|-----------------------------------| |------------------------------------|
| | | |
| | | THE WATER FUND |
| | | -------------- |
| | | (the "Fund") |
| INVESTMENT ADVISER: | | |
| Avalon Trust Company | | |
| 125 Lincoln Avenue | | |
| Suite 100 | | A SERIES OF THE DECLARATION FUND |
| Santa Fe, NM 87501 | | (the "Trust") |
| | | |
| ADMINISTRATOR: | | 555 North Lane, Suite 6160 |
| Declaration Service Company | | Conshohocken, PA 19428 |
| 555 North Lane | | 1-800-318-8353 |
| Suite 6160 | | www.thewaterfund.com |
| Conshohocken, PA 19428 | | |
| | | |
| LEGAL COUNSEL: | | |
| Charles W. Lutter, Jr. | | |
| 103 Canyon Oaks | | |
| San Antonio, TX 78232 | | |
| | | |
| INDEPENDENT AUDITORS: | | |
| Sanville & Company | | SEMI-ANNUAL REPORT |
| 1514 Old York Road | | |
| Abington, PA 19001 | | |
| | | |
| CUSTODIAN: | | |
| First Union National Bank | | |
| 123 South Broad Street | | JUNE 30, 2000 |
| Philadelphia, PA 19109 | | |
| | | |
| | | AS WITH ALL MUTUAL FUNDS, |
| | | THE SECURITIES AND EXCHANGE |
| | | COMMISSION HAS NOT APPROVED |
| | | OR DISAPPROVED THESE SECURITIES |
| | | OR PASSED UPON THE ADEQUACY |
| | | OF THIS PROSPECTUS. ANY |
| | | REPRESENTATION TO THE CONTRARY |
| | | IS A CRIMINAL OFFENSE. |
| | | |
|-----------------------------------| |------------------------------------|
<PAGE>
Dear Fellow Shareholder:
In our shareholder report dated March 1, we said, "It seems plausible
that water issues, ultimately reflecting the most basic aspects of life on
earth, may provide a more stable and growing return than that experienced by
many other sectors of the economy." The experience of the first half of 2000
seems to point further to that conclusion. With the subsidence of
techmania, investor attention has begun to turn toward other potential
growth areas, benefitting your fund.
In keeping with our low turnover tax efficient philosophy, we made few
changes in the fund, electing to use our increasing cash flow to add to
positions. We did, as the Euro began to stabilize, increase our
international exposure with the addition of France's Lyonnais des Eaux and
United Utilities of England. In addition, we expanded our exposure in the
filter sector, so that it is now our second largest grouping after water
utilities. We believe that the filtration area has significant growth
potential as the definition of what constitutes clean water continues to
change to include fewer and fewer contaminants.
Going forward, we have interest in expanding positions in pipes,
metering and irrigation. We believe that the ongoing process of change in
the uses of water away from the traditional ones toward recreation,
conservation, etc. together with continued population growth will require
more precise allocation of water utilization (meters), more efficient
agricultural use (irrigation), and more effective storage and transport both
in urban and nonurban areas (pipes). Areas which we continue to monitor for
their long term interest include oceanic and desalination activities.
The most problematic question with respect to water is its future
price. Water has many of the elements of a scarce commodity, despite its
ubiquity. Some studies have concluded that, based on income percentages,
water is underpriced. A report by the Water Infrastructure Network has
asserted that water rates will have to double if utilities alone have to
finance the current requirements for infrastructure and wastewater
treatment. However, it would appear that no serious estimates have been
able to establish a forward-looking equilibrium price level. Hence an
investment strategy which depends for its success solely on a higher price
for water seems speculative. While higher prices would create an even more
favorable background for the companies in your portfolio, your management
prefers not to speculate.
Our focus is long term; we believe in the case of a substance, which is
so intimately a part of basic human needs, structure and culture change will
come slowly. But it will come. You may rest assured that you and your
portfolio will be focussed on taking advantage of that change in whatever
area it appears.
<PAGE>
<TABLE>
<CAPTION>
THE WATER FUND SEMI-ANNUAL REPORT
---------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
MARKET
SHARES VALUE
------ ---------
<S> <C> <C>
COMMON STOCK -- 87.47%
AGRICULTURAL -- 2.74%
Cadiz, Inc.* ........................................ 14,600 $ 116,800
---------
APPLIANCES -- 2.87%
Fantom Technologies, Inc. ........................... 1,700 11,900
Maytag Corp. ........................................ 3,000 110,625
---------
122,525
---------
BUILDING PRODUCTS -- 3.84%
American Standard Cos., Inc.* ....................... 4,000 164,000
---------
CHEMICALS -- 1.35%
Church & Dwight Co., Inc. ........................... 3,200 57,600
---------
ELECTRONIC EQUIPMENT -- 2.37%
Badger Meter, Inc. .................................. 4,000 101,000
---------
ENGINEERING -- 3.22%
Tetra Tech, Inc.* ................................... 6,000 137,250
---------
FOOD & BEVERAGE -- 5.05%
Groupe Danone ADR ................................... 8,000 215,500
---------
INDUSTRIAL -- 12.80%
Calgon Carbon, Corp. ................................ 20,000 155,000
Danaher Corp. ....................................... 2,000 98,875
ITT Industries, Inc. ................................ 2,000 60,750
Lindsay Manufacturing Co. ........................... 2,000 39,250
Tecumseh Products Co. Cl A .......................... 3,000 114,563
Vivendi ADR ......................................... 3,000 53,173
Watts Industries, Inc. .............................. 2,000 25,250
---------
546,861
---------
MISCELLANEOUS MANUFACTURING -- 5.75%
Millipore Corp. ..................................... 1,000 75,375
Pall Corp. .......................................... 9,200 170,200
---------
245,575
---------
OIL & GAS -- 7.45%
Eastern Enterprises, Inc. ........................... 2,000 126,000
Enron Corp. ......................................... 500 32,250
Schlumberger, Ltd. .................................. 2,000 149,250
Transocean Sedco Forex, Inc. ........................ 193 10,313
---------
317,813
---------
</TABLE>
See notes to financial statements.
2
<TABLE>
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SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 2000 (UNAUDITED)
MARKET
SHARES VALUE
------ ----------
<S> <C> <C>
STEEL -- 0.28%
Northwest Pipe Co.* ................................. 1,000 $ 11,875
----------
WATER -- 39.75%
American States Water Co. ........................... 1,000 29,750
American Water Works Co., Inc. ...................... 7,500 187,500
Azurix Corp.* ....................................... 15,000 117,187
California Water Service Group ...................... 5,000 121,250
Connecticut Water Services Group .................... 3,900 104,325
CUNO, Inc.* ......................................... 4,000 92,500
E'Town Corp. ........................................ 2,800 186,025
Ionics, Inc.* ....................................... 4,000 122,500
Middlesex Water Co. ................................. 4,000 114,500
Osmonics, Inc.* ..................................... 9,500 87,875
Pennichuck Corp. .................................... 2,500 65,312
Philadelphia Suburban Corp. ......................... 9,000 184,500
SJW Corp. ........................................... 1,000 118,875
Southwest Water Co. ................................. 8,000 104,000
United Utilities plc ADR ............................ 3,000 60,844
----------
1,696,943
----------
TOTAL COMMON STOCK (Cost $3,653,644) ................ 3,733,742
----------
FOREIGN STOCK -- 4.68%
ISRAEL -- 0.57%
Israel Chemicals Ltd. (Cost $22,119) ................ 20,000 24,439
----------
FRANCE -- 4.11%
Suez Lyonnaise Des Aux SA* (Cost $161,754) .......... 1,000 175,422
----------
INVESTMENT COMPANIES -- 11.51%
Evergreen Money Market Trust Cl Y (Cost $491,353) ... 491,353 491,353
----------
TOTAL INVESTMENTS (COST $4,328,870) -- 103.66% ...... 4,424,956
----------
LIABILITIES IN EXCESS OF OTHER ASSETS -- (3.66%) .... (156,575)
----------
TOTAL NET ASSETS -- 100.00% ......................... $4,268,381
==========
<FN>
* Non-income producing investment.
ADR -- American Depository Receipt
</TABLE>
See notes to financial statements.
3
<TABLE>
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SCHEDULE OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
<S> <C>
ASSETS:
Investments, at market (identified cost $4,328,870) ......... $4,424,956
Receivables:
Dividends and interest ................................... 11,215
----------
Total assets .......................................... 4,436,171
----------
LIABILITIES:
Payables:
Investment securities purchased .......................... 161,754
Due to advisor ........................................... 5,151
Accrued expenses ......................................... 885
----------
Total liabilities ..................................... 167,790
----------
NET ASSETS ..................................................... $4,268,381
==========
NET ASSETS CONSIST OF:
Common stock (unlimited shares of no par value authorized,
431,233 shares outstanding) .............................. $4,243,543
Undistributed net investment income ......................... 20,489
Accumulated realized loss on investments .................... (92,109)
Net unrealized gain on investments .......................... 96,458
----------
Total Net Assets ...................................... $4,268,381
==========
Net Asset Value, offering and redemption price per share ....... $ 9.90
==========
</TABLE>
See notes to financial statements.
4
<TABLE>
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STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<S> <C>
INVESTMENT INCOME:
Dividends ................................................... $43,337
Interest .................................................... 12,811
-------
Total investment income .................................. 56,148
-------
EXPENSES:
Investment advisory fees .................................... 20,485
Distribution fees ........................................... 5,121
Service fees ................................................ 10,242
-------
Total expenses ........................................... 35,848
-------
Net investment income .................................... 20,300
-------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments ............................ (12,829)
Net change in unrealized appreciation on:
Securities ............................................... 23,155
Translation of assets and liabilities denominated
in foreign currencies ................................. 372
-------
10,698
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $30,998
=======
</TABLE>
See notes to financial statements.
5
<TABLE>
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STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
OCTOBER 26, 1999
SIX MONTHS ENDED (COMMENCEMENT OF
JUNE 30, 2000 OPERATIONS) TO
(UNAUDITED) DECEMBER 31, 1999
---------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ................. $ 20,300 $ 5,132
Net realized loss on investments ...... (12,829) (79,280)
Net change in unrealized appreciation
on investments ..................... 23,527 72,931
---------- ----------
Net increase (decrease) in net assets
resulting from operations ............ 30,998 (1,217)
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................. --- (4,943)
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ............. 1,189,100 3,049,500
Proceeds from shares issued to holders
in reinvestment of dividends ....... --- 4,943
---------- ----------
Net increase in net assets from Fund
share transactions ................. 1,189,100 3,054,443
---------- ----------
Increase in net assets 1,220,098 3,048,283
NET ASSETS:
Beginning of period ................... 3,048,283 ---
---------- ----------
End of period ......................... $4,268,381 $3,048,283
========== ==========
</TABLE>
See notes to financial statements.
6
<TABLE>
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FINANCIAL HIGHLIGHTS
FOR THE PERIOD
OCTOBER 26, 1999
SIX MONTHS ENDED (COMMENCEMENT OF
JUNE 30, 2000 OPERATIONS) TO
(UNAUDITED) DECEMBER 31, 1999
---------------- -----------------
<S> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD ..... $ 9.89 $ 10.00
--------- ---------
INVESTMENT OPERATIONS:
Net investment income ................... 0.05 0.02
Net realized and unrealized gain (loss)
on investments ....................... (0.04) (0.11)
--------- ---------
Total from investment operations ..... 0.01 (0.09)
--------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income .............. --- (0.02)
--------- ---------
Total distributions .................. 0.00 (0.02)
--------- ---------
NET ASSET VALUE -- END OF PERIOD ........... $ 9.90 $ 9.89
========= =========
TOTAL RETURN ............................... 0.10% (0.94)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) .... $4,268 $3,048
Ratio of expenses to average net assets . 1.75%(1) 1.75%(1)
Ratio of net investment income to
average net assets ................... 0.99%(1) 1.03%(1)
Portfolio turnover rate ................. 25.12% 9.67%
(1) Annualized
</TABLE>
See notes to financial statements.
7
THE WATER FUND SEMI-ANNUAL REPORT
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NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Water Fund, (the "Fund") is a series of the Declaration Fund (the
"Trust"). The Trust is registered under the Investment Company Act of 1940
as an open-end diversified management investment company originally
incorporated in Pennsylvania on April 9, 1981 and registered with the
Commonwealth of Pennsylvania as a Pennsylvania Business Trust on May 16,
1990. The Fund's investment strategy is to emphasize growth of capital.
The Fund became effective with the Securities and Exchange Commission
October 21, 1999 and commenced operations on October 26, 1999.
The following is a summary of significant accounting policies
consistently followed by the Fund.
a) Investment Valuation -- Common stocks and other equity-type securities
listed on a securities exchange are valued at the last quoted sales price on
the day of the valuation. Price information on listed stocks is taken from
the exchange where the security is primarily traded. Securities that are
listed on an exchange but which are not rated on the valuation date are
valued at the most recent bid prices. Other assets and securities for which
no quotations are readily available are valued at fair value as determined
in good faith by the Investment Advisor under the supervision of the Board
of Directors. Short-term instruments (those with remaining maturities of 60
days or less) are valued at amortized cost, which approximates market.
b) Federal Income Taxes -- No provision for federal income taxes has
been made since the Fund has complied to date with the provision of the
Internal Revenue Code applicable to regulated investment companies and
intends to so comply in the future and to distribute substantially all of
its net investment income and realized capital gains in order to relieve the
Fund from all federal income taxes. As of June 30, 2000, the Fund had
available for federal income tax purposes an unused capital loss carryover
of approximately $79,280, which expires in 2007.
c) Distributions to Shareholders -- Dividends from net investment income
and distributions of net realized capital gains, if any, will be declared
and paid at least annually. Income and capital gain distributions are
determined in accordance with income tax regulations that may differ from
generally accepted accounting principles.
d) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles 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.
e) Other -- Investment and shareholder transactions are recorded on trade
date. The Fund determines the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold with
the net sales proceeds. 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.
8
THE WATER FUND SEMI-ANNUAL REPORT
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NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 (UNAUDITED)
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the six months ended June 30,
2000 were as follows:
SHARES AMOUNT
------- ----------
Sold ........................... 122,979 $1,189,100
------- ----------
Net Increase ................... 122,979 $1,189,100
======= ==========
Transactions in shares of the Fund for the period ended December 31,
1999 were as follows:
SHARES AMOUNT
------- ----------
Sold ........................... 307,749 $3,049,500
Reinvested ..................... 505 4,943
------- ----------
Net Increase ................... 308,254 $3,054,443
======= ==========
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Fund for the six months ended June 30, 2000, were as
follows:
Purchases ........................................... $2,261,387
Sales ............................................... $911,815
At June 30, 2000, unrealized appreciation of investments for tax
purposes was as follows:
Appreciation ........................................ $319,463
Depreciation ........................................ (223,377)
--------
Net appreciation on investments ..................... $ 96,086
========
At June 30, 2000, the cost of investments for federal income tax
purposes was $4,328,870.
4. ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
The Fund has entered into an Advisory Agreement with Avalon Trust
Company (the "Advisor") to provide investment management services to the
Fund. Pursuant to the Advisory Agreement, the Advisor is entitled to
receive a fee, calculated daily and payable monthly at the annual rate of
1.00% as applied to the Fund's daily net assets. For the six months ended
June 30, 2000 the Advisor received fees of $20,485.
The Fund has entered into an Operating Services Agreement (the
"Servicing Agreement") with the Advisor to provide or arrange for day-to-day
operational services to the Fund. Pursuant to the Servicing Agreement, the
Advisor is entitled to receive a fee, calculated daily and payable monthly
at the annual rate of 0.50% as applied to the Fund's daily net assets. For
the six months ended June 30, 2000 the Advisor received fees of $10,242.
9
THE WATER FUND SEMI-ANNUAL REPORT
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NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 (UNAUDITED)
4. ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS (CONTINUED)
The Fund and the Advisor have entered into an Investment Company
Services Agreement (the "ICSA") with Declaration Service Company to provide
day-to-day operational services to the Fund including, but not limited to,
accounting, administrative, transfer agent, dividend disbursing, registrar
and recordkeeping services.
The Fund and the Advisor have entered into a Distribution Agreement
with Declaration Distributors, Inc. to provide distribution services to the
Fund. Declaration Distributors, Inc. serves as underwriter/distributor of
the Fund.
The effect of the Advisory Agreement and the Servicing Agreement is to
place a "cap" on the Funds' normal operating expenses at 1.50%. The only
other expenses incurred by the Fund are distribution fees, brokerage fees,
taxes, if any, legal fees relating to Fund litigation, and other
extraordinary expenses.
The Fund has adopted a Plan of Distribution under which it may finance
activities primarily intended to sell shares. Under the Plan, the Advisor,
Avalon Trust Company is paid a distribution fee at an annual rate of 0.25%
of average daily net assets of the Fund for distributing shares of the Fund
and for providing certain shareholder services. For the six months ended
June 30, 2000, the Advisor received fees of $5,121.
Certain directors and officers of the Fund are directors and officers
of the Advisor.
10
