UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-6722
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The HomeState Group
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(Exact name of registrant as specified in charter)
1703 Oregon Pike, Suite 101, Lancaster, PA
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(Address of principal executive offices) (Zip code)
Citco Mutual Fund Services, Inc.
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83 General Warren Blvd., Suite 200, Malvern, PA 19355
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(Name and address of agent for service)
Registrant's telephone number, including area code: 800-232-0224
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Date of fiscal year end: 06/30/2005
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Date of reporting period: 12/31/2004
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO SHAREHOLDERS
The following is a copy of the Semi-Annual Report to Shareholders for the period
ended December 31, 2004 pursuant to Rule 30e-1 under the Investment Company Act
of 1940 (17 CFR 270.30e-1).
[LOGO]
EMERALD
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MUTUAL FUNDS
DRIVEN BY RESEARCH
SEMI-ANNUAL REPORT DECEMBER 31, 2004
GROWTH FUND
Class A: HSPGX
Class C: HSPCX
BANK & FINANCE FUND
Class A: HSSAX
Class C: HSSCX
TECHNOLOGY FUND
Class A: HSYTX
Class C: HSYCX
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EMERALD MUTUAL FUNDS
REPORT FROM MANAGEMENT
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February 7, 2005
Dear Shareholder:
Market & Economic Review and Fund Performance Analysis
"Economic Outlook"
Many pundits have called 2004 "the Year of the Small Cap Stock," because small
caps outperformed large caps by a significant amount. But this wasn't really
accurate, as only a few sectors really added value during the year.
A CNBC commentator said it best at the end of the year when he stated that it
was really "the Year of the Commodity," as steel, copper, aluminum, and energy
stocks outperformed for the year. These cyclical stocks are very difficult for a
fundamental manager such as Emerald to overweight because they provide very
little added value. Their stock prices to a large extent are based on the value
of the commodity rather than differentiated growth drivers or value added
components, etc. The chart below illustrates the significance of the
appreciation in these groups during the year.
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4th Quarter 2004 FY 2004
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Russell 2000 Growth - Energy 11.28% 50.81%
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Russell 2000 Growth -Materials 11.81% 28.00%
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Russell 2000 Growth -Oils 6.26% 27.24%
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S&P Sm Cap Oil & Gas Index 0.36% 55.00%
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S&P Sm Cap Metals Index 14.42% 59.00%
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S&P Sm Cap Steel Index 16.13% 68.60%
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S&P Sm Cap Materials Index 11.98% 37.90%
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While we often hear about the market's "wall of worry," the economy had to climb
its own wall in 2004. Higher energy prices, the continuous terrorist alerts,
Osama's tapes and threats, the unconventional continuation of the war in Iraq
and the absence of new tax cuts still couldn't stop the economy from growing at
a better than 4% rate. This was well above the 2.7% long-term average GDP growth
rate. For 2005, we will also face a lower dollar to offset the ever-expanding
trade deficit. A better than expected economy though must rely upon several of
these constraints being broken in 2005. At the end of the year, crude oil costs
dropped by more than $10 a barrel. Which of the other factors may turn positive
is conjecture at best.
One of the missing pieces of this recovery was employment growth. During the
year, the market's fixation on the monthly numbers certainly held back the
market until November. As we looked for a reason, we found a very high level of
continuing layoffs, especially in the manufacturing and technology industry. We
find this very unusual for this point in an economic recovery cycle. These
layoffs have the effect of offsetting the positive job growth which is occurring
in this economy. The fact is that many companies in these two sectors have yet
to grasp the reality of productivity gains of competitors and their worldwide
competition.
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Companies that didn't, or couldn't, exhibit earnings recovery a year and a half
into the recovery had to finally bite the bullet and take the drastic action of
layoffs. While job growth has not been robust, these late stage laggards have
pressured the job creation side of the equation.
At the recent American Economic Association meeting, several economists
presented information that agrees with our conclusion that now, increased demand
can only be met by increasing this workforce. An increase of 200,000+ jobs
should continue to keep the consumer segment at least at parity. The economists
cited four industries - durable goods, manufacturers informational technology,
transportation, and professional and technical services (telecom fits here). In
their analysis, they cite the excessively long period of restructuring as a
result of the excessive bubble economy in the late 90's.
EMERALD GROWTH FUND
PERFORMANCE RESULTS FOR PERIODS ENDED DECEMBER 31, 2004
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AVERAGE ANNUAL RETURN TOTAL
TOTAL ---------------------------------------------------- RETURNS
RETURN ONE FIVE TEN SINCE SINCE
FUND/INDEX SIX MONTHS YEAR YEARS YEARS INCEPTION INCEPTION
- ---------- ---------- ----- ----- ----- --------- ---------
Emerald Growth
Fund - Class A*
At NAV 3.98% 4.14% -1.89% 13.23% 13.20% 357.02%
At MOP -0.96% -0.82% -2.84% 12.68% 12.75% 335.26%
Russell 2000G Index 8.16% 14.31% -3.57% 7.12% 8.01% 157.30%
Russell 2000 Index 10.83% 18.33% 6.61% 11.53% 12.05% 303.19%
Morningstar - Small Company
Funds Index 7.66% 11.95% 0.24% 12.59% 12.88% 341.30%
Past performance is no guarantee of future results. Emerald Growth Fund returns
at NAV do not include the effects of the Fund's Class A maximum 4.75% sales
charge; returns at MOP do. The Russell 2000 Index measures the performance
returns of 2000 small-cap companies. Investments cannot be made in an index. The
Morningstar Small-Company Funds Average represents 756, 402, 123 and 59
small-company funds, respectively, for total return without regard to sales
charges for the One Year, Five Year, Ten Year and Since Inception (10/1/92)
periods. All performance results assume reinvestment of dividends. As you review
the results above, please note that the Fund has invested in a variety of
initial public offerings (IPO's). The performance of IPO's may have a greater
impact on the performance results of a smaller fund, and may lessen as the
Fund's assets grow.
The fourth quarter brought with it a sorely needed rally, saving the year and
sending growth returns into the black. Post election the Russell 2000 increased
in excess of 14%, with strength experienced with double digit returns posted
across the majority of Russell 2000 Growth Sectors. Despite this rally, to say
2004 was a difficult year for fundamental managers is an understatement. Lehman
Brothers reported that 2004 was a hard year to outperform the Russell 2000 style
indices. Less than half of Growth or Value managers outperformed their
benchmark. They attribute the average underperformance to managers'
unwillingness to own enough Energy, Industrial or Material stocks, while owning
too much Technology. The Russell 2000 Technology sector posted a loss of 2.2%
for all of 2004. Emerald chose the latter and performance suffered as a result.
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We believe however that the tide may be turning, as the momentum in these
sectors began to wane during the fourth quarter in favor of Technology, Producer
Durables and Consumer Discretionary and while Emerald's performance continued to
lag the index this quarter, relative performance improved each month in the
quarter, culminating with greater than 90 basis points of outperformance in the
month of December. Strength in the Technology sector continued to build
throughout the quarter and was the greatest source of return, with Consumer
Discretionary a close second. Sources of weakness during the month included
Materials and Services and Healthcare. Within Materials and Services our
underperformance came both as a result of our relative underweight position
(Emerald portfolio's were underweight by approximately 50%) and the
underperformance of GrafTech (GTI), a manufacturer of natural and synthetic
graphite and carbon products, which declined 30% during the quarter. During its
Q3-04 conference call, management reported disappointing contract electrode
pricing for 2005 as average contract pricing came in at 8% lower than analysts
expectations. Our Healthcare exposure in the 4th quarter continued to be our
weakest relative performer. This sector cost us approximately 445 basis points
over the course of the year. Outside of those industry groups Emerald
experienced significant performance from companies such as Psychiatric Solutions
(PSYS) a provider of in-patient behavioral health care services which
appreciated 44% during the quarter and Visx (EYE) VISX, Incorporated. EYE shares
closed an up 2004 on a positive note as the October 2004 announcement that the
company is being acquired by Advanced Medical Optics (AVO - NYSE) drove a 25%
rise in the shares in Q4-04. The acquisition validated our positive viewpoint
regarding the company's leadership position in the laser vision correction
industry and the growth opportunities provided by the recently approved Custom
LASIK technology, as well as soon to be commercialized technologies for the
treatment of hyperopia and presbyopia.
Healthcare has remained difficult, with particular weakness in our biotechnology
and drugs and pharmaceutical holdings. Emerald has been struggling in this
segment since the beginning of third quarter, as the risk aversion of the market
place had already been placing pressure on the riskiest components of the
sector, biotech and drugs and pharmaceuticals. Combine the existing negative
market predisposition with the flu vaccine debacle and the withdrawal of Merck's
blockbuster drug Vioxx from the marketplace over safety concerns, and we have a
crisis of confidence in the FDA and an Agency in turmoil. The ripple effect of
which has created pro-forma concerns about not only the safety and efficacy of
existing drugs, but also the ability of these companies to obtain future FDA
approvals. The FDA has already been overwhelmed by the volume of NDA and BLA
applications as evidenced by the number of PDUFA extensions that have occurred
over the last six months and with these recent wrinkles we have become
increasingly concerned over the ability to get drugs to final approval and at
what cost. In light of these issues and the ongoing uncertainty Emerald has
reduced both its biotech and drugs and pharmaceutical holdings and in so doing
moved to an underweight position in healthcare. We aggressively reallocated
dollars during the course of the quarter into other sectors including Consumer
and Technology where we believe the risk/reward is more favorable. These moves
resulted in the improved performance on a month to month basis as we progressed
through the quarter. The biotech exposure that we have retained is focused on
areas of truly unmet medical needs, such as Telik (TELK) a biopharmaceutical
company that discovers, develops and commercializes small molecule drugs
addressing largely difficult cancers. The company currently has two drug
candidates Telcyta for solid tumors found in ovarian, lung and breast cancers.
It is products like this that we believe will remain a priority of the FDA as
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evidenced by the approvals of Sepracor's Lunesta and Genzyme/Bioenvision's
Clolar. Despite the broad difficulties, our investment philosophy remains
focused on companies with superior products and/or technology platforms
addressing a vast array of medical needs, where there are no real clinical
options and/or the existing drugs and devices provide little or no benefit.
Outside of biotech industry we remain committed to opportunities within medical
systems and instruments as well as certain opportunities within healthcare
services and facilities.
Portfolio returns improved as a result of the reallocation of assets as
Emerald's Technology holdings during the third quarter collectively outpaced the
index by 195 basis points. The greatest contributors to this strong performance
were:
o Micros (MCRS - NASDAQ), MCRS shares were our leading positive
contributor in Q4, rising 56%. The bulk of the share price
appreciation came in the weeks following the announcement of much
better than expected FQ1-05 (Sep) financial results, in which MCRS
reported y/y EPS growth of 100% and exceeded the sell-side consensus
estimate by 52%. MCRS is the dominant provider of point of sale
(POS) technology to the restaurant, lodging, and specialty retail
industries. The company is seeing strength across all business
segments driven by continued unit expansion within the restaurant
industry, a cyclical rebound in the lodging industry, and the
successful integration of the Datavantage acquisition in the
specialty retail industry.
o Ixia (XXIA - NASDAQ), the leading supplier of networking test
systems used in development and production. Its shares rose 44%
during Q4. The stock received a boost in October from strong Q3
results of record revenues (up 39% y-y) and record bookings. These
results confirm a successful execution of the company's product
expansion/diversification strategy and, we believe, are a precursor
to further growth in 2005.
We were similarly rewarded in the reallocation of dollars into Consumer
Discretionary, netting approximately 200 basis points in outperformance in that
sector. Contributors to that outperformance included:
o Tempur-Pedic International (TPX) a manufacturer, marketer and
distributor of visco-elastic foam mattresses and pillows. Sales in
its most recent quarter grew nearly 50%, beating estimates by a wide
margin as the company continues to expand its market presence,
driving a 37% return for the quarter.
o American Eagle Outfitters (AEOS) a specialty retailer of apparel
targeting teenagers. During the course of the 4th quarter, the
company revised guidance higher two times, increasing its original
earnings guidance by 30%. Upside was driven by double digit same
store sales gain during the months of November and December. Shares
of AEOS appreciated 28% in the quarter.
The December quarter was a strong quarter for Technology stocks as post-election
confidence and seasonal consumer market strength offset earlier concerns of the
economy and inventories. As stated above Emerald's Technology exposure increased
during the fourth quarter resulting in a 150 bps increase in our total exposure
bringing our overweight position to 416 basis points. As we enter 2005, we
believe there is the potential for continued volatility in the Technology sector
as the industry continues to deal with: off-shore production and service
outsourcing; higher growth in consumer electronics with higher price erosion
dynamics; the shift to a 2H semiconductor season; shrinking of the component
food chain; and continued global economic conditions. Despite this, Emerald
believes there are niche opportunities within a variety of industries. In
semiconductors
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we believe there are growth opportunities in areas such as digital TVs and MP3
players as these products are still in the early adopter phase of a significant
product cycle. In semiconductor capital equipment, yield and cost improvements
have been validated at 300mm by Intel and others are helping to continue to
drive other semiconductor manufacturers to continue their transition to the next
generation process technologies 300mm/90nm. We remained focused on those
companies providing the tools for this transition. In the networking and telecom
industry we expect modest growth in corporate networking spending, and continued
infrastructure spending in Asia and Europe. During 2005, we believe there will
be a distinct growth in domestic infrastructure spending as the industry's
"triple play" strategy to offer voice, data, and video accelerates. We have
focused on suppliers of networking equipment targeting video-on-demand,
broadband and Internet telephony. Outside of chips and equipment as we look to
2005, we believe increased merger and acquisition activity will be a driving
catalyst for the IT Services and Software industry sector, as larger vendors
look to expand their current product offerings and expand their existing
customer base. Additionally, after spending much of 2004 testing for
Sarbanes-Oxley 404 compliance, we believe that many corporations will look to
automate many of their internal processes through the use of application
software.
The Financial sector is equal-weight relative to the index. We have maintained
our positioning within this sector as small cap banks continued to see market
share gains exhibited in both deposit and commercial loan growth. Throughout the
year the major task facing community banks was the replacement of mortgage
origination and refinancing with commercial real estate, C&I loans, or other
consumer loans based on the local specialty/niche that each institution has.
This is clearly visible in the loan growth seen in Emerald's holdings. Loan
growth from the second quarter to the third remained relatively stable at about
4.6%, which is significantly up from the first quarter, which posted 3.1% loan
growth. The pick-up in the second and third quarters was due to acquisitions and
growing commercial loan demand. This 4.6% quarter-over-quarter growth indicates
that the banks were able to successfully replace the mortgage origination and
refinancing loans with other types of loans. Had they failed at this, we would
have seen the loan growth fall off substantially. The additional increases to
the fed funds rate during the quarter should continue to improve most of the
community banks' net interest margins due to their asset sensitivity.
Additionally, we expect that the growth in C&I lending should continue as the
economy picks up steam and small businesses expand.
Consumer Discretionary currently is overweight relative to the index. Emerald is
currently overweight consumer discretionary by 280 basis points and has
increased our weighting by over 3 percent this quarter, as a result of
appreciation, increased weighting in several existing positions as well as the
initiation of several new positions. Within the sector we continue to be highly
diversified among several industry groups as we believe opportunities are abound
for companies providing the best products and services. In the last quarter we
added exposure to internet advertising, rental and leasing, home furnishings,
toys and commercial services, as well as beverages. Each company and each
exposure is subject to company specific dynamics that are driving their growth,
which we believe are independent in many ways of the more macro issues such as
the price of oil, rising interest rates, and the general volatility in consumer
confidence. In internet advertising, for example we believe the next major wave
of growth in Internet advertising will be branded advertising using rich media.
Branded advertising essentially refers to the delivery of TV-like advertisements
over the Internet. Branded advertising is being driven by advancements in rich
media technology, the proliferation of broadband Internet access
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making the efficient delivery of rich media possible, and the movement of
consumer "eyeballs" to the Internet. The Internet currently accounts for over
14% of media usage and accounts for only 3% of total advertising dollars. As a
result, we see a continuation of the shift of advertising toward the Internet.
Our focus is both on the leading content-oriented websites, which are the best
positioned to capture these dollars as well as the companies providing the ad
serving technology and related services.
Outside of the major economic sectors we have reduced our exposure to Energy
(under-weight) given the recent pullback in the price of oil, and have
maintained positions in Auto and Transportation (under-weight) and Materials and
Processing (under-weight).
In our third quarter commentary we talked about the macro events that continued
to depress growth stocks during the year. Two of these depressants appear to
have been removed (the uncertainty over the election) or reversed (the terrorism
premium in the price of energy). While we don't believe markets can change from
severe risk averseness to one embracing risk overnight the change in sentiment
nonetheless appears to be quite significant. Other risks remain in the forefront
of the market: the twin deficits, the risk of higher interest rates and the risk
that inflation will have a negative impact whenever raised by the bears. While
these all have some merit, we still believe the slope of the yield curve
indicates that the Fed has not tightened to the point of stalling the economy.
We will take these risks into account as we progress through the year.
Nonetheless, economic growth should continue its above trend growth track,
valuations aren't unreasonable and earnings growth while not accelerating is
anticipated to maintain a healthy rate of growth. All positives. We were on the
wrong side of the risk reduction trend that prevailed throughout the first 9
months of 2004. But trends don't last forever and the tide can change quickly as
witnessed by the overall good performance of growth stocks since Election
Day. Fundamental growth factors will once again be in favor and when this occurs
we believe our research and portfolio process will be rewarded.
EMERALD SELECT BANKING AND FINANCE FUND
PERFORMANCE RESULTS FOR PERIODS ENDED DECEMBER 31, 2004
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AVERAGE ANNUAL RETURN TOTAL
TOTAL ---------------------------------------------------- RETURNS
RETURN ONE THREE FIVE SINCE SINCE
FUND/INDEX SIX MONTHS YEAR YEARS YEARS INCEPTION INCEPTION
- ---------- ---------- ----- ----- ----- --------- ---------
Emerald Select Banking & Finance
Fund - Class A*
At NAV 15.82% 20.70% 25.99% 21.61% 16.38% 230.05%
At MOP 10.33% 14.97% 23.97% 20.43% 20.43% 214.34%
Russell 2000 Index 10.83% 18.33% 11.48% 6.61% 8.87% 94.76%
Morningstar - Specialty
Financial Funds Index 11.14% 13.71% 10.78% 10.92% N/A N/A
* Prior to 10/20/98 the Fund, called the Select Opportunities Fund, pursued
a different objective.
Past performance is no guarantee of future results. The Select Banking and
Finance Fund returns at NAV do not include the effects of the Fund's Class A
maximum 4.75% sales charge; returns at MOP do. The Russell 2000 Index measures
the performance returns of 2000 similar-cap companies. Investments cannot be
made in an index. The Morningstar Financial Funds Average represents 125, 101,
66 and 22 financial services funds, for total return without regard to sales
charges for the One Year, Three Year and Five Year, and Since Inception
(2/18/97) periods respectively. All performance results assume reinvestment of
dividends.
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Small cap banks continued to see market share gains exhibited in both deposit
and commercial loan growth. Throughout the year the major task facing community
banks was the replacement of mortgage origination and refinancing with
commercial real estate, C&I loans, or other consumer loans based on the local
specialty/niche that each institution has. This is clearly visible in the loan
growth seen in Emerald's holdings. Loan growth for Emerald holdings in the third
quarter remained relatively in line with second quarter growth at about 4.6%,
which is significantly up from first quarter growth of 3.1%. The pick-up in the
second and third quarters was due to acquisitions and growing commercial loan
demand. This 4.6% quarter-over-quarter growth indicates that the banks were able
to successfully replace the mortgage origination and refinancing loans with
other types of loans. Had they failed at this, banks would have seen the loan
growth fall off substantially.
The community banks offer excellent competitive advantages to their bigger
peers. Some of these advantages are:
1) Superior customer service - This is the best advantage a community
bank has over a bigger bank. Employees at all levels of the bank
know their customers by name and make sure they are taken care of.
As technology continues to be an even greater part of our lives,
personal service will never be replaced; people like to be known by
name rather than their checking account number.
2) Superior asset quality - The personal service translates into better
underwriting. Community bank lenders know their customers on a more
personal level than a big bank can. This relationship between the
community bank lender and the customer gives the lender a better
understanding of the business, which translates into stronger
underwriting.
3) Stable loan growth - Not only does the community bank benefit from
the natural business growth in its market, it is also well
positioned to pick up some additional loans from big bank customers
that are not getting the superior customer service that they want.
4) Higher net interest margins - Big banks attract customers by
offering low rates on loans and high rates on deposits. Community
banks do not have to be as competitively priced due to their
superior customer service. Higher margins translate into a
stronger bottom line. Community banks under $2.5 billion in market
cap, as a group, saw an increase of 3 basis points in their margin
from the 2nd to 3rd quarter, ending at 3.99%. Banks above $2.5
billion in market cap also saw a 3 bps increase in the margin, but
the average was 44 bps lower at 3.55%.
The additional increases to the fed funds rate during the quarter should
continue to improve most of the community banks' net interest margins due to
their asset sensitivity. Additionally, Emerald expects that the growth in C&I
lending, which will further help margins, should continue as the economy picks
up steam and small businesses expand.
Asset quality continues to be a focal point for the entire banking sector. At
this point, ratios measuring asset quality have stabilized, coming off of their
continued improvement over the last several quarters. Nonperforming assets to
total assets for our holdings had a median of 29 bps in the third quarter, and
we are expecting fourth quarter results to be very similar. All banks, as a
group, saw asset quality stabilize at a median of 35 bps. This is seven points
higher than in the third quarter of 2003 and marks the fourth consecutive
quarter of stable or improving NPA/As. This is also the lowest level of NPA/As
since the fourth quarter of 2000. We expect that asset quality will continue to
remain strong in the projected future, and we continue to monitor this for each
of our holdings. The relationships that local lenders have with their customers
gives them a better pulse on the borrower's business; the bank can then adjust
for any changes ahead of any surprises.
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New York Attorney General Elliot Spitzer has created uncertainty in the
insurance sector due to his ongoing investigations into illegal and unethical
business practices, such as bid rigging. So far, Spitzer has brought criminal
charges on six insurance executives. He continues to pursue more individuals as
well as companies and no one is certain when the investigations will end. The
focus on the investigations was very evident from the third quarter earnings
conference calls. Many of the smaller companies tried to reassure investors that
they were not involved in any illegal practices. To add insult to injury, the
insurance sector also saw a decline in premium pricing as the competitive
environment increased. But again, the smaller names were not as susceptible
because many of them have a defined niche or they offer better service than
bigger insurers and can justify higher premiums. Banks continued to see merger
and acquisition activity during the fourth quarter with small deals dominating
most of the activity. For the year, Emerald held eleven banks that were
acquired, which contributed about one percentage point to our total return for
the year in the Bank & Finance Fund.
2004 posted about as many bank and thrift company deals as did 2003. However,
the average deal size almost doubled to $610 million. Higher deal multiples were
also up in 2004 over 2003. The average price/book deal multiple came up from
2.05x to 2.21x.
We expect M&A activity to continue, especially in areas like Texas and
California, where growth is strong and demographics are favorable. Texas, in
particular, has been a hot area for consolidation; everyone wants to be there,
and the easiest way to enter the market is through an acquisition. Emerald has
excellent exposure to the Texas market. As the state continues to prosper,
out-of-state companies will increase their desire to get into Texas, and will do
so most likely through acquisitions. Our Texas holdings will benefit either from
a takeout directly or from the market share opportunities available to our banks
from the disruption of an acquisition.
EMERALD SELECT TECHNOLOGY FUND
PERFORMANCE RESULTS FOR PERIODS ENDED DECEMBER 31, 2004
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AVERAGE ANNUAL RETURN TOTAL
TOTAL ---------------------------------------------------- RETURNS
RETURN ONE THREE FIVE SINCE SINCE
FUND/INDEX SIX MONTHS YEAR YEARS YEARS INCEPTION INCEPTION
- ---------- ---------- ----- ----- ----- --------- ---------
Emerald Select Technology
Fund - Class A*
At NAV 4.77% -4.84% -4.33% -21.33% -0.89% -6.24%
At MOP -0.27% -9.34% -5.88% -22.09% -1.57% -10.71%
Russell 2000 Index 10.83% 18.33% 11.48% 6.61% 7.35% 64.51%
Russell 2000G Index 8.16% 14.31% 5.79% -3.57% 2.51% 17.96%
Morningstar - Specialty
Technology Funds Index 3.06% 3.69% -2.33% -16.01% N/A N/A
As you review the results above, please note that the Fund has invested in a
variety of initial public offerings (IPO's). The performance of IPO's may have a
greater impact on the performance results of a smaller fund, and may lessen as
the Fund's assets grow. Past performance is no guarantee of future results.
Emerald Select Technology Fund returns at NAV do not include the effects of the
Fund's Class A maximum 4.75% sales charge; returns at MOP do. The Russell 2000
Index measures the performance returns of 2000 small-cap companies. Investments
cannot be made in an index. The Morningstar Technology Funds Average represents
309, 265, 125 and 56 technology funds, respectively, for total return without
regard to sales charges for the One Year, Three Year, Five Year and Since
Inception (10/31/97) periods. All performance results assume reinvestment of
dividends.
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The December quarter was a strong quarter for Technology stocks as post-election
confidence and seasonal consumer market strength offset earlier concerns of the
economy and inventories. During the same period, Emerald's Growth Fund rose
15.4%, and the Select Technology Fund rose 22.7%. This performance exceeded the
key indices:the Russell 2000 index, which was up 13.7%; the tech-weighted
NASDAQ, which was up 14.7%; and the Philadelphia Semiconductor (SOX) index;
which was up 12.8%. Even though Technology was relatively strong, most
technology segments underperformed the Russell 2000 index. Therefore, our
performance was the result of picking stocks that outperformed their respective
segments.
In general, the "best"performing segment was the computer and storage
segment, which was up 21%. However, large-cap companies were the primary
beneficiaries here, and small-cap companies were still impacted by strict IT
spending controls. The Software segment was flat with Q3 and was the weakest
segment. Other segments were up between 7% and 12%.
During the quarter, the enterprise software segment was positively impacted by
increased sales activity associated with the year-end budget flush and the
consolidation of larger software vendors (Oracle/Peoplesoft and
Symantec/VeriSign mergers). We believe that the execution issues that negatively
impacted many companies in both Q204 and Q304, abated somewhat, and the negative
implications associated with the distraction of Sarbanes-Oxley 404 testing were
less than we had originally feared.
Following weak performance during the first 9 months of 2004, the Semiconductor
segment somewhat rebounded as confidence grew of end-market demand.
Semiconductor Industry Association (SIA) data for November showed a year-to-year
growth of 18%, and slightly ahead of expectations. However, the rate of growth
is slowing. We believe that, because of the shift towards a consumer-driven
market for semiconductors, manufacturers' unit shipment growth will continue to
be strong, but this will be significantly offset by high price erosion.
The semiconductor capital equipment sector spent most of the fourth quarter
fighting a battle of perception with most companies citing poor visibility and a
"pause"in capital spending from the IC sector. With continued poor visibility
into early-2005, most analysts called an "end" to the cyclical upturn. Despite a
6% drop in gross billings in November from October, and after several months of
declining ratios, the aggregate book-to-bill ratio stabilized at 1.00 - with the
front-end improving to 1.04 (from 1.01) and the back-end ratio improved
significantly to 0.76 (from 0.65). The decline observed during the second half
of the year notwithstanding, semiconductor capital spending is expected to have
grown over 59% in 2004.
A number of our technology holdings outperformed their respective indices
including:
o Micros (MCRS - NASDAQ), MCRS shares were our leading positive
contributor in Q4, rising 56%. The bulk of the share price
appreciation came in the weeks following the announcement of much
better than expected FQ1-05 (Sep) financial results, in which MCRS
reported y/y EPS growth of 100% and exceeded the sell-side consensus
estimate by 52%. MCRS is the dominant provider of point of sale
(POS) technology to the restaurant, lodging, and specialty retail
industries. The company is seeing strength across all business
segments driven by continued unit expansion within the restaurant
industry, a cyclical rebound in the lodging industry, and the
successful integration of the Datavantage acquisition in the
specialty retail industry. MCRS continues to benefit from a major
system rollout with
9
================================================================================
EMERALD MUTUAL FUNDS
REPORT FROM MANAGEMENT -- CONTINUED
- --------------------------------------------------------------------------------
Intercontinental Hotels that should last through calendar 2005. In
addition, the company recently a major contract with MGM MIRAGE to
provide property management systems for all of the company's
hotel/casinos in Nevada and Mississippi. We believe this contract
will be a major financial contributor through 2006. Given the
company's strong competitive position, the favorable outlook in each
of its end markets, and the company's highly talented management
team, we believe the stock's prospects for 2005 are promising.
o InterDigital Communications (IDCC - NASDAQ), whose shares returned
close to 35% in Q4. IDCC designs, develops and licenses wireless
technologies. IDCC earnings are derived from licensing of its
technologies and therefore are closely tied to sales of wireless
devices, most notably cellular phones. Shares rose during the
quarter when IDCC raised its licensing revenue guidance by more than
10%. IDCC shares moved higher on the news. The share price was
driven further by rumors that one of its licensees might be
interested in making a tender offer for IDCC. The company is also
involved in arbitration in a number of intellectual property suits
that if resolved in its favor, would result in earnings increases.
One of the suits is scheduled to be adjudicated in January 2005.
IDCC shares have continued to creep up in anticipation of what we
believe will be a positive outcome
o Cognizant Technology Solutions (CTSH - NASDAQ), Cognizant is a
leading provider of offshore IT services to Fortune 500 companies.
Similar to other off-shore providers, Cognizant continues to see
increased demand for its services as clients continue to look to
lower operating cost by shifting application development and
application management to India. Cognizant's unique business focus
on servicing large strategic clients (defined as $5 to $20 million
in potential annual revenues) and its strong delivery capabilities
have enabled the company to achieve one of the highest gross margin
amongst its peer group (45.6%) and maintain an operating margin
above 19%.
o Virage Logic (VIRL - NASDAQ), a licensor of semiconductor IP, has
been gaining design wins for the past two years that are now
beginning to generate royalty revenues as those designs enter
production. VIRL's shares appreciated 51% during Q4, driven by
strong Q3 results. We believe the company's revenue will continue
to accelerate during 2005 as royalty revenues increase, and as new
products drive ongoing license revenues.
As we enter 2005, we believe there is the potential for continued volatility in
the Technology sector as the industry continues to deal with:off-shore
production and service outsourcing;higher growth in consumer electronics with
higher price erosion dynamics; shift to a 2H semiconductor season; shrinking of
the component food chain; and continued global economic conditions. Despite
this, each segment offers opportunities:
o Semiconductor segment: Semiconductor unit shipments are expected to
grow in 2005, albeit at a lower rate than in 2004. Although the
industry has learned to better manage inventories and to shrink the
food chain with shorter lead-times, other industry factors are
likely to cause ongoing concerns over excessive inventory. Entering
the March quarter, we anticipate some manufacturers (especially
those with a high focus on holiday seasonal consumer products) will
be pressured because of reduced visibility. We will continue to
focus on those semiconductor companies that are best positioned to
grow with high growth markets where there is nearer-term shipments
growth and reduced pricing pressures, i.e., digital TVs, MP3
players.
10
================================================================================
EMERALD MUTUAL FUNDS
REPORT FROM MANAGEMENT -- CONTINUED
- --------------------------------------------------------------------------------
o Semiconductor Capital Equipment segment:The outlook for 2005 is
cautious. Although capital spending is expected to decline by
roughly 5%, momentum is expected to improve throughout the year.
Fourth quarter results, reported in February, particularly guidance
regarding the second quarter will have a significant impact on when
momentum is expected to build. A strong holiday season and good
semiconductor inventory reports will pull the expectations of a
recovery further into the first half of 2005, while continued
inventory issues and/or weak holiday sales could postpone a large
scale recovery into the second half of 2005. In any scenario, it
is Emerald's assertion that the downturn will not be as severe as
has historically been the case and spending on advanced technologies
will continue at a more robust pace, allowing companies focused on
these segments to remain profitable at lower market spending
levels.
o Computers and Storage segment:The high-end computer market,
including servers and storage sub-systems, continues to show
relative strength despite spending restrictions of major projects.
As spending on Sarbanes-Oxley projects declines in 2005, we believe
there will be resumption in major computer and storage project
spending. Additionally, we anticipate some spending to support
Sarbanes-Oxley compliance. We believe this will benefit certain
component groups of companies including display semiconductor
suppliers, although pricing pressures will high as vendors attempt
to generate increased seasonal revenues through aggressive pricing.
o IT Software and Services segment:As we look to 2005, we believe that
a driving catalyst for the sector will be will be increased merger
and acquisition activity, as larger vendors look to expand their
current product offerings and expand their existing customers
base. Due to the current weakness of the US dollar, we believe that
many companies' financial results will be positively impacted by
favorable foreign currency exchange rates. Additionally, after
spending much of 2004 testing for Sarbanes-Oxley 404 compliance, we
believe that many corporations will look to automate many internal
processes through the use of application software.
o Networking and Telecom segment:We expect continued modest corporate
networking spending, and continued infrastructure spending in Asia
and Europe. During 2005, we believe there will be a distinct growth
in domestic infrastructure spending as the industry's "triple play"
strategy to offer voice, data, and video accelerates. We will focus
on suppliers of networking equipment targeting video-on-demand,
broadband and Internet telephony.
o Contract Manufacturing segment: Although the trend towards
outsourcing continues, Asian manufacturing is becoming a major
factor. We will focus on companies with strong management teams that
have consistently executed in difficult markets, and companies that
have an executable strategy for Asia. This means either establishing
an achievable presence in Asia, or growing domestic business through
acquisition. We favor smaller manufacturers that offer
differentiation by offering premium services.
Kenneth G. Mertz II, CFA
Chief Investment Officer
Co-Portfolio Manager - Emerald Growth Fund
Portfolio Manager - Emerald Select Banking & Finance Fund
Portfolio Manager - Emerald Select Technology Fund
Stacey L. Sears
Co-Portfolio Manager - Emerald Growth Fund
11
================================================================================
EMERALD MUTUAL FUNDS
FUND PROFILES DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
Emerald Growth Fund
- --------------------------------------------------------------------------------
Top Ten Portfolio Holdings
(% of Net Assets)
MICROS Systems, Inc. 2.06%
Wesco International, Inc. 1.80%
Airgas, Inc. 1.46%
Avid Technology, Inc. 1.46%
Guitar Center, Inc. 1.41%
VISX, Inc. 1.41%
Benchmark Electronics, Inc. 1.34%
American Eagle Outfitters, Inc. 1.29%
DiamondCluster International, Inc. 1.24%
Marvel Enterprises, Inc. 1.23%
-----
14.70%
=====
Portfolio Asset Allocation
(% of Net Assets)
Consumer Discretionary 20.55%
Technology 17.08%
Healthcare 11.91%
Producer Durables 10.81%
Financial Services 7.25%
Energy 2.56%
Materials & Processing 2.42%
Auto & Transportation 1.59%
Short-Term Investments 1.40%
Real Estate Investment Trust 0.74%
Other Assets less Liabilities, Net 23.69%
------
100.00%
======
- --------------------------------------------------------------------------------
Emerald Banking and Finance Fund
- --------------------------------------------------------------------------------
Top Ten Portfolio Holdings
(% of Net Assets)
Commercial Capital Bancorp, Inc. 2.92%
Oak Hill Financial, Inc. 2.82%
Main Street Banks, Inc. 2.37%
Webster Financial Corp. 2.37%
MB Financial Corp. 2.31%
Sky Financial Group, Inc. 2.28%
Texas Capital Bancshares, Inc. 2.23%
Alabama National Bancorp 2.19%
Columbia Bancorp 1.95%
Central Pacific Financial Corp. 1.94%
-----
23.38%
=====
Portfolio Asset Allocation
(% of Net Assets)
Financial Services 93.86%
Short-Term Investments 5.50%
Real Estate Investment Trusts 1.38%
Other Assets and Liabilities, Net -0.74%
------
100.00%
======
- --------------------------------------------------------------------------------
12
================================================================================
EMERALD MUTUAL FUNDS
FUND PROFILES -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
Emerald Technology Fund
- --------------------------------------------------------------------------------
Top Ten Portfolio Holdings
(% of Net Assets)
MICROS Systems, Inc. 6.26%
Cognizant Technology Solutions Corp. 5.91%
Interdigital Communications Corp. 4.34%
Virage Logic Corp. 4.27%
Telik, Inc. 4.21%
The Medicines Company 3.41%
Ansoft Corp. 3.29%
Gen-Probe, Inc. 3.27%
Opsware, Inc. 3.06%
Siliconix, Inc. 2.74%
-----
40.76%
=====
Portfolio Asset Allocation
(% of Net Assets)
Technology 62.71%
Healthcare 13.99%
Producer Durables 13.52%
Short-Term Investments 9.00%
Consumer Discretionary 6.59%
Other Assets less Liabilities, Net -5.81%
------
100.00%
======
- --------------------------------------------------------------------------------
13
================================================================================
EMERALD MUTUAL FUNDS
EXPENSE INFORMATION DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
As a shareholder of the Emerald Mutual Funds, you incur two types of costs: (1)
transaction costs, including applicable sales charges and redemption fees; and
(2) ongoing costs, including management fees, distribution (12b-1) fees and
other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in a Fund and to compare these costs
with the ongoing costs of investing in other funds. The Example is based on an
investment of $1,000 invested at the beginning of the (six-month) period and
held for the entire period July 1, 2004 through December 31, 2004.
Actual Expenses
The first section of the table below provides information about actual account
values and actual expenses. You may use this information, together with the
amount you invested, to estimate the expenses that you paid over the period.
Simply divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the
applicable line under the heading entitled "Expenses Paid During the Period" to
estimate the expenses you paid on your account during this period.
Hypothetical Example For Comparison Purposes
The second section of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in a Fund to other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds. Please note that the expenses shown in the table are meant
to highlight your ongoing costs only and do not reflect any transactional costs,
such as sales charges (loads), redemption fees or exchange fees. Therefore, the
second section of the table is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher.
EMERALD GROWTH
BEGINNING ACCOUNT ANNUALIZED EXPENSE ENDING ACCOUNT EXPENSES PAID
VALUE 7/01/04 RATIO FOR THE PERIOD VALUE 12/31/04 DURING THE PERIOD*
Actual Return
- -----------------------------------------------------------------------------------------------------------------------
Based on actual return of:
- -----------------------------------------------------------------------------------------------------------------------
Class A 3.98% $1,000.00 1.55% $1,039.80 $ 7.97
- -----------------------------------------------------------------------------------------------------------------------
Class C 3.60% 1,000.00 2.20% 1,036.00 11.29
- -----------------------------------------------------------------------------------------------------------------------
Hypothetical Return
- -----------------------------------------------------------------------------------------------------------------------
Based on assumed 5% return
- -----------------------------------------------------------------------------------------------------------------------
Class A 1,000.00 1.55% 1,017.25 7.88
- -----------------------------------------------------------------------------------------------------------------------
Class C 1,000.00 2.20% 1,014.00 11.17
- -----------------------------------------------------------------------------------------------------------------------
14
================================================================================
EMERALD MUTUAL FUNDS
EXPENSE INFORMATION -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
EMERALD SELECT BANKING AND FINANCE
BEGINNING ACCOUNT ANNUALIZED EXPENSE ENDING ACCOUNT EXPENSES PAID
VALUE 7/01/04 RATIO FOR THE PERIOD VALUE 12/31/04 DURING THE PERIOD*
Actual Return
- -----------------------------------------------------------------------------------------------------------------------
Based on actual return of:
- -----------------------------------------------------------------------------------------------------------------------
Class A 15.82% $1,000.00 1.72% $1,158.20 $9.36
- -----------------------------------------------------------------------------------------------------------------------
Class C 15.46% 1,000.00 2.37% 1,154.60 12.87
- -----------------------------------------------------------------------------------------------------------------------
Hypothetical Return
- -----------------------------------------------------------------------------------------------------------------------
Based on assumed 5% return
- -----------------------------------------------------------------------------------------------------------------------
Class A 1,000.00 1.72% 1,016.40 8.74
- -----------------------------------------------------------------------------------------------------------------------
Class C 1,000.00 2.37% 1,013.15 12.03
- -----------------------------------------------------------------------------------------------------------------------
EMERALD SELECT TECHNOLOGY
BEGINNING ACCOUNT ANNUALIZED EXPENSE ENDING ACCOUNT EXPENSES PAID
VALUE 7/01/04 RATIO FOR THE PERIOD VALUE 12/31/04 DURING THE PERIOD*
Actual Return
- -----------------------------------------------------------------------------------------------------------------------
Based on actual return of:
- -----------------------------------------------------------------------------------------------------------------------
Class A 4.77% $1,000.00 2.58% $1,047.70 $13.32
- -----------------------------------------------------------------------------------------------------------------------
Class C 4.43% 1,000.00 3.08% 1,044.30 15.87
- -----------------------------------------------------------------------------------------------------------------------
Hypothetical Return
- -----------------------------------------------------------------------------------------------------------------------
Based on assumed 5% return
- -----------------------------------------------------------------------------------------------------------------------
Class A 1,000.00 2.58% 1,012.10 13.08
- -----------------------------------------------------------------------------------------------------------------------
Class C 1,000.00 3.08% 1,009.60 15.60
- -----------------------------------------------------------------------------------------------------------------------
- ---------------------------------
* Expenses are equal to the Fund's annualized six-month expense ratios
(excluding reimbursements) multiplied by the average account value over
the period, multiplied by the number of days in the most recent fiscal
half year (184) divided by 365 to reflect the one-half year period.
15
================================================================================
EMERALD MUTUAL FUNDS -- GROWTH FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
COMMON STOCKS -- 74.91%
AUTO & TRANSPORTATION -- 1.59%
RAILROADS -- 0.51%
Genesee & Wyoming, Inc.* ....................... 31,200 $ 877,656
------------
TRUCKERS -- 1.08%
Celadon Group, Inc.* ........................... 30,286 673,864
Old Dominion Freight Line, Inc.* ............... 33,500 1,165,800
------------
1,839,664
------------
TOTAL AUTO & TRANSPORTATION ................................ 2,717,320
------------
CONSUMER DISCRETIONARY -- 20.55%
ADVERTISING AGENCIES -- 0.33%
24/7 Real Media, Inc.* ......................... 131,300 568,529
------------
CONSUMER PRODUCTS -- 0.29%
Collegiate Pacific, Inc. ....................... 35,300 488,199
------------
CONSUMER ELECTRONICS -- 0.61%
Infospace, Inc.* ............................... 10,885 517,582
iVillage, Inc.* ................................ 84,804 524,089
------------
1,041,671
------------
EDUCATION SERVICES -- 0.35%
Education Management Corp.* .................... 17,902 590,945
------------
ENTERTAINMENT -- 0.96%
Lions Gate Entertainment Corp.* ................ 82,300 874,026
Speedway Motorsports, Inc. ..................... 19,600 767,928
------------
1,641,954
------------
HOUSEHOLD FURNISHINGS -- 1.07%
Tempur-Pedic International, Inc.* .............. 86,090 1,825,108
------------
RADIO & TV BROADCASTERS -- 0.63%
XM Satellite Radio Holdings, Inc.* ............. 28,600 1,075,932
------------
RENTAL & LEASING SERVICES -- 2.41%
Aaron Rents, Inc. .............................. 42,000 1,050,000
Wesco International, Inc.* ..................... 103,700 3,073,668
------------
4,123,668
------------
16 See accompanying Notes to Financial Statements
================================================================================
EMERALD MUTUAL FUNDS -- GROWTH FUND
SCHEDULE OF INVESTMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
RESTAURANTS -- 1.71%
Checker's Drive-In Restaurants, Inc.* .......... 19,600 $ 262,640
RARE Hospitality International, Inc.* .......... 51,652 1,645,633
Sonic Corp.* ................................... 32,950 1,004,975
------------
2,913,248
------------
RETAIL -- 7.03%
American Eagle Outfitters, Inc. ................ 46,600 2,194,860
Celebrate Express, Inc.* ....................... 24,160 459,040
Cost Plus, Inc.* ............................... 49,794 1,599,881
Global Imaging Systems, Inc.* .................. 40,700 1,607,650
Guitar Center, Inc.* ........................... 45,705 2,408,196
Hibbett Sporting Goods, Inc.* .................. 54,167 1,441,384
Linens 'N Things, Inc.* ........................ 42,800 1,061,440
MarineMax, Inc.* ............................... 11,100 330,336
1-800-FLOWERS.COM, Inc.* ....................... 105,835 890,072
------------
11,992,859
------------
BEVERAGE: SOFT DRINKS -- 0.58%
Hansen Natural Corp.* .......................... 27,334 995,231
------------
SERVICES: COMMERCIAL -- 3.35%
DiamondCluster International, Inc.* ............ 147,800 2,117,974
Gevity HR, Inc. ................................ 73,700 1,515,272
Navigant Consulting, Inc.* ..................... 78,300 2,082,780
------------
5,716,026
------------
TOYS -- 1.23%
Marvel Enterprises, Inc.* ...................... 102,650 2,102,272
------------
TOTAL CONSUMER DISCRETIONARY ............................... 35,075,642
------------
ENERGY -- 2.56%
MACHINERY: OIL WELL EQUIPMENT & SERVICES -- 1.51%
Cal Dive International, Inc.* .................. 29,600 1,206,200
Superior Energy Services* ...................... 89,200 1,374,572
------------
2,580,772
------------
OIL: CRUDE PRODUCERS -- 1.05%
Carrizo Oil & Gas, Inc.* ....................... 20,002 226,023
Edge Petroleum Corp.* .......................... 26,700 389,286
See accompanying Notes to Financial Statements 17
================================================================================
EMERALD MUTUAL FUNDS -- GROWTH FUND
SCHEDULE OF INVESTMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
Grey Wolf, Inc.* ............................... 112,000 $ 590,240
Pioneer Drilling Co.* .......................... 57,800 583,202
------------
1,788,751
------------
TOTAL ENERGY ............................................... 4,369,523
------------
FINANCIAL SERVICES -- 7.25%
BANKS: REGIONAL -- 3.58%
Columbia Bancorp ............................... 22,943 784,421
Harleysville National Corp. .................... 22,880 608,608
Main Street Banks, Inc. ........................ 19,217 671,250
MB Financial Corp. ............................. 32,509 1,370,254
Prosperity Bancshares, Inc. .................... 17,600 514,096
Sun Bancorp, Inc.* ............................. 37,346 932,903
Texas Capital Bancshares, Inc.* ................ 10,000 216,200
Yardville National Bancorp ..................... 29,600 1,014,096
------------
6,111,828
------------
FINANCIAL: MISCELLANEOUS -- 0.39%
First Cash Financial Services* ................. 12,100 323,191
Prospect Energy Corp. .......................... 28,450 341,400
------------
664,591
------------
INSURANCE: MULTI-LINE -- 0.80%
HCC Insurance Holdings, Inc. ................... 19,900 659,088
Penn-America Group, Inc. ....................... 47,080 710,908
------------
1,369,996
------------
INSURANCE: PROPERTY-CASUALTY -- 1.46%
Philadelphia Consolidated Holding Co.* ......... 19,440 1,285,762
Selective Insurance Group ...................... 27,400 1,212,176
------------
2,497,938
------------
SAVINGS & LOAN -- 1.02%
Commercial Capital Bancorp, Inc.* .............. 74,801 1,733,887
------------
TOTAL FINANCIAL SERVICES ................................... 12,378,240
------------
HEALTH CARE -- 11.91%
BIOTECHNOLOGY RESEARCH & PRODUCTION -- 3.61%
Bioenvision, Inc.* ............................. 79,552 712,786
Martek Biosciences Corp.* ...................... 31,500 1,612,800
Regeneration Technologies, Inc.* ............... 50,632 530,623
Telik, Inc.* ................................... 93,905 1,797,342
Vaxgen, Inc.* .................................. 89,000 1,513,000
------------
6,166,551
------------
18 See accompanying Notes to Financial Statements
================================================================================
EMERALD MUTUAL FUNDS -- GROWTH FUND
SCHEDULE OF INVESTMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
DRUGS & PHARMACEUTICALS -- 2.90%
Alkermes, Inc.* ................................ 30,200 $ 425,518
KV Pharmaceutical Co.* ......................... 61,686 1,360,176
KOS Pharmaceuticals, Inc.* ..................... 17,300 651,172
Medicines Co., The* ............................ 64,000 1,843,200
Salix Pharmaceuticals Ltd.* .................... 37,950 667,540
------------
4,947,606
------------
ELECTRONICS: MEDICAL SYSTEMS -- 1.95%
Cardiodynamics International Corp. ............. 54,625 282,411
EPIX Pharmaceuticals, Inc.* .................... 36,300 650,133
VISX, Inc.* .................................... 92,900 2,403,323
------------
3,335,867
------------
HEALTH CARE SERVICES -- 0.73%
LabOne, Inc.* .................................. 27,700 887,508
Symbion, Inc.* ................................. 16,474 363,746
------------
1,251,254
------------
HEALTH CARE FACILITIES -- 1.16%
Psychiatric Solutions, Inc.* ................... 54,000 1,974,240
------------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES -- 1.06%
Gen-Probe, Inc.* ............................... 7,400 334,554
Resmed, Inc.* .................................. 28,900 1,476,790
------------
1,811,344
------------
MISCELLANEOUS HEALTH CARE -- 0.50%
Thermogenesis Corp.* ........................... 133,380 845,629
------------
TOTAL HEALTH CARE .......................................... 20,332,491
------------
MATERIALS & PROCESSING -- 2.42%
CHEMICALS -- 1.46%
Airgas, Inc. ................................... 94,200 2,497,242
------------
METALS AND MINERALS: MISCELLANEOUS -- 0.79%
Brush Engineered Materials, Inc. ............... 12,900 238,650
GrafTech International Ltd.* ................... 116,400 1,101,144
------------
1,339,794
------------
STEEL -- 0.17%
Allegheny Technologies, Inc. ................... 13,400 290,378
------------
TOTAL MATERIALS & PROCESSING ............................... 4,127,414
------------
See accompanying Notes to Financial Statements 19
================================================================================
EMERALD MUTUAL FUNDS -- GROWTH FUND
SCHEDULE OF INVESTMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
PRODUCER DURABLES -- 10.81%
AEROSPACE -- 0.65%
Environmental Tectonics, Inc.* ................. 188,000 $ 1,103,560
------------
ELECTRICAL: INSTRUMENT GAUGES -- 0.49%
Keithley Instruments, Inc. ..................... 43,000 847,100
------------
IDENTIFICATION CONTROL & FILTER -- 2.08%
American Science & Engineering, Inc.* .......... 22,736 936,951
ESCO Technologies, Inc.* ....................... 25,800 1,977,570
RAE Systems, Inc.* ............................. 86,400 630,720
------------
3,545,241
------------
MACHINERY: INDUSTRIAL/SPECIALTY -- 2.62%
Lincoln Electric Holdings, Inc. ................ 22,606 780,811
Kennametal, Inc. ............................... 34,400 1,712,088
Paragon Technologies, Inc.* .................... 199,715 1,977,178
------------
4,470,077
------------
MACHINERY: SPECIALTY -- 1.96%
Applied Films Corp.* ........................... 29,259 630,824
Helix Technology Corp. ......................... 28,082 488,346
JLG Industries, Inc. ........................... 61,002 1,197,469
Semitool, Inc.* ................................ 111,648 1,036,093
------------
3,352,732
------------
MANUFACTURING -- 0.83%
Met-Pro Corp. .................................. 106,366 1,414,668
------------
PRODUCTION TECHNOLOGY EQUIPMENT -- 1.12%
Brooks Automation, Inc. ........................ 52,300 900,606
Credence Systems Corp.* ........................ 35,100 321,165
Varian Semiconductor Equipment Associates, Inc.* 18,600 685,410
------------
1,907,181
------------
TELECOMMUNICATION EQUIPMENT -- 1.06%
Interdigital Communications Corp.* ............. 81,524 1,801,680
------------
TOTAL PRODUCER DURABLES .................................... 18,442,239
------------
REAL ESTATE INVESTMENT TRUSTS -- 0.74%
La Quinta Corp. ................................ 139,400 1,267,146
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS ........................ 1,267,146
------------
20 See accompanying Notes to Financial Statements
================================================================================
EMERALD MUTUAL FUNDS -- GROWTH FUND
SCHEDULE OF INVESTMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
TECHNOLOGY -- 17.08%
COMPUTER SERVICES SOFTWARE -- 5.90%
Ansoft Corp.* .................................. 41,222 $ 832,684
Citadel Security Software, Inc.* ............... 75,935 197,431
Cognizant Technology Solutions Corp.* .......... 38,400 1,625,472
Magma Design Automation, Inc.* ................. 49,101 616,709
MICROS Systems, Inc.* .......................... 44,972 3,510,514
Niku Corp.* .................................... 23,300 469,728
Opnet Technologies, Inc.* ...................... 62,304 524,600
Opsware, Inc.* ................................. 130,200 955,668
Progress Software Corp.* ....................... 27,953 652,703
Silicon Image, Inc.* ........................... 13,100 215,626
Ultimate Software Group, Inc.* ................. 37,100 470,428
------------
10,071,563
------------
COMMUNICATIONS TECHNOLOGY -- 3.54%
Harmonic, Inc.* ................................ 147,000 1,225,980
Ixia* .......................................... 111,796 1,879,291
Redback Networks, Inc.* ........................ 119,200 638,912
Seachange International, Inc.* ................. 74,740 1,303,466
Viasat, Inc.* .................................. 41,036 995,944
------------
6,043,593
------------
COMPUTER TECHNOLOGY -- 0.93%
Mobility Electronics, Inc.* .................... 74,671 640,677
M-Systems Flash Disk Pioneers* ................. 32,424 639,401
Simple Tech, Inc.* ............................. 65,100 299,460
------------
1,579,538
------------
ELECTRICAL & ELECTRONICS -- 2.18%
Benchmark Electronics, Inc.* ................... 66,850 2,279,585
TTM Technologies* .............................. 112,400 1,326,320
Universal Display Corp.* ....................... 13,100 117,900
------------
3,723,805
------------
ELECTRONICS -- 3.12%
Avid Technology, Inc.* ......................... 40,300 2,488,525
Flir Systems, Inc.* ............................ 13,900 886,681
II-VI, Inc.* ................................... 45,899 1,950,249
------------
5,325,455
------------
See accompanying Notes to Financial Statements 21
================================================================================
EMERALD MUTUAL FUNDS -- GROWTH FUND
SCHEDULE OF INVESTMENTS -- CONCLUDED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
ELECTRONICS: SEMI-CONDUCTORS -- 1.41%
Excel Technology, Inc.* ........................ 6,518 $ 169,468
Silicon Laboratories, Inc.* .................... 8,163 288,236
Siliconix, Inc. ................................ 21,221 774,354
Virage Logic Corp. ............................. 63,000 1,169,910
------------
2,401,968
------------
TOTAL TECHNOLOGY ........................................... 29,145,922
------------
TOTAL COMMON STOCKS (COST $94,431,925) ..................... 127,855,937
------------
WARRANTS -- 0.00%
American Banknote Corp. -- Series 1,
Expiration 10/01/2007, Strike $10.00 (a) ........ 28 --
American Banknote Corp. -- Series 2,
Expiration 10/01/2007, Strike $12.50 (a) ........ 28 --
------------
TOTAL WARRANTS (COST $--) .................................. --
------------
SHORT-TERM INVESTMENTS -- 1.40%
First American Prime Obligations Fund, 1.82%+ ... 2,394,291 2,394,291
------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,394,291) ............. 2,394,291
------------
TOTAL INVESTMENTS (COST $96,826,216) -- 76.31% ................. 130,250,228
OTHER ASSETS AND LIABILITIES, NET -- 23.69%** .................. 40,427,799
------------
NET ASSETS -- 100.00% .......................................... $170,678,027
============
* Non-income producing security
** The Schedule of Investments reflects $41 million in receivables posted
12/31/04 not yet invested. Because there were a large portion of incoming
assets not able to be invested on 12/31/04, the percent of Other Assets
and Liabilities, Net, is unusually large at 23.69% and the percentage of
all other Sectors and Industries are lower than if the fund was fully
invested.
+ Variable rate security, the coupon rate shown represents the rate at
December 31, 2004.
22 See accompanying Notes to Financial Statements
================================================================================
EMERALD MUTUAL FUNDS -- SELECT BANKING AND FINANCE FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
COMMON STOCKS - 95.24%
FINANCIAL SERVICES -- 93.86%
BANKS: REGIONAL -- 72.13%
Abigail Adams National Bancorp ................. 94,531 $ 1,825,398
ACNB Corp. ..................................... 15,000 388,500
Alabama National Bancorp ....................... 98,505 6,353,573
Banc Corp. ..................................... 200,591 1,652,870
Bank of the Ozarks, Inc. ....................... 121,740 4,142,812
Boston Private Financial Holdings, Inc. ........ 120,200 3,386,034
BWC Financial Corp. ............................ 21,582 486,890
Camden National Corp. .......................... 78,000 3,073,980
Capital Bank Corp. ............................. 40,500 743,580
Capital Corp of the West ....................... 40,300 1,894,140
Capital Crossing Bank* ......................... 132,400 4,063,356
Cardinal Financial Corp.* ...................... 125,000 1,393,750
Cascade Financial Corp. ........................ 113,550 2,134,740
Central Pacific Financial Corp.* ............... 155,146 5,611,636
Chester Valley Bancorp ......................... 144,041 3,160,692
Classic Bancshares, Inc. ....................... 22,430 1,001,275
Coast Financial Holdings ....................... 61,500 1,076,250
Codorus Valley Bancorp, Inc. ................... 81,559 1,560,224
Colonial Bancgroup, Inc. ....................... 114,700 2,435,081
Columbia Bancorp ............................... 164,812 5,634,922
Community Banks, Inc. .......................... 69,748 1,964,104
Dearborn Bancorp, Inc.* ........................ 46,999 1,370,491
Desert Community Bank .......................... 62,800 1,623,882
East-West Bancorp, Inc. ........................ 84,400 3,541,424
ECB Bancorp, Inc. .............................. 24,500 731,815
First Community Bancshares, Inc. ............... 23,690 854,735
First Financial Bankshares, Inc. ............... 10,970 491,566
First Midwest Bancorp, Inc. .................... 73,337 2,661,400
First Oak Brook Bancshares, Inc. ............... 127,100 4,119,311
First State Financial Corp.* ................... 24,700 321,594
FNB Corp. ...................................... 47,700 1,352,772
Fulton Financial Corp. ......................... 20,795 484,731
GB&T Bancshares, Inc. .......................... 9,600 231,552
Great Southern Bancorp, Inc. ................... 101,600 3,556,000
Greater Bay Bancorp ............................ 25,000 697,000
Harleysville National Corp. .................... 145,647 3,874,210
Harrington West Financial Group, Inc. .......... 50,400 923,580
Heartland Financial USA, Inc. .................. 101,700 2,045,187
See accompanying Notes to Financial Statements 23
================================================================================
EMERALD MUTUAL FUNDS -- SELECT BANKING AND FINANCE FUND
SCHEDULE OF INVESTMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
Heritage Commerce Corp.* ....................... 30,300 $ 576,306
IBERIABANK Corp. ............................... 82,899 5,501,178
International Bancshares Corp. ................. 51,070 2,011,137
Lakeland Financial Corp. ....................... 60,800 2,413,760
Leesport Financial Corp.* ...................... 48,110 1,207,560
Legacy Bank of Harrisburg ...................... 56,027 802,867
Macatawa Bank Corp. ............................ 31,355 1,012,453
Main Street Banks, Inc. ........................ 196,334 6,857,947
MB Financial Corp. ............................. 159,015 6,702,482
Mercantile Bank Corp. .......................... 104,790 4,139,205
Mercantile Bankshares Corp. .................... 89,100 4,651,020
Northrim BanCorp, Inc. ......................... 105,000 2,467,500
Oak Hill Financial, Inc. ....................... 210,300 8,157,537
Partners Trust Financial Group, Inc. ........... 160,000 1,864,000
Pennrock Financial Services Corp. .............. 28,965 1,127,028
Pinnacle Financial Partners, Inc.* ............. 102,500 2,318,652
Princeton National Bancorp, Inc. ............... 66,400 1,922,280
PrivateBancorp, Inc. ........................... 85,300 2,749,219
Prosperity Bancshares, Inc. .................... 166,449 4,861,975
S&T Bancorp, Inc. .............................. 38,491 1,450,726
Security Bank Corp. ............................ 64,700 2,588,000
Sky Financial Group, Inc. ...................... 230,034 6,595,075
Smithtown Bancorp, Inc. ........................ 28,300 898,525
South Financial Group, Inc. .................... 78,442 2,551,718
Southside Bancshares, Inc. ..................... 80,378 1,836,641
Southwest Bancorp, Inc. ........................ 129,038 3,158,850
Sterling Financial Corp. ....................... 141,650 4,061,106
Summit Bancshares, Inc. ........................ 48,800 1,830,000
Sun Bancorp, Inc. -- NJ* ....................... 125,546 3,136,139
Texas Capital Bancshares, Inc.* ................ 299,420 6,473,460
Texas United Bancshares, Inc. .................. 34,127 674,008
Union Bankshares Corp. ......................... 104,137 4,001,985
United Community Banks, Inc. ................... 100,300 2,701,079
Valley Bancorp* ................................ 9,500 405,555
Virginia Commerce Bancorp ...................... 65,225 1,847,172
Virginia Financial Group, Inc.* ................ 55,200 2,023,632
Webster Financial Corp. ........................ 135,400 6,856,656
Western Sierra Bancorp* ........................ 50,600 1,940,763
Wilshire Bancorp, Inc.* ........................ 284,760 4,709,930
Wintrust Financial Corp. ....................... 30,000 1,708,800
Yardville National Bancorp ..................... 96,200 3,295,812
------------
208,954,795
------------
24 See accompanying Notes to Financial Statements
================================================================================
EMERALD MUTUAL FUNDS -- SELECT BANKING AND FINANCE FUND
SCHEDULE OF INVESTMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
FINANCIAL DATA PROCESSING SERVICES -- 0.37%
Tradestation Group* ............................ 151,500 $ 1,063,530
------------
DIVERSIFIED FINANCIAL SERVICES -- 2.31%
E*TRADE Group, Inc.* ........................... 202,500 3,027,375
Legg Mason, Inc. ............................... 36,600 2,681,316
Stifel Financial Corp.* ........................ 46,333 970,676
------------
6,679,367
------------
FINANCIAL MISCELLANEOUS -- 3.33%
Advanta Corp. .................................. 105,100 2,550,777
First Cash Financial Services, Inc. ............ 62,282 1,663,552
Nicholas Financial, Inc. ....................... 95,500 1,367,465
Prospect Energy Corp. .......................... 106,100 1,273,200
QC Holdings, Inc.* ............................. 145,100 2,780,116
------------
9,635,110
------------
INSURANCE CARRIERS: MULTI-LINE -- 1.65%
HCC Insurance Holdings, Inc. ................... 110,500 3,659,760
Penn-America Group, Inc. ....................... 73,500 1,109,850
------------
4,769,610
------------
INSURANCE CARRIERS: PROPERTY & CASUALTY -- 7.42%
Donegal Group, Inc. ............................ 129,600 2,971,728
Erie Indemnity Co. ............................. 27,400 1,440,418
Navigators Group, Inc., The* ................... 78,700 2,369,657
PartnerRe Ltd. ................................. 29,000 1,796,260
Philadelphia Consolidated Holding Co.* ......... 72,600 4,801,764
Selective Insurance Group, Inc. ................ 62,179 2,750,799
United Fire & Casualty Co. ..................... 159,514 5,377,217
------------
21,507,843
INVESTMENT MANAGEMENT COMPANIES -- 1.61%
Affiliated Managers Group, Inc.* ............... 69,000 4,674,060
------------
SAVINGS & LOAN -- 5.04%
BankAtlantic Bancorp, Inc. ..................... 73,300 1,458,670
Commercial Capital Bancorp, Inc. ............... 364,705 8,453,862
Guaranty Federal Bancshares, Inc. .............. 52,000 1,250,912
Pacific Premier Bancorp, Inc.* ................. 187,600 2,487,576
TierOne Corp. .................................. 38,500 956,725
------------
14,607,745
------------
TOTAL FINANCIAL SERVICES ................................... 271,892,060
------------
See accompanying Notes to Financial Statements 25
================================================================================
EMERALD MUTUAL FUNDS -- SELECT BANKING AND FINANCE FUND
SCHEDULE OF INVESTMENTS -- CONCLUDED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
REAL ESTATE INVESTMENT TRUSTS -- 1.38%
Entertainment Properties Trust ................. 70,900 $ 3,158,595
Urstadt Biddle Properties, Inc. ................ 50,000 852,500
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS ........................ 4,011,095
------------
TOTAL COMMON STOCKS (COST $203,633,027) .................... 275,903,155
------------
SHORT-TERM INVESTMENTS -- 5.50%
Federated Treasury Obligations Fund + .......... 1,730,920 1,730,920
First American Prime Obligations Fund, 0.75% + . 14,200,000 14,200,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $15,930,920) ............ 15,930,920
------------
TOTAL INVESTMENTS (COST $219,563,947) -- 100.74% ............... 291,834,075
------------
OTHER ASSETS AND LIABILITIES, NET -- (0.74)% ................... (2,145,065)
------------
NET ASSETS -- 100.00% .......................................... $289,689,010
============
* Non-income producing security
+ Variable rate security, the coupon rate shown represents the rate at
December 31, 2004.
26 See accompanying Notes to Financial Statements
================================================================================
EMERALD MUTUAL FUNDS -- SELECT TECHNOLOGY FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
COMMON STOCKS -- 96.81%
CONSUMER DISCRETIONARY -- 6.59%
COMMERICAL INFORMATION SERVICE -- 1.37%
Yahoo, Inc.* ................................... 1,400 $ 52,752
------------
CONSUMER ELECTRONICS -- 2.47%
Google, Inc.* .................................. 200 38,620
Verisign, Inc.* ................................ 1,700 56,984
------------
95,604
------------
RADIO & T.V. BROADCASTERS -- 2.75%
XM Satellite Radio Holdings, Inc.* ............. 1,800 67,716
DiamondCluster International, Inc.* ............ 2,700 38,691
------------
106,407
------------
TOTAL CONSUMER DISCRETIONARY ............................... 254,763
------------
HEALTHCARE -- 13.99%
BIOTECHNOLOGY RESEARCH & PRODUCTION -- 6.32%
Martek Biosciences Corp.* ...................... 1,600 81,920
Telik, Inc.* ................................... 8,500 162,690
------------
244,610
------------
DRUGS & PHARMACEUTICALS -- 3.41%
The Medicines Company* ......................... 4,585 132,048
------------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES -- 4.26%
Gen-Probe, Inc.* ............................... 2,800 126,588
Respironics, Inc.* ............................. 700 38,052
------------
164,640
------------
TOTAL HEALTHCARE ........................................... 541,298
------------
PRODUCER DURABLES -- 13.52%
ELECTRONICS: INSTRUMENTS GAUGES -- 1.12%
Measurement Specialties, Inc.* ................. 1,700 43,282
------------
IDENTIFICATION CONTROL & FILTER -- 1.60%
American Science & Engineering, Inc.* .......... 1,500 61,815
------------
See accompanying Notes to Financial Statements 27
- --------------------------------------------------------------------------------
EMERALD MUTUAL FUNDS -- SELECT TECHNOLOGY FUND
SCHEDULE OF INVESTMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
MACHINERY: SPECIALTY -- 3.63%
Applied Films Corp.* ........................... 1,200 $ 25,872
Helix Technology Corp. ......................... 1,900 33,041
Semitool, Inc.* ................................ 8,800 81,664
------------
140,577
------------
PRODUCTION TECHNOLOGY EQUIPMENT -- 1.81%
Varian Semiconductor Equipment Associates, Inc.* 1,900 70,015
------------
TELECOMMUNICATIONS EQUIPMENT -- 4.34%
Interdigital Communications Corp.* ............. 7,600 167,960
------------
MISCELLANEOUS -- 1.02%
ADE Corp.* ..................................... 2,100 39,312
------------
TOTAL PRODUCER DURABLES .................................... 522,961
------------
TECHNOLOGY -- 62.71%
COMPUTER SERVICES & SOFTWARE -- 30.75%
Ansoft Corp.* .................................. 6,300 127,260
Citadel Security Software, Inc.* ............... 15,100 39,260
Cognizant Technology Solutions Corp.* .......... 5,400 228,582
Forgent Networks, Inc.* ........................ 19,200 40,896
Hyperion Solutions Corp.* ...................... 1,700 79,254
Magma Design Automation, Inc.* ................. 1,700 21,352
MICROS Systems, Inc.* .......................... 3,100 241,986
Niku Corp.* .................................... 4,800 96,768
Opnet Technologies, Inc.* ...................... 4,800 40,416
OPSWARE, Inc.* ................................. 16,100 118,174
Progress Software Corp.* ....................... 3,600 84,060
Silicon Image, Inc.* ........................... 2,800 46,088
Ultimate Software Group, Inc.* ................. 2,000 25,360
------------
1,189,456
------------
COMMUNICATIONS TECHNOLOGY -- 13.49%
Harmonic, Inc* ................................. 10,300 85,902
Intervoice-Brite, Inc.* ........................ 3,700 49,395
Ixia* .......................................... 4,000 67,240
Netgear, Inc.* ................................. 4,200 76,398
Redback Networks, Inc.* ........................ 16,200 86,832
Seachange International, Inc.* ................. 4,900 85,456
Viasat, Inc.* .................................. 2,900 70,383
------------
521,606
------------
28 See accompanying Notes to Financial Statements
================================================================================
EMERALD MUTUAL FUNDS -- SELECT TECHNOLOGY FUND
SCHEDULE OF INVESTMENTS -- CONCLUDED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
ELECTRICAL & ELECTRONICS -- 2.38%
Benchmark Electronics, Inc.* ................... 2,700 $ 92,070
------------
ELECTRONICS -- 7.00%
Avid Technology, Inc.* ......................... 1,300 80,275
Flir Systems, Inc.* ............................ 800 51,032
II-VI, Inc.* ................................... 2,400 101,976
Vishay Intertechnology, Inc.* .................. 2,500 37,550
------------
270,833
------------
ELECTRONICS: SEMICONDUCTORS -- 9.09%
Silicon Laboratories, Inc.* .................... 600 21,186
Siliconix, Inc.* ............................... 2,904 105,967
Virage Logic Corp.* ............................ 8,900 165,273
Zebra Technologies Corp.* ...................... 1,050 59,094
------------
351,520
------------
TOTAL TECHNOLOGY ........................................... 2,425,485
------------
TOTAL COMMON STOCKS (COST $2,826,425) ...................... 3,744,507
------------
SHORT-TERM INVESTMENTS -- 9.00%
First American Prime Obligations Fund, 1.82%
(COST $185,000) + .............................. 185,000 185,000
Federated Treasury Obligations Fund, 1.51%
(COST $163,257) + .............................. 163,257 163,257
------------
TOTAL SHORT-TERM INVESTMENTS (COST $ 348,257) .............. 348,257
------------
TOTAL INVESTMENTS (COST $3,174,682) -- 105.81% ................. 4,092,764
------------
OTHER ASSETS AND LIABILITIES, NET -- (5.81%) ................... (224,805)
------------
NET ASSETS -- 100.00% .......................................... $ 3,867,959
============
* Non-income producing security
+ Variable rate security, the coupon rate shown represents the rate at
December 31, 2004
See accompanying Notes to Financial Statements 29
========================================================================================================
EMERALD MUTUAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------
SELECT SELECT
BANKING AND TECHNOLOGY
GROWTH FUND FINANCE FUND FUND
-------------- -------------- --------------
ASSETS
Investments in securities at market value (cost
$96,826,216, $219,563,947 and $3,174,682,
respectively) ................................... $ 130,250,228 $ 291,834,075 $ 4,092,764
Receivables:
Capital shares sold ............................. 41,437,106 2,039,715 --
Investment securities sold ...................... 103,130 -- 119,211
Dividends and interest .......................... 13,172 345,049 327
Other assets ...................................... 36,194 54,695 16,984
-------------- -------------- --------------
Total assets .................................. 171,839,830 294,273,534 4,229,286
-------------- -------------- --------------
LIABILITIES
Payables for:
Capital shares redeemed ......................... 407,562 261,246 1,925
Investment securities purchased ................. 626,436 4,064,812 350,673
Advisory fee payable ............................ 79,855 189,467 3,241
Accrued expenses and other liabilities ............ 47,950 68,999 5,488
-------------- -------------- --------------
Total liabilities .......................... 1,161,803 4,584,524 361,327
-------------- -------------- --------------
NET ASSETS ........................................ $ 170,678,027 $ 289,689,010 $ 3,867,959
============== ============== ==============
NET ASSETS CONSIST OF:
Paid in capital ................................... $ 139,304,934 $ 214,688,733 $ 11,394,360
Accumulated net realized gain/(loss) on investments (1,279,885) 3,286,641 (8,402,671)
Accumulated net investment loss ................... (771,034) (556,492) (41,812)
Net unrealized appreciation on investments ........ 33,424,012 72,270,128 918,082
-------------- -------------- --------------
Total net assets ........................... $ 170,678,027 $ 289,689,010 $ 3,867,959
============== ============== ==============
CLASS A SHARES:
Net assets ........................................ $ 156,979,673 $ 177,943,596 $ 3,380,002
============== ============== ==============
Shares of beneficial interest issued and
outstanding, no par value ....................... 11,917,210 6,205,873 452,748
-------------- -------------- --------------
Net asset value and redemption price per share
($156,979,673 / 11,917,210 shares, $177,943,596
/ 6,205,873 shares and $3,380,002 / 452,748
shares, respectively) ........................... $ 13.17 $ 28.67 $ 7.47
============== ============== ==============
Maximum offering price per share1 ($13.17 / 0.9525,
$28.67 / 0.9525 and $7.47 / 0.9525, respectively) $ 13.83 $ 30.10 $ 7.84
============== ============== ==============
CLASS C SHARES:
Net assets ........................................ $ 13,698,354 $ 111,745,414 $ 487,957
-------------- -------------- --------------
Shares of beneficial interest issued and
outstanding, no par value ....................... 1,070,804 3,992,843 66,712
-------------- -------------- --------------
Net asset value, offering and redemption price per
share(2) ($13,698,354 / 1,070,804 shares,
111,745,414 / 3,992,843 shares and $487,957 /
66,712 shares, respectively) .................... $ 12.79 $ 27.99 $ 7.31
============== ============== ==============
(1) Net asset value plus sales charge of 4.75% of the offering price.
(2) Redemption price per share may be reduced for any applicable contingent
deferred sales charge.
30 See accompanying Notes to Financial Statements
=======================================================================================================
EMERALD MUTUAL FUNDS
STATEMENTS OF OPERATIONS DECEMBER 31, 2004 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2004
SELECT SELECT
BANKING AND TECHNOLOGY
GROWTH FUND FINANCE FUND FUND
------------ ------------ ------------
INVESTMENT INCOME
Dividends ............................................ $ 152,892 $ 1,795,912 $ 394
Interest ............................................. 25,708 44,628 2,253
------------ ------------ ------------
Total investment income ......................... 178,600 1,840,540 2,647
------------ ------------ ------------
EXPENSES
Investment Advisory fees ............................. 440,938 1,139,402 16,768
12b-1 fees -- Class A ................................ 183,877 253,980 7,239
12b-1 fees -- Class C ................................ 62,555 484,332 2,290
Transfer agent, administration and fund accounting ... 145,480 298,987 4,146
Professional fees .................................... 34,592 68,706 3,601
Insurance expense .................................... 10,962 19,857 342
Trustees' fees ....................................... 10,020 20,546 285
Reports to shareholders .............................. 11,134 22,828 317
Proxy expense ........................................ 12,830 28,681 386
Federal and state registration fees .................. 9,264 14,503 5,539
Custody fees ......................................... 12,098 14,619 1,814
Other ................................................ 15,884 30,591 1,732
------------ ------------ ------------
Total expenses before fee waivers ............... 949,634 2,397,032 44,459
Advisory fee waived .................................. -- -- --
------------ ------------ ------------
Total expenses .................................. 949,634 2,397,032 44,459
------------ ------------ ------------
Net Investment (Loss) .................................. (771,034) (556,492) (41,812)
------------ ------------ ------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS
Net realized gain/(loss) on investments .............. (1,244,587) 3,440,033 8,712
Change in unrealized appreciation on investments ..... 6,928,536 33,064,339 192,213
------------ ------------ ------------
Net realized and unrealized gain/(loss) on investments 5,683,949 36,504,372 200,925
------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ...................................... $ 4,912,915 $ 35,947,880 $ 159,113
============ ============ ============
See accompanying Notes to Financial Statements 31
=====================================================================================================================
EMERALD MUTUAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2004 (UNAUDITED)
SELECT SELECT
BANKING AND TECHNOLOGY
GROWTH FUND FINANCE FUND FUND
-------------- -------------- --------------
OPERATIONS
Net investment loss .......................................... $ (771,034) $ (556,492) $ (41,812)
Net realized gain/(loss) on investments ...................... (1,244,587) 3,440,033 8,712
Change in unrealized appreciation on investments ............. 6,928,536 33,064,339 192,213
-------------- -------------- --------------
Net increase in net assets resulting
from operations .................................... 4,912,915 35,947,880 159,113
-------------- -------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income -- Class A ............................. -- -- --
Net investment income -- Class C ............................. -- -- --
Net realized capital gain -- Class A ......................... (2,630,169) (4,974,573) --
Net realized capital gain -- Class C ......................... (325,503) (3,519,861) --
-------------- --------------
Total dividends and distributions to shareholders .... (2,955,672) (8,494,434) --
-------------- --------------
CAPITAL SHARE TRANSACTIONS
Net increase/(decrease) in net assets resulting from
capital share transactions .................................... 43,055,794 40,850,213 (11,218)
-------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS ................................... 45,013,037 68,303,659 147,895
NET ASSETS
Beginning of period .......................................... 125,664,990 221,385,351 3,720,064
-------------- -------------- --------------
End of period ................................................ $ 170,678,027 $ 289,689,010 $ 3,867,959
============== ============== ==============
Undistributed net investment income .......................... -- -- --
============== ============== ==============
- ---------------------------------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
SELECT SELECT
BANKING AND TECHNOLOGY
GROWTH FUND FINANCE FUND FUND
-------------- -------------- --------------
OPERATIONS
Net investment loss .......................................... $ (1,558,356) $ (628,630) $ (104,370)
Net realized gain/(loss) on investments
and securities sold short .................................. 14,486,056 9,555,944 615,631
Change in unrealized appreciation/(depreciation)
on investments and securities sold short ................... 10,180,503 26,712,754 192,271
-------------- -------------- --------------
Net increase in net assets
resulting from operations ........................... 23,108,203 35,640,068 703,532
-------------- -------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income -- Class A ............................. -- (20,232) --
Net investment income -- Class C ............................. -- -- --
Net realized capital gain -- Class A ......................... -- (692,942) --
Net realized capital gain -- Class C ......................... -- (364,072) --
-------------- -------------- --------------
Total dividends and distributions to shareholders .... -- (1,077,246) --
-------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from
capital share transactions ................................. 19,592,101 99,775,582 243,888
-------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS ................................... 42,700,304 134,338,404 947,420
NET ASSETS
Beginning of period .......................................... 82,964,686 87,046,947 2,772,644
-------------- -------------- --------------
End of period ................................................ $ 125,664,990 $ 221,385,351 $ 3,720,064
============== ============== ==============
Undistributed net investment income .......................... -- -- --
============== ============== ==============
32 See accompanying Notes to Financial Statements
==================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
GROWTH FUND
FOR THE SIX-MONTH
PERIOD ENDED FOR THE FOR THE
DECEMBER 31, 2004 YEAR ENDED YEAR ENDED
(UNAUDITED) JUNE 30, 2004 JUNE 30, 2003
CLASS A CLASS A CLASS A
---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 13.02 $ 10.21 $ 10.26
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment loss .................................. (0.07)(1) (0.17)(1) (0.10)(1)
Net realized and unrealized gain/(loss) on investments 0.53 2.98 0.05
---------- ---------- ----------
Total from investment operations ................... 0.46 2.81 (0.05)
---------- ---------- ----------
LESS DISTRIBUTIONS
- ------------------
Distributions from net realized capital gain ......... (0.31) -- --
---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 13.17 $ 13.02 $ 10.21
========== ========== ==========
Total Return* ........................................ 3.98%(2) 27.52% (0.49)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 156,980 $ 112,354 $ 78,060
Ratio of expenses to average net assets .............. 1.55%(3) 1.57% 1.73%
Ratio of net investment (loss) to average net assets . (1.23)%(3) (1.34)% (1.14)%
Portfolio turnover rate .............................. 35% 62% 79%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment loss per share represents net investment loss divided by
the average shares outstanding throughout the period.
(2) Aggregate total return, not annualized.
(3) Annualized.
See accompanying Notes to Financial Statements 33
==================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
GROWTH FUND
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
JUNE 30, 2002 JUNE 30, 2001 YEAR ENDED
CLASS A CLASS A** JUNE 30, 2000
---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 12.50 $ 18.31 $ 11.70
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment loss .................................. (0.10)(1) (0.05)(1) (0.12)
Net realized and unrealized gain/(loss) on investments (2.14) (1.58) 7.79
---------- ---------- ----------
Total from investment operations ................... (2.24) (1.63) 7.67
---------- ---------- ----------
LESS DISTRIBUTIONS
- ------------------
Distributions from net realized capital gain ......... -- (41.8) (1.06)
---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 10.26 $ 12.50 $ 18.31
========== ========== ==========
Total Return* ........................................ (17.92)% (9.62)% (66.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 82,805 $ 107,325 $ 136,649
Ratio of expenses to average net assets .............. 1.62% 1.56% 1.45%
Ratio of net investment (loss) to average net assets . (0.88)% (0.40)% (0.66)%
Portfolio turnover rate .............................. 61% 60% 102%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment loss per share represents net investment loss divided by
the average shares outstanding throughout the period.
(2) Aggregate total return, not annualized.
(3) Annualized.
34 See accompanying Notes to Financial Statements
================================================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
GROWTH FUND
FOR THE SIX-MONTH
PERIOD ENDED FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
DECEMBER 31, 2004 ENDED ENDED ENDED ENDED
(UNAUDITED) JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
CLASS C CLASS C CLASS C CLASS C CLASS C**
---------- ---------- ---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 12.70 $ 10.02 $ 10.14 $ 12.43 $ 18.31
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment loss .................................. (0.11)(1) (0.25)(1) (0.16)(1) (0.17)(1) (0.13)(1)
Net realized and unrealized gain/(loss) on investments 0.51 2.93 0.04 (2.12) (1.57)
---------- ---------- ---------- ---------- ----------
Total from investment operations ................... 0.40 2.68 (0.12) (2.29) (1.70)
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
- ------------------
Distributions from net realized capital gain ......... (0.31) -- -- -- (4.18)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 12.79 $ 12.70 $ 10.02 $ 10.14 $ 12.43
========== ========== ========== ========== ==========
Total Return* ........................................ 3.60%(2) 26.75% (1.18)% (18.42)% (10.08)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 13,698 $ 13,311 $ 4,905 $ 3,505 $ 1,434
Ratio of operating expenses to average net assets .... 2.20%(3) 2.22% 2.39% 2.27% 2.21%
Ratio of net investment (loss) to average net assets . (1.88)%(3) (1.99)% (1.81)% (1.53)% (1.05)%
Portfolio turnover rate .............................. 35% 62% 79% 61% 60%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment loss per share represents net investment loss divided by
the average shares outstanding throughout the period.
(2) Aggregate total return, not annualized.
(3) Annualized.
See accompanying Notes to Financial Statements 35
==================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SELECT BANKING AND FINANCE FUND
FOR THE SIX-MONTH
PERIOD ENDED FOR THE FOR THE
DECEMBER 31, 2004 YEAR ENDED YEAR ENDED
(UNAUDITED) JUNE 30, 2004 JUNE 30, 2003
CLASS A CLASS A CLASS A
---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 25.74 $ 19.89 $ 18.36
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income ................................ (0.03)(1) (0.03)(1) 0.03
Net realized and unrealized gain/(loss) on investments 3.95 6.07 1.84
---------- ---------- ----------
Total from investment operations ................... 3.92 6.04 1.87
---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS
- --------------------------------
Dividends from net investment income ................. -- (0.01) --
Dividends in excess of net investment income ......... -- -- --
Distributions from net realized capital gain ......... (0.99) (0.18) (0.34)
---------- ---------- ----------
Total dividends and distributions .................. (0.99) (0.19) (0.34)
---------- ---------- ----------
Net Asset Value, End of Period
$ 28.67 $ 25.74 $ 19.89
========== ========== ==========
Total Return* ........................................ 15.82%(2) 30.53% 10.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 177,944 $ 133,136 $ 59,565
Ratio of operating expenses to average net assets
before reimbursement by Adviser and waivers ........ 1.72%(3) 1.74% 1.97%
Ratio of operating expenses to average net assets
after reimbursement by Adviser and waivers ......... n/a(4) n/a(4) n/a(4)
Ratio of net investment income/(loss) to average net
assets before reimbursement by Adviser and waivers . (0.20)%(3) (0.13)% 0.20%
Ratio of net investment income/(loss) to average net
assets after reimbursement by Adviser and waivers .. n/a(4) n/a(4) n/a(4)
Portfolio turnover rate .............................. 10% 29% 47%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment income/(loss) per share represents net investment
income/(loss) divided by the average shares outstanding throughout the
period.
(2) Aggregate total return, not annualized.
(3) Annualized.
(4) Not applicable: no reimbursements were made by the Adviser.
36 See accompanying Notes to Financial Statements
==================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SELECT BANKING AND FINANCE FUND
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
JUNE 30, 2002 JUNE 30, 2001 YEAR ENDED
CLASS A CLASS A** JUNE 30, 2000
---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 15.55 $ 11.20 $ 13.36
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income (loss) ......................... 00.5(1) 0.18(1) 0.08
Net realized and unrealized gain/(loss) on investments 3.01 4.34 (2.20)
---------- ---------- ----------
Total from investment operations ................... 3.06 4.52 (2.12)
---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS
- --------------------------------
Dividends from net investment income ................. (0.08) (0.17) (0.03)
Dividends in excess of net investment income ......... -- -- (0.01)
Distributions from net realized capital gain ......... (0.17) -- --
---------- ---------- ----------
Total dividends and distributions .................. (0.25) (0.17) (0.04)
---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 18.36 $ 15.55 $ 11.20
========== ========== ==========
Total Return* ........................................ 19.96% 40.72% (15.91)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 34,933 $ 14,822 $ 10,947
Ratio of operating expenses to average net assets
before reimbursement by Adviser and waivers ........ 2.26% 2.94% 2.60%
Ratio of operating expenses to average net assets
after reimbursement by Adviser and waivers ......... n/a(4) 2.35% 2.35
Ratio of net investment income/(loss) to average net
assets before reimbursement by Adviser and waivers . (0.28)% 0.79% 0.51%
Ratio of net investment income/(loss) to average net
assets after reimbursement by Adviser and waivers .. n/a(4) 1.38% 0.76%
Portfolio turnover rate .............................. 27% 55% 46%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment income/(loss) per share represents net investment
income/(loss) divided by the average shares outstanding throughout the
period.
(2) Aggregate total return, not annualized.
(3) Annualized.
(4) Not applicable: no reimbursements were made by the Adviser.
See accompanying Notes to Financial Statements 37
================================================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
FOR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SELECT BANKING AND FINANCE FUND
FOR THE SIX-MONTH
PERIOD ENDED FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
DECEMBER 31, 2004 ENDED ENDED ENDED ENDED
(UNAUDITED) JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
CLASS C CLASS C CLASS C CLASS C CLASS C**
---------- ---------- ---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 25.23 $ 19.62 $ 18.24 $ 15.47 $ 11.20
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income/(loss) ......................... (0.11)(1) (0.18)(1) (0.08)(1) (0.06)(1) 0.10(1)
Net realized and unrealized gain/(loss) on investments 3.86 5.97 1.80 3.00 4.34
---------- ---------- ---------- ---------- ----------
Total from investment operations ................... 3.75 5.79 1.72 2.94 4.44
---------- ---------- ---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS
- --------------------------------
Dividends from net investment income ................. -- -- -- -- (0.17)
Distributions from net realized capital gain ......... (0.99) (0.18) (0.34) (0.17) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions .................. (0.99) (0.18) (0.34) (0.17) (0.17)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 27.99 $ 25.23 $ 19.62 $ 18.24 $ 15.47
========== ========== ========== ========== ==========
Total Return* ........................................ 15.46% 29.68% 9.69% 19.22% 40.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 111,745 $ 88,249 $ 27,482 $ 6,210 $ 513
Ratio of operating expenses to average net assets
before reimbursement by Adviser and waivers ........ 2.37%(3) 2.39% 2.66% 2.91% 3.59%
Ratio of operating expenses to average net assets
after reimbursement by Adviser and waivers ......... n/a(4) n/a(4) n/a(4) n/a(4) 3.00%
Ratio of net investment income/(loss) to average net
assets before reimbursement by Adviser and waivers . (0.85)%(3) (0.77)% (0.43)% (0.37)% 0.14%
Ratio of net investment income/(loss) to average net
assets after reimbursement by Adviser and waivers .. n/a(4) n/a(4) n/a(4) n/a(4) 0.73%
Portfolio turnover rate .............................. 10% 29% 47% 27% 55%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment income/(loss) per share represents net investment
income/(loss) divided by the average shares outstanding throughout the
period.
(2) Aggregate total return, not annualized.
(3) Annualized.
(4) Not applicable: no reimbursements were made by the Adviser.
38 See accompanying Notes to Financial Statements
==================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SELECT TECHNOLOGY FUND
FOR THE SIX-MONTH
PERIOD ENDED FOR THE FOR THE
DECEMBER 31, 2004 YEAR ENDED YEAR ENDED
(UNAUDITED) JUNE 30, 2004 JUNE 30, 2003
CLASS A CLASS A CLASS A
---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 7.13 $ 5.64 $ 5.38
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment loss .................................. (0.08)(1) (0.19)(1) (0.12)(1)
Net realized and unrealized gain/(loss) on investments 0.42 1.68 0.38
---------- ---------- ----------
Total from investment operations ................... 0.34 1.49 0.26
---------- ---------- ----------
LESS DISTRIBUTIONS
- ------------------
Distributions from net realized capital gain ......... -- -- --
---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 7.47 $ 7.13 $ 5.64
========== ========== ==========
Total Return** ....................................... 4.77%(2) 26.42% 4.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 3,380 $ 3,202 $ 2,572
Ratio of operating expenses to average net assets
before reimbursement by Adviser and waivers ........ n/a(4) 2.75% 4.99%
Ratio of operating expenses to average net assets
after reimbursement by Adviser and waivers ......... 2.58%(3) 2.74% 2.90%
Ratio of net investment (loss) to average net assets
before reimbursement by Adviser and waivers ........ n/a(4) (2.67)% (4.78)%
Ratio of net investment (loss) to average net assets
after reimbursement by Adviser and waivers ......... (2.43)%(3) (2.65)% (2.69)%
Portfolio turnover rate .............................. 67% 65% 151%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment loss per share represents net investment loss divided by
the average shares outstanding throughout the period.
(2) Aggregate total return, not annualized.
(3) Annualized.
(4) Not applicable: no reimbursements were made by the Adviser.
See accompanying Notes to Financial Statements 39
==================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SELECT TECHNOLOGY FUND
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
JUNE 30, 2002 JUNE 30, 2001 YEAR ENDED
CLASS A CLASS A** JUNE 30, 2000
---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 12.15 $ 29.59 $ 12.17
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment loss .................................. (0.20)(1) (0.43)(2) (0.55)(1)
Net realized and unrealized gain/(loss) on investments (6.15) (13.01) 18.62
---------- ---------- ----------
Total from investment operations ................... (6.35) (13.44) 18.07
---------- ---------- ----------
LESS DISTRIBUTIONS
- ------------------
Distributions from net realized capital gain ......... (0.42) (4.00) (0.65)
---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 5.38 $ 12.15 $ 29.59
========== ========== ==========
Total Return** ....................................... (53.76)% (51.80)% 148.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 3,132 $ 8,054 $ 19,390
Ratio of operating expenses to average net assets
before reimbursement by Adviser and waivers ........ 4.66% 3.41% 2.67%
Ratio of operating expenses to average net assets
after reimbursement by Adviser and waivers ......... 2.90% 2.90% n/a(4)
Ratio of net investment (loss) to average net assets
before reimbursement by Adviser and waivers ........ (4.26)% (2.76)% (2.17)%
Ratio of net investment (loss) to average net assets
after reimbursement by Adviser and waivers ......... (2.50)% (2.25)% n/a(4)
Portfolio turnover rate .............................. 249% 193% 199%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment loss per share represents net investment loss divided by
the average shares outstanding throughout the period.
(2) Aggregate total return, not annualized.
(3) Annualized.
(4) Not applicable: no reimbursements were made by the Adviser.
40 See accompanying Notes to Financial Statements
================================================================================================================================
EMERALD MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
FOR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SELECT TECHNOLOGY FUND
FOR THE SIX-MONTH
PERIOD ENDED FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
DECEMBER 31, 2004 ENDED ENDED ENDED ENDED
(UNAUDITED) JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
CLASS C CLASS C CLASS C CLASS C CLASS C**
---------- ---------- ---------- ---------- ----------
Net Asset Value, Beginning of Period ................. $ 7.00 $ 5.56 $ 5.33 $ 12.10 $ 29.59
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment loss .................................. (0.09)(1) (0.22)(1) (0.15)(1) (0.24)(1) (0.37)
Net realized and unrealized gain/(loss) on investments 0.40 1.66 0.38 (6.11) (13.12)
---------- ---------- ---------- ---------- ----------
Total from investment operations ................... 0.31 1.44 0.23 (6.35) (13.49)
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
- ------------------
Distributions from net realized capital gain ......... -- -- -- (0.42) (4.00)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 7.31 $ 7.00 $ 5.56 $ 5.33 $ 12.10
========== ========== ========== ========== ==========
Total Return* ........................................ 4.43%(2) 25.90% 4.32% (53.99)% (52.00)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) .................. $ 488 $ 518 $ 201 $ 89 $ 301
Ratio of operating expenses to average net assets
before reimbursement by Adviser and waivers ........ n/a(4) 3.25% 5.49% 5.16% 3.91%
Ratio of operating expenses to average net assets
after reimbursement by Adviser and waivers ......... 3.08%(3) 3.24% 3.40% 3.40% 3.40%
Ratio of net investment (loss) to average net assets
before reimbursement by Adviser and waivers ........ n/a(4) (3.17)% (5.28)% (4.76)% (3.26)%
Ratio of net investment (loss) to average net assets
after reimbursement by Adviser and waivers ......... (2.92)%(3) (3.15)% (3.19)% (3.00)% (2.75)%
Portfolio turnover rate .............................. 67% 65% 151% 249% 193%
* Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
** On July 1, 2000, the Class C Shares went effective and the existing class
of shares was designated Class A Shares.
(1) Net investment loss per share represents net investment loss divided by
the average shares outstanding throughout the period.
(2) Aggregate total return, not annualized.
(3) Annualized.
(4) Not applicable: no reimbursements were made by the Adviser.
See accompanying Notes to Financial Statements 41
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 -- DESCRIPTION OF FUNDS
The HomeState Group (the "Trust"), an open-end management investment
company, was established as a Pennsylvania common law trust on August 26,
1992, and is registered under the Investment Company Act of 1940, as
amended. The Trust has established three series: the Emerald Growth Fund,
the Emerald Select Banking and Finance Fund and the Emerald Select
Technology Fund (each a "Fund" and collectively, the "Funds").
The Emerald Growth Fund commenced operations on October 1, 1992. The
investment objective of the Fund is long-term growth of capital through
capital appreciation. To pursue its objective, the Fund will invest at
least 80% of its total assets in a diversified portfolio of common stocks,
preferred stocks and securities convertible into common and preferred
stocks. Prior to July 1, 2001, the Fund was named the HomeState
Pennsylvania Growth Fund and had a narrower investment objective.
The Emerald Select Banking and Finance Fund commenced operations on
February 18, 1997. The investment objective of the Fund is long-term
growth through capital appreciation. Income is a secondary objective. To
pursue its objective, the Fund will invest at least 80% of its total
assets in a diversified portfolio of banking and financial services
companies. Prior to October 20, 1998, the Fund was named the HomeState
Select Opportunities Fund and had a different investment objective.
The Emerald Select Technology Fund commenced operations on October 31,
1997. The investment objective of the Fund is to seek capital appreciation
by investing in a non-diversified portfolio of equity securities of public
companies in the technology sector. To pursue its objective, the Fund will
invest at least 80% of its total assets in such companies. Prior to
February 29, 2000, the Fund was named HomeState Year 2000 Fund and had a
narrower investment objective.
The Funds issued a second class of shares, Class C Shares, and renamed the
initial class as Class A Shares on July 1, 2000. The two classes differ
principally in their respective distribution expenses and arrangements as
well as their respective sale and contingent deferred sales charge
arrangements. Both classes of shares have identical rights to earnings,
assets and voting privileges, except for class specific expenses and
exclusive rights to vote on matters affecting only individual classes.
Class A Shares are subject to an initial sales charge of 4.75% imposed at
the time of purchase. Class C Shares were subject to an initial sales
charge of 1.00% imposed at the time of purchase, as well as a contingent
deferred sales charge ("CDSC") for redemptions made within one year of
purchase, in accordance with the Fund's prospectus. The CDSC is 1.00% of
the lesser of the current market value or the cost of shares being
redeemed. Effective April 1, 2004, the Board of Trustees authorized the
elimination of the 1.00% initial sales charge on the Class C shares.
Certain funds invest a high percentage of their assets in specific sectors
of the market, especially technology, banking and financial. As a result,
the economic and regulatory developments in a particular sector of the
market, positive or negative, have a greater impact on the fund's net
asset value and will cause its shares to fluctuate more than if the fund
did not concentrate in investments in a particular sector.
42
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the trust:
SECURITY VALUATION -- Investment securities and securities sold short
traded on a national securities exchange are valued at the last reported
sales price on the security's principal exchange, which is usually at 4:00
p.m. Eastern time, unless there are no transactions on the valuation date,
in which case they are valued at the mean between the closing asked and
bid prices. Securities traded over-the-counter are valued at the last
reported sales price unless there is no reported sales price, in which
case the mean between the closing asked and bid price is used. Investments
in open-ended registered investment companies are valued at their net
asset value each business day. An option contract is valued at the last
sales price as quoted on the principal exchange on which such option is
traded, or in the absence of a sale, the mean between the last bid and ask
prices. Debt securities with maturities of sixty days or less are valued
at amortized cost, which approximates market value. Where market
quotations are not readily available, securities are valued using methods,
which the Board of Trustees believe, in good faith, accurately reflects
their fair value.
INCOME RECOGNITION -- Interest income is accrued as earned. Dividend
income and expense for securities sold short is recorded on the
ex-dividend date. Income, expense (other than expenses attributable to a
specific class) and realized and unrealized gains or losses on investments
are allocated to each class of shares based on the fair value of settled
shares. Expenses that are directly related to one of the Funds are charged
directly to that Fund. Other operating expenses are prorated to the Funds
on the basis of relative net assets. All discounts and premiums on fixed
income securities are amortized on the effective interest method for tax
and financial reporting purposes.
SECURITIES TRANSACTIONS -- Security transactions are accounted for on the
trade date. Realized gains and losses on securities sold are determined
using the first-in, first-out (FIFO) cost method.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
to shareholders, which are determined in accordance with federal tax
regulations, are recorded on the ex-dividend date. Net gains realized from
securities transactions and dividends from net investment income, if any,
would normally be distributed to shareholders in August and December. The
Funds may utilize earnings and profits distributed to shareholders on
redemptions of shares as part of the dividends paid deduction.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- 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
amount 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.
OPTION WRITING/PURCHASING -- The Emerald Select Banking and Finance Fund
and the Emerald Select Technology Fund may write or purchase financial
options contracts solely for the purpose of hedging their existing
portfolio securities, or securities that the funds intend to purchase,
against fluctuations in
43
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
fair value caused by changes in prevailing market interest rates. When the
funds write or purchase an option, an amount equal to the premium received
or paid by the funds is recorded as a liability or an asset and is
subsequently adjusted to the current market value of the option written or
purchased. Premiums received or paid from writing or purchasing options,
which expire unexercised, are treated by the funds on the expiration date
as realized gains or losses. The difference between the premium and the
amount paid or received on effecting a closing purchase or sale
transaction, including brokerage commissions, is also treated as a
realized gain or loss. If an option is exercised, the premium paid or
received is added to the cost of the purchase or proceeds from the sale in
determining whether the funds have realized a gain or loss on investment
transactions. Risks arise from entering into written option transactions
from the potential inability of counterparties to meet the terms of the
contracts, the potential inability to enter into closing transaction
because of an illiquid secondary market and from unexpected movements in
security values. At December 31, 2004, the Emerald Select Banking and
Finance Fund and the Emerald Technology Fund held no purchased or written
options.
SHORT SALES -- The Emerald Select Banking and Finance Fund and the Emerald
Select Technology Fund may sell securities short. Short sales are
transactions in which a fund sells a security that it does not own, in
anticipation of a decline in the market value of that security. To
complete such a transaction, the fund must borrow the security to deliver
to the buyer. The fund then is obligated to replace the security borrowed
by purchasing it in the open market at some later date. The Fund bears the
risk of a loss if the market price of the security increases between the
date of the short sale and the date on which the fund replaces the
borrowed security. The funds will realize a gain if the security declines
in value between those dates. There can be no assurance that securities
necessary to cover a short position will be available for purchase. All
short sales must be fully collateralized. The funds maintain collateral
consisting of cash, U.S. Government securities or other liquid assets in
an amount at least equal to the market value of their respective short
positions. The funds are liable for any dividends payable on securities
while those securities are in a short position. At December 31, 2004, the
Emerald Select Banking and Finance Fund and the Emerald Technology Fund
had no securities sold short.
NOTE 3 -- CAPITAL STOCK
At December 31, 2004, each Fund had authorized an unlimited number of
shares of beneficial interest with no par value.
44
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
The following table summarizes the capital share transactions of each
Fund:
GROWTH FUND
FOR THE SIX-MONTH PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, 2004 (UNAUDITED) JUNE 30, 2004
----------------------------- -----------------------------
CLASS A CLASS A
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Sales .................. 4,051,031 $ 52,103,951 2,720,528 $ 34,341,896
Reinvested distributions 220,696 2,443,099 -- --
Redemptions ............ (982,483) (11,725,303) (1,739,742) (21,675,806)
------------ ------------ ------------ ------------
Net increase ........... 3,289,244 $ 42,821,747 980,786 $ 12,666,090
------------ ============ ------------ ============
SHARES OUTSTANDING:
Beginning of period 8,627,966 7,647,180
------------ ------------
End of period ..... 11,917,210 8,627,966
============ ============
FOR THE SIX-MONTH PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, 2004 (UNAUDITED) JUNE 30, 2004
----------------------------- -----------------------------
CLASS C CLASS C
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Sales .................. 83,080 $ 963,459 650,886 $ 8,067,108
Reinvested distributions 26,657 287,362 -- --
Redemptions ............ (87,215) (1,016,774) (92,133) (1,141,097)
------------ ------------ ------------ ------------
Net increase ........... 22,522 $ 234,047 558,753 $ 6,926,011
------------ ============ ------------ ============
SHARES OUTSTANDING:
Beginning of period 1,048,282 489,529
------------ ------------
End of period ..... 1,070,804 1,048,282
============ ============
Total Net Increase ..... $ 43,055,794 $ 19,592,101
============ ============
45
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
SELECT BANKING AND FINANCE FUND
FOR THE SIX-MONTH PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, 2004 (UNAUDITED) JUNE 30, 2004
----------------------------- -----------------------------
CLASS A CLASS A
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Sales .................. 1,572,757 $ 42,183,653 3,961,024 $ 94,794,254
Reinvested distributions 177,520 4,386,921 26,278 592,917
Redemptions ............ (715,847) (18,531,995) (1,810,887) (44,476,237)
------------ ------------ ------------ ------------
Net increase ........... 1,034,430 $ 28,038,579 2,176,415 $ 50,910,934
------------ ============ ------------ ============
SHARES OUTSTANDING:
Beginning of period 5,171,443 2,995,028
------------ ------------
End of period ..... 6,205,873 5,171,443
============ ============
FOR THE SIX-MONTH PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, 2004 (UNAUDITED) JUNE 30, 2004
----------------------------- -----------------------------
CLASS C CLASS C
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Sales .................. 590,339 $ 15,441,137 2,359,446 $ 55,258,198
Reinvested distributions 104,304 2,520,733 11,968 267,326
Redemptions ............ (199,503) (5,150,236) (274,673) (6,660,876)
------------ ------------ ------------ ------------
Net increase ........... 495,140 $ 12,811,634 2,096,741 $ 48,864,648
------------ ============ ------------ ============
SHARES OUTSTANDING:
Beginning of period 3,497,703 1,400,962
------------ ------------
End of period ..... 3,992,843 3,497,703
============ ============
Total Net Increase ..... $ 40,850,213 $ 99,775,582
============ ============
46
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
SELECT TECHNOLOGY FUND
FOR THE SIX-MONTH PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, 2004 (UNAUDITED) JUNE 30, 2004
----------------------------- -----------------------------
CLASS A CLASS A
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Sales .................. 53,817 $ 366,809 127,511 $ 957,303
Reinvested distributions -- -- -- --
Redemptions ............ (50,400) (329,710) (134,440) (974,250)
------------ ------------ ------------ ------------
Net increase (decrease) 3,417 $ 37,099 (6,929) $ (16,947)
------------ ============ ------------ ============
SHARES OUTSTANDING:
Beginning of period 449,331 456,260
------------ ------------
End of period ..... 452,748 449,331
============ ============
FOR THE SIX-MONTH PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, 2004 (UNAUDITED) JUNE 30, 2004
----------------------------- -----------------------------
CLASS C CLASS C
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Sales .................. -- $ -- 49,228 $ 341,700
Reinvested distributions -- -- -- --
Redemptions ............ (7,324) (48,317) (11,260) (80,865)
------------ ------------ ------------ ------------
Net Increase (Decrease) (7,324) $ (48,317) 37,968 $ 260,835
------------ ============ ------------ ============
SHARES OUTSTANDING:
Beginning of period 74,036 36,068
------------ ------------
End of period ..... 66,712 74,036
============ ============
Total Net Increase
(Decrease) ........... $ (11,218) $ 243,888
============ ============
NOTE 4 -- INVESTMENT TRANSACTIONS
During the six-month period ended December 31, 2004, purchases and sales
of investment securities (excluding securities sold short, options, and
short-term investments) were as follows:
SELECT BANKING SELECT TECHNOLOGY
GROWTH FUND AND FINANCE FUND FUND
------------ ------------ ------------
Purchases .... $ 42,194,339 $ 53,188,837 $ 1,960,217
Sales ........ 40,322,403 24,207,936 1,951,730
47
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 -- FEDERAL TAX POLICIES AND INFORMATION
The Funds intend to comply with the provisions of Subchapter M of the
Internal Revenue Code applicable to regulated investment companies,
including the distribution of all of their taxable income and realized
capital gains. Accordingly, no provision for federal income taxes is
considered necessary in the financial statements.
At December 31, 2004, the total cost of securities and the net realized
gains and losses on securities sold for Federal income tax purposes are
different from amounts reported for financial reporting purposes generally
due to losses incurred in so called "wash sales," which losses cannot be
used for Federal income tax purposes in the current year and have been
deferred for use in future years. The aggregate gross unrealized
appreciation and depreciation for securities (including short sales held
by the Funds at December 31, 2004, were as follows:
TAX BASIS NET TAX BASIS
COST FOR UNREALIZED TAX BASIS GROSS GROSS
FEDERAL INCOME APPRECIATION UNREALIZED UNREALIZED
FUND TAX PURPOSES (DEPRECIATION) APPRECIATION DEPRECIATION
---- ------------ ------------ ------------ ------------
Growth Fund ..................... $ 96,897,384 $ 33,352,844 $ 37,038,283 $ 3,685,439
Select Banking and Finance Fund . 219,563,947 72,270,128 73,020,674 750,546
Select Technology Fund .......... 3,174,682 918,082 1,021,595 103,513
The Funds' tax basis capital gains and losses are determined only at the
end of each fiscal year. At June 30, 2004, undistributed ordinary income
and long-term capital gains for tax purposes are as follows:
UNDISTRIBUTED LONG-TERM CAPITAL LOSS
ORDINARY INCOME CAPITAL GAINS CARRYFORWARDS
--------------- ------------- -------------
Growth Fund ................... -- $ 2,955,672 --
Select Banking and Finance Fund $ 3,562,290 4,778,752 --
Select Technology Fund ........ -- -- $ (8,407,042)
At June 30, 2004, the Select Technology Fund had accumulated capital loss
carryforwards for Federal income tax purposes of $8,407,042 of which
$6,558,055 expires in 2010 and $1,848,987 expires in 2011. To the extent
the Funds realize future net capital gains, those gains will be offset by
unused capital loss carryforwards. During the year ended June 30, 2004,
the Growth Fund and Select Technology Fund utilized capital loss
carryovers of $10,087,274 and $617,865 respectively.
Dividends from net investment income and distributions from net realized
capital gains are determined in accordance with U.S. Federal tax
regulations, which may differ from those amounts determined under
accounting principles generally accepted in the United States of America.
These book/tax differences are either temporary or permanent in nature. To
the extent these differences are permanent, they are charged or credited
to paid-in-capital or accumulated net realized gain, as appropriate, in
the period that the differences arise.
48
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
The tax character of dividends and distributions paid for the six-month
period ended December 31, 2004 and the fiscal year ended June 30, 2004
were as follows:
ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- -----------------------
SIX-MONTH FISCAL YEAR SIX-MONTH FISCAL YEAR
PERIOD ENDED ENDED PERIOD ENDED ENDED
DECEMBER 31, 2004 JUNE 30, 2004 DECEMBER 31, 2004 JUNE 30, 2004
----------------- ------------- ----------------- -------------
Growth Fund ................... -- -- $ 2,955,672 --
Select Banking and Finance Fund $ 3,608,725 $ 20,232 4,885,709 $ 1,057,014
Select Technology Fund ........ -- -- -- --
NOTE 6 -- EXPENSES AND TRANSACTIONS WITH AFFILIATED PARTIES
Emerald Advisors, Inc. serves as the investment advisor (the "Advisor") to
the Funds for which it receives investment advisory fees from each Fund.
The fee for the Emerald Growth Fund is based on average daily net assets
at the annual rate of 0.75% on assets up to and including $250 million,
0.65% for assets in excess of $250 million up to and including $500
million, 0.55% for assets in excess of $500 million up to and including
$750 million, and 0.45% for assets in excess of $750 million. The fee for
the Emerald Select Banking and Finance Fund and the Emerald Select
Technology Fund is based on average daily net assets at the annual rate of
1.00% on assets up to and including $100 million and 0.90% for assets in
excess of $100 million. Under the terms of the investment advisory
agreement, Emerald Advisors, Inc., may also waive or reimburse the Funds
for certain expenses. Through October 31, 2005, the Advisor has
contractually agreed to waive its advisory fee and/or reimburse other
expenses to the extent that the Fund's total operating exceed the
following:
CLASS A CLASS C
------- -------
Growth Fund .......................... 2.25% 2.90%
Select Banking and Finance Fund ...... 2.35% 3.00%
Select Technology Fund ............... 2.90% 3.40%
The following table summarizes the advisory fees and expense
waivers/reimbursements for the six-month period ended December 31, 2004.
GROSS ADVISORY FEE/
ADVISORY WAIVED/REIMBURSED
-------- -----------------
Growth Fund ........................ $ 440,938 $ --
Select Banking and Finance Fund .... 1,139,402 --
Select Technology Fund ............. 16,768 --
49
================================================================================
EMERALD MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 -- OTHER AGREEMENTS
The Emerald Growth, Emerald Select Banking and Finance, and Emerald Select
Technology Funds have adopted distribution plans (the "Plans") pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended. Citco
Mutual Fund Distributors, Inc. ("CMFD") is the sole distributor of the
Trust's shares pursuant to a distribution agreement with each fund. The
Plans provide that the Funds will pay CMFD for services provided and
expenses incurred promoting the sale of shares of the Funds or maintaining
or improving services provided to shareholders by CMFD or dealers. Under
the Class A Plan, the Growth and Select Banking and Finance Funds will
reimburse CMFD at an annual rate up to 0.35% and the Select Technology
Fund will reimburse CMFD at an annual rate up to 0.50%, payable monthly,
of the average net assets attributable to such class of shares. Under the
Class C Plans, the Funds will reimburse CMFD at an annual rate up to
1.00%, payable monthly, of which, 0.25% is a shareholder service fee and
0.75% is for distribution-related expenses, of the average daily net
assets attributable to such class of shares. For the six-month period
ended December 31, 2004, the Funds paid CMFD under the terms of the Plan
as follows:
DISTRIBUTION EXPENSES
FOR THE SIX-MONTH
PERIOD ENDED
CLASS A DECEMBER 31, 2004
------- -----------------
Growth Fund ........................ 0.35% $ 183,877
Select Banking and Finance Fund .... 0.35% 253,980
Select Technology Fund ............. 0.50% 7,239
SHAREHOLDER
DISTRIBUTION SERVICING
EXPENSES EXPENSES
FOR THE SIX-MONTH FOR THE SIX-MONTH
PERIOD ENDED PERIOD ENDED
CLASS C DECEMBER 31, 2004 CLASS C DECEMBER 31, 2004
------- ----------------- ------- -----------------
Growth Fund ....................... 0.75% $ 49,916 0.25% $ 15,639
Select Banking and Finance Fund ... 0.75% 363,249 0.25% 121,083
Select Technology Fund ............ 0.75% 1,718 0.25% 572
Citco Mutual Fund Services serves as transfer agent, administrator and
accounting services agent for the Funds. U.S. Bank, N.A. serves as
custodian for the Funds.
The Funds' Declaration of Trust provides that each Trustee affiliated with
the Funds' Adviser shall serve without compensation and each Trustee who
is not so affiliated shall receive an annual retainer of $6,000 and $1,500
for each Trustee's meeting attended.
50
================================================================================
EMERALD MUTUAL FUNDS
ADDITIONAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
INFORMATION ABOUT TRUSTEES
The business and affairs of the Funds are managed under the direction of the
Fund's Board of Trustees. Information pertaining to the Trustees of the Funds is
set forth below.The SAI includes additional information about the Fund's
Trustees and Officers and is available, without charge, upon request by calling
1-800-232-0224.
Number of
Term of Portfolios
Office and in Fund Other
Positions(s) Length of Complex Directorships
Held with Time Principal Occupation Overseen Held by
Name, Address and Age the Fund Served During Past Five Years by Trustee Trustee
- --------------------- -------- ------ ---------------------- ---------- -------
Disinterested Trustees:
Robert J. Dickson Trustee Since 2004 President of i5 Consulting 3 Fort Pitt
1703 Oregon Pike Solutions LLC from 2003 Capital Funds
Lancaster, PA 17605 to the present; Vice (one portfolio
Age 55 President-Finance and CFO, overseen)
TRACO (a manufacturer
& distributor of windows,
doors, etc.) from 2001 to
2003; Vice President &
Treasurer, Carpenter
Technology Corp. (a
manufacturer of specialty
metals) from 1997 to 2001.
Douglas S. Garban Trustee Since 2004 Disabled since 2001; 3 None
1703 Oregon Pike First Vice President of
Lancaster, PA 17604 Smith Barney from 1994
Age: 40 to 2001.
J. Barton Harrison Trustee Since 2002 Self employed, 3 Steel Plant
1452 County Line Road financial planning. Equipment
Rosemont, PA 19010 Corp.
Age: 73
Robert P. Newcomer Trustee Since 2004 Self employed consultant 3 Burnham
1703 Oregon Pike from 2004 to present; Corporation
Lancaster, PA 17605 President and COO (manufacturer
Age: 56 (2001-2003), Executive of boilers and
Vice President (1993-2001) furnaces)
and CFO (1993-2000) of
P.H. Glatfelter Company
(paper milling).
Dr. H. J. Zoffer Trustee Since 1992 Dean Emeritus and Professor 3 None
220 N. Bellefield Ave., of Business Administration,
Apt. 1201 University of Pittsburgh.
Pittsburgh, PA 15213
Age: 73
51
================================================================================
EMERALD MUTUAL FUNDS
ADDITIONAL INFORMATION -- (UNAUDITED)
- --------------------------------------------------------------------------------
Interested Trustees:
Kenneth G. Mertz II, C.F.A.* Trustee, Vice Since 1992 President and Chief 3 None
1703 Oregon Pike, Suite 101 President, Investment Officer,
Lancaster, PA 17601 Chief Financial Emerald Advisers, Inc.
Age: 51 Officer and
Portfolio
Manager
Scott C. Penwell, Esq.** Trustee Since 1992 Partner at Duane, Morris 3 None
305 North Front Street & Heckscher since 1981.
Harrisburg, PA 17108
Age: 48
OFFICERS OF THE TRUST
Name, Address, Birth Date, Principal Occupation
Positions Held with Trust During Past Five years
- ------------------------- ----------------------
Kenneth G. Mertz II, C.F.A. President of Emerald Advisers, Inc. since 1992
1703 Oregon Pike
Lancaster, PA 17601
Birthdate: June 14, 1952
Chairman of the Board of Trustees,
Vice President and Chief
Investment Officer
Daniel W. Moyer IV President, Emerald Mutual Funds since 10/1/2002
1703 Oregon Pike as well as Executive Vice President of Emerald
Lancaster, PA 17601 Advisers, Inc. Managing Director and Senior Vice
Birthdate: March 7, 1955 President Emerald Asset Management 1992-2002
President as well as a Registered Sales Supervisor for First
Montauk Securities Corp. 1992-2002
Stacey L. Sears Senior Vice President of Emerald Advisers, Inc. since
1703 Oregon Pike 2001. Research analyst and administrative assistant,
Lancaster, PA 17601 Emerald Asset Management, Inc. 1992-2000, as well
Birthdate: November 10, 1971 as representative for First Montauk Securities Corp.,
Vice President and 1995 to 2000
Portfolio Manager
* Employee of Emerald Advisors, Inc. and "Interested Person" within the
meaning of the Investment Company Act of 1940.
** Employee of the Trust's Legal Counsel and therefore an "Interested Person"
within the meaning of the Investment Company Act of 1940.
52
================================================================================
EMERALD MUTUAL FUNDS
------- ------ ------
INVESTMENT ADVISER BOARD OF TRUSTEES
------------------ -----------------
EMERALD ADVISERS, INC. ROBERT J. DICKSON
LANCASTER, PA DOUGLAS S. GARBAN
J. BARTON HARRISON
DISTRIBUTOR KENNETH G. MERTZ II, CFA
----------- ROBERT P. NEWCOMER SCOTT C.
CITCO MUTUAL FUND DISTRIBUTORS PENWELL, ESQ.
MALVERN, PA H.J. ZOFFER, PHD
ADMINISTRATOR AND FUND MANAGEMENT
TRANSFER AGENT ---------------
-------------- EMERALD ADVISERS, INC.
CITCO MUTUAL FUND SERVICES, INC. 1703 OREGON PIKE, SUITE
MALVERN, PA 101 P. O. BOX 10666
LANCASTER, PA 17605
CUSTODIAN
--------- SHAREHOLDER SERVICES
U.S. BANK, N.A. --------------------
CINCINNATI, OH CITCO MUTUAL FUND SERVICES, INC.
P. O. BOX C1100
INDEPENDENT ACCOUNTANTS SOUTHEASTERN, PA 19398-1100
-----------------------
PRICEWATERHOUSECOOPERS LLP TELEPHONE NUMBERS
PHILADELPHIA, PA -----------------
THE FUND (800) 232-0224
LEGAL COUNSEL MARKETING / BROKER SERVICES (800) 232-6572
------------- SHAREHOLDER SERVICES
PEPPER, HAMILTON, LLP (800) 232-0224
PHILADELPHIA, PA
24 HOUR PRICING INFORMATION
---------------------------
1-800-232-0224
www.emeraldmutualfunds.com
This report is for the general information of Fund
shareholders. For more detailed information about the Fund,
please consult a copy of the Fund's current prospectus.This
report is not authorized for distribution to prospective
investors in the Fund unless preceded or accompanied by a copy
of the current prospectus.
================================================================================
02/05
ITEM 2. CODE OF ETHICS.
Not applicable at this time.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Included in the Semi-Annual Report to Shareholders filed under Item 1 of this
form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of trustees,
ITEM 11. CONTROLS AND PROCEDURES.
a. The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
and Rule 15d-15(b) under the Securities Exchange Act of 1934, as
amended.
b. There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act)
that occurred during the registrant's last fiscal half-year (the
registrant's second fiscal half-year in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS
(a)(2) Certifications pursuant to rule 30a-2(a) under the Investment
Company Act of 1940 ("1940 Act"), and Section 302 of the
Sarbanes-Oxley Act of 2002 are filed herewith as Exhibits 99.302
cert.
(a)(3) Not Applicable
(b) Certifications pursuant to rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith as
Exhibits 99.906 Cert.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized. (Registrant)
The HomeState Group
By /s/ Daniel W. Moyer IV
------------------------
Daniel W. Moyer IV
President
Date March 11, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Daniel W. Moyer IV
------------------------
Daniel W. Moyer IV
President
Date March 11, 2005
By /s/ Kenneth G. Mertz II
------------------------
Kenneth G. Mertz II
Treasurer
Date March 11, 2005