Note 1 – Organization
Oakseed Opportunity Fund (the ‘‘Fund’’) was organized as a diversified series of Investment Managers Series Trust, a Delaware statutory trust (the “Trust”) which is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund seeks to achieve long-term capital appreciation. The Fund commenced investment operations on December 31, 2012, with two classes of shares, Investor Class and Institutional Class.
The shares of each class represent an interest in the same portfolio of investments of the Fund and have equal rights as to voting, redemptions, dividends and liquidation, subject to the approval of the Trustees. Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses on investments are allocated to each class of shares in proportion to their relative shares outstanding. Shareholders of a class that bears distribution and service expenses under the terms of a distribution plan have exclusive voting rights to that distribution plan.
Note 2 – Accounting Policies
The following is a summary of the significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates.
(a) Valuation of Investments
The Fund values equity securities at the last reported sale price on the principal exchange or in the principal over the counter (“OTC”) market in which such securities are traded, as of the close of regular trading on the NYSE on the day the securities are being valued or, if there are no sales, at the mean between the last available bid and asked prices on that day. Securities traded on the NASDAQ are valued at the NASDAQ Official Closing Price (“NOCP”). Debt securities are valued at the mean between the last available bid and asked prices for such securities, or if such prices are not available, at prices for securities of comparable maturity, quality and type. All other types of securities, including restricted securities and securities for which market quotations are not readily available, are valued at fair value as determined in accordance with procedures established in good faith by the Board of Trustees. Short-term securities with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value.
A Fund’s assets are valued at their fair market value. If a market quotation is not readily available for a portfolio security, the security will be valued at fair value (the amount which the Fund might reasonably expect to receive for the security upon its current sale) as determined in good faith by the Fund’s advisor, subject to review and approval by the Valuation Committee, pursuant to procedures adopted by the Board of Trustees. The actions of the Valuation Committee are subsequently reviewed by the Board at its next regularly scheduled board meeting. The Valuation Committee meets as needed. The Valuation Committee is comprised of all the Trustees but action may be taken by any one of the Trustees.
(b) Options
The Fund may write or purchase options contracts primarily to enhance the Fund’s returns or reduce volatility. In addition, the Fund may utilize options in an attempt to generate gains from option premiums or to reduce overall portfolio risk. When the Fund writes or purchases an option, an amount equal to the premium received or paid by the Fund is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by the Fund on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on affecting a closing purchase or sale transaction, including brokerage commissions, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or proceeds from the sale in determining whether the Fund has realized a gain or a loss on investment transactions. The Fund, as a writer of an option, may have no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. The Fund, as a purchaser of an option, bears the risk that the counterparties to the option may not have the ability to meet the terms of the option contracts.
Oakseed Opportunity Fund
NOTES TO FINANCIAL STATEMENTS - Continued
Transactions in option contracts written for the year ended December 31, 2013 were as follows:
|
|
|
Number of Contracts
|
|
|
Premiums
Received
|
|
|
Outstanding at January 1, 2013
|
|
|
-
|
|
|
$
|
-
|
|
|
Options written
|
|
|
1,771
|
|
|
|
322,334
|
|
|
Options terminated in closing purchasing transactions
|
|
|
(683
|
)
|
|
|
(143,186
|
)
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at December 31, 2013
|
|
|
1,088
|
|
|
$
|
179,148
|
|
(c) Investment Transactions, Investment Income and Expenses
Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the identified cost basis. Dividend income is recorded net of applicable withholding taxes on the ex-dividend date and interest income is recorded on an accrual basis. Discounts or premiums on debt securities are accreted or amortized to interest income over the lives of the respective securities using the effective interest method. Income and expenses of the Fund are allocated on a pro rata basis to each class of shares, except for distribution fees which are unique to each class of shares. Expenses incurred by the Trust with respect to more than one fund are allocated in proportion to the net assets of each fund except where allocation of direct expenses to each Fund or an alternative allocation method can be more appropriately made.
The Fund incurred offering costs of approximately $36,256, which were amortized over a one-year period from December 31, 2012 (commencement of operations).
(d) Federal Income Taxes
The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its net investment income and any net realized gains to its shareholders. Therefore, no provision is made for federal income or excise taxes. Due to the timing of dividend distributions and the differences in accounting for income and realized gains and losses for financial statement and federal income tax purposes, the fiscal year in which amounts are distributed may differ from the year in which the income and realized gains and losses are recorded by the Fund.
Accounting for Uncertainty in Income Taxes
(the “Income Tax Statement”) requires an evaluation of tax positions taken (or expected to be taken) in the course of preparing a Fund’s tax returns to determine whether these positions meet a “more-likely-than-not” standard that, based on the technical merits, have a more than fifty percent likelihood of being sustained by a taxing authority upon examination. A tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations.
Oakseed Opportunity Fund
NOTES TO FINANCIAL STATEMENTS - Continued
The Income Tax Statement requires management of the Fund to analyze tax positions taken in the prior three open tax years, if any, and tax positions expected to be taken in the Fund’s current tax year, as defined by the IRS statute of limitations for all major jurisdictions, including federal tax authorities and certain state tax authorities. For the year ended December 31, 2013, the Fund did not have a liability for any unrecognized tax benefits. The Fund has no examination in progress and is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.
(e) Distributions to Shareholders
The Fund will make distributions of net investment income and capital gains, if any, at least annually. Distributions to shareholders are recorded on the ex-dividend date. The amount and timing of distributions are determined in accordance with federal income tax regulations, which may differ from GAAP.
The character of distributions made during the year from net investment income or net realized gains may differ from the characterization for federal income tax purposes due to differences in the recognition of income expense and gain (loss) items for financial statement and tax purposes. Where appropriate, reclassifications between net asset accounts are made for such differences that are permanent in nature.
Note 3 – Investment Advisory and Other Agreements
The Trust, on behalf of the Fund, entered into an Investment Advisory Agreement (the “Agreement”) with Jackson Park Capital, LLC (the “Advisor”). Under the terms of the Agreement, the Fund pays a monthly investment advisory fee to the Advisor at the annual rate of 0.95% of the Fund’s average daily net assets up to $1 billion and 0.85% of the Fund’s average daily net assets in excess of $1 billion. Effective December 31, 2012, the Advisor has contractually agreed to waive its fee and, if necessary, to waive other operating expenses in order to limit total annual operating expenses (excluding taxes, leverage interest, brokerage commissions, dividend expenses on short sales, acquired fund fees and expenses as determined in accordance with Form N-1A, expenses incurred in connection with any merger or reorganization, or extraordinary expenses such as litigation) to 1.40% and 1.15% of the Fund’s average daily net assets for Investor Class Shares and Institutional Class Shares, respectively until April 30, 2014.
For the year ended December 31, 2013, the Advisor waived $201,425 of its advisory fees. The Advisor may recover from the Fund fees and/or expenses previously waived and/or absorbed, if the Fund’s expense ratio, including the recovered expenses falls below the expense limit at which they were waived. The Advisor is permitted to seek reimbursement from the Fund for a period of three fiscal years following the fiscal year in which such reimbursements occurred. At December 31, 2013, the amount of these potentially recoverable expenses was $201,425. The Advisor may recapture all or a portion of this amount no later than December 31, 2016.
IMST Distributors, LLC serves as the Fund’s distributor; UMB Fund Services, Inc. (“UMBFS”) serves as the Fund’s fund accountant, transfer agent and co-administrator; and Mutual Fund Administration Corporation (“MFAC”) serves as the Fund’s other co-administrator. UMB Bank, n.a., an affiliate of UMBFS, serves as the Fund’s custodian.
Certain trustees and officers of the Trust are employees of UMBFS or MFAC. The Fund does not compensate trustees and officers affiliated with the Fund’s co-administrators. For the year ended December 31, 2013, the Fund’s allocated fees incurred for Trustees who are not affiliated with the Fund’s co-administrators are reported on the Statement of Operations.
Cipperman & Co. provides Chief Compliance Officer (“CCO”) services to the Trust. The Fund’s allocated fees incurred for CCO services for the year ended December 31, 2013, are reported on the Statement of Operations.
Oakseed Opportunity Fund
NOTES TO FINANCIAL STATEMENTS - Continued
Note 4 – Federal Income Taxes
At December 31, 2013, gross unrealized appreciation and depreciation on investments based on cost for federal income tax purposes were as follows:
|
Cost of investments
|
|
$
|
99,782,690
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
11,810,344
|
|
|
Gross unrealized depreciation
|
|
|
(725,382
|
)
|
|
|
|
|
|
|
|
Net unrealized appreciation on investments
|
|
$
|
11,084,962
|
|
The difference between cost amounts for financial statement and federal income tax purposes is due primarily to timing differences in recognizing certain gains and losses in security transactions.
GAAP requires that certain components of net assets be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. For the year ended December 31, 2013, permanent differences in book and tax accounting have been reclassified to paid-in capital, accumulated net investment income/loss and accumulated net realized gain/loss as follows:
|
Increase (Decrease)
|
|
Paid-in Capital
|
Accumulated Net Investment Income/Loss
|
Accumulated Net Realized Gain/Loss
|
|
$ (37,460)
|
$ (62,330)
|
$ 99,790
|
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
|
Undistributed ordinary income
|
|
$
|
495,900
|
|
|
Undistributed long-term capital gains
|
|
|
1,266
|
|
|
Tax accumulated earnings
|
|
|
497,166
|
|
|
|
|
|
|
|
|
Accumulated capital and other losses
|
|
|
-
|
|
|
Net unrealized appreciation on investments
|
|
|
11,084,962
|
|
|
Net unrealized appreciation on short securities
|
|
|
112,547
|
|
|
Total accumulated earnings
|
|
$
|
11,694,675
|
|
To the extent that a fund may realize future net capital gains, those gains will be offset by any of its unused capital loss carryforward. Future capital loss carryover utilization in any given year may be subject to Internal Revenue Code limitations.
The tax character of distributions paid during the year ended December 31, 2013 was as follows:
|
Distributions paid from:
|
|
|
|
|
Ordinary income
|
|
$
|
673,730
|
|
|
Long-term capital gains
|
|
|
-
|
|
|
Total distributions paid
|
|
$
|
673,730
|
|
Oakseed Opportunity Fund
NOTES TO FINANCIAL STATEMENTS - Continued
Note 5 –
Investment Transactions
For the year ended December 31, 2013, purchases and sales of investments, excluding short-term investments, were $121,423,263 and $33,560,503, respectively.
Note 6 – Distribution Plan
The Trust, on behalf of the Fund, has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act that allows the Fund to pay distribution fees for the sale and distribution of its shares. With respect to Investor Class, the Plan provides for the payment of distribution fees at the annual rate of up to 0.25% of average daily net assets. The Institutional Class does not pay any distribution fees.
For the year ended December 31, 2013, distribution fees incurred are disclosed on the Statement of Operations.
Note 7 – Indemnifications
In the normal course of business, the Fund enters into contracts that contain a variety of representations which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund expects the risk of loss to be remote.
Note 8 – Fair Value Measurements and Disclosure
Fair Value Measurements and Disclosures
defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure about fair value measurements. It also provides guidance on determining when there has been a significant decrease in the volume and level of activity for an asset or liability, when a transaction is not orderly, and how that information must be incorporated into a fair value measurement.
Under
Fair Value Measurements and Disclosures
, various inputs are used in determining the value of the Fund’s investments. These inputs are summarized into three broad Levels as described below:
|
|
·
|
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 valuing 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.
Oakseed Opportunity Fund
NOTES TO FINANCIAL STATEMENTS - Continued
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used, as of December 31, 2013, in valuing the Fund’s assets carried at fair value:
|
|
|
Level 1
|
|
|
Level 2**
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks*
|
|
$
|
85,785,593
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
85,785,593
|
|
|
Exchange-Traded Funds
|
|
|
3,715,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,715,800
|
|
|
REITS
|
|
|
9,914,470
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,914,470
|
|
|
Short-Term Investments
|
|
|
11,451,789
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,451,789
|
|
|
Total Assets
|
|
$
|
110,867,652
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
110,867,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written Options Contracts
|
|
$
|
62,601
|
|
|
$
|
-
|
|
|
$
|
4,000
|
|
|
$
|
66,601
|
|
*
All common stocks held in the Fund are Level 1 securities. For a detailed break-out of common stocks by major industry classification, please refer to the Schedule of Investments.
**The Fund did not hold any Level 2 securities at period end.
Transfers are recognized at the end of the reporting period.
The following is a reconciliation of Level 3 liabilities for the Fund, which significant unobservable inputs were used to determine fair value:
|
|
|
Investments,
at Value
|
|
|
Balance as of 12/31/12
|
|
$
|
-
|
|
|
Realized gain (loss)
|
|
|
-
|
|
|
Change in unrealized appreciation (depreciation)
|
|
|
(74,223
|
)
|
|
Options written
|
|
|
78,223
|
|
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
Balance as of 12/31/13
|
|
$
|
4,000
|
|
Oakseed Opportunity Fund
NOTES TO FINANCIAL STATEMENTS - Continued
The following table presents additional information about valuation methodologies and inputs used for investments that are measured at fair value and categorized within Level 3 as of December 31, 2013:
|
|
|
|
|
|
|
|
Impact to
|
|
|
|
|
|
|
|
|
Valuation
|
|
|
Fair Value
|
|
|
|
|
|
from an
|
|
|
December 31,
|
|
Valuation
|
|
Unobservable
|
|
increase in
|
|
|
2013
|
|
Methodologies
|
|
Input
(1)
|
|
Input
(2)
|
|
Written Options Contracts
|
$ 4,000
|
|
Fair Value Pricing
|
|
discount for lack of marketability
|
|
decrease
|
|
(1)
|
The investment advisor considers relevant indications of value that are reasonably and timely available to it in determining the fair value to be assigned to a particular security, such as the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions. The Fund’s use of fair value pricing may cause the net asset value of Fund shares to differ from the net asset value that would be calculated using market quotations. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security may be materially different than the value that could be realized upon the sale of that security.
|
|
(2)
|
This column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect.
|
Note 9 – Derivatives and Hedging Disclosures
Derivatives and Hedging
requires enhanced disclosures about the Fund’s derivative and hedging activities, including how such activities are accounted for and their effects on the Fund’s financial position, performance and cash flows. The Fund invested in options contracts during the year ended December 31, 2013.
The effects of these derivative instruments on the Fund's financial position and financial performance as reflected in the Statement of Assets and Liabilities and Statement of Operations are presented in the tables below. The fair values of derivative instruments as of December 31, 2013 by risk category are as follows:
