THE PERKINS
DISCOVERY
FUND
A MUTUAL FUND SEEKING TO PROVIDE
CAPITAL APPRECIATION THROUGH THE DISCOVERY
OF EMERGING MICRO-CAP COMPANIES.
SEMI-ANNUAL REPORT
TO SHAREHOLDERS FOR
THE PERIOD ENDED
SEPTEMBER 30, 1998
<PAGE>
THE PERKINS
DISCOVERY
FUND
Dear Perkins Discovery Fund Shareholders:
This is our first semi-annual report for Discovery Fund shareholders. We are
often asked why we would start a new mutual fund to invest exclusively in
micro-cap companies, i.e., those with market capitalizations of less than $100
million. The reason is that these "smallest of the small" have been forgotten by
the investment community. Yet, as we all know, great oaks start from tiny
acorns. The name Discovery Fund was not chosen at random. We hope, and expect,
to "discover" companies with great potential, which for the moment are lost in
the forest of tiny unnoticed and unfollowed companies. The current market
climate reminds us of the fall of 1990, when market sentiment was very negative
for a variety of reasons, not the least of which was the invasion of Kuwait by
Iraq. Today, just as then, there are many things that are negative in the world:
Terrorists who can and will strike anywhere, anytime; a new Russia in both
financial and political turmoil; Asia (especially Japan) in an economic
downspin; and last, but not least, President Clinton's problems and the
resulting concern worldwide about his leadership. But there are times of
uncertainty in any market cycle, times when stocks, both good and bad, go down
together. The past 2 1/2 years have been difficult for small stocks, but
opportunity is created as the result of corrections and market bottoms, which
are the market's way of resolving speculative excesses and creating the
foundation for the next advance. The market bottom in 1990 marked the end of a
long period of underperformance by small company shares vs. the shares of
larger-cap companies. Today this relative valuation is lower than it was at the
bottom of the 1990 market.
The relative values are evident and many of the real values are also. One of our
holdings, Check Technology Corp., is selling at 12 times estimated 1999 earnings
and at about book value. The company is a leading manufacturer of equipment to
produce checks and other bank forms digitally. Its market is huge - - the
replacement of all of the existing offset check printing machines. Its market
cap is only $18 million vs. its revenues of $22 million, which includes
virtually nothing from its new Imaggia equipment. Moving to the bottom of the
alphabet the fund owns shares in Zomax Optical Media, a company which produces
compact discs for companies such as Dell Computer, Microsoft and others who wish
to package a CD with their product. Zomax, is selling at 11 times earnings, only
one times revenues, and at 75% of the cash it has. The Fund has other holdings,
that we feel are attractive, which we believe will provide performance for the
Fund when the market for out-of-favor micro-cap companies turns, which we
believe is now happening. There has been a 4-year election cycle in the stock
market since 1914; there has usually been a significant bottom in the mid-term
year and our view is that 1998 will likely not be an exception. There is a stock
market adage which says "don't fight the Fed". An old rule developed by Edson
Gould called "two tumbles and a jump" was recently activated when the Federal
Reserve cut both the discount rate and the Fed Funds rate close on the heels of
the discount rate cut on September 29. When the discount rate, Fed Funds rate or
margin requirements have been cut twice within a short period of time, it is
widely regarded as a buy signal. The record of this rule is excellent. Within
six months after the second cut the market has been up an average of 10% and one
year later an average of up 23%. This is based on 16 buy signals between 1921
and 1995. Furthermore, the Dow Jones has on average risen 55% from the date of
the "two tumbles and a jump" buy signal to the next bull market top. Therefore,
it is likely that this recent Fed action has given new life to the market. We
believe this pertains especially to small stocks which have been
<PAGE>
literally thrown out of the window by investors out of fear that they were going
lower. We never cease to be amazed that people are willing to sell good
companies simply because they are going lower, which has nothing whatsoever to
do with the fundamentals of the investment. Market bottoms are not made of
smiles and pleasant feelings; rather they come with a great deal of pain. John
Templeton, probably the most famous of all money managers, has said that the
time to buy stocks is at the time of greatest despair, because that is the time
when the greatest values are available. We sincerely believe the fall of 1998 to
be one of those times.
We wish to welcome you as a shareholder in the Discovery Fund. Although the Fund
is still very small, we believe it will attract new shareholders as it achieves
performance. As you know, we plan to close the Fund to new shareholders when it
reaches a market value of $50 million. We are optimistic about micro-cap shares
and our ability to find those which will give us the performance we seek.
The following table shows the Fund's returns by quarter and since inception
compared to several popular indices:
- --------------------------------------------------------------------------------
THE PERKINS S&P NASDAQ RUSSELL
DISCOVERY 500 COMPOSITE 2000
CALENDAR PERIOD FUND INDEX INDEX INDEX
- --------------------------------------------------------------------------------
Second Quarter 1998
(4/9/98 - 6/30/98) 8.60% 3.23% 4.85% (3.77)%
Third Quarter 1998
(7/1/98 - 9/30/98) (18.97)% (9.92)% (10.60)% (20.51)%
Total Return Since
4-9-98 inception
as of 9/30/98 (12.00)% (7.01)% (6.26)% (23.51)%
- --------------------------------------------------------------------------------
In closing, we thank you for your continued support.
Sincerely,
/s/ Richard W. Perkins /s/ Daniel S. Perkins
Richard W. Perkins, C.F.A. Daniel S. Perkins, C.F.A.
President Vice President
The Fund's total return, after the maximum sales charge of 4.75%, from inception
of April 9, 1998 through September 30, 1998 was (16.19)%.The Fund's returns and
share value will fluctuate and shares may be worth more or less than their
original cost when redeemed. Past performance is no guarantee of future
performance. Investing in micro-cap companies involves greater risks and
volatility. The Fund is distributed by First Fund Distributors, Inc., Phoenix,
AZ 85018.
<PAGE>
THE PERKINS DISCOVERY FUND
SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 50.5% Market Value
- --------------------------------------------------------------------------------
BUSINESS SERVICES: 2.9%
1,400 Zomax Optical Media, Inc.*............................. $ 16,013
--------
CHEMICALS: 2.1%
10,000 Verdant Brands, Inc.*.................................. 11,250
--------
COMPUTER - DATA SECURITY: 2.3%
4,000 Datakey, Inc.*......................................... 12,500
--------
COMPUTER - INTEGRATED SYSTEMS: 6.4%
5,000 Check Technology Corp.*................................ 15,000
5,000 VirtualFund.com, Inc.*................................. 19,687
--------
34,687
--------
COMPUTER - INTERNET: 3.8%
10,000 California Pro Sports, Inc.*........................... 9,062
3,000 OnHealth Network Company*.............................. 11,625
--------
20,687
--------
COMPUTER - SOFTWARE: 9.6%
7,500 Cover-All Technologies, Inc.*.......................... 12,188
4,000 IntraNet Solutions, Inc.*.............................. 15,500
6,000 Spanlink Communications, Inc.*......................... 24,750
--------
52,438
--------
DISTRIBUTION / WHOLESALE: 4.5%
5,000 Navarre Corp.*......................................... 16,563
7,500 Tech Squared, Inc.*.................................... 8,203
--------
24,766
--------
MEDICAL - DRUGS: 2.5%
7,500 GalaGen, Inc.*......................................... 13,594
--------
MEDICAL INSTRUMENTS: 3.6%
5,000 CardioThoracic Systems, Inc.*.......................... 19,375
--------
See accompanying Notes to Financial Statements.
3
<PAGE>
THE PERKINS DISCOVERY FUND
SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1998 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
MISCELLANEOUS MANUFACTURING: 2.9%
1,200 Koala Corp.*........................................... $ 15,900
--------
RETAIL - DRUG STORE: 2.5%
1,700 HORIZON Pharmacies, Inc.*.............................. 13,706
--------
RETAIL - RESTAURANTS: 7.4%
15,000 Chicago Pizza & Brewery, Inc.*......................... 20,625
4,000 Pizza Inn, Inc......................................... 19,500
--------
40,125
--------
Total Common Stocks (cost $403,626).................... 275,041
--------
Principal Amount REPURCHASE AGREEMENT: 49.3%
- --------------------------------------------------------------------------------
$268,000 Star Bank Repurchase Agreement, 4.90%, dated 9/30/1998,
due 10/1/1998, collateralized by $275,000 GNMA, 7.375%,
due 5/20/2024 (proceeds $268,036) (cost $268,000)........ 268,000
--------
Total Investment in Securities (cost $671,626++): 99.8%.. 543,041
Other Assets less Liabilities: 0.2%...................... 959
--------
TOTAL NET ASSETS: 100.0%................................. $544,000
========
* Non-income producing security.
++ At September 30, 1998, the cost of securities for Federal income tax purposes
was the same as the basis for financial reporting. Unrealized appreciation and
depreciation were as follows:
Gross unrealized appreciation ........................... $ 3,000
Gross unrealized depreciation ........................... (131,585)
---------
Net unrealized depreciation ..................... $(128,585)
=========
See accompanying Notes to Financial Statements.
4
<PAGE>
THE PERKINS DISCOVERY FUND
STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $403,626)........... $ 275,041
Repurchase agreement (cost $268,000).......................... 268,000
Cash.......................................................... 305
Interest receivable........................................... 36
Deferred organization costs................................... 13,563
Prepaid expenses.............................................. 13,049
---------
Total assets ........................................... 569,994
---------
LIABILITIES
Accrued audit fees............................................ 6,829
Accrued transfer agent fee.................................... 9,691
Other accrued expenses ....................................... 9,474
---------
Total liabilities ...................................... 25,994
---------
NET ASSETS ..................................................... $ 544,000
=========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($544,000/41,215 shares outstanding;
unlimited number of shares authorized
without par value)...................................... $ 13.20
=========
COMPUTATION OF OFFERING PRICE PER SHARE
(Net asset value $13.20/.9525) ......................... $ 13.86
=========
COMPONENTS OF NET ASSETS
Paid-in capital .............................................. $ 646,598
Accumulated net investment loss............................... (823)
Undistributed net realized gain on investments ............... 26,810
Net unrealized depreciation on investments ................... (128,585)
---------
Net assets ............................................. $ 544,000
=========
See accompanying Notes to Financial Statements.
5
<PAGE>
THE PERKINS DISCOVERY FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 9, 1998* THROUGH SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Interest .................................................... $ 4,713
Dividends.................................................... 240
----------
Total income ............................................ 4,953
----------
Expenses
Administration fee........................................... 14,231
Transfer agent fees ......................................... 9,691
Registration fees............................................ 9,057
Fund accounting fees......................................... 7,970
Audit fee.................................................... 6,829
Custody fees................................................. 4,933
Advisory fees................................................ 2,294
Reports to shareholders ..................................... 2,032
Legal fees................................................... 1,907
Amortization of deferred organization costs.................. 1,437
Trustee fees ................................................ 1,430
Distribution fees............................................ 577
Shareholder service fee...................................... 462
----------
Total expenses ............................................ 62,850
Less: expenses waived and reimbursed....................... (57,074)
----------
Net expenses............................................... 5,776
----------
NET INVESTMENT LOSS .................................... (823)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from security transactions .................. 26,810
Net change in unrealized depreciation on investments .......... (128,585)
----------
Net realized and unrealized loss on investments ........... (101,775)
----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .... $ (102,598)
==========
* Commencement of operations.
See accompanying Notes to Financial Statements.
6
<PAGE>
THE PERKINS DISCOVERY FUND
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- --------------------------------------------------------------------------------
April 9, 1998 *
through
September 30, 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment loss ....................................... $ (823)
Net realized gain from security transactions .............. 26,810
Net unrealized depreciation on investments ................ (128,585)
---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ... (102,598)
---------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from net change
in outstanding shares (a)................................ 646,598
---------
TOTAL INCREASE IN NET ASSETS ........................... 544,000
NET ASSETS
Beginning of period........................................ -0-
---------
END OF PERIOD ............................................... $ 544,000
=========
(a) A summary of capital share transactions is as follows:
April 9, 1998 *
through
September 30, 1998
-------------------
Shares Value
-------------------
Shares sold ........................................ 46,391 $728,179
Shares redeemed .................................... (5,176) (81,581)
------ --------
Net increase........................................ 41,215 $646,598
====== ========
* Commencement of operations.
See accompanying Notes to Financial Statements.
7
<PAGE>
THE PERKINS DISCOVERY FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD (UNAUDITED)
- --------------------------------------------------------------------------------
April 9, 1998 *
through
September 30, 1998
- --------------------------------------------------------------------------------
Net asset value, beginning of period.......................... $ 15.00
-------
Income from investment operations:
Net investment loss ....................................... (0.02)
Net realized and unrealized loss on investments............ (1.78)
-------
Total from investment operations.............................. (1.80)
-------
Net asset value, end of period................................ $ 13.20
=======
Total return ................................................. (12.00%)
Ratios/supplemental data:
Net assets, end of period (millions)........................ $ 0.5
Ratio of expenses to average net assets:
Before expense reimbursement .............................. 26.97%+
After expense reimbursement................................ 2.50%+
Ratio of net investment loss to average net assets:
Before expense reimbursement .............................. (24.83%)+
After expense reimbursement ............................... (0.36%)+
Portfolio turnover rate ...................................... 93.91%
* Commencement of operations.
+ Annualized.
See accompanying Notes to Financial Statements.
8
<PAGE>
THE PERKINS DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS AT SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
The Perkins Discovery Fund (the "Fund") is a diversified series of shares
of beneficial interest of Professionally Managed Portfolios (the "Trust"), which
is registered under the Investment Company Act of 1940 (the "1940 Act") as an
open-end management investment company. The Fund's primary investment objective
is capital appreciation. The Fund began operations on April 9, 1998.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund. These policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION. Investments in securities traded on a national
securities exchange or included in the NASDAQ National Market System
are valued at the last reported sale price at the close of regular
trading on the last business day of the period; securities traded on
an exchange or NASDAQ for which there have been no sales and other
over-the-counter securities are valued at the last reported bid
price. Securities for which quotations are not readily available are
valued at their respective fair values as determined in good faith
by the Board of Trustees. Short-term investments are stated at cost,
which when combined with accrued interest, approximates market
value.
B. FEDERAL INCOME TAXES. The Fund intends to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no federal income tax provision is
required.
C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS. As is common in
the industry, security transactions are accounted for on the trade
date. Dividend income and distributions to shareholders are recorded
on the ex-dividend date. Interest income is recognized on an accrual
basis. Income and capital gains distributions to shareholders are
determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Those
differences are primarily due to differing treatments for net
operating losses.
D. DEFERRED ORGANIZATION COSTS. All of the expenses incurred by the
Advisor in connection with the organization and registration of the
Fund's shares will be borne by the Fund are being amortized to
expense on a straight-line basis over a period of five years.
E. USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues
and expenses during the period. Actual results could differ from
those estimates.
9
<PAGE>
THE PERKINS DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
NOTE 3 - COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS
For the period ended September 30, 1998, Perkins Capital Management, Inc.
(the "Advisor") provided the Fund with investment management services under an
Investment Advisory Agreement. The Advisor furnishes all investment advice,
office space and certain administrative services, and provides most of the
personnel needed by the Fund. As compensation for its services, the Advisor was
entitled to a monthly fee at the annual rate of 1.00% based upon the average
daily net assets of the Fund. For the period ended September 30, 1998, the Fund
incurred $2,294 in Advisory fees.
The Fund is responsible for its own operating expenses. The Advisor has
agreed to limit the Fund's total expenses to not more than 2.50% of average net
assets. Any such reductions made by the Advisor in its fees or payments or
reimbursement of expenses which are the Fund's obligation are subject to
reimbursement by the Fund within three years, provided the Fund is able to
effect such reimbursement and remain in compliance with any expense limitations
then in effect. For the period ended September 30, 1998, the Advisor reimbursed
the Fund in the total amount of $57,074.
Investment Company Administration, LLC (the "Administrator") acts as the
Fund's Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, reports and returns for
the Fund; prepares reports and materials to be supplied to the trustees;
monitors the activities of the Fund's custodian, transfer agent and accountants;
coordinates the preparation and payment of Fund expenses and reviews the Fund's
expense accruals. For its services, the Administrator receives a monthly fee at
the following annual rate:
Under $12 million -- $30,000
$12 to $50 million -- 0.25% of average daily net assets
$50 to $100 million -- 0.20% of average daily net assets
$100 to $200 million -- 0.15% of average daily net assets
over $200 million -- 0.10% of average daily net assets
For the period ended September 30, 1998, the Fund incurred $14,231 in
Administration fees.
First Fund Distributors, Inc. (the "Distributor") acts as the Fund's
principal underwriter in a continuous public offering of the Fund's shares. The
Distributor is an affiliate of the Administrator.
Certain officers and trustees of the Trust are also officers and/or
directors of the Administrator and Distributor.
NOTE 4 - DISTRIBUTION COSTS
The Fund has adopted a Distribution Plan (the "Plan") in accordance with
Rule 12b-1 under the 1940 Act. The Plan provides that the Fund may pay a fee to
the Distributor at an annual rate of up to 0.20% of the average daily net assets
of the Fund. The fee is paid to the Distributor as reimbursement for, or in
anticipation of,
10
<PAGE>
THE PERKINS DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
expenses incurred for distribution-related activity. During the period ended
September 30, 1998, the Fund paid the Distributor $577.
NOTE 5 - SHAREHOLDER SERVICING FEE
The Fund has entered into a Shareholder Services Agreement with the
Advisor, under which the Fund pays servicing fees at an annual rate of up to
0.25% of the Fund's average daily net assets. Payments to the Advisor under the
Shareholder Servicing Agreement may reimburse the Advisor for payments it makes
to selected brokers, dealers and administrators which have entered into Service
Agreements with the Advisor for services provided to shareholders of the Fund.
The services provided by such intermediaries are primarily designed to assist
shareholders of the Fund and include the furnishing of office space and
equipment, telephone facilities, personnel and assistance to the Fund in
servicing such shareholders. Services provided by such intermediaries also
include the provision of support services to the Fund and include establishing
and maintaining shareholders' accounts and record processing, purchase and
redemption transactions, answering routine client inquiries regarding the Fund,
and providing such other personal services to shareholders as the Fund may
reasonably request. For the period ended September 30, 1998, the Fund incurred
$462 in Shareholder Servicing fees.
NOTE 6 - PURCHASES AND SALES OF SECURITIES
For the period ended September 30, 1998, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, were
$635,518 and $259,276, respectively.
NOTE 7 - REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with government securities
dealers recognized by the Federal Reserve Board, with member banks of the
Federal Reserve System or with such other brokers or dealers that meet the
credit guidelines established by the Board of Trustees. The Fund will always
receive and maintain, as collateral, securities whose market value, including
accrued interest, will be at least equal to 100% of the dollar amount invested
by the Fund in each agreement, and the Fund will make payment for such
securities only upon physical delivery or upon evidence of book entry transfer
to the account of the custodian. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral.
If the seller defaults and the value of the collateral declines, or if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
11
<PAGE>
ADVISOR
Perkins Capital Management, Inc.
730 East Lake Street
Wayzata, MN 55391-1769
(800) 998-3190
(612) 473-8367
+
DISTRIBUTOR
First Fund Distributors, Inc.
4455 East Camelback Road, Suite 261E
Phoenix, AZ 85018
+
CUSTODIAN
Star Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
+
TRANSFER AGENT AND SHAREHOLDER SERVICES
PFPC, Inc.
P.O. Box 8813
Wilmington, DE 19899-8813
(800) 280-4779
+
AUDITORS
Tait, Weller & Baker
8 Penn Center Plaza, Suite 800
Philadelphia, PA 19101
+
LEGAL COUNSEL
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, CA 94104
This report is intended for
shareholders of the Fund and may not be
used as sales literature unless
preceded or accompanied by a current
prospectus.
Past performance results shown in this
report should not be considered a
representation of future performance.
Share price and returns will fluctuate
so that shares, when redeemed, may be
worth more or less than their original
cost. Statements and other information
herein are dated and are subject to
change.
