PZENA FOCUSED VALUE FUND
ANNUAL REPORT
FOR THE YEAR ENDED
APRIL 30, 1999
<PAGE>
[PZENA FOCUSED VALUE FUND LOGO]
May, 1999
Dear Shareholders:
It is my pleasure to present you with our 1999 Annual Report. As of April 30,
the Fund had gained 3.50% calendar year-to-date, declined by 14.03% for the
prior 12-month period, and earned 10.99% on an average annualized basis since
inception (June 24, 1996).
For value investors, 1999 started out the way 1998 ended, with a small number of
large companies performing well while all others suffered. However, given the
results in April, we may well look back and see that this was the long-awaited
inflection point for value. In particular, our Fund gained 16.90% during April
alone.
While we are encouraged by this recent move, we continue to be excited about the
existing opportunities within our portfolio and our strategy. The stocks in our
portfolio still remain near historic valuation extremes. For example, the
current price-to-book ratio of the Pzena Focused Value Fund is still less than
one-third of that of the S&P 500 Index.
As we write this report, April has been followed by a very strong May,
reinforcing our hope that value has turned the corner. To get a sense of the
potential of a sustained value recovery, consider the historical data in a table
we have used before:
THE CYCLE OF VALUE INVESTING
VALUE
PERIOD S&P 500 UNIVERSE* DIFFERENCE
- ------ ------- --------- ----------
Jan 69 - Jun 73 19.3% -16.8% -36.1%
Jun 73 - Jul 79 30.4% 263.1% 232.7%
Jul 79 - Nov 80 45.6% 22.5% -23.1%
Nov 80 - Feb 89 192.9% 464.6% 271.7%
Feb 89 - Oct 90 11.3% -29.7% -41.0%
Oct 90 - Feb 95 82.6% 199.9% 117.3%
Feb 95 - Mar 99 185.9% 78.6% -107.3%
Apr 99 - May 99 1.4% 16.6% 15.2%
Cumulative annualized
(since 1/1/60) 12.9% 18.1% 5.2%
* lowest price-to-book quintile of largest 1500 companies
<PAGE>
PZENA FOCUSED VALUE FUND
As you can see, following the last three periods of significant underperformance
by value relative to the S&P 500, value's recovery was both dramatic and
sustained. Furthermore, the long-term result is that value has generated nearly
5% of extra annual return per year over the S&P 500 over the past 40 years.
Thus, while we are hopeful that we now have the wind at our backs, we remain
committed to the benefits available from our classic value strategy.
Thank you again for your trust and confidence. We look forward to ongoing
investment success.
Sincerely,
/s/ Richard S. Pzena
Richard S. Pzena
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED APRIL 30, 1999
1 Year..................... -14.03%
Since Inception (6/24/96).. 10.99%
S&P BARRA/500
QTR FUND VALUE INDEX
-------- ------ -------------
6/24/96 10,000 10,000
9/30/96 9,990 10,264
12/31/96 11,067 11,236
3/31/97 11,328 11,434
6/30/97 12,721 13,089
9/30/97 14,215 14,289
12/31/97 13,786 14,606
3/31/98 15,482 16,293
6/30/98 14,797 16,378
9/30/98 11,546 14,263
12/31/98 13,004 16,749
3/31/99 11,513 17,197
4/30/99 13,459 18,830
Past performance is not predictive of future performance.
The S&P Barra/500 Value Index is a capitalization-weighted index of all the
stocks in the Standard & Poor's 500 that have low price-to-book ratios. The
index is unmanaged and returns include reinvested dividends.
2
<PAGE>
PZENA FOCUSED VALUE FUND
SCHEDULE OF INVESTMENTS AT APRIL 30, 1999
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.7% Market Value
- --------------------------------------------------------------------------------
AEROSPACE / DEFENSE: 6.8%
12,025 Boeing Company........................................ $ 488,516
-----------
AUTO PARTS: 4.0%
6,225 Lear Corp.*........................................... 285,572
-----------
CHEMICALS: 2.5%
3,475 Union Carbide Corp.................................... 180,266
-----------
CHEMICALS - DIVERSIFIED: 1.9%
2,025 FMC Corp.*............................................ 131,625
-----------
CHEMICALS - SPECIALTY: 5.0%
7,200 Cytec Industries, Inc.*............................... 204,750
5,375 Lubrizol Corp......................................... 148,820
-----------
353,570
-----------
COMMUNICATIONS EQUIPMENT: 6.6%
30,125 Anixter International, Inc.*.......................... 474,469
-----------
COMPUTERS - PERIPHERALS: 4.4%
17,750 Quantum Corp.*........................................ 317,281
-----------
DISTRIBUTORS - HEALTH FOOD: 1.9%
15,625 Fleming Companies, Inc................................ 136,719
-----------
ELECTRONICS - COMPONENT DISTRIBUTORS: 2.8%
4,750 Avnet, Inc............................................ 201,578
-----------
ENGINEERING AND CONSTRUCTION: 1.8%
3,775 Fluor Corp............................................ 125,991
-----------
FINANCIAL - DIVERSIFIED: 1.0%
3,425 Healthcare Realty Trust, Inc.......................... 74,708
-----------
3
<PAGE>
PZENA FOCUSED VALUE FUND
SCHEDULE OF INVESTMENTS AT APRIL 30, 1999, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
FOODS: 3.1%
8,580 RJR Nabisco Holdings Corp............................. $ 220,935
-----------
HEALTH CARE - HOSPITAL MANAGEMENT: 1.3%
3,675 Columbia/HCA Healthcare Corp.......................... 90,726
-----------
HEALTH CARE - LONG TERM: 5.6%
61,900 Beverly Enterprises, Inc.*............................ 402,350
-----------
HEALTH CARE - MANAGED CARE: 2.8%
14,425 Foundation Health Systems, Inc.*...................... 199,245
-----------
HEALTH CARE - MEDICAL PRODUCTS/SUPPLIES: 3.8%
11,925 Quest Diagnostics, Inc.*.............................. 272,784
-----------
INSURANCE - LIFE/HEALTH: 2.6%
2,125 Aetna, Inc............................................ 186,336
-----------
INSURANCE - PROPERTY AND CASUALTY: 4.2%
4,125 CNA Financial Corp.*.................................. 168,352
4,525 St. Paul Companies, Inc............................... 129,811
-----------
298,163
-----------
IRON AND STEEL: 5.6%
17,550 UCAR International, Inc.*............................. 402,553
-----------
LEISURE TIME - PRODUCTS: 2.6%
4,850 Polaris Industries, Inc............................... 182,784
-----------
MACHINERY - DIVERSIFIED: 9.7%
31,100 AGCO Corp............................................. 307,112
10,950 Coltec Industries, Inc.*.............................. 236,794
9,300 Hussman International, Inc............................ 147,637
-----------
691,543
-----------
4
<PAGE>
PZENA FOCUSED VALUE FUND
SCHEDULE OF INVESTMENTS AT APRIL 30, 1999, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
METAL FABRICATOR: 3.1%
8,475 Kennametal, Inc....................................... $ 225,117
-----------
TEXTILES - APPAREL: 3.9%
26,415 Fruit of the Loom, Inc., Class A*..................... 282,310
-----------
TEXTILES - SPECIALTY: 3.0%
26,830 Burlington Industries, Inc.*.......................... 217,994
-----------
TOBACCO: 3.1%
6,350 Philip Morris Companies, Inc.......................... 222,647
-----------
TRANSPORTATION - RAILROADS: 3.8%
3,505 Canadian Pacific, Ltd................................. 79,301
3,250 Union Pacific Corp.................................... 195,000
-----------
274,301
-----------
UTILITIES - ELECTRIC COMPANIES: 2.8%
12,500 Northeast Utilities*.................................. 200,000
-----------
Total Common Stocks (cost $7,479,318)................. 7,140,083
-----------
Total Investments in Securities (cost $7,479,318+):
99.7%................................................. 7,140,083
Other Assets less Liabilities: 0.3%................... 21,003
-----------
TOTAL NET ASSETS: 100.0% ............................. $ 7,161,086
===========
*Non-income producing security.
+ At April 30, 1999, the cost of securities for Federal tax purposes was
$7,481,763. Unrealized appreciation and depreciation of securities were as
follows:
Gross unrealized appreciation......................... $ 622,464
Gross unrealized depreciation......................... (964,144)
-----------
Net unrealized depreciation................. $ (341,680)
===========
See accompanying Notes to Financial Statements.
5
<PAGE>
PZENA FOCUSED VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES AT APRIL 30, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $7,479,318)....... $ 7,140,083
Cash........................................................ 46,306
Dividends and interest receivables.......................... 3,625
Deferred organization costs ................................ 15,063
Prepaid expenses............................................ 7,503
-----------
Total assets ................................... 7,212,580
-----------
LIABILITIES
Payables:
Advisory fees......................................... 1,277
Administration fee.................................... 2,774
Deferred organization costs........................... 20,750
Accrued expenses............................................ 26,693
-----------
Total liabilities............................... 51,494
-----------
NET ASSETS........................................................ $ 7,161,086
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($7,161,086/605,416 shares outstanding;
unlimited number of shares authorized without
par value)............................................ $ 11.83
===========
COMPONENTS OF NET ASSETS
Paid-in capital ............................................ $ 7,399,256
Undistributed net realized gain on investments.............. 101,065
Net unrealized depreciation on investments.................. (339,235)
-----------
Net assets ........................................... $ 7,161,086
===========
See accompanying Notes to Financial Statements.
6
<PAGE>
PZENA FOCUSED VALUE FUND
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED APRIL 30, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends............................................. $ 98,867
Interest.............................................. 9,514
-----------
Total income.................................... 108,381
-----------
Expenses
Advisory fees......................................... 101,150
Administration fee.................................... 30,000
Fund accounting fees.................................. 18,434
Audit fee............................................. 14,000
Transfer agent fees................................... 12,504
Custody fees.......................................... 8,422
Amortization of deferred organization costs........... 6,997
Reports to shareholders............................... 4,899
Trustee fees.......................................... 4,357
Legal fees............................................ 4,141
Registration fees..................................... 3,004
Miscellaneous......................................... 1,802
Insurance............................................. 850
-----------
Total expenses.................................. 210,560
Less: expenses waived and reimbursed............ (68,951)
-----------
Net expenses.................................... 141,609
-----------
NET INVESTMENT LOSS ...................... (33,228)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from security transactions.......... 114,692
Net change in unrealized depreciation on investments.. (1,700,242)
-----------
Net realized and unrealized loss on investments. (1,585,550)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS.............................. $(1,618,778)
===========
See accompanying Notes to Financial Statements.
7
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PZENA FOCUSED VALUE FUND
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------
Year Year
Ended Ended
April 30, 1999 April 30, 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
(DECREASE) INCREASE IN NET ASSETS FROM:
OPERATIONS
Net investment loss........................................... $ (33,228) $ (20,723)
Net realized gain from security transactions.................. 114,692 801,510
Net change in unrealized (depreciation) appreciation
on investments.............................................. (1,700,242) 1,090,800
----------- -----------
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .............................. (1,618,778) 1,871,587
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
Net realized gain on investments.............................. (343,927) (515,429)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Net (decrease) increase in net assets derived from net change
in outstanding shares (a).................................. (530,603) 4,441,553
----------- -----------
TOTAL (DECREASE) INCREASE IN NET ASSETS ................... (2,493,308) 5,797,711
NET ASSETS
Beginning of year............................................. 9,654,394 3,856,683
----------- -----------
END OF YEAR ..................................................... $ 7,161,086 $ 9,654,394
=========== ===========
</TABLE>
(a) A summary of capital shares transactions is as follows:
<TABLE>
<CAPTION>
Year Year
Ended Ended
April 30, 1999 April 30, 1998
- ------------------------------------------------------------------------------------------------
Shares Value Shares Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold..................... 153,638 $ 1,870,983 347,998 $ 4,631,975
Shares issued in reinvestment
of distribution.............. 31,885 343,409 39,637 496,658
Shares redeemed................. (250,459) (2,744,995) (50,885) (687,080)
----------- ----------- ----------- -----------
Net (decrease) increase......... (64,936) $ (530,603) 336,750 $ 4,441,553
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE>
PZENA FOCUSED VALUE FUND
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- ------------------------------------------------------------------------------------------------------
Year Ended April 30, June 24, 1996*
---------------------------- through
1999 1998 April 30, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period................. $ 14.40 $ 11.56 $ 10.00
----------- ----------- -----------
Income from investment operations:
Net investment loss............................ (0.05) (0.03) --
Net realized and unrealized (loss) gain
on investments............................... (2.02) 3.93 1.59
----------- ----------- -----------
Total from investment operations..................... (2.07) 3.90 1.59
Less distributions:
From net investment income..................... -- -- (0.01)
From net capital gains......................... (0.50) (1.06) (0.02)
----------- ----------- -----------
Total distributions.................................. (0.50) (1.06) (0.03)
Net asset value, end of period....................... $ 11.83 $ 14.40 $ 11.56
=========== =========== ===========
Total return......................................... (14.03)% 35.10% 15.88%
Ratios/supplemental data:
Net assets, end of period (millions)................. $ 7.2 $ 9.7 $ 3.9
Ratio of expenses to average net assets:
Before expense reimbursement................... 2.60% 2.69% 5.82%+
After expense reimbursement.................... 1.75% 1.75% 1.75%+
Ratio of net investment loss to average net assets:
Before expense reimbursement................... (1.26)% (1.26)% (4.16)%+
After expense reimbursement.................... (0.41)% (0.32)% (0.09)%+
Portfolio turnover rate.............................. 47.14% 53.95% 22.06%
</TABLE>
*Commencement of operations.
+Annualized.
See accompanying Notes to Financial Statements.
9
<PAGE>
PZENA FOCUSED VALUE FUND
NOTES TO FINANCIAL STATEMENTS AT APRIL 30, 1999
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
The Pzena Focused Value Fund (the "Fund") is a non-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 June 24, 1996. The investment objective of the Fund is to seek
long-term growth of capital.
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, 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 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 year ended April 30, 1999, Pzena Investment Management, LLC (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 year ended April 30, 1999, the Fund incurred $101,150 in Advisory fees.
10
<PAGE>
PZENA FOCUSED VALUE FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The Fund is responsible for its own operating expenses. The Advisor has
agreed to limit the Fund's total expenses to not more than 1.75% 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. For the year ended April 30, 1999, the Advisor
reimbursed the Fund in the amount of $68,951 and the cumulative expense
reimbursement since inception was $202,342.
The Advisor may recapture from the Fund the cumulative expense
reimbursement of $202,342, subject to the requirements that the Fund must pay
the current ordinary operating expenses of the Fund before any such recapture
and its continued compliance with any other expense limitations. The Advisor
must seek recapture of $69,577 and $132,765 of the cumulative reimbursement by
no later than April 30, 2002 and 2003, respectively or the Advisor forgoes the
right to recapture these amounts.
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 an annual fee at
the following 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 year ended April 30, 1999, the Fund incurred $30,000 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 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and the proceeds from the sale of securities, other
than short-term investments, for the year ended April 30, 1999, were $3,718,441
and $4,311,152, respectively.
11
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To The Shareholders of
The Pzena Focused Value Fund and
The Board of Trustees of
Professionally Managed Portfolios
We have audited the accompanying statement of assets and liabilities of The
Pzena Focused Value Fund (the "Fund"), a series of Professionally Managed
Portfolios, including the schedule of investments, as of April 30, 1999, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the two years in the period then ended and for
the period June 24, 1996 (commencement of operations) to April 30, 1997. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of April 30, 1999, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of The
Pzena Focused Value Fund as of April 30, 1999, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the two years in
the period then ended and for the period June 24, 1996 (commencement of
operations) to April 30, 1997, in conformity with generally accepted accounting
principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
June 21, 1999
12
<PAGE>
ADVISOR
Pzena Investment Management, LLC
830 Third Avenue
14th Floor
New York, NY 10022
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road
Suite 261E
Phoenix, AZ 85018
CUSTODIAN
Firstar Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
SHAREHOLDER SERVICE AND TRANSFER AGENT
American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788
INDEPENDENT AUDITORS
Tait, Weller, & Baker
8 Penn Center Plaza, Suite 800
Philadelphia, PA 19103
COUNSEL TO THE FUND
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, CA 94104
COUNSEL TO THE ADVISOR
Lane Altman & Owens
101 Federal Street
Boston, MA 02110
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.
