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LIGHTHOUSE CONTRARIAN FUND
ANNUAL REPORT
August 31, 1999
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
September 30, 1999
Dear Shareholder,
The Lighthouse Contrarian Fund began on September 29, 1995, with an NAV of
$12.00 and closed on September 30, 1999 at $10.07. Distributions since inception
total $0.949
These have been the best of times and the worst of times for Contrarian
investors - best in that opportunities are the most abundant in decades, worst
in that rewards seem so slow in coming. After posting an average annual total
return of 15.38% from inception through December, 1997, the performance of the
Fund went into reverse at the hands of a small-cap bear market, plunging energy
prices and collapsing gold markets during the 1998 calendar year. Thus far
during 1999, changes are slowly beginning to emerge which we think are very
encouraging. We will discuss some of these changes below and explain why we are
excited about the potential of the Fund's portfolio as we go forward into the
New Millenium.
CURRENT INVESTING CLIMATE
In the Fall of 1998, the Federal Reserve provided interest rate relief three
times to steady a wobbly world financial system reeling from the collapse of the
Russian economy and enormous hedge fund losses in the U.S. It has now taken back
two of those rate reductions and the jury is out on whether more rate increases
are ahead. A combination of the negative interest rate environment, investor
fears of "Y2K", slowing earnings growth, incipient inflation signals and the
plunging U.S. Dollar (especially against the Japanese Yen) has apparently caused
investors to lose their appetite for equity investments. Cash flowing into
mutual funds, which helped fuel the markets' rise over the past few years, is
well below last year's level and shows no sign of improving. Considering the
above, it is not surprising that the Dow, despite great fanfare when it crossed
the 10,000 mark in late March, has made very little net progress since. Small
caps, thus far, have fared no better. The Russell 2000 index of small-cap stocks
is down slightly for the year.
However, the most ominous condition present today is the continued deterioration
of the advance-decline line (cumulative number of stocks advancing less those
declining). This indicator's level is now below the lows set in October, 1998 at
the height of panic. In fact, it's at a three-year low. This shows that, despite
the results portrayed by the major indexes, the great majority of stocks have
been in a bear market since April, 1998. Market segmentation such as this, where
a few large-cap stocks make lopsided advances as the majority of stocks retreat,
is very reminiscent of the early 1970's when the "Nifty Fifty" were in demand.
The Nifty Fifty consisted of about fifty glamorous, large-cap stocks which
seemed invincible to investors of that day. They were valued for their ability
to grow quickly, weather adversity and to basically control their own destiny.
Many considered them to be "one-decision stocks", stocks to be purchased and put
in a safe place, never to be sold. Names included Xerox, McDonald's, Kodak,
Polaroid, Deluxe Check and others which had become so popular with investors
that valuations became absurd (much like today with the Microsofts, Ciscos and
AOLs of the world). As more and more investors chased the narrow performance of
these few stocks, the S&P 500 became heavily tilted toward the massive
capitalizations of these few issues. In late 1972, the Nifty Fifty comprised
over 40% of the entire market value of the S&P 500. When the Bear Market of
1973-74 arrived, these over-valued stocks fell on average by almost 50%, some
with declines of over 80%. After three years, none of the Nifty Fifty had
regained their prior highs and some were still down over 50%. Although value
stocks held up much better than the Nifty Fifty, they were pulled down as well,
but that's where the story changes. Once investors were harshly reminded that
<PAGE>
fundamentals are still important -- that you can pay too much, even for the best
company -- investing methodology and strategy returned to the basics. The
recovery from the trough of the bear market was led by value stocks and that
leadership and out-performance continued for the next six years leaving the
Nifty Fifty far, far behind.
While there are many differences between now and the early 1970's, there are
similarities too, including the stock market dynamics mentioned above, rising
interest rates, and commodity price increases. Based on these factors which are
further discussed below, we believe that we may once again be close to a change
in how investors approach the market. "Value", which has been out of favor for
more than two years, will once again take the lead from "Growth", and as
contrarians, we believe we are very well positioned for that shift.
RISING COMMODITIES
Since April 1996, commodities as measured by the Commodity Research Bureau Index
("CRB Index") had fallen almost 30% through the Spring of 1999. From the oil
patch to the farm to the gold mines of Nevada, times have been tough. Jobs have
been lost, farms sold, chemical plants and mining properties shuttered, wells
plugged, budgets cut and investments foregone. Although consumers have certainly
enjoyed and have greatly benefited from this, it may be getting close to
pay-back time. Surpluses created by over-capacity and weak economic conditions
abroad do not last forever. As commodity producers begin to curtail supply in
response to lower prices, surpluses eventually disappear and prices rise. Since
the middle of July, the CRB index has risen 10.5% and shows no signs of backing
off. As an example, over the last month, oil prices have risen 12.2%; wheat, up
19%; corn, up 4.9%; cotton, up 6.5%; gasoline, up 13.4%; gold, up 21%; and
steel, up 6.7%. Remember, these are price increases during the last month, not
last year. Furthermore, these supply cutbacks come at a time when developing
economies appear to be on the mend. We believe this will foster greater
commodity demand and will only hasten the return to rational commodity pricing.
As contrarians, we have been positioning the Fund to benefit from this
inevitable shift for some time. As of the date of this letter, 32% of the fund
is invested in areas that will benefit from a general commodity price rise - 20%
in energy, 7% in gold and 5% in basic commodities such as fertilizer and other
farm-related commodities. While these positions have hurt our performance in
times past as we waited for the turn, they are now beginning to contribute.
Still, despite the tremendous increases in commodity prices experienced thus
far, many commodity-based stocks still are not reflecting the intrinsic value
implied by the new, higher pricing. For example, in the energy area, Pogo
Producing closed September 29 at $20.75 with oil prices approaching $25/barrel.
The last time oil was at this level (late 1996/early 1997), Pogo traded close to
$48/share. In other words, despite being a larger, more asset-rich company today
than two years ago, it is still trading 57% lower on identical oil prices. The
most likely reason for a disparity such as this is the average investors' view
that commodity prices will resume their decline and that recent price hikes are
only temporary. Once this view changes and the new trend is identified, stocks
of commodity producing companies should become popular again.
THE STIRRING OF SMALL CAPS
Contrary to popular belief, large capitalization stocks do not consistently
outperform small caps. In fact, through most of this decade, small-cap stocks
handily outperformed their large-cap counterparts. From January 1991, through
December 1996, the Russell 2000 Index of small-cap stocks rose 152% versus the
S&P 500 large-cap index's 115% -- a 32% advantage. However, over the last two
years their fortunes have dramatically reversed with the S&P 500 rising 33%
while the Russell 2000 ACTUALLY DROPPED 7%. This 40% gap in performance has
created huge, almost unprecedented disparities in the valuations accorded these
two asset classes. For example, the 50 largest (and therefore most
heavily-weighted) companies in the S&P 500 today trade, on average, in excess of
<PAGE>
40 times estimated 1999 earnings. In contrast, we are continuing to find many
companies in the small and mid-cap area trading at less than 10 times earnings,
many with 20%+ earnings growth to boot. This fact is not lost on company
managers. A number of companies in our portfolio have major stock buybacks
underway.
The questions are obvious. What caused this situation and when will it end? The
cause is really a confluence of factors from the popularity of index funds to
the rise of the "do-it-yourself investor" to the rush of foreign investors to
safe-haven, dollar-denominated investments during foreign market turmoil. We
believe it will end when the now common practice of buying familiar names,
without regard for fundamental value, finally begins to fail. Certainly, this
return to reality would be energized by a violent, lengthy pullback in the
favorite large-cap indexes, but it may already be happening in a more subtle way
right under our noses. For instance, as of September 28, 61% of stocks that
trade on the New York Stock Exchange are down for the year. Well-recognized
stalwarts such as Coca Cola, Eli Lilly, Abbott Laboratories, Fannie Mae, Ford
Motor, AT&T, Disney, Merck, BellSouth, Bank of America. Pfizer, Wells Fargo and
Time Warner are among the year-to-date losers that are also part of the New
Nifty Fifty. The main driver here is the decline of the U.S. Dollar and rising
interest rates. When the Dollar declines vis a vis other currencies, it becomes
more expensive for foreigners to hold our investments. Also, the recent increase
in interest rates makes high valuation-stocks seem less of a "bargain". These
factors, combined with an emerging recovery in foreign economies, makes
re-allocation of funds away from the expensive U.S. blue chips an attractive
alternative. As this important underpinning of the market begins to recede and
the Blue Chips come back to earth, we should see investors begin to question
whether they should reasonably expect to see multiples go back to the
stratosphere again. This should be good for companies trading at low valuations
even if there is a temporary "guilt-by-association" decline in all stocks. We
are already seeing this scenario unfold during 1999. During the March to June
period, small-cap stocks took off, leaving the large-caps in the dust as
investors re-allocated funds more broadly across the market. The Fund did very
well during this period. Since then, most stocks (with the notable exception of
a few holdout technology stocks) have been declining and the Fund has declined
along with the market. However, small-cap stocks appear to be performing better
during the downturn than the typical large cap stock. We believe the Fund is
well positioned to benefit from this developing trend at the point in time when
stocks turn higher. In the meantime, we continue to maintain out-of-the money
put positions on the major indexes should the current downturn in the markets
become more problematic.
IN CONCLUSION
As we have said many times, contrarian investing works best at major turning
points. Finally, signs are emerging that such a point may be near. This is
encouraging as we have been as frustrated as you, our fellow shareholders, over
the long dry period required of prudent investors everywhere. When trends stay
in existence for this length of time and go to such extremes, it is not unusual
to experience major reversals of fortune. What once worked so well in the past
is the absolute worst strategy for the future. Conversely, long-ignored
strategies, if well conceived and followed with discipline, eventually rise to
their potential. We have followed our contrarian philosophy with discipline
throughout this difficult period and will continue to do so. It has served us
well throughout the years. With patience and a long-term perspective, we expect
it should continue to do so in the future.
Sincerely,
/s/ Lanny C. Barbee
Lanny C. Barbee
Portfolio Manager
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
Value of $10,000 vs S&P 500 Index
Average Annual Total Return
Period Ended August 31, 1999
1 Year..................... -3.78%
Since Inception (9/29/95).. -1.97%
Lighthouse Contrarian Fund S&P 500 w/inc
-------------------------- -------------
9/29/95 10,000 10,000
12/31/95 10,068 10,599
3/31/96 10,822 11,170
6/30/96 11,392 11,663
9/30/96 11,300 12,029
12/31/96 12,970 13,035
3/31/97 12,210 13,381
6/30/97 12,841 15,712
9/30/97 14,324 16,891
12/31/97 13,813 17,382
3/31/98 13,830 19,805
6/30/98 12,678 20,447
9/30/98 10,490 18,418
12/31/98 9,303 22,349
3/31/99 9,303 23,453
6/30/99 10,057 25,109
8/31/99 9,250 24,202
Past performance is not predictive of future performance.
The S&P 500 is a broad market-weighted average of U.S. blue-chip companies. The
index is unmanaged and returns include reinvested dividends.
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS AT AUGUST 31, 1999
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 86.0% Market Value
- --------------------------------------------------------------------------------
AEROSPACE/DEFENSE EQUIPMENT: 3.8%
19,000 AVTEAM, Inc.*......................................... $ 148,438
18,500 BE Aerospace, Inc*.................................... 320,281
-----------
468,719
-----------
AGRICULTURAL OPERATIONS: 2.2%
9,800 Delta and Pine Land Company........................... 277,463
-----------
AUTO/TRUCK PARTS & EQUIPMENT: 0.7%
11,700 OEA, Inc.............................................. 81,900
-----------
CONSUMER GOODS - APPAREL: 6.5%
10,000 Jones Apparel Group, Inc.*............................ 259,375
15,000 Nautica Enterprises, Inc.*............................ 201,562
11,000 Oshkosh B'Gosh, Inc., Class A......................... 177,375
11,700 Tarrant Apparel Group*................................ 171,113
-----------
809,425
-----------
CONSUMER GOODS - CONSUMER PRODUCTS: 2.6%
23,000 Helen of Troy Ltd.*................................... 327,750
-----------
CONSUMER GOODS - RESTAURANTS: 2.4%
8,000 Lone Star Steakhouse and Saloon, Inc.*................ 61,000
8,550 CEC Entertainment Inc.*............................... 238,331
-----------
299,331
-----------
CONSUMER GOODS - RETAIL, SPECIALTY: 1.6%
6,800 Claire's Stores, Inc.................................. 127,925
5,000 Toys "R" Us, Inc.*................................... 69,063
-----------
196,988
-----------
ENERGY - OIL, SECONDARY: 18.3%
9,500 Anadarko Petroleum Corp............................... 323,000
6,000 Barrett Resources Corp.*.............................. 216,375
19,200 Basin Exploration, Inc.*.............................. 436,800
30,000 Benton Oil and Gas Company*........................... 76,875
20,000 Nuevo Energy Company*................................. 350,000
See accompanying Notes to Financial Statements.
5
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS AT AUGUST 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
ENERGY - OIL, SECONDARY, CONTINUED
23,500 Plains Resources, Inc.*............................... $ 443,562
20,000 Pogo Producing Company................................ 417,500
-----------
2,264,112
-----------
ENERGY - SEISMIC: 1.0%
29,000 Mitcham Industries, Inc.*............................. 125,969
-----------
FERTILIZERS: 2.8%
6,200 Potash Corp........................................... 346,812
-----------
FOOD: 1.3%
4,900 Suiza Foods Corp.*.................................... 156,187
-----------
HEALTH CARE - BIOTECHNOLOGY: 3.2%
15,200 Maxim Pharmaceuticals, Inc.*.......................... 119,700
60,000 Xoma Corp.*........................................... 273,750
-----------
393,450
-----------
HEALTH CARE - PHARMACEUTICALS: 2.9%
16,000 GelTex Pharmaceuticals, Inc.*......................... 216,000
7,000 ICN Pharmaceuticals, Inc.............................. 145,250
-----------
361,250
-----------
HUMAN RESOURCES: 4.8%
20,000 Labor Ready, Inc*..................................... 321,250
16,500 RemedyTemp, Inc., Class A*............................ 270,187
-----------
591,437
-----------
MEDICAL - BIOMEDICAL/GENE: 2.3%
20,000 CryoLife, Inc.*....................................... 283,750
-----------
MEDICAL - DRUGS: 1.6%
4,100 Rhone-Poulenc S.A..................................... 199,106
-----------
MEDICAL INSTRUMENTS: 3.6%
16,000 Collagen Aesthetics, Inc.............................. 260,000
5,000 St. Jude Medical, Inc.*............................... 181,250
-----------
441,250
-----------
See accompanying Notes to Financial Statements.
6
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS AT AUGUST 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
MEDICAL PRODUCTS: 1.2%
25,000 Cohesion Technologies, Inc.*.......................... $ 146,875
-----------
OPTICAL SUPPLIES: 1.1%
8,600 Ocular Sciences, Inc.*................................ 141,363
-----------
PRECIOUS METALS - GOLD MINING: 4.7%
15,000 Barrick Gold Corp..................................... 290,625
28,000 Placer Dome, Inc...................................... 290,500
-----------
581,125
-----------
REAL ESTATE INVESTMENT: 2.2%
13,500 Kennedy-Wilson Incorporated*.......................... 105,469
6,500 Public Storage, Inc................................... 169,000
-----------
274,469
-----------
RETIREMENT/AGED CARE: 3.4%
17,700 Capital Senior Living Corp.*.......................... 139,388
34,700 CareMatrix Corp.*..................................... 281,938
-----------
421,326
-----------
TECHNOLOGY - SOFTWARE: 6.4%
30,000 Informix Corp.*....................................... 218,437
6,500 Keane, Inc.*.......................................... 140,969
14,000 Progress Software Corp.*.............................. 428,750
-----------
788,156
-----------
TELEPHONE - INTEGRATED: 1.4%
4,000 Sprint Corp........................................... 177,500
-----------
TRANSPORTATION - TRUCK: 4.0%
8,600 American Freightways Corp.*........................... 180,600
11,000 J.B. Hunt Transport Services, Inc..................... 162,937
4,000 CNF Transportation, Inc............................... 155,750
-----------
499,287
-----------
Total Common Stocks (cost $10,726,297)................ 10,655,000
-----------
See accompanying Notes to Financial Statements.
7
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS AT AUGUST 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
Principal
Amount REPURCHASE AGREEMENT: 10.9% Market Value
- --------------------------------------------------------------------------------
$1,352,000 Firstar Bank Repurchase Agreement, 3.3%, dated
8/31/1999, due 9/1/1999, collateralized by $1,378,925
GNMA 7.0%, due 3/20/2024 (proceeds $1,352,124)
(cost $1,352,000)..................................... $ 1,352,000
-----------
Total Investment in Securities
(cost $12,078,297+): 96.9%............................ 12,007,000
-----------
LONG EQUITY PUT OPTIONS: 0.4%
- --------------------------------------------------------------------------------
Contracts Index / Expiration Date / Exercise Price
- --------------------------------------------------------------------------------
50 Applied Materials, Inc./January 50*................... 8,750
105 Citigroup Inc./January 33.38*......................... 7,547
45 Citigroup Inc./January 43.38*......................... 16,313
12 Gateway 2000 Inc./ September 75*...................... 225
20 Gateway 2000 Inc./ January 50*........................ 750
70 Intel Corp. / January 55*............................. 4,375
6 KLA-Tencor Corp./ December 60*........................ 3,825
45 Micron Technology / January 40*....................... 3,656
6 Verisign Inc./ September 65*.......................... 150
-----------
Total Long Equity Put Options (cost $148,789)......... 45,591
-----------
LONG INDEX PUT OPTIONS: 2.5%
- --------------------------------------------------------------------------------
Contracts Index / Expiration Date / Exercise Price
- --------------------------------------------------------------------------------
435 OEX Leaps / December 120*............................. 87,000
77O EX Leaps / December 125*.............................. 47,569
10 OEX Leaps / September 690*............................ 9,280
242 S&P 500 Index / December 125*......................... 96,800
242 S&P 500 Index Leap / December 120*.................... 71,087
-----------
Total Long Index Put Options (cost $556,179).......... 311,736
-----------
Total Put Options Purchased (cost $704,968): 2.9%..... 357,327
-----------
Other Assets less Liabilities: 0.2%................... 20,505
-----------
Total Net Assets: 100.0%.............................. $12,384,832
===========
See accompanying Notes to Financial Statements.
8
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS AT AUGUST 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
* Non-income producing security.
+ At August 31, 1999, the basis of securities for federal income tax purposes
was the same as their cost for financial reporting purposes. Unrealized
appreciation and depreciation of securities were as follows:
Gross unrealized appreciation......................... $ 1,740,873
Gross unrealized depreciation......................... (2,159,811)
-----------
Net unrealized depreciation......................... $ (418,938)
===========
See accompanying Notes to Financial Statements.
9
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
STATEMENT OF ASSETS AND LIABILITIES AT AUGUST 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $10,726,297).......... $10,655,000
Repurchase agreement (cost $1,352,000).......................... 1,352,000
Put options purchased (cost $704,968)........................... 357,327
Cash............................................................ 741
Margin deposits with brokers for options........................ 59,890
Receivables:
Investment securities sold.................................... 141,169
Fund shares sold.............................................. 25,000
Dividends and interest........................................ 2,778
Deferred organization costs..................................... 7,237
Prepaids expenses............................................... 23,454
-----------
Total assets.............................................. 12,624,596
-----------
LIABILITIES
Payables:
Investment securities purchased............................... 190,719
Fund shares redeemed.......................................... 2,337
Accrued distribution fees....................................... 5,643
Accrued advisory fees........................................... 5,416
Accrued administration fee...................................... 2,322
Accrued audit fees.............................................. 15,995
Other accrued expenses.......................................... 17,332
-----------
Total liabilities......................................... 239,764
-----------
NET ASSETS........................................................ $12,384,832
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
($12,384,832/1,187,521 shares outstanding;
unlimited number of shares authorized without par value)........ $ 10.43
===========
COMPONENTS OF NET ASSETS
Paid-in capital................................................. $18,890,828
Accumulated net investment loss................................. (120,474)
Accumulated net realized loss on investments.................... (5,966,584)
Net unrealized depreciation on investments...................... (418,938)
-----------
Net assets................................................ $12,384,832
===========
See accompanying Notes to Financial Statements.
10
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED AUGUST 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Interest........................................................ $ 196,572
Dividends....................................................... 88,058
-----------
Total income................................................ 284,630
-----------
Expenses
Advisory fees................................................... 207,288
Distribution fees............................................... 41,457
Administration fees............................................. 30,000
Registration fees............................................... 25,026
Fund accounting................................................. 22,985
Audit fee....................................................... 19,431
Transfer agent fees............................................. 16,785
Custody fees.................................................... 12,451
Reports to shareholders......................................... 9,648
Amortization of deferred organization costs..................... 6,687
Trustee fees.................................................... 6,030
Legal fees...................................................... 5,584
Miscellaneous................................................... 3,335
Insurance....................................................... 2,274
-----------
Total expenses.............................................. 408,981
Less: expenses reimbursed .................................. (77,321)
Add: dividends paid on short sales.......................... 17,210
-----------
Net expenses................................................ 348,870
-----------
NET INVESTMENT LOSS.................................... (64,240)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from security transactions.................... 1,102,332
Net realized loss from short sale transactions.................. (3,101,741)
Net realized loss on put options................................ (2,024,255)
Unrealized appreciation on investments.......................... 3,388,473
-----------
Net realized and unrealized loss on investments............. (635,191)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS... $ (699,431)
===========
See accompanying Notes to Financial Statements.
11
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Year
Ended Ended
August 31, 1999 August 31, 1998
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss)...................................... $ (64,240) $ 23,913
Net realized gain from security transactions..................... 1,102,332 2,686,781
Net realized loss from short sale transactions.................... (3,101,741) (2,992,648)
Net realized loss on put options.................................. (2,024,255) (1,378,054)
Unrealized appreciation (depreciation) on investments............. 3,388,473 (7,371,821)
----------- -----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ (699,431) (9,031,829)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income........................................ (16,726) --
From net realized gains........................................... -- (1,274,545)
----------- -----------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS......................... (16,726) (1,274,545)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets from net change in
outstanding shares (a)....................................... (8,642,202) 1,585,523
----------- -----------
TOTAL DECREASE IN NET ASSETS................................ (9,358,359) (8,720,851)
NET ASSETS
Beginning of year................................................. 21,743,191 30,464,042
----------- -----------
END OF YEAR....................................................... $12,384,832 $21,743,191
=========== ===========
</TABLE>
(a) A summary of capital shares transactions is as follows:
<TABLE>
<CAPTION>
Year Year
Ended Ended
August 31, 1999 August 31, 1998
------------------------- -------------------------
Shares Value Shares Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold........................................ 103,469 $ 1,113,248 505,849 $ 7,844,256
Shares issued in reinvestment of distributions..... 1,589 16,385 81,339 1,271,330
Shares redeemed.................................... (920,664) (9,771,835) (516,994) (7,530,063)
----------- ----------- ----------- -----------
Net increase (decrease)............................ (815,606) $(8,642,202) 70,194 $ 1,585,523
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Years Ended September 29, 1995*
------------------------------ through
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.................................... (0.07) 0.01 0.05 (0.09)
Net realized and unrealized gain (loss) on investments... (0.34) (4.31) 2.41 1.72
------- ------- ------- -------
Total from investment operations........................... (0.41) (4.30) 2.46 1.63
------- ------- ------- -------
Less distributions:
From investment income................................... (0.01) -- -- --
From net realized gains.................................. -- (0.61) (0.27) (0.06)
------- ------- ------- -------
Total distributions........................................ (0.01) (0.61) (0.27) (0.06)
------- ------- ------- -------
Net asset value, end of period............................. $ 10.43 $ 10.85 $ 15.76 $ 13.57
======= ======= ======= =======
Total return............................................... (3.78%) (28.46%) 18.22% 13.67%
Ratios/supplemental data:
Net assets, end of period (millions)....................... $ 12.4 $ 21.7 $ 30.5 $ 14.0
Ratio of expenses to average net assets:
Before expense reimbursement............................. 2.47% 2.13% 2.24% 2.95%+
After expense reimbursement*............................. 2.00% 2.00% 2.00% 2.00%+
Ratio of net investment income (loss) to average net assets
Before expense reimbursement ............................ (0.85%) (0.06%) (0.13%) (2.14%)+
After expense reimbursement**............................ (0.39%) 0.08% 0.11% (1.19%)+
Portfolio turnover rate.................................... 122.00% 44.09% 21.94% 20.56%
</TABLE>
* Commencement of operations.
+ Annualized.
** Excluding dividends paid on securities sold short representing 0.11%, 0.15%,
0.06% and 0.00% for the period ended August 31, 1999, 1998, 1997 and 1996,
respectively.
See accompanying Notes to Financial Statements.
13
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
NOTES TO FINANCIAL STATEMENTS AT AUGUST 31, 1999
- --------------------------------------------------------------------------------
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 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.
B. FEDERAL INCOME TAXES. The Fund did not meet all the requirements of
the Internal Revenue Code applicable to regulated investment companies
for the year ended August 31, 1999. However, there was no resultant
federal tax liability. The Fund intends to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies during the August 31, 2000 fiscal year.
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.
D. DEFERRED ORGANIZATION COSTS. All of the expenses incurred by the
Advisor in connection with the organization and registration of the
Fund's shares have been 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 August 31, 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 year ended August 31, 1999, the Fund incurred $207,288 in advisory fees.
14
<PAGE>
LIGHTHOUSE CONTRARIAN 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 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
within a three-year period from the year of reimbursement and remain in
compliance with applicable limitations. For the year ended August 31, 1999, the
Advisor reimbursed the Fund in the amount of $77,321. The Fund may reimburse the
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 August 31, 1999, the cumulative expense
reimbursement from the Advisor to the Fund is $237,701.
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:
Average net assets of the Fund Fee or fee 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 August 31, 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 - 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 $41,457 in distribution costs to the Advisor as the appointed
Distribution Coordinator for the year ended August 31, 1999.
15
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
NOTE 5 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and the proceeds from sales of securities, other than
short-term investments, were $18,174,032 and $18,655,003, respectively.
Option transactions during the year ended August 31, 1999 are summarized as
follows:
Put Options
-----------
Options outstanding, beginning of period..................... $ 1,072,887
Options purchased............................................ 3,315,803
Options closed............................................... (3,212,213)
Options written.............................................. (21,248)
Options expired.............................................. (450,261)
-----------
Options outstanding at August 31, 1999....................... 704,968
Unrealized depreciation at August 31, 1999................... (347,641)
-----------
Market value of options at August 31, 1999................... $ 357,327
===========
Average fair market value of options for the year ended
August 31, 1999............................................ $ 981,910
===========
Net trading losses on options for the year ended
August 31, 1999............................................ $(2,024,255)
===========
NOTE 6 - 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
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.
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders of
Lighthouse Contrarian Fund and the
Board of Trustees of Professionally Managed Portfolios
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Lighthouse Contrarian Fund (the Fund), a series
of Professionally Managed Portfolios, as of August 31, 1999, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the three years in the period then ended and for the
period from September 29, 1995 (commencement of operations) through August 31,
1996. 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 audits.
We conducted our audits 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
August 31, 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Lighthouse Contrarian Fund as of August 31, 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 three
years in the period then ended, and for the period September 29, 1995
(commencement of operations) through August 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
September 30, 1999
17
<PAGE>
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 INSTITUTIONAL CUSTODY SERVICES
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
Los Angeles, California 90017
Legal Counsel
PAUL, HASTINGS, JANOFSKY & WALKER
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.
