PZENA
FOCUSED
VALUE
FUND
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
OCTOBER 31, 1999
<PAGE>
PZENA FOCUSED VALUE FUND
November 30, 1999
Dear Shareholders:
The market's continuing obsession with technology at any price has driven
investment returns in 1999. At the same time, our down-to-earth classic value
approach of buying solid businesses at very low prices has gone unrewarded for
the second consecutive year. As a result, our fund had a year-to-date return of
- -1.92% through November 30, and since inception (June 24, 1996), the fund has
earned 7.34% on an average annualized basis.
As we approach the start of a new century and a new millennium, it seems
appropriate to cite a simple investment truth; VALUATION EXTREMES ARE ALWAYS
TEMPORARY.
Investing today is dominated by an appealingly simple thesis: investment success
is solely dependent on a willingness to focus on technology and the internet. To
dwell on the price of a security is to risk missing out on the game. Momentum is
the winning strategy, and those who do not embrace the new paradigm are
out-of-touch. As internet market commentator Jim Cramer of TheStreet.com said
threateningly to investors foolish enough to retain old-fashioned value
strategies, "join us (in the internet/technology frenzy) or die."
But hold on, lest you jump onto a train that may be nearing a wall. Consider
this warning, offered long before anyone had ever heard of the internet, by
American philosopher George Santayana (1863-1952) who said, "those who cannot
remember the past are condemned to repeat it." While the philosopher was aiming
his advice at society at large, his message rings with truth for the long-term
investor. Without exception, the most dangerous words for an investor have
always been, "this time it's different."
So let us be very clear in our message. This time is not any different. We are
in the midst of a valuation extreme that has set new records. No, we do not know
precisely when the extremes will peak. Yes, we can only guess at the likely
triggers for a return to valuation normalcy. What we can say for sure is that we
remember the power of a simple investment truth; VALUATION EXTREMES ARE ALWAYS
TEMPORARY.
That is why we regard the opportunity available in our portfolio today as a once
in a generation event. We build our portfolio from the perspective of a business
owner, concerned with two primary measures, (1) what is the annual return on
investment, and (2) is the return sustainable. An owner does not focus on the
stock price, because they know that at any given time a stock's price can vary
greatly from the fundamental value of the business. Look for a moment at the
following table as a business owner would:
Current Enterprise Value/
Current Cash Flow Current Cash Flow Yield
----------------- -----------------------
PZENA PORTFOLIO* 6.2x 16.1%
CISCO SYSTEMS 66.3x 1.5%
- --------------------------------------------------------------------------------
* Pzena Portfolio represents ten of the largest holdings in the portfolio as of
11/30/99.
<PAGE>
PZENA FOCUSED VALUE FUND
In other words, the companies that comprise over 40% of our portfolio are
earning an annual yield of 16.1% from current cash flows. Furthermore, the cash
flows for most of these companies are at or near their lows, and have already
begun to rebound. Thus, if we consider an average three-year holding period, our
conservative estimate of the annual cash flow yield approaches 20%.
Historically, these kinds of valuation opportunities do not last. A select group
of investors eventually seize the opportunity and earn superior long-term
returns. We believe we are among that select group of investors who will
ultimately benefit from our valuation discipline. Investing is and always will
be a process of allocating scarce resources among a wide range of choices.
Sentiment today says there is only one good allocation decision, because "this
time it's different." But in fact, the only thing that is different today is the
extent of the extreme.
Thank you again for your confidence in us.
Sincerely,
/s/ Richard S. Pzena
Richard S. Pzena
- --------------------------------------------------------------------------------
The Pzena Focused Value Fund's annualized total return from its inception on
June 24, 1996 through September 30, 1999 was 7.55%. For the 12 months ending
September 30, 1999 the Fund showed a total return of 9.86%. Results shown are
past performance and should not be regarded as an indicator of future results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their cost. The Pzena
Focused Value Fund is distributed by First Fund Distributors Inc., Phoenix AZ
85018.
2
<PAGE>
PZENA FOCUSED VALUE FUND
SCHEDULE OF INVESTMENTS AT OCTOBER 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 96.2% Value
- --------------------------------------------------------------------------------
AEROSPACE / DEFENSE: 5.8%
7,975 Boeing Company......................................... $ 367,348
----------
AUTO PARTS: 3.3%
6,225 Lear Corp. *........................................... 210,094
----------
CHEMICALS - DIVERSIFIED: 3.2%
4,998 B.F. Goodrich Company.................................. 118,390
2,025 FMC Corp. *............................................ 82,392
----------
200,782
----------
CHEMICALS - SPECIALTY: 7.6%
8,175 CK Witco Corp.......................................... 76,641
7,200 Cytec Industries, Inc.................................. 185,850
8,350 Lubrizol Corp.*........................................ 213,969
----------
476,460
----------
COMMUNICATIONS EQUIPMENT: 4.1%
12,400 Anixter International, Inc. *.......................... 258,850
----------
COMPUTERS - MEMORY DEVICES: 6.4%
21,850 Quantum Corp. - DLT & Storage*......................... 337,309
10,925 Quantum Corp. - Hard Disk Drive*....................... 66,916
----------
404,225
----------
COMPUTER SOFTWARE: 2.2%
2,900 Autodesk, Inc.......................................... 54,375
5,450 Cadence Design Sustems, Inc.*.......................... 82,772
----------
137,147
----------
ELECTRONICS - COMPONENT DISTRIBUTORS: 4.1%
4,750 Avnet, Inc............................................. 259,172
----------
FINANCIAL - DIVERSIFIED: 5.9%
7,750 Healthcare Realty Trust, Inc........................... 149,188
4,237 The PMI Group, Inc..................................... 219,794
----------
368,982
----------
3
<PAGE>
PZENA FOCUSED VALUE FUND
SCHEDULE OF INVESTMENTS AT OCTOBER 31, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
HEALTH CARE - LONG TERM: 3.9%
61,900 Beverly Enterprises, Inc. *............................ $ 243,731
----------
HEALTH CARE - HOSPITAL MANAGEMENT: 1.4%
3,675 Columbia/HCA Healthcare Corp........................... 88,659
----------
HEALTH CARE - MANAGED CARE: 2.6%
2,125 Aetna, Inc............................................. 106,781
8,400 Foundation Health Systems, Inc. *...................... 55,650
----------
162,431
----------
HEALTH CARE - MEDICAL PRODUCTS/SUPPLIES: 3.1%
6,900 Quest Diagnostics, Inc. *.............................. 193,200
----------
INSURANCE - PROPERTY AND CASUALTY: 4.8%
4,125 CNA Financial Corp. *.................................. 153,656
4,525 St. Paul Companies, Inc................................ 144,800
----------
298,456
----------
IRON & STEEL: 4.5%
14,600 UCAR International, Inc. *............................. 285,612
----------
LEISURE TIME - PRODUCTS: 1.4%
2,550 Polaris Industries, Inc................................ 89,091
----------
MACHINERY - DIVERSIFIED: 7.7%
31,100 AGCO Corp.............................................. 334,325
9,300 Hussman International, Inc............................. 148,800
----------
483,125
----------
METAL FABRICATORS: 3.0%
6,475 Kennametal, Inc....................................... 186,156
----------
OIL & GAS - DRILLING: 2.1%
5,825 Precision Drilling Corp.*.............................. 135,067
----------
4
<PAGE>
PZENA FOCUSED VALUE FUND
SCHEDULE OF INVESTMENTS AT OCTOBER 31, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
OIL & GAS - REFINING/MARKETING: 2.5%
6,325 Tosco Corp............................................. $ 160,102
----------
PAPER & RELATED PRODUCTS: 2.0%
3,125 Georgia-Pacific Group.................................. 124,023
----------
RETAIL - APPAREL/SHOE: 3.2%
4,400 Payless ShoeSource, Inc.*.............................. 201,575
----------
RETAIL - RESTAURANTS: 0.3%
1,375 CBRL Group, Inc........................................ 18,391
----------
TEXTILES - APPAREL: 1.1%
25,340 Fruit of the Loom, Inc., Class A *..................... 68,101
----------
TEXTILES - SPECIALTY: 1.6%
26,830 Burlington Industries, Inc. *.......................... 98,936
----------
TOBACCO: 2.7%
6,350 Philip Morris Companies, Inc........................... 167,481
----------
TRANSPORTATION - RAILROADS: 4.2%
3,505 Canadian Pacific, Ltd.................................. 82,587
3,250 Union Pacific Corp..................................... 181,188
----------
263,775
----------
UTILITIES - ELECTRIC COMPANIES: 1.5%
2,525 Unicom Corp............................................ 96,739
----------
Total Common Stocks (cost $6,882,502).................. 6,047,711
----------
5
<PAGE>
PZENA FOCUSED VALUE FUND
SCHEDULE OF INVESTMENTS AT OCTOBER 31, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Principal
Amount SHORT-TERM INVESTMENTS: 6.1% Value
- --------------------------------------------------------------------------------
MONEY MARKET INVESTMENT: 6.1%
$381,303 Firstar Stellar Treasury, 4.35%, 12/31/1999
(cost $381,303)........................................ $ 381,303
----------
Total Investments in Securities
(cost $7,263,805+): 102.3%............................. 6,429,014
Liabilities in excess of Other Assets: (2.3)%.......... (142,169)
----------
TOTAL NET ASSETS: 100.0%............................... $6,286,845
==========
* Non-income producing security.
+ At October 31, 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.......................... $ 663,505
Gross unrealized depreciation.......................... (1,498,296)
----------
Net unrealized depreciation...................... $ (834,791)
==========
See accompanying Notes to Financial Statements.
6
<PAGE>
PZENA FOCUSED VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES AT OCTOBER 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $7,263,805)........... $6,429,014
Dividends and interest receivable............................... 2,893
Deferred organization costs..................................... 11,536
Prepaid expenses................................................ 6,662
----------
Total assets........................................ 6,450,105
----------
LIABILITIES
Payable for securities purchased................................ 130,874
Advisory fees................................................... 772
Administration fee.............................................. 309
Other accrued expenses.......................................... 14,117
Due to advisor.................................................. 17,188
----------
Total liabilities................................... 163,260
----------
NET ASSETS........................................................ $6,286,845
==========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($6,286,845 / 571,223 shares outstanding; unlimited
number of shares authorized without par value)............ $ 11.01
==========
COMPONENTS OF NET ASSETS
Paid-in capital................................................. $6,951,299
Accumulated net investment loss................................. (22,608)
Undistributed net realized gain on investments.................. 192,945
Net unrealized depreciation on investments...................... (834,791)
----------
Net assets................................................ $6,286,845
==========
See accompanying Notes to Financial Statements.
7
<PAGE>
PZENA FOCUSED VALUE FUND
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends..................................................... $ 39,671
Interest...................................................... 2,141
----------
Total income............................................ 41,812
----------
Expenses
Advisory fees................................................. 46,014
Administration fee............................................ 15,123
Fund accounting fees.......................................... 8,962
Audit fee..................................................... 7,153
Transfer agent fees........................................... 4,199
Amortization of deferred organization costs................... 3,527
Custody fees.................................................. 3,455
Registration fees............................................. 3,180
Trustee fees.................................................. 2,266
Legal fees.................................................... 2,085
Reports to shareholders....................................... 1,936
Insurance..................................................... 277
----------
Total expenses.............................................. 98,177
Less: expenses waived and reimbursed........................ (33,757)
----------
Net expenses................................................ 64,420
----------
NET INVESTMENT LOSS..................................... (22,608)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from security transactions.................... 91,880
Net unrealized depreciation on investments...................... (495,556)
----------
Net realized and unrealized loss on investments............... (403,676)
----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.... $ (426,284)
==========
See accompanying Notes to Financial Statements.
8
<PAGE>
PZENA FOCUSED VALUE FUND
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
October 31, 1999# April 30, 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment loss....................................... $ (22,608) $ (33,228)
Net realized gain from security transactions.............. 91,880 114,692
Net unrealized depreciation on investments................ (495,556) (1,700,242)
---------- ----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS... (426,284) (1,618,778)
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gains................................... -- (343,927)
---------- ----------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from net change in
outstanding shares (a).................................. (447,957) (530,603)
---------- ----------
TOTAL DECREASE IN NET ASSETS........................... (874,241) (2,493,308)
NET ASSETS
Beginning of period....................................... 7,161,086 9,654,394
---------- ----------
END OF PERIOD................................................ $6,286,845 $7,161,086
========== ==========
</TABLE>
(a) A summary of capital share transactions is as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
October 31, 1999# April 30, 1999
------------------------ ------------------------
Shares Value Shares Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares sold...................................... 55,342 $ 673,827 153,638 $1,870,983
---------- ---------- ---------- ----------
Shares issued in reinvestment of distribution.... -- -- 31,885 343,409
Shares redeemed.................................. (89,535) (1,121,784) (250,459) (2,744,995)
---------- ---------- ---------- ----------
Net decrease..................................... (34,193) $ (447,957) (64,936) $ (530,603)
========== ========== ========== ==========
</TABLE>
# Unaudited.
See accompanying Notes to Financial Statements.
9
<PAGE>
PZENA FOCUSED VALUE FUND
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- ------------------------------------------------------------------------------------------------------------
Six Months Year Ended April 30, June 24, 1996*
Ended ------------------------ through
October 31, 1999# 1999 1998 April 30, 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............... $ 11.83 $ 14.40 $ 11.56 $ 10.00
---------- ---------- ---------- ----------
Income from investment operations:
Net investment loss.............................. (0.04) (0.05) (0.03) --
Net realized and unrealized gain (loss) on
investments................................... (0.78) (2.02) 3.93 1.59
---------- ---------- ---------- ----------
Total from investment operations................... (0.82) (2.07) 3.90 1.59
---------- ---------- ---------- ----------
Less distributions:
From net investment income....................... -- -- -- (0.01)
From net realized gains.......................... -- (0.50) (1.06) (0.02)
---------- ---------- ---------- ----------
Total distributions................................ -- (0.50) (1.06) (0.03)
---------- ---------- ---------- ----------
Net asset value, end of period..................... $ 11.01 $ 11.83 $ 14.40 $ 11.56
========== ========== ========== ==========
Total return....................................... (6.93)% (14.03)% 35.10% 15.88%
Ratios/supplemental data:
Net assets, end of period (millions)............... $ 6.3 $ 7.2 $ 9.7 $ 3.9
Ratio of expenses to average net assets:
Before expense reimbursement..................... 2.67%+ 2.60% 2.69% 5.82%+
After expense reimbursement...................... 1.75%+ 1.75% 1.75% 1.75%+
Ratio of net investment loss to average net assets:
Before expense reimbursement..................... (1.53)%+ (1.26)% (1.26)% (4.16)%+
After expense reimbursement...................... (0.61)%+ (0.41)% (0.32)% (0.09)%+
Portfolio turnover rate............................ 20.92% 47.14% 53.95% 22.06%
</TABLE>
* Commencement of operations.
+ Annualized.
# Unaudited.
See accompanying Notes to Financial Statements.
10
<PAGE>
PZENA FOCUSED VALUE FUND
NOTES TO FINANCIAL STATEMENTS AT OCTOBER 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
The Pzena Focused Value Fund (the "Fund") is a non-diversified series of
shares of beneficial interest of Professionally Managed Portfolios (the "Trust")
which is registered under the Investment Company Act of 1940 (the "1940 Act") as
an open-end management investment company. The Fund began operations on June 24,
1996. The investment objective of the Fund is to seek long-term growth of
capital.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund. These policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION. Investments in securities traded on a national
securities exchange or Nasdaq are valued at the last reported sale
price at the close of regular trading on the last business day of the
period; securities traded on an exchange or Nasdaq for which there
have been no sales and other over-the-counter securities are valued at
the last reported bid price. Securities for which quotations are not
readily available are valued at their respective fair values as
determined in good faith by the Board of Trustees. Short-term
investments are stated at cost, which when combined with accrued
interest, approximates market value.
B. FEDERAL INCOME TAXES. The Fund intends to comply with the requirements
of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required.
C. SECURITY TRANSACTIONS, INVESTMENT INCOME AND DISTRIBUTIONS. Security
transactions are accounted for on the trade date. The cost of
securities sold is determined on 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.
Pzena Investment Management, LLC (the "Advisor") provided the Fund with
investment management services under an Investment Advisory Agreement. The
Advisor furnished all investment advice, office space, facilities, and most of
the personnel needed by the Fund. As compensation for its services, the Advisor
was entitled to a monthly fee at the annual rate of 1.25% based upon the average
daily net assets of the Fund. For the six months ended October 31, 1999, the
Fund incurred $46,014 in advisory fees.
11
<PAGE>
PZENA FOCUSED VALUE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
The Fund is responsible for its own operating expenses. The Advisor has
agreed to limit the Fund's total expenses to not more than 1.75% of average net
assets. Any such reductions made by the Advisor in its fees or payments or
reimbursement of expenses which are the Fund's obligation are subject to
recoupment by the Advisor. For the six months ended October 31, 1999, the
Advisor reimbursed the Fund in the amount of $33,757.
The Advisor may recapture from the Fund the cumulative expense
reimbursement waiver of $236,099, subject to the requirements that the Fund must
pay the current ordinary operating expenses of the Fund before any such
recapture and its continued compliance with any other expense limitations. The
Advisor must seek recapture of $69,577 and $166,522 of the cumulative
reimbursement by no later than April 30, 2002 and 2003, respectively, or the
Advisor forgoes the right to recapture these amounts.
Investment Company Administration, 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 at
the following rate:
Under $15 million $30,000
$15 to $50 million 0.20% of average daily net assets
$50 to $100 million 0.15% of average daily net assets
$100 to $150 million 0.10% of average daily net assets
Over $150 million 0.05% of average daily net assets
For the six months ended October 31, 1999, the Fund incurred $15,123 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 the sale of securities, other
than short-term investments, for the six months ended October 31, 1999, were
$1,471,561 and $2,160,257, respectively.
12
<PAGE>
ADVISOR
Pzena Investment Management, LLC
830 Third Avenue
14th Floor
New York, NY 10022
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road
Suite 261E
Phoenix, AZ 85018
CUSTODIAN
Firstar Institutional Custody Services
425 Walnut Street
Cincinnati, OH 45202
SHAREHOLDER SERVICE AND TRANSFER AGENT
American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788
INDEPENDENT AUDITORS
Tait, Weller, & Baker
8 Penn Center Plaza, Suite 800
Philadelphia, PA 19103
COUNSEL TO THE FUND
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, CA 94104
COUNSEL TO THE ADVISOR
Lane Altman & Owens
101 Federal Street
Boston, MA 02110
This report is intended for shareholders of the Fund and may not be used as
sales literature unless preceded or accompanied by a current prospectus.
Past performance results shown in this report should not be considered a
representation of future performance. Share price and returns will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Statements and other information herein are dated and are subject to change.
