ck0001300746-20230930
STATEMENT
OF ADDITIONAL INFORMATION
Dated
January 31,
2024
|
|
|
|
| |
Intrepid
Capital Fund
Institutional
Class (Ticker: ICMVX)
Investor
Class (Ticker: ICMBX) |
Intrepid
Income Fund
Institutional
Class (Ticker: ICMUX)
Investor
Class (Not Available for Sale) |
Intrepid
Small Cap Fund
Institutional
Class (Ticker: ICMZX)
Investor
Class (Ticker: ICMAX) |
1400
Marsh Landing Parkway, Suite 106
Jacksonville
Beach, Florida 32250
Toll
free 1-866-996-FUND
This
Statement of Additional Information (this “SAI”) is not a prospectus and should
be read in conjunction with the Prospectus dated January 31,
2024
of Intrepid Capital Management Funds Trust (the “Trust”). This SAI is
incorporated by reference into the Trust’s Prospectus. A copy of the Prospectus
may be obtained without charge by contacting U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services, at the address or telephone
number listed below or by visiting the Funds’ website at
www.intrepidcapitalfunds.com.
The
following audited financial statements for the Funds are incorporated by
reference from the Annual
Report
dated September 30,
2023
of the Trust (File No. 811-21625) as filed with the Securities and Exchange
Commission (the “SEC”) on Form
N-CSR
on December
6, 2023.
|
| |
Schedule
of Investments Statement of Assets and Liabilities Statement of
Operations Statement of Changes in Net Assets Financial
Highlights Notes to Financial
Statements |
Copies
of the Annual Report may be obtained, without charge, upon request by contacting
U.S. Bank Global Fund Services at the address or telephone number listed below
or by visiting the Funds’ website at www.intrepidcapitalfunds.com.
Intrepid
Capital Management Funds Trust
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
WI 53201-0701
(866)
996 FUND
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
Service Providers – Fund Administrator, Independent Registered Public
Accounting Firm and Custodian |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustees’
Qualifications and Experience |
|
Board
Oversight of Risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
person has been authorized to give any information or to make any
representations other than those contained in this SAI and the Prospectus each
dated January 31,
2024 and,
if given or made, such information or representations may not be relied upon as
having been authorized by Intrepid Capital Management Funds Trust.
This
SAI does not constitute an offer to sell securities.
FUND
HISTORY AND CLASSIFICATION
The
Trust, a Delaware statutory trust organized on August 27, 2004, is an open‑end
management investment company registered under the Investment Company Act of
1940, as amended (the “1940 Act”). The Trust currently has three
portfolios: the Intrepid Capital Fund, the Intrepid Small Cap Fund, and the
Intrepid Income Fund (each a “Fund” and collectively, the “Funds”). Effective
January 22, 2021, the Intrepid Disciplined Value Fund (formerly known as the
Intrepid All Cap Fund) reorganized into the Intrepid Small Cap Fund (formerly
known as the Intrepid Endurance Fund). Effective September 27, 2019, the
Intrepid International Fund was liquidated. Effective January 25, 2019, the
Intrepid Select Fund reorganized into the Intrepid Disciplined Value Fund. Prior
to June 26, 2015 and after June 6, 2022, the Intrepid Endurance Fund was known
as the Intrepid Small Cap Fund. The shares in any portfolio may be offered in
separate classes. The Board of Trustees (the “Board”) has established two
classes of shares with respect to each of the Funds – Institutional Class and
Investor Class (the Investor Class of the Intrepid Income Fund are not currently
available for sale). This SAI provides information about all of the
Funds.
INVESTMENT
RESTRICTIONS
The
Funds have adopted the following investment restrictions which are matters of
fundamental policy. Each Fund’s investment restrictions cannot be changed
without approval of the holders of the lesser of (i) 67% of such Fund’s
shares present or represented at a shareholder’s meeting at which the holders of
more than 50% of such shares are present or represented; or (ii) more
than 50% of the outstanding shares of such Fund.
1.Each
Fund may not purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S government, its agencies or instrumentalities), if, as
a result, as to 75% of the Fund’s total assets, more than five percent of its
total assets would be invested in the securities of one issuer or the Fund would
hold more than ten percent of the outstanding voting securities of any one
issuer.
2.Each
Fund may sell securities short and write put and call options to the extent
permitted by the 1940 Act.
3.The
Funds may not purchase securities on margin (except for such short term credits
as are necessary for the clearance of transactions), except that each Fund may
(i) borrow money to the extent permitted by the 1940 Act, as provided in
Investment Restriction No. 4; (ii) purchase or sell futures contracts and
options on futures contracts; (iii) make initial and variation margin
payments in connection with purchases or sales of futures contracts or options
on futures contracts; and (iv) write or invest in put or call
options.
4.Each
Fund may borrow money or issue senior securities to the extent permitted by the
1940 Act.
5.Each
Fund may pledge, hypothecate or otherwise encumber any of its assets to secure
its borrowings.
6.The
Funds may not act as an underwriter or distributor of securities other than of
its shares, except to the extent that a Fund may be deemed to be an underwriter
within the meaning of the Securities Act of 1933, as amended (the “Securities
Act”), in the disposition of restricted securities.
7.The
Funds may not make loans, including loans of securities, except each Fund may
acquire debt securities from the issuer or others which are publicly distributed
or are of a type normally acquired by institutional investors and each Fund may
enter into repurchase agreements.
8.The
Funds may not invest 25% or more of its total assets (as of the time of
purchase) in securities of non-governmental issuers whose principal business
activities are in the same industry.
9.The
Funds may not make investments for the purpose of exercising control or
acquiring management of any company.
10.The
Funds may not invest in real estate or real estate mortgage loans or make any
investments in real estate limited partnerships.
11.The
Funds may not purchase or sell commodities or commodity contracts, except that
each Fund may enter into futures contracts, options on futures contracts and
other similar instruments.
The
Funds have adopted certain other investment restrictions which are not
fundamental policies and which may be changed by the Board without shareholder
approval. These additional restrictions are as follows:
1.The
Funds will not acquire or retain any security issued by a company, an officer or
trustee of which is an officer or trustee of the Trust or an officer, trustee or
other affiliated person of the Funds’ investment adviser.
2.The
Funds will not invest more than 15% of the value of its net assets in illiquid
securities.
3.The
Funds will not purchase the securities of other investment companies, except:
(a) as part of a plan of merger, consolidation or reorganization approved by the
shareholders of a Fund; (b) securities of registered open-end investment
companies; or (c) securities of registered closed-end investment companies on
the open market where no commission results, other than the usual and customary
broker’s commission. No purchases described in (b) and (c) will be made if as a
result of such purchases (i) a Fund and its affiliated persons would hold more
than 3% of any class of securities, including voting securities, of any
registered investment company; (ii) more than 5% of a Fund’s net assets
would be invested in shares of any one registered investment company; and (iii)
more than 10% of a Fund’s net assets would be invested in shares of registered
investment companies.
The
aforementioned percentage restrictions on investment or utilization of assets
refer to the percentage at the time an investment is made, except for those
percentage restrictions relating to investments in illiquid securities and bank
borrowings. If these restrictions are adhered to at the time an investment is
made, and such percentage subsequently changes as a result of changing market
values or some similar event, no violation of a Fund’s fundamental restrictions
will be deemed to have occurred. Any changes in a Fund’s investment restrictions
made by the Board will be communicated to shareholders prior to their
implementation.
The
Intrepid Small Cap Fund (formerly known as the Intrepid Endurance Fund) has
adopted a non-fundamental policy in accordance with the requirements of Rule
35d-1 under the 1940 Act, that the Intrepid Small Cap Fund will normally invest
at least 80% of its net assets, plus borrowings for investment purposes, in
small capitalization companies. The Fund defines small capitalization companies
to include companies having a capitalization that does not exceed the upper
limit of the capitalization ranges of the higher of the Morningstar Small Cap
Index or the S&P SmallCap 600® Index during the most recent 12 months. For
the 12 months ended December 31, 2023 this limit was approximately $22 billion.
The Board may change this non-fundamental policy without shareholder approval.
If the Board approves a change to this non-fundamental policy for the Fund, then
the Fund will provide a sixty (60) day written notice to the shareholders before
implementing the change of policy. Any such notice will be provided in plain
English in a separate written disclosure document containing the following
prominent statement in bold-type: “Important Notice Regarding Change in
Investment Policy.” If the notice is included with other communications to
shareholders, the aforementioned statement will also be included on the envelope
in which the notice is delivered.
INVESTMENT
CONSIDERATIONS
The
Funds’ Prospectus describes their principal investment strategies and risks.
This section expands upon that discussion and also describes non-principal
investment strategies and risks.
Equity
Securities
Each
Fund may invest in equity securities, such as common stocks, which represent
shares of ownership of a corporation. Preferred stocks are equity securities
that often pay dividends at a specific rate and have a preference over common
stocks in dividend payments and the liquidation of assets. Some preferred stocks
may be convertible into common stock.
Equity
securities generally have greater price volatility than fixed-income securities.
The market price of equity securities owned by a Fund may go up or down,
sometimes rapidly or unpredictably. Equity securities may decline in value due
to factors affecting equity securities markets generally or particular
industries represented in those markets. The value of an equity security may
also decline for a number of reasons which directly relate to the issuer, such
as management performance, financial leverage and reduced demand for the
issuer’s goods or services.
The
global pandemic caused by COVID-19 resulted in unprecedented volatility and a
wide range of social and economic disruptions, including closed borders,
voluntary or compelled quarantines of large populations, stressed healthcare
systems, reduced or prohibited domestic or international travel, and supply
chain disruptions affecting the United States and many other countries. Some
sectors of the economy and individual issuers experienced particularly large
losses
as a result of these disruptions. The impact of these events and other epidemics
or pandemics in the future could adversely affect Fund performance.
Illiquid
Securities
Each
Fund may invest up to 15% of its net assets in securities for which there is no
readily available market (“illiquid securities”). The 15% limitation includes
certain securities whose disposition would be subject to legal restrictions
(“restricted securities”). However, certain restricted securities that may be
resold pursuant to Regulation S or Rule 144A under the Securities Act may be
considered liquid. Regulation S permits the sale abroad of securities that are
not registered for sale in the United States. Rule 144A permits certain
qualified institutional buyers to trade in privately placed securities not
registered under the Securities Act. Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both ascertainable
market values for Rule 144A securities and the ability to liquidate these
securities to satisfy redemption requests. However, an insufficient number of
qualified institutional buyers interested in purchasing Rule 144A securities
held by a Fund could adversely affect their marketability, causing the Fund to
sell securities at unfavorable prices.
The
Board has delegated to Intrepid Capital Management, Inc. (the “Adviser”) the
day‑to‑day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. Although
no definite quality criteria are used, the Board has directed the Adviser to
consider such factors as: (i) the nature of the market for a security (including
the institutional private resale markets); (ii) the terms of these
securities or other instruments allowing for the disposition to a third party or
the issuer thereof (e.g.
certain repurchase obligations and demand instruments); (iii) the
availability of market quotations; and (iv) other permissible
factors.
Restricted
securities may be sold in privately negotiated or other exempt transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act. When registration is required, a Fund may be obligated
to pay all or part of the registration expenses and a considerable time may
elapse between the decision to sell and the sale date. If, during such period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than the price that prevailed when it decided to sell. Illiquid restricted
securities will be priced at fair
value as determined by the Adviser, as the “valuation designee”
under Rule 2a-5 of the 1940 Act.
Borrowing
Each
Fund may borrow money for investment purposes, although none has any present
intention of doing so. Borrowing for investment purposes is known as leveraging.
Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk, but also increases
investment opportunity. When a Fund leverages its investments, the net asset
value (“NAV”) per share will increase more when the Fund’s portfolio assets
increase in value and decrease more when the portfolio assets decrease in value
because substantially all of its assets fluctuate in value and the interest
obligations on the borrowings are generally fixed. Interest costs on borrowings
may partially offset or exceed the returns on the borrowed funds. Under adverse
conditions, a Fund might have to sell portfolio securities to meet interest or
principal payments at a time when investment considerations would not favor such
sales. As required by the 1940 Act, each Fund must maintain continuous asset
coverage (total assets, including assets acquired with borrowed funds, less
liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any
time, the value of a Fund’s assets should fail to meet this 300% coverage test,
the Fund will reduce the amount of the Fund’s borrowings to the extent necessary
to meet this 300% coverage within three business days. Maintenance of this
percentage limitation may result in the sale of portfolio securities at a time
when investment considerations would not favor such sales.
Certain
trading practices and investments, such as reverse repurchase agreements, may be
considered to be borrowings or involve leverage and thus are subject to the 1940
Act restrictions. In accordance with Rule 18f-4 under the 1940 Act, when a Fund
engages in reverse repurchase agreements and similar financing transactions, the
Fund may either (1) maintain asset coverage of at least 300% with respect to
such transactions and any other borrowings in the aggregate, or (ii) treat such
transactions as “derivatives transactions” and comply with Rule 18f-4 with
respect to such transactions.
In
addition to borrowing for investment purposes, each Fund is authorized to borrow
money from banks as a temporary measure for extraordinary or emergency purposes.
For example, a Fund may borrow money to facilitate management of the Fund’s
portfolio by enabling the Fund to meet redemption requests when the liquidation
of portfolio investments would be inconvenient or disadvantageous. To the extent
such borrowings do not exceed 5% of the value of a Fund’s total assets at the
time of borrowing and are promptly repaid, they will not be subject to the
foregoing 300% asset coverage requirement.
Warrants
and Convertible Securities
Each
Fund may purchase rights and warrants to purchase equity securities. Rights and
warrants are options to purchase equity securities at a specific price valid for
a specific period of time. Investments in rights and warrants are speculative in
that they have no voting rights, pay no dividends and have no rights with
respect to the assets of the corporation issuing them. They do not represent
ownership of securities, rather the right to buy them. Rights and warrants
differ from call options in that rights and warrants are issued by the issuer of
the security that may be purchased on their exercise, whereas call options may
be written or issued by anyone. The prices of rights (if traded independently)
and warrants do not necessarily move parallel to the prices of the underlying
securities. Rights and warrants involve the risk that a Fund could lose the
purchase value of the warrant if the warrant is not exercised prior to its
expiration. They also involve the risk that the effective price paid for the
warrant added to the subscription price of the related security may be greater
than the value of the subscribed security’s market price.
Each
Fund may also invest in convertible securities. Convertible securities are debt
securities or preferred stocks of corporations that are convertible into or
exchangeable for common stocks. The Adviser will select only those convertible
securities for which it believes (i) the underlying common stock is a
suitable investment for a Fund; and (ii) a greater potential for total
return exists by purchasing the convertible security because of its higher yield
and/or favorable market valuation. (For the Intrepid Income Fund, the Adviser
will consider only the potential for total return.) Most of a Fund’s investment
in convertible debt securities will be rated less than investment grade. Debt
securities rated less than investment grade are commonly referred to as “junk
bonds.” For additional information regarding convertible securities, please see
“High Yield Securities” below.
High
Yield Securities
Each
Fund may invest in corporate debt securities, including bonds and debentures
(which are long-term) and notes (which may be short or long-term), preferred
securities and convertible securities may be rated investment grade by Standard
& Poor’s®
(“S&P®”)
or Moody’s Investors Service©,
Inc. (“Moody’s”). Securities rated BBB by S&P®
or Baa by Moody’s, although investment grade, exhibit speculative
characteristics and are more sensitive than higher rated securities to changes
in economic conditions.
Each
Fund may also invest in securities that are rated below investment grade,
commonly referred to as junk bonds or high yield securities. Investments in high
yield securities, while providing greater income and opportunity for gain than
investments in higher-rated securities, entail relatively greater risk of loss
of income or principal. Market prices of high yield, lower-grade obligations may
fluctuate more than market prices of higher-rated securities. Lower grade, fixed
income securities tend to reflect short-term corporate and market developments
to a greater extent than higher-rated obligations which, assuming no change in
their fundamental quality, react primarily to fluctuations in the general level
of interest rates.
The
Intrepid Capital Fund and the Intrepid Income Fund normally will not purchase
high yield securities that are rated lower than “CCC” by S&P®
or “Caa” by Moody’s, and will not continue to hold high yield securities
downgraded lower than “C” by S&P®
or Moody’s. Notwithstanding the foregoing, the Intrepid Income Fund may purchase
or hold high yield securities in default if it believes the default will be
cured and the Intrepid Capital Fund may purchase or hold high yield securities
in default if it believes the default will be cured or in situations where the
Intrepid Capital Fund believes it is more appropriate to evaluate the security
as if it were an equity investment.
The
high yield market at times is subject to substantial volatility. An economic
downturn or negative corporate developments may have a more significant effect
on high yield securities and their markets than higher-rated investments, as
well as on the ability of securities’ issuers to repay principal and interest.
Issuers of high yield securities may be of low creditworthiness and the high
yield securities may be subordinated to the claims of senior lenders. During
periods of economic downturn or rising interest rates the issuers of high yield
securities may have greater potential for insolvency and a higher incidence of
high yield bond defaults may be experienced.
During
an economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the issuer
of a high yield security owned by a Fund defaults, the Fund may incur additional
expenses in seeking recovery. Periods of economic uncertainty and changes can be
expected to result in increased volatility of the market prices of high yield
securities and a Fund’s NAV. Yields on high yield securities will fluctuate over
time. Furthermore, in the case of high yield securities structured as
zero-coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes and therefore tend to be more volatile
than the market prices of securities which pay interest periodically and in
cash.
Certain
securities held by a Fund, including high yield securities, may contain
redemption or call provisions. If an issuer exercises these provisions in a
declining interest rate market, the Fund may have to replace the security with a
lower yielding security, resulting in a decreased return for the investor.
Conversely, a high yield security’s value may decrease in a rising interest rate
market, as will the value of a Fund’s net assets.
In
response to adverse publicity or investor perceptions, the secondary market for
high yield securities may at times become less liquid making it more difficult
for a Fund to accurately value or dispose of high yield securities. To the
extent a Fund owns or may acquire illiquid or restricted high yield securities,
these securities may involve special registration responsibilities, liabilities
and costs, and liquidity difficulties, and judgment will play a greater role in
valuing such securities because there is less reliable and objective data
available.
Special
tax considerations are associated with investing in high yield bonds structured
as zero-coupon or pay-in-kind securities. A Fund will report the interest on
these securities as income even though it receives no cash interest until the
security’s maturity or payment date. Further, each Fund must distribute
substantially all of its income to its shareholders to qualify for pass-through
treatment under the tax law. Accordingly, a Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash or may
have to borrow to satisfy distribution requirements.
Credit
ratings evaluate the safety of principal and interest payments, not the market
value risk of high yield securities. Since credit rating agencies may fail to
timely change the credit ratings to reflect subsequent events, the Adviser
monitors the issuers of high yield securities in the portfolio to determine if
the issuers will have sufficient cash flow and profits to meet required
principal and interest payments, and to attempt to assure the securities’
liquidity so a Fund can meet redemption requests. To the extent that a Fund
invests in high yield securities, the achievement of its investment objective
may be more dependent on the Adviser’s credit analysis than would be the case
for higher quality bonds. A Fund may retain a portfolio security whose rating
has been changed.
LIBOR
Transition
The
Funds may have been exposed to financial instruments that were tied to the
London Interbank Offered Rate (“LIBOR”). Until recently, LIBOR was used as a
“benchmark” or “reference rate” for various commercial and financial contracts,
including corporate and municipal bonds, bank loans, asset-backed and
mortgage-related securities, interest rate swaps and other
derivatives.
The
administrator of LIBOR has phased out LIBOR such that after June 30, 2023, the
overnight, 1‑month, 3‑month, 6‑month and 12‑month U.S. dollar LIBOR settings
have ceased to be published or representative. All other LIBOR settings and
certain other interbank offered rates, such as the Euro Overnight Index Average,
ceased to be published or representative after December 31, 2021.
Actions
by regulators have resulted in the establishment of alternative reference rates
to LIBOR in most major currencies. The U.S. Federal Reserve, based on the
recommendations of the New York Federal Reserve’s Alternative Reference Rate
Committee (comprised of major derivative market participants and their
regulators), has begun publishing a Secured Overnight Financing Rate (“SOFR”),
which has replaced U.S. dollar LIBOR. Market participants generally have adopted
alternative rates such as SOFR or otherwise amended such financial instruments
to include fallback provisions and other measures that contemplated the
discontinuation of LIBOR. To facilitate the transition of legacy derivatives
contracts referencing LIBOR, the International SWAPs and Derivatives
Association, Inc. (ISDA) launched a protocol to incorporate fallback provisions.
Notwithstanding the foregoing actions, there still remains uncertainty regarding
successor reference rate methodologies and there is no assurance that the
composition or characteristics of any alternative reference rate will be similar
to or produce the same value or economic equivalence as LIBOR or that
instruments using an alternative rate will have the same volume or liquidity as
did LIBOR prior to its discontinuance or unavailability.
The
transition process away from LIBOR could lead to increased volatility and
illiquidity in markets for instruments whose terms previously relied on LIBOR.
It could also lead to a reduction in the value of some LIBOR-based investments
and reduce the effectiveness of new hedges placed against existing LIBOR-based
instruments.
Money
Market Instruments
Each
Fund may invest in cash and money market securities in order to take a temporary
defensive position or have assets available to pay expenses, satisfy redemption
requests or take advantage of investment opportunities. The money market
securities in which the Funds invest include U.S. Treasury Bills,
commercial paper, commercial paper master notes and repurchase
agreements.
Each
Fund may invest in commercial paper or commercial paper master notes rated, at
the time of purchase, A‑1 or A‑2 by S&P®
or Prime‑1 or Prime‑2 by Moody’s. Commercial paper master notes are demand
instruments without a fixed maturity bearing interest at rates that are fixed to
known lending rates and automatically adjusted when such lending rates
change.
Repurchase
Agreements
Under
a repurchase agreement, a Fund purchases a debt security and simultaneously
agrees to sell the security back to the seller at a mutually agreed-upon future
price and date, normally one day or a few days later. The resale price is
greater than the purchase price, reflecting an agreed-upon market interest rate
during the Fund’s holding period. While the maturities of the underlying
securities in repurchase transactions may be more than one year, the term of
each repurchase agreement will always be less than one year. The Funds will
enter into repurchase agreements only with member banks of the Federal Reserve
System or primary dealers of U.S. government securities. The Adviser will
monitor the creditworthiness of each of the firms that is a party to a
repurchase agreement with a Fund. In the event of a default or bankruptcy by the
seller, a Fund will liquidate those securities (whose market value, including
accrued interest, must be at least equal to 100% of the dollar amount invested
by the Fund in each repurchase agreement) held under the applicable repurchase
agreement, which securities constitute collateral for the seller’s obligation to
pay. However, liquidation could involve costs or delays and, to the extent
proceeds from the sale of these securities were less than the agreed-upon
repurchase price a Fund would suffer a loss. A Fund also may experience
difficulties and incur certain costs in exercising its rights to the collateral
and may lose the interest the Fund expected to receive under the repurchase
agreement. Repurchase agreements usually are for short periods of time, such as
one week or less, but may be longer. It is the current policy of the Funds to
treat repurchase agreements that do not mature within seven days as illiquid for
the purposes of its investments policies.
Depository
Receipts
Each
Fund may invest in, or obtain exposure to, the securities of foreign issuers in
the form of Depositary Receipts or other securities convertible into securities
of foreign issuers or other foreign securities. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. American Depositary Receipts (“ADRs”) are receipts
typically issued by an American bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation. European Depositary
Receipts (“EDRs”) are receipts issued in Europe that evidence a similar
ownership arrangement. Generally, ADRs, in registered form, are designed for use
in the U.S. securities markets, and EDRs, in bearer form, are designed for use
in European securities markets.
A
depository may establish an unsponsored facility without the participation by or
consent of the issuer of the deposited securities, although a letter of
non-objection from the issuer is often requested. Holders of unsponsored
Depositary Receipts generally bear all the costs of such facility, which can
include deposit and withdrawal fees, currency conversion fees and other service
fees. The depository of an unsponsored facility may be under no duty to
distribute shareholder communications from the issuer or to pass through voting
rights. Issuers of unsponsored Depositary Receipts are not obligated to disclose
material information in the U.S. and, therefore, there may not be a correlation
between such information and the market value of the Depositary Receipts.
Sponsored facilities enter into an agreement with the issuer that sets out
rights and duties of the issuer, the depository and the Depositary Receipt
holder. This agreement also allocates fees among the parties. Most sponsored
agreements also provide that the depository will distribute shareholder notices,
voting instruments and other communications. Each Fund may invest in sponsored
and unsponsored Depositary Receipts.
Foreign
Securities
Each
Fund may invest in securities issued by foreign companies. The Adviser considers
foreign companies to be companies domiciled or headquartered outside of the
U.S., or whose primary business activities or principal trading markets are
located outside of the U.S. Each Fund will limit its investments in such
securities to 25% of its net assets.
Investments
in foreign securities may offer potential benefits not available from
investments solely in U.S. dollar-denominated or quoted securities of domestic
issuers. Such benefits may include the opportunity to invest in foreign issuers
that appear, in the opinion of the Adviser, to offer the potential for better
long term growth of capital and income than investments in U.S. securities, the
opportunity to invest in foreign countries with economic policies or business
cycles different from those of the United States and the opportunity to reduce
fluctuations in portfolio value by taking advantage of foreign securities
markets that do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers also involves, however, certain
special risks set forth below, which are not typically associated with investing
in U.S. dollar-denominated securities or quoted securities of U.S.
issuers.
The
value of a Fund’s foreign investments may be significantly affected by changes
in currency exchange rates and the Fund may incur costs in converting securities
denominated in foreign currencies to U.S. dollars. In many countries, there is
less publicly available information about issuers than is available in the
reports and ratings published about companies in the United States.
Additionally, foreign companies are not subject to uniform accounting, auditing
and financial reporting standards. Dividends and interest on foreign securities
may be subject to foreign withholding taxes, which would reduce the Fund’s
income without providing a tax credit for the Fund’s shareholders. Although each
Fund intends to invest in securities of foreign issuers domiciled in nations
which the Adviser considers as having stable and friendly governments, there is
the possibility of expropriation, confiscatory taxation, currency blockage or
political or social instability which would affect investments in those
nations.
The
Russian military invasion of Ukraine in February 2022 and the resulting actions
taken by the United States and European Union in levying broad economic
sanctions against Russia could continue to have adverse effects on the price and
liquidity of investments, which could adversely affect the financial markets,
and therefore, a Fund’s performance. Similarly, the recent conflict between
Israel and Hamas in Gaza, and the threat of future hostilities in the broader
Middle East region, may have similar adverse effects on market volatility and
global economic growth which could adversely affect a Fund’s
performance.
Registered
Investment Companies
Each
Fund may invest up to 15% of its net assets in shares of registered investment
companies, including other investment companies that invest in high quality,
short-term debt securities (i.e.,
money market instruments). If a Fund purchases more than 1% of any class of
security of a registered open-end investment company, such investment will be
considered an illiquid investment.
Any
investment in a registered investment company involves investment risk.
Additionally, an investor could invest directly in the registered investment
companies in which the Funds invest. By investing indirectly through a Fund, an
investor bears not only his or her proportionate share of the expenses of the
Fund (including operating costs and investment advisory fees) but also indirect
similar expenses of the registered investment companies in which the Fund
invests. An investor may also indirectly bear expenses paid by registered
investment companies in which a Fund invests related to the distribution of such
registered investment company’s shares.
Under
certain circumstances an open-end investment company in which a Fund invests may
determine to make payment of a redemption by the Fund (wholly or in part) by a
distribution in kind of securities from its portfolio, instead of in cash. As a
result, the Fund may hold such securities until the Adviser determines it
appropriate to dispose of them. Such disposition will impose additional costs on
the Fund.
Investment
decisions by the investment advisers to the registered investment companies in
which the Funds invest are made independently of the Funds and the Adviser. At
any particular time, one registered investment company in which a Fund invests
may be purchasing shares of an issuer whose shares are being sold by another
registered investment company in which the Fund invests. As a result, the Fund
indirectly would incur certain transactional costs without accomplishing any
investment purpose.
Temporary
Investments
Each
Fund may, in response to adverse market, economic or other conditions, take
temporary defensive positions. This means a Fund will invest some or all of its
assets in money market instruments such as U.S. Treasury Bills, commercial paper
or repurchase agreements (cash). A Fund may maintain a temporary defensive
position for prolonged periods, until such time as it can find securities that
meet its investment criteria. As a result, a Fund will not be able to achieve
its investment objective of long-term capital appreciation or capital
appreciation to the extent it invests in cash. When each Fund is not taking a
temporary defensive position, it will still hold some cash and money market
instruments so that it can pay expenses, satisfy redemption requests or take
advantage of investment opportunities.
During
the 2008 global financial downturn and the recent market volatility caused by
the COVID-19 outbreak, many money market instruments that were thought to be
highly liquid became illiquid and lost value. The U.S. government and the
Federal Reserve, as well as certain foreign governments and central banks, have
taken extraordinary actions with respect to the financial markets generally and
money market instruments in particular. While these actions have stabilized the
markets for these instruments, there can be no assurances that those actions
will continue or continue to be effective. If the Fund's money market
instruments become illiquid, the Fund may be unable to satisfy certain of its
obligations or may only be able to do so by selling other securities at prices
or times that may be disadvantageous to do so.
Each
Fund may hold any portion of its assets in cash or cash equivalents at any time
or for an extended time. The Adviser will determine the amount of the Fund’s
assets to be held in cash or cash equivalents at its sole discretion, based on
such factors as it may consider appropriate under the circumstances. The portion
of a Fund’s assets invested in cash and cash equivalents may at times exceed 25%
of the Fund’s net assets. To the extent a Fund holds assets in cash (or cash
equivalents) and otherwise uninvested, the ability of the Fund to meet its
objective may be limited.
Foreign
Currency Transactions
Although
the Funds value their assets daily in U.S. dollars, they are not required to
convert their holdings of foreign currencies to U.S. dollars on a daily basis. A
Fund’s foreign currencies generally will be held as “foreign currency call
accounts” at foreign branches of foreign or domestic banks. These accounts bear
interest at negotiated rates and are payable upon relatively short demand
periods. If a bank at which a Fund maintains such an account becomes insolvent,
the Fund could suffer a loss of some or all of the amounts deposited. A Fund may
convert foreign currency to U.S. dollars from time to time. Although foreign
exchange dealers generally do not charge a stated commission or fee for
conversion, the prices posted generally include a “spread,” which is the
difference between the prices at which the dealers are buying and selling
foreign currencies. A Fund may hedge its foreign currency exposure under normal
market conditions.
Certain
transactions involving forward currency contracts may serve as long hedges (for
example, if a Fund seeks to buy a security denominated in a foreign currency, it
may purchase a forward currency contract to lock in the U.S. dollar price of the
security) or as short hedges (if a Fund anticipates selling a security
denominated in a foreign currency, it may sell a forward currency contract to
lock in the U.S. dollar equivalent of the anticipated sales
proceeds).
A
Fund may seek to hedge against changes in the value of a particular currency by
using forward contracts on another foreign currency or a basket of currencies,
the value of which the Adviser believes will have a positive correlation to the
values of the currency being hedged. In addition, each Fund may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if a Fund owns securities denominated in a
foreign currency and the Adviser believes that currency will decline relative to
another currency, the Fund might enter into a forward contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second currency. Transactions that use two foreign currencies are sometimes
referred to as “cross hedges.” Use of different foreign currency magnifies the
risk that movements in the price of the instrument will not correlate or will
correlate unfavorably with the foreign currency being hedged.
The
cost to a Fund of engaging in forward currency contracts or currency futures
contracts varies with factors such as the interest rate environments in the
relevant countries, the currencies involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As
is the case with futures contracts, holders and writers of forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by selling or purchasing, respectively, an instrument
identical to the instrument held or written. Closing transactions are generally
made for forward currency contacts by negotiating directly with the
counterparty. Thus, there can be no assurance that a Fund will in fact be able
to close out a forward currency contract at a favorable price. In addition, in
the event of insolvency of the counterparty, a Fund might be unable to close out
a forward currency contract.
Futures
Contracts and Index Futures Contracts
A
futures contract is a bilateral agreement where one party agrees to accept, and
the other party agrees to make, delivery of cash or an underlying debt security,
as called for in the contract, at a specified date and at an agreed upon
price.
An
index futures contract involves the delivery of an amount of cash equal to a
specified dollar amount multiplied by the difference between the index value at
the close of trading of the contract and at the price designated by the futures
contract. No physical delivery of the securities comprising the index is made.
Generally, these futures contracts are closed out prior to the expiration date
of the contracts.
A
Treasury bond futures contract is based on the value of an equivalent 20-year,
6% Treasury bond. Generally, any Treasury bond with a remaining maturity or term
to call of 15 years as of the first day of the month in which the contracts are
scheduled to be exercised will qualify as a deliverable security pursuant to a
Treasury bond futures contract. A Treasury note futures contract is based on the
value of an equivalent 10-year, 6% Treasury note. Generally, any Treasury note
with a remaining maturity or term to call of 6 1/2 years or 10 years,
respectively, as of the first day of the
month
in which the contracts are scheduled to be exercised will qualify as a
deliverable security pursuant to Treasury note futures contract.
Since
a number of different Treasury notes will qualify as a deliverable security, the
price that the buyer will actually pay for those securities will depend on which
ones are actually delivered. Normally, the exercise price of the futures
contract is adjusted by a conversion factor that takes into consideration the
value of the deliverable security if it were yielding 6% as of the first day of
the month in which the contract is scheduled to be exercised.
There
are certain investment risks associated with futures transactions. These risks
include: (1) dependence on the Adviser’s ability to predict movements in
the prices of individual securities and fluctuations in the general securities
markets; (2) imperfect correlation between movements in the price of the
securities (or indices) hedged or used for cover which may cause a given hedge
not to achieve its objective; (3) the fact that the skills and techniques
needed to trade these instruments are different from those needed to select the
securities in which the Fund invests; and (4) lack of assurance that a
liquid secondary market will exist for any particular instrument at any
particular time, which, among other things, may hinder the Fund’s ability to
limit exposures by closing its positions. The potential loss to the Fund from
investing in certain types of futures transactions is unlimited.
A
Fund could be unable to recover assets held at the futures clearing broker, even
assets directly traceable to the Fund from the futures clearing broker in the
event of a bankruptcy of the commodity broker. Although a Futures Commission
Merchant (including the futures clearing broker) is required to segregate
customer funds pursuant to the Commodities Exchange Act (CEA), in the unlikely
event of the commodity broker’s bankruptcy, there is no equivalent of the
Securities Investors Protection Corporation insurance as is applicable in the
case of securities broker dealers’ bankruptcies. If the FCM does not provide
accurate reporting, a Fund also is subject to the risk that the FCM could use
the Fund’s assets, which are held in an omnibus account with assets belonging to
the FCM’s other customers, to satisfy its own financial obligations or the
payment obligations of another customer to the central
counterparty.
In
addition, the futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The Fund may be
forced, therefore, to liquidate or close out a futures contract position at a
disadvantageous price. The Fund may use various futures contracts that are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market in those contracts
will develop or continue to exist. The Fund’s activities in the futures markets
may result in higher portfolio turnover rates and additional brokerage costs,
which could reduce the Fund’s returns.
The
Funds will only invest in futures contracts after complying with the
requirements of the Commodity Futures Trading Commission (“CFTC”). Each of the
Funds has claimed an exclusion from the definition of “Commodity Pool Operator”
(“CPO”) found in Rule 4.5 of the Commodity Exchange Act (“CEA”). Accordingly,
the Adviser is not subject to registration or regulation as a CPO with respect
to the Funds under the CEA. To rely on the exemption, a Fund’s commodities
transactions must be made solely for bona fide hedging purposes as defined by
the CFTC. In addition, the Fund may invest in commodity interests for other than
bona fide hedging purposes if it meets either the 5% trading de minimis test
(the “5% Test”) or a test based on the net notional value of the Fund’s
commodities transactions (the “Notional Test”). Under the 5% Test, the aggregate
initial margin and premiums required to establish positions in commodity
futures, commodity options or swaps may not exceed 5% of the Fund’s liquidation
value. Under the Notional Test, the aggregate net notional value of commodity
futures, commodity options or swaps not used solely for bona fide hedging
purposes may not exceed 100% of the Fund’s NAV.
Regulation
of Derivatives
Rule
18f-4 under the 1940 Act permits a Fund to enter into Derivatives Transactions
(as defined below) and certain other transactions notwithstanding the
restrictions on the issuance of “senior securities” under Section 18 of the 1940
Act. Section 18 of the 1940 Act, among other things, prohibits open-end funds,
including the Funds, from issuing or selling any “senior security,” other than
borrowing from a bank (subject to a requirement to maintain 300% “asset
coverage”).
Under
Rule 18f-4, “Derivatives Transactions” include the following: (1) any swap,
security-based swap (including a contract for differences), futures contract,
forward contract, option (excluding purchased options), any combination of the
foregoing, or any similar instrument, under which a Fund is or may be required
to make any payment or delivery of cash or other assets during the life of the
instrument or at maturity or early termination, whether as margin or settlement
payment or otherwise; (2) any short sale borrowing; (3) reverse repurchase
agreements and similar financing transactions (e.g., recourse and non-recourse
tender option bonds, and borrowed bonds), if a Fund elects to treat these
transactions as Derivatives Transactions under Rule 18f-4; and (4) when-issued
or forward-settling securities (e.g., firm and standby
commitments,
including to-be-announced commitments, and dollar rolls) and non-standard
settlement cycle securities, unless such transactions meet the
Delayed-Settlement Securities Provision discussed below.
Rule
18f-4 under the 1940 Act permits a Fund to enter into when-issued or
forward-settling securities (e.g., firm and standby commitments, including
to-be-announced commitments, and dollar rolls) and non-standard settlement cycle
securities notwithstanding the limitation on the issuance of senior securities
in Section 18 of the 1940 Act, provided that the Fund intends to physically
settle the transaction and the transaction will settle within 35 days of its
trade date (the “Delayed-Settlement Securities Provision”). If a when-issued,
forward-settling or non-standard settlement cycle security does not satisfy the
Delayed-Settlement Securities Provision, then it is treated as a Derivatives
Transaction under Rule 18f-4.
Currently
each Fund is relying on the Limited Derivatives User Exception (as defined
below). If a Fund were unable to rely on this exception, the Fund would have to
comply with all of the requirements of Rule 18f-4 with respect to its
Derivatives Transactions. Rule 18f-4, among other things, requires a Fund to
adopt and implement a comprehensive written derivatives risk management program
(“DRMP”) and comply with a relative or absolute limit on Fund leverage risk
calculated based on value-at-risk (“VaR”). The DRMP would be administered by a
“derivatives risk manager,” who is appointed by the Funds’ Board, including a
majority of the independent Trustees, and periodically reviews the DRMP and
reports to the Funds’ Board. As the Funds all rely on the Limited Derivatives
User Exception, they are not required to maintain a DRMP or comply with the VaR
limit.
As
referenced above, Rule 18f-4 provides an exception from the DRMP, VaR limit and
certain other requirements if a Fund’s “derivatives exposure” is limited to 10%
of its net assets (as calculated in accordance with Rule 18f-4) and the Fund
adopts and implements written policies and procedures reasonably designed to
manage its derivatives risks (the “Limited Derivatives User Exception”). The
Funds meet the requirements for the Limited Derivatives User
Exception.
Exchange-Traded
Funds
Each
share of an Exchange-Traded Fund (“ETF”) represents an undivided ownership
interest in the portfolio of securities held by that ETF. The ETFs in which the
Funds invest are investment companies that offer investors a proportionate share
in a portfolio of stocks, bonds, commodities, currencies or other securities.
Like individual equity securities, ETFs are traded on a stock exchange and can
be bought and sold throughout the day.
Traditional
ETFs attempt to achieve the same investment return as that of a particular
market index. To mirror the performance of a market index, an ETF invests either
in all of the securities in a particular index in the same proportion that is
represented in the index itself or in a representative sample of securities in a
particular index in a proportion meant to track the performance of the entire
index. Such ETFs generally do not buy or sell securities, except to the extent
necessary to conform their portfolios to the corresponding index. Because such
ETFs have operating expenses and transaction costs, while a market index does
not, they typically will be unable to match the performance of the index
exactly. Alternatively, some ETFs use active investment strategies instead of
tracking broad market indices and, as a result, may incur greater operating
expenses and transactions costs than traditional ETFs. Investments in ETFs are
investments in other investment companies.
ETFs
generally do not sell or redeem their shares for cash, and most investors do not
purchase or redeem shares directly from an ETF at all. Instead, the ETF issues
and redeems its shares in large blocks (typically 50,000 of its shares) called
“creation units.” Creation units are issued to anyone who deposits a specified
portfolio of the ETF’s underlying securities, as well as a cash payment
generally equal to accumulated dividends on the securities (net of expenses) up
to the time of deposit, and creation units are redeemed in kind for a portfolio
of the underlying securities (based on the ETF’s NAV) together with a cash
payment generally equal to accumulated dividends as of the date of redemption.
Most ETF investors, however, purchase and sell ETF shares in the secondary
trading market on a securities exchange, in lots of any size, at any time during
the trading day. ETF investors generally must pay a brokerage fee for each
purchase or sale of ETF shares, including purchases made to reinvest
dividends.
Because
ETF shares are created from the securities of an underlying portfolio and can be
redeemed into the securities of an underlying portfolio on any day, arbitrage
traders may move to profit from any discrepancies between the market price of
the ETF’s shares in the secondary market and the NAV per share of the ETF’s
portfolio, which helps to close the price gap between the two. Of course,
because of the forces of supply and demand and other market factors, there may
be times when an ETF share trades at a premium or discount to its
NAV.
The
Funds intend to be long-term investors in ETFs and do not intend to purchase and
redeem creation units to take advantage of short-term arbitrage opportunities.
However, a Fund may redeem creation units for the underlying securities (and any
applicable cash), and may assemble a portfolio of the underlying securities and
use it (and any required
cash)
to purchase creation units, if the Adviser believes it is in a Fund’s best
interest to do so. A Fund’s ability to redeem creation units may be limited by
the 1940 Act, which provides that ETFs will not be obligated to redeem shares
held by a Fund in an amount exceeding one percent of its total outstanding
securities during any period of less than 30 days.
The
Funds will invest in ETF shares only if the ETF is registered as an investment
company under the 1940 Act. If an ETF in which a Fund invests ceases to be a
registered investment company, the Fund will dispose of the securities of the
ETF. Furthermore, in connection with its investment in ETF shares, a Fund will
incur various costs. A Fund may also realize capital gains or losses when ETF
shares are sold, and the purchase and sale of the ETF shares may include a
brokerage commission that may result in costs. In addition, the Funds are
subject to other fees as an investor in ETFs. Generally, those fees include, but
are not limited to, trustees’ fees, operating expenses, licensing fees,
registration fees and marketing expenses, each of which will be reflected in the
NAV of ETFs and therefore the shares representing a beneficial interest
therein.
There
is a risk that the underlying ETFs in which a Fund invests may terminate due to
extraordinary events that may cause any of the service providers to the ETFs,
such as the trustee or sponsor, to close or otherwise fail to perform their
obligations to the ETF. Also, because certain ETFs in which the Funds may invest
are each granted licenses by agreement to use the indices as a basis for
determining their compositions and/or otherwise to use certain trade names, the
ETFs may terminate if such license agreements are terminated. In addition, an
ETF may terminate if its entire net asset value falls below a certain amount.
Although the Adviser believes that, in the event of the termination of an
underlying ETF, it will be able to invest instead in shares of an alternate ETF
tracking the same market index or another market index with the same general
market, there is no guarantee that shares of an alternate ETF would be available
for investment at that time.
Cannabis
and Hemp Industry Risks
The
Funds may invest in exchange-traded equity securities of companies engaged in
legal cannabis and hemp related businesses. The Funds consider a company to be
engaged in the legal cannabis and hemp business if the company derives at least
50% of its revenue from the legal cannabis and hemp industries.
Cannabis-Related
Risks
Cannabis
remains illegal under United States federal law and a change in federal
enforcement practices could significantly and negatively affect the value of
cannabis holdings. Despite the development of a cannabis industry legal under
state laws, state laws legalizing medicinal and adult cannabis use are in
conflict with the federal Controlled Substances Act (the “CSA”). Cannabis is
categorized as a Schedule-I controlled substance under the CSA, as enforced by
the Drug Enforcement Agency (the “DEA”) and the United States Department of
Justice (the “DOJ”). Under the CSA, it is illegal to grow, process, sell,
possess and consume cannabis. A Schedule-I controlled substance is defined under
the CSA as a substance that has no currently accepted medical use in the United
States, a lack of safety for use under medical supervision and a high potential
for abuse. The CSA further defines Schedule I controlled substances as “the most
dangerous drugs of all the drug schedules with potentially severe psychological
or physical dependence.” In addition, the revenue generated from these cannabis
businesses would represent proceeds of a crime under federal law and, thus, a
violation of United States anti-money laundering laws. However, over thirty
states and the District of Columbia currently allow their citizens to use
medical cannabis, and eleven states and the District of Columbia have legalized
cannabis for adult use. As a result, this has created an unpredictable
business-environment for dispensaries and cultivators that legally operate under
state-laws but in violation of federal law.
Notwithstanding
cannabis being illegal under United States federal law, the Rohrabacher-Farr
amendment (now called the Rohrabacher-Blumenauer amendment) was appended to the
federal budget bill starting in December 2014, and has been re-adopted every
year ever since. This amendment limits the ability of the DOJ to interfere in
states with businesses and individuals who participate in and comply with
state-regulated medical cannabis programs. The amendment has been interpreted to
prohibit the DOJ from using federal funds for the prosecution of businesses and
individuals that are operating in accordance with state medical cannabis laws.
The Rohrabacher-Blumenauer amendment must be renewed annually unless federal
legislation is adopted to formalize this restriction. Federal legislation has
been proposed over the years to formalize the protection covered by this rider
to the federal spending bill. Until that protection becomes law or if the
amendment is not renewed in the future, the federal government’s enforcement of
current federal laws could cause significant financial risk to cannabis
securities. The Rohrabacher-Blumenauer amendment does not provide protection to
those engaged in the adult use cannabis business.
Laws
and regulations affecting the cannabis/marijuana industries are constantly
changing, which could detrimentally affect cannabis holdings, and we cannot
predict the impact that future laws and regulations may have on the Funds.
Local, state and federal cannabis laws and regulations are constantly changing
and they are subject to evolving
interpretations,
which could require companies in which the Funds may invest to incur substantial
costs associated with compliance or to alter one or more of their
service/product offerings. In addition, violations of these laws, or allegations
of such violations, could disrupt their business and result in a material
adverse effect on the value of the cannabis holdings. We cannot predict the
nature of any future United States local, state and federal laws, regulations,
interpretations or applications, nor can we determine what impact additional
governmental regulations or administrative policies and procedures, when and if
promulgated, could have on cannabis holdings. Any change in law or
interpretation could have a material adverse impact on the value of such
holdings.
Companies
involved in the cannabis industry also face intense competition, may have
substantial burdens on company resources due to litigation, as well as
complaints or enforcement actions, all of which could adversely impact the value
of cannabis securities.
Hemp-Related
Risks
Botanically,
hemp and marijuana come from the same species of plant, Cannabis sativa, but
from different varieties or cultivars that have been bred for different uses. In
fact, hemp and marijuana are genetically distinct forms of cannabis that differ
by their use, chemical makeup, and differing cultivation practices. While
marijuana generally refers to the psychotropic drug used in the medical and
adult use cannabis businesses, growers cultivate hemp for use in production of
many products, including foods and beverages, personal care products,
nutritional supplements, fabrics, textiles, paper, construction materials, and
other manufactured goods. There are about 500 natural components found within
the Cannabis sativa plant, of which over 100 have been classified as
“cannabinoids” (another word for chemicals unique to the plant). The two most
well-known cannabinoids are delta-9-tetrahydrocannabinol (“THC”) and Cannabidiol
(“CBD”). THC is the main psychoactive cannabinoid that gives users the “high”
feeling, while CBD is the main non-psychoactive cannabinoid in cannabis and
constitutes up to 40% of the plant’s extracts. CBD can derive from both
marijuana and hemp. Although the Agriculture Improvement Act of 2018 (the “2018
Farm Bill”) federally legalized hemp and hemp derived products, issues remain
with the growth and sale of hemp and hemp-based products.
As
noted, the 2018 Farm Bill expressly removed hemp from the CSA definition of
“marijuana.” It also carved-out an exception for the low levels of THC found in
hemp. This means that hemp is no longer an illegal substance under United States
federal law. Further, the production, sale, and distribution of hemp is no
longer subject to the enforcement or regulatory oversight of the DEA. Instead,
the 2018 Farm Bill delegates those responsibilities to the Secretary of
Agriculture (the “Secretary”).
With
regard to regulation, the 2018 Farm Bill offers primary regulatory authority
over the growth/production of hemp to each individual state. Under the 2018 Farm
Bill, this authority must be expressed in a “plan” under which the particular
state monitors and regulates the growth/production of hemp. The 2018 Farm Bill
expressly allows states to enact more stringent hemp laws without facing federal
preemption. After a state adopts a plan, the Secretary must either approve or
reject the state plan within 60 days after submission. However, state plans will
not be approved until the Department of Agriculture promulgates regulations,
which it has not done. Thus, hemp companies are in a state of flux regarding
their compliance with federal and state law.
The
regulatory uncertainty surrounding the industry may adversely affect the
business and operations of a Fund’s portfolio companies, including without
limitation, the costs to remain compliant with applicable laws and the
impairment of its business or the ability to raise additional capital. In
addition, a Fund is not be able to predict the nature of any future laws,
regulations, interpretations or applications. This means it is possible that
regulations may be enacted in the future that will be directly applicable to the
business of the Fund’s portfolio companies, and which may have an adverse effect
on such companies’ operations.
Cybersecurity
Considerations
With
the increased use of technologies such as mobile devices and Web-based or
“cloud” applications, and the dependence on the Internet and computer systems to
conduct business, the Funds are susceptible to operational, information security
and related risks. In general, cybersecurity incidents can result from
deliberate attacks or unintentional events (arising from external or internal
sources) that may cause a Fund to lose proprietary information, suffer data
corruption, physical damage to a computer or network system or lose operational
capacity. Cybersecurity attacks include, but are not limited to, infection by
malicious software, such as malware or computer viruses or gaining unauthorized
access to digital systems, networks or devices that are used to service a Fund’s
operations (e.g., through “hacking,” “phishing” or malicious software coding) or
other means for purposes of misappropriating assets or sensitive information,
corrupting data, or causing operational disruption. Cybersecurity attacks may
also be carried out in a manner that does not require gaining unauthorized
access, such as causing denial-of-service attacks on the Funds’ websites (i.e.,
efforts
to make network services unavailable to intended users). In addition, authorized
persons could inadvertently or intentionally release confidential or proprietary
information stored on the Funds’ systems.
Cybersecurity
incidents affecting the Adviser, other service providers to the Funds or their
shareholders (including, but not limited to, Fund accountants, custodians,
sub-custodians, transfer agents and financial intermediaries) have the ability
to cause disruptions and impact business operations, potentially resulting in
financial losses to both the Funds and their shareholders, interference with the
Funds’ ability to calculate their net asset value, impediments to trading, the
inability of Fund shareholders to transact business and the Funds to process
transactions (including fulfillment of fund share purchases and redemptions),
violations of applicable privacy and other laws (including the release of
private shareholder information) and attendant breach notification and credit
monitoring costs, regulatory fines, penalties, litigation costs, reputational
damage, reimbursement or other compensation costs, forensic investigation and
remediation costs, and/or additional compliance costs. Similar adverse
consequences could result from cybersecurity incidents affecting issuers of
securities in which the Funds invest, counterparties with which the Funds engage
in transactions, governmental and other regulatory authorities, exchange and
other financial market operators, banks, brokers, dealers, insurance companies
and other financial institutions (including financial intermediaries and other
service providers) and other parties.
PORTFOLIO
TURNOVER
None
of the Funds actively trade for short-term profits, but when the circumstances
warrant, securities may be sold without regard to the length of time held. The
annual portfolio turnover rate indicates changes in a Fund’s portfolio and is
calculated by dividing the lesser of purchases or sales of portfolio securities
(excluding securities having maturities at acquisition of one year or less) for
the fiscal year by the monthly average of the value of the portfolio securities
(excluding securities having maturities at acquisition of one year or less)
owned by the Fund during the fiscal year. High portfolio turnover in any year
(100% or higher) will result in the payment by a Fund of above-average
transaction costs and could result in the payment by shareholders of
above-average amounts of taxes on realized investment gains. The portfolio
turnover for each Fund for the following fiscal periods is set forth
below.
|
|
|
|
|
|
|
| |
Portfolio
Turnover Rate for the Fiscal Years Ended September 30, |
Name
of Fund |
2023 |
2022 |
Intrepid
Capital Fund |
57 |
% |
36 |
% |
Intrepid
Small Cap Fund |
40 |
% |
66 |
% |
Intrepid
Income Fund |
112 |
% |
146 |
% |
DISCLOSURE
OF PORTFOLIO HOLDINGS
Fund
Service Providers – Fund Administrator, Independent Registered Public Accounting
Firm and Custodian
The
Funds have entered into arrangements with certain third-party service providers
(fund administrator, independent registered public accounting firm and
custodian) for services that require these groups to have access to each Fund’s
portfolio on a daily basis. For example, the Funds’ administrator is responsible
for maintaining the accounting records of each Fund, which includes maintaining
a current portfolio of each Fund. The Funds also undergo an annual audit that
requires the Funds’ independent registered public accounting firm to review each
Fund’s portfolio. In addition to the Funds’ administrator, the Funds’ custodian
also maintains an up-to-date list of each Fund’s holdings. Each of these parties
is contractually and/or ethically prohibited from sharing a Fund’s portfolios
unless specifically authorized by the Funds.
Rating
and Ranking Organizations
The
Funds may provide their portfolio holdings to the following rating and ranking
organizations:
Morningstar®,
Inc.
Lipper
Standard
& Poor’s®
Ratings Group
Bloomberg™,
L.P.
Thomson™
Financial Research
Value
Line, Inc.
Vickers
Stock Research
The
Funds’ management has determined that these organizations provide investors with
a valuable service and, therefore, are willing to provide them with portfolio
information. The Funds may not pay these organizations or receive any
compensation from them for providing this information.
The
Funds may provide portfolio information to these organizations on either a
monthly or quarterly basis but not prior to ten business days following the end
of the period.
Other
Disclosure
Each
Fund publishes its top ten holdings at the end of each calendar quarter on its
website at www.intrepidcapitalfunds.com. This information is updated
approximately 15 to 30 business days following the end of each fiscal quarter.
It is available to anyone that visits the website.
The
disclosure referenced above is in addition to the portfolio disclosure in the
annual, semiannual, December quarter, and June quarter shareholder reports and
on Part F of Form N-PORT, which disclosures are filed with the Securities and
Exchange Commission within 60 days of the first and third fiscal quarter ends
and on Form N-CSR for the Semi-Annual and Annual report period ends. Monthly
portfolio disclosures are filed with the Securities and Exchange Commission on
Form N-PORT, with quarter-end disclosures being made public 60 days after the
end of each fiscal quarter.
The
Adviser may manage other accounts such as separate accounts, private accounts,
unregistered products, and portfolios sponsored by companies other than the
Adviser. These other accounts may be managed in a similar fashion to certain of
the Funds and thus may have similar portfolio holdings. Such accounts may be
subject to different portfolio holdings disclosure policies that permit public
disclosure of portfolio holdings information in different forms and at different
times than the Funds’ portfolio holdings disclosure policies. Additionally,
clients of such accounts have access to their portfolio holdings and are
generally not subject to the Funds’ portfolio holdings disclosure
policies.
Oversight
The
officers of the Trust are responsible for decisions authorizing the disclosure
of portfolio holdings. The Trust’s Chief Compliance Officer addresses issues
relating to the disclosure of portfolio holdings, including whether there are
any conflicts between the shareholders of the Funds and those of the Adviser or
any other affiliate of the Funds, in its annual report to the
Board.
TRUSTEES
AND OFFICERS OF THE TRUST
Board
Leadership Structure
As
a Delaware statutory trust, the business and affairs of the Trust are managed by
its officers under the direction of its Board. The Board is responsible for the
overall management of the Trust. This includes the general supervision and
review of each Fund’s investment policies and activities. The Board approves all
significant agreements between the Trust and those parties furnishing services
to it, which include agreements with the Adviser, Administrator, Custodian and
Transfer Agent. The Board appoints officers who conduct and administer each
Fund’s day-to-day operations. The Trust has an audit committee consisting solely
of the two independent trustees. The audit committee plays a significant role in
risk oversight as it meets annually with the auditors of the Funds and
periodically with the Funds’ Chief Compliance Officer. The Trust does not have a
Chairman of the Board. As President of the Trust, Mr. Mark Travis is the
presiding officer at all meetings of the Board. The Trust does not have a lead
independent trustee. The Trust has determined that its leadership structure is
appropriate in light of, among other factors, the asset size and nature of the
Funds, the arrangements for the conduct of the Funds’ operations, the number of
trustees, and the Board’s responsibilities.
Trustees’
and Officers’ Information
Certain
important information regarding each of the trustees and officers of the Trust
(including their principal occupations for at least the last five years) is set
forth on the following pages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Address and Age |
Position(s) Held
with the Fund |
Term
of Office and Length of Service |
Principal Occupation(s) During
Past Five Years |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held
by Trustee |
Interested
Trustee(1) |
Mark
F. Travis
c/o
Intrepid Capital Management Funds Trust
1400
Marsh Landing Pkwy.
Suite
106
Jacksonville
Beach, FL 32250
Age:
62 |
Trustee,
President and Chief Compliance Officer |
Indefinite
Term; Since November 2004 |
President,
Intrepid Capital Management, Inc. (1995-present); Chief Executive Officer,
Intrepid Capital Management, Inc. (2003-present). |
Three |
None |
(1)“Interested”
trustees are trustees who are deemed to be “interested persons” (as defined in
the 1940 Act) of the Trust. Mr. Travis is an interested trustee because of his
ownership in the Adviser and because he is an officer of the Trust.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Address and Age |
Position(s) Held
with the Fund |
Term
of Office and Length of Service |
Principal Occupation(s) During
Past Five Years |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held
by Trustee |
Independent
Trustees(1) |
Peter
R. Osterman, Jr.
c/o
Intrepid Capital Management Funds Trust
1400
Marsh Landing Pkwy.
Suite
106
Jacksonville
Beach, FL 32250
Age:
75 |
Trustee |
Indefinite
Term; Since November 2004 |
Retired,
former Senior Vice President and Chief Financial Officer, HosePower U.S.A.
(an industrial tool distributor) (October 2010-March 2016), Chief
Financial Officer, JAX Refrigeration, Inc. (a commercial refrigeration
construction company) (April 2016- June 2017), Chief Financial Officer,
Standard Precast, Inc. (an industrial concrete casting company) (June
2017-October 2017). |
Three |
None |
Ed
Vandergriff, CPA
c/o
Intrepid Capital Management Funds Trust
1400
Marsh Landing Pkwy.
Suite
106
Jacksonville
Beach, FL 32250
Age:
74 |
Trustee |
Indefinite
Term; Since November 2004 |
President,
Development Catalysts (a real estate finance and development company)
(2000-present). |
Three |
None |
John
J. Broaddus
c/o
Intrepid Capital Management Funds Trust
1400
Marsh Landing Pkwy.
Suite
106
Jacksonville
Beach, FL 32250
Age:
74 |
Trustee |
Indefinite
Term: Since March 2020 |
Retired
(March 2020 to present). President & CEO, Sunnyside Communities (a
retirement community) (2008-2020). |
Three |
Trustee,
Intrepid Capital Management Funds Trust (March 2019 - October 2019) (5
portfolios) |
(1)“Independent”
trustees are trustees who are not deemed to be “interested persons” (as defined
in the 1940 Act) of the Trust.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Address and Age |
Position(s) Held
with the Fund |
Term
of Office and Length of Service |
Principal Occupation(s) During
Past Five Years |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held
by Trustee |
Officer |
Timothy
A. Page
c/o
Intrepid Capital Management Funds Trust
1400
Marsh Landing Pkwy.
Suite
106
Jacksonville
Beach, FL 32250
Age:
40 |
Treasurer
and Secretary |
Indefinite
Term; Since April 2023 |
President
Chief Financial Officer, Intrepid Capital Management, Inc. (April
2023-President), Vice President & Controller, Genesis Health, (July
2022-March 2023), Vice President & Controller, RS&H, Inc.
(December 2016-June 2022) |
N/A |
N/A |
Trustees’
Qualifications and Experience
The
Board believes that each of the trustees has the qualifications, experience,
attributes and skills appropriate to their continued service as trustees of the
Trust in light of the Trust’s business and structure. The trustees have
substantial business and professional backgrounds that indicate they have the
ability to critically review, evaluate and assess information provided to them.
Certain of these business and professional experiences are set forth in detail
in the table above. In addition, the trustees have substantial board experience
and, in their service to the Trust, have gained substantial insight as to the
operation of the Trust. The Board annually conducts a “self-assessment” wherein
the effectiveness of the Board and the individual trustees is
reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each individual trustee. The information
provided below, and in the table above, is not all-inclusive. Many of the
trustees’ qualifications to serve on the Board involve intangible elements, such
as intelligence, integrity, work ethic, the ability to work together, the
ability to communicate effectively, the ability to exercise judgment, the
ability to ask incisive questions, and commitment to shareholder interests. In
conducting its annual self-assessment, the Board has determined that the
trustees have the appropriate attributes and experience to continue to serve
effectively as trustees of the Trust.
Mark
F. Travis has been a trustee and a portfolio manager of the Funds since the
inception of the fund family. Mr. Travis has broad experience and skill as a
portfolio manager, as well as familiarity with the investment strategies
utilized by the Adviser.
Peter
R. Osterman, Jr., has served as a trustee of the Trust since 2004. Besides his
service as a trustee, Mr. Osterman has extensive experience as a chief financial
officer, which has provided him with a thorough knowledge of financial products
and financial statements.
Ed
Vandergriff, CPA, has served as a trustee of the Trust since 2004. Besides
his service as a trustee, Mr. Vandergriff’s experience as an employer and
president of a real estate finance and development company has honed his
understanding of financial statements and the complex issues that confront
businesses. Executive Vice President and Chief Financial Officer of the Haskel
Company, a large design and construction firm.
John
J. Broaddus has served as trustee of the Trust since 2020. He also previously
served as trustee of the Trust from November 2004 to January 2008 and from March
2019 to October 2019. Through his experience as a trustee, past President and
CEO of a multi-site retirement community, and past President and CEO of Cassco
Corporation (a national ice, refrigerated warehousing, and logistics company),
Mr. Broaddus is experienced with financial, accounting, regulatory, and
investment matters.
Board
Oversight of Risk
Through
its direct oversight role, and indirectly through the Audit Committee, and
officers of the Funds and service providers, the Board performs a risk oversight
function for the Funds. To effectively perform its risk oversight function, the
Board, among other things, performs the following activities: receives and
reviews reports related to the performance and operations of the Funds; reviews
and approves, as applicable, the compliance policies and procedures of the
Funds; approves the Funds’ principal investment policies; adopts policies and
procedures designed to deter market timing; meets with representatives of
various service providers, including the Adviser and the independent registered
public accounting firm of the Funds, to review and discuss the activities of the
Funds and to provide direction with respect thereto; and appoints a chief
compliance officer of the Funds who oversees the implementation and testing of
the Funds’ compliance program and reports to the Board regarding compliance
matters for the Funds and their service providers.
The
Trust has an Audit Committee, which plays a significant role in the risk
oversight of the Funds as it generally meets semi-annually with the independent
registered public accounting firm of the Funds.
Not
all risks that may affect the Funds can be identified nor can controls be
developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Funds, the Adviser or other service providers. Moreover, it is necessary to bear
certain risks (such as investment-related risks) to achieve the Funds’ goals. As
a result of the foregoing and other factors, the Funds’ ability to manage risk
is subject to substantial limitations.
Trustees
Ownership of Funds as of December 31,
2023
The
following table shows the amount of dollars in the Funds owned by the Trustees
as of the calendar year ended December 31,
2023
using the following ranges: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000,
and Over $100,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dollar
Range of Shares Owned: |
Interested
Trustee: |
| Independent
Trustees: |
| Mark
F. Travis |
John
J. Broaddus |
Peter
R. Osterman, Jr. |
Ed
Vandergriff, Jr. |
Intrepid
Capital Fund |
Over
$100,000 |
None |
Over
$100,000 |
None |
Intrepid
Small Cap Fund |
Over
$100,000 |
None |
None |
None |
Intrepid
Income Fund |
Over
$100,000 |
Over
$100,000 |
None |
Over
$100,000 |
Aggregate
Dollar Range of Equity Securities in the Intrepid Capital Management Funds
Trust |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Compensation
The
Trust’s standard method of compensating non-interested Trustees is to pay each
such Trustee an annual retainer of $15,000 (which is then invested in shares of
the Funds as designated by each Trustee) and a fee of $1,000 for each meeting of
the Board attended. The non-interested Trustees also receive a fee of $2,250 for
each Audit Committee meeting attended. The Trust also reimburses such Trustees
for their reasonable travel expenses incurred in attending meetings of the
Board. The Trust does not provide pension or retirement benefits to its Trustees
and officers. The aggregate compensation paid by the Trust to each Trustee
during the Trust’s fiscal year ended
September 30, 2023
is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
of Person, Position |
| Aggregate Compensation from
Trust* |
| Pension
or Retirement Benefits Accrued As Part of Trust’s
Expenses |
| Estimated Annual Benefits
Upon Retirement |
| Total Compensation from
Trust Paid to Trustees |
Independent
Trustees |
|
|
|
|
|
|
| |
John
J. Broaddus |
| $69,500 |
| $0 |
| $0 |
| $69,500 |
Peter
R. Osterman, Jr. |
| $65,500 |
| $0 |
| $0 |
| $65,500 |
Ed
Vandergriff, CPA |
| $69,500 |
| $0 |
| $0 |
| $69,500 |
Interested
Trustee |
|
|
|
|
|
|
| |
Mark
F. Travis |
| $0 |
| $0 |
| $0 |
| $0 |
_______________________
*Trustee
fees and expenses are allocated among the Funds in the Trust.
Committees
The
Board has created an Audit Committee, whose members are Mr. Osterman, Mr.
Vandergriff, and Mr. Broaddus. The primary functions of the Audit Committee are
to select the independent registered public accounting firm to be retained to
perform the annual audit of the Funds, to review the results of the audit, to
review the Trust’s internal controls and to review certain other matters
relating to the Trust’s independent registered public accounting firm and
financial records. See below for additional information on the duties and
responsibilities of the Audit Committee. The Trust’s Board of Trustees has no
other committees. The Audit Committee met two times during the Trust’s fiscal
year ended September 30,
2023.
In
overseeing the independent registered public accounting firm (the “Auditor”),
the Audit Committee: (1) reviews the Auditor’s independence from the Funds and
management, and from the Adviser; (2) reviews periodically the level of fees
approved for payment to the Auditor and the pre-approved non-audit services it
has provided to the Funds to ensure their compatibility with the Auditor’s
independence; (3) reviews the Auditor’s performance, qualifications and quality
control procedures; (4) reviews the scope of and overall plans for the annual
audit; (5) reviews the Auditor’s performance, qualifications and quality control
procedures; (6) consults with management and the Auditors with respect to the
Funds’ processes for risk assessment and risk management; (7) reviews with
management the scope and effectiveness of the Funds’ disclosure controls and
procedures, including for purposes of evaluating the accuracy and fair
presentation of the company’s financial statements in connection with
certifications made by the President and Treasurer; and (8) reviews significant
legal developments and the Funds’ processes for monitoring compliance with law
and compliance policies.
In
determining each year whether to reappoint the Auditors as the Funds’
independent registered public accounting firm, the Audit Committee takes into
consideration a number of factors, including the following: (1) the length of
time the Auditor has been engaged by the Funds as the independent registered
public accounting firm; (2) the Auditor’s historical and recent performance on
the audit; (3) an assessment of the professional qualifications and past
performance of the lead audit partner and the Auditor; (4) the quality of the
Audit Committee’s ongoing discussions with the Auditor; (5) an analysis of the
Auditor’s known legal risks and significant proceedings; and (6) external data
relating to audit quality and performance, including recent Public Company
Accounting Oversight Board (PCAOB) reports on the Auditor and its peer firms.
Based on the Audit Committee’s evaluation, the Audit Committee then determines
whether it believes that the Auditor is independent and that it is in the best
interests of the Funds and their shareholders to retain the Auditor to serve as
the independent registered public accounting firm.
Proxy
Voting Policy
Each
Fund votes proxies in accordance with the Adviser’s proxy voting policy. The
Adviser votes proxies in a manner that it believes is consistent with the
economic best interests of each Fund. In accordance with its duty of care, the
Adviser monitors proxy proposals just as it monitors other corporate events
affecting the companies in which the Funds invest.
Although
the Adviser’s policy is to vote proxies for clients unless otherwise directed in
writing, there may be times in which the firm would not exercise voting
authority on matters where the cost of voting would be high, such as with some
foreign securities, and/or the benefit to the client would be low, such as when
casting a vote would not reasonably be expected to have a material effect on the
value of the client’s investment.
With
respect to routine matters, the Adviser will tend to vote with management,
although it reserves the right to vote otherwise. Routine proposals are those
that do not change the structure, bylaws or operations of the
company.
The
Adviser generally supports management with respect to social, environmental, or
political proposals.
The
Adviser generally votes against poison pills, green mail, super-majority voting
provisions, golden parachute arrangements, staggered board arrangements and the
creation of classes of stock with superior voting rights. The Adviser generally
votes in favor of maintaining preemptive rights for shareholders and cumulative
voting rights. Whether or not the Adviser votes in favor of or against a
proposal to a merger, acquisition or spin-off depends on its evaluation of the
impact of the transaction on the Fund. The Adviser generally votes in favor of
transactions paying what it believes to be a fair price in cash or liquid
securities and against transactions which it believes do not.
In
circumstances that the Adviser would vote against management’s recommendations,
an explanation as to the reason for divergence from the recommendation would be
documented and maintained by the Adviser.
There
may be instances where the interests of the Adviser may conflict or appear to
conflict with the interests of a Fund. In such situations the Adviser will,
consistent with its duty of care and duty of loyalty, vote the securities in
accordance with its pre-determined voting policy, but only after disclosing any
such conflict to the Trust’s Board of Trustees prior to voting and affording the
Board the opportunity to direct the Adviser in the voting of such
securities.
Information
on how the Funds voted proxies relating to its portfolio securities during the
most recent twelve‑month period ending June 30 is available, without charge, at
the Fund’s website at www.intrepidcapitalfunds.com or the website of the SEC at
https://www.sec.gov.
Code
of Ethics
The
Trust and the Adviser have adopted a code of ethics pursuant to Rule 17j‑1 under
the 1940 Act. Subject to certain conditions, the code of ethics permits
personnel subject thereto to invest in securities, including securities that may
be purchased or held by the Funds. The code of ethics prohibits, among other
things, persons subject thereto from purchasing or selling securities if they
know at the time of such purchase or sale that the security is being considered
for purchase or sale by the Fund or is being purchased or sold by the
Funds.
MANAGEMENT
OWNERSHIP, PRINCIPAL SHAREHOLDERS AND CONTROL PERSONS
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of a Fund. A control person is a shareholder that
owns beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
owning voting securities in excess of 25% may determine the outcome of any
matter affecting and voted on by shareholders of a Fund. The Funds do not know
of any person who owns beneficially or through controlled companies more than
25% of a Fund’s shares or who acknowledges the existence of control. As of
December 31,
2023,
the following shareholders were considered to be principal shareholders of a
Fund:
Intrepid
Capital Fund – Investor Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent Company |
Jurisdiction |
National
Financial Services, LLC For the Exclusive Benefit of our
Customers Attn: Mutual Funds Dept, 4th Floor 499 Washington
Boulevard Jersey City, NJ 07310-1995 |
21.94% |
Record |
Fidelity
Global Brokerage Group, Inc. |
DE |
|
|
|
| |
Charles
Schwab & Co., Inc. Special Custody A/C FBO Customers Attn:
Mutual Funds 211 Main Street San Francisco, CA 94105-1901 |
20.19% |
Record |
The
Charles Schwab Corporation |
DE |
Intrepid
Capital Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent Company |
Jurisdiction |
Charles
Schwab & Co., Inc. Special Custody A/C FBO Customers Attn:
Mutual Funds 211 Main Street San Francisco, CA 94105-1901 |
73.96% |
Record |
The
Charles Schwab Corporation |
DE |
Intrepid
Small Cap Fund
– Investor Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent Company |
Jurisdiction |
National
Financial Services, LLC For the Exclusive Benefit of our
Customers Attn: Mutual Funds Dept, 4th Floor 499 Washington
Boulevard Jersey City, NJ 07310-1995 |
54.42% |
Record |
Fidelity
Global Brokerage Group, Inc. |
DE |
|
|
|
| |
Charles
Schwab & Co., Inc. Special Custody A/C FBO Customers Attn:
Mutual Funds 211 Main Street San Francisco, CA 94105-1901 |
21.69% |
Record |
The
Charles Schwab Corporation |
DE |
Intrepid
Small Cap Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent Company |
Jurisdiction |
Charles
Schwab & Co., Inc. Special Custody A/C FBO Customers 211 Main
Street San Francisco, CA 94105-1901 |
61.24% |
Record |
The
Charles Schwab Corporation |
DE |
|
|
|
| |
National
Financial Services, LLC For the Exclusive Benefit of our
Customers Attn: Mutual Funds Dept, 4th Floor 499 Washington
Boulevard Jersey City, NJ 07310-1995 |
11.75% |
Record |
Fidelity
Global Brokerage Group, Inc. |
DE |
|
|
|
| |
US
Bank NA Pledgee Intrepid Capital Management Inc. Pledgor 1400
Marsh Landing Pkwy. Suite 106 Jax Beach FL 32250-2492
|
8.70% |
Record |
U.S.
Bancorp |
DE |
|
|
|
| |
John
R. Gibbs Revocable Living Trust B Jeanne M. Gibbs TR U/A
10/27/1975 5007 Buttonwood Dr. Ponte Vedra, FL 32082-3006 |
6.83% |
Beneficial |
N/A |
N/A |
|
|
|
| |
US
Bank NA Cust Fred M Kusumoto IRA Rollover 132 Lamp Lighter
Ln. Ponte Vedra, FL 32082-1941 |
5.40% |
Beneficial |
N/A |
N/A |
Intrepid
Income Fund – Institutional Class*
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent Company |
Jurisdiction |
Charles
Schwab & Co., Inc. Special Custody A/C FBO Customers Attn:
Mutual Funds 211 Main Street San Francisco, CA 94105-1901 |
48.60% |
Record |
The
Charles Schwab Corporation |
DE |
|
|
|
| |
National
Financial Services, LLC For the Exclusive Benefit of our
Customers Attn: Mutual Funds Dept, 4th Floor 499 Washington
Boulevard Jersey City, NJ 07310-1995 |
27.76% |
Record |
Fidelity
Global Brokerage Group, Inc. |
DE |
|
|
|
| |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07399-0002 |
9.54% |
Record |
The
Bank of New York Mellon |
DE |
*The
Investor Class shares of the Intrepid Income Fund are not currently available
for sale.
As
of December 31, 2023, the Trustees and Officers as a group owned less than
1% of the outstanding shares of the Intrepid Income Fund, Intrepid Capital Fund,
and Intrepid Small Cap Fund.
MANAGEMENT
OF THE TRUST
Investment
Adviser
The
investment adviser to each Fund is Intrepid Capital Management, Inc., 1400 Marsh
Landing Parkway, Suite 106, Jacksonville Beach, Florida, 32250. The Adviser is a
wholly-owned subsidiary of Intrepid Capital Corporation.
Pursuant
to an investment advisory agreement between the Trust, on behalf of each Fund,
and the Adviser (collectively, the “Advisory Agreements”), the Adviser furnishes
continuous investment advisory services to the Funds. The Adviser supervises and
manages the investment portfolio of each Fund and, subject to such policies as
the Board of Trustees of the Trust may determine, directs the purchase or sale
of investment securities in the day-to-day management of each Fund. Under the
Advisory Agreements, the Adviser, at its own expense and without separate
reimbursement from the Funds, furnishes office space and all necessary office
facilities, equipment and executive personnel for managing the Funds and
maintaining their organization; bears all sales and promotional expenses of the
Funds, other than distribution expenses paid by the Funds pursuant to the Funds’
Service and Distribution Plan, and expenses incurred in complying with the laws
regulating the issue or sale of securities; and pays salaries and fees of all
officers and trustees of the Trust (except the fees paid to trustees who are not
officers of the Trust). For the foregoing, (i) the Intrepid Capital Fund pays
the Adviser a monthly fee based on the Fund’s average daily net assets at the
annual rate of 1.00% on the first $500 million of the Fund’s average daily net
assets and 0.80% of the Fund’s average daily net assets in excess of $500
million; (ii) the Intrepid Small Cap Fund pays the Adviser a monthly fee based
on the Fund’s average daily net assets at the annual rate of 1.00% on the first
$500 million of the Fund’s average daily net assets and 0.80% of the Fund’s
average daily net assets in excess of $500 million; and (iii) the Intrepid
Income Fund pays the Adviser a monthly fee at the annual rate of 0.75% of the
Fund’s average daily net assets.
The
Funds pay all of their expenses not assumed by the Adviser, including, but not
limited to, the costs of preparing and printing the registration statements
required under the Securities Act and the 1940 Act and any amendments thereto,
the expenses of registering their shares with the SEC and in various states, the
printing and distribution cost of prospectuses mailed to existing shareholders,
the cost of trustee and officer liability insurance, reports to shareholders,
reports to government authorities and proxy statements, interest charges,
brokerage commissions and expenses incurred in connection with portfolio
transactions. The Trust also pays the fees of trustees who are not officers of
the Trust, auditing and accounting services, fees and expenses of any custodian
having custody of assets of the Funds, expenses of calculating NAVs and
repurchasing and redeeming shares, and charges and expenses of dividend
disbursing agents, registrars and share transfer agents, including the cost of
keeping all necessary shareholder records and accounts and handling any problems
relating thereto.
Pursuant
to the Advisory Agreements, the Adviser has undertaken to reimburse each Fund to
the extent that its aggregate annual operating expenses, including the
investment advisory fee, but excluding interest, dividends on short positions,
taxes, brokerage commissions and other costs incurred in connection with the
purchase or sale of portfolio securities, and extraordinary items, exceed that
percentage of the average net assets of the Fund for such year, as determined by
valuations made as of the close of each business day of the year, which is the
most restrictive percentage provided by the state laws of the various states in
which the shares of the Fund are qualified for sale or, if the states in which
the shares of the Fund are qualified for sale impose no such restrictions, 3.00%
(currently no state imposes such restrictions).
In
addition, for the Intrepid Capital Fund, the Adviser has contractually agreed to
reduce its fees and/or reimburse the Fund to the extent necessary to ensure that
the net annual operating expenses (excluding acquired fund fees and expenses and
Rule 12b-1 fees) do not exceed a stated maximum percentage (“cap”) for the
period ending January 31, 2025. For the Intrepid Income Fund, the Adviser
has contractually agreed to reduce its fees and/or reimburse the Fund to the
extent necessary to ensure that the net annual operating expenses (excluding
acquired fund fees and expenses) do not exceed the cap for the period ending
January 31, 2025. For the Intrepid Small Cap Fund, the Adviser has
contractually agreed to reduce its fees and/or reimburse the Fund to the extent
necessary to ensure that the net annual operating expenses (excluding acquired
fund fees and expenses and Rule 12b-1 fees) do not exceed the cap for the period
ending January 31, 2025.
Under
these agreements, the Adviser may recapture waived fees and expenses it pays for
a three-year period under specified conditions (in no event may a Fund’s
expenses exceed the expense limitation). As of the date of this SAI, the expense
cap for each Fund is as follows:
|
|
|
|
| |
Fund |
Expense
Cap |
Intrepid
Capital Fund |
|
Investor
Class |
1.15% |
Institutional
Class |
1.15% |
Intrepid
Small Cap Fund |
|
Investor
Class |
1.15% |
Institutional
Class |
1.15% |
Intrepid
Income Fund |
|
Investor
Class* |
1.15% |
Institutional
Class |
1.00% |
*Not
currently available for sale.
Each
Fund monitors its expense ratio on a monthly basis. If the accrued amount of the
expenses of a Fund exceeds the expense limitation, the Fund creates an account
receivable from the Adviser for the amount of such excess. In such a situation,
the monthly payment of the Adviser’s fee will be reduced by the amount of such
excess (and if the amount of such excess in any month is greater than the
monthly payment of the Adviser’s fee, the Adviser will pay the Fund the amount
of such difference), subject to adjustment month by month during the balance of
the Fund’s fiscal year if accrued expenses thereafter fall below this
limit.
The
Advisory Agreements will remain in effect as long as their continuance is
specifically approved at least annually (i) by the Board of Trustees of the
Trust or by the vote of a majority (as defined in the 1940 Act) of the
outstanding shares of the applicable Fund; and (ii) by the vote of a
majority of the trustees of the Trust who are not parties to the Advisory
Agreements or interested persons of the Adviser, cast in person at a meeting
called for the purpose of voting on such approval. Each Advisory Agreement
provides that it may be terminated at any time without the payment of any
penalty by the Board of Trustees of the Trust or by vote of the majority of the
applicable Fund’s shareholders on a 60‑day written notice to the Adviser, and by
the Adviser on the same notice to the Trust, and that it shall be automatically
terminated if it is assigned.
Each
Advisory Agreement provides that the Adviser shall not be liable to the Trust or
its shareholders for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties. Each Advisory
Agreement also provides that the Adviser and its officers, trustees and
employees may engage in other businesses, devote time and attention to any other
business whether of a similar or dissimilar nature, and render services to
others.
The
table below shows the amount of advisory fees paid by each of the Funds and the
amount of fees waived and/or reimbursed by the Adviser for the fiscal years
shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Advisory Fees Incurred |
Waived
Fees and/or Expenses Reimbursed by Adviser |
Recouped
Fees and Expenses to Advisor |
Net
Advisory Fees Paid to the Adviser |
Intrepid
Capital Fund |
|
|
| |
Year
Ended September 30, 2023 |
$439,582 |
$310,874 |
$0 |
$128,708 |
Year
Ended September 30, 2022 |
$504,584 |
$261,924 |
$0 |
$242,660 |
Year
Ended September 30, 2021 |
$588,525 |
$245,687 |
$0 |
$342,838 |
|
|
|
| |
Intrepid
Small Cap Fund |
|
|
| |
Year
Ended September 30, 2023 |
$534,995 |
$329,720 |
$0 |
$205,275 |
Year
Ended September 30, 2022 |
$666,203 |
$281,135 |
$0 |
$385,068 |
Year
Ended September 30, 2021 |
$799,992 |
$307,461 |
$0 |
$492,531 |
|
|
|
| |
Intrepid
Income Fund |
|
|
| |
Year
Ended September 30, 2023 |
$2,355,090 |
$429,910 |
$0 |
$1,925,180 |
Year
Ended September 30, 2022 |
$2,223,556 |
$243,006 |
$0 |
$1,980,550 |
Year
Ended September 30, 2021 |
$1,036,847 |
$190,174 |
$0 |
$846,673 |
Waived
fees and/or reimbursed expenses subject to potential recovery by the Adviser by
year of expiration are as follows:
|
|
|
|
|
|
|
|
|
|
| |
| Year
of Expiration |
| 2024 |
2025 |
2026 |
Intrepid
Capital Fund |
$245,687 |
$261,924 |
$310,874 |
Intrepid
Small Cap Fund |
$307,461 |
$281,135 |
$329,720 |
Intrepid
Income Fund |
$190,174 |
$243,006 |
$429,910 |
Administrator
The
administrator to the Trust is U.S. Bancorp Fund Services, LLC doing business as
U.S. Bank Global Fund Services (the “Administrator” or “Fund Services”),
615 East Michigan Street, Milwaukee, Wisconsin 53202. Pursuant to a Fund
Administration Servicing Agreement (the “Administration Agreement”) entered into
between the Trust and the Administrator relating to the Funds, the Administrator
maintains the books, accounts and other documents required by the Act, responds
to shareholder inquiries, prepares each Fund’s financial statements and tax
returns, prepares certain reports and filings with the SEC and with state Blue
Sky authorities, furnishes statistical and research data, clerical, accounting
and bookkeeping services and stationery and office supplies, keeps up and
maintains each Fund’s financial and accounting records and generally assists in
all aspects of each Fund’s operations. The Administrator, at its own expense and
without reimbursement from the Funds, furnishes office space and all necessary
office facilities, equipment and executive personnel for performing the services
required to be performed by it under the Administration Agreement. For providing
the foregoing services, the Administrator receives an asset-based fee, subject
to certain conditions. The Administration Agreement will remain in effect until
terminated by either party. The Administration Agreement may be terminated at
any time, without the payment of any penalty, by the Board of Trustees of the
Trust upon the giving of a 90-day written notice to the Administrator, or by the
Administrator upon the giving of a 90 day written notice to the
Trust.
Under
the Administration Agreement, the Administrator shall exercise reasonable care
and is not liable for any error or judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of the Administration
Agreement, except a loss resulting from willful misfeasance, bad faith or
negligence on the part of the Administrator in the performance of its duties
under the Administration Agreement.
The
table below shows the amount of fees paid by each Fund to the Administrator for
the fiscal years shown.
|
|
|
|
|
|
|
|
|
|
| |
| Year
Ended September 30, |
| 2023 |
2022 |
2021 |
Intrepid
Capital Fund |
$76,764 |
$73,718 |
$79,574 |
Intrepid
Small Cap Fund |
$81,703 |
$86,766 |
$97,263 |
Intrepid
Income Fund |
$284,536 |
$255,838 |
$125,442 |
Custodian
U.S. Bank,
N.A., (the “Custodian”) 1555 North RiverCenter Drive, Suite 302, Milwaukee,
Wisconsin 53212, an affiliate of Fund Services and the Distributor, serves as
custodian of the assets of the Fund pursuant to a Custody Agreement. Under the
Custody Agreement, the Custodian has agreed to (i) maintain a separate
account in the name of each Fund; (ii) make receipts and disbursements of
money on behalf of each Fund; (iii) collect and receive all income and
other payments and distributions on account of each Fund’s portfolio
investments; (iv) respond to correspondence from shareholders, security
brokers and others relating to its duties and; (v) make periodic reports to
each Fund concerning the Fund’s operations.
U.S.
Bank, N.A. is the designated Foreign Custody Manager (as the term is defined in
Rule 17f-5 under the 1940 Act) of the Funds’ securities and cash held outside
the United States. The Trustees have delegated to U.S. Bank certain
responsibilities for such assets, as permitted by Rule 17f-5. U.S. Bank and the
foreign subcustodians selected by it hold the Funds’ assets in safekeeping and
collect and remit the income thereon, subject to the instructions of the
Funds.
Transfer
Agent, Dividend Disbursing Agent and Fund Accountant
U.S. Bancorp
Fund Services, LLC (the “Transfer Agent”), 615 East Michigan Street, Milwaukee,
Wisconsin 53202, also serves as transfer agent and dividend disbursing agent for
the Funds under a Transfer Agent Agreement. As transfer and dividend disbursing
agent, the Transfer Agent has agreed to (i) issue and redeem shares of the
Funds; (ii) make dividend and other distributions to shareholders of the
Funds; (iii) respond to correspondence by Fund shareholders and others
relating to its duties; (iv) maintain shareholder accounts; and (v) make
periodic reports to the Funds.
In
addition, the Trust has entered into a Fund Accounting Servicing Agreement with
Fund Services pursuant to which Fund Services has agreed to maintain the
financial accounts and records of the Funds and provide other accounting
services to the Funds.
Distributor
Quasar
Distributors, LLC (the “Distributor”), a subsidiary of Foreside Financial Group,
LLC, acts as distributor for the Funds under a Distribution Agreement. Its
principal business address is 111 E. Kilbourn Avenue, Suite 2200, Milwaukee,
Wisconsin 53202. The Distributor sells each Fund’s shares on a best efforts
basis. Shares of the Funds are offered continuously.
For
the fiscal year ended September 30, 2023, the Distributor received
$24,414.87 as compensation from the Trust for distribution services for the
Trust.
PORTFOLIO
MANAGERS
The
sole investment adviser to the Funds is Intrepid Capital Management, Inc. The
portfolio managers for the Funds have responsibility for the day-to-day
management of accounts other than the Funds. Information regarding these other
accounts is set forth below.
The number of accounts and assets is shown as of September 30,
2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Number
of Other Accounts Managed and Total Assets by Account Type |
Number
of Accounts and Total Assets for which Advisory Fee is
Performance-Based |
Name
of Portfolio Manager |
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other Accounts |
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other Accounts |
Mark
Travis |
0 |
2 |
6 |
0 |
2 |
6 |
| $0 |
$15
million |
$7.7
million |
$0 |
$15
million |
$7.7
million |
|
|
|
|
|
| |
Matt
Parker |
0 |
1 |
6 |
0 |
1 |
6 |
| $0 |
$2.8
million |
$7.7
million |
$0 |
$2.8
million |
$7.7
million |
|
|
|
|
|
| |
Hunter
Hayes |
0 |
1 |
6 |
0 |
1 |
6 |
| $0 |
$2.8
million |
$7.7
million |
$0 |
$2.8
million |
$7.7
million |
|
|
|
|
|
| |
Joe
Van Cavage |
0 |
1 |
6 |
0 |
1 |
6 |
| $0 |
$2.8
million |
$7.7
million |
$0 |
$2.8
million |
$7.7
million |
The
portfolio managers are responsible for managing other accounts. The Adviser
typically assigns accounts with similar investment strategies to the portfolio
managers to mitigate the potentially conflicting strategies of accounts. Other
than potential conflicts between investment strategies, the side-by-side
management of both the Funds and other accounts may raise potential conflicts of
interest due to the interest held by the Adviser or one of its affiliates in an
account, the fact that one account has a performance-based investment advisory
fee and certain trading practices used by the portfolio managers (for example,
cross trades between a Fund and another account and allocation of aggregated
trades among the Funds and other accounts). The Adviser has developed policies
and procedures reasonably designed to mitigate these conflicts. In particular,
the Adviser has adopted policies limiting the ability of portfolio managers to
effect cross trades and policies to ensure the fair allocation of securities
purchased on an aggregated basis.
The
portfolio managers are compensated in various forms. The following table
outlines the forms of compensation paid to each portfolio manager as of
September 30,
2023.
|
|
|
|
|
|
|
|
|
|
| |
Name
of Portfolio Manager |
Form
of Compensation |
Source
of Compensation |
Method
Used to Determine Compensation (Including Any Differences in
Method) |
Mark
Travis |
Salary |
Intrepid
Capital Management, Inc. |
Mr.
Travis’ salary is determined on an annual basis and it is a fixed amount
throughout the year. It is not based on the performance of the Funds or on
the value of the assets held in the Funds’ portfolios. |
| Bonus |
| Mr.
Travis receives a bonus based on his performance and the profitability of
the Adviser. |
| Deferred
Compensation |
| Mr.
Travis receives deferred compensation based on a percentage of his annual
salary. |
| Restricted
Stock |
| Mr.
Travis is eligible for grants of restricted stock, which typically vest
over a two-year period. The equity awards are granted annually, if at all,
and are granted by the Board of Directors of the Adviser based on
individual contributions. |
|
|
|
|
|
|
|
|
|
|
| |
Name
of Portfolio Manager |
Form
of Compensation |
Source
of Compensation |
Method
Used to Determine Compensation (Including Any Differences in
Method) |
Hunter
Hayes |
Salary
|
Intrepid
Capital Management, Inc. |
Mr.
Hayes’ salary is determined on an annual basis and it is a fixed amount
throughout the year. It is not based on the performance of the Funds or on
the value of the assets held in the Funds’ portfolios. |
| Bonus |
| Mr.
Hayes receives a bonus based on his performance and the profitability of
the Adviser. |
|
Restricted
Stock
|
| Mr.
Hayes is eligible for grants of restricted stock, which typically vest
over a two-year period. The equity awards are granted annually, if at all
granted by the Board of Directors of the Adviser based on individual
contributions. |
Matt
Parker |
Salary
|
Intrepid
Capital Management, Inc. |
Matt
Parker’s salary is determined on an annual basis and it is a fixed amount
throughout the year. It is not based on the performance of the Funds or on
the value of the assets held in the Funds’ portfolios. |
| Bonus
|
| Mr.
Parker receives a bonus based on his performance and the profitability of
the Adviser. |
| Restricted
Stock
|
| Mr.
Parker is eligible for grants of restricted stock, which typically vest
over a two-year period. The equity awards are granted annually, if at all,
and are granted by the Board of Directors of the Adviser based on
individual contributions. |
Joe
Van Cavage |
Salary
|
Intrepid
Capital Management, Inc. |
Mr.
Van Cavage’s salary is determined on an annual basis and it is a fixed
amount throughout the year. It is not based on the performance of the
Funds or on the value of the assets held in the Funds’
portfolios. |
| Bonus
|
| Mr.
Van Cavage receives a bonus based on his performance and the profitability
of the Adviser. |
| Restricted
Stock
|
| Mr.
Van Cavage is eligible for grants of restricted stock, which typically
vest over a two-year period. The equity awards are granted annually, if at
all, and are granted by the Board of Directors of the Adviser based on
individual contributions. |
The
following table sets forth the dollar range of Fund shares beneficially owned by
each portfolio manager as of September 30,
2023,
stated using the following ranges: None, $1-$10,000, $10,001-$50,000,
$50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 or over
$1,000,000.
|
|
|
|
| |
Fund/Portfolio
Manager |
Dollar
Range of Shares Owned |
| |
Intrepid
Capital Fund |
|
Mark
Travis |
$500,001-$1,000,000 |
Hunter
Hayes |
None |
Matt
Parker |
None |
Joe
Van Cavage |
$1
- $10,000 |
| |
Intrepid
Small Cap Fund |
|
Matt
Parker |
$100,001
- $500,000 |
Joe
Van Cavage |
$100,001
- $500,000 |
Hunter
Hayes |
$1-$10,000 |
| |
Intrepid
Income Fund |
|
Mark
Travis |
$100,001-$500,000 |
Hunter
Hayes |
$50,001-$100,000 |
Matt
Parker |
None |
Joe
Van Cavage |
None |
DETERMINATION
OF NET ASSET VALUE
The
NAV of each Fund will normally be determined as of the close of regular trading
(currently 4:00 p.m. Eastern time) on each day the New York Stock Exchange
(“NYSE”) is open for trading. If the NYSE is not open, then the Funds do not
determine their NAV, and investors may not purchase or redeem shares of the
Funds. The NYSE is open for trading Monday through Friday except New Year’s Day,
Dr. Martin Luther King, Jr. Day, Washington’s Birthday, Good Friday,
Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, when any of the aforementioned
holidays falls on a Saturday, the NYSE will not be open for trading on the
preceding Friday and when any such holiday falls on a Sunday, the NYSE will not
be open for trading on the succeeding Monday, unless unusual business conditions
exist, such as the ending of a monthly or the yearly accounting period. The NYSE
also may be closed on national days of mourning or due to natural disaster or
other extraordinary events or emergencies. If the NYSE closes early on a
valuation day, the Funds shall determine their NAV as of that time. The staff of
the SEC considers the NYSE to be closed on any day when it is not open for
trading the entire day. On days when the NYSE is not open for trading the entire
day, a Fund may, but is not obligated to, determine its NAV.
The
per share NAV of a Fund is determined by dividing the value of the Fund’s net
assets (i.e.,
its assets less its liabilities) by the total number of its shares outstanding
at that time. Due to the fact that different expenses are charged to the
Institutional Class and Investor Class of the Funds, the NAV of the two classes
of a Fund may vary. In determining the NAV of each Fund’s shares, securities
that are listed on national securities exchanges (other than NASDAQ®
as defined below) are valued at the last sales price on the securities exchange
on which such securities are primarily traded. Securities that are traded on the
NASDAQ®
Global Select Market, NASDAQ®
Global Market or the NASDAQ®
Capital MarketSM
(collectively “NASDAQ®
traded securities”) are valued at the NASDAQ®
Official Closing Price (“NOCP”).
The
Board of Trustees has appointed the Adviser as the Funds’ valuation designee
under Rule 2a-5 of the 1940 Act, to perform all fair valuations of the Funds’
portfolio investments, subject to the Board’s oversight. As the valuation
designee, the Adviser has established procedures for its fair valuation of the
Funds’ portfolio investments. For example, if there are no sales on a given day
for securities traded on an exchange, the security will be priced at the mean
between the current ask an bid prices; provided, however, that in the event the
spread between the bid and offer is so large that in the judgment of the Adviser
using the mean would overstate the value of a security, the Adviser shall
determine the fair value of such security. If there is not a NOCP for a security
traded on NASDAQ®
or a sale price available for an over-the-counter security, the security will be
priced at the mean between the current ask and bid prices; provided however,
that in the event the spread between the bid and offer is so large that in the
judgement of the Adviser using the mean would overstate the value of a security,
the Adviser shall determine the fair value of such security.
Investment
in mutual funds, including money market funds, are generally priced at the
ending net asset value (NAV). Debt securities, such as corporate bonds,
convertible bonds, senior loans, preferred securities and U.S. government agency
issues for which market quotations are not readily available may be valued based
on information supplied by independent pricing services using matrix pricing
formulas and/or independent broker bid quotations. Debt securities with
remaining
maturities of 60 days or less may be valued on an amortized cost basis to the
extent it is equivalent to fair value, which involves valuing an instrument at
its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating rates on the fair
value of the instrument. Amortized cost will not be used if it does not
approximate fair value, due to credit or other impairments of the
issuer.
Forward
currency contracts derive their value from the underlying currency prices. These
are valued by a pricing service using pricing models. The models use inputs that
are observed from active markets, such as exchange rates.
Futures
contracts are valued at the last sale price at the close of trading on the
relevant exchange or board of trade. If there was no sale on the applicable
exchange or board of trade on such day, they are valued at the average of the
quoted bid and asked prices as of the close of such exchange or board of
trade.
Market
quotations may not be available, for example, if trading in particular
securities was halted during the day and not resumed prior to the close of
trading on the NYSE. Other types of securities that the Funds may hold for which
fair value pricing might be required include, but are not limited to: (a)
illiquid securities; (b) securities of an issuer that has entered into a
restructuring; (c) securities whose trading has been halted or suspended or
primary market is closed; and (d) securities whose value has been impacted by a
significant event that occurred before the close of the NYSE but after the close
of the securities’ primary markets.
Any
securities or other assets for which there are no readily available market
quotations and other assets will be valued at their fair value as determined by
the Adviser, as the valuation designee. The fair value of a security is the
amount which a Fund might reasonably expect to receive upon a current sale. The
fair value of a security may differ from the last quoted price and a Fund may
not be able to sell a security at the fair value. In determining fair value, the
Adviser considers all relevant qualitative and quantitative information
available including news regarding significant market or security specific
events. For securities that do not trade during NYSE hours, fair value
determinations are based on analyses of market movements after the close of
those securities’ primary markets, and may include reviews of developments in
foreign markets, the performance of U.S. securities markets, and the performance
of instruments trading in U.S. markets that represent foreign securities and
baskets of foreign securities. The Adviser utilizes a service provided by an
independent third party to assist in fair valuation of certain
securities.
DISTRIBUTION
OF SHARES
The
Trust has adopted a Service and Distribution Plan (the “Plan”). The Plan was
adopted in anticipation that the Investor Class shares of the Funds, will
benefit from the Plan through increased sale of shares, thereby reducing the
expense ratio of each Fund’s Investor Class of shares and providing the Adviser
greater flexibility in management. The Plan authorizes payments by each Fund’s
Investor Class in connection with the distribution of its shares at an annual
rate, as determined from time to time by the Board of Trustees, of up to 0.25%
of the average daily net assets of each Fund’s Investor Class of shares. Amounts
paid under the Plan by the Investor Class may be spent by a Fund on any
activities or expenses primarily intended to result in the sale of Investor
Class shares of the Fund, including, but not limited to, advertising,
compensation for sales and marketing activities of financial institutions and
others such as dealers and distributors, shareholder account servicing, the
printing and mailing of prospectuses to other than current shareholders and the
printing and mailing of sales literature. To the extent any activity is one that
a Fund may finance without a plan pursuant to Rule 12b‑1, the Fund may also make
payments to finance such activity outside of the Plan and not subject to its
limitations.
The
Plan may be terminated by a Fund at any time by a vote of the trustees of the
Trust who are not interested persons of the Trust and who have no direct or
indirect financial interest in the Plan or any agreement related thereto (the
“Rule 12b‑1 Trustees”) or by a vote of a majority of the outstanding shares of
the Fund. Mr. Osterman, Mr. Vandergriff, and Mr. Broaddus are currently the Rule
12b‑1 Trustees. Any change in the Plan that would materially increase the
distribution expenses of a Fund provided for in the Plan requires the approval
of the Board of Trustees, including the Rule 12b‑1 Trustees, and a majority of
the Fund’s outstanding shares.
While
the Plan is in effect, the selection and nomination of trustees who are not
interested persons of the Trust will be committed to the discretion of the
trustees of the Trust who are not interested persons of the Trust. The Board of
Trustees of the Trust must review the amount and purposes of expenditures
pursuant to the Plan quarterly as reported to it by the Distributor or officers
of the Trust. The Plan will continue in effect for as long as its continuance is
specifically approved at least annually by the Board of Trustees, including the
Rule 12b‑1 Trustees.
The
tables below show the amount of 12b-1 fees paid by the Investor Class shares of
each Fund for the fiscal year ended September 30,
2023.
|
|
|
|
| |
12b-1
fees paid |
Fund |
Year
Ended
September 30,
2023 |
Intrepid
Capital Fund – Investor Class |
$20,149 |
Intrepid
Small Cap Fund – Investor Class |
$74,495 |
Intrepid
Income Fund – Investor Class(1) |
$0 |
(1)Investor
Class shares of the Intrepid Income Fund are currently not available for
sale.
For
the fiscal year ended September 30,
2023,
the following amounts were paid pursuant to the Distribution Plan:
|
|
|
|
|
|
|
|
|
|
| |
| Intrepid
Capital Fund – Investor Class |
Intrepid
Small Cap Fund – Investor Class |
Intrepid
Income Fund –
Investor
Class(1) |
Advertising
and Marketing |
$346 |
$470 |
$0 |
Printing
and Postage |
$0 |
$0 |
$0 |
Payment
to distributor |
$7,954 |
$13,351 |
$0 |
Payment
to dealers |
$11,849 |
$60,674 |
$0 |
Compensation
to sales personnel |
$0 |
$0 |
$0 |
Other
Marketing Expenses |
$0 |
$0 |
$0 |
(1)Investor
Class shares of the Intrepid Income Fund are currently not available for
sale.
The
Adviser and/or its subsidiaries or affiliates (“Adviser Entities”) may pay
certain broker-dealers and other financial intermediaries (“Intermediaries”) for
certain activities related to the Funds (“Payments”). Any Payments made by
Adviser Entities will be made from their own assets and not from the assets of
the Funds. Although a portion of Adviser Entities’ revenue comes directly or
indirectly in part from fees paid by the Funds, Payments do not increase the
price paid by investors for the purchase of shares of, or the cost of owning, a
Fund. Adviser Entities may make Payments for Intermediaries to participate in
activities that are designed to make registered representatives, other
professionals and individual investors more knowledgeable about the Funds or for
other activities, such as participation in marketing activities and
presentations, educational training programs, the support of technology
platforms and/or reporting systems. Adviser Entities may also make Payments to
Intermediaries for certain printing, publishing and mailing costs associated
with the Fund. In addition, Adviser Entities may make Payments to Intermediaries
that make shares of the Funds available to their clients or for otherwise
promoting the Funds. Payments of this type are sometimes referred to as
revenue-sharing payments.
Payments
to an Intermediary may be significant to the Intermediary, and amounts that
Intermediaries pay to an investor’s salesperson or other investment professional
may also be significant for the investor’s salesperson or other investment
professional. Because an Intermediary may make decisions about which investment
options it will recommend or make available to its clients or what services to
provide for various products based on payments it receives or is eligible to
receive. Payments create conflicts of interest between the Intermediary and its
clients and these financial incentives may cause the Intermediary to recommend
the Funds over other investments. The same conflict of interest exists with
respect to an investor’s salesperson or other investment professional if he or
she receives similar payments from his or her Intermediary firm.
Adviser
Entities may determine to make Payments based on any number of metrics. For
example, Adviser Entities may make Payments at year-end or other intervals in a
fixed amount, an amount based upon an Intermediary’s services at defined levels
or an amount based on the Intermediary’s net sales of one or more of the Funds
in a year or other period, any of which arrangements may include an agreed-upon
minimum or maximum payment, or any combination of the foregoing. The Adviser
anticipates that the Payments paid by Adviser Entities in connection with the
Funds will be immaterial to Adviser Entities in the aggregate for the current
fiscal year.
AUTOMATIC
INVESTMENT PLAN AND TELEPHONE PURCHASES
The
Funds offer an automatic investment option pursuant to which money will be moved
from a shareholder’s bank account to the shareholder’s Fund account on the
schedule (e.g.,
monthly or quarterly) the shareholder selects. The minimum initial amount of
investment in each Fund is $2,500 for Investor Class shares and $250,000 for
Institutional Class shares ($2,500 for Institutional Class shares of the
Intrepid Income Fund). Subsequent investments in the Investor Class or
Institutional Class shares of a Fund may be made with a minimum investment of
$100.
The
Funds offer a telephone purchase option pursuant to which money will be moved
from a shareholder’s bank account to the shareholder’s Fund account upon
request. Only bank accounts held at domestic financial institutions that are
Automated Clearing House members can be used for telephone transactions. Shares
will be purchased at the NAV calculated on the day of your purchase order if
your purchase order is received prior to the close of regular trading on the
NYSE (currently 4:00 p.m. Eastern time). The minimum amount that can be
transferred by telephone is $100.
Anti-Money
Laundering Program
The
Funds have established an Anti-Money Laundering Compliance Program (the
“Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT Act”). To ensure compliance with this law, the Program provides for the
development of internal practices, procedures and controls, designation of
anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the
Program.
Procedures
to implement the Program include, but are not limited to, determining that the
Fund’s Distributor and transfer agent have established proper anti-money
laundering procedures, reporting suspicious and/or fraudulent activity and a
complete and thorough review of all new opening account applications. The Funds
will not transact business with any person or legal entity whose identity and
beneficial owners cannot be adequately verified under the provisions of the USA
PATRIOT Act.
REDEMPTION
OF SHARES
The
Funds expect to use a variety of resources to honor requests to redeem shares of
the Funds, including available cash; short-term investments; interest, dividend
income and other monies earned on portfolio investments; the proceeds from the
sale or maturity of portfolio holdings; and various other techniques. As of the
date of this SAI, the Funds also have available to them an uncommitted line of
credit that they may draw on to manage their liquidity needs.
If
the Board shall determine that it is in the best interest of the shareholders of
a Fund, and subject to such Fund’s compliance with applicable regulations, each
Fund has reserved the right to pay the redemption prices of shares redeemed,
either totally or partially, by a distribution in-kind of securities (instead of
cash) from the Fund’s portfolio. The securities so distributed would be valued
at the same amount as that assigned to them in calculating the NAV for the
shares redeemed. If a holder of Fund shares receives a distribution in-kind, the
holder of Fund shares would incur brokerage charge when subsequently converting
the securities to cash. For federal income tax purposes, redemption in-kind are
taxed in the same manner as redemptions made in cash. In addition, sales of
in-kind securities may generate taxable gains.
The
Funds have made an election pursuant to Rule 18f-1 under the 1940 Act requiring
that all redemptions be effected in cash to each redeeming shareholder, during
any period of 90 days, up to the lesser of $250,000 or 1% of the net assets of
the Fund.
A
shareholder’s right to redeem shares of the Funds will be suspended and the
right to payment postponed for more than seven days for any period during which
the NYSE is closed because of financial conditions or any other extraordinary
reason and may be suspended for any period during which (i) trading on the
NYSE is restricted pursuant to rules and regulations of the SEC; (ii) the
SEC has by order permitted such suspension; or (iii) such emergency, as
defined by rules and regulations of the SEC, exists as a result of which it is
not reasonably practicable for a Fund to dispose of its securities or fairly to
determine the value of its net assets.
Each
Fund imposes a 2% redemption fee on the value of shares redeemed 30 days or less
after purchase. The 2% redemption fee does not apply to exchanges between the
Funds. The redemption fee will not apply to (a) shares purchased through
reinvested distributions (dividends and capital gains); (b) shares held in
employer-sponsored retirement plans, such as 401(k) plans, but will apply to
IRA accounts; or (c) through systematic programs such as the
systematic withdrawal plan, automatic investment plan and systematic exchange
plans. The redemption fee is designed to discourage short-term trading and any
proceeds of the fee will be credited to the assets of the Fund.
In
calculating whether a redemption of a Fund’s shares is subject to a redemption
fee, a shareholder’s holdings will be viewed on a “first in/first out” basis.
This means that, in determining whether any fee is due, the shareholder will be
deemed to have sold the shares he or she acquired earliest. The fee will be
calculated based on the current NAV of the shares as of the redemption
date.
SYSTEMATIC
WITHDRAWAL PLAN
An
investor who owns Investor Class shares of a Fund worth at least $10,000 (at
least $350,000 in the case of the Institutional Class shares of a Fund) at the
current NAV may, by completing an application which may be obtained from the
Trust or the Transfer Agent, create a Systematic Withdrawal Plan (“SWP”) from
which a fixed sum will be paid to the investor at regular intervals. To
establish a SWP for the Intrepid Income Fund, your account must have a balance
of at least $10,000. To establish the SWP, the investor deposits Fund shares
with the Trust and appoints the Trust as agent to effect redemptions of shares
held in the account for the purpose of making monthly, quarterly or annual
withdrawal payments of a fixed amount to the investor out of the account. Fund
shares deposited by the investor in the account need not be endorsed or
accompanied by a stock power if registered in the same name as the account;
otherwise, a properly executed endorsement or stock power, obtained from any
bank, broker-dealer or the Trust is required. The investor’s signature may be
required to be guaranteed by a bank, a member firm of a national stock exchange
or other eligible guarantor.
The
minimum amount of a withdrawal payment is $100. These payments will be made from
the proceeds of periodic redemptions of shares in the account at NAV.
Redemptions will be made in accordance with the schedule (e.g.,
monthly, quarterly or yearly, but in no event more frequently than monthly)
selected by the investor. If a scheduled redemption is a weekend or a holiday,
such redemption will be made on the next business day. Because a SWP may reduce,
and eventually deplete, your account over time, investors may want to consider
reinvesting all income dividends and capital gains distributions payable by each
Fund. The investor may purchase or transfer additional Fund shares in his or her
account at any time.
Withdrawal
payments cannot be considered as yield or income on the investor’s investment,
since portions of each payment will normally consist of a return of capital.
Depending on the size or the frequency of the disbursements requested, and the
fluctuation in the value of a Fund’s portfolio, redemptions for the purpose of
making such disbursements may reduce or even exhaust the investor’s
account.
The
investor may vary the amount or frequency of withdrawal payments, temporarily
discontinue them, or change the designated payee or payee’s address, by
notifying the Fund in writing five days prior to the effective
date.
INACTIVE
ACCOUNTS
It
is the responsibility of a shareholder to ensure that the shareholder maintains
a correct address for the shareholder’s account(s), as a shareholder’s
account(s) may be transferred to the shareholder’s state of residence if no
activity occurs within the shareholder’s account during the “inactivity period”
specified in the applicable state’s abandoned property laws. Specifically, an
incorrect address may cause a shareholder’s account statements and other
mailings to be returned to the Funds. Upon receiving returned mail, the Funds
will attempt to locate the shareholder or rightful owner of the account. If the
Funds are unable to locate the shareholder, then they will determine whether the
shareholder’s account has legally been abandoned. The Funds are legally
obligated to escheat (or transfer) abandoned property to the appropriate state’s
unclaimed property administrator in accordance with statutory requirements. The
shareholder’s last known address of record determines which state has
jurisdiction. Interest or income is not earned on redemption or distribution
checks sent to you during the time the check remained uncashed. Investors with a
state of residence in Texas have the ability to designate a representative to
receive legislatively required unclaimed property due diligence notifications.
Please contact the Texas Comptroller of Public Accounts for further
information.
ALLOCATION
OF INVESTMENT OPPORTUNITIES
Although
the Funds have differing investment objectives, there will be times when certain
securities will be eligible for purchase by multiple Funds or will be contained
in the portfolios of multiple Funds. Although securities of a particular company
may be eligible for purchase by the Funds, the Adviser may determine at any
particular time to purchase a security for one Fund, but not another, based on
each Fund’s investment objective and in a manner that is consistent with the
Adviser’s fiduciary duties under federal and state law to act in the best
interests of each Fund.
There
may also be times when a given investment opportunity is appropriate for some,
or all, of the Adviser’s other client accounts. It is the policy and practice of
the Adviser not to favor or disfavor consistently or consciously any
client
or class of clients in the allocation of investment opportunities, so that to
the extent practical, such opportunities will be allocated among clients,
including the Funds, over a period of time on a fair and equitable
basis.
If
the Adviser determines that a particular investment is appropriate for more than
one client account, the Adviser may aggregate securities transactions for those
client accounts (“block trades”). To ensure that no client account is
disadvantaged as a result of such aggregation, the Adviser has adopted policies
and procedures to ensure that the Adviser does not aggregate securities
transactions for client accounts unless it believes that aggregation is
consistent with its duty to seek best execution for client accounts and is
consistent with the applicable agreements of the client accounts for which the
Adviser aggregates securities transactions. No client account is favored over
any other client account in block trades, and each client account that
participates in block trades participates at the average share price for all
transactions in the security for which that aggregated order is placed on the
day that such aggregated order is placed. Subject to minimum ticket charges,
transaction costs are shared in proportion to Client Accounts’
participation.
It
is the Adviser’s general policy not to purchase a security in one Fund while
simultaneously selling it in another Fund. However, there may be circumstances
outside of the Adviser’s control that require the purchase of a security in one
portfolio and a sale in the other. For example, when one Fund experiences
substantial cash inflows while another Fund experiences substantial cash
outflows, the Adviser may be required to buy securities to maintain a fully
invested position in one Fund, while selling securities in another Fund to meet
shareholder redemptions. In such circumstances, a Fund may acquire assets from
another Fund that are otherwise qualified investments for the acquiring Fund, so
long as no Fund bears any markup or spread, and no commission, fee or other
remuneration is paid in connection with the acquisition, and the acquisition
complies with Section 17(a) of the 1940 Act and Rule 17a-7 thereunder. If the
purchase and sale are not affected pursuant to Rule 17a-7, then the purchase
and/or sale of a security common to both portfolios may result in a higher price
being paid by a Fund in the case of a purchase than would otherwise have been
paid, or a lower price being received by a Fund in the case of a sale than would
otherwise have been received, as a result of a Fund’s transactions affecting the
market for such security. In any event, the Funds management believes that under
normal circumstances such events will have a minimal impact on a Fund’s per
share NAV and its subsequent long-term investment return.
ALLOCATION
OF PORTFOLIO BROKERAGE
General
Each
Fund’s securities trading and brokerage policies and procedures are reviewed by
and subject to the supervision of the Trust’s Board of Trustees. Decisions to
buy and sell securities for the Funds are made by the Adviser subject to review
by the Trust’s Board of Trustees. In placing purchase and sale orders for
portfolio securities for the Funds, it is the policy of the Adviser to seek the
best execution of orders at the most favorable price in light of the overall
quality of brokerage and research services provided, as described in this and
the following paragraphs. Many of these transactions involve payment of a
brokerage commission by the Funds. In some cases, transactions are with firms
who act as principals of their own accounts. In selecting brokers to effect
portfolio transactions, the determination of what is expected to result in best
execution at the most favorable price involves a number of largely judgmental
considerations. Among these are the Adviser’s evaluation of the broker’s
efficiency in executing and clearing transactions, block trading capability
(including the broker’s willingness to position securities) and the broker’s
reputation, financial strength and stability. The most favorable price to a Fund
means the best net price (namely, the price after giving effect to commissions,
if any). Over‑the‑counter securities may be purchased and sold directly with
principal market makers who retain the difference in their cost in the security
and its selling price (i.e.,
“markups” when a market maker sells a security and “markdowns” when the market
maker purchases a security). In some instances, the Adviser feels that better
prices are available from non-principal market makers who are paid commissions
directly.
In
allocating brokerage business for the Funds, the Adviser also takes into
consideration the research, analytical, statistical and other information and
services provided by the broker, such as general economic reports and
information, reports or analyses of particular companies or industry groups,
market timing and technical information, and the availability of the brokerage
firm’s analysts for consultation. While the Adviser believes these services have
substantial value, they are considered supplemental to the Adviser’s own efforts
in the performance of its duties under the Advisory Agreements. Other clients of
the Adviser may indirectly benefit from the availability of these services to
the Adviser, and the Funds may indirectly benefit from services available to the
Adviser as a result of transactions for other clients. The Advisory Agreements
provide that the Adviser may cause the Funds to pay a broker that provides
brokerage and research services to the Adviser a commission for effecting a
securities transaction in excess of the amount another broker would have charged
for effecting the transaction, if the Adviser determines in good faith that such
amount of commission is reasonable in relation to the value of brokerage and
research services provided by the executing broker viewed in terms of either the
particular transaction or the Adviser’s overall responsibilities with respect to
the Funds and the other accounts as to which it exercises investment discretion.
Brokerage
Commissions
An
aggregate brokerage commission paid by each Fund for the following fiscal years
is shown in the table below.
|
|
|
|
|
|
|
|
|
|
| |
Fund |
2023 |
2022 |
2021 |
Intrepid
Capital Fund |
$28,051 |
$23,796 |
$14,372(1) |
Intrepid
Small Cap Fund |
$161,590 |
$202,777 |
$193,346 |
Intrepid
Income Fund |
$68,160 |
$73,408(2) |
$17,784 |
(1)
Material decrease due to decrease in the Fund’s portfolio turnover
rate. |
(2)
Material increase due to increase in the Fund’s portfolio turnover
rate. |
Aggregate
brokerage commissions paid by each Fund to brokers who provided brokerage and
research services for the fiscal year ended September 30,
2023
are shown in the table below.
|
|
|
|
|
|
|
| |
Fund |
Commissions
Paid to Brokers Who Supplied Research Services |
Total
Dollar Amount Involved in Such Transactions |
Intrepid
Capital Fund |
$14,204 |
$14,604,536 |
Intrepid
Small Cap Fund |
$106,322 |
$40,600,423 |
Intrepid
Income Fund |
$16,595 |
$38,473,431 |
CERTAIN
U.S. FEDERAL INCOME TAX CONSEQUENCES
IN
VIEW OF THE COMPLEXITIES OF U.S. FEDERAL AND OTHER INCOME TAX LAWS APPLICABLE TO
REGULATED INVESTMENT COMPANIES, A PROSPECTIVE SHAREHOLDER IS URGED TO CONSULT
WITH AND RELY SOLELY UPON ITS TAX ADVISORS TO UNDERSTAND FULLY THE U.S. FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THAT INVESTOR OF SUCH AN INVESTMENT
BASED ON THAT INVESTOR’S PARTICULAR FACTS AND CIRCUMSTANCES. THIS SUMMARY IS NOT
INTENDED TO BE, AND SHOULD NOT BE CONSTRUED AS, LEGAL OR TAX ADVICE TO ANY
PROSPECTIVE SHAREHOLDER.
The
following information supplements and should be read in conjunction with the
section in each Prospectus entitled “DIVIDENDS, DISTRIBUTIONS AND TAXES.” Each
Prospectus generally describes the U.S. federal income tax treatment of
distributions by the Funds. This section of the SAI provides additional
information concerning U.S. federal income taxes. It is based on the Internal
Revenue Code of 1986, as amended (the “Code”), applicable Treasury Regulations,
judicial authority, and administrative rulings and practice, all as of the date
of this SAI and all of which are subject to change, including changes with
retroactive effect. Except as specifically set forth below, the following
discussion does not address any state, local or foreign tax
matters.
A
shareholder’s tax treatment may vary depending upon the shareholder’s particular
situation. This discussion applies only to shareholders holding Fund shares as
capital assets within the meaning of the Code. A shareholder may also be subject
to special rules not discussed below if they are a certain kind of shareholder,
including, but not limited to: an insurance company; a tax-exempt organization;
a financial institution or broker-dealer; a person who is neither a citizen nor
resident of the United States or entity that is not organized under the laws of
the United States or political subdivision thereof; a shareholder who holds Fund
shares as part of a hedge, straddle or conversion transaction; a shareholder who
does not hold Fund shares as a capital asset; or an entity taxable as a
partnership for U.S. federal income tax purposes and investors in such an
entity.
The
Fund has not requested and will not request an advance ruling from the Internal
Revenue Service (the “IRS”) as to the U.S. federal income tax matters described
below. The IRS could adopt positions contrary to those discussed below and such
positions could be sustained. In addition, the following discussion and the
discussions in each Prospectus applicable to each shareholder address only some
of the U.S. federal income tax considerations generally affecting investments in
the Funds. Prospective shareholders are urged to consult their own tax advisers
and financial planners regarding the U.S. federal tax consequences of an
investment in a Fund, the application of state, local or foreign laws, and the
effect of any possible changes in applicable tax laws on their investment in the
Funds.
Qualification
as a Regulated Investment Company
It
is intended that each Fund will qualify for treatment as a regulated investment
company (a “RIC”) under Subchapter M of Subtitle A, Chapter 1 of the Code. Each
Fund will be treated as a separate entity for U.S. federal income tax purposes.
Thus, the provisions of the Code applicable to RICs generally will apply
separately to each Fund, even though each Fund is a series of the Trust.
Furthermore, each Fund will separately determine its income, gains, losses and
expenses for U.S. federal income tax purposes.
In
order to qualify as a RIC under the Code, each Fund must, among other things,
derive at least 90% of its gross income each taxable year generally from (i)
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock, securities or foreign currencies,
and other income attributable to its business of investing in such stock,
securities or foreign currencies (including, but not limited to, gains from
options, futures or forward contracts) and (ii) net income derived from an
interest in a qualified publicly traded partnership, as defined in the Code.
Future U.S. Treasury regulations may (possibly retroactively) exclude from
qualifying income foreign currency gains that are not directly related to a
Fund’s principal business of investing in stock, securities or options and
futures with respect to stock or securities. In general, for purposes of this
90% gross income requirement, income derived from a partnership, except a
qualified publicly traded partnership, will be treated as qualifying income only
to the extent such income is attributable to items of income of the partnership
which would be qualifying income if realized by the RIC.
Each
Fund must also diversify its holdings so that, at the end of each quarter of the
Fund’s taxable year: (i) at least 50% of the fair market value of its gross
assets consists of (A) cash and cash items (including receivables), U.S.
government securities and securities of other RICs, and (B) securities of any
one issuer (other than those described in clause (A)) to the extent such
securities do not exceed 5% of the value of the Fund’s total assets and do not
exceed 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Fund’s total assets consists of the securities
of any one issuer (other than those described in clause (i)(A)), the securities
of two or more issuers the Fund controls and which are engaged in the same,
similar or related trades or businesses, or the securities of one or more
qualified publicly traded partnerships. In addition, for purposes of meeting the
diversification requirement of clause (i)(B), the term “outstanding voting
securities of such issuer” includes the equity securities of a qualified
publicly traded partnership. The qualifying income and diversification
requirements applicable to a Fund may limit the extent to which it can engage in
transactions in options, futures contracts, forward contracts and swap
agreements.
If
a Fund fails to satisfy any of the qualifying income or diversification
requirements in any taxable year, such Fund may be eligible for relief
provisions if the failures are due to reasonable cause and not willful neglect
and if a penalty tax is paid with respect to each failure to satisfy the
applicable requirement. Additionally, relief is provided for certain de minimis
failures of the diversification requirements where the Fund corrects the failure
within a specified period. If the applicable relief provisions are not available
or cannot be met, such Fund will be taxed in the same manner as an ordinary
corporation, described below.
In
addition, with respect to each taxable year, each Fund generally must distribute
to its shareholders at least 90% of its investment company taxable income, which
generally includes its ordinary income and the excess of any net short-term
capital gain over net long- term capital loss, and at least 90% of its net
tax-exempt interest income earned for the taxable year. If a Fund meets all of
the RIC qualification requirements, it generally will not be subject to U.S.
federal income tax on any of the investment company taxable income and net
capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) it
distributes to its shareholders. For this purpose, a Fund generally must make
the distributions in the same year that it realizes the income and gain,
although in certain circumstances, a Fund may make the distributions in the
following taxable year. Shareholders generally are taxed on any distributions
from a Fund in the year they are actually distributed. However, if a Fund
declares a distribution to shareholders of record in October, November or
December of one year and pays the distribution by January 31 of the following
year, the Fund and its shareholders will be treated as if the Fund paid the
distribution on December 31 of the first year. Each Fund intends to distribute
its net income and gain in a timely manner to maintain its status as a RIC and
eliminate fund-level U.S. federal income taxation of such income and gain.
However, no assurance can be given that a Fund will not be subject to U.S.
federal income taxation.
Moreover,
a Fund may retain for investment all or a portion of their net capital gain. If
a Fund retains any net capital gain, it will be subject to a tax at regular
corporate rates on the amount retained, but may report the retained amount as
undistributed capital gain in a written statement furnished to its shareholders,
who (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund on such undistributed amount against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares owned
by a shareholder of the Fund will be increased by an amount equal to the
difference between the amount of undistributed capital gain included in the
shareholder’s gross income and the
tax
deemed paid by the shareholder under clause (ii) of the preceding sentence. A
Fund is not required to, and there can be no assurance that it will, make this
designation if it retains all or a portion of its net capital gain in a taxable
year.
If,
for any taxable year, a Fund fails to qualify as a RIC, and is not eligible for
relief as described above, it will be taxed in the same manner as an ordinary
corporation without any deduction for its distributions to shareholders, and all
distributions from the Fund’s current and accumulated earnings and profits
(including any distributions of its net tax-exempt income and net long-term
capital gain) to its shareholders will be taxable as dividend income. To
re-qualify to be taxed as a RIC in a subsequent year, the Fund may be required
to distribute to its shareholders its earnings and profits attributable to
non-RIC years reduced by an interest charge on 50% of such earnings and profits
payable by the Fund to the IRS. In addition, if a Fund initially qualifies as a
RIC but subsequently fails to qualify as a RIC for a period greater than two
taxable years, the Fund generally would be required to recognize and pay tax on
any net unrealized gain (the excess of aggregate gain, including items of
income, over aggregate loss that would have been realized if the Fund had been
liquidated) or, alternatively, to be subject to tax on such unrealized gain
recognized for a period of ten years, in order to re-qualify as a RIC in a
subsequent year.
Equalization
Accounting
Each
Fund may use the so-called “equalization method” of accounting to allocate a
portion of its “earnings and profits,” which generally equals a Fund’s
undistributed investment company taxable income and net capital gain, with
certain adjustments, to redemption proceeds. This method permits a Fund to
achieve more balanced distributions for both continuing and redeeming
shareholders. Although using this method generally will not affect a Fund’s
total returns, it may reduce the amount that the Fund would otherwise distribute
to continuing shareholders by reducing the effect of redemptions of Fund shares
on Fund distributions to shareholders. However, the IRS may not have expressly
sanctioned the particular equalization methods that may be used by a Fund, and
thus a Fund’s use of these methods may be subject to IRS scrutiny.
Capital
Loss Carry-Forwards
For
net capital losses realized in taxable years beginning before January 1, 2011, a
Fund is permitted to carry forward a net capital loss to offset its capital
gain, if any, realized during the eight years following the year of the loss,
and such capital loss carry-forward is treated as a short-term capital loss in
the year to which it is carried. For net capital losses realized in taxable
years beginning on or after January 1, 2011, a Fund is permitted to carry
forward a net capital loss to offset its capital gain indefinitely. For capital
losses realized in taxable years beginning after January 1, 2011, the excess of
a Fund’s net short-term capital loss over its net long-term capital gain is
treated as a short-term capital loss arising on the first day of the Fund’s next
taxable year and the excess of a Fund’s net long-term capital loss over its net
short-term capital gain is treated as a long-term capital loss arising on the
first day of the Fund’s next taxable year. If future capital gain is offset by
carried-forward capital losses, such future capital gain is not subject to
fund-level U.S. federal income tax, regardless of whether it is distributed to
shareholders. Accordingly, the Funds do not expect to distribute any such
offsetting capital gain. The Funds cannot carry back or carry forward any net
operating losses.
At
September 30, 2023, the Intrepid Capital Fund had short-term tax basis
capital losses of $15,647,488 and long-term tax basis capital losses of
$4,199,344, which may be carried forward to offset future capital gains. To the
extent that the Intrepid Capital Fund may realize future net capital gains,
those gains may be offset by any of its unused capital loss carryforwards. These
losses do not expire.
At
September 30, 2023, the Intrepid Small Cap Fund had long-term tax basis
capital losses of $745,367, short-term unlimited tax basis capital losses of
$2,131,339, short-term limited tax basis capital losses of $159,383, and no
long-term tax basis capital losses which may be carried forward to offset future
capital gains. To the extent that the Intrepid Small Cap Fund may realize future
net capital gains, those gains will be offset by any of its unused capital loss
carryforwards. These losses do not expire.
At
September 30, 2023, the Intrepid Income Fund had short-term tax basis
capital losses of $12,868,318 and long-term tax basis capital losses of
$3,405,738, which may be carried forward to offset future capital gains. To the
extent that the Intrepid Income Fund may realize future net capital gains, those
gains will be offset by any of its unused capital loss carry-forwards. These
losses do not expire.
If
a Fund engages in a reorganization, either as an acquiring fund or acquired
fund, its capital loss carry-forwards (if any), its unrealized losses (if any),
and any such losses of other funds participating in the reorganization may be
subject to severe limitations that could make such losses, in particular losses
realized in taxable years beginning before January 1, 2011, substantially
unusable. The Funds have engaged in reorganizations in the past and/or may
engage in reorganizations in the future.
Excise
Tax
If
a Fund fails to distribute by December 31 of each calendar year at least the sum
of 98% of its ordinary income for that year (excluding capital gains and
losses), 98.2% of its capital gain net income (adjusted for certain net ordinary
losses) for the 12-month period ending on October 31 of that year, and any of
its ordinary income and capital gain net income from previous years that was not
distributed during such years, the Fund will be subject to a nondeductible 4%
U.S. federal excise tax on the undistributed amounts (other than to the extent
of its tax-exempt interest income, if any). For these purposes, a Fund will be
treated as having distributed any amount on which it is subject to corporate
level U.S. federal income tax for the taxable year ending within the calendar
year. Each Fund generally intends to actually, or be deemed to, distribute
substantially all of its ordinary income and capital gain net income, if any, by
the end of each calendar year and thus expects not to be subject to the excise
tax. However, no assurance can be given that a Fund will not be subject to the
excise tax. Moreover, each Fund reserves the right to pay an excise tax rather
than make an additional distribution when circumstances warrant (for example,
the amount of excise tax to be paid by a Fund is determined to be de
minimis).
Taxation
of Investments
In
general, realized gains or losses on the sale of securities held by a Fund will
be treated as capital gains or losses, and long-term capital gains or losses if
the Fund has held the disposed securities for more than one year at the time of
disposition.
If
a Fund purchases a debt obligation with original issue discount (“OID”)
(generally, a debt obligation with a purchase price at original issuance less
than its principal amount, such as a zero-coupon bond), which generally includes
“payment-in-kind” or “PIK” bonds, the Fund generally is required to annually
include in its taxable income a portion of the OID as ordinary income, even
though the Fund may not receive cash payments attributable to the OID until a
later date, potentially until maturity or disposition of the obligation. A
portion of the OID includible in income with respect to certain high-yield
corporate discount obligations may be treated as a dividend for U.S. federal
income tax purposes. Similarly, if a Fund purchases a debt obligation with
market discount (generally a debt obligation with a purchase price after
original issuance less than its principal amount (reduced by any OID)), the Fund
generally is required to annually include in its taxable income a portion of the
market discount as ordinary income, even though the Fund may not receive cash
payments attributable to the market discount until a later date, potentially
until maturity or disposition of the obligation. A Fund generally will be
required to make distributions to shareholders representing the OID or market
discount income on debt obligations that is currently includible in income, even
though the cash representing such income may not have been received by a Fund.
Cash to pay such distributions may be obtained from sales proceeds of securities
held
by the Fund which
a Fund otherwise might have continued to hold; obtaining such cash might be
disadvantageous for the Fund.
If
a Fund invests in debt obligations that are in the lowest rating categories or
are unrated, including debt obligations of issuers not currently paying interest
or who are in default, special tax issues may exist for the Fund. U.S. federal
income tax rules are not entirely clear about issues such as when a Fund may
cease to accrue interest, OID, or market discount, when and to what extent
deductions may be taken for bad debts or worthless securities, and how payments
received on obligations in default should be allocated between principal and
income. These and other related issues will be addressed by a Fund when, as, and
if it invests in such securities, in order to seek to ensure that it distributes
sufficient income to preserve its status as a RIC and does not become subject to
U.S. federal income or excise tax.
If
an option granted by a Fund is sold, lapses or is otherwise terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. Some capital losses realized by a Fund in the sale,
exchange, exercise, or other disposition of an option may be deferred if they
result from a position that is part of a “straddle,” discussed below. If
securities are sold by a Fund pursuant to the exercise of a covered call option
granted by it, the Fund generally will add the premium received to the sale
price of the securities delivered in determining the amount of gain or loss on
the sale. If securities are purchased by a Fund pursuant to the exercise of a
put option granted by it, the Fund generally will subtract the premium received
from its cost basis in the securities purchased.
Some
regulated futures contracts, certain foreign currency contracts, and non-equity,
listed options used by a Fund will be deemed “Section 1256 contracts.” A Fund
will be required to “mark-to-market” any such contracts held at the end of the
taxable year by treating them as if they had been sold on the last day of that
year at market value. Sixty percent of any net gain or loss realized on all
dispositions of Section 1256 contracts, including deemed dispositions under the
“mark-to-market” rule, generally will be treated as long-term capital gain or
loss, and the remaining 40% will be treated as short-term capital gain or loss,
although certain foreign currency gains and losses from such contracts may be
treated as ordinary income or loss (as described below). These provisions may
require a Fund to recognize income or gains without a
concurrent
receipt of cash. Transactions that qualify as designated hedges are exempt from
the mark-to-market rule and the “60%/40%” rule and may require the Fund to defer
the recognition of losses on certain futures contracts, foreign currency
contracts and non-equity options.
Foreign
currency gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt obligations, certain
options, futures contracts, forward contracts, and similar instruments relating
to foreign currency, foreign currencies, or payables or receivables denominated
in a foreign currency are subject to Section 988 of the Code, which generally
causes such gains and losses to be treated as ordinary income or loss and may
affect the amount and timing of recognition of the Fund’s income. Under future
U.S. Treasury regulations, any such transactions that are not directly related
to a Fund’s investments in stock or securities (or its options contracts or
futures contracts with respect to stock or securities) may have to be limited in
order to enable the Fund to satisfy the 90% income test described above. If the
net foreign currency loss exceeds a Fund’s net investment company taxable income
(computed without regard to such loss) for a taxable year, the resulting
ordinary loss for such year will not be deductible by the Fund or its
shareholders in future years.
Offsetting
positions held by a Fund involving certain derivative instruments, such as
financial forward, futures, and options contracts, may be considered, for U.S.
federal income tax purposes, to constitute “straddles.” “Straddles” are defined
to include “offsetting positions” in actively traded personal property. The tax
treatment of “straddles” is governed by Section 1092 of the Code which, in
certain circumstances, overrides or modifies the provisions of Section 1256 of
the Code, described above. If a Fund is treated as entering into a “straddle”
and at least one (but not all) of the Fund’s positions in derivative contracts
comprising a part of such straddle is governed by Section 1256 of the Code, then
such straddle could be characterized as a “mixed straddle.” A Fund may make one
or more elections with respect to “mixed straddles.” Depending upon which
election is made, if any, the results with respect to a Fund may differ.
Generally, to the extent the straddle rules apply to positions established by a
Fund, losses realized by the Fund may be deferred to the extent of unrealized
gain in any offsetting positions. Moreover, as a result of the straddle rules,
short-term capital loss on straddle positions may be recharacterized as
long-term capital loss, and long-term capital gain may be characterized as
short-term capital gain. In addition, the existence of a straddle may affect the
holding period of the offsetting positions. As a result, the straddle rules
could cause distributions that would otherwise constitute qualified dividend
income (defined below) to fail to satisfy the applicable holding period
requirements (described below) and therefore to be taxed as ordinary income.
Furthermore, the Fund may be required to capitalize, rather than deduct
currently, any interest expense and carrying charges applicable to a position
that is part of a straddle, including any interest expense on indebtedness
incurred or continued to purchase or carry any positions that are part of a
straddle. Because the application of the straddle rules may affect the character
and timing of gains and losses from affected straddle positions, the amount
which must be distributed to shareholders, and which will be taxed to
shareholders as ordinary income or long-term capital gain, may be increased or
decreased substantially as compared to the situation where a Fund had not
engaged in such transactions.
If
a Fund enters into a “constructive sale” of any appreciated financial position
in stock, a partnership interest, or certain debt instruments, the Fund will be
treated as if it had sold and immediately repurchased the property and must
recognize gain (but not loss) with respect to that position. A constructive sale
of an appreciated financial position occurs when a Fund enters into certain
offsetting transactions with respect to the same or substantially identical
property, including: (i) a short sale; (ii) an offsetting notional principal
contract; (iii) a futures or forward contract; or (iv) other transactions
identified in future U.S. Treasury regulations. The character of the gain from
constructive sales will depend upon a Fund’s holding period in the appreciated
financial position. Losses realized from a sale of a position that was
previously the subject of a constructive sale will be recognized when the
position is subsequently disposed of. The character of such losses will depend
upon a Fund’s holding period in the position and the application of various loss
deferral provisions in the Code. Constructive sale treatment does not apply to
certain closed transactions, including if such a transaction is closed on or
before the 30th day after the close of the Fund’s taxable year and the Fund
holds the appreciated financial position unhedged throughout the 60-day period
beginning with the day such transaction was closed.
The
amount of long-term capital gain a Fund may recognize from certain derivative
transactions with respect to interests in certain pass-through entities is
limited under the Code’s constructive ownership rules. The amount of long-term
capital gain is limited to the amount of such gain a Fund would have had if the
Fund directly invested in the pass-through entity during the term of the
derivative contract. Any gain in excess of this amount is treated as ordinary
income. An interest charge is imposed on the amount of gain that is treated as
ordinary income.
In
addition, a Fund’s transactions in securities and certain types of derivatives
(e.g.,
options, futures contracts, forward contracts, and swap agreements) may be
subject to other special tax rules, such as the wash sale rules or the short
sale rules, the effect of which may be to accelerate income to the Fund, defer
losses to the Fund, cause adjustments to the holding periods of the Fund’s
securities, convert long-term capital gains into short-term capital gains,
and/or convert short-term capital losses into long- term capital losses. These
rules could therefore affect the amount, timing, and character of distributions
to shareholders.
Rules
governing the U.S. federal income tax aspects of derivatives, including swap
agreements, are in a developing stage and are not entirely clear in certain
respects. Accordingly, while each Fund intends to account for such transactions
in a manner it deems to be appropriate, the IRS might not accept such treatment.
If it did not, the status of a Fund as a RIC might be jeopardized. Certain
requirements that must be met under the Code in order for a Fund to qualify as a
RIC may limit the extent to which a Fund will be able to engage in derivatives
transactions.
A
Fund may invest in real estate investment trusts (“REITs”). Investments in REIT
equity securities may require a Fund to accrue and distribute income not yet
received. To generate sufficient cash to make the requisite distributions, the
Fund may be required to sell securities in its portfolio (including when it is
not advantageous to do so) that it otherwise would have continued to hold. A
Fund’s investments in REIT equity securities may at other times result in the
Fund’s receipt of cash in excess of the REIT’s earnings if the Fund distributes
these amounts, these distributions could constitute a return of capital to Fund
shareholders for U.S. federal income tax purposes. Dividends received by the
Fund from a REIT generally will not constitute qualified dividend income and
will not qualify for the dividends-received deduction. Taxable ordinary
dividends received and distributed by the Fund on its REIT holdings may be
eligible to be reported by the Fund, and treated by individual shareholders, as
“qualified REIT dividends” that are eligible for a 20% deduction on its federal
income tax returns. Individuals must satisfy holding period and other
requirements in order to be eligible for this deduction. Without further
legislation, the deduction would sunset after 2025. Shareholders should consult
their own tax professionals concerning their eligibility for this
deduction.
A
Fund may invest directly or indirectly in residual interests in real estate
mortgage investment conduits (“REMICs”) or in other interests that may be
treated as taxable mortgage pools (“TMPs”) for U.S. federal income tax purposes.
Under IRS guidance, a Fund must allocate “excess inclusion income” received
directly or indirectly from REMIC residual interests or TMPs to its shareholders
in proportion to dividends paid to such shareholders, with the same consequences
as if the shareholders had invested in the REMIC residual interests or TMPs
directly.
In
general, excess inclusion income allocated to shareholders (i) cannot be offset
by net operating losses (subject to a limited exception for certain thrift
institutions), (ii) constitutes unrelated business taxable income to Keogh,
401(k) and qualified pension plans, as well as individual retirement accounts
and certain other tax exempt entities, thereby potentially requiring such an
entity, which otherwise might not be required to file a tax return, to file a
tax return and pay tax on such income, and (iii) in the case of a foreign
shareholder, does not qualify for any reduction, by treaty or otherwise, in the
30% U.S. federal withholding tax. In addition, if at any time during any taxable
year a “disqualified organization” (as defined in the Code) is a record holder
of a share in a Fund, then the Fund will be subject to a tax equal to that
portion of its excess inclusion income for the taxable year that is allocable to
the disqualified organization, multiplied by the highest federal corporate
income tax rate. To the extent permitted under the 1940 Act, a Fund may elect to
specially allocate any such tax to the applicable disqualified organization, and
thus reduce such shareholder’s distributions for the year by the amount of the
tax that relates to such shareholder’s interest in the Fund. A Fund may or may
not make such an election.
“Passive
foreign investment companies” (“PFICs”) are generally defined as foreign
corporations with respect to which at least 75% of their gross income for their
taxable year is income from passive sources (such as interest, dividends,
certain rents and royalties, or capital gains) or at least 50% of their assets
on average produce, or are held for the production of, such passive income. If a
Fund acquires any equity interest in a PFIC, the Fund could be subject to U.S.
federal income tax and interest charges on “excess distributions” received from
the PFIC or on gain from the sale of such equity interest in the PFIC, even if
all income or gain actually received by the Fund is timely distributed to its
shareholders. Excess distributions will be characterized as ordinary income even
though, absent the application of PFIC rules, some excess distributions may have
been classified as capital gain.
A
Fund will not be permitted to pass through to its shareholders any credit or
deduction for taxes and interest charges incurred with respect to PFICs.
Elections may be available that would ameliorate these adverse tax consequences,
but such elections could require a Fund to recognize taxable income or gain
without the concurrent receipt of cash. Investments in PFICs could also result
in the treatment of associated capital gains as ordinary income. The Funds may
attempt to limit and/or manage their holdings in PFICs to minimize their tax
liability or maximize their returns from these investments but there can be no
assurance that they will be able to do so. Moreover, because it is not always
possible to identify a foreign corporation as a PFIC in advance of acquiring
shares in the corporation, a Fund may incur the tax and interest charges
described above in some instances. Dividends paid by a Fund attributable to
income and gains derived from PFICs will not be eligible to be treated as
qualified dividend income.
If
a Fund owns 10% or more of either the voting power or value of the stock of a
“controlled foreign corporation” (a “CFC”), such corporation will not be treated
as a PFIC with respect to the Fund. In general, a Fund may be required to
recognize dividends from a CFC before actually receiving any dividends. There
may also be a tax imposed on a U.S. shareholder’s aggregate net CFC income that
is treated as global intangible low-taxed income. As a result of the foregoing,
a Fund may be required to recognize income sooner than it otherwise would.
In
addition to the investments described above, prospective shareholders should be
aware that other investments made by a Fund may involve complex tax rules that
may result in income or gain recognition by a Fund without corresponding current
cash receipts. Although a Fund seeks to avoid significant non-cash income, such
non-cash income could be recognized by a Fund, in which case a Fund may
distribute cash derived from other sources in order to meet the minimum
distribution requirements described above. In this regard, a Fund could be
required at times to liquidate investments prematurely in order to satisfy their
minimum distribution requirements.
Notwithstanding
the foregoing, under recently enacted tax legislation, accrual method taxpayers
required to recognize gross income under the “all events tests” no later than
when such income is recognized as revenue in an applicable financial statement
(e.g.,
an audited financial statement which is used for reporting to partners). This
new rule may require the Fund to recognize income earlier than as described
above.
Taxation
of Distributions
Distributions
paid out of a Fund’s current and accumulated earnings and profits (as determined
at the end of the year), whether paid in cash or reinvested in the Fund,
generally are deemed to be taxable distributions and must be reported by each
shareholder who is required to file a U.S. federal income tax return. Dividends
and other distributions on a Fund’s shares are generally subject to U.S. federal
income tax as described herein to the extent they do not exceed the Fund’s
realized income and gains, even though such dividends and distributions may
economically represent a return of a particular shareholder’s investment. Such
distributions are likely to occur in respect of shares acquired at a time when
the Fund’s net asset value reflects gains that are either unrealized, or
realized but not distributed. For U.S. federal income tax purposes, a Fund’s
earnings and profits, described above, are determined at the end of the Fund’s
taxable year and are allocated pro rata to distributions paid over the entire
year. Distributions in excess of a Fund’s current and accumulated earnings and
profits will first be treated as a return of capital up to the amount of a
shareholder’s tax basis in the shareholder’s Fund shares and then as capital
gain. A Fund may make distributions in excess of its earnings and profits, from
time to time.
For
U.S. federal income tax purposes, distributions of investment income are
generally taxable as ordinary income, and distributions of gains from the sale
of investments that a Fund owned for one year or less will be taxable as
ordinary income. Distributions properly reported in writing by a Fund as capital
gain dividends will be taxable to shareholders as long-term capital gain (to the
extent such distributions do not exceed the Fund’s net capital gain for the
taxable year), regardless of how long a shareholder has held Fund shares, and do
not qualify as dividends for purposes of the dividends-received deduction or as
qualified dividend income. Each Fund will report capital gain dividends, if any,
in a written statement furnished to its shareholders after the close of the
Fund’s taxable year.
Fluctuations
in foreign currency exchange rates may result in foreign exchange gain or loss
on transactions in foreign currencies, foreign currency-denominated debt
obligations, and certain foreign currency options, futures contracts and forward
contracts. Such gains or losses are generally characterized as ordinary income
or loss for tax purposes. A Fund must make certain distributions in order to
qualify as a RIC, and the timing of and character of transactions such as
foreign currency-related gains and losses may result in the fund paying a
distribution treated as a return of capital. Such distribution is nontaxable to
the extent of the recipient’s basis in its shares.
Some
states will not tax distributions made to individual shareholders that are
attributable to interest a Fund earned on direct obligations of the U.S.
government if the Fund meets the state’s minimum investment or reporting
requirements, if any. Investments in GNMA or FNMA securities, bankers’
acceptances, commercial paper and repurchase agreements collateralized by U.S.
government securities generally do not qualify for state-tax-free treatment.
This exemption may not apply to corporate shareholders.
Sales
and Exchanges of Fund Shares
If
a shareholder sells, pursuant to a cash or in-kind redemption, or exchanges the
shareholder’s Fund shares, subject to the discussion below, the shareholder
generally will recognize a taxable capital gain or loss on the difference
between the amount received for the shares (or deemed received in the case of an
exchange) and the shareholder’s tax basis in the shares. This gain or loss will
be long-term capital gain or loss if the shareholder has held such Fund shares
for more than one year at the time of the sale or exchange, and short-term
otherwise.
If
a shareholder sells or exchanges Fund shares within 90 days of having acquired
such shares and if, before January 31 of the calendar year following the
calendar year of the sale or exchange, as a result of having initially acquired
those shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different RIC, the sales charge previously
incurred in acquiring the Fund’s shares generally shall not be taken into
account (to the extent the previous sales charges do not exceed the reduction in
sales charges on the new purchase) for the purpose
of
determining the amount of gain or loss on the disposition, but generally will be
treated as having been incurred in the new purchase. Also, if a shareholder
recognizes a loss on a disposition of Fund shares, the loss will be disallowed
under the “wash sale” rules to the extent the shareholder purchases
substantially identical shares within the 61-day period beginning 30 days before
and ending 30 days after the disposition. Any disallowed loss generally will be
reflected in an adjustment to the tax basis of the purchased
shares.
If
a shareholder receives a capital gain dividend with respect to any Fund share
and such Fund share is held for six months or less, then (unless otherwise
disallowed) any loss on the sale or exchange of that Fund share will be treated
as a long-term capital loss to the extent of the capital gain dividend. If such
loss is incurred from the redemption of shares pursuant to a periodic redemption
plan then U.S. Treasury regulations may permit an exception to this six-month
rule. No such regulations have been issued as of the date of this
SAI.
Corporate
Shareholders
Subject
to limitation and other rules, a corporate shareholder of a Fund may be eligible
for the FATCA deduction on Fund distributions attributable to dividends received
by the Fund from domestic corporations, which, if received directly by the
corporate shareholder, would qualify for such a deduction. For eligible
corporate shareholders, the dividends-received deduction may be subject to
certain reductions, and a distribution by a Fund attributable to dividends of a
domestic corporation will be eligible for the deduction only if certain holding
period and other requirements are met. These requirements are complex;
therefore, corporate shareholders of the Funds are urged to consult their own
tax advisers and financial planners.
Foreign
Taxes
Amounts
realized by a Fund from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. If
more than 50% of the value of a Fund’s total assets at the close of its taxable
year consists of securities of foreign corporations, the Fund will be eligible
to file an annual election with the IRS pursuant to which the Fund may
pass-through to its shareholders on a pro rata basis certain foreign income and
similar taxes paid by the Fund, and such taxes may be claimed, subject to
certain limitations, either as a tax credit or deduction by the shareholders.
However, even if a Fund qualifies for the election for any year, it may not make
the election for such year. If a Fund does not so elect, then shareholders will
not be entitled to claim a credit or deduction with respect to foreign taxes
paid or withheld. If a Fund does elect to “pass through” its foreign taxes paid
in a taxable year, the Fund will furnish a written statement to its shareholders
reporting such shareholders proportionate share of the Funds’ foreign taxes
paid.
Even
if a Fund qualifies for the election, foreign income and similar taxes will only
pass through to the Fund’s shareholders if the Fund and its shareholders meet
certain holding period requirements.
If
a Fund makes the election, the Fund will not be permitted to claim a credit or
deduction for foreign taxes paid in that year, and the Fund’s dividends-paid
deduction will be increased by the amount of foreign taxes paid that year. Fund
shareholders that have satisfied the holding period requirements and certain
other requirements shall include their proportionate share of the foreign taxes
paid by the Fund in their gross income and treat that amount as paid by them for
the purpose of the foreign tax credit or deduction. If the shareholder claims a
credit for foreign taxes paid, the credit will be limited to the extent it
exceeds the shareholder’s federal income tax attributable to foreign source
taxable income. If the credit is attributable, wholly or in part, to qualified
dividend income (as defined below), special rules will be used to limit the
credit in a manner that reflects any resulting dividend rate
differential.
The
Intrepid Capital Fund, Intrepid Small Cap Fund, and Intrepid Income Fund may not
make the foregoing election.
In
general, an individual with $300 or less of creditable foreign taxes may elect
to be exempt from the foreign source taxable income and qualified dividend
income limitations if the individual has no foreign source income other than
qualified passive income. This $300 threshold is increased to $600 for joint
filers. A deduction for foreign taxes paid may only be claimed by shareholders
that itemize their deductions.
U.S.
Federal Income Tax Rates
Noncorporate
Fund shareholders (i.e.,
individuals, trusts and estates) are taxed at a maximum rate of 37% on ordinary
income and 20% on net capital gain.
In
general, “qualified dividend income” realized by noncorporate Fund shareholders
is taxable at the same rate as net capital gain. Generally, qualified dividend
income is dividend income attributable to certain U.S. and foreign corporations,
as long as certain holding period requirements are met. In general, if less than
95% of a Fund’s income is attributable to qualified dividend income, then only
the portion of the Fund’s distributions that are attributable to qualified
dividend income and reported in writing as such in a timely manner will be so
treated in the hands of individual shareholders. Payments received by a Fund
from securities lending, repurchase, and other derivative transactions
ordinarily will not qualify. The rules attributable to the qualification of Fund
distributions as qualified dividend income are complex, including the holding
period requirements. Individual Fund shareholders therefore are urged to consult
their own tax advisers and financial planners.
The
maximum stated corporate U.S. federal income tax rate applicable to ordinary
income and net capital gain is 21%. Actual marginal tax rates may be higher for
some shareholders, for example, through reductions in deductions. Distributions
from a Fund may qualify for the “dividends-received deduction” applicable to
corporate shareholders with respect to certain dividends. Naturally, the amount
of tax payable by any taxpayer will be affected by a combination of tax laws
covering, for example, deductions, credits, deferrals, exemptions, sources of
income and other matters.
In
addition, noncorporate Fund shareholders generally will be subject to an
additional 3.8% tax on its “net investment income,” which ordinarily includes
taxable distributions received from the corresponding Fund and taxable gain on
the disposition of Fund shares if the shareholder meets a taxable income
test.
Under
the Foreign Account Tax Compliance Act, or “FATCA,” U.S. federal income tax
withholding at a 30% rate will be imposed on dividends and proceeds of
redemptions in respect of Fund shares received by Fund shareholders who own
their shares through foreign accounts or foreign intermediaries if certain
disclosure requirements related to U.S. accounts or ownership are not satisfied.
The Funds will not pay any additional amounts in respect to any amounts
withheld.
Backup
Withholding
A
Fund is generally required to withhold and remit to the U.S. Treasury, subject
to certain exemptions (such as for certain corporate or foreign shareholders),at
a rate under Section 3406 of the Code for U.S. residents of all distributions
and redemption proceeds (including proceeds from exchanges and redemptions
in-kind) paid or credited to a Fund shareholder if (i) the shareholder fails to
furnish the Fund with a correct “taxpayer identification number” (“TIN”), (ii)
the shareholder fails to certify under penalties of perjury that the TIN
provided is correct, (iii) the shareholder fails to make certain other
certifications, or (iv) the IRS notifies the Fund that the shareholder’s TIN is
incorrect or that the shareholder is otherwise subject to backup withholding.
Backup withholding is not an additional tax imposed on the shareholder. The
shareholder may apply amounts withheld as a credit against the shareholder’s
U.S. federal income tax liability and may obtain a refund of any excess amounts
withheld, provided that the required information is furnished to the IRS. If a
shareholder fails to furnish a valid TIN upon request, the shareholder can also
be subject to IRS penalties. A shareholder may generally avoid backup
withholding by furnishing a properly completed IRS Form W-9. State backup
withholding may also be required to be withheld by the Funds under certain
circumstances.
Foreign
Shareholders
For
purposes of this discussion, “foreign shareholders” include: (i) nonresident
alien individuals, (ii) foreign trusts (i.e.,
a trust other than a trust with respect to which a U.S. court is able to
exercise primary supervision over administration of that trust and one or more
U.S. persons have authority to control substantial decisions of that trust),
(iii) foreign estates (i.e.,
the income of which is not subject to U.S. tax regardless of source), and (iv)
foreign corporations.
Generally,
distributions made to foreign shareholders will be subject to non-refundable
U.S. federal income tax withholding at a 30% rate (or such lower rate provided
under an applicable income tax treaty) even if they are funded by income or
gains (such as portfolio interest, short-term capital gain, or foreign-source
dividend and interest income) that, if paid to a foreign person directly, would
not be subject to such withholding.
Under
legislation that has been available from time to time, a Fund could report in
writing to its shareholders certain distributions made to foreign shareholders
that would not be subject to U.S. federal income tax withholding where the
distribution is attributable to specific sources (such as “portfolio interest”
and short-term capital gain), certain requirements are met and the Fund makes
appropriate designations to pay such “exempt” distributions. Even if a Fund
realizes income from such sources, no assurance can be made the Fund would meet
such requirements or make such designations. Where Fund shares are held through
an intermediary, even if a Fund makes the appropriate designation, the
intermediary may withhold U.S. federal income tax.
Capital
gains dividends and gains recognized by a foreign shareholder on the redemption
of Fund shares generally will not be subject to U.S. federal income tax
withholding, provided that certain requirements are satisfied.
Under
FATCA, a withholding tax of 30% will be imposed on dividends on, and the gross
proceeds of a disposition of, Fund shares paid to certain foreign shareholders
unless various information reporting requirements are satisfied. Such
withholding tax will generally apply to non-U.S. financial institutions, which
are generally defined for this purpose as non-U.S. entities that (i) accept
deposits in the ordinary course of a banking or similar business, (ii) are
engaged in the business of holding financial assets for the account of others,
or (iii) are engaged or hold themselves out as being engaged primarily in the
business of investing, reinvesting, or trading in securities, partnership
interests, commodities, or any interest in such assets. Prospective foreign
shareholders are encouraged to consult their tax advisors regarding the
implications of FATCA on their investment in a Fund.
Before
investing in a Fund’s shares, a prospective foreign shareholder should consult
with its own tax advisors, including whether the shareholder’s investment can
qualify for benefits under an applicable income tax treaty.
Tax-Deferred
Plans
Shares
of the Funds may be available for a variety of tax-deferred retirement and other
tax-advantaged plans and accounts. Prospective investors should contact their
tax advisers and financial planners regarding the tax consequences to them of
holding Fund shares through such plans and/or accounts.
A
1.4% excise tax is imposed on the net investment income of certain private
colleges and universities. This tax would only apply to private institutions
with endowment valued at $500,000 per full-time student or more, subject to
other limitations. Tax-exempt shareholders should contact their tax advisers and
financial planners regarding the tax consequences to them of an investment in
the Funds.
Any
investment in residual interests of a collateralized mortgage obligation that
has elected to be treated as a REMIC can create complex U.S. federal income tax
consequences, especially if a Fund has state or local governments or other
tax-exempt organizations as shareholders.
Special
tax consequences apply to charitable remainder trusts (“CRTs”) (as defined in
Section 664 of the Code) that invest in RICs that invest directly or indirectly
in residual interests in REMICs or equity interests in TMPs. CRTs are urged to
consult their own tax advisers and financial planners concerning these special
tax consequences.
Tax
Shelter Reporting Regulations
Generally,
under U.S. Treasury regulations, if an individual shareholder recognizes a loss
of $2 million or more, or if a corporate shareholder recognizes a loss of $10
million or more, with respect to Fund shares, the shareholder must file with the
IRS a disclosure statement on Form 8886. Direct shareholders of securities are
in many cases exempt from this reporting requirement, but under current
guidance, shareholders of a RIC are not exempt. Future guidance may extend the
current exemption from this reporting requirement to shareholders of most or all
RICs. The fact that a loss is reportable under these regulations does not affect
the legal determination of whether the taxpayer’s treatment of the loss is
proper. Shareholders should consult their own tax advisers to determine the
applicability of these regulations in light of their individual
circumstances.
Cost
Basis Reporting
In
general, each Fund must report “cost basis” information to its shareholders and
the IRS for redemptions of “covered shares.” Fund shares purchased on or after
January 1, 2012 are generally treated as covered shares. By contrast, Fund
shares purchased before January 1, 2012 or shares without complete cost basis
information are generally treated as noncovered shares. Fund shareholders should
consult their tax advisors to obtain more information about how these cost basis
rules apply to them and determine which cost basis method allowed by the IRS is
best for them.
Recently
Enacted Tax Legislation
Under
recently enacted tax legislation, a Fund may be required to recognize income
sooner than it otherwise would (as described above), which also may result in a
change in its methods of tax accounting. The full effects of this tax
legislation are not certain.. Prospective shareholders should recognize that the
present U.S. federal income tax treatment of the Funds and their shareholders
may be modified by legislative, judicial or administrative actions at any time,
which may be retroactive in effect. The rules dealing with U.S. federal income
taxation are constantly under review by Congress, the IRS and the Treasury
Department, and statutory changes as well as promulgation of new regulations,
revisions to existing
statutes,
and revised interpretations of established concepts occur frequently. You should
consult your advisors concerning the status of legislative proposals that may
pertain to holding Fund shares.
The
foregoing summary should not be considered to describe fully the income and
other tax consequences of an investment in a Fund. Fund investors are strongly
urged to consult with their tax advisors, with specific reference to their own
situations, with respect to the potential tax consequences of an investment in a
Fund.
SHAREHOLDER
MEETINGS AND ELECTION OF TRUSTEES
As
a Delaware statutory trust, the Trust is not required to hold regular annual
shareholder meetings and, in the normal course, does not expect to hold such
meetings. The Trust, however, must hold shareholder meetings for such purposes
as, for example: (i) approving certain agreements as required by the 1940
Act; (ii) changing fundamental investment restrictions of a Fund; and
(iii) filling vacancies on the Board of Trustees in the event that less
than a majority of the Board of Trustees were elected by shareholders or if
filling a vacancy would result in less than two-thirds of the trustees having
been elected by shareholders. However, matters affecting only one particular
class can only be voted on by shareholders of that class. In addition, the
shareholders may remove any Trustee at any time, with or without cause, by vote
of not less than a majority of the shares then outstanding. Trustees may appoint
successor Trustees.
CAPITAL
STRUCTURE
Shares
of Beneficial Interest
The
Trust will issue new shares of a Fund at its most current NAV. The Trust is
authorized to issue an unlimited number of shares of beneficial interest. The
Trust has registered an indefinite number of shares of each Fund under
Rule 24f‑2 of the 1940 Act. Each share has one vote and is freely
transferable; shares represent equal proportionate interests in the assets of
the applicable Fund only and have identical voting, dividend, redemption,
liquidation and other rights. The shares, when issued and paid for in accordance
with the terms of the Prospectus, are deemed to be fully paid and
non-assessable. Shares have no preemptive, cumulative voting, subscription or
conversion rights. Shares can be issued as full shares or as fractions of
shares. A fraction of a share has the same kind of rights and privileges as a
full share on a pro-rata basis.
Additional
Series
The
Trustees may from time to time establish additional series or classes of shares
without the approval of shareholders. The assets of each series belong only to
that series, and the liabilities of each series are borne solely by that series
and no other.
Conversion
of Share Classes
If
you hold Institutional Class shares of the Intrepid Capital Fund or the Intrepid
Small Cap Fund and your account balance falls below $250,000 (for any reason),
the Fund reserves the right to give you 60 days’ written notice to make
additional investments so that your account balance is $250,000 or more. If you
do not, the Fund may convert your Institutional Class shares of the Intrepid
Capital Fund or Intrepid Small Cap Fund into Investor Class shares, at which
time your account will be subject to the policies and procedures for Investor
Class shares. Any such conversion will occur at the relative NAV of the two
share Classes, without the imposition of any fees or other charges. Where a
retirement plan or other financial intermediary holds Institutional Class shares
on behalf of its participants or clients, the above policy applies to any such
participants or clients when they roll over their accounts with the retirement
plan or financial intermediary into an individual retirement account and they
are not otherwise eligible to purchase Institutional Class shares. If you hold
Institutional Class shares of the Intrepid Income Fund and your account balance
falls below $500 (for any reason) the Fund reserves the right to give you 60
days’ written notice to make additional investments so that your account balance
is $500 or more. If you do not, the Fund may close your account and mail the
redemption proceeds to you.
Shareholders
who hold Investor Class shares of a Fund that are eligible to own Institutional
Class shares may convert their Investor Class shares into Institutional Class
shares by providing notice to the Funds’ transfer agent on the basis of the
relative NAVs of the two classes without the imposition of any fee or other
charge if the account is held directly with the Fund. If the account is held
through a retirement plan or other financial intermediary, then the intermediary
must have a specific agreement in place with the Distributor, and the
intermediary may separately charge a fee to the shareholder.
Any
such conversion will occur at the respective NAVs of the share classes next
calculated after (a) a Fund’s receipt of the investor’s request in good order,
or (b) a Fund’s decision to convert an account from one class to another. As a
result, a shareholder may receive fewer shares or more shares than originally
owned at the time of conversion, depending on that day’s NAV for each class,
although the total dollar value will remain the same. Under current
interpretations of applicable federal income tax law by the Internal Revenue
Service, a conversion of shares of a Fund from one class to the class does not
cause the shareholder or the Fund to recognize gain or loss for federal income
tax purposes.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The
Trust’s Board of Trustees engaged Deloitte & Touche LLP, located at 111
South Wacker Drive, Chicago, Illinois 60606, to perform the annual audits of the
Funds.
FINANCIAL
STATEMENTS
The
audited financial statements for the Funds are incorporated herein by reference
to the Funds’ Annual
Report
to Shareholders for the year or period ended September 30, 2023. Financial
statements audited by the Funds’ Independent registered public accounting firm
will be submitted to shareholders at least annually.
DESCRIPTION
OF SECURITIES RATINGS
S
& P Global Ratings Issue Credit Rating Definitions
An
S&P Global Ratings issue credit rating is a forward-looking opinion about
the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium-term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes into
account the currency in which the obligation is denominated. The opinion
reflects S&P Global Ratings’ view of the obligor’s capacity and willingness
to meet its financial commitments as they come due, and this opinion may assess
terms, such as collateral security and subordination, which could affect
ultimate payment in the event of default.
Issue
credit ratings can be either long-term or short-term. Short-term ratings are
generally assigned to those obligations considered short-term in the relevant
market. Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. Medium-term notes
are assigned long-term ratings.
Short-Term
Issue Credit Ratings
A-1
A
short-term obligation rated ‘A-1’ is rated in the highest category by S&P
Global Ratings. The obligor’s capacity to meet its financial commitments on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor’s capacity to meet its
financial commitments on these obligations is extremely strong.
A-2
A
short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor’s capacity to meet its financial
commitments on the obligation is satisfactory.
A-3
A
short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to weaken an obligor’s capacity to meet its financial commitments on the
obligation.
B
A
short-term obligation rated ‘B’ is regarded as vulnerable and has significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitments; however, it faces major ongoing uncertainties that could
lead to the obligor’s inadequate capacity to meet its financial
commitments.
C
A
short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitments on the obligation.
D
A
short-term obligation rated ‘D’ is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the ‘D’ rating category is used
when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be
treated as five business days. The ‘D’ rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay
provisions. An obligation’s rating is lowered to ‘D’ if it is subject to a
distressed exchange offer.
SPUR
(S&P Underlying Rating)
A
SPUR is an opinion about the stand-alone capacity of an obligor to pay debt
service on a credit-enhanced debt issue, without giving effect to the
enhancement that applies to it. These ratings are published only at the request
of the debt issuer or obligor with the designation SPUR to distinguish them from
the credit-enhanced rating that applies to the debt issue. S&P Global
Ratings maintains surveillance of an issue with a published SPUR.
Dual
Ratings
Dual
ratings may be assigned to debt issues that have a put option or demand feature.
The first component of the rating addresses the likelihood of repayment of
principal and interest as due, and the second component of the rating addresses
only the demand feature. The first component of the rating can relate to either
a short-term or long-term transaction and accordingly use either short-term or
long-term rating symbols. The second component of the rating relates to the put
option and is assigned a short-term rating symbol (for example, ‘AAA/A-1+’ or
‘A-1+/A-1’). With U.S. municipal short-term demand debt, the U.S. municipal
short-term note rating symbols are used for the first component of the rating
(for example, ‘SP-1+/A-1+’).
The
analyses, including ratings, of S&P Global Ratings and its affiliates
(together, S&P Global Ratings) are statements of opinion as of the date they
are expressed and not statements of fact or recommendations to purchase, hold,
or sell any securities or make any investment decisions. S&P Global Ratings
assumes no obligation to update any information following publication. Users of
ratings or other analyses should not rely on them in making any investment
decision. S&P Global Ratings’ opinions and analyses do not address the
suitability of any security. S&P Global Ratings does not act as a fiduciary
or an investment advisor except where registered as such. While S&P Global
Ratings has obtained information from sources it believes to be reliable, it
does not perform an audit and undertakes no duty of due diligence or independent
verification of any information it receives. Ratings and other opinions may be
changed, suspended, or withdrawn at any time.
Active
Qualifiers
S&P
Global Ratings uses the following qualifiers that limit the scope of a rating.
The structure of the transaction can require the use of a qualifier such as a
‘p’ qualifier, which indicates the rating addresses the principal portion of the
obligation only. A qualifier appears as a suffix and is part of the
rating.
1.
Federal deposit insurance limit: ‘L’ qualifier
Ratings
qualified with ‘L’ apply only to amounts invested up to federal deposit
insurance limits.
2.
Principal: ‘p’ qualifier
This
suffix is used for issues in which the credit factors, the terms, or both that
determine the likelihood of receipt of payment of principal are different from
the credit factors, terms, or both that determine the likelihood of receipt of
interest on the obligation. The ‘p’ suffix indicates that the rating addresses
the principal portion of the obligation only and that the interest is not
rated.
3.
Preliminary ratings: ‘prelim’ qualifier
Preliminary
ratings, with the ‘prelim’ suffix, may be assigned to obligors or obligations,
including financial programs, in the circumstances described below. Assignment
of a final rating is conditional on the receipt by S&P Global Ratings of
appropriate documentation. S&P Global Ratings reserves the right not to
issue a final rating. Moreover, if a final rating is issued, it may differ from
the preliminary rating.
a.Preliminary
ratings may be assigned to obligations, most commonly structured and project
finance issues, pending receipt of final documentation and legal
opinions.
b.Preliminary
ratings may be assigned to obligations that will likely be issued upon the
obligor’s emergence from bankruptcy or similar reorganization, based on
late-stage reorganization plans, documentation, and discussions with the
obligor. Preliminary ratings may also be assigned to the obligors. These ratings
consider the anticipated general credit quality of the reorganized or
post-bankruptcy issuer as well as attributes of the anticipated
obligation(s).
c.Preliminary
ratings may be assigned to entities that are being formed or that are in the
process of being independently established when, in S&P Global Ratings’
opinion, documentation is close to final. Preliminary ratings may also be
assigned to the obligations of these entities.
d.Preliminary
ratings may be assigned when a previously unrated entity is undergoing a
well-formulated restructuring, recapitalization, significant financing, or other
transformative event, generally at the point that investor or lender commitments
are invited. The preliminary rating may be assigned to the entity and to its
proposed obligation(s). These preliminary ratings consider the anticipated
general credit quality of the obligor, as well as attributes of the anticipated
obligation(s), assuming successful completion of the transformative event.
Should the transformative event not occur, S&P Global Ratings would likely
withdraw these preliminary ratings.
e.A
preliminary recovery rating may be assigned to an obligation that has a
preliminary issue credit rating.
4.
Termination structures: ‘t’ qualifier
This
symbol indicates termination structures that are designed to honor their
contracts to full maturity or, should certain events occur, to terminate and
cash settle all their contracts before their final maturity date.
5.
Counterparty instrument rating: ‘cir’ qualifier
This
symbol indicates a counterparty instrument rating (CIR), which is a
forward-looking opinion about the creditworthiness of an issuer in a
securitization structure with respect to a specific financial obligation to a
counterparty (including interest rate swaps, currency swaps, and liquidity
facilities). The CIR is determined on an ultimate payment basis; these opinions
do not take into account timeliness of payment.
Inactive
Qualifiers
Inactive
qualifiers are no longer applied or outstanding.
1.
Contingent upon final documentation: ‘*’ inactive qualifier
This
symbol indicated that the rating was contingent upon S&P Global Ratings’
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows. Discontinued use in August
1998.
2.
Termination of obligation to tender: ‘c’ inactive qualifier
This
qualifier was used to provide additional information to investors that the bank
may terminate its obligation to purchase tendered bonds if the long-term credit
rating of the issuer was lowered to below an investment-grade level and/or the
issuer’s bonds were deemed taxable. Discontinued use in January 2001.
3.
U.S. direct government securities: ‘G’ inactive qualifier
The
letter ‘G’ followed the rating symbol when a fund’s portfolio consisted
primarily of direct U.S. government securities.
4.
Public information ratings: ‘pi’ qualifier
This
qualifier was used to indicate ratings that were based on an analysis of an
issuer’s published financial information, as well as additional information in
the public domain. Such ratings did not, however, reflect in-depth meetings with
an issuer’s management and therefore could have been based on less comprehensive
information than ratings without a ‘pi’ suffix. Discontinued use as of December
2014 and as of August 2015 for Lloyd’s Syndicate Assessments.
5.
Provisional ratings: ‘pr’ inactive qualifier
The
letters ‘pr’ indicate that the rating was provisional. A provisional rating
assumed the successful completion of a project financed by the debt being rated
and indicates that payment of debt service requirements was largely or entirely
dependent upon the successful, timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, made no comment on the likelihood of or the risk of default upon
failure of such completion.
6.
Quantitative analysis of public information: ‘q’ inactive qualifier
A
‘q’ subscript indicates that the rating is based solely on quantitative analysis
of publicly available information. Discontinued use in April 2001.
7.
Extraordinary risks: ‘r’ inactive qualifier
The
‘r’ modifier was assigned to securities containing extraordinary risks,
particularly market risks, that are not covered in the credit rating. The
absence of an ‘r’ modifier should not be taken as an indication that an
obligation would not exhibit extraordinary noncredit-related risks. S&P
Global Ratings discontinued the use of the ‘r’ modifier for most obligations in
June 2000 and for the balance of obligations (mainly structured finance
transactions) in November 2002.
Active
Identifiers
1.
Unsolicited: ‘unsolicited’ and ‘u’ identifier
The
‘u’ identifier and ‘unsolicited’ designation are assigned to credit ratings
initiated by parties other than the issuer or its agents, including those
initiated by S&P Global Ratings.
2.
Structured finance: ‘sf’ identifier
The
‘sf’ identifier shall be assigned to ratings on "structured finance instruments"
when required to comply with applicable law or regulatory requirement or when
S&P Global Ratings believes it appropriate. The addition of the ‘sf’
identifier to a rating does not change that rating’s definition or our opinion
about the issue’s creditworthiness. For detailed information on the instruments
assigned the ‘sf’ identifier, please see "VII. APPENDIX: Types of Instruments
Carrying The ‘sf’ Identifier”
Local
Currency and Foreign Currency Ratings
S&P
Global Ratings’ issuer credit ratings make a distinction between foreign
currency ratings and local currency ratings. An issuer’s foreign currency rating
will differ from its local currency rating when the obligor has a different
capacity to meet its obligations denominated in its local currency, vs.
obligations denominated in a foreign currency.
Moody’s
Credit Rating Definitions
Purpose
Since
John Moody devised the first bond ratings more than a century ago, Moody’s
rating systems have evolved in response to the increasing depth and breadth of
the global capital markets. Much of the innovation in Moody’s rating system is a
response to market needs for clarity around the components of credit risk or to
demand for finer distinctions in rating classifications.
Rating
Symbols
Gradations
of creditworthiness are indicated by rating symbols, with each symbol
representing a group in which the credit characteristics are broadly the same.
There are nine symbols as shown below, from that used to designate least credit
risk to that denoting greatest credit risk:
Aaa
Aa A Baa Ba B Caa Ca C
Moody’s
appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa.
Absence
of a Rating
Where
no rating has been assigned or where a rating has been withdrawn, it may be for
reasons unrelated to the creditworthiness of the issue.
Should
no rating be assigned, the reason may be one of the following:
1.
An application was not received or accepted.
2.
The issue or issuer belongs to a group of securities or entities that are not
rated as a matter of policy.
3.
There is a lack of essential data pertaining to the issue or issuer.
4.
The issue was privately placed, in which case the rating is not published in
Moody’s publications.
Withdrawal
may occur if new and material circumstances arise, the effects of which preclude
satisfactory analysis; if there is no longer available reasonable up-to-date
data to permit a judgment to be formed; if a bond is called for redemption; or
for other reasons.
Changes
in Rating
The
credit quality of most issuers and their obligations is not fixed and steady
over a period of time, but tends to undergo change. For this reason changes in
ratings occur so as to reflect variations in the intrinsic relative position of
issuers and their obligations.
A
change in rating may thus occur at any time in the case of an individual issue.
Such rating change should serve notice that Moody’s observes some alteration in
creditworthiness, or that the previous rating did not fully reflect the quality
of the bond as now seen. While because of their very nature, changes are to be
expected more frequently among bonds of lower ratings than among bonds of higher
ratings. Nevertheless, the user of bond ratings should keep close and constant
check on all ratings — both high and low — to be able to note promptly any signs
of change in status that may occur.
Limitations
to Uses of Ratings*
Obligations
carrying the same rating are not claimed to be of absolutely equal credit
quality. In a broad sense, they are alike in position, but since there are a
limited number of rating classes used in grading thousands of bonds, the symbols
cannot reflect the same shadings of risk which actually exist.
As
ratings are designed exclusively for the purpose of grading obligations
according to their credit quality, they should not be used alone as a basis for
investment operations. For example, they have no value in forecasting the
direction of future trends of market price. Market price movements in bonds are
influenced not only by the credit quality of individual issues but also by
changes in money rates and general economic trends, as well as by the length of
maturity, etc. During its life even the highest rated bond may have wide price
movements, while its high rating status remains unchanged.
The
matter of market price has no bearing whatsoever on the determination of
ratings, which are not to be construed as recommendations with respect to
"attractiveness". The attractiveness of a given bond may depend on its yield,
its maturity date or other factors for which the investor may search, as well as
on its credit quality, the only characteristic to which the rating refers.
Since
ratings involve judgements about the future, on the one hand, and since they are
used by investors as a means of protection, on the other, the effort is made
when assigning ratings to look at "worst" possibilities in the "visible" future,
rather than solely at the past record and the status of the present. Therefore,
investors using the rating should not expect to find in them a reflection of
statistical factors alone, since they are an appraisal of long-term risks,
including the recognition of many non-statistical factors.
Though
ratings may be used by the banking authorities to classify bonds in their bank
examination procedure, Moody’s ratings are not made with these bank regulations
in mind. Moody’s Investors Service’s own judgement as to the desirability or
non-desirability of a bond for bank investment purposes is not indicated by
Moody’s ratings.
Moody’s
ratings represent the opinion of Moody’s Investors Service as to the relative
creditworthiness of securities. As such, they should be used in conjunction with
the descriptions and statistics appearing in Moody’s publications. Reference
should be made to these statements for information regarding the issuer. Moody’s
ratings are not commercial credit ratings. In no case is default or receivership
to be imputed unless expressly stated.
*As
set forth more fully on the copyright, credit ratings are, and must be construed
solely as, statements of opinion and not statements of fact or recommendations
to purchase, sell or hold any securities. Each rating or other opinion must be
weighed solely as one factor in any investment decision made by or on behalf of
any user of the information, and each such user must accordingly make its own
study and evaluation of each security and
of
each issuer and guarantor of, and each provider of credit support for, each
security that it may consider purchasing, selling or holding.
Short-Term
Obligation Ratings
Ratings
assigned on Moody’s global long-term and short-term rating scales are
forward-looking opinions of the relative credit risks of financial obligations
issues by non-financial corporates, financial institutions, structured finance
vehicles, project finance vehicles, and public sector entities. Long-term
ratings are assigned to issuers or obligations with an original maturity of one
year or more and reflect both on the likelihood of a default on contractually
promised payments and the expected financial loss suffered in the event of
default. Short-term ratings are assigned to obligations with an original
maturity of thirteen months or less and reflect the likelihood of a default on
contractually promised payments and the expected financial loss suffered in the
event of default.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
P-1
Issuers
(or supporting institutions) rated Prime-1 have a superior ability to repay
short-term debt obligations.
P-2
Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations.
P-3
Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to repay
short-term obligations.
NP
Issuers
(or supporting institutions) rated Not Prime do not fall within any of the Prime
rating categories.
The
following table indicates the long-term ratings consistent with different
short-term ratings when such long-term ratings exist.
SHORT-TERM
VS. LONG-TERM RATINGS
Fitch’s
National Credit Ratings
National
scale ratings are an opinion of creditworthiness relative to the universe of
issuers and issues within a single country. They are most commonly used in
emerging market countries with sub- or low investment grade sovereign ratings on
the international scale.
As
creditworthiness can be expressed across the full range of the scale, a national
scale can enable greater rating differentiation within a market than the
international scale, particularity in highly speculative grade countries
where
ratings tend to cluster around the often low sovereign rating due to higher
risks associated with a more volatile operating environment.
A
"+" or "-" may be appended to a National Rating to denote relative status within
a major rating category. Such suffixes are not added to the ‘AAA(xxx)’ National
Rating category, to categories below ‘CCC(xxx)’, or to Short-Term National
Ratings other than ‘F1(xxx)’.
National
scale ratings are assigned on the basis that the “best credits or issuers” in
the country are rated ‘AAA’ on the national scale. National Ratings are then
assessed using the full range of the national scale based on a comparative
analysis of issuers rated under the same national scale to establish a relative
ranking of credit worthiness.
At
any given point in time, there is a certain relationship between National and
International Ratings but there is not a precise translation between the scales.
Fitch monitors the ratings relationship of issuers rated on both the
international and national scales to ensure the consistency of rating
relativities across scales. In other words, if issuer “X” is rated higher than
issuer “Y” on one scale, issuer “X” cannot be rated lower than issuer “Y” on the
other scale.
National
Ratings for local issuers exclude the effects of sovereign and transfer risk and
exclude the possibility that investors may be unable to repatriate any due
interest and principal repayments. Comparisons between different national scales
or between an individual national scale and the international rating scale are
therefore inappropriate and potentially misleading.
In
certain countries, regulators have established credit rating scales to be used
within their domestic markets using specific nomenclature. In these countries,
the agency’s National Rating definitions may be substituted by the regulatory
scales. For instance Fitch’s National Short Term Ratings of ‘F1+(xxx)’,
‘F1(xxx)’, ‘F2(xxx)’ and ‘F3(xxx)’ may be substituted by the regulatory scales,
e.g. ‘A1+’, ‘A1’, ‘A2’ and ‘A3’. The below definitions thus serve as a template,
but users should consult the individual scales for each country listed on
Fitch’s regional websites to determine if any additional or alternative category
definitions apply.
Fitch
maintains internal mapping tables that document the current relationship between
the National and International Local Currency Ratings in each jurisdiction where
we maintain a National Rating scale in order to serve as a tool for analysts.
Where our National rating coverage exceeds a minimum threshold and there is
external demand, these mappings will be published on this site. Presently,
publicly available mappings can be accessed here. Fitch currently publishes the
mapping tables for Brazil and South Africa.
Limitations
of the National Rating Scale
Specific
limitations relevant to National Rating scale include:
•National
scale ratings are only available in selected countries.
•National
scale ratings are only directly comparable with other national ratings in the
same country. There is a certain correlation between national and global ratings
but there is not a precise translation between the scales. The implied
vulnerability to default of a given national scale rating will vary over
time.
•The
value of default studies for National Ratings is limited. Due to the relative
nature of national scales, a given national scale rating is not intended to
represent a fixed amount of default risk over time. As a result, a default study
using only National Ratings may not give an accurate picture of the historical
relationship between ratings and default risk. Users should exercise caution in
making inferences relating to the relative vulnerability to default of national
scale ratings using the historical default experience with International Ratings
and mapping tables to link the National and International ratings. As with
ratings on any scale, the future will not necessarily follow the past.
National
Short-Term Credit Ratings
F1(xxx)
Indicates the strongest capacity for timely payment of financial commitments
relative to other issuers or obligations in the same country. Under the agency’s
National Rating scale, this rating is assigned to the
lowest
default risk relative to others in the same country. Where the liquidity profile
is particularly strong, a “+” is added to the assigned rating.
F2(xxx)
Indicates a good capacity for timely payment of financial commitments relative
to other issuers or obligations in the same country. However, the margin of
safety is not as great as in the case of the higher ratings.
F3(xxx)
Indicates an adequate capacity for timely payment of financial commitments
relative to other issuers or obligations in the same country or monetary
union.
B(xxx)
Indicates an uncertain capacity for timely payment of financial commitments
relative to other issuers or obligations in the same country or monetary
union.
C(xxx)
Indicates a highly uncertain capacity for timely payment of financial
commitments relative to other issuers or obligations in the same country or
monetary union.
RD(xxx):
Restricted default
Indicates
an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Applicable to entity
ratings only.
D(xxx)
Indicates a broad-based default event for an entity, or the default of a
short-term obligation.
Notes
to Long-Term and Short-Term National Ratings:
The
ISO international country code is placed in parentheses immediately following
the rating letters to indicate the identity of the National market within which
the rating applies. For illustrative purposes, (xxx) has been used.
“+”
or “-” may be appended to a National Rating to denote relative status within a
major rating category. Such suffixes are not added to the ‘AAA(xxx)’ Long-Term
National Rating category, to categories below ‘CCC(xxx)’, or to Short-Term
National Ratings other than ‘F1(xxx).’
LONG-TERM
RATINGS
S
& P Global Ratings Long-Term Issue Credit Ratings
Issue
credit ratings are based, in varying degrees, on S & P Global Ratings
analysis of the following considerations:
•
Likelihood of payment—the capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
•Nature
of and provisions of the obligation and the promise we impute; and
•Protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors’ rights.
An
issue rating is an assessment of default risk, but may incorporate an assessment
of relative seniority or ultimate recovery in the event of default. Junior
obligations are typically rated lower than senior obligations, to reflect the
lower priority in bankruptcy, as noted above. (Such differentiation may apply
when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company
obligations.)
Long-Term
Issuer Credit Ratings
AAA
An
obligation rated ‘AAA’ has the highest rating assigned by S & P Global
Ratings. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong.
AA
An
obligation rated ‘AA’ differs from the highest-rated obligations only to a small
degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
A
An
obligation rated ‘A’ is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
BBB
An
obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB;
B; CCC; CC; and C
Obligations
rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant
speculative characteristics. ‘BB’ indicates the least degree of speculation and
‘C’ the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB
An
obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor’s
inadequate capacity to meet its financial commitment on the
obligation.
B
An
obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated
‘BB’, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitment on the obligation.
CCC
An
obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC
An
obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The ‘CC’
rating is used when a default has not yet occurred, but S & P Global Ratings
expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
An
obligation rated ‘C’ is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared with obligations that are rated higher.
D
An
obligation rated ‘D’ is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the ‘D’ rating category is used when payments on
an obligation are not made on the date due, unless S&P Global Ratings
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of the stated grace
period or 30 calendar days. The ‘D’ rating also will be used upon the filing of
a bankruptcy petition or the taking of similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay provisions.
An obligation's rating is lowered to ‘D’ if it is subject to a distressed
exchange offer.
Plus
(+) or minus (-)
The
ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating
categories.
See
active and inactive qualifiers following S & P Global Ratings Short-Term
Issue Credit Ratings beginning on pages A-2 and A-3.
Moody’s
Long-Term Obligation Ratings
Long-Term
Obligation Ratings
Long-term
ratings are assigned to issuers or obligations with an original maturity of one
year or more and reflect both on the likelihood of a default or impairment on
contractual financial obligations and the expected financial loss suffered in
the event of default or impairment. Short-term ratings are assigned to
obligations with an original maturity of thirteen months or less and reflect
both on the likelihood of a default or impairment on contractual financial
obligations and the expected financial loss suffered in the event of default or
impairment.
Moody’s
Long-Term Rating Definitions:
Aaa
Obligations
rated Aaa are judged to be of the highest quality, subject to the lowest level
of credit risk.
Aa
Obligations
rated Aa are judged to be of high quality and are subject to very low credit
risk.
A
Obligations
rated A are considered upper-medium grade and are subject to low credit
risk.
Baa
Obligations
rated Baa are judged to be medium-grade and subject to moderate credit risk and
as such may possess certain speculative characteristics.
Ba
Obligations
rated Ba are judged to be speculative and are subject to substantial credit
risk.
B
Obligations
rated B are considered speculative and are subject to high credit
risk.
Caa
Obligations
rated Caa are judged to be speculative of poor standing and are subject to very
high credit risk.
Ca
Obligations
rated Ca are highly speculative and are likely in, or very near, default, with
some prospect of recovery of principal and interest.
C
Obligations
rated C are the lowest rated and are typically in default, with little prospect
for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category. Additionally, a “(hyb)” indicator is appended to
all ratings of hybrid securities issued by banks, insurers, finance companies,
and securities firms.*
*
By their terms, hybrid securities allow for the omission of scheduled dividends,
interest, or principal payments, which can potentially result in impairment if
such an omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that could result in impairment. Together
with the hybrid indicator, the long-term obligation rating assigned to a hybrid
security is an expression of the relative credit risk associated with that
security.
Fitch’s
National Long-Term Credit Ratings
AAA(xxx)
‘AAA’ National Ratings denote the highest rating assigned by the agency in its
National Rating scale for that country. This rating is assigned to issuers or
obligations with the lowest expectation of default risk relative to all other
issuers or obligations in the same country or monetary union.
AA(xxx)
‘AA’ National Ratings denote expectations of very low default risk relative to
other issuers or obligations in the same country or monetary union. The default
risk inherent differs only slightly from that of the country’s highest rated
issuers or obligations.
A(xxx)
‘A’ National Ratings denote expectations of low default risk relative to other
issuers or obligations in the same country or monetary union.
BBB(xxx)
‘BBB’ National Ratings denote a moderate default risk relative to other issuers
or obligations in the same country or monetary union.
BB(xxx)
‘BB’ National Ratings denote an elevated default risk relative to other issuers
or obligations in the same country or monetary union.
B(xxx)
‘B’ National Ratings denote a significantly elevated default risk relative to
other issuers or obligations in the same country or monetary union.
CCC(xxx)
‘CCC’
National Ratings denote very high default risk relative to other issuers or
obligations in the same country or monetary union.
CC(xxx)
‘CC’
National Ratings denote default risk is among the highest relative to other
issuers or obligations in the same country or monetary union.
C(xxx)
A
default or default-like process has begun, or the issuer is in standstill, or
for a closed funding vehicle, payment capacity is irrevocably impaired.
Conditions that are indicative of a ‘C’ category rating for an issuer include:
a.
the issuer has entered into a grace or cure period following non-payment of a
material financial obligation;
b.
the issuer has entered into a temporary negotiated waiver or standstill
agreement following a payment default on a material financial obligation;
c.
the formal announcement by the issuer or their agent of a distressed debt
exchange; and
d.
a closed financing vehicle where payment capacity is irrevocably impaired such
that it is not expected to pay interest and/or principal in full during the life
of the transaction, but where no payment default is imminent
RD(xxx):
Restricted default.
‘RD’
ratings indicated that an issuer that in Fitch Ratings’ opinion has experienced
an uncured payment default on a bond, loan or other material financial
obligation but which has not entered into bankruptcy filings, administration,
receivership, liquidation or other formal winding-up procedure, and which has
not otherwise ceased business. This would include:
a.
the selective payment default on a specific class or currency of
debt;
b.
the uncured expiry of any applicable grace period, cure period or default
forbearance period following a payment default on a bank loan, capital markets
security or other material financial obligation;
c.
the extension of multiple waivers or forbearance periods upon a payment default
on one or more material financial obligations either in series or in parallel;
or
d.
execution of a distressed debt exchange on one or more material financial
obligations.
D(xxx)
‘D’ National Ratings denote an issuer or instrument that is currently in
default.
Notes
to Long-Term and Short-Term National Ratings:
The
ISO International Country Code is placed in parentheses immediately following
the rating letters to indicate the identity of the National market within which
the rating applies. For illustrative purposes, (xxx) has been used.
“+”
or “-” may be appended to a National Rating to denote relative status within a
major rating category. Such suffixes are not added to the ‘AAA(xxx)’ Long-Term
National Rating category, to categories below ‘CCC(xxx)’, or to Short-Term
National Ratings other than ‘F1(xxx).’
MUNICIPAL
NOTE RATINGS
S
& P Global Ratings Municipal Short-Term Note Ratings
Definitions
An
S & P Global Ratings U.S. municipal note rating reflects S & P Global
Ratings’ opinion about the liquidity factors and market access risks unique to
the notes. Notes due in three years or less will likely receive a note rating.
Notes with an original maturity of more than three years will most likely
receive a long-term debt rating. In determining which type of rating, if any, to
assign, S & P Global Ratings analysis will review the following
considerations:
•Amortization
schedule—the larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
•Source
of payment—the more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note.
Note
rating symbols are as follows:
SP-1
Strong
capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+)
designation.
SP-2
Satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
SP-3
Speculative
capacity to pay principal and interest.
D
'D'
is assigned upon failure to pay the note when due, completion of a distressed
exchange offer, or the filing of a bankruptcy petition or the taking of similar
action and where default on an obligation is a virtual certainty, for example
due to automatic stay provisions
See
active and inactive qualifiers following S & P Global Ratings Short-Term
Issue Credit Ratings beginning on page A-2.
Moody’s
US Municipal Short-Term Debt And Demand Obligation Ratings
Short-Term
Obligation Ratings
We
use the global short-term Prime rating scale for commercial paper issued by US
Municipalities and nonprofits. These commercial paper programs may be backed by
external letters of credit or liquidity facilities, or by an issuer’s
self-liquidity.
For
other short-term municipal obligations we use one of two other short-term rating
scales, the Municipal Investment Grade (MIG) and Variable Municipal Investment
Grade (VMIG) scales discussed below.
We
use the MIG scale for US municipal cash flow notes, bond anticipation notes and
certain other short-term obligations, which typically mature in three years or
less. Under certain circumstances, we use the MIG scale for bond anticipation
notes with maturities of up to five years.
MIG
1
This
designation denotes superior credit quality. Excellent protection is afforded by
established cash flows, highly reliable liquidity support, or demonstrated
broad-based access to the market for refinancing.
MIG
2
This
designation denotes strong credit quality. Margins of protection are ample,
although not as large as in the preceding group.
MIG
3
This
designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less
well-established.
SG
This
designation denotes speculative-grade credit quality. Debt instruments in this
category may lack sufficient margins of protection.
Standard
Linkage Between the Long-Term and MIG Short-Term Rating Scale
The
following table indicates the municipal long-term ratings consistent with
different MIG short-term ratings.
Demand
Obligation Ratings
In
the case of variable rate demand obligations (VRDOs), a two-component rating is
assigned. The components are a long-term rating and a short-term demand
obligation rating. The long-term rating addresses the issuer’s ability to meet
scheduled principal and interest payments. The short-term demand obligation
rating addresses the ability of the issuer or the liquidity provider to make
payments associated with the purchase-price-upon-demand feature (“demand
feature”) of the VRDO. The short-term demand obligation rating uses the VMIG
scale. VMIG ratings with liquidity support use as an input the short-term
Counterparty Risk Assessment of the support provider, or the long-term rating of
the underlying obligor in the absence of third party liquidity support.
Transitions of VMIG ratings of demand obligations with conditional liquidity
support differ from transitions on the Prime scale to reflect the risk that
external liquidity support will terminate if the issuer’s long-term rating drops
below investment grade. Please see our methodology that discusses demand
obligations with conditional liquidity support.
We
typically assign the VMIG short-term demand obligation rating if the frequency
of the demand feature is less than every three years. If the frequency of the
demand feature is less than three years but the purchase price is payable only
with remarketing proceeds, the short-term demand obligation rating is
“NR”.
VMIG
1
This
designation denotes superior credit quality. Excellent protection is afforded by
the superior short-term credit strength of the liquidity provider and structural
and legal protections that ensure the timely payment of purchase price upon
demand.
VMIG
2
This
designation denotes strong credit quality. Good protection is afforded by the
strong short-term credit strength of the liquidity provider and structural and
legal protections that ensure the timely payment of purchase price upon
demand.
VMIG
3
This
designation denotes acceptable credit quality. Adequate protection is afforded
by the satisfactory short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
SG
This
designation denotes speculative-grade credit quality. Demand features rated in
this category may be supported by a liquidity provider that does not have an
investment grade short-term rating or may lack the structural and/or legal
protections necessary to ensure the timely payment of purchase price upon
demand.
*
For VRDBs supported with conditional liquidity support, short-term ratings
transition down at higher long-term ratings to reflect the risk of termination
of liquidity support as a result of a downgrade below investment grade.
VMIG
ratings of VRDBs with unconditional liquidity support reflect the short-term
debt rating (or counterparty assessment) of the liquidity support provider with
VMIG 1 corresponding to P-1, VMIG 2 to P-2, VMIG 3 to P-3 and SG to not
prime.
|
| |
US
MUNICIPAL SHORT-TERM VS. LONG-TERM
RATINGS |
|
| |
*For
SBPA-backed VRDBs, The rating transitions are higher to allow for distance
to downgrade to below investment grade due to the presence of automatic
termination events in the SBPAs. |
Reviewed
October 21, 2020