[AVONDALE HESTER LOGO]
TOTAL RETURN FUND
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1999
<PAGE>
[AVONDALE HESTER LOGO]
TOTAL RETURN FUND
November 12, 1999
Dear Shareholders:
We are pleased to provide the semi-annual report for the Avondale Hester Total
Return Fund for the period ending September 30, 1999. The driving forces of the
U.S. financial markets so far in 1999 have been the surprising strength of the
U.S. economy, and the synchronization of the world's economies into a global
expansion. Led by this economic strength and better than expected corporate
profits, stock prices rallied in the first half of the year. However, as we
entered the September quarter the markets were bothered by high valuations and
rising interest rates.
Avondale Hester produced a return of - 3.53% for the quarter ending September 30
and a 5.70% gain during the first six months of the Fund's fiscal year. Since
January the Fund has advanced 10.47%, and 28.9% over the last twelve months.
During this time the investment performance has benefited from a shift in asset
allocation, which increased the equity exposure and reduced the allocation to
fixed income securities. With interest rates rising since January, the
allocation of 7.9% to bonds and 91.1% to equities have been beneficial to
portfolio returns. We ended September with 1.0% invested in short-term
securities.
AVONDALE HESTER TOTAL RETURN FUND
INVESTMENT PERFORMANCE
06/30/99 03/31/99 01/01/99 10/01/98
through through through through
09/30/99 09/30/99 09/30/99 09/30/99
-------- -------- -------- --------
Avondale Hester (3.53%) 5.70% 10.47% 28.90%
Lipper Balanced Fund Index (4.14) 0.16% 1.77% 13.48%
S&P 500 Composite Index (6.24%) 0.37% 5.37% 27.79%
S&P 500 Composite Unweighted (10.87%) (0.16%) (1.04%) 14.20%
Lipper Large Cap Value Index (8.14%) (0.17%) 2.18% 20.47%
Lehman Intermediate Bond Index 0.92% 0.52% 0.33% 0.63%
90 Day US Treasury Bonds 1.16% 2.25% 3.41% 4.50%
Consumer Price Index 1.02% 1.76% 2.44% 2.63%
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AVONDALE HESTER TOTAL RETURN FUND
This year we have increased the Fund's sector exposure in technology and capital
goods, which together account for 40.9% of the total portfolio. The exposure to
electric utilities was eliminated and investments in consumer staples have also
been reduced. Given the sharp rise in interest rates, the extremely negative
bond market psychology, and some indications that economic growth may be
moderating, we are gradually increasing our exposure in fixed income securities
toward a targeted 15% to 20% allocation. We purchased one government agency
security in the last quarter. While yield spreads have narrowed, we continue to
find government agencies and high-grade corporates attractive in the current
market.
The U.S. economy continues its red-hot performance with real gross domestic
product advancing 4.8% in the third quarter. This strength combined with
tightness in the labor markets have caused the Federal Reserve to move from a
passive to a tightening bias. The Fed funds rate has been increased twice this
summer and we anticipate at least one more increase by the Federal Reserve
within the next four months. While inflation appears to be on target for a 2.5%
increase this year, continued gains in productivity are keeping unit labor cost
in check. Economic growth should remain positive through the first year of the
new millenium, albeit at a more moderate pace as evidenced by the softening in
construction activity, retail sales, and a decline in mortgage refinancings.
Investor psychology toward the bond market is the most negative it has been in
many years. The strength of the economy, moderately higher inflation, and
tightening by the Federal Reserve have been the culprits. Yields have reached an
attractive valuation, and while we believe one more tightening by the Fed will
likely occur, we also believe long rates, as measured by the 30-year U.S.
Treasury bond, should trade in the range of 5.75% to 6.5%.
The stock market continues to be characterized by extremely narrow breadth and
favoritism towards large capitalization stocks. So far in 1999 only 44 of the
102 Standard & Poor's industry groups have out-performed the market, and only 50
of those groups have produced positive returns. At the end of the third quarter,
the 30 largest companies in the S&P Index accounted for 44% of the total market
cap, and yet these stocks were only down 4% in the quarter compared to a 7%
price decline in the overall Index. Technology was the only sector to contribute
positively to the market's performance. As we peer into the year 2000 we believe
that earnings will be the primary driver of stock prices. Following an
anticipated 15% increase in corporate profitability in 1999, we expect earnings
to advance 10% to 12% next year. This positive trend along with positive
economic growth should continue to support equity prices.
We look forward to reporting to you in six months at the end of our fiscal year.
We continue our commitment to a disciplined investment process in the management
of Avondale and appreciate the opportunity to serve as your advisor.
Very truly yours,
/s/ Ira Craig Hester /s/ John E. Gunthorp
Ira Craig Hester, CFA John E. Gunthorp, CFA
President & CEO Executive Vice President
- --------------------------------------------------------------------------------
Since September 30, 1999 the Fund's five year annualized return was 16.29% and
the ten year annualized return was 11.51%.
2
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AVONDALE HESTER TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1999 (UNAUDITED)
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Shares COMMON STOCKS: 91.1% Value
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BANKS: 7.5%
8,014 Bank One Corp......................................... $ 278,987
4,713 BankAmerica Corp...................................... 262,455
11,020 Regions Financial Corp................................ 330,600
-----------
872,042
-----------
BEVERAGES - ALCOHOLIC: 2.2%
3,596 Anheuser-Busch Companies, Inc......................... 251,945
-----------
CHEMICAL - SPECIALTY:1.2%
2,250 H.B. Fuller Company................................... 136,969
-----------
COMPUTER SERVICES:10.0%
4,500 Adobe Systems, Inc.................................... 510,750
9,737 First Data Corp....................................... 427,211
5,000 Oracle Corp.*......................................... 227,500
-----------
1,165,461
-----------
COMPUTERS:8.8%
3,500 Hewlett-Packard Co.................................... 322,000
5,826 International Business Machines Corp.................. 707,131
-----------
1,029,131
-----------
CONSUMER PRODUCTS: 10.5%
3,000 Bell & Howell Company*................................ 110,062
3,750 NIKE, Inc............................................. 213,281
7,537 General Electric Company.............................. 893,606
-----------
1,216,949
-----------
DIVERSIFIED MANUFACTURING: 3.1%
2,500 Cooper Industries, Inc................................ 116,875
2,500 Minnesota Mining and Manufacturing Company............ 240,156
-----------
357,031
-----------
ELECTRONICS: 2.0%
3,200 Intel Corp............................................ 237,800
-----------
See accompanying Notes to Financial Statements.
3
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AVONDALE HESTER TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1999 (UNAUDITED), CONTINUED
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Shares Value
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FILTRATION/SEPARATION PRODUCTS: 0.5%
2,500 Pall Corp............................................. $ 57,969
-----------
FINANCIAL SERVICES: 8.0%
3,513 American Express Company.............................. 472,938
10,534 Citigroup, Inc........................................ 463,518
-----------
936,456
-----------
FURNITURE: 3.7%
7,500 Ethan Allen Interiors, Inc............................ 238,594
8,000 Herman Miller, Inc.................................... 191,250
-----------
429,844
-----------
HOTEL/MOTEL: 2.9%
10,400 Marriott International, Inc., Class A................. 339,950
-----------
INDUSTRIAL MACHINERY: 5.9%
6,650 Tyco International Ltd................................ 686,612
-----------
LINEN SUPPLIES: 1.2%
12,500 Angelica Corp......................................... 143,750
-----------
MEDICAL PRODUCTS: 1.5%
15,000 Possis Medical, Inc.*................................. 170,625
-----------
OIL - ENERGY: 3.7%
2,500 Texaco Inc............................................ 157,812
3,539 Exxon Corp............................................ 268,743
-----------
426,555
-----------
PHARMACEUTICALS: 12.9%
5,932 Bristol-Myers/Squibb Company.......................... 400,410
4,166 Johnson & Johnson..................................... 382,751
19,872 Pfizer, Inc........................................... 714,150
-----------
1,497,311
-----------
See accompanying Notes to Financial Statements.
4
<PAGE>
AVONDALE HESTER TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
PHOTOGRAPHY / IMAGING: 1.3%
2,000 Eastman Kodak Co...................................... $ 150,875
-----------
RETAIL-RESTAURANTS: 2.2%
6,000 McDonald's Corp....................................... 258,000
-----------
TELECOMMUNICATIONS EQUIPMENT: 2.0%
4,000 Tellabs, Inc.*........................................ 227,750
-----------
Total Common Stocks (cost $5,694,612)................. 10,593,025
-----------
Principal
Amount BONDS: 7.9%
- --------------------------------------------------------------------------------
AGENCIES: 6.6%
$200,000 FHLB, 5.705%, 3/02/2009............................... 186,522
500,000 FHLMC, 5.865%, 7/16/2001.............................. 497,291
82,824 FNMA, 7.000%, 6/1/2003................................ 82,992
-----------
766,805
-----------
U.S. TREASURY NOTES: 0.4%
50,000 7.125%, 2/29/2000..................................... 50,437
-----------
CORPORATE: 0.9%
75,000 Associates Corp., 6.75%, 10/15/1999................... 75,029
25,000 IBM, 6.375%, 6/15/2000................................ 25,099
-----------
100,128
-----------
Total Bonds (cost $917,874)........................... 917,370
-----------
See accompanying Notes to Financial Statements.
5
<PAGE>
AVONDALE HESTER TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Principal
Amount SHORT-TERM INVESTMENTS: 0.8% Value
- --------------------------------------------------------------------------------
MONEY MARKET INVESTMENT: 0.8%
$99,244 Star Treasury, 4.710%, 4/1/2000 (cost $99,245)........ $ 99,245
-----------
Total Investment in Securities
(cost $6,711,731+): 99.8%............................. 11,609,640
Other Assets less Liabilites: 0.2%.................... 25,017
-----------
TOTAL NET ASSETS: 100.0%.............................. $11,634,657
===========
* Non-income producing security.
+ At September 30, 1999, the basis of securities for federal income tax purposes
was the same as their cost for financial reporting purposes. Gross unrealized
appreciation and depreciation were as follows:
Gross unrealized appreciation......................... $ 4,998,586
Gross unrealized depreciation......................... (100,677)
-----------
Net unrealized appreciation......................... $ 4,897,909
===========
See accompanying Notes to Financial Statements.
6
<PAGE>
AVONDALE HESTER TOTAL RETURN FUND
STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investment in securities, at value (cost $6,711,731)........... $11,609,640
Receivables:
Securities sold.............................................. 24,186
Dividends and interest....................................... 29,032
Other assets................................................... 5,265
-----------
Total assets............................................. 11,668,123
-----------
LIABILITIES
Advisory fees.................................................. 6,804
Administration fee............................................. 2,811
Other accrued expenses......................................... 23,851
-----------
Total liabilities........................................ 33,466
-----------
NET ASSETS....................................................... $11,634,657
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($11,634,657/287,825 shares outstanding; unlimited
number of shares authorized without par value)............... $ 40.42
===========
COMPONENTS OF NET ASSETS
Paid-in capital................................................ $ 5,495,094
Undistributed net investment income............................ 34,285
Accumulated net realized gain on investments................... 1,207,369
Net unrealized appreciation on investments..................... 4,897,909
-----------
Net assets............................................... $11,634,657
===========
See accompanying Notes to Financial Statements.
7
<PAGE>
AVONDALE HESTER TOTAL RETURN FUND
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividend..................................................... $ 63,621
Interest .................................................... 33,252
Other........................................................ 569
-----------
Total income............................................. 97,442
-----------
Expenses
Advisory fees ............................................... 41,744
Administration fee .......................................... 15,041
Fund accounting fees......................................... 10,575
Audit fee.................................................... 7,089
Transfer agent fees.......................................... 6,117
Registration fees............................................ 3,372
Custody fees................................................. 3,282
Trustees fees................................................ 2,718
Legal fees................................................... 1,926
Reports to shareholders...................................... 1,113
Miscellaneous ............................................... 1,016
-----------
Total expenses........................................... 93,993
-----------
NET INVESTMENT INCOME ................................. 3,449
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from security transactions................... 748,676
Net unrealized depreciation on investments..................... (93,822)
-----------
Net realized and unrealized gain on investments.............. 654,854
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $ 658,303
===========
See accompanying Notes to Financial Statements.
8
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AVONDALE HESTER TOTAL RETURN FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Six Months Year
Ended Ended
September 30, 1999# March 31,1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income.......................................... $ 3,449 $ 42,991
Net realized gain from security transactions................... 748,676 481,917
Net unrealized appreciation (depreciation) on investments...... (93,822) 603,123
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......... 658,303 1,128,031
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.......................................... -- (14,289)
Net realized gain from security transactions................... -- (213,810)
----------- -----------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS.......................... -- (228,099)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets derived from net change in
outstanding shares (a)....................................... (248,143) (589,689)
----------- -----------
TOTAL INCREASE IN NET ASSETS................................. 410,160 310,243
NET ASSETS
Beginning of period.............................................. 11,224,497 10,914,254
----------- -----------
END OF PERIOD.................................................... $11,634,657 $11,224,497
=========== ===========
(a) A summary of capital share transactions is as follows:
Six Months Ended Year Ended
September 30, 1999# March 31, 1999
-------------------------- --------------------------
Shares Value Shares Value
----------- ----------- ----------- -----------
Shares sold ................................... 12,014 $ 484,396 76,567 $ 2,596,160
Shares issued in reinvestment of distribution.. -- -- 6,221 214,284
Shares redeemed................................ (17,717) (732,539) (98,828) (3,400,133)
----------- ----------- ----------- -----------
Net decrease................................... (5,703) $ (248,143) (16,040) $ (589,689)
=========== =========== =========== ===========
</TABLE>
# Unaudited.
See accompanying Notes to Financial Statements.
9
<PAGE>
AVONDALE HESTER TOTAL RETURN FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Six Months Years Ended March 31,
Ended --------------------------------------------------
September 30, 1999# 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $38.24 $35.26 $26.13 $27.76 $23.58 $22.93
Income from investment operations:
Net investment income ................. 0.01 0.15 0.16 0.18 0.27 0.23
Net realized and unrealized gain
on investments....................... 2.17 3.62 9.61 0.14 6.00 1.49
------ ------ ------ ------ ------ ------
Total from investment operations......... 2.18 3.77 9.77 0.32 6.27 1.72
------ ------ ------ ------ ------ ------
Less distributions:
From net investment income............. -- (0.05) (0.15) (0.28) (0.27) (0.23)
From net realized gains................ -- (0.74) (0.49) (1.67) (1.82) (0.84)
------ ------ ------ ------ ------ ------
Total distributions...................... -- (0.79) (0.64) (1.95) (2.09) (1.07)
------ ------ ------ ------ ------ ------
Net asset value, end of period........... $40.42 $38.24 $35.26 $26.13 $27.76 $23.58
====== ====== ====== ====== ====== ======
Total return............................. 5.70% 10.94% 37.65% 1.10% 26.67% 7.82%
Ratios/supplemental data:
Net assets, end of period (millions)..... $ 11.6 $ 11.2 $ 10.9 $ 9.9 $ 9.8 $ 6.9
Ratio of expenses to average net assets.. 1.57%+ 1.57% 1.59% 1.83% 1.69% 1.77%
Ratio of net investment income to
average net assets..................... 0.06%+ 0.41% 0.48% 0.62% 1.03% 0.96%
Portfolio turnover rate.................. 12.28% 25.71% 9.38% 40.87% 52.25% 52.24%
</TABLE>
# Unaudited.
+ Annualized.
See accompanying Notes to Financial Statements.
10
<PAGE>
AVONDALE HESTER TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999 (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 Fund's advisor, is a registered
investment advisor, and provides investment advisory service to individuals and
institutions with assets of approximately $500 million. Mr. I. Craig Hester,
President, and Mr. John Gunthorp, 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 primary investment objective is to realize the combination of
income and capital appreciation that will produce the maximum total return
consistent with reasonable risk. The Fund seeks to achieve its objective by
investing primarily in higher quality fixed income debt securities and equity
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 Nasdaq 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 the ask 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. Security
transactions are accounted for on the trade date. The cost of
securities sold is determined 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.
11
<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
During the six months ended September 30, 1999, Hester Capital Management,
L.L.C. (the "Manager") provided the Fund with investment management services
under an Investment Advisory Agreement. The Manager furnished all investment
advice, office space, certain administrative services, 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, 1999, the Fund incurred $41,744 in advisory fees.
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
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, 1999, 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 proceeds from sales of securities, excluding
short-term securities and U.S. Government securities, for the six months ended
September 30, 1999, were $1,212,451 and $1,256,096, respectively.
For the six months ended September 30, 1999, the cost of purchases and the
proceeds from sales of U.S. Government and Government Agency obligations,
excluding short-term securities, were $190,484 and $137,527, respectively.
12
<PAGE>
INVESTMENT ADVISOR
Hester Capital Management, L.L.C.
100 Congress Ave., Suite 1960
Austin, TX 78701
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261E
Phoenix, AZ 85018
CUSTODIAN
Firstar Institutional Custody Services
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.
