LIGHTHOUSE CONTRARIAN FUND
SEMI-ANNUAL REPORT
February 28, 1999
<PAGE>
March 25, 1999
Dear Shareholder,
PERFORMANCE
THE LIGHTHOUSE CONTRARIAN FUND began on September 29, 1995, with an NAV of
$12.00 and closed on March 24, 1999 at $10.45. A capital gains distribution of
$0.01 was paid on December 31, 1998, bringing the total capital gains
distribution since inception to $0.95. The annualized total return from
inception through March 24, 1999 was 2.16%. The total return for the 12 month
period ended February 28, 1999 was -32.68%.
INVESTING MADE SIMPLE
The beauty of today's stock market is its utter simplicity. Buy an index fund, a
handful of leading technology stocks, a few Internet stocks and you're all set.
The rest of the investment universe is simply a waste of time. You can cut out
the overpaid portfolio manager and replace him with a cost efficient computer.
Buy your stocks online and save on brokerage commissions. If 20% returns aren't
high enough, quit your job and day trade.
Don't be frightened by record valuations for the market's "leaders". Large size
and liquidity are all that matter. An eager baby boomer or foreign investor will
always be willing to buy your stock at a higher price.
Best of all, above-average returns come relatively risk-free. After all,
inflation is dead, interest rates will stay low, and the business cycle has been
buried. The largest technology trees (Dell, Cisco, Microsoft, et. al.) face
little competition and will grow to the sky. The Internet is not only the
greatest invention since the printing press, but a perpetual money machine for
investors. Bear markets are all but impossible with Alan Greenspan ready and
willing to step in and save the day.
No, this is not an E*Trade commercial. In our view, this is the fantasyland
which many investors live in today. Fortunately, the current delusion creates
tremendous opportunities for the rational, disciplined, and patient contrarian
investor.
CONVENTIONAL WISDOM
As the late Malcolm Forbes used to say, "Conventional wisdom seldom is". Once an
idea or future event becomes widely accepted, it deserves to be challenged by
contrary thinking.
A good example was the consensus view of the late 1980s and early 1990s that the
U.S. had lost its competitiveness in the world economy. The popular media told
us repeatedly that Japan was on the rise and America was in decline. Ravi
Batra's THE GREAT DEPRESSION OF 1990 was a best seller. Several movies captured
America's inferiority complex towards Japan. Portfolio managers raised cash,
focused on takeovers, and sold growth stocks. Technology stocks became so
depressed that many traded for little more than the cash on their balance
sheets. The conventional wisdom was not only wrong, but the polar opposite view
proved uncannily accurate.
Why is the majority so often so wrong, especially at major turning points?
First, mass preparation for a future event prevents that event from occuring. If
an industry is booming and expects the boom to continue, it adds capacity and
attracts competition. When mutual fund managers anticipate a bear market, they
raise cash, thus cushioning any downturn. Second, a crowd loses its ability to
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
reason. It gets carried away and extrapolates current trends to a level of
absurdity. For example, Dell Computer has achieved near cult status due to
flawless execution and market share gains. At its peak, Dell was valued at 13
times what we believe they could earn if they captured the entire global
personal computer industry. This might be a reasonable valuation for the whole
computer industry, a highly-competitive commodity business with no revenue
growth. It is an outrageous price to pay for one company that hopes to capture
25% of that industry over the next five years.
For contrarians, opportunity is directly proportional to the amount of
conventional wisdom. Today, this is at a level not seen since the period from
1980-82, the beginning of the great bull market for financial assets. In fact,
it strikes us how the consensus view today is almost completely opposite.
<TABLE>
<CAPTION>
1980-1982 1998-1999
--------- ---------
<S> <C>
Economy sick - rolling recessions Economy sound - long expansions
Inflation - double digit forever Inflation dead
Equities dead - market timing in vogue "Buy and hold" equities forever
Bonds yielding 14% - "instruments of confiscation" Bonds yielding 5 1/2% - safe long term investments
Federal Reserve - doing terrible job Federal Reserve - doing terrific job
Gold at $800.00/oz. - important inflation hedge Gold at $300.00/oz. - dead asset
Large companies - stodgy Large companies - world beaters
Small companies - best growth opportunities Small companies - too illiquid
Commodities - scarce resources, inflation hedges Commodities - abundant resources
Fringe element - survivalists planning Armageddon Fringe element - "new economy" optimists
</TABLE>
OPPORTUNITY #1: U.S. STOCK MARKET
The largest U.S. stock market indexes show all the signs of a classic
speculative mania:
1. PARABOLIC RISE IN PRICES - The Dow Jones Industrials Average has climbed
thirteen-fold since August 1982. This surpasses the greatest bull markets
of the century. The 1921-29 bull saw Dow rise six times. The 1949-66 bull
markets increased almost 11 times. Parabolic rises are driven not by
fundamentals, but sheer momentum, and are never sustainable.
2. EXTREME VALUATIONS - The total U.S. stock market is valued at over 165% of
GDP (about 180% if stock options are included). This compares to the 1929
peak of 81% and the 1968 peak of 78%. More recently, the 1989 Japanese
bubble reached roughly 150% of GDP before dropping 65% over the next nine
years. The S&P 500 trades at nearly 30 times earnings compared to an
historic norm of 15 times. The technology-heavy NASDAQ trades at over 100
times earnings.
3. STRONG PUBLIC PARTICIPATION/SPECULATION - Ten years ago, with the Dow under
2500, individuals were net sellers of mutual funds. Today, they seem to be
pouring their life savings into funds. Day trading, jumping on hot Internet
initial public offerings, and chasing stock splits are all signs of intense
speculation.
2
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
4. RATIONALIZATIONS FOR A CONTINUATION OF THE BOOM - In order for most
investors to ignore the obvious risks of a mania, there must be a
justification. The simpler, the better. Many believe in the existence of a
"new economy", in which technology-driven productivity gains and an
omniscient Fed will keep inflation at bay and the economy perking
indefinitely. Others believe demographics favor financial assets for at
least another ten years. Similar rationalizations were heard at other stock
market tops, including the U.S. in 1929 and 1968, and Japan in 1989.
When this bubble bursts, the damage will be substantial. We believe we are well
positioned to benefit with long term put options (LEAPs) on semiconductor stocks
(Applied Material, Micron Technology, and Intel), banking stocks (Citigroup and
BankAmerica), and the S&P 500.
OPPORTUNITY #2: SMALL CAP STOCKS VS. LARGE CAP STOCKS
As speculators have turned to large cap and Internet stocks, the rest of the
market has been neglected. Last year, the difference between the S&P 500's 28.6%
return and the small-cap Russell 2000 index's negative 2.6% return was the
biggest on record.
Smaller companies are now as cheap as they have been, relative to large
companies, in at least the past 40 years. One time-tested measure is the
relative price-earnings ratio of the S&P 500 and the stocks held in the T. Rowe
Price New Horizons Fund, the granddaddy of small cap funds. Normally, its faster
growing small companies command a higher P/E than large caps. Yet, at the end of
1998, for just the third time in 38 years, the average P/E of the fund was at a
discount (92% of the S&P's P/E), based on 12-month estimated earnings. The
relative valuations today are the lowest in the fund's history.
We think that the Lighthouse Contrarian Fund is also a good proxy for the
relative bargains in the small cap universe. The non-gold holdings in the Fund
trade for about 15 times expected earnings with roughly 25% earnings growth.
This compares to the S&P 500, which trades at 27 times expected earnings with
only 7% earnings growth.
It is important to note that small caps have been cheaper on an ABSOLUTE basis.
This is still a bubble and small cap stocks will likely go down with the rest of
the market. The opportunity here is that small caps should fall LESS than the
large cap and Internet stocks that are over-owned by portfolio managers and
individual investors.
The Fund has a 70% position in mostly small and mid cap stocks. We also own put
options on the Russell 2000 and S&P 500 which should help to cushion these
stocks from a broad market decline.
OPPORTUNITY #3: GOLD
After enduring a 19 year bear market, gold is an asset on ly a contrarian could
love. It is an insurance policy in a world where risk is being underestimated by
most investors. Gold is also a store of value in a world that we believe has
misplaced its faith in paper currencies.
We are well positioned with a 9% weighting in gold mining stocks, which are
actually leveraged to the price of gold. While we cannot predict price
movements, we estimate an increase from the current $2.85/oz. To $3.50/oz.
could result in a more than doubling of many gold mining stocks.
OPPORTUNITY #4: COMMODITIES
Commodity prices have dropped precipitously over the past three years due to
over-capacity, weak demand from Asia and emerging markets, and a general lack of
inflation fears. Prices, as measured by the CRB Index, hit 24-year lows earlier
3
<PAGE>
this year. In the past year alone, coffee is down 37%; sugar, 46%; natural gas,
23%; wheat, 25%; and steel, 43%. Out of 27 commodities we track, 21 are down
over the past year.
Many commodities now sell below the cost of production, forcing producers to cut
back on adding new capacity. Downward pressure on prices will abate as supply
and demand come into balance. The Fund has roughly an 18% position in
commodity-related stocks, primarily in the energy sector.
FINAL THOUGHTS
We have made a number of tactical changes since the end of 1998 to better
position the Fund for the road ahead. Although it is still early, we are
encouraged by recent results.
Thank you for your continued patience and support. We are highly confident that
we will all be rewarded for staying true to our contrarian discipline during
these extraordinary times. Please feel free to call us at 713-688-6881 if you
have any questions concerning the investment decisions being made in your Fund.
Sincerely,
/s/ Lanny Barbee /s/ Kevin P. Duffy
Lanny Barbee Kevin P. Duffy
Portfolio Manager Investment Strategist
4
<PAGE>
SCHEDULE OF INVESTMENTS AT FEBRUARY 28, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 82.6% Market Value
- --------------------------------------------------------------------------------
AEROSPACE/DEFENSE EQUIPMENT: 1.9%
18,000 BE Aerospace, Inc.*................................ $ 265,500
-----------
CAPITAL GOODS: 0.4%
10,000 3D Systems Corp.*.................................. 63,750
-----------
CONSUMER GOODS - APPAREL: 8.8%
10,000 Jones Apparel Group, Inc.*......................... 279,375
18,000 Nautica Enterprises, Inc.*......................... 270,000
19,000 Oshkosh B'Gosh, Inc., Class A...................... 361,000
10,000 Quiksilver, Inc.*.................................. 339,375
-----------
1,249,750
-----------
CONSUMER GOODS - CONSUMER PRODUCTS: 1.5%
13,000 Helen of Troy Ltd.*................................ 181,188
3,100 Polk Audio, Inc.*.................................. 32,550
-----------
213,738
-----------
CONSUMER GOODS - RESTAURANTS: 0.5%
8,000 Lone Star Steakhouse and Saloon, Inc.*............. 72,500
-----------
CONSUMER GOODS - RETAIL, APPAREL: 0.7%
15,000 Paul Harris Stores, Inc.*.......................... 97,500
-----------
CONSUMER GOODS - RETAIL, MAIL ORDER: 5.4%
25,200 Lands' End, Inc.*.................................. 763,875
-----------
CONSUMER GOODS - RETAIL, SPECIALTY: 6.9%
15,000 Claire's Stores, Inc............................... 330,937
32,000 Good Guys, Inc.*................................... 115,000
36,000 REX Stores Corp.*.................................. 463,500
5,000 Toys "R" Us, Inc.*................................. 70,625
-----------
980,062
-----------
CONSUMER GOODS - TOBACCO: 2.9%
4,400 Philip Morris Companies, Inc....................... 172,150
9,000 RJR Nabisco Holdings Corp.......................... 245,813
-----------
417,963
-----------
See accompanying Notes to Financial Statements.
5
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS AT FEBRUARY 28, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
DATA PROCESSING/MANAGEMENT: 1.3%
8,500 Documentum, Inc.*.................................. $ 181,688
-----------
ENERGY - OIL, SECONDARY: 12.0%
14,000 Anadarko Petroleum Corp............................ 385,000
16,000 Barrett Resources Corp.*........................... 263,000
40,000 Basin Exploration, Inc.*........................... 350,000
13,000 Benton Oil and Gas Company*........................ 39,812
34,000 Nuevo Energy Company*.............................. 238,000
28,000 Plains Resources, Inc.*............................ 259,000
20,000 Pogo Producing Company............................. 185,000
-----------
1,719,812
-----------
ENERGY - SEISMIC: 0.6%
27,000 Mitcham Industries, Inc.*.......................... 89,437
-----------
FERTILIZERS: 1.6%
4,000 Potash Corp........................................ 226,750
-----------
FOOD: 0.9%
3,500 Suiza Foods Corp................................... 129,500
-----------
HEALTH CARE - BIOTECHNOLOGY: 1.5%
60,000 Xoma Corp.*........................................ 210,000
-----------
HEALTH CARE - PHARMACEUTICALS: 4.3%
28,000 ICN Pharmaceuticals, Inc........................... 612,500
-----------
HUMAN RESOURCES: 2.1%
6,800 Labor Ready, Inc.*................................. 191,675
6,600 Remedy Temp, Inc.*................................. 104,775
-----------
296,450
-----------
MEDICAL INSTRUMENTS: 2.0%
11,500 Collagen Aesthetics, Inc........................... 128,656
6,300 St. Jude Medical, Inc.*............................ 158,288
-----------
286,944
-----------
See accompanying Notes to Financial Statements.
6
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS AT FEBRUARY 28, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
PRECIOUS METALS - GOLD MINING: 11.4%
48,000 Barrick Gold Corp.................................. $ 849,000
25,000 Battle Mountain Gold Company*...................... 84,375
34,000 Newmont Mining Corp................................ 586,500
10,000 Placer Dorne, Inc.................................. 109,375
-----------
1,629,250
-----------
REAL ESTATE INVESTMENT: 1.2%
6,500 Public Storage, Inc................................ 165,750
-----------
RETIREMENT/AGED CARE: 1.4%
9,000 CareMatrix Corp...................................... 198,000
-----------
TECHNOLOGY - SEMICONDUCTORS: 1.0%
2,700 SDL, Inc.*........................................... 147,150
-----------
TECHNOLOGY - SOFTWARE: 7.4%
30,000 Informix Corp.*...................................... 262,500
26,000 Progress Software Corp.*............................. 799,500
-----------
1,062,000
-----------
TELECOMMUNICATIONS EQUIPMENT: 1.2%
20,000 Premisys Communications, Inc.*....................... 165,000
-----------
TRANSPORTATION - TRUCK: 3.6%
22,200 American Freightways Corp.*.......................... 346,181
4,000 CNF Transportation, Inc.............................. 169,000
-----------
515,181
-----------
Total Common Stocks (cost $12,251,463)............... 11,760,050
-----------
See accompanying Notes to Financial Statements.
7
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS AT FEBRUARY 28, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Principal
Amount REPURCHASE AGREEMENT: 7.8% Market Value
- --------------------------------------------------------------------------------
$1,107,000 Firstar Bank Repurchase Agreement, 3.5%, dated
2/26/1999, due 3/1/1999, collateralized by
$1,145,000 GNMA, 7.0%, due 3/20/2024 (proceeds
$1,107,323) (cost $1,107,000)...................... $ 1,107,000
-----------
Total Investment in Securities (cost $13,380,657+):
90.3%............................................ 12,867,050
-----------
LONG EQUITY OPTIONS: 1.1%
- --------------------------------------------------------------------------------
Contracts Common Stocks / Expiration Date / Exercise Price
- --------- ------------------------------------------------
60 Applied Materials, Inc. / January 40 Puts.......... 22,125
20 BankAmerica Corp. / January 75 Puts................ 28,875
30 CitiCorp / January 65 Puts......................... 33,000
25 Intel Corp. / January 110 Puts..................... 31,875
70 Micron Technology, Inc. / January 40 Puts.......... 36,313
-----------
Total Long Equity Options (cost $144,366).......... 152,188
-----------
LONG INDEX OPTIONS: 9.3%
- --------------------------------------------------------------------------------
Contracts Index / Expiration Date / Exercise Price
- --------- ----------------------------------------
46 Russell 2000 Index / March 440 Puts................ 213,325
99 Russell 2000 Index / June 440 Puts................. 473,962
75 S&P 500 Index / June 1250 Puts..................... 533,438
240 S&P 500 Index LEAP / December 105 Puts............. 112,500
-----------
Total Long Index Options (cost $1,657,600)......... 1,333,225
-----------
Total Put Options Purchased (cost $1,801,966):
10.4%.............................................. 1,485,413
Liabilities in excess of Other Assets: (0.7%)...... (100,744)
-----------
TOTAL NET ASSETS: 100.0% .......................... $14,251,719
===========
*Non-income producing security.
+At February 28, 1999, the cost of the investments for Federal tax purposes was
the same as the basis for financial reporting. Unrealized appreciation and
depreciation of investments were as follows:
Gross unrealized appreciation ..................... $ 2,514,843
Gross unrealized depreciation ..................... (3,345,003)
-----------
Net unrealized depreciation ................. $ (830,160)
===========
See accompanying Notes to Financial Statements.
8
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
STATEMENT OF ASSETS AND LIABILITIES AT FEBRUARY 28, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $13,380,657) ........ $ 12,867,050
Cash .......................................................... 6,416
Put options purchased (cost $1,801,966) ....................... 1,485,413
Receivables:
Investment securities sold .................................. 13,247
Dividends and interest ...................................... 2,671
Fund shares sold ............................................ 2,073
Deferred organization costs ................................... 10,608
Other assets .................................................. 28,636
------------
Total assets .............................................. 14,416,114
------------
LIABILITIES
Payables:
Advisory fees ............................................... 7,479
Administration fee .......................................... 2,076
Distribution fees ........................................... 19,230
Fund shares redeemed ........................................ 25,931
Investment securities purchased ............................. 93,070
Accrued expenses .............................................. 16,609
------------
Total liabilities ......................................... 164,395
------------
NET ASSETS ...................................................... $ 14,251,719
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
($14,251,719/1,427,468 shares outstanding;
unlimited number of shares authorized without par value) ...... $ 9.98
============
COMPONENTS OF NET ASSETS
Paid-in capital ............................................... $ 21,473,464
Accumulated net investment loss ............................... (34,092)
Accumulated net realized loss on investments .................. (6,357,493)
Net unrealized depreciation on investments .................... (830,160)
------------
Net assets ............................................... $ 14,251,719
============
See accompanying Notes to Financial Statements.
9
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Interest .................................................... $ 168,977
Dividends ................................................... 61,919
-----------
Total income ............................................ 230,896
-----------
Expenses
Advisory fees ............................................... 119,716
Distribution fees ........................................... 23,943
Administration fee .......................................... 14,950
Registration fees ........................................... 12,424
Fund accounting fees ........................................ 11,847
Transfer agent fees ......................................... 7,931
Audit fee ................................................... 7,687
Custody fees ................................................ 6,215
Reports to shareholders ..................................... 4,209
Legal fees .................................................. 3,367
Amortization of deferred organization costs ................. 3,316
Miscellaneous ............................................... 3,043
Trustee fees ................................................ 3,005
Insurance fee ............................................... 1,140
-----------
Total expenses ............................................ 222,793
Less: expenses reimbursed ................................. (31,249)
Add: dividends paid on short sales ........................ 17,210
-----------
Net expenses .............................................. 208,754
-----------
NET INVESTMENT INCOME ................................... 22,142
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from security transactions ................ (3,458,581)
Net realized loss from short sale transactions .............. (329,476)
Net realized loss on put options purchased .................. (626,516)
Net change in unrealized depreciation on investments ........ 2,977,251
-----------
Net realized and unrealized loss on investments ........... (1,437,322)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .... $(1,415,180)
===========
See accompanying Notes to Financial Statements.
10
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Six Months Year
Ended Ended
February 28, 1999# August 31, 1998
------------------ ---------------
INCREASE IN NET ASSETS FROM:
OPERATIONS
<S> <C> <C>
Net investment income ................................. $ 22,142 $ 23,913
Net realized (loss) gain from security transactions ... (3,458,581) 2,686,781
Net realized loss from short sale transactions ........ (329,476) (2,992,648)
Net realized loss on put options purchased ............ (626,516) (1,378,054)
Net change in unrealized depreciation on investments .. 2,977,251 (7,371,821)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (1,415,180) (9,031,829)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ................................. (16,726) (1,274,545)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Net (decrease) increase in net assets derived from net
change in outstanding shares (a) .................... (6,059,566) 1,585,523
------------ ------------
TOTAL DECREASE IN NET ASSETS ....................... (7,491,472) (8,720,851)
NET ASSETS
Beginning of period .................................. 21,743,191 30,464,042
------------ ------------
END OF PERIOD ............................................ $ 14,251,719 $ 21,743,191
============ ============
</TABLE>
(a) A summary of capital shares transactions is as follows:
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
February 28, 1999# August 31, 1998
------------------------ -----------------------
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Shares sold ................................. 67,586 $ 724,141 505,849 $ 7,844,256
Shares issued in reinvestment of distribution 1,589 16,385 81,339 1,271,330
Shares redeemed ............................. (644,834) (6,800,092) (516,994) (7,530,063)
-------- ----------- ------ -----------
Net (decrease) increase ..................... (575,659) $(6,059,566) 70,194 $ 1,585,523
======== =========== ====== ===========
</TABLE>
#Unaudited.
See accompanying Notes to Financial Statements.
11
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Six Months Year Ended August 31, September 29, 1995*
Ended ----------------------- through
February 28, 1999# 1998 1997 August 31, 1996
------------------ ---- ---- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........ $10.85 $15.76 $13.57 $12.00
------ ------ ------ ------
Income from investment operations:
Net investment income (loss).......... 0.01 0.01 0.05 (0.09)
Net realized and unrealized (loss)
gain on investments................ (0.87) (4.31) 2.41 1.72
------ ------ ------ ------
Total from investment operations............ (0.86) (4.30) 2.46 1.63
------ ------ ------ ------
Less distributions:
From investment income................ (0.01) (0.61) (0.27) (0.06)
------ ------ ------ ------
Net asset value, end of period.............. $ 9.98 $10.85 $15.76 $13.57
====== ====== ====== ======
Total return................................ (7.93)% (28.46)% 18.22% 13.67%
Ratios/supplemental data:
Net assets, end of period (millions)........ $ 14.3 $ 21.7 $ 30.5 $ 14.0
Ratio of expenses to average net assets:
Before expense reimbursement.......... 2.51%+ 2.13% 2.24% 2.95%+
After expense reimbursement........... 2.18%+ 2.00% 2.00% 2.00%+
Ratio of net investment income (loss) to
average net assets:
Before expense reimbursement.......... (0.10)%+ (0.06)% (0.13)% (2.14)%+
After expense reimbursement........... 0.23%+ 0.08% 0.11% (1.19)%+
Portfolio turnover rate..................... 61.63% 44.09% 21.94% 20.56%
</TABLE>
#Unaudited.
*Commencement of operations.
+Annualized.
See accompanying Notes to Financial Statements.
12
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
NOTES TO FINANCIAL STATEMENTS AT FEBRUARY 28, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
The Lighthouse Contrarian 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 began
operations on September 29, 1995. The investment objective of the Fund is to
seek growth of capital. The Fund seeks to achieve its objective by investing
primarily in equity securities. Prior to November 12, 1997, the Fund was known
as the Lighthouse Growth Fund.
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.
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 is
relieved on a first-in, first-out basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
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 and 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. Actual results could differ from those estimates.
NOTE 3 - COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS
For the six months ended February 28, 1999, Lighthouse Capital Management,
Inc. (the "Advisor") provided the Fund with investment management services under
an Investment Advisory Agreement. The Advisor furnished all investment advice,
office space, facilities, and 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 1.25% based upon the average daily net assets of the Fund. For
the six months ended February 28, 1999, the Fund incurred $119,716 in Advisory
fees.
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The Fund is responsible for its own operating expenses. The Advisor has
agreed to limit the Fund's total expenses to not more than 2.00% of average net
assets annually. 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 provided the Fund is able to effect such reimbursement
and remain in compliance with applicable limitations. For the six months ended
February 28, 1999, the Advisor reimbursed the Fund in the amount of $31,249. The
Fund may reimburse its Advisor, pursuant to this agreement, in later years in
which operating expenses for the portfolio are less than the applicable
percentage limitation, set forth previously for any such year. As of February
28, 1999, the cumulative expense reimbursement from the Advisor to the Fund is
$191,629.
Investment Company Administration, L.L.C. (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 $15 million $30,000
$15 to $50 million 0.20% of average daily net assets
$50 to $100 million 0.15% of average daily net assets
$100 to $150 million 0.10% of average daily net assets
Over $150 million 0.05% of average daily net assets.
For the six months ended February 28, 1999, the Fund incurred $14,950 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 the Distributor.
NOTE 4 - DISTRIBUTION PLAN
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 will pay a fee
to the Advisor as Distribution Coordinator at an annual rate of up to 0.25% of
the average daily net assets of the Fund. The Plan allows that approved excess
distribution costs can be resubmitted by the Distribution Coordinator in the
future years, up to a maximum of three subsequent fiscal years following initial
submission. No such excess costs were incurred during the current period ended.
The Fund paid $23,943 in distribution costs to the Advisor as the appointed
Distribution Coordinator for the six months ended February 28, 1999.
NOTE 5 - 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
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<PAGE>
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.
NOTE 6 - PURCHASES AND SALES OF SECURITIES
For the six months ended February 28, 1999, the cost of purchases and the
proceeds from sales of securities, other than short-term investments, were
$13,795,162 and $10,940,137, respectively.
Purchased options transactions during the six months ended February 28,
1999 are summarized as follows:
Put Options Purchased
---------------------
Options outstanding, beginning of period .............. $ 1,072,887
Options purchased ..................................... 2,312,301
Options closed ........................................ (1,230,380)
Options exercised ..................................... --
Options expired ....................................... (352,843)
-----------
Options outstanding at February 28, 1999 .............. 1,801,965
Unrealized depreciation at February 28, 1999 .......... (316,552)
-----------
Market value of options at February 28, 1999 .......... $ 1,485,413
===========
Average fair market value of options for the
six months ended February 28, 1999 .................. $ 2,011,982
===========
Net trading losses on options for the six months
ended February 28, 1999 ............................. $ (626,516)
===========
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Advisor
LIGHTHOUSE CAPITAL MANAGEMENT, INC.
10000 Memorial Drive, Suite 660
Houston, Texas 77024
(713) 688-6881
Account Inquiries (800) 282-2340
Distributor
FIRST FUND DISTRIBUTORS, INC.
4455 East Camelback Road, Suite 261E
Phoenix, Arizona 85018
Custodian
FIRSTAR BANK, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
Transfer and Dividend Disbursing Agent
AMERICAN DATA SERVICES, INC.
P.O. Box 5536
Hauppauge, New York 11788-0132
Auditors
ERNST & YOUNG LLP
725 South Figueroa Street, 6th Floor
Los Angeles, California 90071
Legal Counsel
PAUL, HASTINGS, JANOFSKY & WALKER LLP
345 California Street, 29th Floor
San Francisco, California 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.
