... $39,211 $33,649 $32,147 $20,281 $21,446
Ratio of expenses to average
net assets................... 1.66% 1.87% 1.74% 2.16% 1.97%
Ratio of net investment loss to
average net assets........... (0.56%) (0.96%) (0.82%) (0.77%) (0.97%)
Portfolio turnover rate........ 81% 109% 107% 198% 178%
Average commission rate paid... $0.0644 $0.0601 $0.0683 N/A N/A
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE> 10
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The tables below set forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
TOTAL RETURN
BOND
-------------------
YEAR PERIOD
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997(1)
-------- --------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.08 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
Net investment income..................................... 0.52 0.41
Net gains on securities (both realized and unrealized).... 0.25 0.08
------- ------
Total from investment operations........................ 0.77 0.49
------- ------
LESS DISTRIBUTIONS
--------------------
Dividends from net investment income...................... (0.53) (0.40)
Distributions from capital gains.......................... (0.07) 0.00
Distributions in excess of capital gains.................. 0.00 (0.01)
------- ------
Total distributions..................................... (0.60) (0.41)
------- ------
NET ASSET VALUE, END OF PERIOD.............................. $10.25 $10.08
======= ======
TOTAL RETURN................................................ 7.84% 4.90%+
RATIOS/SUPPLEMENTAL DATA
- ----------------------------
Net assets, end of period (in 000's)...................... $11,976 $8,479
Ratio of expenses to average net assets
before reimbursement of expenses by Advisor............. 1.68% 2.01%*
after reimbursement of expenses by Advisor.............. 1.20% 0.88%*
Ratio of net investment income to average net assets
before reimbursement of expenses by Advisor............. 4.86% 4.53%*
after reimbursement of expenses by Advisor.............. 5.34% 5.66%*
Portfolio turnover rate................................... 83% 112%+
</TABLE>
- -------------------------------------------
(1) The Total Return Bond Fund commenced operations on October 1, 1996.
+ Since inception, not annualized.
* Annualized.
The notes to financial statements are an integral part of these financial
statements.
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Trainer, Wortham First Mutual Funds (the "Trust") is an open-end investment
management company which currently offers shares of two series: First Mutual
Fund; and Trainer, Wortham Total Return Bond Fund ("Total Return Bond Fund").
Each Series has distinct investment objectives and policies.
First Mutual Fund's primary investment objective is to seek capital appreciation
principally through investments in common stock. The Fund may also invest in
securities convertible into common stock such as convertible bonds or preferred
stock. Its secondary investment objective is to seek income from dividends and
interest. The Total Return Bond Fund seeks to maximize total return consistent
with preservation of capital. The Fund will invest in U.S. Government and agency
securities, investment grade corporate bonds and other fixed-income securities.
The Fund will seek to produce conservative, risk adjusted returns.
Due to the inherent risk in any investment program, no Fund can ensure that its
investment objectives will be realized. The following is a summary of
significant accounting policies consistently followed by the Funds in the
preparation of their financial statements. The policies are in conformity with
generally accepted accounting principles for investment companies.
A. SECURITY VALUATION. Investments in securities traded on a national
securities exchange are valued at the last reported sales price on the last
business day of the period. Unlisted securities, or listed securities in which
there were no sales, are valued at the mean of the closing bid and ask prices.
Short-term obligations with remaining maturities of 60 days or less are valued
at amortized cost which approximates market value. All other securities are
valued at their fair value as determined in good faith by the Board of Trustees.
B. OTHER. As is common in the industry, security transactions are accounted for
on the date the securities are purchased or sold (trade date). Cost is
determined and gains and losses are based on the identified cost basis for both
financial statement and Federal income tax purposes. Dividend income and
distributions to shareholders are reported on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Discounts and premiums on
securities purchased are amortized over the life of the respective securities.
Distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Those differences are
primarily due to different treatments for net operating losses and post-October
capital losses.
C. NET ASSET VALUE PER SHARE. Net asset value per share of the capital stock of
a Fund is determined daily as of the close of trading on the New York Stock
Exchange by dividing the value of its net assets by the number of Fund shares
outstanding. The offering price and redemption price per share is the same as
the net asset value per share.
D. FEDERAL INCOME TAXES. It is the policy of each Fund to comply with
requirements of the Internal Revenue Code applicable to regulated investment
companies, if such qualification is in the best interest of its stockholders,
and to make distributions of net investment income and capital gains (after
reduction for any amounts available for Federal income tax purposes as
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998
- --------------------------------------------------------------------------------
capital loss carryovers) sufficient to relieve it from all, or substantially
all, Federal income taxes.
E. USE OF ESTIMATES IN FINANCIAL STATEMENTS. In preparing financial statements
in conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from these estimates.
F. ORGANIZATIONAL COSTS. Organizational costs for Total Return Bond Fund are
being amortized on a straight-line basis over five years, commencing October 1,
1996.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term investments, for the
year ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
First Mutual Fund........................................... $29,749,639 $32,668,828
Total Return Bond Fund...................................... 11,381,548 8,045,472
</TABLE>
NOTE 3 - INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Trainer, Wortham & Co., Inc. (the "Advisor") is the investment advisor for the
Trust pursuant to two separate investment advisory agreements (the
"Agreements"). Under the terms of the Agreements, the Advisor receives an annual
fee, accrued daily and paid monthly, of 0.75% of the average daily net assets of
First Mutual Fund and 0.45% of the average daily net assets of the Total Return
Bond Fund.
For the year ended June 30, 1998, the Trust paid the Advisor $280,113 in
advisory fees on behalf of First Mutual Fund and $45,382 on behalf of Total
Return Bond Fund. For the period October 1, 1996 (commencement of operations)
through April 30, 1997, the Advisor voluntarily elected to waive advisory fees
and reimburse other operating expenses to the extent necessary to cause total
operating expenses not to exceed 0.75% for the Total Return Bond Fund. Effective
May 1, 1997, the waiver and reimbursement was reduced on the Total Return Bond
Fund to the extent that total operating expenses do not exceed 1.20%. For the
year ended June 30, 1998, the Advisor waived and reimbursed expenses amounting
to $48,128 for the Total Return Bond Fund. The Trust has adopted a Distribution
Plan (the "Plan"), with respect to First Mutual Fund, pursuant to Rule 12b-1
under the Investment Company Act of 1940, which permits the Fund to pay certain
expenses associated with the distribution of its shares. The Plan provides that
the Trust will reimburse FPS Broker Services, Inc. (the "Distributor"), the
Trust's sole Underwriter and Distributor, for actual distribution and
shareholder servicing expenses incurred by the Distributor not exceeding, on an
annual basis, 0.25% of the average daily net assets of First Mutual Fund. For
the year ended June 30, 1998, the Trust reimbursed the Distributor $93,371 on
behalf of First Mutual Fund for distribution costs incurred. Distribution costs
incurred by First Mutual include $32,500 paid to an affiliate involved with
Marketing and Distribution of the Fund
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998
- --------------------------------------------------------------------------------
and $35,522 retained by FPS Broker Services, Inc. as compensation for their
distribution services.
NOTE 4 - RESTRICTED SECURITIES
Total Return Bond Fund owns certain investment securities which are restricted
as to resale. Accordingly, these securities are valued at fair value in good
faith by or under the direction of the Trust's Board of Trustees, taking into
consideration such factors including recent private sales, market conditions and
the issuer's financial performance. At June 30, 1998, Total Return Bond Fund
owned the following securities which may not be sold without registration under
the Securities Act of 1933:
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
ACQUISITION UNIT MARKET
SECURITY DATE PAR PRICE VALUE %TNA COST
-------- ----------- ------- ------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Province of Tucuman
9.450%, 08/01/04............. 08/15/97 267,814 100.00 $248,397 2.07% $267,814
Comp De Desarollo Aeropu
10.190%, 05/31/11............ 07/16/97 500,000 111.36 486,250 4.06% 556,800
-------- ---- --------
$734,647 6.13% $824,614
======== ==== ========
</TABLE>
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998
- --------------------------------------------------------------------------------
Certain officers and trustees of the Trust are affiliated persons of the
Advisor.
TRAINER, WORTHAM FUNDS
845 Third Avenue, 6th Floor
New York, NY 10022
<TABLE>
<S> <C>
OFFICERS AUDITORS
David P. Como Briggs, Bunting & Dougherty, LLP
President Two Logan Square, Suite 2121
Philadelphia, PA 19103
H. Williamson Ghriskey, Jr.
Vice President/Treasurer CUSTODIAN
UMB Bank KC, NA
John D. Knox P.O. Box 412797
Vice President Kansas City, MO 64141
Debra L. Clark FUND ADMINISTRATION
Secretary First Data Investor Services Group, Inc.
3200 Horizon Drive
INVESTMENT ADVISOR King of Prussia, PA 19406
Trainer, Wortham & Co., Inc.
845 Third Avenue, 6th Floor
New York, NY 10022
</TABLE>
This report is submitted for the general information of the shareholders of the
Trust. It is not authorized for distribution to prospective investors in the
Trust unless preceded or accompanied by an effective Prospectus which includes
details regarding the Trust's objectives, policies, expenses and other
information.
<PAGE> 15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
Trainer, Wortham First Mutual Funds
New York, New York
We have audited the statements of assets and liabilities of Trainer, Wortham
First Mutual Fund and Trainer, Wortham Total Return Bond Fund, each a series of
shares of Trainer, Wortham Mutual Funds, including the schedules of investments,
as of June 30, 1998, and the related statements of operations for the year then
ended, and the statements of changes in net assets and the financial highlights
for each of the two years (or period from commencement of operations) in the
period ended June 30, 1998. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for Trainer, Wortham First Mutual Fund
for each of the three years in the period ended June 30, 1996 were audited by
other auditors whose report dated July 11, 1996 expressed an unqualified opinion
thereon.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 June
30, 1998, by correspondence with the custodian and brokers. Where brokers did
not reply to our confirmation requests, we carried out other appropriate
auditing procedures. 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 our audits provide 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
Trainer, Wortham First Mutual Fund and Trainer, Wortham Total Return Bond Fund
as of June 30, 1998, the results of their operations for the year then ended,
and the changes in their net assets and the financial highlights for each of the
two years (or period from commencement of operations) in the period ended June
30, 1998 in conformity with generally accepted accounting principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
July 17, 1998
<PAGE> 16
DIVIDEND NOTICES
- --------------------------------------------------------------------------------
Note the following information is required by sections 852(b)(3)(c) and
854(b)(2) of the Internal Revenue Code and is based on the Trainer, Wortham
First Mutual Fund's tax year July 1, 1997 to June 30, 1998:
<TABLE>
<CAPTION>
ORDINARY INCOME
DISTRIBUTIONS PER SHARE PERCENTAGE
-------------------------- QUALIFYING
FROM 70% DIVIDENDS LONG TERM
INVESTMENT FROM RECEIVED DEDUCTION CAPITAL GAINS
DATE PAID INCOME CAPITAL GAINS FOR CORPORATIONS PER SHARE
--------- ---------- ------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
11/10/97 $ 0.000 $0.230 100% $2.301
</TABLE>
The Fund intends to make a distribution of ordinary income and capital gains in
December. Form 1099-DIV will be mailed to you in late January 1999, providing
you with the nature and dollar amounts of all distributions paid in calendar
1998 and should be used to complete your 1998 tax return.
<PAGE> 17
ILLUSTRATION OF $10,000 INVESTMENT
- --------------------------------------------------------------------------------
The graph below compares the increase in value of a $10,000 investment in the
Trainer, Wortham First Mutual Fund with the performance of the Standard & Poor's
500 Index. The values are as of June 30 for each of the last ten years. The
values and returns for the Trainer, Wortham First Mutual Fund include reinvested
dividends.
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEAR 10 YEAR
25.40% 19.31% 14.62%
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) FIRST MUTUAL S&P 500 INDEX
<S> <C> <C>
1988 $10000 $10000
1989 11852 11626
1990 13970 13090
1991 14578 13571
1992 14431 14923
1993 16187 16473
1994 15553 16244
1995 19447 20003
1996 29000 24520
1997 31224 32363
1998 39157 41457
Past performance is not predictive of future performance.
</TABLE>
<PAGE> 18
ILLUSTRATION OF $10,000 INVESTMENT
- --------------------------------------------------------------------------------
The graph below compares the increase in value of a $10,000 investment in the
Trainer, Wortham Total Return Bond Fund with the performance of the Lehman
Aggregate Index. The values and returns for the Trainer, Wortham Total Return
Bond Fund include reinvested dividends.
AVERAGE ANNUAL TOTAL RETURN
1 YEAR SINCE INCEPTION
7.84% 7.33%*
<TABLE>
<CAPTION>
Measurement Period TOTAL RETURN LEHMAN
(Fiscal Year Covered) BOND AGGREGATE INDEX*
<S> <C> <C>
10/1/96 $10000 $10000
12/31/96 10221 10300
3/31/97 10146 10242
6/30/97 10490 10618
9/30/97 10802 10971
12/31/97 11001 11293
3/31/98 11138 11469
6/30/98 11313 11738
Past performance is not predictive of future performance.
</TABLE>
* Fund commenced operations October 1, 1996.
<PAGE> 19
TRUSTEES:
Robert H. Breslin, Jr.
David P. Como
Raymond Eisenberg
David Elias
Robert S. Lazar
Martin S. Levine
Timothy J. O'Hara
Therese C. Thibadeau
James F. Twaddell
For more complete information including
charges and expenses, you may request
a prospectus by calling:
800.257.4414
TWF LOGO
845 Third Avenue/6th Floor, New York, New York 10022
800.257.4414 - Fax: 415.288.1401
ANNUAL REPORT
JUNE 30, 1998
TWF LOGO
FIRST MUTUAL FUND
TOTAL RETURN BOND FUND
800.257.4414
