Item 1. Reports to Stockholders.
Morgan Dempsey Small/Micro Cap Value Fund (MITYX)
Investment Adviser
Morgan Dempsey Capital Management, LLC
309 North Water Street
Suite 510
Milwaukee, Wisconsin 53202
Phone: 877-642-7227
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LETTER TO SHAREHOLDERS
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3
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EXPENSE EXAMPLE
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5
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INVESTMENT HIGHLIGHTS
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7
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SCHEDULE OF INVESTMENTS
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9
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STATEMENT OF ASSETS AND LIABILITIES
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13
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STATEMENT OF OPERATIONS
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14
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STATEMENTS OF CHANGES IN NET ASSETS
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15
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FINANCIAL HIGHLIGHTS
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16
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NOTES TO FINANCIAL STATEMENTS
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17
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REPORT OF INDEPENDENT REGISTERED
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PUBLIC ACCOUNTING FIRM
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24
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BASIS FOR TRUSTEES’ APPROVAL OF
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INVESTMENT ADVISORY AGREEMENT
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25
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NOTICE OF PRIVACY POLICY & PRACTICES
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29
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ADDITIONAL INFORMATION
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30
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Dear Shareholder,
During the past year we saw an elevation of valuations and stock prices during a period of tepid GDP growth of 1-2%, and a guarded growth in business activity. There has been an increase in mergers and acquisitions and initial public offerings as larger companies have accumulated material cash reserves by curtailing their investments in new property plant and equipment, minimizing their investments in research and development, and limiting the expansion of their work force. In spite of the sluggish growth in the economy, the Federal Reserve’s continued policy to pump cash into the system ensured the stock market’s rise.
Performance
During this period when stock prices were rising with significant help from the Federal Reserve monetary policy, the Fund participated in the growth to a lesser degree than our benchmark, the Russell 2000
®
Value Index. For the Fund’s fiscal year ended August 31, 2013 the Fund returned 23.64% vs. the Russell 2000
®
Value Index, which returned 24.38%.
While it is not always the case, typically in down markets the Fund should outperform the Russell 2000
®
Value Index, and in up markets the Fund generally underperforms the Russell 2000
®
Value Index. This is a reflection of the goal of the Fund to invest in what we believe to be the strongest small companies. We applied a Graham/Dodd valuation methodology looking for inefficiently priced small/micro-cap companies with robust “fortress balance sheets” and ample free cash flow that in most cases are managed by what we call “Founder/Owner Operator” management teams. In periods of trepidation, we expect that our companies will typically weather the storm better than their peers. In speculative periods, where solid earnings and healthy balance sheets are not as important, we expect that our companies will typically do well, but not as well as the more speculative companies.
The Fund emphasizes Founder/Owner Operator led companies that typically invest more than $1 for every $1 in Capital Expenditure to Depreciation and Amortization expenses and typically double their industry’s levels of Research and Development spending. For many of our companies, this has led to 20-40% of their trailing 12 month sales being generated by new products they have developed in the prior 2-3 years. While the Fund underperformed the Russell 2000
®
Value Index, the underlying companies in the Fund were growing and expanding their businesses.
Issue Specific
As of the Fund year end of August 31, 2013, issue specific performance that has aided the performance of the Fund has been led by Sturm Ruger & Co. Inc. (RGR) up +34.94% and Utah Medical Products Inc. up +53.72%. The performance of the Fund was hurt by Jos A Bank Clothiers Inc., down -16.20%, and Gulf Island Fabrication Inc. down -7.50% year-to-date as of August 31, 2013.
As we head into the fall with looming budget battles and fiscal chaos, we find ourselves compelled as a function of our fiduciary responsibility to communicate to you the risks as we see them to the economic and market landscape in the U.S.
Risk to the Economic Landscape in the U.S.
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•
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Federal Spending and Debt:
We continue to see excessive Federal spending with borrowed money as a plague to the economy and eventually the equity markets, as well as bureaucratic regulation growth and the uncertainty created by Federal policy.
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Unemployment:
The unemployment rate has dropped from 7.4% to 7.3%. Unemployment, underemployment, and search abandonment have remained high and are a barometer of this uncertain recovery. At the current rate of 160,000 jobs being
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created per month, we will not return to pre-2007 employment levels until the spring of 2024.
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Federal Reserve Policy:
In 2008 the Federal Reserve’s balance sheet held $843 billion; today it sits at $3.7 trillion. How can it return to the 2008 levels without creating chaos in the markets?
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Lack of Credit:
Banks are not lending. Free reserves should be at 2-4 times the required reserves, today they are 14 times the required amount. Brought to a normal level, there would be $7-9 trillion in potential loans available to grow the economy. The lack of credit represents a continued and material choke point in the nation’s economy.
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Potential Opportunities
As we said in our 2012 annual Shareholder Letter, if Washington could/would give us sound economic and regulatory policy and a clear and positive message from the White House, we believe a more positive sentiment would develop and the current anemic recovery would assume a more historic recovery pattern.
Year End Perspective
With the uncertain implementation of the Affordable Health Care Act beginning October 1, 2013 as well as the looming requirement for Congress to raise the debt ceiling and agree to a 2014 budget, we believe we will see periods of trepidation and volatility in the equity markets in the remaining months of 2013. That uncertainty may give the Fund the opportunity to buy high quality securities at attractive prices. Whatever may happen in the coming year, we believe the defensive characteristics of the Fund, with our emphasis on “Fortress Balance sheets” and “Founder/Owner Operator” managements should aid us in both our relative and absolute performance.
Past performance is not a guarantee of future results.
The information provided herein represents the opinion of Morgan Dempsey Capital Management, LLC and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
Mutual fund investing involves risk. Principal loss is possible. Investments in small and micro cap companies involve additional risks such as limited liquidity and greater volatility. Unlike mutual funds, ETFs do not necessarily trade at the net asset values of their underlying securities, which means an ETF could potentially trade above or below the value of its underlying portfolio. The Fund’s use of derivatives could cause losses due to the unexpected effect of market movements on a derivative’s price, or because the derivatives do not perform as anticipated.
Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security. Please refer to the Schedule of Investments in this report for a complete list of fund holdings.
The Russell 2000
®
Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. You cannot invest directly in an index.
Price to Sales (P/S) is a ratio for valuing a stock relative to its own past performance. Price to sales is calculated by dividing a stock’s current price by its revenue per share for the trailing 12 months. Beta is a measure of volatility of a security or a portfolio in comparison to the market as a whole. Free cash flow is a measure of financial performance calculated as operating cash flow minus capital expenditures.
This report is intended for the shareholders of the Fund and may not be used as sales literature unless preceded or accompanied by a current prospectus.
The Morgan Dempsey Small/Micro Cap Value Fund is distributed by Quasar Distributors, LLC.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Expense Example
(Unaudited)
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund, and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (3/1/13 – 8/31/13).
Actual Expenses
The first line of the following table provides information about actual account values and actual expenses. Although the Fund charges no load, you will be assessed fees for outgoing wire transfers, returned checks and stop payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, currently a $15.00 fee is charged by the Fund’s transfer agent. You will be charged a redemption fee equal to 2.00% of the net amount of the redemption if you redeem your shares of the Fund within 90 days of purchase. IRA accounts will be charged a $15.00 annual maintenance fee. To the extent the Fund invests in shares of exchange-traded funds or other investment companies as part of its investment strategy, you will indirectly bear your proportionate share of any fees and expenses charged by the underlying funds in which the Fund invests in addition to the expenses of the Fund. Actual expenses of the underlying funds are expected to vary among the various underlying funds. These expenses are not included in the example. The example includes, but is not limited to, management fees, fund administration and accounting, custody and transfer agent fees. 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.
Hypothetical Example for Comparison Purposes
The second line of the table 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 the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Expense Example (Continued)
(Unaudited)
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Beginning
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Ending
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Expenses Paid
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Account Value
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Account Value
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During Period
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3/1/13
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8/31/13
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3/1/13 – 8/31/13*
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Actual
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$1,000.00
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$1,096.30
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$6.87
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Hypothetical (5% return
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before expenses)
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$1,000.00
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$1,018.65
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$6.61
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*
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Expenses are equal to the Fund’s annualized expense ratio of 1.30%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
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MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Investment Highlights
(Unaudited)
The investment objective of the Fund is long-term capital appreciation. To achieve its investment objective, the Fund invests in companies with micro- and small-size market capitalizations (“micro-cap” and “small-cap” companies). The Fund currently defines micro-cap companies as companies with market capitalizations between $30 million and $500 million and small-cap companies as companies with market capitalizations between $500 million and $3 billion. Under normal market conditions, at least 80% of the Fund’s net assets, plus the amount of any borrowings for investment purposes, will be invested in common stocks and other equity securities of micro-cap and small-cap companies. The Fund’s allocation of portfolio holdings as of August 31, 2013 is shown below.
Allocation of Portfolio Holdings
(% of Investments)
Continued
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Investment Highlights (Continued)
(Unaudited)
Total Returns as of August 31, 2013
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Annualized
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Since Inception
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One Year
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(12/31/10)
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Morgan Dempsey
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Small/Micro Cap Value Fund
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23.64
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%
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9.24
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%
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Russell 2000 Value Index
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24.38
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%
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10.28
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%
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Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 877-642-7227. The Fund imposes a 2.00% redemption fee on shares redeemed within ninety days of purchase. Performance quoted does not reflect the redemption fee. If reflected, total returns would be reduced.
Investment performance reflects fee waivers in effect. In the absence of such waivers, total returns would be reduced.
The returns shown assume reinvestment of Fund distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The following graph illustrates performance of a hypothetical investment made in the Fund and a broad-based securities index on the Fund’s inception date. The graph does not reflect any future performance.
The Russell 2000 Value Index is an unmanaged index of those Russell 2000 companies chosen for their value orientation.
One cannot invest directly in an index.
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Growth of $10,000 Investment
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MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
August 31, 2013
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Shares
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Value
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COMMON STOCKS – 95.80%
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Aerospace & Defense – 5.91%
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Astronics Corp. (a)
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6,180
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$
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287,555
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CPI Aerostructures, Inc. (a)
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9,060
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104,009
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Cubic Corp.
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4,050
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203,351
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National Presto Industries, Inc.
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4,395
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303,167
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SIFCO Industries, Inc.
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8,925
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172,074
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1,070,156
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Automobiles – 0.78%
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Thor Industries, Inc.
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2,745
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140,626
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Building Products – 1.24%
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Apogee Enterprises, Inc.
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8,030
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224,037
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Chemicals – 3.78%
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Balchem Corp.
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3,325
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159,135
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Hawkins, Inc.
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4,190
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155,365
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KMG Chemicals, Inc.
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9,200
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216,753
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Stepan Co.
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1,785
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100,745
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Zep, Inc.
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3,705
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52,166
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684,164
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Commercial Banks – 1.16%
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Bar Harbor Bankshares
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1,920
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69,120
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First of Long Island Corp.
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3,845
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141,612
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210,732
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Commercial Services & Supplies – 1.46%
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Mine Safety Appliances Co.
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5,490
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264,234
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Construction & Engineering – 4.06%
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Granite Construction, Inc.
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22,380
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633,802
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Pike Electric Corp.
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9,064
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100,610
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734,412
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Construction Materials – 0.95%
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Eagle Materials, Inc.
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2,675
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171,628
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Containers & Packaging – 4.06%
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Aptargroup, Inc.
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12,495
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734,830
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The accompanying notes are an integral part of these financial statements.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
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Schedule of Investments (Continued)
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August 31, 2013
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Shares
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Value
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Electrical Equipment – 1.93%
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Espey Manufacturing & Electronics Corp.
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3,845
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$
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109,044
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LSI Industries, Inc.
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8,240
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55,538
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Powell Industries, Inc. (a)
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3,500
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184,555
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349,137
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Electronic Equipment, Instruments & Components – 0.58%
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Badger Meter, Inc.
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2,335
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105,262
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Energy Equipment & Services – 12.80%
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CARBO Ceramics, Inc.
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3,160
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257,824
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C&J Energy Services, Inc. (a)
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7,895
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162,084
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Dawson Geophysical Co. (a)
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2,610
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93,699
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Dril-Quip, Inc. (a)
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3,225
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328,982
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Gulf Island Fabrication, Inc.
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16,340
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383,827
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Gulfmark Offshore, Inc. – Class A
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8,240
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378,875
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RPC, Inc.
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9,885
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141,158
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Unit Corp. (a)
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12,425
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572,171
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2,318,620
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Food & Staples Retailing – 2.26%
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Weis Markets, Inc.
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8,720
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409,666
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Food Products – 8.67%
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Cal-Maine Foods, Inc.
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5,630
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256,897
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Flowers Foods, Inc.
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15,280
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317,671
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J & J Snack Foods Corp.
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9,954
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765,661
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Sanderson Farms, Inc.
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2,745
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179,743
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Tootsie Roll Industries, Inc.
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1,690
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50,683
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1,570,655
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Health Care Equipment & Supplies – 8.05%
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Atrion Corp.
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550
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131,450
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ICU Medical, Inc. (a)
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2,745
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196,213
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Merit Medical Systems, Inc. (a)
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12,520
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160,256
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Span-America Medical Systems, Inc.
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10,845
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228,613
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Utah Medical Products, Inc.
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14,690
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741,844
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1,458,376
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Hotels, Restaurants & Leisure – 2.38%
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Marcus Corp.
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16,750
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206,025
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Monarch Casino & Resort, Inc. (a)
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|
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11,945
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224,566
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430,591
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|
The accompanying notes are an integral part of these financial statements.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
|
Schedule of Investments (Continued)
|
August 31, 2013
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Shares
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Value
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Household Durables – 0.32%
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Koss Corp.
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10,985
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|
$
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57,452
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Household Products – 0.78%
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Oil-Dri Corp. of America
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4,530
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|
140,475
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance – 0.78%
|
|
|
|
|
|
|
|
|
|
Erie Indemnity Co. – Class A
|
|
|
1,920
|
|
|
|
141,619
|
|
|
|
|
|
|
|
|
|
|
|
|
Leisure Equipment & Products – 6.94%
|
|
|
|
|
|
|
|
|
|
Johnson Outdoors, Inc. (a) – Class A
|
|
|
11,670
|
|
|
|
293,967
|
|
|
Sturm Ruger & Co., Inc.
|
|
|
18,400
|
|
|
|
963,608
|
|
|
|
|
|
|
|
|
|
1,257,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery – 17.07%
|
|
|
|
|
|
|
|
|
|
Astec Industries, Inc.
|
|
|
8,925
|
|
|
|
308,448
|
|
|
Columbus McKinnon Corp. (a)
|
|
|
3,160
|
|
|
|
67,624
|
|
|
Gorman-Rupp Co.
|
|
|
23,503
|
|
|
|
821,900
|
|
|
Graham Corp.
|
|
|
6,520
|
|
|
|
225,005
|
|
|
Hardinge, Inc.
|
|
|
21,075
|
|
|
|
305,377
|
|
|
LB Foster Co. – Class A
|
|
|
11,810
|
|
|
|
500,980
|
|
|
Lincoln Electronic Holdings, Inc.
|
|
|
1,920
|
|
|
|
120,058
|
|
|
LS Starrett Co. – Class A
|
|
|
4,325
|
|
|
|
45,110
|
|
|
MFRI, Inc. (a)
|
|
|
16,615
|
|
|
|
169,141
|
|
|
Sun Hydraulics Corp.
|
|
|
8,485
|
|
|
|
259,980
|
|
|
Twin Disc, Inc.
|
|
|
10,160
|
|
|
|
268,122
|
|
|
|
|
|
|
|
|
|
3,091,745
|
|
|
|
|
|
|
|
|
|
|
|
|
Media – 0.08%
|
|
|
|
|
|
|
|
|
|
Value Line, Inc.
|
|
|
1,715
|
|
|
|
15,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals & Mining – 1.26%
|
|
|
|
|
|
|
|
|
|
Synalloy Corp.
|
|
|
14,555
|
|
|
|
227,495
|
|
|
|
|
|
|
|
|
|
|
|
|
Road & Rail – 1.72%
|
|
|
|
|
|
|
|
|
|
Marten Transport Ltd.
|
|
|
6,275
|
|
|
|
111,005
|
|
|
Old Dominion Freight Lines, Inc. (a)
|
|
|
4,600
|
|
|
|
199,732
|
|
|
|
|
|
|
|
|
|
310,737
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductors & Semiconductor Equipment – 1.60%
|
|
|
|
|
|
|
|
|
|
Cabot Microelectronics Corp. (a)
|
|
|
4,120
|
|
|
|
148,814
|
|
|
MKS Instruments, Inc.
|
|
|
5,630
|
|
|
|
141,032
|
|
|
|
|
|
|
|
|
|
289,846
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
|
Schedule of Investments (Continued)
|
August 31, 2013
|
|
|
Shares
|
|
|
Value
|
|
|
Specialty Retail – 4.73%
|
|
|
|
|
|
|
|
Jos A Bank Clothiers, Inc. (a)
|
|
|
17,355
|
|
|
$
|
690,381
|
|
|
The Buckle, Inc.
|
|
|
3,225
|
|
|
|
166,991
|
|
|
|
|
|
|
|
|
|
857,372
|
|
|
Textiles, Apparel & Luxury Goods – 0.45%
|
|
|
|
|
|
|
|
|
|
Lakeland Industries, Inc. (a)
|
|
|
19,810
|
|
|
|
82,212
|
|
|
TOTAL COMMON STOCKS (Cost $16,258,086)
|
|
|
|
|
|
$
|
17,348,763
|
|
|
|
|
|
|
|
|
|
|
|
|
SHORT-TERM INVESTMENTS – 3.46%
|
|
|
|
|
|
|
|
|
|
Money Market Funds – 3.46%
|
|
|
|
|
|
|
|
|
|
First American Prime Obligations Fund – Class Z, 0.016% (b)
|
|
|
627,636
|
|
|
|
627,636
|
|
|
TOTAL SHORT-TERM INVESTMENTS (Cost $627,636)
|
|
|
|
|
|
|
627,636
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments (Cost $16,885,722) – 99.26%
|
|
|
|
|
|
|
17,976,399
|
|
|
Other Assets in Excess of Liabilities – 0.74%
|
|
|
|
|
|
|
133,345
|
|
|
TOTAL NET ASSETS – 100.00%
|
|
|
|
|
|
$
|
18,109,744
|
|
|
(a)
|
Non-income producing security.
|
|
(b)
|
Variable rate security; the rate shown represents the rate at August 31, 2013.
|
The Schedule of Investments incorporates the Global Industry Classification Standard (GICS
®
). GICS was developed by and/or is the exclusive property of MSCI, Inc. (“MSCI”) and Standard & Poor Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
The accompanying notes are an integral part of these financial statements.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
|
Statement of Assets and Liabilities
|
August 31, 2013
|
Assets
|
|
|
|
|
Investments, at value (cost $16,885,722)
|
|
$
|
17,976,399
|
|
|
Dividends and interest receivable
|
|
|
11,869
|
|
|
Receivable from Adviser
|
|
|
60
|
|
|
Receivable for Fund shares sold
|
|
|
142,288
|
|
|
Other assets
|
|
|
11,976
|
|
|
Total Assets
|
|
|
18,142,592
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Payable for Fund shares redeemed
|
|
|
3,156
|
|
|
Payable to affiliates
|
|
|
8,924
|
|
|
Accrued expenses and other liabilities
|
|
|
20,768
|
|
|
Total Liabilities
|
|
|
32,848
|
|
|
Net Assets
|
|
$
|
18,109,744
|
|
|
|
|
|
|
|
|
Net Assets Consist Of:
|
|
|
|
|
|
Paid-in capital
|
|
$
|
16,820,756
|
|
|
Accumulated net realized gain
|
|
|
198,311
|
|
|
Net unrealized appreciation on investments
|
|
|
1,090,677
|
|
|
Net Assets
|
|
$
|
18,109,744
|
|
|
|
|
|
|
|
|
Shares of beneficial interest outstanding (unlimited
|
|
|
|
|
|
number of shares authorized, $0.001 par value)
|
|
|
1,472,030
|
|
|
|
|
|
|
|
|
Net asset value, redemption price and offering price per share
(1)
|
|
$
|
12.30
|
|
|
(1)
|
If applicable, redemption price per share may be reduced by a 2.00% redemption fee for shares redeemed within ninety days of purchase.
|
The accompanying notes are an integral part of these financial statements.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
For the Year Ended August 31, 2013
|
Investment Income
|
|
|
|
|
Dividend income
|
|
$
|
144,776
|
|
|
Interest income
|
|
|
68
|
|
|
Total Investment Income
|
|
|
144,844
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
Management fees
|
|
|
84,030
|
|
|
Administration fees
|
|
|
33,042
|
|
|
Transfer agent fees and expenses
|
|
|
27,671
|
|
|
Fund accounting fees
|
|
|
24,878
|
|
|
Federal and state registration fees
|
|
|
18,827
|
|
|
Legal fees
|
|
|
17,506
|
|
|
Audit and tax fees
|
|
|
16,501
|
|
|
Custody fees
|
|
|
15,796
|
|
|
Chief Compliance Officer fees and expenses
|
|
|
9,096
|
|
|
Trustees’ fees and related expenses
|
|
|
6,130
|
|
|
Reports to shareholders
|
|
|
3,149
|
|
|
Other expenses
|
|
|
3,867
|
|
|
Total Expenses
|
|
|
260,493
|
|
|
Less waivers and reimbursement by Adviser (Note 4)
|
|
|
(121,025
|
)
|
|
Less waivers by service provider (Note 5)
|
|
|
(40,159
|
)
|
|
Net Expenses
|
|
|
99,309
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
45,535
|
|
|
|
|
|
|
|
|
Realized and Unrealized Gain on Investments
|
|
|
|
|
|
Net realized gain from investments
|
|
|
215,447
|
|
|
Change in net unrealized appreciation on investments
|
|
|
1,009,509
|
|
|
Net Realized and Unrealized Gain on Investments
|
|
|
1,224,956
|
|
|
Net Increase in Net Assets from Operations
|
|
$
|
1,270,491
|
|
The accompanying notes are an integral part of these financial statements.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
|
Statements of Changes in Net Assets
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
August 31, 2013
|
|
|
August 31, 2012
|
|
|
From Operations
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
45,535
|
|
|
$
|
10,458
|
|
|
Net realized gain from investments
|
|
|
215,447
|
|
|
|
17,100
|
|
|
Net change in unrealized
|
|
|
|
|
|
|
|
|
|
appreciation on investments
|
|
|
1,009,509
|
|
|
|
148,241
|
|
|
Net increase in net assets from operations
|
|
|
1,270,491
|
|
|
|
175,799
|
|
|
|
|
|
|
|
|
|
|
|
|
From Distributions
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(56,246
|
)
|
|
|
—
|
|
|
Net realized gain on investments
|
|
|
(30,929
|
)
|
|
|
(8,255
|
)
|
|
Net decrease in net assets resulting
|
|
|
|
|
|
|
|
|
|
from distributions paid
|
|
|
(87,175
|
)
|
|
|
(8,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
From Capital Share Transactions
|
|
|
|
|
|
|
|
|
|
Proceeds from shares sold
|
|
|
15,151,261
|
|
|
|
1,645,387
|
|
|
Net asset value of shares issued to shareholders
|
|
|
|
|
|
|
|
|
|
in payment of distributions declared
|
|
|
32,266
|
|
|
|
1,729
|
|
|
Costs for shares redeemed
(1)
|
|
|
(1,098,453
|
)
|
|
|
(496,074
|
)
|
|
Net increase in net assets from
|
|
|
|
|
|
|
|
|
|
capital share transactions
|
|
|
14,085,074
|
|
|
|
1,151,042
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase in Net Assets
|
|
|
15,268,390
|
|
|
|
1,318,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
2,841,354
|
|
|
|
1,522,738
|
|
|
End of year
|
|
$
|
18,109,744
|
|
|
$
|
2,841,354
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Net Investment Income (Loss)
|
|
$
|
—
|
|
|
$
|
10,458
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of redemption fees of $970 and $3 for the years ended August 31, 2013 and August 31, 2012, respectively.
|
The accompanying notes are an integral part of these financial statements.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Per Share Data for a Share Outstanding Throughout Each Period
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Period Ended
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
(1)
|
|
|
Net Asset Value, Beginning of Period
|
|
$
|
10.20
|
|
|
$
|
9.62
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
(2)
|
|
|
0.07
|
|
|
|
0.04
|
|
|
|
(0.04
|
)
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
|
|
2.29
|
|
|
|
0.57
|
|
|
|
(0.34
|
)
|
|
Total from investment operations
|
|
|
2.36
|
|
|
|
0.61
|
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less distributions paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.17
|
)
|
|
|
—
|
|
|
|
—
|
|
|
From net realized gain on investments
|
|
|
(0.09
|
)
|
|
|
(0.03
|
)
|
|
|
—
|
|
|
Total distributions paid
|
|
|
(0.26
|
)
|
|
|
(0.03
|
)
|
|
|
—
|
|
|
Paid-in capital from redemption fees (Note 2)
(5)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Net Asset Value, End of Period
|
|
$
|
12.30
|
|
|
$
|
10.20
|
|
|
$
|
9.62
|
|
|
Total Return
(3)
|
|
|
23.64
|
%
|
|
|
6.40
|
%
|
|
|
(3.80
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data and Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period (000’s)
|
|
$
|
18,110
|
|
|
$
|
2,841
|
|
|
$
|
1,523
|
|
|
Ratio of expenses to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before waiver and expense reimbursement
(4)
|
|
|
3.42
|
%
|
|
|
7.75
|
%
|
|
|
24.08
|
%
|
|
After waiver and expense reimbursement
(4)(7)
|
|
|
1.30
|
%
|
|
|
1.49
|
%
(6)
|
|
|
2.00
|
%
|
|
Ratio of net investment income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before waiver and expense reimbursement
(4)
|
|
|
(1.52
|
)%
|
|
|
(5.82
|
)%
|
|
|
(22.69
|
)%
|
|
After waiver and expense reimbursement
(4)(7)
|
|
|
0.60
|
%
|
|
|
0.44
|
%
(6)
|
|
|
(0.61
|
)%
|
|
Portfolio turnover rate
(3)
|
|
|
37.76
|
%
|
|
|
11.76
|
%
|
|
|
15.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Fund commenced operations on December 31, 2010.
|
|
(2)
|
Per share net investment income (loss) has been calculated using the daily average shares outstanding method.
|
|
(3)
|
Not annualized for periods less than one year.
|
|
(4)
|
Annualized for periods less than one year.
|
|
(5)
|
Rounds to less than 0.5 cent per share.
|
|
(6)
|
Effective December 29, 2011, the expense cap was lowered to 1.30% from 2.00%.
|
|
(7)
|
The voluntary waiver amounted to 0.53% of the total waiver.
|
The accompanying notes are an integral part of these financial statements.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Notes to Financial Statements
August 31, 2013
Trust for Professional Managers (the “Trust”) was organized as a Delaware statutory trust under a Declaration of Trust dated May 29, 2001. The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Morgan Dempsey Small/Micro Cap Value Fund (the “Fund”) represents a distinct diversified series with its own investment objective and policies within the Trust. The investment objective of the Fund is long-term capital appreciation. The Trust may issue an unlimited number of shares of beneficial interest at $0.001 par value. The assets of the Fund are segregated, and a shareholder’s interest is limited to the fund in which shares are held. The Fund became effective on April 30, 2010 and commenced operations on December 31, 2010. Costs incurred by the Fund in connection with the organization and the initial public offering of shares were paid by Morgan Dempsey Capital Management, LLC (the “Adviser”), the Fund’s investment adviser.
|
(2)
|
Significant Accounting Policies
|
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies are in conformity with generally accepted accounting principles in the United States of America (“GAAP”).
Each security owned by the Fund that is listed on a securities exchange is valued at its last sale price on that exchange on the date as of which assets are valued. When the security is listed on more than one exchange, the Fund will use the price of the exchange that the Fund generally considers to be the principal exchange on which the stock is traded.
Fund securities listed on the NASDAQ Stock Market, Inc. (“NASDAQ”) will be valued at the NASDAQ Official Closing Price (“NOCP”), which may not necessarily represent the last sale price. If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation. If there has been no sale on such exchange or on NASDAQ on such day, the security is valued at the mean between the bid and asked prices on such day.
Debt securities other than short-term instruments are valued at the mean between the closing bid and asked prices provided by a pricing service (a “Pricing Service”). If the closing bid and asked prices are not readily available, the Pricing Service may provide a price determined by a matrix pricing method or other analytical pricing models. Short-term debt securities such as commercial paper, bankers acceptances and U.S. Treasury Bills, having a maturity of less than 60 days are valued at amortized cost. If a short-term debt security has a maturity of greater than 60 days, it is valued at market price. Any discount or premium is accreted or amortized on a straight-line basis until maturity.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Notes to Financial Statements (Continued)
August 31, 2013
When market quotations are not readily available, any security or other financial instrument is valued at its fair value as determined under procedures approved by the Trust’s Board of Trustees. These fair value procedures will also be used to price a security when corporate events, events in the securities market and/or world events cause the Adviser to believe that a security’s last sale price may not reflect its actual fair value. The intended effect of using fair value pricing procedures is to ensure that the Fund is accurately priced.
Redeemable securities issued by open-end, registered investment companies, including money market funds, are valued at the net asset value (“NAV”) of such companies for purchase and/or redemption orders placed on that day.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, “Fair Value Measurements and Disclosures” Topic 820 (“ASC 820”), establishes an authoritative definition of fair value and sets out a hierarchy for measuring fair value. ASC 820 requires an entity to evaluate certain factors to determine whether there has been a significant decrease in volume and level of activity for the security such that recent transactions and quoted prices may not be determinative of fair value and further analysis and adjustment may be necessary to estimate fair value. ASC 820 also requires enhanced disclosure regarding the inputs and valuation techniques used to measure fair value in those instances as well as expanded disclosure of valuation levels for each class of investments. These inputs are summarized in the three broad levels listed below:
|
•
|
Level 1 –
|
Quoted prices in active markets for identical securities.
|
|
|
|
|
|
•
|
Level 2 –
|
Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
|
|
|
|
|
|
•
|
Level 3 –
|
Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments).
|
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following is a summary of the inputs used to value the Fund’s investments carried at fair value as of August 31, 2013:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks
|
|
$
|
17,348,763
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,348,763
|
|
|
Total Equity
|
|
|
17,348,763
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,348,763
|
|
|
Short-Term Investments
|
|
|
627,636
|
|
|
|
—
|
|
|
|
—
|
|
|
|
627,636
|
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Securities
|
|
$
|
17,976,399
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,976,399
|
|
During the year ended August 31, 2013, there were no transfers between levels for the Fund. It is the Fund’s policy to record transfers as of the end of the reporting period.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Notes to Financial Statements (Continued)
August 31, 2013
The Fund held no Level 3 securities during the year ended August 31, 2013. The Fund did not hold any financial derivative instruments during the reporting period.
The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to make the requisite distributions of income and capital gains to its shareholders sufficient to relieve it from all or substantially all federal income taxes. Therefore, no federal income tax provision has been provided.
As of and during the year ended August 31, 2013, the Fund did not have a liability for any unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to uncertain tax benefits as income tax expense in the Statement of Operations. During the year ended August 31, 2013, the Fund did not incur any interest or penalties. The Fund is subject to examination by U.S. taxing authorities for the tax periods since the commencement of operations.
|
(c)
|
Distributions to Shareholders
|
The Fund will distribute any net investment income and any net realized long- or short-term capital gains at least annually. Distributions from net realized gains for book purposes may include short-term capital gains. All short-term capital gains are included in ordinary income for tax purposes. Distributions to shareholders are recorded on the ex-dividend date. The Fund may also pay a special distribution at the end of the calendar year to comply with federal tax requirements.
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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The NAV per share of the Fund is calculated by dividing the sum of the value of the securities held by the Fund, plus cash or other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding for the Fund, rounded to the nearest cent. The Fund’s shares will not be priced on the days on which the New York Stock Exchange (“NYSE”) is closed for trading. The Fund charges a 2.00% redemption fee on shares redeemed within ninety days of purchase. These fees are deducted from the redemption proceeds otherwise payable to the shareholder. The Fund will retain the fee charged as an increase in paid-in capital and such fees become part of the Fund’s daily NAV calculation. The Fund collected redemption fees during the year ended August 31, 2013 amounting to $970.
Expenses associated with a specific fund in the Trust are charged to that fund. Common expenses are typically allocated evenly between the funds of the Trust, or by other equitable means.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Notes to Financial Statements (Continued)
August 31, 2013
Investment transactions are recorded on the trade date. The Fund determines the gain or loss from investment transactions using the first in – first out (FIFO) method by comparing the original cost of the security lot sold with the net sale proceeds. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis.
The tax character of distributions paid during the year ended August 31, 2013 and August 31, 2012 were as follows:
|
|
|
August 31, 2013
|
|
|
August 31, 2012
|
|
|
Ordinary Income
|
|
$
|
57,504
|
|
|
$
|
8,225
|
|
|
Long-Term Capital Gain
|
|
|
29,671
|
|
|
|
—
|
|
As of August 31, 2013, the components of accumulated earnings on a tax basis were as follows:
|
Cost basis of investments for federal income tax purposes
|
|
$
|
16,901,435
|
|
|
Gross tax unrealized appreciation
|
|
|
1,594,583
|
|
|
Gross tax unrealized depreciation
|
|
|
(519,619
|
)
|
|
Net tax unrealized appreciation
|
|
$
|
1,074,964
|
|
|
Undistributed ordinary income
|
|
|
120,620
|
|
|
Undistributed long-term capital gain
|
|
|
93,404
|
|
|
Total distributable earnings
|
|
$
|
214,024
|
|
|
Other accumulated gains (losses)
|
|
|
—
|
|
|
Total accumulated gains
|
|
$
|
1,288,988
|
|
The tax basis of investments for tax and financial reporting purposes differs principally due to the deferral of losses on wash sales.
GAAP requires that certain components of net assets relating to permanent differences 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 August 31, 2013, the following reclassifications were made for permanent tax adjustments related to the reclassification of distributions:
|
Accumulated Net Realized Gain (Loss)
|
|
$
|
(253
|
)
|
|
Accumulated Undistributed Net Investment Income
|
|
$
|
253
|
|
The Trust has an Investment Advisory Agreement (the “Agreement”) with the Adviser to furnish investment advisory services to the Fund. Under the terms of the Agreement, the Fund compensates the Adviser for its management services at the annual rate of 1.10% of the Fund’s average daily net assets.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Notes to Financial Statements (Continued)
August 31, 2013
The Adviser has contractually agreed to waive its management fee and/or reimburse the Fund’s other expenses at least through December 29, 2014, at the discretion of the Adviser and the Board of Trustees, to the extent necessary to ensure that the Fund’s total operating expenses (exclusive of front-end or contingent deferred sales loads, taxes, leverage, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, dividends or interest on short positions, acquired fund fees and expenses and extraordinary items) do not exceed 2.00% prior to December 29, 2011 and 1.30% on and after December 29, 2011 (the “Expense Limitation Cap”) of the Fund’s average daily net assets. For the year ended August 31, 2013, expenses of $121,025 were waived or reimbursed by the Adviser. Any such waiver or reimbursement is subject to later adjustment to allow the Adviser to recoup amounts waived or reimbursed to the extent actual fees and expenses for a fiscal period are less than the Expense Limitation Cap; provided, however, that the Adviser shall only be entitled to recoup such amounts for a period of three years from the date such amount was waived or reimbursed.
The following table shows the remaining waived or reimbursed expenses subject to potential recovery expiring by:
|
August 31, 2014
|
$103,740
|
|
August 31, 2015
|
$147,950
|
|
August 31, 2016
|
$121,025
|
|
(5)
|
Related Party Transactions
|
U.S. Bancorp Fund Services, LLC (“USBFS” or the “Administrator”) acts as the Fund’s Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Fund’s custodian, transfer agent and accountants; coordinates the preparation and payment of the Fund’s expenses; and reviews the Fund’s expense accruals. For the year ended August 31, 2013, the Fund incurred $33,042 in administration fees. At August 31, 2013, the Administrator was owed fees of $165.
USBFS also serves as the fund accountant and transfer agent to the Fund. U.S. Bank, N.A. (“US Bank”), an affiliate of USBFS, serves as the Fund’s custodian. For the year ended August 31, 2013, the Fund incurred $24,878, $27,671, and $15,796 in fund accounting, transfer agency, and custody fees, respectively. At August 31, 2013, fees of $491, $3,444, and $2,819 were owed for fund accounting, transfer agency, and custody fees, respectively.
Quasar Distributors, LLC (the “Distributor”) acts as the Fund’s principal underwriter in a continuous public offering of the Fund’s shares. The Distributor is an affiliate of USBFS and US Bank.
Certain officers of the Fund are also employees of USBFS. A Trustee of the Trust is affiliated with USBFS and US Bank. This same Trustee is an interested person of the Distributor.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Notes to Financial Statements (Continued)
August 31, 2013
The Fund also has a line of credit with US Bank (see Note 9).
The Trust’s Chief Compliance Officer is also an employee of USBFS. For the year ended August 31, 2013, the Fund was allocated $9,096 of the Trust’s Chief Compliance Officer fees. At August 31, 2013, fees of $2,005 were owed by the Fund to USBFS for Chief Compliance Officer services.
During December through August, USBFS and U.S. Bank voluntarily waived service fees totaling $40,159, which are not subject to recoupment.
|
(6)
|
Capital Share Transactions
|
Transactions in shares of the Fund were as follows:
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
August 31, 2013
|
|
|
August 31, 2012
|
|
|
Shares sold
|
|
|
1,288,303
|
|
|
|
168,222
|
|
|
Shares redeemed
|
|
|
(97,875
|
)
|
|
|
(48,064
|
)
|
|
Shares reinvested
|
|
|
3,061
|
|
|
|
174
|
|
|
Net increase
|
|
|
1,193,489
|
|
|
|
120,332
|
|
|
(7)
|
Investment Transactions
|
The aggregate purchases and sales of securities, excluding short-term investments, for the Fund for the year ended August 31, 2013, were $16,254,960 and $2,813,495, respectively. There were no purchases or sales of U.S. government securities for the Fund.
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 1940 Act. At August 31, 2013, National Financial Services LLC, for the benefit of its customers, held 71.65% of the Fund’s outstanding shares.
At August 31, 2013, the Fund had a line of credit in the amount of the lessor of $1,500,000 or 33.33% of the fair value of unencumbered assets of the Fund, as defined, which matures on August 14, 2014. This unsecured line of credit is intended to provide short-term financing, if necessary, subject to certain restrictions, in connection with shareholder redemptions. Interest will be accrued at the prime rate of 3.25% (as of August 31, 2013). The credit facility is with the Fund’s custodian, U.S. Bank. The Fund did not utilize the line of credit during the year ended August 31, 2013.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Notes to Financial Statements (Continued)
August 31, 2013
|
(10)
|
Recent Accounting Pronouncement
|
In January 2013, the FASB issued ASU No. 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” in GAAP and International Reporting Financial Standards (“IFRS”). ASU No. 2013-01 clarifies ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities to increase comparability and reduce presentation differences between financial statements prepared in accordance with GAAP and financial statements prepared in accordance with IFRS. This requires increased disclosure about derivative instruments that are offset in a reporting entity’s Statement of Assets and Liabilities and derivative instruments that are subject to a master netting agreement (“MNA”). Specifically, the ASU requires reporting entities to present separately for assets and liabilities: a) the gross amounts of those recognized assets and recognized liabilities; b) the amounts offset to determine the net amounts presented in the Statement of Assets and Liabilities; c) the net amount presented in the Statement of Assets and Liabilities; d) the amounts subject to an enforceable MNA not included in (b), and e) the net amount after deducting the amounts from (d) and (c). The effective date of the ASU is for interim and annual periods beginning on or after January 1, 2013. There is no impact of the ASU on the financial statements of the Fund for the year ended August 31, 2013.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Morgan Dempsey Small/Micro Cap Value Fund
(Trust for Professional Managers)
We have audited the accompanying statement of assets and liabilities, including the schedule of investments of Morgan Dempsey Small/Micro Cap Value Fund (the “Fund”), a series of the Trust for Professional Managers, as of August 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the three periods in the period then ended. These financial statements and financial highlights are the responsibility of Fund management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2013, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Dempsey Small/Micro Cap Value Fund as of August 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the three periods in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
COHEN FUND AUDIT SERVICES, LTD.
Cleveland, Ohio
October 30, 2013
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Basis for Trustees’ Approval of Investment Advisory Agreement
The Board of Trustees (the “Trustees”) of Trust for Professional Managers (the “Trust”) met on August 23, 2013 to consider the renewal of the Investment Advisory Agreement (the “Agreement”) between the Trust, on behalf of the Morgan Dempsey Small/Micro Cap Value Fund (the “Fund”), a series of the Trust, and Morgan Dempsey Capital Management, LLC, the Fund’s investment adviser (the “Adviser”). The Trustees also met at a prior meeting held on June 20, 2013 (the “June 20, 2013 Meeting”) to review materials related to the renewal of the Agreement. Prior to these meetings, the Trustees requested and received materials to assist them in considering the renewal of the Agreement. The materials provided contained information with respect to the factors enumerated below, including a copy of the Agreement, a memorandum prepared by the Trust’s outside legal counsel discussing in detail the Trustees’ fiduciary obligations and the factors they should assess in considering the renewal of the Agreement, detailed comparative information relating to the Fund’s performance, as well as the management fees and other expenses of the Fund, due diligence materials relating to the Adviser (including a due diligence questionnaire completed on behalf of the Fund by the Adviser, the Adviser’s Form ADV, select financial statements of the Adviser, bibliographic information of the Adviser’s key management and compliance personnel, comparative fee information for the Fund and the Adviser’s other separately-managed accounts and a summary detailing key provisions of the Adviser’s written compliance program, including its code of ethics) and other pertinent information. The Trustees also received information periodically throughout the year that was relevant to the Agreement renewal process, including performance, management fee and other expense information. Based on their evaluation of the information provided by the Adviser, in conjunction with the Fund’s other service providers, the Trustees, by a unanimous vote (including a separate vote of the Trustees who are not “interested persons,” as that term is defined in the Investment Company Act of 1940, as amended (the “Independent Trustees”)), approved the continuation of the Agreement for an additional one-year term ending August 31, 2014.
DISCUSSION OF FACTORS CONSIDERED
In considering the renewal of the Agreement and reaching their conclusions, the Trustees reviewed and analyzed various factors that they determined were relevant, including the factors enumerated below.
|
1.
|
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED TO THE FUND
|
The Trustees considered the nature, extent and quality of services provided by the Adviser to the Fund and the amount of time devoted to the Fund’s affairs by the Adviser’s staff. The Trustees considered the Adviser’s specific responsibilities in all aspects of day-to-day management of the Fund, as well as the qualifications, experience and responsibilities of Mr. Brian Rafn, the Fund’s portfolio manager, and other key personnel at the Adviser involved in the day-to-day activities of the Fund. The Trustees reviewed the structure of the Adviser’s compliance program and the Adviser’s marketing activity and goals and its continuing commitment to the growth of Fund assets. The Trustees noted that during the course of the prior year they had met with the Adviser in person to discuss various performance, marketing and
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Basis for Trustees’ Approval of Investment Advisory Agreement
(Continued)
compliance issues. The Trustees also noted any services that extended beyond portfolio management, and they considered the trading capability of the Adviser. The Trustees discussed in detail the Adviser’s handling of compliance matters, including the reports of the Trust’s chief compliance officer to the Trustees on the effectiveness of the Adviser’s compliance program. The Trustees concluded that the Adviser had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing its duties under the Agreement and that the nature, overall quality and extent of the management services provided to the Fund, as well as the Adviser’s compliance program, were satisfactory and reliable.
|
2.
|
INVESTMENT PERFORMANCE OF THE FUND AND THE ADVISER
|
The Trustees discussed the performance of the Fund for the year-to-date and one-year periods ended April 30, 2013. In assessing the quality of the portfolio management services delivered by the Adviser, the Trustees also compared the short-term and longer-term performance of the Fund on both an absolute basis and in comparison to the Fund’s benchmark index, the Russell 2000 Value Index, and in comparison to a peer group of U.S. open end small blend funds as constructed by data presented by Morningstar, Inc. (the “Morningstar Peer Group”). The Trustees also reviewed information on the historical performance of other separately-managed accounts of the Adviser that were similar to the Fund in terms of investment strategy.
The Trustees noted that the Fund’s performance for the year-to-date and one-year periods ended April 30, 2013 was below the Morningstar Peer Group medians, falling within the fourth and third quartiles, respectively. The Trustees further noted that for the year-to-date period ended March 31, 2013 and for the one-year and since-inception periods ended December 31, 2012, the Fund had underperformed the Russell 2000 Value Index. The Trustees also noted that the Fund’s performance was generally in alignment with, but slightly below, the performance of other separately managed accounts managed by the Adviser for the year-to-date period ended March 31, 2013 and for the one-year period ended December 31, 2012.
After considering all of the information, the Trustees concluded that the performance obtained by the Adviser for the Fund was satisfactory under current market conditions and in light of the Fund’s limited track record. Although past performance is not a guarantee or indication of future results, the Trustees determined that the Fund and its shareholders were likely to benefit from the Adviser’s continued management.
|
3.
|
COSTS OF SERVICES PROVIDED AND PROFITS REALIZED BY THE ADVISER
|
The Trustees considered the cost of services and the structure of the Adviser’s fees, including a review of the expense analyses and other pertinent material with respect to the Fund. The Trustees reviewed the related statistical information and other materials provided, including the comparative expenses, expense components and peer group selections. The Trustees considered the cost structure of the Fund relative to the Morningstar Peer Group and the Adviser’s separately-managed
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Basis for Trustees’ Approval of Investment Advisory Agreement
(Continued)
accounts, as well as the fee waivers and expense reimbursements provided by the Adviser.
The Trustees also considered the overall profitability of the Adviser, reviewing the Adviser’s financial information and noted that the Adviser had subsidized the Fund’s operations following the Fund’s inception and had not yet recouped those subsidies. The Trustees also examined the level of profits that could be expected to accrue to the Adviser from the fees payable under the Agreement, as well as the Fund’s brokerage arrangements, noting that the Adviser makes no effort to seek soft dollar arrangements. These considerations were based on materials requested by the Trustees and the Fund’s administrator specifically for the June 20, 2013 meeting and the August 23, 2013 meeting at which the Agreement was formally considered, as well as the presentations made by the Adviser over the course of the year.
The Trustees noted that the Fund’s contractual management fee of 1.10% fell within the third quartile and ranked above the Morningstar Peer Group average of 1.00%, which fell at the top of the second quartile. The Trustees observed that the Fund’s total expense ratio (net of fee waivers and expense reimbursements) of 1.30% fell within the third quartile, compared to the Morningstar Peer Group average of 1.29%, which also fell within the third quartile.
The Trustees also compared the fees paid by the Fund to the fees paid by other separately-managed accounts of the Adviser that were similar to the Fund in terms of investment discipline and asset allocation techniques and noted that the Fund’s management fees were in alignment with the fee charged to the Adviser’s separately-managed accounts.
The Trustees concluded that the Fund’s expenses and the management fees paid to the Adviser were fair and reasonable in light of the comparative performance, expense and management fee information. The Trustees further concluded that the Adviser had maintained adequate profit levels to support its services to the Fund from the revenues of its overall investment advisory business, despite subsidizing the Fund’s operations.
|
4.
|
EXTENT OF ECONOMIES OF SCALE AS THE FUND GROWS
|
The Trustees compared the Fund’s expenses relative to the Morningstar Peer Group and discussed realized and potential economies of scale. The Trustees also reviewed the structure of the Fund’s management fee and whether the Fund was large enough to generate economies of scale for shareholders or whether economies of scale would be expected to be realized as Fund assets grow (and if so, how those economies of scale were being or would be shared with shareholders). The Trustees noted that the Fund’s management fee structure did not contain any breakpoint reductions as the Fund’s assets grow in size, but that the feasibility of incorporating breakpoints would continue to be reviewed on a regular basis. With respect to the Adviser’s fee structure and any applicable expense waivers, the Trustees concluded that the current fee structure was reasonable and reflects a sharing of economies of scale between the Adviser and the Fund at the Fund’s current asset level.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Basis for Trustees’ Approval of Investment Advisory Agreement
(Continued)
|
5.
|
BENEFITS DERIVED FROM THE RELATIONSHIP WITH THE FUND
|
The Trustees considered the direct and indirect benefits that could be realized by the Adviser from its association with the Fund. The Trustees examined the brokerage and commissions of the Adviser with respect to the Fund, noting that the Adviser receives no soft dollar benefits from its relationship with the Fund. The Trustees concluded that the benefits the Adviser may receive, such as greater name recognition, growth in separate account management services or greater exposure to press coverage appear to be reasonable, and in many cases may benefit the Fund through growth in assets.
CONCLUSIONS
The Trustees considered all of the foregoing factors. In considering the renewal of the Agreement, the Trustees did not identify any one factor as all-important, but rather considered these factors collectively in light of the Fund’s surrounding circumstances. Based on this review, the Trustees, including a majority of the Independent Trustees, approved the renewal of the Agreement as being in the best interests of the Fund and its shareholders.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Notice of Privacy Policy & Practices
We collect non-public personal information about you from the following sources:
•
information we receive about you on applications or other forms;
•
information you give us orally; and
•
information about your transactions with us or others.
We do not disclose any non-public personal information about our shareholders or former shareholders without the shareholder’s authorization, except as permitted by law or in response to inquiries from governmental authorities. We may share information with affiliated parties and unaffiliated third parties with whom we have contracts for servicing the Fund. We will provide unaffiliated third parties with only the information necessary to carry out their assigned responsibility. All shareholder records will be disposed of in accordance with applicable law. We maintain physical, electronic and procedural safeguards to protect your non-public personal information and require third parties to treat your non-public personal information with the same high degree of confidentiality.
In the event that you hold shares of the Fund through a financial intermediary, including, but not limited to, a broker-dealer, bank or trust company, the privacy policy of your financial intermediary would govern how your non-public personal information would be shared with unaffiliated third parties.
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Additional Information
(Unaudited)
Tax Information
The Fund designated 89.03% of its ordinary income distribution for the year ended
August 31, 2013, as qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003.
For the year ended August 31, 2013, 90.26% of dividends paid from net ordinary income qualified for the dividends received deduction available to corporate shareholders.
Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide general indemnifications to other parties. 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 has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Information about Trustees
The business and affairs of the Trust are managed under the direction of the Board of Trustees. Information pertaining to the Trustees of the Trust is set forth below. The Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling 877-642-7227.
Independent Trustees
|
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|
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Number of
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|
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|
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Term of
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Principal
|
Portfolios
|
Other
|
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Position(s)
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Office and
|
Occupation(s)
|
in Trust
|
Directorships
|
|
Name,
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Held with
|
Length of
|
During the Past
|
Overseen
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Held by
|
|
Address and Age
|
the Trust
|
Time Served
|
Five Years
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by Trustee
|
Trustee
|
|
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|
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Michael D. Akers, Ph.D.
|
Trustee
|
Indefinite
|
Professor and
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31
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Independent
|
|
615 E. Michigan St.
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|
Term; Since
|
Chair, Department
|
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Trustee, USA
|
|
Milwaukee, WI 53202
|
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August 22,
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of Accounting,
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|
MUTUALS
|
|
Age: 58
|
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2001
|
Marquette University
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(an open-end
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|
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(2004–present).
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investment
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|
|
|
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company with
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two portfolios).
|
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Gary A. Drska
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Trustee
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Indefinite
|
Pilot, Frontier/
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31
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Independent
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|
615 E. Michigan St.
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Term; Since
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Midwest Airlines, Inc.
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Trustee, USA
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Milwaukee, WI 53202
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August 22,
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(airline company)
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MUTUALS
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Age: 56
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2001
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(1986–present).
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(an open-end
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investment
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company with
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two portfolios).
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MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Additional Information (Continued)
(Unaudited)
|
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|
Number of
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|
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Term of
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Principal
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Portfolios
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Other
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Position(s)
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Office and
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Occupation(s)
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in Trust
|
Directorships
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Name,
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Held with
|
Length of
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During the Past
|
Overseen
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Held by
|
|
Address and Age
|
the Trust
|
Time Served
|
Five Years
|
by Trustee
|
Trustee
|
|
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|
|
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Jonas B. Siegel
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Trustee
|
Indefinite
|
Managing Director,
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31
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Independent
|
|
615 E. Michigan St.
|
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Term; Since
|
Chief Administrative
|
|
Trustee, Gottex
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|
Milwaukee, WI 53202
|
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October 23,
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Officer (“CAO”) and
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Multi-Asset
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Age: 70
|
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2009
|
Chief Compliance
|
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Endowment
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Officer (“CCO”),
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fund complex
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Granite Capital
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(three closed-
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International Group,
|
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end investment
|
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L.P. (an investment
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companies);
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management firm)
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Independent
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(1994–2011); Vice
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Trustee, Gottex
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President, Secretary,
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Multi-
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Treasurer and CCO
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Alternatives
|
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of Granum Series
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fund complex
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Trust (an open-end
|
|
(three closed-
|
|
|
|
|
investment company)
|
|
end investment
|
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|
|
(1997–2007);
|
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companies);
|
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President, CAO
|
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Independent
|
|
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and CCO, Granum
|
|
Manager,
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|
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Securities, LLC
|
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Ramius IDF
|
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|
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(a broker-dealer)
|
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fund complex
|
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(1997–2007).
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(two closed-
|
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|
|
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end investment
|
|
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|
|
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companies).
|
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Interested Trustee and Officers
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Joseph C. Neuberger
(1)
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Chairperson
|
Indefinite
|
Executive Vice
|
31
|
Trustee, Buffalo
|
|
615 E. Michigan St.
|
and
|
Term; Since
|
President, U.S.
|
|
Funds (an open-
|
|
Milwaukee, WI 53202
|
Trustee
|
August 22,
|
Bancorp Fund
|
|
end investment
|
|
Age: 51
|
|
2001
|
Services, LLC
|
|
company with
|
|
|
|
|
(1994–present).
|
|
ten portfolios);
|
|
|
|
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Trustee, USA
|
|
|
|
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|
|
MUTUALS (an
|
|
|
|
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open-end
|
|
|
|
|
|
|
investment
|
|
|
|
|
|
|
company with
|
|
|
|
|
|
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two portfolios).
|
|
|
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John Buckel
|
President
|
Indefinite
|
Mutual Fund
|
N/A
|
N/A
|
|
615 E. Michigan St.
|
and
|
Term; Since
|
Administrator,
|
|
|
|
Milwaukee, WI 53202
|
Principal
|
January 24,
|
U.S. Bancorp Fund
|
|
|
|
Age: 56
|
Executive
|
2013
|
Services, LLC
|
|
|
|
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Officer
|
|
(2004–present).
|
|
|
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
Additional Information (Continued)
(Unaudited)
|
|
|
|
|
Number of
|
|
|
|
|
Term of
|
Principal
|
Portfolios
|
Other
|
|
|
Position(s)
|
Office and
|
Occupation(s)
|
in Trust
|
Directorships
|
|
Name,
|
Held with
|
Length of
|
During the Past
|
Overseen
|
Held by
|
|
Address and Age
|
the Trust
|
Time Served
|
Five Years
|
by Trustee
|
Trustee
|
|
|
|
|
|
|
|
|
Jennifer A. Lima
|
Vice
|
Indefinite
|
Mutual Fund
|
N/A
|
N/A
|
|
615 E. Michigan St.
|
President,
|
Term; Since
|
Administrator;
|
|
|
|
Milwaukee, WI 53202
|
Treasurer
|
January 24,
|
U.S. Bancorp Fund
|
|
|
|
Age: 39
|
and
|
2013
|
Services, LLC
|
|
|
|
|
Principal
|
|
(2002–present).
|
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Financial
|
|
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|
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and
|
|
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|
|
|
|
Accounting
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
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|
|
|
|
|
|
Rachel A. Spearo
|
Secretary
|
Indefinite
|
Vice President
|
|
|
|
615 E. Michigan St.
|
|
Term; Since
|
U.S. Bancorp Fund
|
|
|
|
Milwaukee, WI 53202
|
|
November 15,
|
Services, LLC
|
N/A
|
N/A
|
|
Age: 34
|
|
2005
|
(2004–present).
|
|
|
|
|
|
|
|
|
|
|
Robert M. Slotky
|
Vice
|
Indefinite
|
Senior Vice
|
N/A
|
N/A
|
|
615 E. Michigan St.
|
President,
|
Term; Since
|
President,
|
|
|
|
Milwaukee, WI 53202
|
Chief
|
January 26,
|
U.S. Bancorp Fund
|
|
|
|
Age: 66
|
Compliance
|
2011
|
Services, LLC
|
|
|
|
|
Officer and
|
|
(2001–present).
|
|
|
|
|
Anti-Money
|
|
|
|
|
|
|
Laundering
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Jesse J. Schmitting
|
Assistant
|
Indefinite
|
Mutual Fund
|
N/A
|
N/A
|
|
615 E. Michigan St.
|
Treasurer
|
Term; Since
|
Administrator;
|
|
|
|
Milwaukee, WI 53202
|
|
July 21,
|
U.S. Bancorp Fund
|
|
|
|
Age: 31
|
|
2011
|
Services, LLC
|
|
|
|
|
|
|
(2008–present).
|
|
|
|
(1)
|
Mr. Neuberger is an “interested person” of the Trust as defined by the 1940 Act. Mr. Neuberger is an interested person of the Trust by virtue of the fact that he is an interested person of Quasar Distributors, LLC, the Fund’s principal underwriter.
|
A NOTE ON FORWARD LOOKING STATEMENTS (Unaudited)
Except for historical information contained in this report for the Fund, the matters discussed in this report may constitute forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These include any adviser or portfolio manager predictions, assessments, analyses or outlooks for individual securities, industries, market sectors and/or markets. These statements involve risks and uncertainties. In addition to the general risks described for the Fund in the current Prospectus, other factors bearing on this report include the accuracy of the Adviser’s or portfolio managers’ forecasts and predictions, and the appropriateness of the investment programs designed by the Adviser or portfolio managers to implement their strategies efficiently and effectively. Any one or more of these factors, as well as other risks affecting the securities markets and investment instruments generally, could cause the actual results of the Fund to differ materially as compared to benchmarks associated with the Fund.
ADDITIONAL INFORMATION (Unaudited)
The Fund has adopted proxy voting policies and procedures that delegate to the Adviser the authority to vote proxies. A description of the Fund’s proxy voting policies and procedures is available without charge, upon request, by calling the Fund toll free at 1-877-642-7227. A description of these policies and procedures is also included in the Fund’s Statement of Additional Information, which is available on the SEC’s website at
http://www.sec.gov
.
The Fund’s proxy voting record for the most recent 12 month period ended June 30, 2013 is available without charge, upon request, by calling, toll free, 1-877-642-7227, or by accessing the SEC’s website at
http://www.sec.gov
.
The Fund files its complete schedule of portfolio holdings with the SEC four times each fiscal year at quarter-ends. The Fund files the schedule of portfolio holdings with the SEC on Form N-CSR (second and fourth quarters) and on Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at
www.sec.gov
. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the SEC’s Public Reference Room may be obtained by calling 1-202-551-8090 (direct) or 1-800-SEC-0330 (general SEC number).
HOUSEHOLDING
In an effort to decrease costs, the Fund intends to reduce the number of duplicate prospectuses and annual and semi-annual reports you receive by sending only one copy of each to those addresses shared by two or more accounts and to shareholders the Fund reasonably believes are from the same family or household. Once implemented, if you would like to discontinue householding for your accounts, please call toll-free at 1-877-642-7227 to request individual copies of these documents. Once the Fund receives notice to stop householding, the Fund will begin sending individual copies 30 days after receiving your request. This policy does not apply to account statements.
(This Page Intentionally Left Blank.)
MORGAN DEMPSEY SMALL/MICRO CAP VALUE FUND
|
Investment Adviser
|
Morgan Dempsey Capital Management, LLC
|
|
|
309 North Water Street
|
|
|
Suite 510
|
|
|
Milwaukee, Wisconsin 53202
|
|
|
|
|
Legal Counsel
|
Godfrey & Kahn, S.C.
|
|
|
780 North Water Street
|
|
|
Milwaukee, Wisconsin 53202
|
|
|
|
|
Independent Registered Public
|
Cohen Fund Audit Services, Ltd.
|
|
Accounting Firm
|
1350 Euclid Avenue
|
|
|
Suite 800
|
|
|
Cleveland, Ohio 44115
|
|
|
|
|
Transfer Agent, Fund Accountant and
|
U.S. Bancorp Fund Services, LLC
|
|
Fund Administrator
|
615 East Michigan Street
|
|
|
Milwaukee, Wisconsin 53202
|
|
|
|
|
Custodian
|
U.S. Bank, N.A.
|
|
|
Custody Operations
|
|
|
1555 North River Center Drive
|
|
|
Milwaukee, Wisconsin 53212
|
|
|
|
|
Distributor
|
Quasar Distributors, LLC
|
|
|
615 East Michigan Street
|
|
|
Milwaukee, Wisconsin 53202
|
|
|
|
This report is intended for shareholders of the Fund and may not be used as sales literature unless preceded or accompanied by a current prospectus.