N-CSRS 1 cef-ncsrs.htm CORE EQUITY FUND SEMIANNUAL REPORT 3-31-08 cef-ncsrs.htm
As filed with the Securities and Exchange Commission on June 5, 2008

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES




Investment Company Act file number (811-09088)



Empiric Funds, Inc.
(Exact name of registrant as specified in charter)



6300 Bridgepoint Parkway, Building II, Suite 105, Austin, TX  78759
(Address of principal executive offices) (Zip code)



Mark A. Coffelt, President
Empiric Advisors, Inc.
6300 Bridgepoint Parkway, Building II, Suite 105, Austin, TX  78759
(Name and address of agent for service)



513-328-9321
Registrant's telephone number, including area code



Date of fiscal year end: 09/30/2008



Date of reporting period:  03/31/2008




Item 1. Report to Stockholders.


 
 

 




 
 
 

 
 

 
Core Equity Fund
 



Semi-Annual Report
March 31, 2008


This report is for the shareholders of the Empiric Core Equity Fund.  Its use in connection with any offering of the Company’s shares is authorized only in a case of concurrent or prior delivery of the Company’s current prospectus.  Quasar Distributors, LLC is the Distributor of the Fund.




 
 

 

INVESTMENT MANAGER’S REPORT

 
Fellow Shareholders:
 
The Net Asset Value of the Fund’s Class “A” shares for the period ending March 31, 2008 was $29.71 per share.  The Fund’s performance for the last six months was better than the market.  The Fund was down 8.16% while the S&P 500 was down 12.46%, but we  did not produce a positive return.  I expected to do better.  While we were negative for the first quarter of 2008 and six months ending March 31, 2008, we had positive returns and bettered the performance of the S&P 500 and Russell 2000 indices for, 1-, 3-, 5-, 10-years, and since inception, as the chart below indicates.
 
Period
Core Equity
Core Equity
   
Ended 03.31.08
Class A1
Class C2
S&P 500
Russell 2000
Last 3 months
-9.92
-10.08
  -9.44
  -9.90
Last 6 months
-8.16
  -8.49
-12.46
-14.02
Last 12 months
  0.10
  -0.63
  -5.08
-13.00
Last 3 Years
  8.31
       -
   5.85
   5.06
Last 5 Years
22.74
       -
11.32
 14.90
Last 10 Years
  6.26
       -
  3.50
   4.96
Since Inception (A)
12.20
       -
  8.57
   8.22
Since Inception (C)
       -
  6.66
  6.16
   3.93
Gross Expense Ratio
  1.66
  2.41
   
 
Performance data quoted represents past performance which does not guar-antee future results.  Investment returns and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost.  Current performance may be lower or higher than the performance data quoted.  To obtain performance to the most recent month-end, please call 1-800-880-0324, or visit our website at www.EmpiricFunds.com.
 
Additionally, Lipper awarded the Fund a “Lipper Fund” award.  Your Fund was recognized as the best Multi-Cap Value Fund for five- year risk adjusted performance among 267 Multi-Cap Value funds for the period ended December 31,

1
After the maximum sales charge of 5.75%, the returns for the last 3 months, last 6 months, last 12 months, last 3 years, last 5 years, last 10 years and since inception (class A shares, 11.06.95) would be -15.09%, -13.44%, -5.66%, 6.20%, 21.30%, 5.63% and 11.66%, respectively.  The returns shown do not reflect the deduction of taxes that a shareholder may pay on fund distributions or the redemption of fund shares.  Shaded areas indicate highest relative performance.
2
Inception date of Class C shares was 10.07.05.  Class C shares redeemed within 12 months of purchase are subject to a maximum CDSC of 1.00%.  Please see the Share Class Information pages of the Prospectus for more information about the applicable sales charges for each share class.


 
- 1 -

 

INVESTMENT MANAGER’S REPORT


2007.  Keep in mind the mantra we say in our sleep (as taught to us by our attorneys):  Past performance is not a guarantee of future results.
 
Executive Summary
As of March 31st, the Fund holds 103 stocks with the top 10 positions accounting for 22.8% of assets,  which can indicate wide diversification.  Foreign based companies account for approximately 57% of the portfolio, while short positions total about 22%.  With the short sales, we are not forecasting a poor stock market.  Rather, we are just responding to our models which indicate some stocks are facing poor growth prospects with excessive valuations.
 
Comparing the Fund against the S&P 500, the Fund is net short in Technology and Consumer Discretionary stocks, and also underweighted in Financials.  Consumer Staples, Energy, Health, Materials, and Telecom all have weightings higher than weightings in the S&P 500.  Our net short in Technology stocks worked well as Technology stocks fell the most with a 15.2% decline during the six months ended March 31, 2008.  With Health Care and Telecom, we had higher weightings than the S&P 500, and missed on both selection and weights.
 
We think that there is a good possibility that the stock market and your Fund will be positive for 2008 by year-end.  Historically, stocks lead the economy and turn up approximately mid-way in the cycle.  With both the fourth and first quarter GDP growing at 0.6%, the economy is slow, but not officially in recession, and may never get there this cycle.  This may be the most forecasted and press covered downturn ever.  It is worth noting that had inflation been more realistically measured (official statistics may be understating inflation by 1- 2% per year), we would be in the second quarter of recession.  Recession or not, the Federal Reserve has been exceedingly quick and aggressive in addressing any economic weakness.  As a result, the downturn this year will likely be short and shallow.  In fact, we may have already seen it.  It’s the downturn’s next cycle, after the election that I worry about, but that’s for future letters. For the moment, in our opinion a stock upturn in the foreseeable future looks likely.
 
Empiric Funds Investment Approach and Philosophy
Our goal is to produce high returns with low volatility, or mathematically, produce a high Sharpe ratio.  We try to implement that by keeping the Fund focused on the “sweet spots” of the market.  Sweet spots can be thought of in terms of market capitalization, large versus small, and in a value or growth bias to the portfolio.  We also identify sweet spots by industries and sectors, and by the many

 
- 2 -

 

INVESTMENT MANAGER’S REPORT


quantitative models we employ.  Our approach is structured, quantitative and empirical, giving the Fund what we believe is its best chance of performance repeatability.
 
Market Sweet Spots
The economies of the world are being driven by emergence of a broad middle class in China, India, Russia and the Americas.  Along with that middle class growth are fast growing demands for housing, infrastructure, better food and better travel.  The sweet spots, we believe, are those companies that can address the needs of those markets.  As the incipient middle classes grow, they want more meat, which pushes grain prices higher.  One sweet spot is thus the fertilizer companies as farmers struggle to produce higher yields and output.  Infrastructure growth is driving steel stocks and ore producers higher.  Moving from bicycles to automobiles is pushing oil prices, making energy companies another sweet spot.  Higher energy costs combined with high agricultural exports and coal exports are driving railroads.  In short, companies related to commodities and international markets continue to be, we believe, in the market’s sweet spots.
 
Key Drivers of Performance
Most of our gains are consistent with the sweet spots we described.  Our biggest gains in dollar terms were fertilizer companies including Mosaic Company (MOS) up 85%, Potash Corp (POT) up 46% and CF Industries (CF) up 34%.  Closely related is the Swiss agricultural company Syngenta ADR (SYN) up 35%.  Coca-Cola Femsa of Mexico (KOF) was up 31% and is currently our largest holding.  We gained 49% on our Peruvian Compania De Minas Buenaver (BVN), a producer of gold, silver and zinc.  Also in our largest gains were four stocks we held short: Avis Budget Group (CAR), A.C. Moore Arts (ACMR), CBeyond (CBEY) and Pacific Sunwear California (PSUN).
 
The stocks which hurt the most were Aegon NV (AEG) down 23%, and two health maintenance companies, United Healthcare group (UNH) down 32% and Aetna (AET) down 26%.  Dell (DELL) declined 22.8%, and two shorts that went against us, NVR (NVR) and Martin Transport (MRTN) added to the losses.  Posco (PKX) and Veolia Environmental (VE), which have previously been big gainers for us, declined 33% and 18% respectively, while Acergy SA (ACGY) declined about 27%.  Rounding out the losers is Vodaphone (VOD) down some 18%.

 
- 3 -

 

INVESTMENT MANAGER’S REPORT


Market Outlook
In our previous letter, we noted that the Federal Reserve had dropped the federal funds rate twice by a total of 75 basis points to 4.5%.  Only six months later, the federal funds rate is now down to 2%.  We are witness to one of the quickest and most aggressive central bank eases in at least two decades.  We expect this extraordinary attempt to inflate the economy will have positive implications for stocks over the next year.  But in the words of the economist and Army General Leonard P. Ayers:  “It is an immutable economic fact,” said the general, “that There Is No Such Thing As A Free Lunch.”  Economics now even has an acronym:  TINSTAAFL.  Our “free lunch,” courtesy of the Federal Reserve, will likely be paid for with inflation down the road.  Inflation and the fight against inflation are generally not good for stocks, but we are getting ahead of ourselves.
 
As we noted in our summary, had inflation been better measured we would likely be in the fourth or fifth month of recession.  That presumes the downturn started approximately, in November of 2007.  Stocks almost always lead the economy.  Forecasters, including the National Bureau of Economic Research, use stocks as a leading indicator in forecasting the economy.  Since WW2, stocks have on average bottomed six months into recession and turned up before the economy.
 
Given the quick and aggressive easing by the Federal Reserve, and the average upturn of stocks six months into recession, we have probably already seen the bottom for stocks.  More importantly, in the first year after stocks bottom, the S&P 500 is up an average of 37%.3  Now that is not a forecast.  And when one speaks about averages, remember there is frequently lots of variation about an average.  You can be in over your head in a river that, on average, is only six inches deep.  While conditions may change, we think the next year or so will be a reasonably good period for stocks.
 
Further out, we face challenges.  The Federal Reserve will most likely not get inflation under control before the next economic upturn.  Several years out, the next downturn may thus be more protracted and severe.  On the part of the Presidential candidates, there have been many promises, but not much realism on how to pay for those promises.  All the while, Medicaid and Social Security daily become more and more untenable.  Many of our problems would be better handled if the public and our politicians could just remember one idea—TINSTAAFL.  There is no such thing as a free lunch.

3
Leuthold Group, Perception for the Professional, February 2008, Vol. 28, No. 2.

 
- 4 -

 

INVESTMENT MANAGER’S REPORT


We appreciate your confidence in investing along with us.
 
Respectfully submitted,
 



Mark A. Coffelt, CFA

 
For updated investment performance, please visit www.EmpiricFunds.com.  Additionally, shareholders with comments, questions or inputs may contact me at markcoffelt@EmpiricAdvisors.com.
 
Past performance does not guarantee future results.
 
Must be preceded or accompanied by a prospectus.
 
Opinions expressed in this letter are those of the fund manager, are subject to change and are not guaranteed.
 
Mutual fund investing involves risk.  Principal loss is possible. The Fund invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. The Fund invests in foreign securities which involve political, economic and currency risks, greater volatility, and differences in accounting methods. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund’s use of derivative instruments involves the risk that such instruments may not work as intended due to unanticipated developments in market conditions or other causes. Derivatives often involve the risk that the other party to the transaction will be unable to close out the position at any particular time or at an acceptable price. When a Fund uses certain types of derivative instruments for investment purposes, it could lose more than the original cost of the investment and its potential loss could be unlimited.
 
Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.  Please refer to page 6 for a complete listing of fund holdings.
 
The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Russell 2000 Index consists of the smallest 2,000 companies in a group of 3,000 U.S. companies in the Russell 3000 Index, as ranked by market capitalization.  You cannot invest directly in an index.  A basis point is a unit that is equal to 1/100th of 1%.
 
A Lipper Fund Award is awarded to one fund in each Lipper classification for achieving the strongest trend of consistent risk-adjusted performance against its classification peers over a three, five or ten-year period, if applicable.  Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper.  Lipper Analytical Services, Inc. is an independent mutual fund research and rating service.
 
Investors must consult their tax advisor or legal counsel for advice and information concerning their particular tax situation. Neither the Fund nor any of its representatives may give legal or tax advice.
 
The Empiric Funds are distributed by Quasar Distributors, LLC.  (05/08)

 
- 5 -

 

Core Equity Fund
SCHEDULE OF INVESTMENTS

March 31, 2008 (Unaudited)
 
         
Market
 
COMMON STOCKS – 94.72%
 
Shares
   
Value
 
             
CONSUMER DISCRETIONARY – 2.02%
           
             
Home Improvement Retail – 0.94%
           
Lowe’s Companies, Inc.
    25,000     $ 573,500  
                 
Household Appliances – 1.08%
               
Snap-on, Inc.
    13,000       661,050  
Total Consumer Discretionary (Cost $1,315,744)
            1,234,550  
                 
CONSUMER STAPLES – 16.28%
               
                 
Agricultural Products – 0.24%
               
Corn Products International, Inc.
    4,000       148,560  
                 
Brewers – 4.17%
               
Anheuser-Busch Companies, Inc.
    25,000       1,186,250  
Compania Cervecerias Unidas S.A. – ADR^
    38,700       1,367,658  
              2,553,908  
Distillers & Vintners – 2.38%
               
Diageo PLC – ADR^
    17,900       1,455,628  
                 
HyperMarkets & Super Centers – 2.24%
               
Wal-Mart Stores, Inc.
    26,000       1,369,680  
                 
Packaged Foods & Meats – 1.11%
               
Omega ProteinCorp.*
    50,000       682,500  
                 
Soft Drinks – 6.14%
               
The Coca-Cola Co.
    10,000       608,700  
Coca-Cola Femsa S.A.B. de C.V. – ADR^
    39,300       2,213,769  
PepsiCo, Inc.
    13,000       938,600  
              3,761,069  
Total Consumer Staples (Cost $8,137,484)
            9,971,345  
                 
                 
ENERGY – 13.50%
               
                 
Coal & Consumable Fuel – 1.78%
               
Arch Coal, Inc.
    25,000       1,087,500  
 
The accompanying notes are an integral part of these financial statements.

 
- 6 -

 

Core Equity Fund
SCHEDULE OF INVESTMENTS (Continued)

March 31, 2008 (Unaudited)
 
         
Market
 
COMMON STOCKS (Continued)
 
Shares
   
Value
 
             
ENERGY (Continued)
           
             
Integrated Oil & Gas – 6.07%
           
ChevronTexaco Corp.
    3,000     $ 256,080  
ConocoPhillips
    4,000       304,840  
Exxon Mobil Corp.
    11,000       930,380  
Petro-Canada^
    15,800       685,878  
StatoilHydro ASA – ADR^
    16,173       483,088  
Suncor Energy, Inc.^
    11,000       1,059,850  
              3,720,116  
Oil & Gas Equipment & Services – 2.96%
               
Acergy S.A. – ADR^
    52,260       1,115,751  
Schlumberger Ltd.^
    8,000       696,000  
              1,811,751  
Oil & Gas Exploration & Production – 1.59%
               
Canadian Natural Resources Ltd.^
    6,000       409,560  
Nexen, Inc.^
    19,000       562,590  
              972,150  
Oil & Gas Refining & Marketing – 1.10%
               
Sasol Ltd. – ADR^
    14,000       677,460  
Total Energy (Cost $8,988,588)
            8,268,977  
                 
FINANCIALS – 8.67%
               
                 
Diversified Banks – 0.76%
               
Wells Fargo & Co.
    16,000       465,600  
                 
Diversified Financial Services – 2.84%
               
Banco Bilbao Vizcaya Argentaria SA – ADR^
    52,000       1,143,480  
ING Groep NV – ADR^
    16,000       597,920  
              1,741,400  
Life & Health Insurance – 2.11%
               
Aegon NV – ADR^
    51,000       746,640  
 
The accompanying notes are an integral part of these financial statements.

 
- 7 -

 

Core Equity Fund
SCHEDULE OF INVESTMENTS (Continued)

March 31, 2008 (Unaudited)
 
         
Market
 
COMMON STOCKS (Continued)
 
Shares
   
Value
 
             
FINANCIALS (Continued)
           
             
Life & Health Insurance (Continued)
           
Prudential Financial, Inc.
    7,000     $ 547,750  
              1,294,390  
Property & Casualty Insurance – 1.00%
               
W.R. Berkley Corp.
    22,000       609,180  
                 
Reinsurance – 1.96%
               
Reinsurance Group of America, Inc.
    22,000       1,197,680  
Total Financials (Cost $5,739,221)
            5,308,250  
                 
HEALTH – 13.54%
               
                 
Health Care Distributors – 1.61%
               
Cardinal Health, Inc.
    15,000       787,650  
McKesson Corp.
    3,800       199,006  
              986,656  
Health Care Equipment – 1.11%
               
Medtronic, Inc.
    14,000       677,180  
                 
Health Care Services – 2.05%
               
Fresenius Medical Care AG & Co. – ADR^
    25,000       1,258,000  
                 
Health Care Supplies – 0.38%
               
Luxottica Group SpA – ADR^
    9,333       234,818  
                 
Managed Health Care – 5.11%
               
Aetna, Inc.
    24,000       1,010,160  
CIGNA Corp.
    26,000       1,054,820  
UnitedHealth Group, Inc.
    31,000       1,065,160  
              3,130,140  
Pharmaceuticals – 3.28%
               
Johnson & Johnson
    10,000       648,700  
Merck & Co., Inc.
    6,000       227,700  
 
The accompanying notes are an integral part of these financial statements.

 
- 8 -

 

Core Equity Fund
SCHEDULE OF INVESTMENTS (Continued)

March 31, 2008 (Unaudited)
 
         
Market
 
COMMON STOCKS (Continued)
 
Shares
   
Value
 
             
HEALTH (Continued)
           
             
Pharmaceuticals (Continued)
           
Pfizer, Inc.
    54,000     $ 1,130,220  
              2,006,620  
Total Health Care (Cost $9,646,565)
            8,293,414  
                 
INDUSTRIALS – 11.35%
               
                 
Aerospace & Defense – 2.71%
               
Cae, Inc.^
    14,400       162,864  
Lockheed Martin Corp.
    12,000       1,191,600  
Precision Castparts Corp.
    3,000       306,240  
              1,660,704  
Construction & Engineering – 0.83%
               
Chicago Bridge & Iron Co. NV^
    13,000       510,120  
                 
Construction, Farm Machinery & Heavy Trucks – 1.19%
               
CNH Global NV^
    14,000       728,420  
                 
Industrial Conglomerates – 0.07%
               
ABB Ltd. – ADR^
    1,700       45,764  
                 
Industrial Machinery – 0.53%
               
Lincoln Electric Holdings, Inc.
    5,000       322,450  
                 
Marine – 0.12%
               
K-Sea Transportation Partners L.P.
    2,050       72,365  
                 
Railroads – 5.90%
               
Canadian National Railway Co.^
    25,000       1,208,000  
Canadian Pacific Railway Ltd.^
    18,000       1,157,220  
Norfolk Southern Corp.
    23,000       1,249,360  
              3,614,580  
Total Industrials (Cost $7,623,022)
            6,954,403  
 
The accompanying notes are an integral part of these financial statements.

 
- 9 -

 

Core Equity Fund
SCHEDULE OF INVESTMENTS (Continued)

March 31, 2008 (Unaudited)
 
         
Market
 
COMMON STOCKS (Continued)
 
Shares
   
Value
 
             
MATERIALS – 18.11%
           
             
Aluminum – 0.34%
           
Kaiser Aluminum Corp.
    3,000     $ 207,900  
                 
Diversified Metals & Mining – 4.89%
               
BHP Billiton Ltd. – ADR^
    11,000       724,350  
Cia de Minas Buenaventura S.A. – ADR^
    21,000       1,438,500  
Cia Vale do Rio Doce – ADR^
    24,000       831,360  
              2,994,210  
Fertilizers & Agricultural Chemicals – 7.37%
               
Agrium Inc.^
    20,000       1,242,200  
Mosaic Co.*
    2,000       205,200  
Potash Corporation of Saskatchewan^
    6,000       931,260  
Syngenta AG – ADR^
    25,000       1,462,750  
Terra Nitrogen Co. LP
    6,000       669,300  
              4,510,710  
Gold – 2.82%
               
Barrick Gold Corp.^
    10,000       434,500  
Randgold Resources Ltd. – ADR^
    14,000       648,760  
Yamana Gold Inc.^
    44,000       645,565  
              1,728,825  
Steel – 2.69%
               
POSCO – ADR*^
    9,700       1,154,106  
Tenaris SA – ADR^
    10,000       498,500  
              1,652,606  
Total Materials (Cost $8,596,022)
            11,094,251  
                 
TECHNOLOGY – 1.91%
               
                 
Application Software – 1.05%
               
SAP AG – ADR^
    13,000       644,410  
 
The accompanying notes are an integral part of these financial statements.

 
- 10 -

 

Core Equity Fund
SCHEDULE OF INVESTMENTS (Continued)

March 31, 2008 (Unaudited)
 
         
Market
 
COMMON STOCKS (Continued)
 
Shares
   
Value
 
             
TECHNOLOGY (Continued)
           
             
IT Consulting & Services – 0.86%
           
Accenture Ltd.^
    15,000     $ 527,550  
Total Technology (Cost $1,156,800)
            1,171,960  
                 
TELECOMMUNICATION SERVICES – 7.07%
               
                 
Integrated Telecommunication Services – 0.33%
               
Philippine Long Distance Telephone Co. – ADR^
    3,000       199,380  
                 
Wireless Telecommunication Services – 6.74%
               
China Mobile Ltd. – ADR^
    4,000       300,040  
Mobile Telesystems – ADR*^
    14,000       1,061,900  
Partner Communications Co. Ltd. – ADR^
    11,000       246,950  
SK Telecom Co., Ltd. – ADR*^
    20,000       432,200  
Turkcell Iletisim Hizmet AS – ADR^
    22,000       459,580  
Vimpel-Communications – ADR^
    16,000       478,240  
Vodafone Group PLC New – ADR^
    39,000       1,150,890  
              4,129,800  
Total Telecommunication Services (Cost $4,633,689)
            4,329,180  
                 
UTILITIES – 2.27%
               
                 
Electric Utilities – 0.12%
               
National Grid Transco PLC – ADR^
    1,100       76,923  
                 
Water Utilities – 2.15%
               
Veolia Environnement – ADR^
    18,800       1,314,684  
Total Utilities (Cost $918,989)
            1,391,607  
                 
TOTAL COMMON STOCKS
               
  (Cost $56,756,124)
            58,017,937  
 
The accompanying notes are an integral part of these financial statements.

 
- 11 -

 

Core Equity Fund
SCHEDULE OF INVESTMENTS (Continued)

March 31, 2008 (Unaudited)
 
   
Principal
   
Market
 
SHORT-TERM INVESTMENTS – 5.62%
 
Amount
   
Value
 
             
Commercial Paper – 3.84%
           
General Electric Capital,  2.052% 04/01/2008
  $ 2,350,000     $ 2,350,000  
                 
Variable Rate Demand Notes# – 1.78%
               
Wisconsin Corporate Central Credit Union, 4.99%
    1,090,688       1,090,688  
TOTAL SHORT-TERM INVESTMENTS
               
  (Cost $3,440,688)
            3,440,688  
TOTAL INVESTMENTS
               
  (Cost $60,196,812) – 100.34%
            61,458,625  
Liabilities in Excess of Other Assets – (0.34%)
            (205,242 )
TOTAL NET ASSETS – 100.00%
          $ 61,253,383  

Percentages are stated as a percent of net assets.
ADR – American Depository Receipt
*
Non Income Producing
^
Foreign Issued Security
#
Variable rate demand notes are considered short-term obligations and are payable on demand.  Interest rates change periodically on specified dates. The rate shown are as of March 31, 2008.
 
The accompanying notes are an integral part of these financial statements.

 
- 12 -

 

Core Equity Fund
SCHEDULE OF SECURITIES SOLD SHORT

March 31, 2008 (Unaudited)
 
   
Shares
   
Value
 
AC Moore Arts & Crafts, Inc.*
    16,574     $ 113,035  
Cavium Networks, Inc.*
    25,000       410,000  
Cbeyond, Inc.*
    37,000       695,230  
CompuCredit Corp.*
    34,000       301,580  
Cree, Inc.*
    25,000       699,000  
Equinix, Inc.*
    8,000       531,920  
Exar Corp.*
    57,200       470,756  
GSI Commerce, Inc.*
    70,000       920,500  
Hutchinson Technology, Inc.*
    64,000       1,018,240  
Innerworkings, Inc.*
    66,000       925,980  
InterDigital, Inc.*
    16,000       316,960  
KBW Inc.*
    39,000       859,950  
Lamar Advertising Co.
    24,000       862,320  
LoopNet, Inc.*
    25,000       317,500  
Lululemon Athletica, Inc.*
    9,000       255,870  
MarineMax, Inc.*
    64,307       801,265  
Morgans Hotel Group*
    32,000       474,240  
Rambus, Inc.*
    20,000       466,200  
SBA Communications Corp.*
    24,000       715,920  
Supertex, Inc.*
    13,000       265,330  
Synchronoss Technologies, Inc.*
    22,000       440,660  
Tellabs, Inc.*
    55,000       299,750  
Veeco Instruments, Inc.*
    40,000       665,200  
VistaPrint Limited*^
    21,000       733,950  
TOTAL SECURITIES SOLD SHORT
               
  (Proceeds $14,246,908)
          $ 13,561,356  

*
Non Income Producing
^
Foreign Issued Security
 
The accompanying notes are an integral part of these financial statements.

 
- 13 -

 

Core Equity Fund
ALLOCATION BY SECTOR

As of March 31, 2008 (Unaudited)


 
Percentages are based upon net assets.
 
Top 10 Securities*:
 
Market Value
 
Top 10 Industries*:
 
Market Value
 
Coca-Cola Femsa
     
Fertilizers &
     
  S.A.B. de C.V. – ADR
  $ 2,213,769  
  Agricultural Chemicals
  $ 4,510,710  
Syngenta AG – ADR
    1,462,750  
Wireless
       
Diageo PLC – ADR
    1,455,628  
  Telecommunication
       
Cia de Minas
       
  Services
    4,129,800  
  Buenaventura S.A. – ADR
    1,438,500  
Soft Drinks
    3,761,069  
Wal-Mart Stores, Inc.
    1,369,680  
Integrated Oil & Gas
    3,720,116  
Compania Cervecerias
       
Railroads
    3,614,580  
  Unidas S.A. – ADR
    1,367,658  
Managed Health Care
    3,130,140  
Veolia
       
Diversified Metals
       
  Environnement – ADR
    1,314,684  
  & Mining
    2,994,210  
Fresenius Medical
       
Brewers
    2,553,908  
  Care AG & Co. – ADR
    1,258,000  
Pharmaceuticals
    2,006,620  
Norfolk Southern Corp.
    1,249,360  
Oil & Gas Equipment
       
Agrium Inc.
    1,242,200  
  & Services
    1,811,751  
    $ 14,372,229       $ 32,232,904  

*   Excludes Cash and Short-term Investments.
 
The accompanying notes are an integral part of these financial statements.

 
- 14 -

 

Core Equity Fund
STATEMENTS OF ASSETS & LIABILITIES

March 31, 2008 (Unaudited)


ASSETS:
     
Investments, at value (cost of $60,196,812)
  $ 61,458,625  
Cash
    867,450  
Deposits at broker for securities sold short
    13,263,132  
Receivable for securities sold
    235,729  
Receivable for capital shares sold
    88,453  
Dividends and interest receivable
    81,109  
Total assets
    75,994,498  
LIABILITIES:
       
Securities sold short (proceeds $14,246,908)
    13,561,356  
Payables:
       
Securities purchased
    998,784  
Fund shares purchased
    46,616  
Advisory fee
    53,575  
Administration fee
    21,438  
Distribution fees
    53,609  
Custody fees
    3,804  
Interest fees
    1,933  
Total liabilities
    14,741,115  
NET ASSETS
  $ 61,253,383  
NET ASSETS CONSIST OF:
       
Paid in capital
  $ 56,711,720  
Undistributed net investment income
    190,663  
Undistributed net realized gain on investments
    2,403,520  
Net unrealized appreciation on
       
Investments
    1,261,813  
Securities sold short
    685,552  
Foreign currency translation
    115  
NET ASSETS
  $ 61,253,383  
Class A:
       
Net assets applicable to outstanding Class A shares
  $ 58,481,453  
Shares issued ($25,000,000 shares of
       
  beneficial interest authorized, $0.0001 par value)
    1,969,403  
Net asset value and redemption price per share
  $ 29.70  
Maximum offering price per share (net asset value divided by 94.25%)
  $ 31.51  
Class C:
       
Net assets applicable to outstanding Class C shares
  $ 2,771,930  
Shares issued ($25,000,000 of
       
  beneficial interest authorized, $0.0001 par value)
    94,742  
Net asset value, offering price and redemption price per share*
  $ 29.26  

*   Redemption price per share is equal to net asset value less any applicable sales charges.
 
The accompanying notes are an integral part of these financial statements.

 
- 15 -

 

Core Equity Fund
STATEMENT OF OPERATIONS

For the Period Ended March 31, 2008 (Unaudited)
 
INVESTMENT INCOME:
     
Dividends (net of foreign taxes withheld of $30,998)
  $ 471,140  
Interest
    299,118  
Total investment income
    770,258  
         
EXPENSES:
       
Investment advisory fees (Note 3)
    343,331  
Administration fees (Note 3)
    134,134  
Distribution fees (Note 3)
       
Distribution fees – Class A
    82,167  
Distribution fees – Class C
    14,653  
Custody fees
    4,144  
Dividends on short sale positions
    1,280  
Interest Expense
    7  
Total expenses
    579,716  
NET INVESTMENT INCOME
    190,542  
         
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
       
Net realized gain (loss) on:
       
Investments
    1,960,663  
Securities sold short
    443,135  
Foreign currency translations
    (148 )
In-kind redemptions (Note 2)
    109,724  
Net change in unrealized gain (loss) on:
       
Investments
    (8,911,359 )
Securities sold short
    700,554  
Foreign currency translations
    115  
Net realized and unrealized gain (loss) on investments
    (5,697,316 )
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
  $ (5,506,774 )
 
The accompanying notes are an integral part of these financial statements.

 
- 16 -

 

Core Equity Fund
STATEMENTS OF CHANGES IN NET ASSETS


 
   
Period Ended
   
Year Ended
 
   
March 31, 2008
   
September 30,
 
   
(Unaudited)
   
2007
 
OPERATIONS:
           
Net investment income (loss)
  $ 190,542     $ 465,768  
Net realized gain (loss) on:
               
Investments transactions
    2,403,650       14,887,634  
In-kind redemptions
    109,724        
Net change in unrealized appreciation on investments
    (8,210,690 )     893,531  
Net increase (decrease) in net assets
               
  resulting from operations
    (5,506,774 )     16,246,933  
                 
DISTRIBUTIONS TO SHAREHOLDERS FROM:
               
Net realized gains
               
Class A
    (13,013,949 )     (3,214,989 )
Class C
    (562,289 )     (122,025 )
Net investment income
               
Class A
    (455,954 )      
Class C
           
Total distributions
    (14,032,192 )     (3,337,014 )
                 
CAPITAL SHARE TRANSACTIONS: (a)
               
Proceeds from shares sold
               
Class A shares
    3,988,396       6,555,998  
Class C shares
    219,975       419,722  
Proceeds from shares issued to holders in
               
  reinvestment of dividends
               
Class A shares
    13,069,352       3,043,870  
Class C shares
    558,075       119,963  
Cost of shares redeemed
               
Class A shares
    (10,172,960 )     (29,906,682 )
Class C shares
    (104,358 )     (1,050,660 )
Net increase (decrease) in net assets
               
  from capital share transactions (a)
    7,558,480       (20,817,789 )
Total increase (decrease) in net assets
    (11,980,486 )     (7,907,870 )
                 
NET ASSETS:
               
Beginning of period
    73,233,869       81,141,739  
End of period (includes $190,663 and $456,075 of
               
  undistributed net investment income, respectively)
  $ 61,253,383     $ 73,233,869  

– Continued –


The accompanying notes are an integral part of these financial statements.

 
- 17 -

 

Core Equity Fund
STATEMENTS OF CHANGES IN NET ASSETS (Continued)


 
   
Period Ended
   
Year Ended
 
   
March 31, 2008
   
September 30,
 
   
(Unaudited)
   
2007
 
(a)  Changes in Shares Outstanding:
           
             
Class A
           
Shares sold
    124,272       180,932  
Shares reinvested
    383,598       89,106  
Shares redeemed
    (312,361 )     (833,217 )
Net increase (decrease) in capital shares
    195,509       (563,179 )
Shares Outstanding:
               
Beginning of period
    1,773,894       2,337,073  
End of period
    1,969,403       1,773,894  
                 
Class C
               
Shares sold
    6,766       11,744  
Shares reinvested
    16,659       3,541  
Shares redeemed
    (3,379 )     (29,518 )
Net increase (decrease) in capital shares
    20,046       (14,233 )
Shares Outstanding:
               
Beginning of period
    74,696       88,929  
End of period
    94,742       74,696  
 

The accompanying notes are an integral part of these financial statements.

 
- 18 -

 

Core Equity Fund
FINANCIAL HIGHLIGHTS

For a capital share outstanding throughout each period

Class A
   
Six Months
                               
   
Ended
                               
   
March 31,
                               
   
2008
   
Year Ended September 30,
 
   
(Unaudited)
   
2007
   
2006
   
2005
   
2004
   
2003
 
NET ASSET VALUE –
                                   
  BEGINNING OF PERIOD
  $ 39.64     $ 33.46     $ 32.91     $ 26.30     $ 19.93     $ 14.70  
                                                 
INCOME FROM
                                               
  INVESTMENT OPERATIONS:
                                               
Net investment income (loss)
    0.06       0.26       (0.10 )     (0.03 )     (0.11 )     (0.20 )
Net realized and unrealized
                                               
  gain (loss) on investments
    (2.36 )     7.40       0.65       6.64       6.48       5.43  
Total from investment operations
    (2.30 )     7.66       0.55       6.61       6.37       5.23  
                                                 
LESS DISTRIBUTIONS:
                                               
Dividends from net investment income
    (0.22 )                              
Distributions from net realized gains
    (7.42 )     (1.48 )                        
Total distributions
    (7.64 )     (1.48 )                        
                                                 
NET ASSET VALUE –
                                               
  END OF PERIOD
  $ 29.70     $ 39.64     $ 33.46     $ 32.91     $ 26.30     $ 19.93  
                                                 
TOTAL RETURN
    (8.16 %)+     23.6 %     1.7 %     25.1 %     32.0 %     35.6 %
                                                 
RATIOS AND
                                               
  SUPPLEMENTAL DATA:
                                               
Net assets, end of period (thousands)
  $ 58,481     $ 70,316     $ 78,187     $ 77,603     $ 40,370     $ 26,029  
Ratio of operating expenses
                                               
  to average net assets
 
1.65
%^     1.65 %     1.67 %     1.68 %     1.78 %     1.93 %
Ratio of operating expenses excluding
                                               
  interest expense and dividend payments
                                               
  on short positions to average net assets
 
1.65
%^     1.64 %     1.62 %     1.68 %     1.78 %     1.93 %
Ratio of net investment income
                                               
  to average net assets
 
0.59
%^     0.64 %     (0.28 )%     (0.13 )%     (0.45 )%     (1.28 )%
Portfolio turnover rate
    82.5 %+     89.7 %     147.7 %     122.0 %     171.9 %     260.2 %

+
Not Annualized
^
Annualized
 
The accompanying notes are an integral part of these financial statements.

 
- 19 -

 

Core Equity Fund
FINANCIAL HIGHLIGHTS

For a capital share outstanding throughout each period
 
Class C
   
Six Months
             
   
Ended
         
October 7, 2005
 
   
March 31,
   
Year Ended
   
through
 
   
2008
   
September 30,
   
September 30,
 
   
(Unaudited)
   
2007
   
2006*
 
NET ASSET VALUE –
                   
  BEGINNING OF PERIOD
  $ 39.06     $ 33.22     $ 31.80  
                         
INCOME FROM
                       
  INVESTMENT OPERATIONS:
                       
Net investment income (loss)
    (0.02 )     (0.04 )     (0.21 )
Net realized and unrealized
                       
  gain (loss) on investments
    (2.36 )     7.36       1.63  
Total from investment operations
    (2.38 )     7.32       1.42  
                         
LESS DISTRIBUTIONS:
                       
Dividends from net investment income
                 
Distributions from net realized gains
    (7.42 )     (1.48 )      
Total distributions
    (7.42 )     (1.48 )      
                         
NET ASSET VALUE –
                       
  END OF PERIOD
  $ 29.26     $ 39.06     $ 33.22  
                         
TOTAL RETURN
    (8.49 %)+     22.7 %     4.5 %+
                         
RATIOS AND SUPPLEMENTAL DATA:
                       
Net assets, end of year (thousands)
  $ 2,772     $ 2,917     $ 2,954  
Ratio of operating expenses
                       
  to average net assets
 
2.40
%^     2.40 %  
2.42
%^
Ratio of operating expenses excluding
                       
  interest expenses and dividend payments
                       
  on short positions to average net assets
 
2.40
%^     2.39 %  
2.37
%^
Ratio of net investment income
                       
  to average net assets
 
(0.16
)%^     (0.11 )%  
(1.02
)%^
Portfolio turnover rate
    82.5 %+     89.7 %     147.7 %+
 
*
Commencement of operations for Class C shares was October 7, 2005.
+
Not Annualized
^
Annualized
 
The accompanying notes are an integral part of these financial statements.

 
- 20 -

 

Core Equity Fund
STATEMENT OF CASH FLOWS

For the Six Months Ended March 31, 2008 (Unaudited)
 
INCREASE (DECREASE) IN CASH —
     
       
CASH FLOWS FROM OPERATING ACTIVITIES:
     
Net decrease in net assets from operations
  $ (5,506,774 )
Adjustments to reconcile net increase (decrease) in net assets
       
  from operations to net cash used in operating activities:
       
Purchases of investments
    (48,770,067 )
Proceeds for dispositions of investment securities
    49,962,150  
Sale of short term investments, net
    6,395,683  
Decrease in receivable for securities sold
    114,865  
Increase in deposits with brokers for short sales
    (12,227,854 )
Decrease in dividend and interest receivable
    22,561  
Increase in securities sold short
    12,511,076  
Decrease in payable for securities purchased
    (1,978,362 )
Decrease in accrued management fees
    (4,879 )
Decrease in accrued administration fees
    (1,176 )
Increase in distribution fees
    30,283  
Increase in custody fees
    1,408  
Increase in interest expenses
    1,907  
Unrealized depreciation on securities
    8,911,359  
Net realized gains on investments
    (2,069,782 )
Net cash used in operating activities
    7,392,398  
         
CASH FLOWS FROM FINANCING ACTIVITIES:
       
Proceeds from shares sold
    4,130,257  
Payment on shares redeemed
    (10,250,929 )
Distributions paid in cash
    (404,765 )
Net cash used in financing activities
    (6,525,437 )
         
Net increase in cash
    866,961  
         
Cash:
       
Beginning balance
    489  
Ending balance
  $ 867,450  
         
Supplemental information:
       
Cash paid for interest on loan outstanding
  $ 7  
 
The accompanying notes are an integral part of these financial statements.

 
- 21 -

 

NOTES TO FINANCIAL STATEMENTS

March 31, 2008 (Unaudited)
 
1.
ORGANIZATION
   
 
Empiric Funds, Inc. (formerly, Texas Capital Value Funds, Inc.) was incorporated on June 26, 1995 as a Maryland Corporation and is registered under the Investment Company Act of 1940 (the “’40 Act”) as a non-diversified, open-end management investment company.  The Core Equity Fund (formerly, Value & Growth Portfolio) (the “Fund”) is a series of the Empiric Funds, Inc. (the “Corporation”).  The Fund offers Class A and Class C shares.  Each class of shares differs principally in its respective distribution expenses and sales charges, if any.  Each class of shares has identical rights to earnings, assets and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only individual classes.  The Fund’s Class A shares commenced operations on November 6, 1995.  The Fund’s Class C shares commenced operations on October 7, 2005.  Prior to October 7, 2005, the shares of the Fund had no specific class designation.  As of that date, all of the then outstanding shares were re-designated as Class A shares.  The Fund’s investment objective is capital appreciation.  The following is a summary of significant accounting policies followed by the Fund in the preparation of the financial statements.  The policies are in conformity with accounting principles generally accepted in the United States of America.
   
2.
SIGNIFICANT ACCOUNTING POLICIES
   
 
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements.  These policies are in conformity with accounting principles generally accepted in the United States.
 
 
a)
Valuation of Securities – Securities that are listed on national securities exchanges or the NASDAQ National Market System are valued as of the close of business of the exchange on each business day which that exchange is open (presently 4:00 pm Eastern time).  Unlisted securities that are not included in such System are valued at the bid prices in the over-the-counter-market.  Securities and other assets for which market quotations are not readily available are valued at fair value as determined in good faith by the Advisor under procedures established by and under the general supervision and responsibility of the Fund’s Board of Directors.  Short-term investments are valued at amortized cost, if their original maturity was 60 days or less, or by amortizing the values as of the 61st day prior to maturity, if their original term to maturity exceeded 60 days.
     
 
b)
Federal Income Taxes – It is the Fund’s policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable net income to its shareholders.  In addition, the Fund intends to pay distributions as required to avoid imposition of excise tax.  Therefore, no federal income tax provision is required.

 
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NOTES TO FINANCIAL STATEMENTS (Continued)

March 31, 2008 (Unaudited)
 
 
c)
Security Transactions, Income and Other – Investment and shareowner transactions are recorded on the trade date.  Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund, and interest income is recognized on an accrual basis.  Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains or losses on investments are allocated to each class of shares based on its respective shares outstanding.
     
 
d)
Distributions to Shareholders – Distributions from net investment income and realized gains, if any, are recorded on the ex-dividend date.  The Fund may periodically make reclassifications among certain of its capital accounts as a result of the recognition and characterization of certain income and capital gain distributions determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America.  These principles require that permanent financial reporting and tax differences be reclassified in the capital accounts.  These differences primarily relate to partnership, foreign currency and investments in Passive Foreign Investment Companies with differing book and tax methods for accounting.  For the year ended September 30, 2007, the Fund’s most recent fiscal year end, the Fund increased paid-in capital by $15,009, decreased undistributed net investment by $9,693 and decreased undistributed net realized gains on investments by $5,316.
     
 
e)
Short Sale Transactions –  The Fund may not purchase securities on margin or effect short sales, except that the Fund may: (a) obtain short-term credits necessary for the clearance of security transactions; (b) provide initial and variation margin payments in connection with transactions involving futures contracts and options on such contracts; and (c) make short sales “against the box” (i.e., owning an equal amount of the security itself, or of securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue and equal in amount to the security sold short) or in compliance with the Securities and Exchange Commission’s positions regarding the asset segregation requirements of Section 18 of the ’40 Act.
     
 
f)
Foreign Risk – Investments in foreign securities entail certain risks.  There may be a possibility of nationalization or expropriation of assets, confiscatory taxation, political or financial instability, and diplomatic developments that could affect the value of the Fund’s investments in certain foreign countries.  Since foreign securities normally are denominated and traded in foreign currencies, the value of the Fund’s assets may be affected favorably or unfavorably by currency exchange rates, currency exchange control regulations, foreign withholding taxes, and restrictions or prohibitions on the repatriation of foreign currencies.  There may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign

 
- 23 -

 

NOTES TO FINANCIAL STATEMENTS (Continued)

March 31, 2008 (Unaudited)
 
   
issuers are not generally subject to accounting, auditing, and financial reporting standards and practices comparable to those in the United States.  The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers.
     
   
In addition to securities traded principally in securities markets outside the United States and securities denominated in foreign currencies, the Fund may invest in American Depository Receipts (ADRs).  ADRs generally are U.S. dollar-denominated receipts issued by domestic banks representing the deposit with the bank of securities of a foreign issuer, and are traded on exchanges or over-the-counter in the United States.  Because an ADR represents an indirect investment in securities of a foreign issuer, investments in ADRs are subject to the risks associated with foreign securities generally, as described above.
     
 
g)
Derivative Financial Instruments and Other Investment Strategies – The Fund may engage in various portfolio strategies, to the extent that they are consistent with the Fund’s investment objectives and limitations, to attempt to hedge against changes in net asset value or to attempt to realize a greater current return.  The use of these instruments involves certain risks, including the possibility that the value of the underlying assets or indices fluctuate, the derivative becomes illiquid, imperfect correlation exists between the value of the derivative and the underlying assets or indices, or that the counterparty fails to perform its obligations when due.
     
 
h)
Use of Estimates – The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expense during the reporting period.  Actual results could differ from those estimates.
     
 
i)
Accounting for Uncertainty in Income Taxes – Effective March 30, 2008, the Fund adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”  FIN 48 requires the evaluation of tax positions taken on previously filed tax returns or expected to be taken on future returns.  These positions must meet a “more likely than not” standard that, based on the technical merits, have a more than fifty percent likelihood of being sustained upon examination.  In evaluating whether a tax position has met the recognition threshold, the Fund must presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information.  Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax expense in the current year.

 
- 24 -

 

NOTES TO FINANCIAL STATEMENTS (Continued)

March 31, 2008 (Unaudited)
 
   
FIN 48 requires the Fund to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions.  Open tax years are those that are open for examination by taxing authorities.  Major jurisdictions for the Fund include Federal and state of Maryland.  As of March 30, 2008, open Federal and Maryland tax years include the tax years ended September 30, 2004 through 2006.  The Fund has no examination in progress.
     
   
The Fund has reviewed all open tax years and major jurisdictions and concluded that the adoption of FIN 48 resulted in no effect to the Fund’s financial position or results of operations.  There is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on the tax return for the fiscal year-end September 30, 2007.  The Fund is also 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.
     
 
j)
Recently Issued Accounting Pronouncement – In September 2006, FASB issued Statement on Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.”  This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements.  SFAS No. 157 applies to fair value measurements already required or permitted by existing standards.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The Fund believes the adoption of SFAS 157 will have no material impact on its financial statements.
     
 
k)
In-Kind Redemptions – During the period ended March 31, 2008, the Empiric Core Equity Fund realized $109,724 of net capital gains resulting from an in-kind redemption.  A shareholder exchanged fund shares for securities held by the Fund rather than for cash.  Because such gains are not taxable to the Fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized gains and losses to paid-in-capital.  Such reclassification has no effect on the Fund’s net assets.

3.
INVESTMENT ADVISORY AND OTHER AGREEMENTS
   
 
Investment Advisory and Administration Agreements
 
The Fund has an investment advisory agreement with the Advisor, Empiric Advisors, Inc. (formerly, First Austin Capital Management, Inc.), pursuant to which the Advisor receives a fee, computed daily, at an annual rate of 1.0% of the average daily net assets.  The Advisor provides continuous supervision of the investment portfolio and pays the cost of compensation of the officers of the Fund, occupancy and certain clerical and administrative costs involved in the day to day operations of the Fund.

 

 
- 25 -

 

NOTES TO FINANCIAL STATEMENTS (Continued)

March 31, 2008 (Unaudited)
 
 
In addition, the Advisor is acting as the administrator to the Fund.  For this service, the Advisor receives a fee, computed daily based on the Fund’s average daily net assets at an annual rate of .70% on the first $5 million, .50% on the next $25 million, .28% on the next $70 million, .25% on the next $100 million, and .20% for over $200 million of each series.  The Advisor bears most of the operating expenses of the Fund including legal, audit, printing, and insurance.
   
 
Transactions with Empiric Distributors, Inc.
 
The Advisor owns an interest in Empiric Distributors, Inc. (formerly, Texas Capital, Inc.), a registered broker-dealer.  For the six month period ended March 31, 2008, the Fund transacted $63,305.08 in commissions through Empiric Distributors, Inc.  All transactions were at $0.035 per share through November 7, 2007, after which all transactions were at $0.030 per share, or at rates considered competitive with comparable transactions elsewhere.  The Board reviews affiliated transactions quarterly.
   
 
Distribution Agreement and Plan
 
The Fund has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the ’40 Act under which the Fund contracts with registered broker-dealers and their agents to distribute shares of the Fund.  The Plan authorizes payments by the Fund in connection with the distribution of its shares at an annual rate, as determined from time to time by the Board of Directors, of up to 0.25% of the average daily net assets for the Fund’s Class A shares.  The Fund’s Class C shares allow for up to 1.00% of the average daily net assets.  For the six month period ended March 31, 2008, the Fund incurred Distribution expenses of $82,167 for the Class A shares and $14,653 for the Class C shares pursuant to the Plan.  The amount of sales charge retained by the distributor was $4,685.
 
Certain officers and directors of the Fund are also officers and/or directors of the Advisor.
   
4.
LINE OF CREDIT
   
 
The Fund has a $9 million unsecured line of credit with U.S. Bank, N.A., intended to provide short-term financing, if necessary, subject to certain restrictions, in connection with shareholder redemptions.  Borrowings under this arrangement bear interest at the bank’s prime rate.  At March 31, 2008, the Fund had $0 outstanding.  Based upon balances outstanding during the year, the weighted average interest rate was 7.50% and the weighted average amount outstanding was $180.
   
5.
PURCHASES AND SALES OF SECURITIES
   
 
For the six month period ending March 31, 2008, the cost of purchases were $48,770,067 and the proceeds from sales of securities, excluding short-term securities, were $49,962,150, for the Fund.

 
- 26 -

 

NOTES TO FINANCIAL STATEMENTS (Continued)

March 31, 2008 (Unaudited)
 
6.
FEDERAL TAX INFORMATION
   
 
As of September 30, 2007, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) on a tax basis were as follows:

 
Cost of investments (a)
  $ 65,714,796  
           
 
Gross unrealized appreciation
  $ 10,793,015  
 
Gross unrealized depreciation
    (619,843 )
 
Net unrealized appreciation
  $ 10,173,172  
           
 
Undistributed ordinary income