NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2012 (UNAUDITED)
1. ORGANIZATION
The Clark Fork Trust (the “Trust”) is registered as an open-end management investment company under the Investment Company Act of 1940 (the “Act”) and is organized as a statutory trust under the laws of Delaware by the filing of a Certificate of Trust on October 28, 2010. The Trust is authorized to issue one or more series of beneficial interests and issue classes of any series or divide shares of any series into two or more separate classes. The Trust currently consists of one series of units of beneficial interest (“shares”) called the Tarkio Fund (the “Fund”). The Fund is a non-diversified fund. The investment adviser to the Fund is Front Street Capital Management, Inc. (the “Adviser”).
The Fund’s investment objective is long term growth of capital.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the U.S. (“GAAP”).
SECURITY VALUATIONS
: All investments in securities are recorded at their estimated fair value, as described in Note 3.
ORGANIZATIONAL AND OFFERING EXPENSES:
All costs incurred by the Fund in connection with the organization, offering and initial registration of the Fund, principally professional fees, were paid on behalf of the Fund by the Adviser and will not be borne by the Fund.
FEDERAL INCOME TAXES:
The Fund’s policy is to comply with the requirements of Subchapter M of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all of its taxable income to their shareholders. Therefore, no federal income tax provision is required. It is the Fund’s policy to distribute annually, prior to the end of the calendar year, dividends sufficient to satisfy excise tax requirements of the Internal Revenue Code. This Internal Revenue Code requirement may cause an excess of distributions over the book year-end accumulated income. In addition, it is the Fund’s policy to distribute annually, after the end of the fiscal year, any remaining net investment income and net realized capital gains.
The Fund recognizes the tax benefits of certain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Fund’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded as of or during the six months ended November 30, 2012, related to uncertain tax positions expected to be taken in the Fund’s 2012 tax returns. The Fund identifies its major tax jurisdictions as U.S. Federal and certain State tax authorities; however the Fund is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period, the Fund did not incur any interest or penalties.
USE OF ESTIMATES:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. The treatment for financial reporting purposes of distributions made to shareholders during the year from net investment income or net realized capital gains may differ from their ultimate treatment for federal income tax purposes. These differences are caused primarily by differences in the timing of the recognition of certain components of income, expense, or realized capital gain for federal income tax purposes.
RECLASSIFICATION OF CAPITAL ACCOUNT
:
GAAP requires that certain components of net assets be reclassified between financial and tax reporting. These reclassifications have no impact on the net asset value of the Fund and are designed generally to present undistributed income and net realized gains on a tax basis, which is considered to be more informative to shareholders.
OTHER:
The Fund records security transactions on the trade date. Dividend income is recognized on the ex-dividend date. Interest income is recognized on an accrual basis. The Fund uses the specific identification method in computing gain or loss on sale of investment securities. Discounts and premiums on securities purchased are amortized over the life of the respective securities.
3. SIGNIFICANT ACCOUNTING POLICIES
SECURITIES VALUATIONS:
As described in Note 2, all investments in securities are recorded at their estimated fair value. The Fund utilizes various methods to measure the fair value of most of its investments on a recurring basis. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of inputs are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.
Level 2 - Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level 3 - Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuating the asset or liability, and would be based on the best information available.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
FAIR VALUE MEASUREMENTS:
A description of the valuation techniques applied to the Fund’s major categories of assets and liabilities measured at fair value on a recurring basis follows.
Equity securities (common stock) - Equity securities are valued by using market quotations furnished by a pricing service when the Adviser believes such prices accurately reflect the fair value of such securities. Securities that are traded on any stock exchange are valued by the pricing service at the last quoted sale price. Lacking a last sale price, an exchange traded security is valued by the pricing service at its last bid price. Securities traded in the NASDAQ over-the-counter market are valued by the pricing service at the NASDAQ Official Closing Price. When market quotations are not readily available, when the Adviser determines that the market quotation or the price provided by the pricing service does not accurately reflect the current fair value or when restricted or illiquid securities are being valued, such securities are valued at a fair value as determined by the Adviser in good faith, in accordance with guidelines adopted by and subject to review of the Board. Manually priced securities held by the Fund (if any) are reviewed by the Board on a quarterly basis. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. If the Adviser decides that a price provided by the pricing services does not accurately reflect the fair value of the securities, when prices are not readily available from a pricing service or when restricted or illiquid securities are being valued, securities are valued at fair value as determined in good faith by the Adviser.
Money market mutual funds are generally priced at the ending NAV provided by the service agent of the funds. These securities will be categorized as Level 1 securities.
Fixed income securities - Fixed income securities such as corporate bonds and U.S. Government Securities when valued using market quotations in an active market, will be categorized as Level 1 securities. However, they may be valued on the basis of prices furnished by a pricing service when the Adviser believes such prices more accurately reflect the fair value of such securities. A pricing service utilizes electronic data processing techniques based on yield spreads relating to securities with similar characteristics to determine prices for normal institutional-size trading units of debt securities without regard to sale or bid prices. These securities will generally be categorized as Level 2 securities. If the Adviser decides that a price provided by the pricing service does not accurately reflect the fair value of the securities, when prices are not readily available from a pricing service, or when restricted or illiquid securities are being valued, securities are valued at fair value as determined in good faith by the Adviser, in conformity with guidelines adopted by and subject to review of the Board. These securities will be categorized as Level 3 securities. Short term investments in fixed income securities with maturities of less than 60 days when acquired, or which subsequently are within 60 days of maturity, are valued by using the amortized cost method of valuation. These securities are categorized as Level 2 or Level 3, when appropriate.
The following table summarizes the inputs used to value the Fund’s assets measured at fair value as of November 30, 2012:
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Valuation Inputs of Assets *
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Level 1
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Level 2
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Level 3
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Total
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Common Stock
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$ 8,761,164
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$0
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$0
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$ 8,761,164
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Cash Equivalents
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117,759
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0
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0
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117,759
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Total
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$ 8,878,923
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$0
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$0
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$ 8,878,923
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* See the Schedule of Investments for categories by industry.
There were no transfers into or out the levels during the six months ended November 30, 2012. The Fund considers transfers into and out of the levels as of the end of the reporting period.
The Fund did not hold any Level 3 assets during the six months ended November 30, 2012. For more detail on the investments, please refer to the Schedule of Investments. The Fund did not hold any derivative instruments at any time during the six months ended November 30, 2012.
4. RELATED PARTY TRANSACTIONS
INVESTMENT ADVISOR:
Front Street Capital Management, Inc. serves as investment adviser to the Fund. Subject to the authority of the Board, the Adviser is responsible for management of the Fund's investment portfolio. The Adviser is responsible for selecting the Fund's investments according to the Fund's investment objective, policies and restrictions and as compensation for its management services, the Fund is obligated to pay the Adviser a fee computed and accrued daily and paid monthly in arrears at an annual rate of 1.00% of the average daily net assets of the Fund during the term of the Investment Advisory Agreement (“Agreement”). Effective April 9, 2012, the Adviser agreed to reduce its management fee to 0.90%. Under the Agreement, the Adviser, at its own expense and without reimbursement from the Trust, furnishes office space and all necessary office facilities, equipment and executive personnel necessary for managing the assets of the Fund. Under this Agreement, the Adviser pays the operating expenses of the Fund excluding fees payable under the Agreement and the Services Agreement, brokerage fees and commissions, taxes, interest expense, the costs of acquired fund fees and expenses, and extraordinary expenses. For the six months ended November 30, 2012, the Advisor earned $36,829 in Advisory fees. At November 30, 2012, the Fund owed the Adviser $1,867. The Advisor has voluntarily agreed to waive a portion of its Advisory fees. These waivers may be discontinued at any time. For the six months ended November 30, 2012, the Advisor voluntarily waived $3,683 in advisory fees.
The Fund entered into a Services Agreement with the Adviser. Under the Services Agreement, the Adviser receives an additional fee of 0.25% of the average daily net assets of the Fund and is obligated to provide executive and administrative services, assist in the preparation of the Trust’s tax returns and various reports to shareholders, and provide non-investment related statistical and research data. For the six months ended November 30, 2012, the Fund incurred $9,207 in service fees. At November 30, 2012, the Fund owed $1,697 in service fees.
5. CAPITAL SHARE TRANSACTIONS
At November 30, 2012, paid in capital amounted to $8,687,776 of the Fund. Transactions in capital stock were as follows:
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Six months ended
November 30, 2012
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June 28, 2011
(commencement of operations)
through May 31, 2012
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Shares
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Amount
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Shares
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Amount
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Shares sold
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277,929
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$ 2,523,274
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675,679
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$ 6,235,519
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Shares issued in reinvestment of dividends
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-
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-
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-
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-
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Shares redeemed
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(18,246)
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(171,017)
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-
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-
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Net increase
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259,683
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$ 2,352,257
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675,679
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$ 6,235,519
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6. INVESTMENT TRANSACTIONS
For the six months ended November 30, 2012, purchases and sales of investment securities, other than short-term investments, were as follows:
Purchases
Investment Securities $ 2,524,449
Sales
Investment Securities $ 237,188
As of November 30, 2012, the net unrealized depreciation of investments for tax purposes was as follows:
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Gross Appreciation
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$ 925,381
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Gross (Depreciation)
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(745,719)
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Net Appreciation on Investments
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$ 179,662
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At November 30, 2012, the aggregate cost of securities for federal income tax purposes was $8,699,261.
7. DISTRIBUTIONS TO SHAREHOLDERS
As of the fiscal period ended May 31, 2012, the components of distributable earnings/(accumulated losses) on a tax basis are as follows:
Undistributed Ordinary Income $ 0
Undistributed Gains 4,180
Unrealized Depreciation
(261,847)
$(257,667)
The difference between book basis and tax basis unrealized depreciation is attributable to the tax deferral of losses on wash sales.
The Fund did not pay any distributions for the period June 28, 2011, (commencement of operations), through May 31, 2012.
The Fund did not pay any distributions for the six months ended November 30, 2012.
8. CONTROL OWNERSHIP
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates a presumption of control of the fund, under Section 2 (a) (9) of the Act. As of November 30, 2012, Ameritrade, Inc. held in omnibus accounts for the benefit of others approximately 56% of the voting securities of the Fund. The Trust believes that neither Ameritrade, Inc., nor any of the underlying beneficial owners owned or controlled 25% or more of the voting securities of the Fund.
9. NEW ACCOUNTING PRONOUNCEMENT
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2011-11 related to disclosures about offsetting assets and liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented. Management is currently evaluating the impact of this amendment may have on the Fund’s financial statements.
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Tarkio Fund
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Expense Illustration
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November 30, 2012 (Unaudited)
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Expense Example
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As a shareholder of the Tarkio Fund, you incur two types of costs: (1) transaction costs which consist of redemption fees; and (2) ongoing costs which consist of management fees and service fees. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds.
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The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, June 1, 2012 through November 30, 2012.
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Actual Expenses
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The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period.
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Hypothetical Example for Comparison Purposes
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The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in this Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
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Beginning Account Value
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Ending Account Value
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Expenses Paid During the Period*
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June 1, 2012
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November 30, 2012
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June 1, 2012 to November 30, 2012
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Actual
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$1,000.00
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$1,055.30
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$5.93
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Hypothetical
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(5% Annual Return before expenses)
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$1,000.00
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$1,019.30
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$5.82
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* Expenses are equal to the Fund's annualized expense ratio of 1.15%, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period).
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TARKIO FUND