AVONDALE HESTER
TOTAL RETURN FUND
SEMI-ANNUAL REPORT
September 30, 1998
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
November 13, 1998
Re: Avondale Hester Total Return Fund
Dear Shareholders:
We are pleased to submit our first semi-annual report on the Avondale Hester
Total Return Fund. On September 30, shareholders approved the new investment
advisory agreement with Hester Capital Management, L.L.C. ("HCM").
Avondale Hester experienced a return of 3.92% during the month of September.
Primarily due to the equity allocation, the Fund experienced a -10.1% rate of
return for the quarter ended September 30. However, the Fund is up 1.66%
year-to-date and is up 2.38% over the last 12 months as of September 30, 1998.
<TABLE>
<CAPTION>
INVESTMENT PERFORMANCE
9/1/98 7/1/98 1/1/98 10/1/97
THROUGH THROUGH THROUGH THROUGH
9/30/98 9/30/98 9/30/98 9/30/98
<S> <C> <C> <C> <C>
Avondale Hester Total Return Fund 3.92% (10.10%) 1.66% 2.38%
S&P 500 Composite Index 6.41% (9.93%) 6.01% 9.06%
S&P 500 Composite Unweighted (5.06%) (15.73%) (7.17%) (7.99%)
Lehman Intermediate Bond Index 2.51% 4.49% 8.12% 10.43%
90 Day U.S. Treasury Bills 0.49% 1.36% 4.01% 5.28%
Consumer Price Index 0.18% 0.43% 1.49% 1.55%
</TABLE>
Our plans for the portfolio include a restructuring of the bond portfolio. The
portfolio has mortgage related securities and a rather short average life.
Through restructuring, we plan to invest monies in government agencies and
high-grade corporates, as yield spreads have widened dramatically and these
sectors represent relative value. In the equity area, we are removing selected
names from the technology, services, and pharmaceutical areas of the portfolio.
Some stocks are in loss positions, and we will be utilizing those to offset
gains for the year. We have been redeploying money in the consumer staples,
industrial, and technology areas. With the broad decline in the equity market,
we believe it will present an
<PAGE>
excellent opportunity to buy good companies at attractive prices. The portfolio
ended the quarter with 81% of the assets invested in common stocks, 18% in fixed
income securities, and 1% in cash reserves. At this point, we plan to maintain
the fixed income exposure in a range of 20-25%, with the balance invested in
common stocks.
The U.S. equity market has finally succumbed to over-valuation, decelerating
earnings momentum, and the global economic and financial crisis. We expect the
outcome from these events to be a substantial slowing in U.S. economic growth
over the next several months, accompanied by a definitive slowing in corporate
profits. Additional reduction of rates on the part of the Federal Reserve is
expected, with the federal funds rate potentially declining 50 to 75 basis
points from the current rate of 5.00%. The expected Fed easing should result in
a positively sloped yield curve and lower interest rates across all maturities.
The equity markets should remain quite volatile. Further downside risk on the
order of 10% is not out of the question. Serious technical damage has been done
to the market and it may take several months for things to stabilize.
Looking forward over the next 18 to 24 months and recognizing that future
returns can't be assured, we would assess the potential upside for the market to
be as much as 30% based on lower interest rates and a resumption of corporate
profit growth. The key going forward is for central banks around the globe to
continue lowering interest rates and, more importantly, for Japan to address its
banking crisis and stimulate the economy through fiscal policy. We expect
large-cap and mid-cap names to lead the market higher in the next up trend. We
will continue to search for companies that possess strong balance sheets and
that are showing improvement in return on assets and operating profit margins,
as well as possessing some catalyst that should ignite their stock price.
The Fund's investment objective of seeking maximum total return consistent with
reasonable risk by investment in equity and fixed-income securities is
unchanged. However, effective October 7, 1998, the Fund's dividend policy has
been revised to provide for payment of dividends once annually. We hope this
will result in some savings to the Fund as a result of not having to process
relatively small dividend payments quarterly.
Respectfully yours,
/s/ /s/
Ira Craig Hester, CFA John E. Gunthorp, CFA
President & CEO Executive Vice President
The Avondale Hester Total Return Fund's average annualized total return from its
inception on October 12, 1988 through the five-year period and the three-year
period ending on September 30, 1998 was 10.9% and 10.0%, respectively. The
twelve months ending September 30, 1998 showed a total return of 2.4%. Results
shown are past performance, which should not be regarded as an indicator of
future results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their cost. The
Avondale Hester Total Return Fund is distributed by First Fund Distributors,
Inc., Phoenix, AZ 85018.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS at September 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 81.4% Market Value
Banks: 11.5%
<S> <C> <C>
7,462 Banc One Corp........................................................... $ 318,068
4,600 NationsBank Corp........................................................ 246,100
13,003 Regions Financial Corp.................................................. 471,359
-------
1,035,527
---------
Beverages - Alcoholic: 2.1%
3,400 Anheuser-Busch Companies, Inc........................................... 183,600
-------
Beverages - Soft Drink: 1.4%
2,100 Coca-Cola Company....................................................... 121,012
-------
Computer Services: 2.5%
9,400 First Data Corp......................................................... 220,900
-------
Computers: 5.0%
500 3Com Corp.*............................................................. 15,031
2,800 International Business Machines Corp.................................... 358,400
6,600 Western Digital Corp.*.................................................. 70,950
------
444,381
-------
Consumer Products: 7.2%
3,000 Bell & Howell Company*.................................................. 77,812
7,200 General Electric Company................................................ 572,850
-------
650,662
-------
Consumer Services: 1.8%
6,200 Walt Disney Company..................................................... 156,938
-------
Electric Services: 3.7%
5,002 Duke Power Company...................................................... 331,070
-------
Electronic Instrumentation: 0.9%
5,000 Kollmorgen Corp......................................................... 78,125
------
See accompanying Notes to Financial Statements.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS at September 30, 1998 (Unaudited), Continued
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Finance: 6.2%
3,400 American Express Company................................................ $ 263,925
2,700 Transamerica Corp....................................................... 286,200
-------
550,125
-------
Hotel/Motel: 2.8%
10,400 Marriott International, Inc., Class A................................... 248,300
-------
Industrial Machinery: 3.3%
5,300 Tyco International Ltd.................................................. 292,825
-------
Insurance: 3.6%
8,500 Travelers Group, Inc.................................................... 318,750
-------
Linen Supplies: 1.4%
8,000 Angelica Corp........................................................... 128,500
-------
Oil-Energy: 2.7%
3,400 Exxon Corp.............................................................. 238,638
-------
Pharmaceuticals: 23.0%
2,800 Bristol-Myers/Squibb Company............................................ 290,850
8,500 Carrington Laboratories, Inc.*.......................................... 27,625
4,000 Johnson & Johnson....................................................... 313,000
6,400 Pfizer, Inc............................................................. 678,000
7,200 Schering-Plough Corp.................................................... 745,650
- -------
2,055,125
---------
Retail - Restaurants: 2.0%
3,000 McDonald's Corp......................................................... 179,062
-------
Telecommunications Equipment: 0.3%
4,000 IPC Information Systems, Inc.*.......................................... 28,000
------
Total Common Stock (cost $4,098,084).................................... 7,261,540
---------
See accompanying Notes to Financial Statements.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS at September 30, 1998 (Unaudited), Continued
Principal Amount BONDS: 15.4% Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Agencies: 13.7%
$150,000 FNMA, 5.300%, 12/10/1998................................................ $ 150,081
250,000 FNMA, 6.375%, 10/13/2000................................................ 250,103
500,000 FNMA, 5.865%, 7/16/2001................................................. 505,085
93,528 FNMA, 7.500%, 8/1/2002.................................................. 95,704
154,459 FNMA, 7.000%, 6/1/2003.................................................. 158,418
64,232 GNMA, 5.500%, 5/20/2027................................................. 65,071
------
1,224,462
---------
U.S. Treasury Notes: 0.6%
50,000 7.125%, 2/29/2000....................................................... 51,781
------
Corporate: 1.1%
75,000 Associates Corp., 6.750%, 10/15/1999.................................... 76,056
25,000 IBM, 6.375%, 6/15/2000.................................................. 25,644
------
101,700
-------
Total Bonds (cost $1,365,242)........................................... 1,377,943
-- ---------
SHORT-TERM INVESTMENTS: 2.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Investment: 2.4%
213,721 Star Treasury Cash Management Fund, 4.710%, 4/1/1999
(cost $213,721)......................................................... 213,721
-------
Total Investment in Securities (cost $5,677,047+): 99.2%................ 8,853,204
Other Assets less Liabilities: 0.8%..................................... 68,922
------
Total Net Assets: 100.0% ......................................... $ 8,922,126
===========
<FN>
*Non-income producing security.
+At September 30, 1998, the cost of securities for Federal tax purposes was the
same as the basis for financial reporting. Unrealized appreciation and
depreciation of securities were as follows:
Gross unrealized appreciation....................................................... $ 3,494,379
Gross unrealized depreciation....................................................... (318,222)
--------
Net unrealized appreciation............................................. $ 3,176,157
===========
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES at September 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Investments in securities, at value (cost $5,677,047).................................... $ 8,853,204
Receivables:
Dividends and interest............................................................. 30,858
Securities sold.................................................................... 77,961
------
Total assets ................................................................ 8,962,023
---------
LIABILITIES
Payables:
Advisory fees...................................................................... 525
Administration fee................................................................. 2,728
Securities purchased............................................................... 16,298
Accrued expenses ........................................................................ 20,346
------
Total liabilities ........................................................... 39,897
------
NET ASSETS ................................................................................... $ 8,922,126
===========
Net asset value, offering and redemption price per share
($8,922,126/278,337 shares outstanding;
unlimited number of shares authorized without par value) ........................ $32.06
======
COMPONENTS OF NET ASSETS
Paid-in capital ......................................................................... $ 5,153,558
Undistributed net investment income...................................................... 19,975
Undistributed net realized gain on investments .......................................... 572,436
Net unrealized appreciation on investments .............................................. 3,176,157
---------
Net assets ........................................................................ $ 8,922,126
===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS - For the Six Months Ended September 30, 1998
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Income
<S> <C>
Dividends ....................................................................... $ 57,741
Interest ......................................................................... 44,739
Other ............................................................................. 549
---
Total income ............................................................... 103,029
-------
Expenses
Advisory fees...................................................................... 31,933
Administration fee ................................................................ 15,041
Fund accounting fees ............................................................. 9,619
Audit fee ......................................................................... 6,182
Transfer agent fees .............................................................. 4,582
Legal fees ....................................................................... 3,937
Trustee fees ..................................................................... 2,290
Custody fees....................................................................... 2,157
Miscellaneous...................................................................... 1,590
Reports to shareholders ........................................................... 997
Registration fees.................................................................. 921
---
Total expenses ............................................................. 79,249
------
Net investment income ................................................ 23,780
------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from security transactions............................................. 274,420
Net change in unrealized appreciation on investments..................................... (1,212,451)
----------
Net realized and unrealized loss on investments.............................. (938,031)
--------
Net decrease in net assets resulting from operations .................. $ (914,251)
==========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Year
Ended Ended
September 30, 1998# March 31,1998
- ------------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN NET ASSETS FROM:
OPERATIONS
<S> <C> <C>
Net investment income ............................................. $ 23,780 $ 51,755
Net realized gain from security transactions ......................... 274,420 217,544
Net change in unrealized appreciation on investments .................. (1,212,451) 3,099,157
---------- ---------
Net (decrease) increase in net assets resulting from operations ... (914,251) 3,368,456
-------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ................................................. (5,939) (49,621)
Net realized gain from security transactions .......................... 0 (166,584)
- --------
Total distributions to shareholders ................................ (5,939) (216,205)
------ --------
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets derived from net change in
outstanding shares (a)............................................... (1,071,938) (2,115,938)
---------- ----------
Total (decrease) increase in net assets............................. (1,992,128) 1,036,313
NET ASSETS
Beginning of period.................................................... 10,914,254 9,877,941
---------- ---------
End of period ............................................................ $ 8,922,126 $10,914,254
=========== ===========
<FN>
(a) A summary of capital share transactions is as follows:
Six Months Ended Year Ended
September 30, 1998# March 31, 1998
------------------- --------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold ...................................... 42,607 $ 1,438,310 11,969 $ 383,640
Shares issued in reinvestment of distributions.... 149 5,313 6,229 196,258
Shares redeemed................................... (73,987) (2,515,561) (86,710) (2,695,836)
------- ---------- ------- ----------
Net decrease...................................... (31,231) $(1,071,938) (68,512) $(2,115,938)
======= =========== ======= ===========
#Unaudited.
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For a capital share outstanding throughout each period
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months
Ended September Years Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
30, 1998# 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .. $35.26 $26.13 $27.76 $23.58 $22.93 $24.78
Income from investment operations:
Net investment income............ 0.08 0.16 0.18 0.27 0.23 0.26
Net realized and unrealized gain
(loss) on investments ..... (3.26) 9.61 0.14 6.00 1.49 (0.44)
----- ---- ---- ---- ---- -----
Total from investment operations....... (3.18) 9.77 0.32 6.27 1.72 (0.18)
----- ---- ---- ---- ---- -----
Less distributions:
From net investment income....... (0.02) (0.15) (0.28) (0.27) (0.23) (0.35)
From net capital gains........... 0.00 (0.49) (1.67) (1.82) (0.84) (1.32)
---- ----- ----- ----- ----- -----
Total distributions.................... (0.02) (0.64) (1.95) (2.09) (1.07) (1.67)
----- ----- ----- ----- ----- -----
Net asset value, end of period......... $32.06 $35.26 $26.13 $27.76 $23.58 $22.93
====== ====== ====== ====== ====== ======
Total return........................... (9.02)% 37.65% 1.10% 26.67% 7.82% (0.82)%
Ratios/supplemental data:
Net assets, end of period (millions)... $ 8.9 $ 10.9 $ 9.9 $ 9.8 $ 6.9 $ 7.4
Ratio of expenses to average net assets 1.52%+ 1.59% 1.83% 1.69% 1.77% 1.83%
Ratio of net investment income to average
net assets....................... 0.45%+ 0.48% 0.62% 1.03% 0.96% 1.09%
Portfolio turnover rate .............. 8.15% 9.38% 40.87% 52.25% 52.24% 73.65%
<FN>
#Unaudited.
+Annualized.
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS at September 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
Avondale Hester Total Return 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 investment management company. The Fund began
operations on October 12, 1988.
Hester Capital Management, L.L.C. (the "Advisor"), the Fund's advisor, is
a registered investment advisor, and provides investment advisory service to
individuals and institutions with assets of approximately $500 million. Mr. Ira
Craig Hester, President, and Mr. John Gunthrop, Executive Vice President, are
responsible for the management of the Fund's portfolio. Prior to September 1,
1998, the Fund was known as the Avondale Total Return Fund and was managed by
Herbert R. Smith & Co., Inc.
The Fund's investment objective is to seek maximum total return consistent
with reasonable risk. The Fund seeks to achieve its objective by investing in
equity and fixed income securities.
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 sales 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.
U.S. Government securities with less than 60 days remaining to
maturity when acquired by the Fund are valued on an amortized cost
basis. U.S. Government securities with more than 60 days remaining
to maturity are valued at the current market value (using the mean
between the bid and asked price) until the 60th day prior to
maturity, and then valued at amortized cost based upon the value on
such date unless the Board determines during such 60-day period that
this amortized cost basis does not represent fair 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, Investment Income and Distributions. As is
common in the industry, security transactions are accounted for on
the trade date. The cost of securities owned on realized
transactions are relieved on a first-in, first-out basis. Dividend
income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis.
Discounts and premiums on securities purchased are amortized over
the life of the respective securities.
<PAGE>
AVONDALE HESTER
TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Unaudited), Continued
- --------------------------------------------------------------------------------
D. 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. Actual results could differ from those
estimates.
NOTE 3 - COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS
For the five months ended August 31, 1998, Herbert R. Smith, Incorporated
(the "Manager") provided the Fund with investment management services under an
Investment Advisory Agreement. The Manager furnished all investment advice,
office space, facilities, and most of the personnel needed by the Fund. As
compensation for its services, the Manager was entitled to a monthly fee at the
annual rate of 0.70% on the first $200 million of average daily net assets;
0.60% on the next $300 million of net assets; and 0.50% on net assets exceeding
$500 million. For the six months ended September 30, 1998, the Fund incurred
$31,933 in Management fees. The Advisor assumed management of the Fund's assets
on September 1, 1998 and did not receive an investment advisory fee for the
one-month period ended September 30, 1998.
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
an annual rate equal to the greater of 0.15% of the Fund's average daily net
assets or $30,000. For the six months ended September 30, 1998, the Fund
incurred $15,041 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 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and the proceeds from sales of securities, excluding
short-term securities and U.S. Government securities, for the six months ended
September 30, 1998, were $311,979 and $1,797,514, respectively.
For the six months ended September 30, 1998, the cost of purchases and the
proceeds from sales of U.S. Government and Government Agency obligations,
excluding short-term securities, were $499,466 and $94,313, respectively.
NOTE 5 - SHAREHOLDER MEETING
At a shareholder meeting on September 30, 1998, Hester Capital Management,
L.L.C. was approved as investment advisor to the Avondale Hester Total Return
Fund.
<PAGE>
Investment Advisor
Hester Capital Management, L.L.C.
100 Congress Ave., Suite 1920
Austin, TX 78701
Distributor
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261E
Phoenix, AZ 85018
Custodian
Star Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
Transfer Agent
American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788-0132
(800) 282-2340
Auditors
Tait, Weller & Baker
8 Penn Center Plaza, Suite 800
Philadelphia, PA 19103
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.
