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Notes to Financial Statements
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October 31, 2012
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The Funds recognize transfers between levels as of the beginning of the fiscal year.
There were no transfers between Level 1 and Level 2 as of October 31, 2012. For the year ended October 31, 2012, the Funds did not have significant unobservable inputs (Level 3) used in determining fair value. Therefore, a reconciliation of assets
in which significant unobservable inputs (Level 3) were used is not applicable.
Federal Income Taxes —
The Trust’s
policy is to continue to comply with the requirements of the
Internal Revenue Code of 1986, as amended, that are applicable to regulated
investment companies and to distribute all its taxable income to its shareholders. Therefore, no federal income tax provision is required.
Management has analyzed the Funds’ tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions. The Funds file income tax returns in
the U.S. federal jurisdiction and the State of California. The statute of limitations on the Funds’ federal tax return filings remain open for the years ended October 31, 2009 through October 31, 2012. The Funds’ California tax return
filings also remain open for the years ended October 31, 2009 through October 31, 2012. To the knowledge of Stonebridge Capital Management, Inc., there are no federal or California income tax returns currently under examination.
Allocation of Expense —
Trust expenses which are not Series-specific are allocated to each Series based upon its relative proportion of
net assets and/or open accounts to the Trust’s totals.
Other —
Securities transactions are accounted for on the date
the securities are purchased or sold (trade date). Dividend income is recorded on the ex-dividend date. Interest income, which includes amortization of premiums and accretion of discounts, is accrued and recorded daily. Realized gains and losses
from investment transactions and unrealized appreciation and depreciation of investments are reported on an identified cost basis, which is the same basis each Series uses for federal income tax purposes.
3. FEDERAL INCOME TAXES AND TAX BASIS INFORMATION:
The amount of net unrealized appreciation and
the cost of investment securities for tax purposes, including short-term securities, at October 31, 2012 were as follows:
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Institutional
Small-Cap Growth Fund
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Small-Cap
Growth Fund
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Gross appreciation (excess of value over tax cost)
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$
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757,676
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$
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327,387
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Gross depreciation (excess of tax cost over value)
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(583,651)
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(246,583)
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Net unrealized appreciation
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$
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174,025
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$
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80,804
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Cost of investments for income tax purposes
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$
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12,703,813
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$
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5,284,843
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The difference between book-basis and tax-basis unrealized appreciation is due to wash sale losses.
Classifications of Distributions —
Net investment income/(loss) and net realized gain/(loss) may differ for financial statement and tax
purposes. The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. Ordinary income distributions may include dividends paid
from short-term capital gains. Also, due to the timing of dividends made, the fiscal year in which amounts are distributed may differ from the fiscal year in which the income or realized gain was recorded by the Series.
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26
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Stonebridge Funds Trust
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Notes to Financial Statements
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October 31, 2012
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On November 2, 1998, the Trust entered into an administration agreement with ALPS Fund Services,
Inc. (“ALPS”). The administration agreement provides that ALPS will receive a monthly administration fee equal to the annual rate of 0.10% of the average daily net assets in each Series up to $250,000,000 and 0.075% of the average daily
net assets of each Series in excess of $250,000,000, and that ALPS’ fee will be no less than $6,250 per month per Series.
ALPS
Distributors, Inc. serves as the principal underwriter for shares of both the Institutional Fund and the Small-Cap Fund and acts as each Fund’s distributor in a continuous public offering of each Fund’s shares.
7. SUBSEQUENT EVENTS:
In preparing these financial statements, the Trust has evaluated events and transactions for potential recognition or disclosure resulting from
subsequent events.
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30
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Stonebridge Funds Trust
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Additional Information
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October 31, 2012 (Unaudited)
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1. SHAREHOLDER TAX INFORMATION:
Certain tax information regarding each Fund
is required to be provided to shareholders based upon the Fund’s income and distributions for the taxable year ended October 31, 2012. The information and distributions reported herein may differ from information and distributions taxable to
the shareholders for the calendar year ended December 31, 2012.
2. PROXY VOTING INFORMATION:
Trust policies and procedures used in
determining how to vote proxies relating to the Funds’ portfolio securities and information regarding proxies voted by the Funds during the most recent 12-month period ended June 30 are available without a charge, upon request, by contacting
Stonebridge Funds at 1-800-639-3935 and on the Securities Exchange Commission’s (“SEC”) website at http://www.sec.gov.
3. FUND
HOLDINGS:
The complete
schedules of Fund holdings at the end of the second and fourth quarters of each fiscal year are contained in the Funds’ semi-annual and annual shareholder reports, respectively. The Trust files complete schedules of Fund holdings with the SEC
at the end of the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Trust’s Form N-Q filings are available without charge, upon request, by contacting Stonebridge Funds at
1-800-639-3935 and on the SEC’s website at http://www.sec.gov. You may also review and copy the Trust’s Form N-Q filings at the SEC’s Public Reference Room in Washington, D.C. For more information about the operation of the Public
Reference Room, please call the SEC at 1-800-SEC-0330.
4. OTHER:
The following entities owned of record or
beneficially, as of October 31, 2012, 5% or greater of the Funds’ outstanding shares:
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Fund
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Name
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Percentage
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Institutional Small-Cap Growth Fund (SBSCX)
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Charles Schwab & Co, Inc.
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15.93%
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Small-Cap Growth Fund (SBAGX)
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Charles Schwab & Co, Inc.
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63.32%
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Small-Cap Growth Fund (SBAGX)
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Hass Family Trust
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5.15%
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Trustee Compensation:
The Trust pays a quarterly retainer of $2,000 and $500 per meeting to each Trustee who
is not an “interested person” of the Trust, as defined in the Investment Company Act of 1940, as amended (each, an “Independent Trustee”). The Independent Trustees are reimbursed for any out-of-pocket expenses relating to
attendance at meetings.
5.
BOARD APPROVAL OF ADVISORY AGREEMENTS:
The Board of Trustees of the Trust (the
“Board”) is comprised of three Trustees, two of whom are Independent Trustees. During the six months ended October 31, 2012, the Board unanimously approved a six-month renewal of the Trust’s investment advisory agreements (together,
the “Investment Advisory Agreements”) with the Adviser on behalf of each of the Small-Cap Fund and the Institutional Fund.
General Information —
The following information summarizes the considerations of the Board (including the Independent Trustees)
associated with its review of the Investment Advisory Agreements. In connection with their deliberations, the Board and the Independent Trustees
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Annual Report | October 31, 2012
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31
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Additional Information
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October 31, 2012 (Unaudited)
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considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. Each Investment Advisory Agreement was
considered separately for each respective Fund, although the Board took into account the common interests of both Funds in its review. As described below, the Board considered: (i) the nature, extent, and quality of the services to be provided by
the Adviser; (ii) the investment performance of each Fund and the Adviser; (iii) the costs of the services to be provided and profits to be realized by the Adviser from its relationship with the Funds; (iv) the extent to which economies of scale
would be realized as each Fund grows; and (v) whether fee levels reflect these economies of scale for the benefit of Fund investors.
In
considering these matters, the Board discussed the renewal of the Investment Advisory Agreements with management, and the Independent Trustees met in a private session with counsel at which no representatives of the Adviser were present. The Board
(including the Independent Trustees) reviewed materials regarding the investment results of the Funds, management fee and expense comparisons, financial and profitability information with respect to the Adviser, descriptions of various functions
such as compliance monitoring and portfolio trading practices, and information about the personnel of the Adviser providing services to the Funds. In deciding to approve the renewal of the Investment Advisory Agreements, the Board and the
Independent Trustees did not identify a single factor as controlling, and each Trustee may have assigned a different level of significance to each factor.
Nature, Extent and Quality of Services —
In reviewing the services provided by the Adviser, the Board discussed the services provided by the Adviser to the Funds under the Investment Advisory
Agreements, including the experience of its key portfolio management and operational personnel, its overall financial strength and stability, and the overall general quality and depth of its organization. The Board also took into account the
experience, capability, and integrity of the Adviser’s senior management; its investment philosophy and processes, including its brokerage, trading, and soft dollar practices; its disaster recovery and contingency planning; and its commitment
and systems in place with regard to compliance with applicable laws and regulations. The Board and the Independent Trustees determined that the Adviser continued to provide high quality services to the Funds.
Fund Expenses and Management Fees; Investment Performance —
The Board (including the Independent Trustees) reviewed a report, prepared
by the Administrator based on data from Morningstar Inc. as of July 31, 2012, regarding the total expenses of each Fund compared to those of other small cap funds with asset sizes between $1 million and $100 million (the “Peer Group”). The
Board noted that the total expenses of the Small-Cap Fund were among the highest among the funds in the Peer Group as a percentage of assets under management, and that the Institutional Fund’s expenses were the highest in the Peer Group. The
Board considered that the Adviser, at the request of the Board of Trustees, was actively pursuing reorganization of the Funds as a means of addressing their high expenses.
The Board noted that the Administrator had provided a chart demonstrating that, based on data from Morningstar as of July 31, 2012, the Adviser’s management for each Fund was below the median of management
fees of the funds included in the Peer Group. In addition, the Board considered that each Fund’s management fee was higher than another account managed by the Adviser with similar investment objectives to those of the Funds. The Adviser had
indicated, however, that the other account was a sub-advisory mandate for which the Adviser had fewer management responsibilities than those involved in its management of the Funds.
The Board reviewed the performance of each Fund compared with its benchmark and the average of all the funds in the Morningstar small cap growth
category for the one-, three-, five-, and ten-
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32
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Stonebridge Funds Trust
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Additional Information
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October 31, 2012 (Unaudited)
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year periods ended July 31, 2012. The Board observed that the one-, three-, five-, and ten-year
total returns for the Small-Cap Fund net of annualized expenses were below the median total net returns of the category for those periods and below the Fund’s benchmark index for those periods. The Board noted that the Institutional Fund’s
total returns for the one-, three-, five-, and ten-year periods net of annualized expenses were also below its benchmark index and the median total net returns of the small cap growth category.
The Board also considered each Fund’s performance relative to the performance of the other funds included in the Peer Group for the one-,
five-, and ten-year periods ended July 31, 2012. The Board noted that the performance of each of the Small-Cap Fund and the Institutional Fund was among the lowest in the Peer Group for the one- and five-year periods, but that each Fund’s
ten-year performance was closer to (although still below) the median. The Board also evaluated other factors, including the continuing effect of the 2008 financial crisis on the Funds’ performance during certain periods and, with respect to the
Institutional Fund, the fact that it had been managed with a different objective and different principal investment strategies before February 2007.
Based on the information provided, the Board concluded that, on balance, each Fund’s management fee was reasonable in light of the nature and quality of services that the Adviser provided to each Fund and its
familiarity with each Fund’s investment strategies. The Board also concluded that the Funds’ shareholders were likely to continue to benefit from the Adviser’s management services.
Costs and Profits —
The Board considered information regarding the Adviser’s expenses in providing services to the Funds and the
Adviser’s profitability from its relationship with the Funds. Among other things, the Board considered the costs incurred by the Adviser in researching small cap companies for potential investment by the Funds, as well as information provided
by the Adviser regarding its administration and compliance expenses. The Board Independent Trustees determined that the Adviser’s profitability was reasonable in light of the nature, extent and quality of services provided to each Fund.
Other Benefits and Economies of Scale —
The Board also considered the benefits to the Adviser as a result of its
relationship with the Funds, including its receipt of management fees and research, its ability to offer the Funds to its separate account clients, and other benefits. The Board considered whether each Fund would be likely to benefit from any
economies of scale in the management of its portfolio in the event of growth in assets. Due to the relatively small asset size of each Fund, the Board concluded that the Adviser did not currently realize economies of scale in acting as investment
adviser to the Funds.
Conclusions —
Based on their review, including their consideration of each of the factors referred to
above, the Board and the Independent Trustees concluded that the compensation payable to the Adviser pursuant to the Investment Advisory Agreements is fair and reasonable in light of the services being provided by the Adviser to the Funds and their
shareholders, and that renewal of the Investment Advisory Agreements for another six-month term was in the best interests of the Funds and their shareholders while the Adviser pursued reorganizing the Funds.
DISCLOSURE OF FUND EXPENSES
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs (such as the 2% fee on redemption of Fund shares made within 30 days
of purchase); and (2) ongoing costs, including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with
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Annual Report | October 31, 2012
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33
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Additional Information
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October 31, 2012 (Unaudited)
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the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on May 1, 2012 and held until October 31, 2012.
Actual Return.
The first line of the following tables 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 $1,000 = 8.6), then multiply the
result by the number in the first line under the heading “Expense Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical 5% Return.
The second line of the following tables provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed
rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use
this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees.
Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. If the transaction fees were included, your costs would be higher.
Institutional Small-Cap Growth Fund (SBSCX)
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Beginning Account
Value at
5/01/12
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Ending Account
Value at
10/31/12
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Expense Paid
During Period
*
5/01/12 to 10/31/12
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Actual Fund Return
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$ 1,000.00
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$ 996. 40
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$ 21.43
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Hypothetical Fund Return
(5% return before expenses)
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$ 1,000.00
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$ 1,003.67
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$ 21.51
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*
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Expenses are equal to the Institutional Small-Cap Growth Fund’s (SBSCX) annualized expense ratio of 4.27%, multiplied by the average account value
over the period, multiplied by the number of days in the most recent fiscal half-year (184)/366 (to reflect the half-year period).
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Small-Cap Growth Fund (SBAGX)
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Beginning Account
Value at
5/01/12
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Ending Account
Value at
10/31/12
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Expense Paid
During Period
*
5/01/12 to 10/31/12
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Actual Fund Return
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$ 1,000.00
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$ 990.10
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$ 26.51
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Hypothetical Fund Return
(5% return before expenses)
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$ 1,000.00
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$ 998.49
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$ 26.62
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*
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Expenses are equal to the Small-Cap Growth Fund’s (SBAGX) annualized expense ratio of 5.30%, multiplied by the average account value over the period,
multiplied by the number of days in the most recent fiscal half-year (184)/366 (to reflect the half-year period).
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34
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Stonebridge Funds Trust
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