UNITED STATES TRUST COMPANY
BOSTON INVESTMENT MANAGEMENT
BOSTON BALANCED FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 1998
<PAGE>
UNITED STATES TRUST COMPANY
BOSTON INVESTMENT MANAGEMENT
To: All Shareholders/BOSTON BALANCED FUND
From: Domenic Colasacco
Re: Portfolio Manager's Report - December 31, 1998
Fund NAV: $28.86
COMPARATIVE PERFORMANCE*
Annualized
Since
Quarter Year Inception
Ending Ended 12/1/95 to
12/31/98 12/31/98 12/31/98
-------- -------- --------
Boston Balanced Fund 11.23% 19.27% 20.02%
Standard & Poor's 500 21.29% 28.59% 28.01%
Lehman G/C Bond Index 0.12% 9.46% 8.13%
90-Day U.S. Treasury Bill 1.02% 4.80% 5.06%
*AFTER ALL EXPENSES AT AN ANNUAL RATE OF 1%, THE ADVISOR'S EXPENSE
LIMITATION. RESULTS SHOWN ARE PAST PERFORMANCE, WHICH IS NOT AN INDICATION OF
FUTURE RETURNS. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF UNITED
STATES TRUST COMPANY OF BOSTON OR ANY BANK AND ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY AGENCY. THE VALUE OF THE FUND SHARES AND RETURNS
WILL FLUCTUATE AND INVESTORS MAY HAVE A GAIN OR LOSS WHEN THEY REDEEM SHARES.
DISTRIBUTED BY FIRST FUND DISTRIBUTORS, INC.
================================================================================
MARKET AND PERFORMANCE SUMMARY - FOURTH QUARTER, 1998
Three months ago....was it only three months ago when all of the
primary stock indices had fallen by 20% or more from peak levels reached earlier
in 1998? Was it just three months ago when fear of the imminent demise of the
American economy was spreading through Wall Street faster than the fall foliage
through New England? Although I have experienced sudden changes in investor
views on many occasions over my nearly thirty years as a money manager, the
recent reversals rank among the most extreme. Our own investment backbone also
wavered a bit, but good judgment prevailed sufficiently to maintain our
long-standing bullish investment policy in Boston Balanced Fund of close to 65%
of assets in stocks. The relatively high equity allocation allowed Boston
Balanced Fund to post attractive gains for the quarter and year. Year end net
asset value reached $28.86, which translates to an increase of 11.23% for the
quarter and 19.27% for all of 1998.
The fact that Boston Balanced Fund recorded another annual gain of
virtually 20% and a three year annualized return of 20.12% is a source of pride
and concern alike. For while the performance of our Fund has been several
percentage points per annum above the Lipper balanced fund average during the
past three years, most of the absolute increase was made possible particularly
by the sharp rise in growth stock prices. As we experienced over the past
summer, current high stock prices leave little room for increased investor
concern
<PAGE>
about continued economic and corporate health. An actual deterioration in the
established positive economic trend would result in an even deeper and longer
lasting stock market drop than occurred in 1998. Although we recognize the
potential risks, as we begin 1999 we do not believe it is time to assume a more
conservative investment position. As outlined in the following sections of this
memorandum, not only does the prevailing economic trend support continued high
equity valuations, but many stocks are still available at reasonable prices if
we focus outside of the 25 largest companies that have led the market uptrend
over the past four years.
ECONOMIC SUMMARY AND OUTLOOK
In my September 30, 1998 memorandum, I noted that economic and business
conditions in the United States and in most Western European countries remained
very favorable. Our economy was in its seventh consecutive year of growth;
inflation and interest rates were at their lowest levels in thirty years;
employment was high and growing, and personal income and corporate profits were
at record levels. Not much has changed in three months, except for greater
investor confidence that these positive trends are likely to continue through
1999. It is difficult to identify all of the reasons for the sudden change in
investor psychology. The one most frequently cited is the three-step interest
rate cut by the Federal Reserve, which demonstrated the Fed's desire to avoid a
recession. Another quarter of positive economic reports in Western Europe and
the United States also helped ease fears that problems in Asia and Latin America
would spread globally. Moreover, while most Asian and Latin American economies
have yet to show improvement, there have been initial signs that most of the
downward economic spirals have stabilized.
Our own economic views have not changed much since October. We continue
to believe that gradual economic growth with low inflation remains the most
likely path for the United States. If anything, recent evidence suggests faster
rather than slower growth in the year ahead. Except for the weak international
economies cited, the usual imbalances that have preceded past economic
recessions are still not present today. To the contrary, personal income and
consumption are rising, corporate capital spending remains strong, inventories
are not excessive, and credit is readily available for consumers and businesses
alike. A combination of productivity gains and low commodity prices also
supports prospects for continued low inflation despite scant unemployment levels
and attendant pressures for higher wages. In short, we believe there is a low
probability of deterioration in the economies of either Western Europe or the
United States that would be sufficient to trigger a deep and long lasting stock
market drop.
INVESTMENT STRATEGY
Boston Balanced Fund seeks to generate above average returns over the
long term with below average risk through an active approach to asset
allocation, portfolio composition and individual security selection. Selecting
an investment strategy for such a fund is always a challenge. Currently, that
challenge happens to be higher than normal. The difficulty does not emanate, as
it often does, from economic uncertainty. As noted above, economic risks seem
comparatively low, Asia and Latin America notwithstanding. Rather, the
difficulty derives from the very high valuations of the primary market indices,
and particularly the small group of stocks in the technology, pharmaceutical and
telecommunications sectors that have been responsible for virtually all of the
stock market gains recorded over the past year or so.
<PAGE>
Let me add some perspective. The Standard & Poors 500 stock index
increased by just over 28% in 1998. More than half of this gain can be
attributed to just fifteen stocks out of the total of 500. The median increase
of all 500 stocks last year was only about 4%, and more than 200 issues actually
declined in value. Accordingly, if a portfolio did not hold many of the few best
performing stocks, achieving competitive returns last year was virtually
impossible. That is the reason most investors and mutual funds failed to achieve
attractive 1998 returns. Indices of mid-size and smaller companies performed
even worse than the S & P 500, rising by only 17% and actually losing 1%,
respectively. Moreover, companies in more mature industries such as machinery,
chemicals, paper and financial services (so-called value stocks) performed much
worse than the more rapidly-growing technology, pharmaceutical and
telecommunications sectors mentioned above. To be fair, there are differences in
the performance of "value" and "growth" stocks virtually every year, but the
1998 results were among the most extreme.
The 1998 performance disparity of growth and value stocks and large and small
companies is clearly visible among equity mutual funds which employ these
different investment styles, as tracked by Morningstar*:
Growth Blended Value
Funds Funds Funds
----- ----- -----
Large
Companies +34.8% +23.7% +12.0%
Mid-Size
Companies +17.8% + 9.1% + 0.5%
Small
Companies + 3.0% - 5.5% - 6.7%
*Morningstar Inc. is a mutual fund tracking and evaluation
firm based in Chicago. Returns are for domestic general equity
funds, as reported in The New York Times on January 3, 1999,
reflecting returns through 12/31/98. Boston Balanced Fund
falls in a category Morningstar titles Domestic Hybrid. The
average Domestic Hybrid Fund increased by 12.4% in 1998.
Lipper Analytical, the other major firm that tracks mutual
funds, would place our Fund in the Balanced category. The
average balanced fund tracked by Lipper increased by 13.5% in
1998. Boston Balanced increased by 19.27%.
It is important to note that the disparity of returns in 1998 for the
different equity styles outlined in the table above came after three years of
similar, although less severe, return variances. The result is that valuations
for stocks that fit into the different equity styles are now very skewed. For
example, a portfolio of large growth companies (which would include such top
performers as Microsoft, Pfizer and Lucent Technologies) would have a price
earnings ratio of about 40 times earnings and a dividend yield less than 1%. In
contrast, a high quality portfolio of companies in the more mature industries
noted previously would have an average valuation of well under 20 times earnings
and a dividend yield close to 3%. As in past years, several of the equity styles
noted above will significantly outperform others in the future. Therein lies the
challenge.
<PAGE>
How to proceed? In recent years, Boston Balanced Fund has benefited not
only from an above average allocation to stocks rather than bonds, but also from
a significant allocation (though in hindsight never enough) to large growth
companies. Many of these companies have very positive operating trends, yet now
have reached prices that strain all but the most optimistic quantitative
valuation models. Pfizer is a reasonable example. We have owned the stock since
the Fund's inception, during which time its value has increased by over 400%.
Although sales and earnings have increased over this period, the operating gains
have remained closer to 15% annually. Accordingly, the valuation has moved from
about 25 times earnings and a little under four times sales in December, 1995 to
roughly 60 times earnings and more than 10 times sales today. Similar valuation
shifts have occurred in other large growth companies. Such upward valuation
adjustments will not continue indefinitely.
Has the time come to complete a SIGNIFICANT move out of these types of
stocks and place more assets in lower priced, yet slower-growing companies? We
think not, but over the past six months we began a slow, gradual movement to
lower-valued stocks. Thus far, the performance of the Fund has been modestly
hindered, not helped, by such a shift. In part, the gradual movement represented
our preference to retain a more neutral blend of equity styles in the portfolio
given our awareness that, in time, the recent trends between growth and value
and large and small companies will reverse. In the months ahead, we do not
anticipate moving significantly more equity assets to value stocks until we have
greater confidence that we are about to enter a period of faster economic growth
that is accompanied by an acceleration in corporate profits. Value stocks,
particularly those of companies operating in economically sensitive industries,
tend to perform better in such environments. In the interim, the primary risks
in highly valued stocks are sales and earnings disappointments in individual
companies. As always, we will strive to reduce investments where such risk is
greatest. Please refer to the attached Fund summary for a complete listing of
the specific holdings in the Fund as of year end.
A final note. Many of you may have read or heard about the Year 2000
computer problem. As the investment manager of your account, we are also
evaluating Year 2000 issues as they relate to your investments. In that regard,
we are assessing the potential impact of Year 2000 matters on assets held in
Boston Balanced Fund by reviewing and analyzing public disclosures of entities
in which the Fund has an interest. We will evaluate, on a regular basis, the
significance of such Year 2000 information as we would any other potential
investment risk, and will make investment decisions we deem prudent.
On behalf of all of us at United States Trust, I thank you for your
continued confidence in our services and extend our best wishes for a healthy,
prosperous and peaceful 1999. Please feel free to contact either me or my
colleagues at (617) 726-7252 should you have any questions about our investment
views or your account.
Sincerely,
/s/ Domenic Colasacco
- ----------------------------
Domenic Colasacco
Portfolio Manager and President,
United States Trust Company of Boston
<PAGE>
BOSTON BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 67.8% Market Value
- --------------------------------------------------------------------------------
COMMUNICATION SERVICES: 7.0%
40,000 AT&T Corp.......................................... $ 3,010,000
15,000 Aliant Communications, Inc......................... 613,125
40,000 Ameritech Corp..................................... 2,535,000
70,000 BellSouth Corp..................................... 3,491,250
-----------
9,649,375
-----------
CONSUMER CYCLICALS: 8.4%
25,000 Costco Companies, Inc.*............................ 1,804,688
50,000 Ford Motor Company................................. 2,934,375
40,000 Gannett Company, Inc............................... 2,647,500
25,000 Johnson Controls, Inc.............................. 1,475,000
75,000 Leggett & Platt, Inc............................... 1,650,000
30,000 The McClatchy Company, Class A..................... 1,061,250
-----------
11,572,813
-----------
CONSUMER PRODUCTS: 8.1%
50,000 American Greetings Corp., Class A.................. 2,053,125
15,000 Anheuser-Busch Companies, Inc...................... 984,375
10,000 Gillette Company................................... 483,125
25,000 Procter & Gamble Company........................... 2,282,812
100,000 Sysco Corp......................................... 2,743,750
35,000 Walt Disney Company................................ 1,050,000
17,000 William Wrigley, Jr. Company....................... 1,522,562
-----------
11,119,749
-----------
ENERGY AND RESOURCES: 2.8%
10,000 Amoco Corp......................................... 603,750
10,000 Atlantic Richfield Company......................... 652,500
35,000 Exxon Corp......................................... 2,559,375
-----------
3,815,625
-----------
FINANCE: 10.9%
25,000 BankAmerica Corp................................... 1,503,125
75,000 BankBoston Corp.................................... 2,920,313
25,000 Chubb Corp......................................... 1,621,875
40,000 Cincinnati Financial Corp.......................... 1,465,000
25,000 Federal National Mortgage Association.............. 1,850,000
30,000 First Virginia Banks, Inc.......................... 1,410,000
5
<PAGE>
BOSTON BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1998 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
FINANCE, CONTINUED
80,000 T. Rowe Price Associates, Inc...................... $ 2,740,000
7,500 Wachovia Corp...................................... 655,781
15,000 Wilmington Trust Corp.............................. 924,375
-----------
15,090,469
-----------
HEALTH CARE: 12.3%
65,000 Becton, Dickinson and Company...................... 2,774,688
32,000 Johnson & Johnson.................................. 2,684,000
35,000 Medtronic, Inc..................................... 2,598,750
12,000 Merck & Company, Inc............................... 1,772,250
28,000 Pfizer Inc......................................... 3,512,250
65,000 Schering-Plough Corp............................... 3,591,250
-----------
16,933,188
-----------
INDUSTRIAL MATERIALS: 0.1%
5,000 Sigma-Aldrich Corp................................. 146,875
PRODUCER PRODUCTS: 5.7%
45,000 Donaldson Company, Inc............................. 933,750
45,000 Emerson Electric Company........................... 2,815,313
20,000 Grainger, W.W., Inc................................ 832,500
5,000 Hubbell Inc., Class A.............................. 190,312
15,000 Hubbell Inc., Class B.............................. 570,000
40,000 Illinois Tool Works, Inc........................... 2,320,000
5,000 Precision Castparts Corp........................... 221,250
-----------
7,883,125
-----------
TECHNOLOGY: 11.6%
15,000 Applied Materials, Inc.*........................... 640,312
15,000 Automatic Data Processing, Inc..................... 1,202,813
5,000 Cisco Systems, Inc.*............................... 464,062
15,000 Hewlett-Packard Company............................ 1,024,687
12,500 Intel Corp......................................... 1,482,031
15,000 International Business Machines, Inc............... 2,771,250
27,500 Lucent Technologies, Inc........................... 3,025,000
25,000 Microsoft Corp.*................................... 3,467,188
17,000 Xerox Corp......................................... 2,006,000
-----------
16,083,343
-----------
6
<PAGE>
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1998 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
TRANSPORTATION: 0.9%
10,000 AMR Corp.*......................................... $ 593,750
12,500 Delta Air Lines, Inc............................... 650,000
-----------
1,243,750
-----------
Total Common Stocks (cost $58,699,005)............................. 93,538,312
-----------
Principal
Amount CORPORATE BONDS: 10.9%
- --------------------------------------------------------------------------------
$1,000,000 Albertson's Inc., 6.66%, 7/21/2008................. 1,075,019
925,000 American Home Products, 7.90%, 2/15/2005........... 1,047,624
300,000 Atlantic Richfield Company, 8.50%, 4/1/2012........ 372,737
500,000 Eaton Corp., 8.90%, 8/15/2006...................... 593,479
425,000 Ford Motor Credit Corp., 7.75%, 11/15/2002......... 456,529
300,000 Ford Motor Credit Corp., 6.625%, 6/30/2003......... 311,393
1,000,000 Ford Motor Credit Corp., 7.20%, 6/15/2007.......... 1,103,184
1,000,000 General Electric Capital Corp., 7.375%, 9/15/2004.. 1,090,208
1,000,000 General Electric Capital Corp., 8.30%, 9/20/2009... 1,205,190
825,000 General Motors Acceptance Corp., 9.625%, 12/15/2001 918,246
300,000 General Motors Acceptance Corp., 8.50%, 1/1/2003... 329,717
500,000 Honeywell, Inc., 7.00%, 3/15/2007.................. 549,630
1,000,000 International Lease, 8.25%, 1/15/2000.............. 1,027,021
1,000,000 Leggett & Platt, Inc., 7.185%, 4/24/2002........... 1,048,334
500,000 Leggett & Platt, Inc., 6.25%, 9/9/2008............. 513,065
1,000,000 Paccar Financial Corp., 6.12%, 4/17/2000........... 1,006,546
1,000,000 Procter & Gamble, 5.25%, 9/15/2003................. 1,008,922
300,000 Sears, Roebuck and Company, 9.46%, 6/20/2000....... 315,245
375,000 Sysco Corp., 6.50%, 6/15/2005...................... 398,169
400,000 Unum Corp., 5.88%, 10/15/2003...................... 400,771
300,000 Weyerhaeuser Company, 7.25%, 7/1/2013 ............. 333,544
-----------
Total Corporate Bonds (cost $14,592,635)........... 15,104,573
-----------
7
<PAGE>
BOSTON BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1998 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Principal U.S. GOVERNMENT AND GOVERNMENT AGENCY
Amount OBLIGATIONS: 17.2% Market Value
- --------------------------------------------------------------------------------
$ 400,000 FFCB, 4.85%, 11/4/2003........................... $ 393,206
2,000,000 FFCB, 5.39%, 9/15/2004........................... 2,017,576
2,000,000 FFCB, 5.801%, 6/17/2005.......................... 2,074,310
600,000 FFCB, 6.20%, 11/30/2009.......................... 640,502
3,000,000 FHLB, 5.55%, 8/17/2000........................... 3,026,373
500,000 FHLB, 6.24%, 11/18/2002.......................... 504,029
1,500,000 FHLB, 7.015%, 9/25/2006.......................... 1,671,930
4,000,000 FHLB, 6.185%, 5/6/2008........................... 4,245,324
3,000,000 FNMA, 4.75%, 12/21/2000.......................... 2,986,875
1,000,000 FNMA, 8.25%, 10/12/2004.......................... 1,024,406
4,000,000 U.S. Treasury Bond, 7.50%, 11/15/2016............ 4,975,000
250,000 U.S. Treasury Note, 9.125%, 5/15/1999............ 253,984
------------
Total U.S. Government and Government Agency
Obligations (cost $23,161,606) .................. 23,813,515
------------
SHORT-TERM INVESTMENT: 4.3%
- --------------------------------------------------------------------------------
6,004,170 SEI Daily Income Government Fund II
(cost $6,004,170)................................ 6,004,170
------------
Total Investment in Securities
(cost $102,457,416+): 100.2%..................... 138,460,570
Liabilities in excess of Other Assets: (0.2%).... (282,038)
------------
TOTAL NET ASSETS: 100.0% ........................ $138,178,532
============
*Non-income producing security.
+ At December 31, 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.................... $ 36,935,982
Gross unrealized depreciation.................... (932,828)
------------
Net unrealized appreciation.................... $ 36,003,154
============
See accompanying Notes to Financial Statements.
8
<PAGE>
BOSTON BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $102,457,416).......... $138,460,570
Receivables:
Fund shares sold............................................... 103,900
Dividends and interest ........................................ 639,221
Prepaid expenses and other assets.............................. 19,686
------------
Total assets .................................................. 139,223,377
------------
LIABILITIES
Payables:
Advisory fees.................................................. 85,261
Administration fee............................................. 11,398
Securities purchased........................................... 860,157
Fund shares redeemed........................................... 51,200
Accrued expenses .............................................. 36,829
------------
Total liabilities.............................................. 1,044,845
------------
NET ASSETS ........................................................ $138,178,532
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($138,178,532/4,787,879 shares outstanding; unlimited number
of shares authorized without par value) ......................... $28.86
============
COMPONENTS OF NET ASSETS
Paid-in capital ................................................. $101,568,354
Undistributed net investment income.............................. 131,198
Undistributed net realized gain on investments................... 475,826
Net unrealized appreciation on investments....................... 36,003,154
------------
Net assets .................................................... $138,178,532
============
See accompanying Notes to Financial Statements.
9
<PAGE>
BOSTON BALANCED FUND
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Interest ....................................................... $ 1,239,998
Dividends ...................................................... 605,525
Other income.................................................... 2,827
-----------
Total income ................................................. 1,848,350
-----------
Expenses
Advisory fees .................................................. 470,466
Administration fee.............................................. 62,729
Fund accounting fees............................................ 25,349
Custody fees.................................................... 9,906
Audit fees ..................................................... 7,815
Trustee fees.................................................... 6,453
Miscellaneous................................................... 4,973
Transfer agent fees............................................. 4,883
Registration fees............................................... 4,537
Legal fees ..................................................... 2,521
Reports to shareholders......................................... 1,765
Insurance ...................................................... 1,547
-----------
Total expenses................................................ 602,944
-----------
NET INVESTMENT INCOME ....................................... 1,245,406
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from security transactions ................... 2,170,851
Net change in unrealized appreciation on investments ........... 2,468,796
-----------
Net realized and unrealized gain on investments .............. 4,639,647
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ....... $ 5,885,053
===========
See accompanying Notes to Financial Statements.
10
<PAGE>
BOSTON BALANCED FUND
STATEMENT OF CHANGES IN NET ASSETS
Six Months Year
Ended Ended
December 31, 1998# June 30, 1998
------------------ -------------
INCREASE IN NET ASSETS FROM:
OPERATIONS
Net investment income...................... $ 1,245,406 $ 1,807,541
Net realized gain from security
transactions ............................ 2,170,851 3,852,396
Net change in unrealized appreciation
on investments. ......................... 2,468,796 17,971,318
------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ......................... 5,885,053 23,631,255
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income...................... (2,187,509) (1,584,936)
Net realized gain from security
transactions............................. (4,866,093) (1,549,116)
------------ ------------
NET DISTRIBUTIONS TO SHAREHOLDERS ......... ( 7,053,602) (3,134,052)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived
from net change in outstanding
shares (a)............................... 17,406,432 19,409,973
------------ ------------
TOTAL INCREASE IN NET ASSETS .............. 16,237,883 39,907,176
NET ASSETS
Beginning of period........................ 121,940,649 82,033,473
------------ ------------
END OF PERIOD ............................... $138,178,532 $121,940,649
============ ============
(a) A summary of capital shares transactions is as follows:
Six Months Ended Year Ended
December 31, 1998# June 30, 1998
--------------------- -----------------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold ................... 498,802 $14,324,077 656,792 $24,300,384
Shares issued in reinvestment
of distributions ............ 253,300 7,041,748 2,801,048 3,134,052
Shares redeemed ............... (139,319) (3,959,393) (147,984) (8,024,463)
-------- ----------- --------- -----------
Net increase .................. 612,783 $17,406,432 3,309,856 $19,409,973
======== =========== ========= ===========
#Unaudited.
See accompanying Notes to Financial Statements.
<PAGE>
BOSTON BALANCED FUND
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
Six Months Year Year December 1, 1995
Ended Ended Ended through
December 31, 1998# June 30, 1998++ June 30, 1997++ June 30, 1996++
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 29.21 $23.70 $19.31 $18.41
------- ------ ------ ------
Income from investment operations:
Net investment income ................ 0.26 0.46 0.47 0.25
Net realized and unrealized gain
on investments ...................... 0.97 5.94 4.36 0.69
------- ------ ------ ------
Total from investment operations ........ 1.23 6.40 4.83 0.94
------- ------ ------ ------
Less distributions:
From net investment income ........... (0.49) (0.45) (0.44) (0.04)
From net capital gains ............... (1.09) (0.44) -0- -0-
------- ------ ------ ------
Total distributions ..................... (1.58) (0.89) (0.44) (0.04)
------- ------ ------ ------
Net asset value, end of period .......... $ 28.86 $29.21 $23.70 $19.31
======= ====== ====== ======
Total return ............................ 4.42% 27.55% 25.40% 5.14%
Ratios/supplemental data:
Net assets, end of period (millions) .... $ 138.2 $121.9 $82.0 $61.8
Ratio of expenses to average net assets:
Before expense reimbursement ......... 0.96%+ 1.00% 1.02% 1.00%+
After expense reimbursement .......... 0.96%+ 1.00% 1.00% 1.00%+
Ratio of net investment income to
average net assets:
Before expense reimbursement ......... 1.98%+ 1.85% 2.24% 2.43%+
After expense reimbursement .......... 1.98%+ 1.85% 2.25% 2.43%+
Portfolio turnover rate ................. 10.26% 22.71% 30.78% 17.69%
</TABLE>
*Commencement of operations.
+Annualized.
++Per share data has been restated to give effect to a 4-for-1 stock split to
shareholders of record as of the close of business on January 9, 1998.
#Unaudited.
See accompanying Notes to Financial Statements.
12
<PAGE>
BOSTON BALANCED FUND
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
The Boston Balanced 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 December 1,
1995. The investment objective of the Fund is to seek long-term capital growth
and income through an actively-managed portfolio of stocks, bonds, and money
market instruments. Prior to January 5, 1998, the Fund was known as the Boston
Managed 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.
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 ask price) until the 60th day prior to maturity,
and are 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.
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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
NOTE 3 - COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS
For the six months ended December 31, 1998, United States Trust Company
of Boston (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 0.75% based upon the average daily net assets of the Fund.
For the six months ended December 31, 1998, the Fund incurred $470,466 in
Advisory fees.
The Fund is responsible for its own operating expenses. The Advisor has
agreed to reduce fees payable to it by the Fund to the extent necessary to limit
the Fund's aggregate annual operating expenses to 1.00% 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 may be subject to reimbursement by
the Fund within three years provided the Fund is able to effect such
reimbursement and remain in compliance with any applicable limitations.
The Advisor, which is a Massachusetts-chartered banking and trust
company, acts as the Fund's Custodian and Transfer Agent under the Custody and
Transfer Agency Agreements with the Fund. For the six months ended December 31,
1998, the Fund incurred $9,906 and $4,883 in Custody and Transfer Agency fees,
respectively.
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 an annual fee
equal to the greater of 0.10% of average net assets or $30,000. For the six
months ended December 31, 1998, the Fund incurred $62,729 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 U.S. Government obligations and short-term investments, for the six
months ended December 31, 1998, were $14,692,697 and $6,586,365, respectively.
For the six months ended December 31, 1998, the cost of purchases and
the proceeds from sales of U.S. Government obligations, excluding short-term
securities, were $12,212,412 and $5,502,016, respectively.
14
<PAGE>
Advisor, Custodian and Transfer Agent
United States Trust Company of Boston
40 Court Street
Boston, MA 02108
(617) 726-7250
+
Distributor
First Fund Distributors, Inc.
4455 East Camelback Road, Suite 261E
Phoenix, AZ 85018
+
Auditors
Ernst & Young LLP
725 South Figueroa Street
Los Angeles, CA 90017
+
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, CA 94104
This report is intended for the 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.
