<PAGE> 1
THE KELMOORE STRATEGY(TM) COVERED OPTION FUND
[LIGHTBULB GRAPHIC]
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE> 2
Dear Shareholder:
We are pleased to present the first annual report to shareholders of The
Kelmoore Strategy(TM) Covered Option Fund (the "Fund"). This report covers the
period from the Fund's inception on May 3, 1999 to February 29, 2000.
The Fund's Class C shares returned 5.54% for the period. The Fund's Class A
shares were introduced on October 25, 1999, and returned 4.55%+ for the
abbreviated period. The Dow Jones Industrial Average(SM)* was down 6.8% for the
period while the Lehman Brothers Corporate Bond Intermediate Total Return
Index(TM)* was down 1.61% for the same period.
Despite a period of negative returns for both of the Fund's stated benchmarks,
the Fund was able to realize gains by continually writing covered options
against a forty stock universe of highly capitalized domestic equities. The Fund
paid one dollar and seventy-four cents per share in dividends during the period.
The dividends consisted of realized short-term gains, and interest and dividends
received, net of expenses.
The Fund pays dividends on a monthly basis to shareholders of record on the
second-to-last day of the month, with the last day of the month being the
ex-dividend date and payable date. Dividends reflect all amounts accrued and
unpaid as of the first business day of the month after options expiration day
(set by the Options Clearing Corporation).
We are delighted with the growth and performance of the Fund during its first
year. The introduction of the Class A shares helped to broaden the appeal of the
Fund. The net assets of the Fund grew to better than one hundred forty million
dollars during the period. On February 18th, 2000, the Trustees approved a
change of name of The Kelmoore Strategy(TM) Covered Option Fund to The Kelmoore
Strategy(TM) Fund.
We encourage all shareholders to visit us on the web at www.kelmoore.com. Here
you will find the Fund's daily net asset value, performance charts, and a
downloadable version of the prospectus.
Sincerely,
/s/ Matthew Kelmon
Matthew Kelmon
President and Portfolio Manager
* The Dow Jones Industrial Average(SM) and Lehman Brothers Corporate Bond
Intermediate Total Return Index(TM) are unmanaged indexes.
+ Total return calculation does not reflect sales load.
1
<PAGE> 3
THE KELMOORE STRATEGY (TM) COVERED OPTION FUND PERFORMANCE
PERIOD ENDED FEBRUARY 29, 2000
The graphs below compare the increase in value of a $10,000 investment in the
Fund with the performance of the Dow Jones Industrial Average and the Lehman
Brothers Corporate Bond Intermediate Total Return Index. The values for the Fund
include reinvested dividends. The Class A graph includes the impact of the
maximum sales charge placed on purchases.
CLASS C
[GRAPH OMITTED]
CLASS A
[GRAPH OMITTED]
2
<PAGE> 4
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND
PORTFOLIO OF INVESTMENTS FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------ --------
<S> <C> <C>
COMMON STOCKS - 100.7%++
CONSUMER GOODS - 19.9%
28,000 General Mills, Inc. .................. $ 922,250
40,000 The Gillette Co. ..................... 1,410,000
75,000 The Home Depot, Inc. ................. 4,335,937
100,000 Johnson & Johnson .................... 7,175,000
45,000 McDonald's Corp. ..................... 1,420,313
73,000 Merck & Co., Inc. .................... 4,494,062
21,900 The Procter & Gamble Co. ............. 1,927,200
75,000 Wal-Mart Stores, Inc. ................ 3,651,563
35,000 Walgreen Co. ......................... 903,437
------------
26,239,762
------------
FINANCIAL SERVICES - 19.7%
20,000 The Allstate Corp. ................... 390,000
20,000 American Express Co. ................. 2,683,750
70,000 Bank of America Corp. ................ 3,224,375
75,000 Citigroup, Inc. ...................... 3,876,563
10,000 Fannie Mae ........................... 530,000
22,000 FleetBoston Financial Corp. .......... 599,500
60,000 Merrill Lynch & Co., Inc. ............ 6,150,000
120,000 Morgan Stanley
Dean Witter & Co. .................... 8,452,500
------------
25,906,688
------------
MANUFACTURING - 24.0%
50,000 Eastman Kodak Co. .................... 2,865,625
70,000 Ford Motor Co. ....................... 2,913,750
75,000 General Electric Co. ................. 9,914,062
100,000 General Motors Corp. ................. 7,606,250
70,000 International Paper Co. .............. 2,576,875
50,000 Minnesota Mining &
Manufacturing Co. .................... 4,406,250
59,300 Xerox Corp. .......................... 1,286,069
------------
31,568,881
------------
RESOURCES - 11.5%
25,000 Alcoa, Inc. .......................... $ 1,712,500
50,000 Chevron Corp. ........................ 3,734,375
40,000 du Pont (E.I.) de Nemours & Co. ...... 2,020,000
50,003 Exxon Mobil Corp. .................... 3,765,851
55,000 Halliburton Co. ...................... 2,100,313
25,000 Schlumberger Ltd. .................... 1,846,875
234 Transocean Sedco Forex, Inc. ......... 9,228
------------
15,189,142
------------
TECHNOLOGY - 25.6%
25,000 Cisco Systems, Inc.+ ................. 3,304,688
25,000 Hewlett-Packard Co. .................. 3,362,500
50,000 Intel Corp. .......................... 5,650,000
56,000 International Business
Machines Corp. ....................... 5,712,000
85,000 Microsoft Corp.+ ..................... 7,596,875
25,000 Motorola, Inc. ....................... 4,262,500
50,000 Oracle Corp.+ ........................ 3,712,500
------------
33,601,063
------------
TOTAL COMMON STOCKS
(Cost $142,814,738*) ................. 132,505,536
------------
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 5
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED) FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Number of
Contract Shares Expiration Strike Value
Subject to Call Date Price (Note 1)
- --------------- ----------- ------ --------------
<S> <C> <C> <C> <C>
CALL OPTIONS WRITTEN -
(3.8)%
25,000 Alcoa, Inc. ......................... 3/18/00 $ 80.0 $ (7,813)
20,000 The Allstate Corp. .................. 3/18/00 20.0 (16,250)
20,000 American
Express Co. ......................... 3/18/00 150.0 (18,750)
70,000 Bank of
America Corp. ....................... 3/18/00 45.0 (148,750)
50,000 Chevron Corp. ....................... 3/18/00 80.0 (37,500)
25,000 Cisco Systems, Inc. . ............... 3/18/00 130.0 (165,625)
75,000 Citigroup, Inc. ..................... 3/18/00 55.0 (65,625)
40,000 du Pont (E.I) de
Nemours & Co. ....................... 3/18/00 55.0 (22,500)
50,000 Eastman Kodak Co. ................... 4/22/00 65.0 (28,125)
50,000 Exxon Mobil Corp. ................... 3/18/00 75.0 (131,250)
10,000 Fannie Mae .......................... 3/18/00 55.0 (13,125)
22,000 FleetBoston
Financial Corp. ..................... 4/22/00 30.0 (22,000)
70,000 Ford Motor Co. ...................... 3/18/00 45.0 (35,000)
75,000 General Electric Co. ................ 3/18/00 135.0 (262,500)
28,000 General Mills, Inc. ................. 3/18/00 30.0 (89,250)
50,000 General Motors
Corp. ............................... 3/18/00 75.0 (187,500)
50,000 General Motors
Corp. ............................... 3/18/00 80.0 (53,125)
40,000 The Gillette Co. .................... 4/22/00 40.0 (25,000)
55,000 Halliburton Co. ..................... 3/18/00 35.0 (233,750)
25,000 Hewlett-Packard Co. ................. 3/18/00 135.0 (162,500)
75,000 The Home
Depot, Inc. ......................... 3/18/00 55.0 (271,875)
50,000 Intel Corp. ......................... 3/18/00 110.0 (325,000)
56,000 International Business
Machines Corp. ...................... 3/18/00 120.0 (17,500)
70,000 International
Paper Co. ........................... 3/18/00 40.0 (91,875)
75,000 Johnson &
Johnson ............................. 3/18/00 80.0 (23,437)
25,000 Johnson &
Johnson ............................. 4/22/00 80.0 (39,063)
45,000 McDonald's Corp. .................... 4/22/00 35.0 (39,375)
73,000 Merck & Co., Inc. ................... 3/18/00 65.0 (95,812)
60,000 Merrill Lynch &
Co., Inc. ........................... 3/18/00 $ 90.0 $ (727,500)
85,000 Microsoft Corp. ..................... 3/18/00 105.0 (42,500)
20,000 Minnesota
Mining &
Manufacturing Co. ................... 3/18/00 95.0 (15,000)
30,000 Minnesota
Mining &
Manufacturing Co. ................... 4/22/00 100.0 (30,000)
120,000 Morgan Stanley
Dean Witter & Co. ................... 3/18/00 72.5 (217,500)
25,000 Motorola, Inc. ...................... 3/18/00 170.0 (243,750)
50,000 Oracle Corp. ........................ 3/18/00 62.5 (637,500)
21,900 The Procter &
Gamble Co. .......................... 3/18/00 95.0 (19,162)
25,000 Schlumberger Ltd. ................... 3/18/00 65.0 (228,125)
75,000 Wal-Mart
Stores, Inc. ........................ 3/18/00 50.0 (140,625)
35,000 Walgreen Co. ........................ 4/22/00 27.5 (40,469)
59,300 Xerox Corp. ......................... 4/22/00 22.5 (74,125)
------------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $3,663,310).................................. (5,046,131)
------------
CASH AND OTHER ASSETS,
LESS LIABILITIES - 3.1%......................................... 4,081,745
------------
NET ASSETS - 100.0%............................................. $131,541,150
============
</TABLE>
+ Non-income producing security.
++ Common stocks are pledged as collateral for written options.
* Aggregate cost for Federal tax purposes is $142,867,564 and net unrealized
depreciation consists of:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation .......... $ 4,798,191
Gross unrealized depreciation .......... (15,160,219)
------------
Net unrealized depreciation .......... $(10,362,028)
============
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 6
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND
STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 29, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at market value (Cost $142,814,738) (Note 1) .... $ 132,505,536
Cash (Note 1) ............................................... 7,199,533
Deposits with brokers for open option contracts (Note 1) .... 3,663,310
Receivables:
Investment securities sold ............................... 478,619
Capital stock sold ....................................... 1,396,992
Dividends and interest ................................... 260,750
Due From Adviser ......................................... 47,733
Other assets ................................................ 55,115
-------------
Total Assets ............................................. 145,607,588
-------------
LIABILITIES:
Payables:
Investment securities purchased .......................... 7,667,408
Capital stock redeemed ................................... 667,985
Due to Adviser ........................................... 98,282
Accrued distribution fees Class C ........................ 86,829
Accrued distribution fees Class A ........................ 2,646
Accrued expenses ......................................... 110,220
Distribution payable Class C ............................. 305,455
Distribution payable Class A ............................. 81,482
Option contracts written (Proceeds $3,663,310) (Note 1) ..... 5,046,131
-------------
Total Liabilities ........................................ 14,066,438
-------------
NET ASSETS ............................................... $ 131,541,150
=============
CLASS C SHARES:
Applicable to 13,184,817 shares; unlimited number of shares
of beneficial interest authorized with $0.001 par value .. $ 116,050,952
=============
Net asset value, offering and redemption price
per Class C share ($116,050,952 / 13,184,817 shares) ..... $ 8.80
=============
CLASS A SHARES:
Applicable to 1,751,494 shares; unlimited number of shares
of beneficial interest authorized with $0.001 par value .. $ 15,490,198
=============
Net asset value and redemption price per Class A share
($15,490,198 / 1,751,494 shares) ......................... $ 8.84
=============
Offering price per Class A share (Net asset value / 0.945) .. $ 9.35
=============
NET ASSETS CONSIST OF:
Paid-in capital ............................................. $ 143,048,296
Accumulated undistributed net realized gain on securities
and written options ........................................ 184,877
Net unrealized depreciation on securities and written options (11,692,023)
-------------
NET ASSETS ............................................... $ 131,541,150
=============
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 7
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND FOR THE PERIOD MAY 3, 1999*
STATEMENT OF OPERATIONS THROUGH FEBRUARY 29, 2000
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends ......................................................... $ 595,869
Interest (Note 1) ................................................. 554,129
-------------
Total Income ................................................... 1,149,998
-------------
EXPENSES:
Investment advisory fees (Note 3) ................................. 491,388
Distribution expense Class C (Note 3) ............................. 468,771
Distribution expense Class A (Note 3) ............................. 5,654
Amortization of offering costs (Note 1) ........................... 164,136
Transfer agent fees ............................................... 84,099
Administration fees ............................................... 79,136
Registration fees ................................................. 78,100
Custodian fees .................................................... 50,558
Audit fees ........................................................ 37,508
Accounting fees ................................................... 34,400
Legal fees ........................................................ 30,000
Directors' fees ................................................... 17,153
Insurance fees .................................................... 7,343
Printing fees ..................................................... 3,999
Miscellaneous fees ................................................ 1,689
-------------
Total Expenses ................................................. 1,553,934
Expenses waived by Adviser (Note 3) ............................ (98,495)
-------------
Net Expenses ................................................... 1,455,439
-------------
Net Investment Loss ............................................... (305,441)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from:
Security transactions .......................................... 7,325,929
Written options ................................................ 6,550,393
Net change in unrealized depreciation on:
Security transactions .......................................... (10,309,202)
Written options ................................................ (1,382,821)
-------------
Net realized and unrealized gain on investments ................ 2,184,299
-------------
Net increase in nets assets resulting from operations ............. $ 1,878,858
=============
</TABLE>
* Commencement of investment operations.
See Notes to Financial Statements.
6
<PAGE> 8
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND FOR THE PERIOD MAY 3, 1999*
STATEMENT OF CHANGES IN NET ASSETS THROUGH FEBRUARY 29, 2000
<TABLE>
<CAPTION>
<S> <C>
OPERATIONS:
Net investment loss ................................ $ (305,441)
Net realized gain on securities and written options 13,876,322
Net change in unrealized depreciation on securities
and written options ............................... (11,692,023)
-------------
Net increase in net assets resulting from operations 1,878,858
-------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized short-term capital gains:
Class C ......................................... (12,729,782)
Class A ......................................... (809,109)
-------------
Total Distributions to Shareholders ................ (13,538,891)
-------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class C ......................................... 123,435,999
Class A ......................................... 16,529,130
Reinvestment of dividends:
Class C ......................................... 11,283,775
Class A ......................................... 604,558
Cost of shares redeemed:
Class C ......................................... (8,220,450)
Class A ......................................... (531,829)
-------------
Increase in net assets derived from capital share
transactions (a) .................................. 143,101,183
-------------
TOTAL INCREASE IN NET ASSETS ....................... 131,441,150
-------------
NET ASSETS:
Beginning of period ................................ 100,000
-------------
End of period ...................................... $ 131,541,150
=============
(a) Transactions in capital stock were:
Shares sold:
Class C ...................................... 12,844,559
Class A ...................................... 1,743,184
Shares issued through reinvestment of dividends:
Class C ...................................... 1,205,716
Class A ...................................... 65,711
Shares redeemed:
Class C ...................................... (865,458)
Class A ...................................... (57,401)
-------------
Increase in shares outstanding ..................... 14,936,311
=============
</TABLE>
* Commencement of investment operations.
See Notes to Financial Statements.
7
<PAGE> 9
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND FOR THE PERIODS ENDED
FINANCIAL HIGHLIGHTS FEBRUARY 29, 2000
The table below sets forth financial data for one share of capital stock
outstanding throughout the period presented.
<TABLE>
<CAPTION>
CLASS C* CLASS A**
-------- ---------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .............. $ 10.00 $ 9.43
--------- ---------
Income from investment operations:
Net investment loss ............................ (0.05)(#) (0.00)(#)
Net realized and unrealized gain on investments 0.59 0.44
--------- ---------
Total from investment operations ............... 0.54 0.44
--------- ---------
Less distributions from:
Net realized gains ............................. (1.74) (1.03)
--------- ---------
NET ASSET VALUE, END OF PERIOD .................... $ 8.80 $ 8.84
========= =========
TOTAL RETURN ...................................... 5.54%(2) 4.55%(2),(+)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) ............... $ 116,051 $ 15,490
Ratio of expenses to average net assets:
Before expense reimbursement ................... 3.20%(1) 2.45%(1)
After expense reimbursement .................... 3.00%(1) 2.25%(1)
Ratio of net investment loss to average net assets:
Before expense reimbursement ................... (1.82%)(1) (1.07%)(1)
After expense reimbursement .................... (1.62%)(1) (0.87%)(1)
Portfolio turnover rate ........................... 218.66%(2) 218.66%(2)
</TABLE>
* Class C commenced operations on May 3, 1999.
** Class A commenced operations on October 25, 1999.
1 Annualized.
2 Not Annualized.
# Per share numbers have been calculated using the monthly average share
method, which more appropriately represents the per share data for the
period.
+ Total return calculation does not reflect sales load.
See Notes to Financial Statements.
8
<PAGE> 10
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND
NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Kelmoore Strategic Trust (the "Trust"), an open-end, diversified management
investment company was organized as a Delaware business trust on November 30,
1998. The Trust has a fiscal year ending the last day of February each year and
currently consists of one investment fund, The Kelmoore Strategy(TM) Covered
Option Fund (the "Fund"). The Fund's primary goal is to maximize realized gains
from writing covered options on common stocks. The Fund's authorized capital
consists of an unlimited number of shares of beneficial interest of $0.001 par
value. The Fund offers two classes of shares (Class A and Class C). The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
A. SECURITY VALUATION. The Fund's securities are valued based on market value
or, where market quotations are not readily available, based on fair value as
determined in good faith by or at the direction of the Trustees. Equity
securities traded on an exchange or on the NASDAQ National Market System (the
"NASDAQ"), will be valued at the last sale price on the exchange or system in
which they are principally traded on the valuation date. If there is no sale on
the valuation date, securities traded principally on a U.S. exchange or the
NASDAQ will be valued at the mean between the closing bid and asked prices or on
a foreign exchange at the most recent closing price. Equity securities which are
traded in the over-the-counter market only, but which are not included in the
NASDAQ, will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices. Debt securities
with a remaining maturity of sixty days or more will be valued using a pricing
service if such prices are believed to accurately represent market value. Debt
securities and money market instruments with a remaining maturity of less than
sixty days will be valued at amortized cost.
B. OPTION VALUATION. Exchange traded options are valued at the last sale price
on the exchange where the options are principally traded or, if no sale occurs,
at the mean between the last bid and asked price.
When the Fund writes an option, there is no taxable event and an amount equal to
the premium received is recorded by the Fund as an asset and an equivalent
liability. The liability is thereafter valued to reflect the current value of
the option. If the option expires, or if the Fund enters a closing purchase
transaction, the Fund will realize a gain (or a loss in the case of a closing
purchase transaction where the cost exceeds the original premium received) and
the liability related to the option will be extinguished. Any such gain or loss
is a short-term capital gain or loss for Federal income tax purposes, except
that any loss realized when the Fund closes certain covered call options whose
underlying security is trading above the exercise price of the option will be
long-term capital loss if the hypothetical sale of the underlying security on
the date of such transaction would have given rise to a long-term capital gain.
If a call option which the Fund has written on any equity security is exercised,
the Fund realizes a capital gain or loss (long-term or short-term, depending on
the holding period of the underlying security) from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received. If a put option which the Fund has written on an equity security is
exercised, the amount of the premium originally received will reduce the cost of
the security which the Fund purchases upon exercise of the option.
The risk in writing a call option is that the Fund may forego the opportunity of
profit if the market value of the underlying security increases and the option
is exercised, although any potential loss would be reduced by the amount of
option premium received.
9
<PAGE> 11
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND
NOTES TO FINANCIAL STATEMENTS-(Continued) FEBRUARY 29, 2000
The risk in writing a put option is that the Fund may be called on to pay the
exercise price of the option for a security that has decreased (potentially to
zero) in market price, although any potential loss would be reduced by the
amount of option premium received.
Generally, options transactions also involve risks concerning the liquidity of
the options' market. An illiquid market for an option may limit the Fund's
ability to write options or enter closing transactions. As the options written
by the Fund are traded on a national exchange, counterparty and credit risk are
limited to the failure of the exchange on which the options are traded.
Transactions in options contracts written for the period ended February 29, 2000
were as follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
--------- -------
<S> <C> <C>
Options beginning of period................................. - -
Options written during period............................... (10,297,867) $(20,729,085)
Options exercised during period............................. 2,328,813 5,723,607
Options expired during period............................... 4,225,954 7,411,481
Options closed during period................................ 1,817,900 3,930,687
----------- ------------
Outstanding at February 29, 2000............................ (1,925,200) $ (3,663,310)
=========== ============
</TABLE>
C. INVESTMENT INCOME AND SECURITIES TRANSACTIONS. Securities transactions are
accounted for on the date the securities are purchased or sold (trade date).
Cost is determined and gains and losses are based on the identified cost basis
for both financial statement and Federal income tax purposes. Dividend income is
reported on the ex-dividend date. Interest income and expenses are accrued
daily. Uninvested cash and premiums from options written are swept daily into an
interest bearing account at the Bank of New York.
D. OFFERING COSTS. Offering costs are being amortized on a straight line basis
over 10 months from commencement of operations.
E. DISTRIBUTIONS TO SHAREHOLDERS. The Fund will distribute substantially all of
its net investment income and short-term capital gains monthly and long-term
capital gains, if any, annually. Distributions to shareholders are recorded on
the ex-dividend date. Income and capital gain distributions are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for wash sales for book and tax purposes. Permanent book and tax
basis differences will result in reclassifications to capital accounts.
F. FEDERAL INCOME TAXES. It is the policy of the Fund to comply with all
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income and capital
gains to shareholders. Therefore, no Federal income tax provision is required.
G. USE OF ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
H. NET ASSET VALUE AND CALCULATION OF EXPENSES. Net asset value per share of
each class, investment income, realized and unrealized gains and losses and
expenses other than class specific expenses are allocated daily to each class of
shares based upon the proportion of shares outstanding attributed to each class
at the beginning of each day. Distribution expenses are solely borne by and
charged to the respective class shares.
10
<PAGE> 12
THE KELMOORE STRATEGY(TM)
COVERED OPTION FUND
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) FEBRUARY 29, 2000
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term investments, totaled
$247,054,833 and $108,511,176, respectively, for the period ended February 29,
2000.
NOTE 3 - INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Kelmoore Investment Company, Inc. (the "Adviser"), a registered investment
adviser, provides the Fund with investment management services. For providing
these services, the Fund pays the Adviser an annual fee of 1.00% of average
daily net assets. The Adviser has voluntarily undertaken to waive all or a
portion of its fees and to reimburse certain expenses of the Fund so that the
total operating expenses for the first year of operations will not exceed 2.25%
for Class A and 3.00% for Class C. The Adviser reserves the right to terminate
this undertaking at any time, in its sole discretion. Any waiver or
reimbursement by the Adviser is subject to recoupment from the Fund within the
following three years, to the extent such recoupment would not cause total
expenses to exceed any current expense limitation. For the period ended February
29, 2000, advisory fees of $491,388 were paid to the Adviser and the Adviser
reimbursed the Fund $98,495 which the Adviser may recoup through 2/28/2003. As
part of the Fund's organization, the Fund has issued to the Adviser 10,000
shares of beneficial interest at $10.00 per share in a private placement.
The Fund has, on behalf of the Class A and Class C shares, adopted plans
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended,
(each a "Plan") that allow the Fund to pay distribution and service fees for the
sale and distribution of its shares and for services provided to shareholders.
Because these fees are paid out of the Fund's assets on an ongoing basis, over
time, these fees will increase the cost of your investment and may cost more
than paying other types of sales charges. The Plan for Class A shares permits
the Fund to reimburse the Adviser, as the Fund's distributor, an annual fee not
to exceed 0.25% of the average daily net assets of the Class. The Plan for Class
C shares permits the Fund to reimburse the Adviser an annual fee not to exceed
0.75% of the average daily net assets of the Class. In addition, the Plan for
Class C shares permits the Fund to reimburse the Adviser for payments to dealers
or others, an annual service fee not to exceed 0.25% of the average daily net
assets of the Class. For the period ended February 29, 2000, the Fund reimbursed
the Distributor $474,425, ($5,654 for Class A and $468,771 for Class C) for
distribution and servicing expenses incurred.
A. SERVICES AGREEMENT. The Fund has entered into a Services Agreement with PFPC
Inc. Under the Services Agreement, PFPC Inc. provides certain transfer agency,
administrative, accounting and custody administration services.
B. BROKERAGE COMMISSIONS. The Fund places substantially all its securities
transactions, including transactions involving options, through the Adviser in
accordance with procedures adopted by the Trustees. The Fund will not deal with
the Adviser (or any affiliate) in any transaction in which the Adviser (or any
affiliate) acts as principal, except in accordance with rules promulgated by the
Securities and Exchange Commission. As of February 29, 2000, the Fund has paid
$904,587 in brokerage commissions to the Adviser and affiliated parties.
C. OFFICER AND TRUSTEE COMPENSATION. Certain officers and trustees of the Fund
are affiliated persons of the Adviser and the Distributor. No officer, Trustee
or employee of the Adviser, PFPC Inc., or any affiliate thereof, receives any
compensation from the Trust for serving as an officer or Trustee of the Trust.
The Trust pays each Trustee who is not an affiliated person of the Adviser, PFPC
Inc., or any affiliate thereof an annual retainer of $4,000, payable in
quarterly installments, and the Trust reimburses expenses incurred by the
Trustees for attendance at Trustee meetings.
11
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF THE KELMOORE STRATEGIC TRUST,
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statement of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Kelmoore Strategic Trust
(consisting of The Kelmoore Strategy(TM) Covered Option Fund, hereafter referred
to as the "Fund") at February 29, 2000, and the results of its operations, the
changes in its net assets and the financial highlights for the period from May
3, 1999 (commencement of operations) through February 29, 2000, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, CA
April 14, 2000
12
<PAGE> 14
FOR MORE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
ADMINISTRATOR, TRANSFER AGENT AND COUNSEL
FUND ACCOUNTING AGENT Sutherland, Asbill & Brennan LLP
PFPC Inc. 1275 Pennsylvania Avenue NW
3200 Horizon Drive Washington, DC 20004-2415
King of Prussia, PA 19406
(877) 328-9456
CUSTODIAN INDEPENDENT ACCOUNTANTS
The Bank of New York PricewaterhouseCoopers LLP
48 Wall Street 333 Market Street
New York, NY 10286 San Francisco, CA 94105
KELMOORE STRATEGIC TRUST
2471 E. Bayshore Road, Suite 501
Palo Alto, CA 94303
(877) 328-9456
</TABLE>
The Trust's SEC file no. is 811-9165
FOR ADDITIONAL INFORMATION ABOUT
THE KELMOORE STRATEGY(TM) COVERED OPTION FUND
CALL 877-328-9456
This report is submitted for general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors in the Fund
unless preceded or accompanied by an effective Prospectus which includes details
regarding the Fund's objectives, policies, expenses and other information.
