NOTES TO THE FINANCIAL STATEMENTS
October 31, 2006 (Unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Pope Family of Funds, (the “Trust”) was organized on February 25, 2005 as a Delaware statutory trust. The sole series of shares of the Trust is the Halter Pope USX China Fund (the “Fund”). The Fund is a non-diversified Fund. The Trust is registered as an open-end management investment company under the Investment Company Act of 1940 (the “1940 Act”). The Fund was registered to offer two classes of shares, Class A and Class C shares. Each class differs as to sales and redemption charges and ongoing fees. Income and realized/unrealized gains or losses are allocated to each class based on relative share balances.
The Fund’s investment objective is long term growth of capital.
The Class C shares commenced operations on July 1, 2005. The Class A shares commenced operations on September 23, 2005.
The following is a summary of significant accounting policies consistently followed by the Funds. The policies are in conformity with accounting principles generally accepted in the United States of America.
a) Investment Valuation—Common stocks and other equity securities listed on a securities exchange or quoted on a national market system are valued at 4:00 p.m., New York time, on the day of valuation. Price information on listed stocks is taken from the exchange where the security is primarily traded. Equity securities that are traded on the NASDAQ National Market System, for which quotes are readily available, are valued at the official closing price. Securities that are listed on an exchange but which are not traded on the valuation date are valued at the most recent bid quotation. Short-term instruments (those with remaining maturities of 60 days or less) are valued at amortized cost, which approximates fair market value. Securities and assets for which representative market quotations are not readily available or which cannot be accurately valued using the Fund's normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Trustees. Fair value pricing may be used, for example, in situations where (i) a portfolio security, such as a small-cap stock, is so thinly traded that there have been no transactions for that stock over an extended period of time or the validity of a market quotation received is questionable; (ii) the exchange on which the portfolio security is principally traded closes early; (iii) trading of the particular portfolio security is halted during the day and does not resume prior to the Fund's net asset value calculation; or (iv) the security was purchased in a private placement and is an illiquid investment (e.g., “restricted securities” that are not freely tradable because they are not registered under federal securities laws). Consistent with the foregoing, the Fund has adopted guidelines and instructions for the valuation of restricted securities held by the Fund focusing on such important factors, among others, as valuation, liquidity and availability of relevant information. Because a fair value determination is based on an assessment of the value of the security pursuant to the policies approved by the Fund's Board of Trustees rather than a market price, the fair value price may differ substantially from the price at which the security may ultimately be traded or sold. At October 31, 2006, three (3) securities were valued as determined by the Board of Trustees.
b) Restricted Securities—The investments in 30,000 shares of Fushi International, Inc., 36,900 shares of China-Biotics, Inc., 100,000 shares of China Security & Surveillance Technology, Inc. and 20,000 warrants of China Security & Surveillance Technology, Inc. were initiated by Pope Asset Management, LLC (the “Adviser”) as private placement offerings. Other clients of the Adviser also participated in the private placement. The securities that are part of the private placement are restricted from sale until such time as their registrations become effective and the restrictions are lifted.
These securities have been valued based upon fair value pricing procedures approved by the Board of Trustees after considering certain pertinent factors including but not limited to the restriction from sale, the results of operations, economic news and expectations and currency changes. The securities have been priced at a discount from market quotations available for these securities. It is possible that the estimated value may differ significantly from the amount that might ultimately be realized in the near term, and the difference could be material. The total fair value of these securities at October 31, 2006 is $1,159,260, which represents 6.16% of total net assets.
c) Federal Income Taxes—The Trust’s policy is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all its taxable income to its shareholders. Therefore, no federal income tax provision is required.
Pope Family of Funds | SEMI-ANNUAL REPORT |
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2006 (Unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d) Distributions to Shareholders—Dividends from net investment income and distributions of net realized capital gains, if any, will be declared and paid at least annually. Income and capital gain distributions, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. Accounting principles generally accepted in the United States of America require that permanent financial reporting differences relating to shareholder distributions be reclassified to paid in capital or net realized gains.
e) Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
f) Other—Investment and shareholder transactions are recorded on trade date. The Funds determine the gain or loss realized from the investment transactions by comparing the original cost of the security lot sold with the net sales proceeds. Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund and interest income is recognized on an accrual basis. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the Halter Pope USX China Fund Class A and Class C shares for the six month period ended October 31, 2006 were as follows:
| | | Class A | |
| | | Shares | | Amount | |
| Sold | | | 636,919 | | $ | 7,142,128 | |
| Redeemed | | | (6,847 | ) | | (77,253 | ) |
| Net Increase | | | 630,072 | | $ | 7,064,875 | |
| | | Class C | |
| | | Shares | | Amount | |
| Sold | | | 16,355 | | $ | 189,506 | |
| Redeemed | | | (3,271 | ) | | (34,585 | ) |
| Net Increase | | | 13,084 | | $ | 154,921 | |
Transactions in shares of capital stock for the Halter Pope USX China Fund Class A shares for the period September 23, 2005 through April 30, 2006 were as follows:
| | | Class A | |
| | | Shares | | Amount | |
| Sold | | | 995,063 | | $ | 10,931,867 | |
| Redeemed | | | (46,679 | ) | | (550,823 | ) |
| Net Increase | | | 948,384 | | $ | 10,381,044 | |
Pope Family of Funds | SEMI-ANNUAL REPORT |
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2006 (Unaudited)
2. CAPITAL SHARE TRANSACTIONS (continued)
Transactions in shares of capital stock for the Halter Pope USX China Fund Class C shares for the period July 1, 2005 through April 30, 2006 were as follows:
| | | Class C | |
| | | Shares | | Amount | |
| Sold | | | 647,948 | | $ | 6,807,023 | |
| Redeemed | | | (641,168 | ) | | (6,794,377 | ) |
| Net Increase | | | 6,780 | | $ | 12,646 | |
3. INVESTMENT TRANSACTIONS
For the period ended October 31, 2006, aggregate purchases and sales of investment securities (excluding short-term investments) for the Halter Pope USX China Fund were as follows:
Purchases | Sales |
| $8,091,622 | $2,532,155 |
There were no government securities purchased or sold during the period.
4. ADVISORY FEES AND OTHER RELATED PARTY TRANSACTIONS
Effective April 28, 2005, the Fund has entered into an Advisory Agreement with Pope Asset Management, LLC (the “Adviser”) to provide investment management services to the Fund in accordance with its investment objectives, policies and restrictions. Pursuant to the Advisory Agreement, the Adviser is entitled to receive a fee, calculated daily and payable monthly at the annual rate of 1.25% as applied to the Fund’s average daily net assets. For the six month period ended October 31, 2006, the Halter Pope USX China Fund incurred $76,183 of advisory fees. For the six month period ended October 31, 2006, the Adviser waived advisory fees of $76,183.
The Adviser and the Fund have entered into an Expense Limitation Agreement under which the Adviser has agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in an amount that limits annual operating expenses (exclusive of interest, taxes, brokerage fees and commissions, and extraordinary expenses and payments, if any, under the Rule 12b-1 Plan). It is expected that the contractual agreement will continue from year-to-year provided such continuance is approved by the Board of Trustees of the Fund. Pursuant to the Agreement, the Adviser has agreed to reimburse the Fund to the extent that total annualized expenses exceed 2.25% of the Fund's average daily net assets. Effective February 1, 2006, the Adviser has voluntarily reduced the expense limitation to 2.00% of the Fund's average daily net assets. For the six moth period ended October 31, 2006, the Adviser reimbursed $6,429 of Fund expenses.
One trustee of the Fund is also an officer of the Adviser.
The Fund has entered into an Investment Company Services Agreement (“ICSA”) with Matrix Capital Group, Inc. (“Matrix”). Pursuant to the ICSA, Matrix will provide day-to-day operational services to the Funds including, but not limited to, accounting, administrative, transfer agent, dividend disbursement, registrar and record keeping services. For its services, Matrix receives a minimum fee of $6,250 per month. In addition, the following asset based fees will apply at the following breakpoints: 0.10% on assets between $20 million and $50 million; 0.075% on the next $50 million; 0.05% on the next $100 million; 0.03% in excess of $200 million of daily net assets. For the six month period ended October 31, 2006, Matrix earned $37,808, with $6,096 remaining payable at October 31, 2006.
Pursuant to the ICSA, Matrix will provide chief compliance officer services to the Fund. For these services Matrix will receive a fee of $18,000 per year. For the six month period ended October 31, 2006, Matrix earned $9,075, with $1,464 remaining payable at October 31, 2006.
Certain officers of the Fund are also employees of Matrix.
Pope Family of Funds | SEMI-ANNUAL REPORT |
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2006 (Unaudited)
4. ADVISORY FEES AND OTHER RELATED PARTY TRANSACTIONS (continued)
The Fund and Adviser have entered into a Distribution Agreement with Matrix Capital Group, Inc. Pursuant to the Distribution Agreement, Matrix will provide distribution services to the Fund. Matrix serves as underwriter/distributor of the Fund. Pursuant to the Distribution Agreement, Matrix receives $7,200 per year from the Fund. For the six month period ended October 31, 2006, Matrix received $3,630 of distribution fees, with $486 remaining payable at October 31, 2006.
A separate plan of distribution has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 for each class of shares. With respect to Class A shares, the plan provides that the Fund may pay a servicing or Rule 12b-1 fee of up to 0.25% annually of the Fund’s average net assets, and up to 1.00% annually of the Fund’s average net assets attributable to Class C shares to persons or institutions for performing certain servicing functions for the Fund’s shareholders. Under the Plan the Fund may pay for any activity primarily intended to result in the sale of shares of the Fund and the servicing of shareholder accounts, provided that the Trustees have approved the category of expenses for which payment is being made.
The distribution plans for the Class A and Class C shares in the Halter Pope USX China Fund took effect September 23, 2005 and July 1, 2005, respectively. For the six month period ended October 31, 2006, the Fund accrued $2,969 and $1,061 in 12b-1 expenses attributable to Class A and Class C shares, respectively.
5. TAX MATTERS
The Fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. As of April 30, 2006, the Fund’s most recent fiscal year end, the components of distributable earnings on a tax basis was as follows:
| | | Halter Pope USX China Fund | |
| Cost of investments for tax purposes | | $ | 10,701,727 | |
| Unrealized Appreciation / (Depreciation): | | | | |
| Gross Appreciation | | | 1,328,466 | |
| Gross Depreciation | | | (329,286 | ) |
| Net Unrealized Appreciation / (Depreciation) | | $ | 999,180 | |
| Undistributed Ordinary Income: | | | 117,902 | |
| Distributable Earnings, Net | | $ | 1,117,082 | |
There were no distributions during the six month period ended October 31, 2006 or during the period July 1, 2005 to April 30, 2006 for the Halter Pope USX China Fund.
6. RECLASS OF CAPITAL ACCOUNTS
In accordance with accounting pronouncements, the Fund has recorded reclassifications in the capital accounts. These reclassifications have no impact on the net asset value of the Fund and are designed generally to present undistributed net investment income and accumulated net realized gain (loss) on a tax basis which is considered to be more informative to the shareholder. As of April 30, 2006, the Fund recorded the following reclassifications to increase (decrease) the capital accounts listed below:
| | Undistributed Net Investment Loss | Accumulated Net Realized Gain |
| Halter Pope USX China Fund | $ 19,968 | $ (19,968) |
7. CONCENTRATION OF RISK
The Halter Pope USX China Fund will primarily invest 80% of its assets in equity securities issued by companies listed on the Halter USX China Index which is mainly comprised of U.S. listed companies doing business in China. Investing in the companies from one geographic region may pose additional risks inherent to a region's economical and political situation.
Pope Family of Funds | SEMI-ANNUAL REPORT |
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2006 (Unaudited)
8. BENEFICIAL OWNERSHIP
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates a presumption of control of the fund, under Section 2(a)(9) of the Investment Company Act of 1940. As of October 31, 2006, Stern Agee & Leach, Inc. held 37.08% of Class A Halter Pope USX China Fund in an omnibus account for the sole benefit of its customers. As of October 31, 2006, ADP Clearing & Outsourcing Services, Inc. held 67.18% of Class C Halter Pope USX China Fund in an omnibus account for the sole benefit of its customers and Stern Agee & Leach, Inc. held 32.82% of Class C Halter Pope USX China Fund in an omnibus account for the sole benefit of its customers.
9. ANNUAL RENEWAL OF INVESTMENT ADVISORY AGREEMENT
The Trust's Board of Trustees unanimously approved the continuation of the Advisory Agreement for a one year period ending June 30, 2007 after reviewing and considering such information as the Board deemed reasonably necessary to evaluate the nature and scope of the services to be provided by the Adviser to the Fund; the proposed compensation terms for the Adviser; the Expense Limitation Agreement; the Adviser's history and experience; and the effect growth of assets of the Fund would have on the Fund's advisory fees and expense ratio. To aid it in its review, the Board reviewed various informational materials including, without limitation, copies of the draft Advisory Agreement and the Expense Limitation Agreement; a memorandum from the Adviser to the Board including information about the Adviser, its business, its finances, its personnel, its services to the Funds and comparative expense ratio information for other mutual funds with similar strategies as the Fund (the "Advisor Memo"); and a memorandum from Kilpatrick Stockton LLP (counsel to the Trust) to the Board regarding considerations relevant to a review of investment advisory contracts by investment company trustees.
In considering the nature and scope of the services provided by the Adviser, the Board considered the responsibilities the Adviser would have under the Advisory Agreement. The Board reviewed the services being provided by the Adviser including without limitation, its investment advisory services since the Fund’s inception, its efforts during the Fund’s start-up phase, its coordination of services for the Fund among the Fund’s service providers, its compliance procedures and practices, and its efforts to promote the Fund and assist in its distribution. The Board also considered that the Trust's executive officers, other than the chief compliance officer, are employees of the Adviser, and that these officers would serve without additional compensation. After reviewing the foregoing information, reviewing further information in the Adviser Memo (e.g., descriptions of the Adviser's business and the Adviser's Form ADV), and discussing the Adviser's proposed services to the Fund with the Adviser, the Board concluded that the nature and scope of the services would be satisfactory and adequate for the Fund.
In examining the investment performance of the Fund and the Adviser, the Board compared the performance of the Fund with the performance of the benchmark indices, comparable funds managed by other advisers and comparable peer group indices. The Board also considered the consistency of the Adviser’s management of the Fund with the Fund’s investment objective and policies. Following further discussion of the investment performance of the Fund, the Adviser’s experience managing the Fund and separate accounts, and other factors, the Board concluded that the investment performance of the Fund and Adviser was satisfactory.
In regards to the costs of the services to be provided and profits to be realized by the Adviser and its affiliates from the relationship with the Fund, the Board considered the Adviser’s staffing, personnel, and methods of operating; the Adviser’s compliance policies and procedures; the financial condition of the Adviser and the level of commitment to the Fund and the Adviser by the principals of the Adviser; the asset levels of the Fund; the Adviser’s payment of startup costs for the Fund; and the overall expenses of the Fund, including certain fee waivers and reimbursements by the Adviser on behalf of the Fund. The Board compared the Fund’s proposed management fee with fees paid to other investment advisers by other actively managed funds that invest primarily or substantially in companies in China. The Board also compared the expense ratios of comparable funds to the Fund’s expense cap through the Expense Limitation Agreement. The Board noted that the Adviser would subsidize the Fund to the extent necessary to meet its obligations under the Expense Limitation Agreement.
Pope Family of Funds | SEMI-ANNUAL REPORT |
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2006 (Unaudited)
9. ANNUAL RENEWAL OF INVESTMENT ADVISORY AGREEMENT (continued)
The Board also considered that, giving effect to the Expense Limitation Agreement, the Fund’s expense ratio is lower than the expense ratio of some other funds that the Board determined to be comparable to the Fund based on the type of fund, the style of investment management, the location of the companies invested in, and/or the nature of the markets invested in, among other factors. The Board also considered that, giving effect to the Expense Limitation Agreement, the Fund’s expense ratio was not as low as that of some other funds with certain comparable characteristics. The Board also considered potential benefits for the Adviser in managing the Fund, including promotion of the Adviser's name, the ability for the Adviser to place small accounts into the Fund, and the potential for the Adviser to generate soft dollars from Fund trades that may benefit the Adviser's clients other than the Fund. After comparing the fees under the Investment Advisory Agreement with those paid by comparable funds and considering all of the foregoing, the Board concluded that the fees to be paid to the Adviser by the Fund were fair and reasonable.
To the extent which economies of scale would be realized as the Fund grows and whether advisory fee levels reflect these economies of scale for the benefits of the Fund’s investors, the Board considered that the Fund’s fee arrangements with the Adviser involve both the management fee and the Expense Limitation Agreement. The Board determined that, while the management fee would remain the same at all asset levels, the Fund has experienced benefits from the Expense Limitation Agreement, and will continue to do so until the Fund’s assets grow to a level where the Adviser begins receiving its full fees. Thereafter, the Board noted that the Fund would continue to benefit from economies of scale under its agreements with service providers other than the Adviser. Following further discussion of the Fund’s asset levels, expectations for growth and levels of fees, the Board determined that the Fund’s fee arrangements with the Adviser continued to provide benefits through the Expense Limitation Agreement and that, at the Fund’s current and projected net asset levels for the next year, the Fund’s arrangements with the Adviser were fair and reasonable.
With regards to brokerage and portfolio transactions, the Board considered the Adviser’s standards, and performance in utilizing those standards, to seek best execution for Fund portfolio transactions. The Board also considered the anticipated portfolio turnover rate for the Fund; the process by which evaluations are made of the overall reasonableness of commissions paid; the method and basis for selecting and evaluating the broker-dealers used; any anticipated allocation of portfolio business to persons affiliated with the Adviser; and the extent to which the Fund allocates portfolio business to broker-dealers who provide research, statistical, or other services (“soft dollars”). After further review and discussion, the Board determined that the Adviser’s practices regarding brokerage and portfolio transactions were satisfactory.
In evaluating the possibility for conflicts of interest, the Board considered such matters as the experience and ability of the advisory personnel assigned to the Fund; the basis of decisions to buy or sell securities for the Fund and/or the Adviser’s other accounts; the method for bunching of portfolio securities transaction; and the substance and administration of the Adviser’s code of ethics. Following further consideration and discussion, the Board indicated that the Adviser’s standards and practices relating to the identification and mitigation of potential conflicts of interest were satisfactory.
Based upon all of the foregoing considerations, and after further discussion and careful review, the Board, including a majority of those Trustees who are not parties to such agreement or interested persons of any such party, voting separately, approved the Investment Advisory Agreement to continue for a one year period ending June 30, 2007 upon the terms and for the compensation described therein.
10. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
On July 13, 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At this time, management is evaluating the implication of FIN 48 and its impact in the financial statements has not yet been determined.
Additional Information (Unaudited) | |
The Fund files its complete schedules of portfolio holdings with the Securities and Exchange Commission (the “Commission”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at http://www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC. Information on the operation of the Commission’s Public Reference Room may be obtained by calling 1-800-SEC-0330.
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling 877-244-6235; and on the Commission’s website at http://www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, 2006 is available without charge, upon request, by calling 877-244-6235; and on the Commission’s website at http://www.sec.gov.
