-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UawX4Jw4FQqtCsMhd+Jvlj2R1Xt9DcDJtX0jFDIumzRXJxgQcN2PZH7uJBgBEU3P qD8uj4R+ufwpA/OxHHMS8A== 0000912057-02-040999.txt : 20021105 0000912057-02-040999.hdr.sgml : 20021105 20021105165851 ACCESSION NUMBER: 0000912057-02-040999 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020831 FILED AS OF DATE: 20021105 EFFECTIVENESS DATE: 20021105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GMO TRUST CENTRAL INDEX KEY: 0000772129 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04347 FILM NUMBER: 02810151 BUSINESS ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173307500 MAIL ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: GMO CORE TRUST DATE OF NAME CHANGE: 19900927 N-30D 1 a2090637zn-30d.txt N-30D GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------- MUTUAL FUNDS -- 99.5% 4,682 GMO Core Plus Bond Fund, Class III 50,329 2,167 GMO Currency Hedged International Equity Fund, Class III 13,588 7,030 GMO Domestic Bond Fund, Class III 71,562 2,054 GMO Emerging Country Debt Fund, Class III 18,321 4,896 GMO Emerging Markets Fund, Class III 44,849 2,530 GMO Inflation Indexed Bond Fund, Class III 30,228 3,352 GMO International Bond Fund, Class III 35,570 2,505 GMO International Intrinsic Value Fund, Class III 45,248 2,918 GMO International Small Companies Fund, Class III 30,464 3,044 GMO Real Estate Fund, Class III 34,548 1,879 GMO Small Cap Value Fund, Class III 23,954 8,622 GMO U.S. Core Fund, Class III 93,285 --------- TOTAL MUTUAL FUNDS (COST $497,597) 491,946 --------- SHORT-TERM INVESTMENTS -- 0.1% REPURCHASE AGREEMENTS -- 0.1% $ 500 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $501, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest of $13,677. 500 --------- TOTAL SHORT-TERM INVESTMENTS (COST $500) 500 --------- TOTAL INVESTMENTS -- 99.6% (Cost $498,097) 492,446 Other Assets and Liabilities (net) -- 0.4% 1,907 --------- TOTAL NET ASSETS -- 100.0% $ 494,353 =========
See accompanying notes to the financial statements. 1 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $498,097) (Note 1) $ 492,446 Receivable for expenses reimbursed by Manager (Note 2) 4,154 ---------- Total assets 496,600 ---------- LIABILITIES: Accrued expenses 2,247 ---------- Total liabilities 2,247 ---------- NET ASSETS $ 494,353 ========== NET ASSETS CONSIST OF: Paid-in capital $10,455,938 Distributions in excess of net investment income (585,405) Accumulated net realized loss (9,370,529) Net unrealized depreciation (5,651) ---------- $ 494,353 ========== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 494,353 ========== SHARES OUTSTANDING: Class III 46,860 ========== NET ASSET VALUE PER SHARE: Class III $ 10.55 ==========
2 See accompanying notes to the financial statements. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $1,586,376 Interest 881 ---------- Total income 1,587,257 ---------- EXPENSES: Custodian and transfer agent fees 9,384 Audit fees 7,912 Legal fees 2,944 Registration fees 1,564 Trustees fees (Note 2) 1,569 Miscellaneous 1,440 Fees reimbursed by Manager (Note 2) (23,244) ---------- Net expenses 1,569 ---------- Net investment income 1,585,688 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (4,553,353) Realized gains distributions from investment company shares 520,607 ---------- Net realized loss (4,032,746) ---------- Change in net unrealized appreciation (depreciation) on investments 2,469,482 ---------- Net realized and unrealized loss (1,563,264) ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 22,424 ==========
See accompanying notes to the financial statements. 3 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,585,688 $ 4,661,808 Net realized loss (4,032,746) (554,872) Change in net unrealized appreciation (depreciation) 2,469,482 1,302,323 ------------- ------------ Net increase in net assets from operations 22,424 5,409,259 ------------- ------------ Distributions to shareholders from: Net investment income Class III (2,183,367) (5,364,302) ------------- ------------ Total distributions from net investment income (2,183,367) (5,364,302) ------------- ------------ Net realized gains Class III (474,643) -- ------------- ------------ Total distributions from net realized gains (474,643) -- ------------- ------------ (2,658,010) (5,364,302) ------------- ------------ Net share transactions: (Note 5) Class III (127,796,128) 18,176,615 ------------- ------------ Increase (decrease) in net assets resulting from net share transactions (127,796,128) 18,176,615 ------------- ------------ Total increase (decrease) in net assets (130,431,714) 18,221,572 NET ASSETS: Beginning of period 130,926,067 112,704,495 ------------- ------------ End of period (including distributions in excess of net investment income of $64,798 and accumulated undistributed net investment income of $12,274, respectively) $ 494,353 $130,926,067 ============= ============
4 See accompanying notes to the financial statements. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ----------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998* ---------------- ------------ ------------ ------------ ------------ --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.77 $ 10.80 $ 10.78 $ 10.51 $ 11.87 $ 11.56 ----------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income(b) 0.12+ 0.43+ 0.47 0.44 0.31 0.17+ Net realized and unrealized gain (loss) (0.14) 0.04 0.60 0.91 (0.54) 1.30 ----------- -------- -------- -------- -------- -------- Total from investment operations (0.02) 0.47 1.07 1.35 (0.23) 1.47 ----------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.16) (0.50) (0.82) (0.43) (0.57) (0.33) From net realized gains (0.04) -- (0.23) (0.65) (0.56) (0.83) ----------- -------- -------- -------- -------- -------- Total distributions (0.20) (0.50) (1.05) (1.08) (1.13) (1.16) ----------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.55 $ 10.77 $ 10.80 $ 10.78 $ 10.51 $ 11.87 =========== ======== ======== ======== ======== ======== TOTAL RETURN(a) (0.22)%++ 4.43% 10.12% 12.77% (2.27)% 13.31%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 494 $130,926 $112,704 $119,075 $127,600 $115,280 Net expenses to average daily net assets(c) 0.00%**(d) 0.00%(d) 0.00% 0.00% 0.00% 0.00%** Net investment income to average daily net assets(b) 2.23%** 4.00% 4.13% 4.18% 2.50% 1.91%** Portfolio turnover rate 31% 16% 26% 26% 10% 18% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03%** 0.04% 0.04% 0.04% 0.05% 0.11%**
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 1. (d) Net expenses to average daily net assets were less than 0.01%. + Computed using average shares outstanding throughout the period. ++ Not annualized. * Period from June 2, 1997 (commencement of operations) to February 28, 1998. ** Annualized. See accompanying notes to the financial statements. 5 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global Balanced Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the GMO Global Balanced Index, a benchmark of the Fund's manager, through investment to varying extents in other funds of the Trust. The Fund will pursue its objective by investing in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market 6 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $340,106 expiring in 2010. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on an accrual basis. Non-cash dividends, if any, are recorded at fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other 7 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not charge an advisory fee for asset allocation advice provided to the Fund, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. No shareholder service fee is charged for Class III shares. Like the other operating expenses (as described below), the shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying Funds. For the six months ended August 31, 2002, the shareholder service fees incurred indirectly by the Fund were 0.15% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees, and fund expenses (as defined above) incurred indirectly by the Fund through 8 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- investment in underlying Funds. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.392% and 0.013% of the Fund's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $1,569. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002 aggregated $37,766,313 and $166,110,528 respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $498,097 $2,556 $(8,207) $(5,651)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 100% of the outstanding shares of the Fund were held by the Manager. Investment activities of this shareholder may have a material effect on the Fund. 9 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- ---------------------- Shares Amount Shares Amount Class III: ----------- ------------- --------- ----------- Shares sold 1,560,846 $ 17,414,452 1,956,453 $20,845,851 Shares issued to shareholders in reinvestment of distributions 240,093 2,530,980 472,191 4,972,168 Shares repurchased (13,908,442) (147,741,560) (713,698) (7,641,404) ----------- ------------- --------- ----------- Net increase (decrease) (12,107,503) $(127,796,128) 1,714,946 $18,176,615 =========== ============= ========= ===========
6. SUBSEQUENT EVENT On June 18, 2002, the Board of Trustees approved the proposed reorganization of the Fund into Evergreen Asset Allocation Fund, a mutual fund within the Evergreen Family of Funds managed by Evergreen Investment Management Company, LLC. At August, 31, 2002, Grantham, Mayo, Van Otterloo & Co. LLC was the sole shareholder of the Fund. The Reorganization took place in the manner approved by the Board of Trustees as of the close of business on October 2, 2002. 10 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATION FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 1,615,682 GMO Core Plus Bond Fund, Class III 17,368,584 860,652 GMO Currency Hedged International Bond Fund, Class III 7,582,348 583,319 GMO Currency Hedged International Equity Fund, Class III 3,657,410 2,414,042 GMO Domestic Bond Fund, Class III 24,574,949 595,155 GMO Emerging Countries Fund, Class III 5,290,925 560,485 GMO Emerging Country Debt Fund, Class III 4,999,523 86,107 GMO Emerging Country Debt Fund, Class IV 768,077 874,659 GMO Emerging Markets Fund, Class III 8,011,879 235,261 GMO Emerging Markets Fund, Class IV 2,152,639 773,320 GMO Inflation Indexed Bond Fund, Class III 9,241,171 554,318 GMO International Bond Fund, Class III 5,881,313 160,554 GMO International Intrinsic Value Fund Class IV 2,897,996 764,101 GMO International Intrinsic Value Fund, Class III 13,799,664 1,017,541 GMO International Small Companies Fund, Class III 10,623,130 1,053,120 GMO Real Estate Fund, Class III 11,952,916 659,454 GMO Small Cap Value Fund, Class III 8,408,035 2,486,873 GMO U.S. Core Fund, Class III 26,907,964 432,688 GMO U.S. Core Fund, Class V 4,673,027 196,031 GMO Value Fund, Class III 1,470,234 ------------- TOTAL MUTUAL FUNDS (COST $177,366,038) 170,261,784 ------------- SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENTS -- 0.0% $ 37,656 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $37,660 and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest of $41,032. 37,656 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $37,656) 37,656 ------------- TOTAL INVESTMENTS -- 100.0% (Cost $177,403,694) 170,299,440 Other Assets and Liabilities (net) -- (0.0%) (5,335) ------------- TOTAL NET ASSETS -- 100.0% $ 170,294,105 =============
See accompanying notes to the financial statements. 1 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATION FUND) (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $177,403,694) (Note 1) $170,299,440 Receivable for Fund shares sold 620,000 Receivable for expenses reimbursed by Manager (Note 2) 1,984 ------------ Total assets 170,921,424 ------------ LIABILITIES: Payable for investments purchased 620,000 Accrued expenses 7,319 ------------ Total liabilities 627,319 ------------ NET ASSETS $170,294,105 ============ NET ASSETS CONSIST OF: Paid-in capital $182,656,547 Accumulated undistributed net investment income 144,873 Accumulated net realized loss (5,403,061) Net unrealized depreciation (7,104,254) ------------ $170,294,105 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $170,294,105 ============ SHARES OUTSTANDING: Class III 19,925,833 ============ NET ASSET VALUE PER SHARE: Class III $ 8.55 ============
2 See accompanying notes to the financial statements. GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATION FUND) (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 146,569 Interest 3,213 ----------- Total income 149,782 ----------- EXPENSES: Audit fees 8,096 Registration fees 1,288 Custodian and transfer agent fees 1,104 Legal fees 184 Trustees fees (Note 2) 10 Miscellaneous 368 Fees reimbursed by Manager (Note 2) (11,040) ----------- Net expenses 10 ----------- Net investment income 149,772 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 116,527 Realized gains distributions from investment company shares 86,405 ----------- Net realized gain 202,932 ----------- Change in net unrealized appreciation (depreciation) on investments (6,888,371) ----------- Net realized and unrealized loss (6,685,439) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,535,667) ===========
See accompanying notes to the financial statements. 3 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATION FUND) (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 149,772 $ 199,434 Net realized gain (loss) 202,932 (514,358) Change in net unrealized appreciation (depreciation) (6,888,371) 249,596 ------------ ----------- Net decrease in net assets from operations (6,535,667) (65,328) ------------ ----------- Distributions to shareholders from: Net investment income Class III (203,375) (463,488) ------------ ----------- Total distributions from net investment income (203,375) (463,488) ------------ ----------- Net share transactions: (Note 5) Class III 169,715,245 (3,173,880) ------------ ----------- Increase (decrease) in net assets resulting from net share transactions 169,715,245 (3,173,880) ------------ ----------- Total increase (decrease) in net assets 162,976,203 (3,702,696) NET ASSETS: Beginning of period 7,317,902 11,020,598 ------------ ----------- End of period (including accumulated undistributed net investment income of $144,873 and $198,476, respectively) $170,294,105 $ 7,317,902 ============ ===========
4 See accompanying notes to the financial statements. GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATION FUND) (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- --------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.64 $ 8.99 $ 8.96 $ 8.52 $ 10.39 $ 10.52 -------- ------ ------- ------- ------- ------- Income from investment operations: Net investment income(a) 0.19 0.23 0.21 0.20+ 0.18+ 0.29+ Net realized and unrealized gain (loss) (0.04) (0.20) 0.18 1.69 (0.82) 1.03 -------- ------ ------- ------- ------- ------- Total from investment operations 0.15 0.03 0.39 1.89 (0.64) 1.32 -------- ------ ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.24) (0.38) (0.36) -- (0.51) (0.28) From net realized gains -- -- -- (1.45) (0.72) (1.17) -------- ------ ------- ------- ------- ------- Total distributions (0.24) (0.38) (0.36) (1.45) (1.23) (1.45) -------- ------ ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.55 $ 8.64 $ 8.99 $ 8.96 $ 8.52 $ 10.39 ======== ====== ======= ======= ======= ======= TOTAL RETURN(b) 1.71%++ 0.49% 4.29% 22.45% (6.67)% 13.56% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $170,294 $7,318 $11,021 $10,834 $29,582 $50,952 Net expenses to average daily net assets(c) 0.00%*(d) 0.00%(d) 0.00% 0.00% 0.00% 0.00% Net investment income to average daily net assets 1.95%* 2.66% 2.31% 2.24% 1.91% 2.65% Portfolio turnover rate 28% 25% 12% 12% 17% 49% Fees and expenses reimbursed by the Manager to average daily net assets: 0.14%* 0.31% 0.20% 0.19% 0.06% 0.11%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 1. (d) Net expenses to average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period. ++ Not annualized. * Annualized. See accompanying notes to the financial statements. 5 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATIONFUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO World Balanced Allocation Fund (the "Fund") (formerly GMO World Equity Allocation Fund) is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund's benchmark is the GMO World Balanced Index, a composite benchmark computed by GMO. It consists of (i) the S&P 500 Index (a U.S. large capitalization stock index, independently maintained and published by Standard & Poor's Corporation); (ii) the MSCI ACWI (All Country World Index) Free ex-U.S. Index (an international (excluding U.S. and including emerging) equity index, independently maintained and published by Morgan Stanley Capital International): (iii) the Lehman Brothers U.S. Aggregate Bond Index (an independently maintained and published index comprised of U.S. fixed rate debt issues, having a maturity of at least one year, rated investment grade or higher by Moody's Investors Service, Standard & Poor's or Fitch IBCA, Inc.) in the following proportions: 48.75% (S&P 500), 16.25% (MSCI ACWI), and 35% (Lehman Brothers). The GMO World Balanced Index reflects investment of all applicable dividends, capital gains, and interest. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the GMO World Balanced Index through investment to varying extents in other Funds of the Trust. The Fund will pursue its objective by investing in the least expensive actively invested class of underlying domestic equity, international equity, and fixed income funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. 6 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATIONFUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. 7 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATIONFUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $4,770,690 and $654,995 expiring in 2008 and 2010, respectively. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on an accrual basis. Non-cash dividends, if any, are recorded at fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 8 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATIONFUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not charge an advisory fee for asset allocation advice provided to the Fund, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. No shareholder service fee is charged for Class III shares. Like the other operating expenses (as described below), the shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying Funds. For the six months ended August 31, 2002, the shareholder service fees incurred indirectly by the Fund were 0.14% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees, and fund expenses (as defined above) incurred indirectly by the Fund through investment in underlying Funds. For the six months ended, August 31, 2002 indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.469% and 0.012% of the Fund's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $10. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $64,147,803 and $9,154,149, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $177,403,694 $6,306,546 $(13,410,800) $(7,104,254)
9 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATIONFUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 13.9% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ --------------------- Shares Amount Shares Amount ---------- ------------ -------- ----------- Class III: Shares sold 19,924,693 $177,140,467 90,177 $ 763,787 Shares issued to shareholders in reinvestment of distributions 43 368 19,848 164,333 Shares repurchased (845,864) (7,425,590) (489,222) (4,102,000) ---------- ------------ -------- ----------- Net increase (decrease) 19,078,872 $169,715,245 (379,197) $(3,173,880) ========== ============ ======== ===========
10 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 98.1% AUTO & TRANSPORTATION -- 5.5% 8,700 AMR Corp* 88,653 6,900 Burlington Northern Santa Fe Railroad Co 198,444 1,900 CSX Corp 66,177 7,100 Delta Air Lines Inc 124,747 400 Eaton Corp 28,296 4,200 FedEx Corp 198,870 12,069 Ford Motor Co 142,052 12,241 General Motors Corp 585,854 1,500 Genuine Parts Co 49,875 4,400 Goodyear Tire & Rubber Co 59,488 2,200 Harley Davidson Inc 108,306 4,400 Norfolk Southern Corp 92,092 1,200 Paccar Inc 42,372 1,500 SPX Corp* 162,900 1,400 TRW Inc 80,360 600 Union Pacific Corp 36,330 -------------- 2,064,816 -------------- CONSUMER DISCRETIONARY -- 12.0% 2,800 Amazon.com Inc* 41,832 3,000 Autonation Inc* 39,600 1,900 Autozone Inc* 137,465 2,050 Best Buy Co Inc* 43,460 800 Black and Decker Corp 35,896 2,600 CDW Computer Centers Inc* 111,592 6,400 Circuit City Stores Inc 89,216 1,800 Clear Channel Communications Inc* 61,524 3,200 Clorox Co 137,792 1,350 Darden Restaurants Inc 34,601 3,400 Dollar Tree Stores Inc* 83,674 8,000 Eastman Kodak Co 244,320 800 Expedia Inc* 40,352 2,400 Federated Department Stores Inc* 86,160 6,900 Fox Entertainment Group Inc, Class A* 154,077 8,600 Gillette Co 271,158 1,500 Harrahs Entertainment Inc* 71,310 10,200 Hilton Hotels Corp 117,402 1,100 International Flavors & Fragrances 35,475
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 2,500 Interpublic Group Inc 45,575 3,100 Jones Apparel Group Inc* 111,879 1,900 Kohls Corp* 132,468 4,500 KPMG Consulting Inc* 45,675 9,100 Liberty Media Corp, Class A* 76,076 700 Liberty Media Corp, Class B* 6,083 2,500 Limited Brands 38,225 1,400 Manpower Inc 46,368 2,500 May Department Stores Co 73,325 2,700 MGM Grand Inc* 95,823 1,300 Mohawk Industries Inc* 64,350 2,100 Newell Rubbermaid Inc 72,660 6,600 Office Depot Inc* 85,272 600 Outback Steakhouse Inc* 17,616 2,500 Penney (JC) Co Inc 43,400 1,400 R.R. Donnelley and Sons 36,932 2,200 Robert Half International Inc* 38,104 1,700 Ross Stores Inc 61,387 7,500 Sears Roebuck & Co 341,325 8,000 Staples Inc* 111,200 4,500 Starbucks Corp* 90,450 600 Target Corp 20,520 1,400 Toys R Us Inc* 18,662 800 VF Corp 32,488 3,300 Viacom Inc, Class A* 134,310 2,300 Viacom Inc, Class B* 93,610 12,900 Wal Mart Stores Inc 689,892 500 Whirlpool Corp 27,655 -------------- 4,488,236 -------------- CONSUMER STAPLES -- 10.1% 1,900 Albertsons Inc 48,868 3,400 Anheuser Busch Cos Inc 180,744 2,100 Campbell Soup Co 48,615 14,000 Coca Cola Co 714,000 2,500 ConAgra Foods Inc 65,725 1,000 Heinz (HJ) Co 37,770 2,000 Kellogg Co 64,320 2,200 Pepsico Inc 87,010 24,000 Philip Morris Cos Inc 1,200,000
2 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER STAPLES -- CONTINUED 10,100 Procter and Gamble Co 895,365 15,200 Rite Aid Corp* 31,920 1,900 RJ Reynolds Tobacco Holdings 111,796 4,600 Safeway Inc* 118,772 3,700 Sara Lee Corp 68,228 1,500 UST Inc 52,065 2,300 Walgreen Co 79,925 -------------- 3,805,123 -------------- ELECTRONIC EQUIPMENT -- 0.1% 2,200 Polycom Inc* 21,582 -------------- FINANCIAL SERVICES -- 16.7% 1,000 Affiliated Computer Services Inc* 44,500 7,200 Allstate Corp 267,984 250 AMBAC Inc 14,378 9,900 American Express Co 356,994 2,200 Amsouth Bancorp 49,434 2,400 Automatic Data Processing Inc 90,648 8,600 Bank of America Corp 602,688 3,900 Bank One Corp 159,705 2,200 Bear Stearns Cos Inc 140,646 915 Charter One Financial Inc 30,836 800 Cigna Corp 68,096 2,200 CNA Financial Corp* 60,302 2,100 Comerica Inc 122,850 900 Compass Bankshares Inc 30,231 2,400 Countrywide Credit Industries Inc 125,976 1,100 Deluxe Corp 50,006 1,100 Dun & Bradstreet Corp* 38,819 400 Edwards (AG) Inc 15,056 3,500 Equifax Inc 81,480 6,310 FleetBoston Financial Corp 152,260 2,900 Franklin Resources Inc 101,500 600 Greenpoint Financial Corp 30,600 500 Hartford Financial Services Group Inc 25,010 4,200 Household International Inc 151,662 800 Hudson City Bancorp Inc 14,816 4,300 Huntington Bancshares Inc 86,817
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 5,510 J.P. Morgan Chase & Co 145,464 3,700 Key Corp 99,271 1,100 Lehman Brothers Holdings Inc 62,711 1,900 Lincoln National Corp 70,395 4,300 Loews Corp 225,793 2,200 Marsh & McLennan Cos Inc 107,030 1,200 Marshall & Ilsley Corp 36,720 1,300 MBIA Inc 59,748 4,700 Merrill Lynch & Co Inc 170,234 3,300 MGIC Investment Corp 198,693 2,100 Moody's Corp 101,472 7,000 Morgan Stanley Dean Witter & Co 299,040 3,700 National City Corp 115,329 1,300 Old Republic International Corp 41,730 3,300 PMI Group Inc 111,870 1,200 PNC Bank Corp 55,308 2,600 Radian Group Inc 112,996 1,500 Regions Financial Corp 53,580 900 Safeco Corp 29,799 800 Southtrust Corp 20,992 1,400 Sovereign Bancorp Inc 21,448 5,500 Stilwell Financial Inc 76,670 1,000 Suntrust Banks Inc 67,510 2,200 Torchmark Corp 82,170 1,000 Total System Services Inc 17,000 1,800 Union Planters Corp 55,908 1,500 UnionBanCal Corp 67,500 5,400 Unumprovident Corp 125,064 3,100 US Bancorp 66,619 7,500 Wachovia Corp 276,375 4,700 Washington Mutual Inc 177,707 4,200 Wells Fargo & Co 219,198 -------------- 6,284,638 -------------- HEALTH CARE -- 12.2% 4,300 Aetna Inc 183,223 4,100 Boston Scientific Corp* 119,515 12,100 Bristol Myers Squibb Co 301,895 1,700 Genentech Inc* 55,743 2,400 Gilead Sciences Inc* 76,992
4 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 4,500 Guidant Corp* 165,600 3,200 Healthsouth Corp* 17,248 19,478 Johnson & Johnson 1,057,850 600 Lincare Holdings Inc* 19,230 3,400 Medtronic Inc 140,012 26,600 Merck & Co Inc 1,343,832 1,300 Millipore Corp 45,877 900 Patterson Dental Co* 42,930 11,250 Pfizer Inc 372,150 22,900 Schering Plough Corp 528,532 1,700 Wellpoint Health Network* 126,429 -------------- 4,597,058 -------------- INTEGRATED OILS -- 1.9% 3,600 Conoco Inc 88,380 10,900 Marathon Oil Corp 269,775 3,400 Occidental Petroleum Corp 100,980 5,000 Phillips Petroleum Co 262,900 -------------- 722,035 -------------- MATERIALS & PROCESSING -- 2.2% 2,000 Ashland Inc 57,320 1,100 Avery Dennison Corp 69,432 1,900 Cooper Industries Ltd 62,168 3,700 Du Pont (E.I.) De Nemours 149,147 900 Eastman Chemical Co 40,383 1,800 Engelhard Corp 47,088 600 Georgia-Pacific Group 12,630 1,400 MeadWestvaco Corp 32,606 400 Nucor Corp 20,016 800 Phelps Dodge Corp* 25,848 1,400 PPG Industries Inc 78,778 2,100 Praxair Inc 117,663 3,200 Sealed Air Corp* 49,568 2,600 Sherwin Williams Co 70,200 -------------- 832,847 -------------- OTHER -- 2.5% 14,700 Honeywell International Inc 440,265
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- OTHER -- CONTINUED 1,400 Illinois Tool Works Inc 95,928 1,600 Ingersoll Rand Co 60,080 1,200 ITT Industries Inc 81,576 1,500 Johnson Controls 129,435 1,500 Textron Inc 58,275 1,600 Westwood One Inc* 55,888 -------------- 921,447 -------------- OTHER ENERGY -- 1.0% 2,300 Devon Energy Corp 108,100 3,800 Schlumberger Ltd 164,198 500 Sunoco Inc 17,740 4,100 Transocean Sedco Forex Inc 100,450 -------------- 390,488 -------------- PRODUCER DURABLES -- 5.0% 6,300 American Power Conversion Corp* 78,813 9,000 Applied Materials Inc* 120,240 4,700 Boeing Co 174,229 1,500 Caterpillar Inc 65,460 300 Centex Corp 15,147 1,500 Danaher Corp 90,225 1,000 Deere (John) and Co 45,920 900 Diebold Inc 32,436 1,200 Emerson Electric Co 58,536 1,100 Grainger (WW) Inc 49,555 2,300 Horton (DR) Inc 47,748 1,500 Lexmark International Group Inc* 70,800 6,700 Lockheed Martin Corp 424,244 1,100 Northrop Grumman Corp 135,080 200 NVR Inc* 59,300 900 Parker-Hannifin Corp 36,504 2,400 Pitney Bowes Inc 87,000 3,000 United Technologies Corp 178,170 14,000 Xerox Corp* 98,140 -------------- 1,867,547 -------------- TECHNOLOGY -- 14.9% 3,000 Adobe Systems Inc 60,300
6 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 4,700 Analog Devices Inc* 113,270 6,500 Apple Computer Inc* 95,875 2,400 Applera Corp-Applied Biosystems Group 47,544 1,100 Arrow Electronics Inc* 17,919 1,000 Avnet Inc 15,480 1,700 AVX Corp 20,876 6,800 BMC Software Inc* 94,520 3,000 Brocade Communications Systems Inc* 43,410 1,900 ChoicePoint Inc* 81,643 77,800 Cisco Systems Inc* 1,075,196 5,200 Computer Associates International Inc 58,240 3,800 Computer Sciences Corp* 139,954 21,600 Compuware Corp* 78,408 7,800 Corning Inc* 15,600 16,300 Dell Computer Corp* 433,906 4,100 Fiserv Inc* 150,921 5,300 Gateway Inc* 18,550 12,000 Hewlett Packard Co 161,160 73,000 Intel Corp 1,216,910 1,400 Intuit Inc* 62,482 7,500 Lucent Technologies Inc* 12,975 3,400 Maxim Integrated Products Inc* 107,474 2,900 Microchip Technology Inc* 61,045 1,800 Microsoft Corp* 88,344 4,900 Motorola Inc 58,800 4,400 Network Appliance Inc* 41,976 3,400 Network Associates Inc* 44,200 49,200 Oracle Corp* 471,828 4,600 Raytheon Co 161,000 1,600 Rockwell International Corp 29,472 5,900 Symantec Co* 168,740 18,400 Tellabs Inc* 103,960 4,700 Xilinx Inc* 90,804 14,200 Yahoo! Inc* 146,118 -------------- 5,588,900 -------------- U.S. GOVERNMENT AGENCY -- 3.7% 12,400 Fannie Mae 939,672
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- CONTINUED 6,900 Freddie Mac 442,290 -------------- 1,381,962 -------------- UTILITIES -- 10.3% 1,400 Ameren Corp 61,670 1,200 American Electric Power Inc 40,920 68,400 AT & T Corp 835,848 9,300 Bellsouth Corp 216,876 5,700 Broadwing Inc* 18,354 900 Cinergy Corp 30,960 1,900 CMS Energy Corp 20,064 2,700 Consolidated Edison Inc 109,863 600 Constellation Energy Group Inc 16,806 1,200 DTE Energy Co 51,492 9,300 Edison International* 111,414 1,200 Entergy Corp 50,628 1,097 Firstenergy Corp 36,201 1,200 FPL Group Inc 68,496 10,500 PG & E Corp* 119,175 700 Pinnacle West Capital Corp 23,387 1,000 PPL Corp 36,350 1,600 Public Service Enterprise Group Inc 56,320 4,700 Reliant Energy Inc 55,695 24,726 SBC Communications Inc 611,721 2,200 Sempra Energy 52,822 2,000 Southern Co 57,920 20,900 Sprint Corp (Fon Group) 242,440 1,500 TXU Corp 72,540 28,242 Verizon Communications 875,502 -------------- 3,873,464 -------------- TOTAL COMMON STOCKS (COST $41,974,161) 36,840,143 --------------
See accompanying notes to the financial statements. 8 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 7.3% CASH EQUIVALENTS -- 5.5% 826,041 Dreyfus Money Market Fund(a) 826,041 $ 751,157 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(a) 751,157 488,252 Merrimac Money Market Fund(a) 488,252 -------------- 2,065,450 -------------- REPURCHASE AGREEMENTS -- 1.8% $ 691,073 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $691,139 and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19 and a market value, including accrued interest of $711,217. 691,073 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $2,756,523) 2,756,523 -------------- TOTAL INVESTMENTS -- 105.4% (Cost $44,730,684) 39,596,666 Other Assets and Liabilities (net) -- (5.4%) (2,043,646) -------------- TOTAL NET ASSETS -- 100.0% $ 37,553,020 ============== NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). See accompanying notes to the financial statements. 9 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $1,984,496 (cost $44,730,684) (Note 1) $39,596,666 Cash 145 Dividends and interest receivable 57,160 Receivable for expenses reimbursed by Manager (Note 2) 4,898 ----------- Total assets 39,658,869 ----------- LIABILITIES: Payable upon return of securities loaned (Note 1) 2,065,450 Payable to affiliate for (Note 2): Management fee 10,457 Shareholder service fee 4,753 Accrued expenses 25,189 ----------- Total liabilities 2,105,849 ----------- NET ASSETS $37,553,020 =========== NET ASSETS CONSIST OF: Paid-in capital $45,237,418 Accumulated undistributed net investment income 79,170 Accumulated net realized loss (2,629,550) Net unrealized depreciation (5,134,018) ----------- $37,553,020 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $37,553,020 =========== SHARES OUTSTANDING: Class III 3,989,323 =========== NET ASSET VALUE PER SHARE: Class III $ 9.41 ===========
10 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 283,065 Interest (including securities lending income of $1,011) 6,341 ----------- Total income 289,406 ----------- EXPENSES: Management fee (Note 2) 57,854 Audit fees 16,100 Custodian and transfer agent fees 11,500 Registration fees 1,010 Legal fees 485 Trustees fees (Note 2) 436 Miscellaneous 667 Fees reimbursed by Manager (Note 2) (29,737) ----------- 58,315 Shareholder service fee (Note 2) - Class III 26,297 ----------- Net expenses 84,612 ----------- Net investment income 204,794 ----------- REALIZED AND UNREALIZED LOSS: Net realized loss on: Investments (1,106,742) Closed futures contracts (162,168) ----------- Net realized loss (1,268,910) ----------- Change in net unrealized appreciation (depreciation) on investments (5,349,527) ----------- Net realized and unrealized loss (6,618,437) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,413,643) ===========
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 204,794 $ 208,046 Net realized loss (1,268,910) (883,849) Change in net unrealized appreciation (depreciation) (5,349,527) (72,583) ----------- ----------- Net decrease in net assets from operations (6,413,643) (748,386) ----------- ----------- Distributions to shareholders from: Net investment income Class III (182,747) (180,097) ----------- ----------- Total distributions from net investment income (182,747) (180,097) ----------- ----------- Net share transactions: (Note 5) Class III 16,654,588 17,005,362 ----------- ----------- Increase in net assets resulting from net share transactions 16,654,588 17,005,362 ----------- ----------- Total increase in net assets 10,058,198 16,076,879 NET ASSETS: Beginning of period 27,494,822 11,417,943 ----------- ----------- End of period (including accumulated undistributed net investment income of $79,170 and $57,123, respectively) $37,553,020 $27,494,822 =========== ===========
12 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 -------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999* ---------------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.24 $ 12.08 $ 12.64 $ 10.67 $ 10.00 ------- ------- ------- ------- ----------- Income from investment operations: Net investment income 0.06+ 0.16+ 0.15+ 0.13 0.09 Net realized and unrealized gain (loss) (1.84) (0.86) (0.57) 1.97 0.65 ------- ------- ------- ------- ----------- Total from investment operations (1.78) (0.70) (0.42) 2.10 0.74 ------- ------- ------- ------- ----------- Less distributions to shareholders: From net investment income (0.05) (0.14) (0.14) (0.13) (0.07) ------- ------- ------- ------- ----------- Total distributions (0.05) (0.14) (0.14) (0.13) (0.07) ------- ------- ------- ------- ----------- NET ASSET VALUE, END OF PERIOD $ 9.41 $ 11.24 $ 12.08 $ 12.64 $ 10.67 ======= ======= ======= ======= =========== TOTAL RETURN(a) (15.87)%++ (5.78)% (3.44)% 19.83% 7.48%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $37,553 $27,495 $11,418 $13,275 $ 8,116 Net expenses to average daily net assets 0.48%** 0.48% 0.48% 0.48% 0.48%** Net investment income to average daily net assets 1.17%** 1.36% 1.18% 1.11% 1.30%** Portfolio turnover rate 27% 45% 161% 19% 33% Fees and expenses reimbursed by the Manager to average daily net assets: 0.17%** 0.36% 0.54% 0.44% 1.47%**
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Period from July 23, 1998 (commencement of operations) through February 28, 1999. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not annualized. See accompanying notes to the financial statements. 13 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax-Managed U.S. Equities Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high after-tax total return primarily through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 (After Tax), which is computed by the Manager by applying a 40% tax (credit) on short-term realized capital gains (losses), a 40% tax on income, and a 20% tax (credit) on long-term realized capital gains (losses) on the securities comprising the S&P 500 Stock Index, a U.S. large capitalization stock index, independently maintained and published by Standard & Poor's Corporation. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 14 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, the Fund held no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a 15 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. As of August 31, 2002, the Fund held no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $1,984,496 collateralized by cash in the amount of $2,065,450, which was invested in short-term investments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 16 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $24,242 and $1,030,107 expiring in 2008 and 2010, respectively. The Fund elected to defer to March 1, 2002 post-October losses of $306,291. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. 17 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $436. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $25,223,888 and $9,064,053 respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $44,730,684 $1,257,438 $(6,391,456) $(5,134,018)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 77.2% of the outstanding shares of the Fund were held by five shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ---------------------- ---------------------- Shares Amount Shares Amount Class III: --------- ----------- --------- ----------- Shares sold 1,724,420 $18,483,853 1,498,911 $16,997,564 Shares issued to shareholders in reinvestment of distributions 915 9,891 694 7,798 Shares repurchased (181,198) (1,839,156) -- -- --------- ----------- --------- ----------- Net increase 1,544,137 $16,654,588 1,499,605 $17,005,362 ========= =========== ========= ===========
18 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 98.5% AUTO & TRANSPORTATION -- 7.0% 2,900 Airborne Inc 37,294 2,600 American Axle & Manufacturing Holdings Inc* 77,350 5,000 Arctic Cat Inc 74,750 5,425 ArvinMeritor Inc 126,891 3,900 Autoliv Inc 85,410 2,900 Borg Warner Automotive Inc 174,696 2,700 CNF Transportation Inc 82,890 3,600 Continental Airlines Inc, Class B* 36,612 5,600 Cooper Tire & Rubber Co 116,928 8,200 Dana Corp 138,908 1,400 Hunt (JB) Transportation Services Inc* 33,194 1,500 Keystone Automotive Industries Inc* 21,990 5,900 Lear Corp* 274,940 2,800 Navistar International Corp 70,000 3,300 Northwest Airlines Corp* 33,561 3,500 Offshore Logistics Inc* 63,035 6,250 Paccar Inc 220,687 1,700 Polaris Industries Inc 124,695 2,800 Smith (AO) Corp, Class B 85,260 400 SPX Corp* 43,440 1,100 US Freightways Corp 29,700 2,200 Wabtec Corp 28,358 4,000 World Fuel Services Corp 76,640 2,300 Yellow Corp* 51,267 ------------- 2,108,496 ------------- CONSTRUCTION -- 0.1% 4,700 McDermott International Inc* 33,135 ------------- CONSUMER DISCRETIONARY -- 21.8% 900 Action Performance Cos Inc* 29,133 6,000 American Greetings Corp 100,200 1,700 AnnTaylor Stores Corp* 45,390 3,100 Applebees International Inc 68,851 3,200 Autozone Inc* 231,520 2,300 Aztar Corp* 32,890 3,700 Banta Corp 138,898 4,900 Big Lots Inc* 82,565 2,800 Black and Decker Corp 125,636
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 2,100 Blockbuster Inc 47,775 1,000 Blyth Industries Inc 29,570 1,000 Bob Evans Farms Inc 24,260 6,700 Bowne and Co Inc 81,070 4,100 Boyd Gaming Corp* 66,830 3,300 Burlington Coat Factory Warehouse 65,043 3,700 Callaway Golf Co 54,871 4,000 Catalina Marketing Corp* 125,720 1,800 CBRL Group Inc 46,224 2,600 CDW Computer Centers Inc* 111,592 6,100 Circuit City Stores Inc 85,034 2,500 Circuit City Stores Inc-CarMax Group* 40,375 2,000 Constellation Brands Inc, Class A* 56,820 2,000 Cumulus Media Inc* 27,920 6,400 Dillard's Inc 157,184 4,700 Dollar Tree Stores Inc* 115,667 7,500 DoubleClick Inc* 42,225 5,200 Dress Barn Inc* 63,700 3,400 Fastenal Co 119,748 5,400 Fossil Inc* 118,044 4,500 Furniture Brands International Inc* 113,625 5,700 G TECH Holdings Corp* 109,155 1,600 Global Imaging Systems Inc* 31,376 800 Group 1 Automotive Inc* 21,840 900 Harman International Industries 46,287 4,700 Hasbro Inc 61,805 2,400 Hollywood Entertainment Corp* 32,400 15,900 Ikon Office Solutions Inc 147,075 3,300 infoUSA Inc* 16,830 3,400 International Flavors & Fragrances 109,650 1,000 Isle of Capris Casinos Inc* 21,200 2,800 Kellwood Co 69,776 2,000 Kelly Services, Class A 47,180 4,600 Liz Claiborne Inc 129,812 6,300 Lone Star Steakhouse and Saloon Inc 125,874 4,000 Magna Entertainment Corp* 17,520 14,300 Mail-Well Inc* 17,160 2,300 Manpower Inc 76,176 2,800 Maytag Corp 91,392 1,100 Michaels Stores Inc* 51,139 3,500 Mohawk Industries Inc* 173,250
2 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 6,500 MPS Group Inc* 34,775 4,700 Natures Sunshine Products Inc 50,290 2,000 Nautilus Group Inc* 63,420 3,400 Neiman Marcus Group Inc, Class A* 99,280 10,800 Nu Skin Enterprises Inc 135,000 12,600 Office Depot Inc* 162,792 24,100 OfficeMax Inc* 102,425 4,200 Outback Steakhouse Inc* 123,312 3,200 Papa Johns International Inc* 96,768 1,200 Payless ShoeSource Inc* 63,480 2,100 Pegasus Solutions Inc* 32,382 2,400 Petsmart Inc* 40,104 5,500 Pier 1 Imports Inc 98,450 7,900 Prime Hospitality Corp* 71,574 1,100 ProQuest Co* 36,520 4,200 R.R. Donnelley and Sons 110,796 1,800 Racing Champions Corp* 35,208 4,400 Radio One Inc, Class A* 69,740 1,000 Rent-A-Center Inc* 54,640 5,100 Ross Stores Inc 184,161 2,400 Ryan's Family Steak Houses Inc* 28,608 10,800 Saks Inc* 114,696 1,800 Shoe Carnival Inc* 34,200 8,100 Sinclair Broadcast Group, Class A* 102,303 4,500 Snap-On Inc 127,170 1,300 Sonic Automotive Inc* 26,520 5,900 Spanish Broadcasting System* 41,713 1,400 Spherion Corp* 11,550 1,600 Stanley Works 55,808 1,400 Steinway Musical Instruments* 24,220 14,500 Stewart Enterprises Inc* 65,685 2,300 Tech Data Corp* 76,061 2,300 The Pep Boys - Manny, Moe & Jack 32,660 3,100 Ticketmaster* 49,879 3,400 United Automotive Group Inc* 54,094 2,400 United Stationers Inc* 66,000 3,600 Universal Electronics Inc* 34,924 1,200 Urban Outfitters Inc* 31,068 4,400 Wallace Computer Services 81,488 1,600 West Marine Inc* 20,080 ------------- 6,589,121 -------------
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER STAPLES -- 3.9% 2,400 Dean Foods Co* 90,840 2,200 Dole Food Co 59,840 200 Farmer Brothers Co 67,400 2,200 Great Atlantic & Pacific Tea Co* 23,122 3,100 Ingles Markets Inc, Class A 34,875 2,400 Interstate Bakeries Corp 58,440 2,400 NBTY Inc* 36,528 6,700 PepsiAmericas Inc 95,944 2,700 Standard Commercial Corp 51,462 8,429 Supervalu Inc 175,070 2,900 The Dial Corp 58,609 21,767 Tyson Foods Inc, Class A 270,346 3,700 Universal Corp 141,895 ------------- 1,164,371 ------------- ELECTRONIC EQUIPMENT -- 0.5% 900 Benchmark Electronics Inc* 22,860 3,200 C-cor Electronics* 15,264 2,900 ESS Technology* 34,655 1,500 Imation Corp* 49,875 1,400 Inter-Tel Inc 33,292 ------------- 155,946 ------------- FINANCIAL SERVICES -- 25.8% 2,100 Allmerica Financial Corp 46,725 2,900 American Financial Group Inc 72,558 1,400 American National Insurance Co 106,750 2,500 AmerUs Group Co 79,975 2,400 Annaly Mortgage Management Inc 48,792 3,700 Archstone-Smith Trust 97,495 2,700 Arden Realty Group Inc, REIT 67,662 1,870 Associated Banc Corp 65,095 2,700 Astoria Financial Corp 90,396 3,300 Bank of Hawaii Corp 95,304 5,900 BankAtlantic Bancorp Inc 60,475 3,300 Banknorth Group Inc 86,064 1,200 Bedford Property Investors 30,276 2,121 BOK Financial Corp* 70,651 1,900 Capstead Mortgage Corp 40,280 2,600 CarrAmerica Realty Corp, REIT 70,980
4 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 2,100 CBL & Associates Properties Inc, REIT 81,900 2,400 Colonial BancGroup Inc 32,520 1,700 Colonial Properties Trust, REIT 60,537 3,100 Commerce Group Inc 119,970 2,600 Commercial Federal Corp 66,300 7,300 Commercial Net Lease Realty 114,683 1,100 Community Trust Bancorp 29,700 2,400 Compass Bankshares Inc 80,616 2,100 Corrections Corporation Of America* 30,975 2,736 Delphi Financial Group Inc 109,166 3,400 Deluxe Corp 154,564 3,600 Developers Diversified Realty Corp, REIT 83,160 2,100 Doral Financial Corp 89,019 2,700 Dun & Bradstreet Corp* 95,283 2,700 Edwards (AG) Inc 101,628 3,800 Entertainment Properties Trust, REIT 86,450 500 Erie Indemnity Co, Class A 21,850 6,000 Felcor Lodging Trust Inc, REIT 88,800 5,005 Fidelity National Financial Inc 149,900 1,700 First Bancorp Puerto Rico 70,210 800 First Citizens Bancshares, Class A 86,592 2,100 Gables Residential Trust, REIT 61,320 1,700 German American Bancorp 30,005 1,600 Glacier Bancorp Inc 36,240 3,200 Glenborough Realty Trust Inc, REIT 67,360 2,600 Glimcher Realty Trust, REIT 46,982 4,000 Health Care Inc 113,600 2,300 Healthcare Realty Trust Inc, REIT 73,922 1,200 Highwood Properties Inc, REIT 28,680 2,500 Hospitalities Properties Trust, REIT 86,700 3,500 Host Marriott Corp, REIT 35,490 21,000 HRPT Properties Trust, REIT 176,820 1,400 Hudson City Bancorp Inc 25,928 2,800 Hudson United Bancorp 80,864 5,400 Huntington Bancshares Inc 109,026 1,900 Interactive Data Corp* 27,816 2,400 Interpool Inc 31,944 6,300 IRT Property Co 74,655 4,200 iStar Financial Inc, REIT 122,640 8,600 JDN Realty Corp 108,360 900 Kansas City Life Insurance Co 32,400
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 2,100 Kimco Realty Corp, REIT 66,675 24,500 La Quinta Corp 126,910 3,600 Lexington Corporate Properties Trust 59,688 2,600 Mack-Cali Realty Corp, REIT 87,230 9,200 Meristar Hospitality Corp, REIT 103,500 2,600 Mony Group Inc 70,590 8,100 National Health Investors 118,422 2,100 Nationwide Financial Service, Class A 64,050 1,900 Nationwide Health Properties Inc 32,756 3,229 Net.B@nk Inc* 36,262 2,200 New Century Financial Corp 67,628 7,100 New Plan Excel Realty Trust, REIT 139,018 800 Novastar Financial Inc 23,008 5,501 Ohio Casualty Corp* 92,307 5,800 Old Republic International Corp 186,180 6,700 PMI Group Inc 227,130 2,100 Prentiss Properties Trust, REIT 61,425 3,700 Presidential Life Corp 59,200 3,200 PRG-Schultz International Inc* 46,144 5,200 Protective Life Corp 170,820 1,000 Provident Financial Group 28,960 1,900 PS Business Parks Inc, REIT 66,500 2,900 Public Storage Inc, REIT 92,510 3,000 Raymond James Financial Corp 84,600 6,700 RFS Hotel Investors Inc, REIT 85,425 4,200 Riggs National Corp 61,068 4,600 Ryder System Inc 120,244 4,700 Safeco Corp 155,617 3,900 Seacoast Banking Corp of Florida 72,150 1,300 Selective Insurance Group 30,680 1,300 Silicon Valley Bancshares* 29,458 1,600 SL Green Realty Corp, REIT 52,912 15,300 Sovereign Bancorp Inc 234,396 2,600 Sovran Self Storage, REIT 79,430 1,200 Student Loan Group 112,104 2,300 Summit Properties Inc, REIT 47,380 1,100 TCF Financial Corp 53,460 2,700 Thornburg Mortgage Inc 53,325 1,533 UMB Financial Corp 61,489 3,219 Washington Federal Inc 82,535 3,490 Westcorp 70,742
6 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 1,600 WFS Financial Inc* 30,720 ------------- 7,798,701 ------------- FOOD AND BEVERAGE -- 0.3% 1,200 Constellation Brands Inc, Class B* 34,200 500 Coors (Adolph) Co, Class B 30,025 900 Sanderson Farms Inc 15,930 ------------- 80,155 ------------- HEALTH CARE -- 3.0% 5,800 Aetna Inc 247,138 1,400 Ameripath Inc* 23,030 3,100 Hanger Orthopedic Group Inc* 53,785 8,000 Health Net Inc* 186,240 7,700 Humana Inc* 102,410 2,800 ICN Pharmaceuticals Inc 28,448 1,900 Invacare Corp 66,500 3,000 Mid Atlantic Medical Services Inc* 108,330 1,200 Ocular Sciences Inc* 27,720 7,200 Res-Care Inc* 34,560 5,200 WebMD Corp* 30,680 ------------- 908,841 ------------- MANUFACTURING -- 0.9% 6,900 Brunswick Corp 168,705 4,000 Columbus McKinnon Corp 25,040 1,600 Griffon Corp* 18,720 1,400 Hughes Supply Inc 40,222 3,700 Tower Automotive Inc* 29,489 ------------- 282,176 ------------- MATERIALS & PROCESSING -- 10.7% 3,500 A. Schulman Inc 73,920 3,900 Airgas Inc* 60,060 2,600 Albemarle Corp 80,158 2,800 Allegheny Technologies Inc 24,332 3,600 Ashland Inc 103,176 1,800 Ball Corp 89,658 1,400 Barnes Group Inc 28,000 1,400 Cleveland Cliffs Inc 36,848
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MATERIALS & PROCESSING -- CONTINUED 3,600 Commercial Metals Co 68,112 2,600 Cooper Industries Ltd 85,072 2,000 CoorsTek Inc* 43,000 2,100 Corn Products International Inc 58,800 3,500 Cytec Industries Inc* 93,100 7,300 Engelhard Corp 190,968 2,400 Ferro Corp 62,760 1,500 Florida Rock Industries 50,640 3,500 Freeport-McMoran Copper & Gold* 57,365 1,200 Fuller (HB) Co 32,340 1,400 Harsco Corp 42,490 4,700 Holly Corp 80,605 4,400 IMC Global Inc 58,256 4,400 Imco Recycling Inc* 34,760 1,000 Kaydon Corp 21,100 6,000 Lafarge Corp 204,060 2,000 Lubrizol Corp 62,400 4,500 Material Sciences Corp* 63,000 3,300 Olin Corp 62,700 11,800 Owens Illinois Inc* 138,060 2,700 PolyOne Corp 25,245 2,500 Quanex Corp 101,250 3,650 Reliance Steel and Aluminum Co 88,330 5,700 RPM Inc 87,096 4,600 Sealed Air Corp* 71,254 6,400 Sherwin Williams Co 172,800 1,700 Silgan Holdings Inc* 53,737 5,200 Sonoco Products Co 122,616 3,300 Standard Register Co 83,985 3,000 Texas Industries Inc 84,330 5,400 Timken Co 98,604 8,600 Unifi Inc* 64,500 9,500 United States Steel Corp 130,435 2,100 Worthington Industries Inc 37,275 ------------- 3,227,197 ------------- OTHER -- 1.6% 2,400 FMC Corp* 67,944 3,900 Kaman Corp, Class A 43,758 3,400 Lancaster Colony Corp 140,046 700 Sequa Corp, Class A* 37,331
8 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OTHER -- CONTINUED 6,301 Trinity Industries Inc 114,300 1,900 Westwood One Inc* 66,367 ------------- 469,746 ------------- OTHER ENERGY -- 1.2% 3,100 Denbury Resources Inc* 29,543 4,600 Patina Oil & Gas Corp 128,128 14,900 Petroquest Energy Inc* 67,944 7,300 TransMontaigne Inc* 37,303 3,100 Valero Energy Corp 100,657 ------------- 363,575 ------------- PRODUCER DURABLES -- 9.1% 900 Actuant Corp* 34,425 3,600 Agco Corp* 68,832 9,100 American Power Conversion Corp* 113,841 3,100 Belden Inc 51,801 4,200 Cable Design Technologies Corp* 27,090 5,200 Centex Corp 262,548 1,500 Cohu Inc 21,225 2,400 Cummins Inc 71,496 2,100 Donaldson Co Inc 79,422 5,600 General Cable Corp 23,632 13,132 Horton (DR) Inc 272,620 1,500 Hubbell Inc, Class B 48,150 4,500 KB HOME 215,775 2,800 Kimball International, Class B 41,356 4,900 Ladish Co Inc* 36,799 4,378 Lennar Corp 231,158 3,528 MDC Holdings Inc 141,826 1,800 Miller Herman Inc 27,882 2,000 Pentair Inc 86,880 2,100 Plantronics Inc* 38,556 4,700 Pulte Corp 224,378 3,200 Ryland Group Inc 136,480 1,500 Standex International Corp 32,100 1,800 Tecumseh Products Co 87,516 1,100 Tecumseh Products Co, Class B 48,763 1,900 Thomas & Betts Corp* 30,685 7,800 Toll Brothers Inc* 195,000
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PRODUCER DURABLES -- CONTINUED 2,900 Watts Industries Inc, Class A 50,895 2,200 William Lyon Homes* 46,640 ------------- 2,747,771 ------------- REAL ESTATE -- 0.0% 600 Jones Lang Lasalle Inc* 12,642 ------------- RETAIL TRADE -- 1.2% 5,300 Central Garden and Pet Co* 71,656 8,700 CKE Restaurants Inc* 63,684 2,900 Nordstrom Inc 56,057 3,700 Rex Stores Corp* 38,110 2,300 Shopko Stores Inc* 33,028 3,600 Sports Authority Inc* 19,368 1,400 Tractor Supply Company* 46,522 1,300 Valuevision International Inc, Class A* 18,499 1,600 Whitehall Jewellers Inc* 18,736 ------------- 365,660 ------------- TECHNOLOGY -- 6.8% 11,300 Adaptec Inc* 69,269 2,900 American Management Systems Inc* 43,500 3,200 Ametek Inc 110,080 6,000 Answerthink Inc* 12,300 5,900 Arrow Electronics Inc* 96,111 3,600 Artisan Components Inc* 33,012 7,242 Avnet Inc 112,106 3,300 AVX Corp 40,524 7,000 Ceridian Corp* 112,490 5,800 Ciber Inc* 35,438 2,900 Comcast Corp, Class A* 71,224 3,500 Gartner Group Inc, Class A* 32,935 2,300 Harris Corp 73,485 3,200 Hologic Inc* 34,400 7,100 Hypercom Corp* 26,696 2,900 Hyperion Solutions Corp* 65,830 15,600 Ingram Micro Inc* 212,940 1,500 JDA Software Group Inc* 19,005 7,200 Kemet Corp* 86,760 8,700 Manufacturers Services Ltd* 34,800
10 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 2,700 MCSi Inc* 16,578 3,550 Microchip Technology Inc* 74,727 3,200 Neoforma Inc* 28,864 3,100 Network Associates Inc* 40,300 8,300 PTEK Holdings Inc* 46,065 6,800 Red Hat Inc* 32,300 3,400 Siliconix Inc* 74,290 1,965 Skyworks Solutions Inc* 8,253 2,700 Storage Technology Corp* 36,855 2,600 Supertex Inc* 29,380 2,800 Sykes Enterprises Inc* 18,088 4,500 Syntel Inc* 53,010 2,800 Systems & Computer Technology Corp* 17,668 8,000 Tibco Software Inc* 33,680 4,800 Trikon Technologies Inc* 32,688 8,600 Tyler Technologies Inc* 32,250 2,100 Zebra Technologies Corp* 114,051 5,100 Zomax Inc* 19,431 1,950 Zoran Corp* 25,682 ------------- 2,057,065 ------------- UTILITIES -- 4.6% 1,600 American Water Works Co 71,152 3,100 Avista Corp 39,432 1,600 CH Energy Group Inc 77,600 3,700 DQE Inc 55,537 10,300 Edison International* 123,394 4,700 El Paso Electric Co* 55,225 8,706 Energy East Corp 182,130 2,600 Great Plains Energy Inc 54,262 1,600 Hawaiian Electric Industries Inc 72,096 1,300 Nicor Inc 36,920 4,000 OGE Energy Corp 76,800 4,800 Oneok Inc 92,832 3,500 Pepco Holdings Inc 75,530 4,400 PNM Resources Inc 97,152 2,900 Puget Energy Inc 62,930 2,500 SCANA Corp 69,950
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 5,200 Wisconsin Energy Corp 132,132 ------------- 1,375,074 ------------- TOTAL COMMON STOCKS (COST $26,775,497) 29,739,672 ------------- SHORT-TERM INVESTMENTS -- 11.5% CASH EQUIVALENTS -- 9.9% 1,201,416 Dreyfus Money Market Fund(a) 1,201,416 $ 1,092,507 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(a) 1,092,507 710,131 Merrimac Money Market Fund(a) 710,131 ------------- 3,004,054 ------------- REPURCHASE AGREEMENTS -- 1.6% $ 474,003 Salomon Brothers Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $474,048, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest of $492,381. 474,003 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $3,478,057) 3,478,057 ------------- TOTAL INVESTMENTS -- 110.0% (Cost $30,253,554) 33,217,729 Other Assets and Liabilities (net) -- (10.0%) (3,017,789) ------------- TOTAL NET ASSETS -- 100.0% $ 30,199,940 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). 12 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $2,875,019 (cost $30,253,554) (Note 1) $33,217,729 Cash 526 Dividends and interest receivable 35,738 Receivable for expenses reimbursed by Manager (Note 2) 4,836 ----------- Total assets 33,258,829 ----------- LIABILITIES: Payable upon return of securities loaned (Note 1) 3,004,054 Payable to affiliate for (Note 2): Management fee 13,982 Shareholder service fee 3,813 Accrued expenses 37,040 ----------- Total liabilities 3,058,889 ----------- NET ASSETS $30,199,940 =========== NET ASSETS CONSIST OF: Paid-in capital $32,913,220 Accumulated undistributed net investment income 55,524 Accumulated net realized loss (5,732,979) Net unrealized appreciation 2,964,175 ----------- $30,199,940 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $30,199,940 =========== SHARES OUTSTANDING: Class III 2,817,366 =========== NET ASSET VALUE PER SHARE: Class III $ 10.72 ===========
See accompanying notes to the financial statements. 13 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $101) $ 299,922 Interest (including securities lending income of $2,974) 4,985 ----------- Total income 304,907 ----------- EXPENSES: Management fee (Note 2) 98,429 Audit fees 15,916 Custodian and transfer agent fees 12,604 Legal fees 902 Trustees fees (Note 2) 480 Registration fees 276 Miscellaneous 955 Fees reimbursed by Manager (Note 2) (30,487) ----------- 99,075 Shareholder service fee (Note 2) - Class III 26,844 ----------- Net expenses 125,919 ----------- Net investment income 178,988 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on investments 2,171,732 ----------- Change in net unrealized appreciation (depreciation) on investments (4,783,566) ----------- Net realized and unrealized loss (2,611,834) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,432,846) ===========
14 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 178,988 $ 468,124 Net realized gain 2,171,732 2,873,008 Change in net unrealized appreciation (depreciation) (4,783,566) 1,594,048 ----------- ----------- Net increase (decrease) in net assets from operations (2,432,846) 4,935,180 ----------- ----------- Distributions to shareholders from: Net investment income Class III (123,464) (523,894) ----------- ----------- Total distributions from net investment income (123,464) (523,894) ----------- ----------- Net share transactions: (Note 5) Class III (4,787,268) (7,909,373) ----------- ----------- Decrease in net assets resulting from net share transactions (4,787,268) (7,909,373) ----------- ----------- Total decrease in net assets (7,343,578) (3,498,087) NET ASSETS: Beginning of period 37,543,518 41,041,605 ----------- ----------- End of period (including accumulated undistributed net investment income of $55,524 and $0, respectively) $30,199,940 $37,543,518 =========== ===========
See accompanying notes to the financial statements. 15 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ----------------------------------- (UNAUDITED) 2002 2001 2000* ---------------- ----------- ----------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.76 $ 10.54 $ 9.52 $ 10.00 ------- ------- ------- ------- Income from investment operations: Net investment income 0.06 0.15 0.12 0.08 Net realized and unrealized gain (loss) (1.06) 1.23 1.02 (0.50) ------- ------- ------- ------- Total from investment operations (1.00) 1.38 1.14 (0.42) ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.04) (0.16) (0.12) (0.06) ------- ------- ------- ------- Total distributions (0.04) (0.16) (0.12) (0.06) ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 10.72 $ 11.76 $ 10.54 $ 9.52 ======= ======= ======= ======= TOTAL RETURN(a) (8.52)%++ 13.25% 12.12% (4.25)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $30,200 $37,544 $41,042 $39,000 Net expenses to average daily net assets 0.70%** 0.70% 0.70% 0.70%** Net investment income to average daily net assets 1.00%** 1.30% 1.25% 1.08%** Portfolio turnover rate 18% 65% 131% 18% Fees and expenses reimbursed by the Manager to average daily net assets: 0.17%** 0.20% 0.17% 0.21%** Purchase premiums consisted of the following per share amounts:(b) --(c) --(c) $ 0.01 $ N/A
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown. Calculation excludes purchase premiums. (b) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change in presentation. Amounts calculated using average shares outstanding throughout the period. (c) Purchase premiums were less than $0.01 per share. * Period from June 1, 1999 (commencement of operations) through February 29, 2000. ** Annualized. ++ Not annualized. 16 See accompanying notes to the financial statements. GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax Managed Small Companies Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks to maximize after-tax total return through investment in a portfolio of common stocks of smaller companies principally traded in the U.S. The Fund's benchmark is the Russell 2500 Index (After Tax). The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the 17 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At August 31, 2002, the Fund held no open futures contracts. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $2,875,019 collateralized by cash in the amount of $3,004,054, which was invested in short-term investments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, 18 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of August 31, 2002, the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 19 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $640,309, $5,176,933 and $1,587,943 expiring in 2008, 2009 and 2010, respectively. The Fund elected to defer to March 1, 2002 post-October losses of $494,132. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .50% of the amount invested. If the Manager determines that any portion of a cash purchase is offset by a corresponding cash redemption occurring on the same day, the purchase premium charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium charged by the Fund may be waived if the Manager determines the Fund is substantially underweighted in cash so that a purchase will not require a securities transaction. All purchase premiums are paid and recorded by the Fund as paid-in capital. For the year ended February 28, 2002 and the six months ended August 31, 2002 the fund received $7,812 and $1,515 in purchase premiums, respectively. There is no premium for redemptions, reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .55% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. 20 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the period ended August 31, 2002 was $480. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $6,379,988 and $10,980,718, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $30,253,554 $5,512,749 $(2,548,574) $2,964,175
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 39.5% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 21 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 --------------------- --------------------- Shares Amount Shares Amount Class III: -------- ----------- -------- ----------- Shares sold 24,321 $ 303,000 141,701 $ 1,562,447 Shares issued to shareholders in reinvestment of distributions 4,447 52,487 8,017 85,606 Shares repurchased (402,969) (5,142,755) (853,209) (9,557,426) -------- ----------- -------- ----------- Net decrease (374,201) $(4,787,268) (703,491) $(7,909,373) ======== =========== ======== ===========
22 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 14.5% U.S. GOVERNMENT -- 6.1% 2,742,275 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 3,011,789 ------------ U.S. GOVERNMENT AGENCY -- 8.4% 245,000 Agency for International Development Floater (Support of Botswana),Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 2.07%, due 10/01/12 240,406 1,575,675 Agency for International Development Floater (Support of C.A.B.E.I.),Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 2.07%, due 10/01/12 1,546,131 1,585,099 Agency for International Development Floater (Support of Honduras),Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 2.01%, due 10/01/11 1,575,192 71,983 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 2.01%, due 05/01/14 71,264 725,573 Small Business Administration Pool #502320,Variable Rate, Prime - 2.18%, 2.56%, due 08/25/18 727,015 ------------ 4,160,008 ------------ TOTAL DEBT OBLIGATIONS (COST $7,217,442) 7,171,797 ------------ MUTUAL FUNDS -- 82.6% 1,584,743 GMO Alpha LIBOR Fund 40,670,936 ------------ TOTAL MUTUAL FUNDS (COST $40,655,642) 40,670,936 ------------
See accompanying notes to the financial statements. 1 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.8% REPURCHASE AGREEMENTS -- 0.8% 377,085 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $377,121 and an effective yield of 0.85%, collateralized by a U.S. Treasury Strip with a rate of 0.00%, maturity date of 11/15/14 and market value of $389,875. 377,085 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $377,085) 377,085 ------------ TOTAL INVESTMENTS -- 97.9% (Cost $48,250,169) 48,219,818 Other Assets and Liabilities (net) -- 2.1% 1,031,616 ------------ TOTAL NET ASSETS -- 100.0% $ 49,251,434 ============
Variable rates - The rates shown on variable rate notes are the current interest rates at August 31, 2002, which are subject to change based on the terms of the security. 2 See accompanying notes to the financial statements. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $48,250,169) (Note 1) $48,219,818 Receivable for investments sold 3,074 Receivable for Fund shares sold 1,000,000 Interest receivable 51,702 Receivable for expenses reimbursed by Manager (Note 2) 3,379 ----------- Total assets 49,277,973 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 2,161 Shareholder service fee 6,482 Accrued expenses 17,896 ----------- Total liabilities 26,539 ----------- NET ASSETS $49,251,434 =========== NET ASSETS CONSIST OF: Paid-in capital $49,058,822 Accumulated undistributed net investment income 257,886 Accumulated net realized loss (34,923) Net unrealized depreciation (30,351) ----------- $49,251,434 =========== SHARES OUTSTANDING: 5,127,978 =========== NET ASSET VALUE PER SHARE: $ 9.60 ===========
See accompanying notes to the financial statements. 3 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $247,575 Interest 145,688 -------- Total income 393,263 -------- EXPENSES: Management fee (Note 2) 12,322 Audit fees 11,776 Custodian and transfer agent fees 3,772 Registration fees 1,564 Legal fees 1,106 Trustees fees (Note 2) 642 Miscellaneous 828 Fees reimbursed by Manager (Note 2) (18,952) -------- 13,058 Shareholder service fee 36,966 -------- Net expenses 50,024 -------- Net investment income 343,239 -------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (119,412) Realized gains distributions from investment company shares 128,674 -------- Net realized gain 9,262 -------- Change in net unrealized appreciation (depreciation) on investments 281,717 -------- Net realized and unrealized gain 290,979 -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $634,218 ========
4 See accompanying notes to the financial statements. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 343,239 $ 1,183,337 Net realized gain 9,262 1,497,617 Change in net unrealized appreciation (depreciation) 281,717 (1,199,696) ------------ ------------ Net increase in net assets from operations 634,218 1,481,258 ------------ ------------ Distributions to shareholders from: Net investment income (85,353) (1,411,118) Net realized gains (650,834) (1,032,265) ------------ ------------ (736,187) (2,443,383) ------------ ------------ FUND SHARE TRANSACTIONS: (NOTE 5) Proceeds from sale of shares 17,953,395 39,182,645 Net asset value of shares issued to shareholders in payment of distributions declared 736,025 2,340,365 Cost of shares repurchased (17,682,827) (32,719,050) ------------ ------------ Net increase in net assets resulting from Fund share transactions 1,006,593 8,803,960 ------------ ------------ Total increase in net assets 904,624 7,841,835 NET ASSETS: Beginning of period 48,346,810 40,504,975 ------------ ------------ End of period (including accumulated undistributed net investment income of $257,886 and $0, respectively) $ 49,251,434 $ 48,346,810 ============ ============
See accompanying notes to the financial statements. 5 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.62 $ 9.92 $ 9.62 $ 9.63 $ 9.81 $ 9.78 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income 0.07(b)+ 0.30(b)+ 0.42(b)+ 0.46(b)+ 0.57 0.55 Net realized and unrealized gain (loss) 0.06 0.06 0.33 0.05 (0.16) 0.03 ------- ------- ------- ------- ------- ------- Total from investment operations 0.13 0.36 0.75 0.51 0.41 0.58 ------- ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.02) (0.39) (0.44) (0.52) (0.59) (0.55) From net realized gains (0.13) (0.28) (0.01) -- -- -- ------- ------- ------- ------- ------- ------- Total distributions (0.15) (0.66) (0.45) (0.52) (0.59) (0.55) ------- ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.60 $ 9.62 $ 9.92 $ 9.62 $ 9.63 $ 9.81 ======= ======= ======= ======= ======= ======= TOTAL RETURN(a) 1.31%** 3.73% 7.91% 5.42% 4.29% 6.10% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $49,251 $48,347 $40,505 $43,491 $53,387 $37,377 Net expenses to average daily net assets(c) 0.20%* 0.20% 0.20% 0.20% 0.20% 0.20% Net investment income to average daily net assets(b) 1.39%* 3.04% 4.30% 4.82% 5.50% 5.73% Portfolio turnover rate 16% 91% 50% 178% 76% 50% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08%* 0.12% 0.09% 0.08% 0.32% 0.28%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Net investment income for the period is affected by the timing of the declaration of dividends by other GMO Funds in which the Fund invests. (c) Net expenses exclude expenses incurred indirectly through investment in GMO Alpha LIBOR Fund. + Computed using average shares outstanding throughout the period. * Annualized. ** Not Annualized. 6 See accompanying notes to the financial statements. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Short-Term Income Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks to provide current income to the extent consistent with the preservation of capital and liquidity through investment in a portfolio of high-quality fixed income instruments. The Fund's benchmark is the Salomon Smith Barney 3 Month T-Bill Index. At August 31, 2002, 82.6% of the Fund was invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. GMO Alpha LIBOR Fund invests primarily in relatively high quality, low volatility fixed income instruments. The financial statements of the GMO Alpha LIBOR Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 7 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the 8 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Dividend income is recognized on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon the inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 9 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .05% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of the Fund at the annual rate of .15%. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding fund expenses, as defined above) incurred indirectly by the Fund through its investment in the GMO Alpha LIBOR Fund exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) rounded to less than 0.001% of the Fund's average daily net assets, and indirect investment expenses incurred by the Fund were 0.018% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $642. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the six months ended August 31, 2002, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ---------- ---------- U.S. Government securities $ -- $ 311,957 Investments (non-U.S. Government securities) 7,676,250 7,700,000
At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $48,250,169 $15,612 $(45,963) $(30,351)
10 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 66.7% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is an affiliate of the manager. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ---------------- ----------------- Shares sold 1,852,188 4,058,239 Shares issued to shareholders in reinvestment of distributions 76,737 240,652 Shares repurchased (1,825,331) (3,358,895) ------------- -------------- Net increase 103,594 939,996 Fund shares: Beginning of period 5,024,384 4,084,388 ------------- -------------- End of period 5,127,978 5,024,384 ============= ==============
11 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 96.1% ADVERTISING -- 0.4% 3,000 Getty Images Inc* 54,060 -------------- AUTO & TRANSPORTATION -- 4.0% 7,300 Airborne Inc 93,878 4,000 American Axle & Manufacturing Holdings Inc* 119,000 4,600 ArvinMeritor Inc 107,594 3,000 Coachmen Industries Inc 47,100 1,000 Landstar System Inc* 50,650 2,800 Navistar International Corp 70,000 1,000 Polaris Industries Inc 73,350 -------------- 561,572 -------------- CONSUMER DISCRETIONARY -- 34.6% 1,900 Action Performance Cos Inc* 61,503 3,500 Activision Inc* 97,545 1,000 American Woodmark Corp 50,390 2,550 Applebees International Inc 56,635 3,400 Autozone Inc* 245,990 3,000 Aztar Corp* 42,900 1,900 Bally Total Fitness Holdings Corp* 22,287 920 Benihana Inc* 11,500 1,800 Blyth Industries Inc 53,226 1,200 Bob Evans Farms Inc 29,112 5,700 Boyd Gaming Corp* 92,910 3,200 Callaway Golf Co 47,456 2,200 Career Education Corp* 98,098 2,000 Catalina Marketing Corp* 62,860 2,800 CDW Computer Centers Inc* 120,176 4,950 Chicos FAS Inc* 86,823 1,000 Children's Place Retail Stores Inc* 18,520 2,300 Choice Hotels International Inc* 53,337 8,400 Circuit City Stores Inc 117,096 4,700 Coach Inc* 115,761 1,600 Coinstar Inc* 43,200 3,800 Constellation Brands Inc, Class A* 107,958 3,000 Corinthian Colleges Inc* 111,750 1,700 Corporate Executive Board Co* 49,980 3,200 Cumulus Media Inc* 44,672
See accompanying notes to the financial statements. 1 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 5,100 Dollar Tree Stores Inc* 125,511 3,200 Dover Motorsports Inc 14,720 1,900 Education Management Corp* 78,489 1,400 Expedia Inc* 70,616 3,200 Fisher Scientific International Inc* 92,032 2,200 Fossil Inc* 48,092 2,100 FTI Consulting Inc* 76,482 4,600 G TECH Holdings Corp* 88,090 2,200 International Flavors & Fragrances Inc 70,950 4,000 ITT Educational Services Inc* 72,200 1,400 Jack in the Box Inc* 39,550 2,400 Krispy Kreme Doughnuts Inc* 85,200 2,800 Lightbridge Inc* 19,964 2,300 Liz Claiborne Inc 64,906 1,100 Manpower Inc 36,432 3,000 Maytag Corp 97,920 3,800 Michaels Stores Inc* 176,662 2,940 Mohawk Industries Inc* 145,530 8,500 MPS Group Inc* 45,475 2,100 MSC Industrial Direct Co* 27,258 1,700 Natures Sunshine Products Inc 18,190 2,463 Nautilus Group Inc* 78,086 1,600 Oakley Inc* 20,960 10,200 Office Depot Inc* 131,784 1,700 Outback Steakhouse Inc* 49,912 3,100 Overture Services Inc* 62,781 1,700 P.F. Chang's China Bistro Inc* 53,788 1,700 Panera Bread Co, Class A* 48,212 1,700 Papa Johns International Inc* 51,408 700 Payless ShoeSource Inc* 37,030 6,400 Petsmart Inc* 106,944 6,300 Pier 1 Imports Inc 112,770 1,600 Pre-Paid Legal Services Inc* 33,072 2,900 QRS Corp* 18,444 2,700 Readers Digest Association Inc 46,116 1,400 Rent-A-Center Inc* 76,496 3,400 Ross Stores Inc 122,774 1,500 SCP Pool Corp* 41,430 2,400 Sonic Automotive Inc* 48,960 5,500 Spanish Broadcasting System* 38,885
2 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 1,600 Steven Madden Ltd* 29,008 2,300 Tech Data Corp* 76,061 6,200 TeleTech Holdings Inc* 39,060 3,800 Ticketmaster* 61,142 3,700 Topps Inc (The)* 32,560 1,900 United Stationers Inc* 52,250 3,300 Williams-Sonoma Inc* 75,900 -------------- 4,881,787 -------------- CONSUMER STAPLES -- 1.9% 2,400 Great Atlantic & Pacific Tea Co* 25,224 3,400 NBTY Inc* 51,748 3,800 Supervalu Inc 78,926 5,400 The Dial Corp 109,134 -------------- 265,032 -------------- ELECTRONIC EQUIPMENT -- 1.8% 2,800 Benchmark Electronics Inc* 71,120 2,200 Concord Communications Inc* 16,610 4,100 ESS Technology* 48,995 6,300 PLX Technology Inc* 13,860 9,800 ScanSoft Inc* 42,532 3,600 Semtech Corp* 47,556 4,600 Trident Microsystems Inc* 17,388 -------------- 258,061 -------------- FINANCIAL SERVICES -- 10.6% 2,000 Brown & Brown Inc 58,500 1,900 City National Corp 102,448 2,600 Commerce Bancorp Inc 123,266 5,500 CompuCredit Corp* 33,275 4,000 Corrections Corporation Of America* 59,000 2,900 Digital Insight Corp* 47,270 2,600 Doral Financial Corp 110,214 2,600 First Midwest Bancorp Inc 74,620 900 Hilb Rogal and Hamilton Co 39,555 2,000 Investors Financial Services Corp 60,120 1,800 Irwin Financial Corp 32,760 1,800 John Nuveen and Co Inc, Class A 40,500
See accompanying notes to the financial statements. 3 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 2,600 NCO Group Inc* 44,902 2,800 New Century Financial Corp 86,072 3,612 New York Community Bancorp Inc 112,731 5,600 Roslyn Bancorp Inc 124,712 5,800 S1 Corp* 30,334 2,100 Sandy Spring Bancorp Inc 68,985 4,400 Silicon Valley Bancshares* 99,704 1,000 Triad Guaranty Inc* 43,650 1,700 UCBH Holdings Inc 65,348 2,600 Ventas Inc 33,800 -------------- 1,491,766 -------------- HEALTH CARE -- 15.8% 1,900 Accredo Health Inc* 97,337 3,300 Aetna Inc 140,613 3,900 American Medical Systems Holdings Inc* 87,126 2,700 AmerisourceBergen Corp 195,777 2,300 Aspect Medical Systems Inc* 7,728 5,500 AVI BioPharma Inc* 21,835 6,600 Caremark Rx Inc* 106,920 2,000 Cerner Corp* 74,720 2,100 Charles River Laboratories International Inc* 83,055 1,100 Cooper (The) Companies Inc 49,929 2,200 Cyberonics* 40,700 3,400 DaVita Inc* 75,276 1,400 Dentsply International Inc 55,538 2,300 Endocare Inc* 25,438 3,200 Entremed Inc* 8,800 2,400 Express Scripts Inc, Class A* 115,200 2,600 Hanger Orthopedic Group Inc* 45,110 1,700 Henry Schein Inc* 84,949 1,000 Immucor Inc* 26,790 1,500 LabOne Inc* 31,350 1,700 Lifepoint Hospital Inc* 51,408 2,500 Lincare Holdings Inc* 80,125 4,200 MGI Pharma Inc* 32,718 3,600 Mid Atlantic Medical Services Inc* 129,996 2,100 Oxford Health Plans Inc* 85,155 1,400 Patterson Dental Co* 66,780 3,500 Pharmaceutical Product Development Inc* 77,980
4 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 1,400 PolyMedica Corp* 34,188 2,400 Possis Medical Inc* 30,240 2,500 Sangstat Medical Corp* 45,525 5,800 Sepracor Inc* 32,306 2,200 Stericycle Inc* 68,288 3,500 Telik Inc* 49,105 1,800 Transkaryotic Therapies Inc* 62,352 1,210 Vivus Inc* 5,142 -------------- 2,225,499 -------------- MATERIALS & PROCESSING -- 2.7% 3,700 Airgas Inc* 56,980 1,800 Commscope Inc* 12,168 1,900 Mueller Industries Inc* 50,920 4,800 Owens Illinois Inc* 56,160 2,600 Packaging Corp of America* 48,958 380 Packaging Dynamics Corp* 2,500 5,700 RPM Inc 87,096 1,900 Sealed Air Corp* 29,431 2,300 The Shaw Group Inc* 38,525 -------------- 382,738 -------------- OTHER -- 0.8% 2,500 Elcor Corp 41,875 1,700 Lancaster Colony Corp 70,023 -------------- 111,898 -------------- OTHER ENERGY -- 2.5% 1,700 Clayton Williams Energy Inc* 16,660 5,200 Denbury Resources Inc* 49,556 2,100 Frontier Oil Corp 29,925 2,400 KEY Production Company Inc* 44,688 1,750 Patina Oil & Gas Corp 48,738 2,000 Pogo Producing Co 65,700 1,200 Pure Resources Inc* 27,744 1,100 Stone Energy Corp* 37,400 3,800 Vintage Petroleum Inc 38,532 -------------- 358,943 --------------
See accompanying notes to the financial statements. 5 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- PRODUCER DURABLES -- 6.2% 4,400 Agco Corp* 84,128 5,100 American Power Conversion Corp* 63,801 2,100 Cohu Inc 29,715 1,600 Electro Scientific Industries* 29,744 2,300 Headwaters Inc* 30,820 1,600 HON Industries Inc 43,952 1,800 Itron Inc* 24,318 3,100 KB HOME 148,645 2,800 L-3 Communications Holdings Inc* 142,492 1,800 Ladish Co Inc* 13,518 1,300 Manitowoc Co Inc 42,900 400 NVR Inc* 118,600 1,700 Photon Dynamics Inc* 35,479 2,800 Plantronics Inc* 51,408 3,500 Somera Communications Inc* 9,625 -------------- 869,145 -------------- RETAIL TRADE -- 0.4% 1,800 Tractor Supply* 59,814 -------------- TECHNOLOGY -- 13.2% 11,100 Adaptec Inc* 68,043 2,500 American Management Systems Inc* 37,500 1,500 Ametek Inc 51,600 1,000 Black Box Corp* 34,710 3,200 Ceridian Corp* 51,424 6,300 Ciber Inc* 38,493 5,600 Concurrent Computer Corp* 15,736 1,800 Cymer Inc* 43,560 5,400 Digital River Inc* 42,012 3,300 Documentum Inc* 50,919 2,900 Electronics For Imaging Inc* 43,587 3,500 Emulex Corp* 59,080 3,500 F5 Networks Inc* 43,750 1,300 Factset Research Systems Inc 32,240 4,400 Fairchild Semiconductor Corp, Class A* 53,108 7,400 Harmonic Lightwaves Inc* 18,870 2,300 Hologic Inc* 24,725 2,900 IDT Corp* 51,185
6 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 2,700 Ingram Micro Inc* 36,855 6,300 J.D. Edwards & Co* 82,215 4,100 Kana Software Inc* 7,790 7,200 Kopin Corp* 44,712 2,000 Kronos Inc* 51,920 11,500 Liberate Technologies Inc* 21,735 5,850 Microchip Technology Inc* 123,143 6,100 Network Associates Inc* 79,300 5,800 Oak Technology Inc* 25,346 6,000 Parametric Technology Corp* 13,680 2,900 Perot Systems Corp* 34,365 6,500 PMC-Sierra Inc* 45,565 4,500 Quadramed Corp* 6,615 3,400 Sandisk Corp* 55,114 3,300 Silicon Laboratories Inc* 74,547 1,100 Siliconix Inc* 24,035 2,100 SPSS Inc* 24,150 2,000 Supertex Inc* 22,600 4,000 Syntel Inc* 47,120 12,400 Tibco Software Inc* 52,204 1,500 Websense Inc* 25,560 12,000 Western Digital Corp* 48,720 3,200 Witness Systems Inc* 20,960 1,200 Zebra Technologies Corp* 65,172 7,200 Zomax Inc* 27,432 2,700 Zoran Corp* 35,559 -------------- 1,856,956 -------------- UTILITIES -- 1.2% 1,600 Commonwealth Telephone Enterprises Inc* 61,200 8,100 Edison International* 97,038 5,100 US Unwired Inc* 4,743 -------------- 162,981 -------------- TOTAL COMMON STOCKS (COST $14,868,340) 13,540,252 -------------- RIGHTS AND WARRANTS -- 0.1% CONSUMER DISCRETIONARY -- 0.1% 403 Expedia Inc Warrants, Expires 2/04/09* 8,511 --------------
See accompanying notes to the financial statements. 7 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- 0.0% 2,800 Endo Pharmaceutical Warrants, Expires 12/31/02* 364 -------------- TOTAL RIGHTS AND WARRANTS (COST $16,346) 8,875 -------------- SHORT-TERM INVESTMENTS -- 15.9% CASH EQUIVALENTS -- 11.9% 668,443 Dreyfus Money Market Fund(a) 668,443 $ 607,845 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(a) 607,845 395,099 Merrimac Money Market Fund(a) 395,099 -------------- 1,671,387 -------------- U.S. GOVERNMENT -- 0.7% $ 100,000 U.S. Treasury Bill, 1.64%, due 9/5/02(b) 99,977 -------------- REPURCHASE AGREEMENT -- 3.3% $ 464,099 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $464,143 and an effective yield of 0.85% collateralized by a U.S. Treasury Bond with a rate 8.125%, maturity date of 8/15/19 and market value, including interest of $478,703. 464,099 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $2,235,463) 2,235,463 -------------- TOTAL INVESTMENTS -- 112.1% (Cost $17,120,149) 15,784,590 Other Assets and Liabilities (net) -- (12.1%) (1,697,688) -------------- TOTAL NET ASSETS -- 100.0% $ 14,086,902 ============== NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 8 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $1,592,623 (cost $17,120,149) (Note 1) $15,784,590 Cash 578 Dividends and interest receivable 5,490 Receivable for expenses reimbursed by Manager (Note 2) 4,774 ----------- Total assets 15,795,432 ----------- LIABILITIES: Payable upon return of securities loaned (Note 1) 1,671,387 Payable to affiliate for (Note 2): Management fee 3,886 Shareholder service fee 1,767 Payable for variation margin on open futures contracts (Notes 1 and 6) 3,350 Accrued expenses 28,140 ----------- Total liabilities 1,708,530 ----------- NET ASSETS $14,086,902 =========== NET ASSETS CONSIST OF: Paid-in capital $19,380,222 Net investment loss (6,574) Accumulated net realized loss (3,967,805) Net unrealized depreciation (1,318,941) ----------- $14,086,902 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $14,086,902 =========== SHARES OUTSTANDING: Class III 998,454 =========== NET ASSET VALUE PER SHARE: Class III $ 14.11 ===========
See accompanying notes to the financial statements. 9 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $98) $ 26,575 Interest (including securities lending income of $4,866) 6,059 ---------------- Total income 32,634 ---------------- EXPENSES: Management fee (Note 2) 26,829 Audit fees 16,376 Custodian and transfer agent fees 10,672 Registration fees 1,380 Legal fees 185 Trustees fees (Note 2) 183 Miscellaneous 586 Fees reimbursed by Manager (Note 2) (29,198) ---------------- 27,013 Shareholder service fee (Note 2) - Class III 12,195 ---------------- Net expenses 39,208 ---------------- Net investment loss (6,574) ---------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 295,712 Closed futures contracts (48,982) ---------------- Net realized gain 246,730 ---------------- Change in net unrealized appreciation (depreciation) on: Investments (2,435,558) Open futures contracts 29,461 ---------------- Net unrealized loss (2,406,097) ---------------- Net realized and unrealized loss (2,159,367) ---------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (2,165,941) ================
10 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income (loss) $ (6,574) $ 13,089 Net realized gain (loss) 246,730 (4,129,648) Change in net unrealized appreciation (depreciation) (2,406,097) 2,747,114 ----------- ----------- Net decrease in net assets from operations (2,165,941) (1,369,445) ----------- ----------- Distributions to shareholders from: Net investment income Class III -- (12,318) ----------- ----------- Total distributions from net investment income -- (12,318) ----------- ----------- Net realized gains Class III -- (1,633,992) ----------- ----------- Total distributions from net realized gains -- (1,633,992) ----------- ----------- -- (1,646,310) ----------- ----------- Net share transactions: (Note 5) Class III (796,397) 108,455 ----------- ----------- Increase (decrease) in net assets resulting from net share transactions (796,397) 108,455 ----------- ----------- Total decrease in net assets (2,962,338) (2,907,300) NET ASSETS: Beginning of period 17,049,240 19,956,540 ----------- ----------- End of period (including net investment loss of $6,574 and $0, respectively) $14,086,902 $17,049,240 =========== ===========
See accompanying notes to the financial statements. 11 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------------------- (UNAUDITED) 2002 2001++ 2000++ 1999++ 1998++ ---------------- ----------- -------------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 16.48 $ 19.08 $ 168.70 $ 108.80 $ 122.80 $ 98.20 ------- ------- -------- -------- -------- -------- Income from investment operations: Net investment income (loss) (0.01)+ 0.01+ (0.04) 0.10 0.30 0.50 Net realized and unrealized gain (loss) (2.36) (1.12) (37.26) 70.20 (9.80) 34.30 ------- ------- -------- -------- -------- -------- Total from investment operations (2.37) (1.11) (37.30) 70.30 (9.50) 34.80 ------- ------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income -- -- -- (0.30) (0.20) (0.70) From net realized gains -- (1.49) (112.32) (10.10) (4.30) (9.50) ------- ------- -------- -------- -------- -------- Total distributions -- (1.49) (112.32) (10.40) (4.50) (10.20) ------- ------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 14.11 $ 16.48 $ 19.08 $ 168.70 $ 108.80 $ 122.80 ======= ======= ======== ======== ======== ======== TOTAL RETURN(a) (14.38)%* (6.36)% (33.14)% 67.27% (8.20)% 36.66% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $14,087 $17,049 $ 19,957 $137,290 $129,983 $399,613 Net expenses to average daily net assets 0.48%** 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets (0.08)%** 0.07% (0.09)% 0.09% 0.21% 0.47% Portfolio turnover rate 57% 118% 147% 122% 113% 132% Fees and expenses reimbursed by the Manager to average daily net assets: 0.36%** 0.33% 0.19% 0.11% 0.23% 0.24% Purchase and redemption fees consisted of the following per share amounts:(b) $ 0.01 $ 0.02 $ 0.87 N/A N/A N/A
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change in presentation. Amounts calculated using average shares outstanding throughout the period. + Calculated using average shares outstanding throughout the period. ++ Amounts were adjusted to reflect a 1:10 reverse stock split effective December 11, 2000. * Not annualized. ** Annualized. 12 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Small Cap Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Fund's benchmark is the Russell 2500 Growth Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is 13 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $1,592,623 collateralized by cash in the amount of $1,671,387, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on 14 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of August 31, 2002, there were no open swap agreements. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 15 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $3,602,582 expiring in 2010. The Fund elected to defer to March 1, 2002 post-October losses of $557,147. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .50% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase fee is offset by a corresponding cash redemption occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is substantially underweighted/overweighted in cash so that a purchase or redemption will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2002, the Fund received $2,507 in purchase premiums and $6,521 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. 16 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $183. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $8,792,905 and $9,171,584, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $17,120,149 $1,344,732 $(2,680,277) $(1,335,545)
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 62.2% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 17 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------- --------------------- Shares Amount Shares Amount Class III: ------- ----------- -------- ----------- Shares sold 36,898 $ 501,304 99,465 $ 1,677,783 Shares issued to shareholders in reinvestment of distributions -- -- 92,295 1,644,603 Shares repurchased (72,990) (1,297,701) (203,137) (3,213,931) ------- ----------- -------- ----------- Net increase (decrease) (36,092) $ (796,397) (11,377) $ 108,455 ======= =========== ======== ===========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FINANCIAL FUTURES
Number of Contract Net Unrealized Contracts Type Expiration Date Value Appreciation --------- ------------------------------------ ----------------- --------- -------------- Buys 2 Russell 2000 September 2002 $391,050 $16,618 =======
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 18 GMO GROWTH FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 96.9% AUTO & TRANSPORTATION -- 1.8% 5,800 ArvinMeritor Inc 135,662 15,800 FedEx Corp 748,130 10,100 Harley Davidson Inc 497,223 1,900 Hunt (JB) Transportation Services Inc* 45,049 5,200 Navistar International Corp 130,000 2,300 SPX Corp* 249,780 4,700 Tidewater Inc 133,950 ------------- 1,939,794 ------------- CONSUMER DISCRETIONARY -- 15.9% 2,466 99 Cents Only Stores* 59,554 6,700 Activision Inc* 186,729 8,500 Amazon.com Inc* 126,990 3,800 AnnTaylor Stores Corp* 101,460 2,700 Apollo Group Inc* 112,941 6,600 Autozone Inc* 477,510 4,400 Bed, Bath & Beyond Inc* 141,064 12,550 Best Buy Co Inc* 266,060 9,800 Big Lots Inc* 165,130 8,100 Blockbuster Inc 184,275 1,700 Career Education Corp* 75,803 7,800 Catalina Marketing Corp* 245,154 2,900 CBRL Group Inc 74,472 7,100 CDW Computer Centers Inc* 304,732 47,000 Cendant Corp* 672,570 19,500 Chicos FAS Inc* 342,030 17,500 Circuit City Stores Inc 243,950 6,300 Clear Channel Communications Inc* 215,334 9,200 Clorox Co 396,152 12,000 Coach Inc* 295,560 4,800 Constellation Brands Inc, Class A* 136,368 8,200 Cox Radio Inc* 196,636 2,850 Darden Restaurants Inc 73,046 12,900 Dollar Tree Stores Inc* 317,469 2,200 Electronic Arts Inc* 139,172 2,500 Estee Lauder Cos Inc 74,875 2,200 Fisher Scientific International Inc* 63,272 1,500 Fortune Brands Inc 78,705
See accompanying notes to the financial statements. 1 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 20,100 Fox Entertainment Group Inc, Class A* 448,833 8,400 G TECH Holdings Corp* 160,860 6,200 Gillette Co 195,486 1,700 Harman International Industries 87,431 4,700 Harrahs Entertainment Inc* 223,438 20,200 Hilton Hotels Corp 232,502 14,000 Home Depot Inc 461,020 4,100 International Flavors & Fragrances Inc 132,225 10,900 Interpublic Group Inc 198,707 12,200 Jones Apparel Group Inc* 440,298 2,700 Kimberly-Clark Corp 161,568 12,600 Kohls Corp* 878,472 2,200 Krispy Kreme Doughnuts Inc* 78,100 32,480 Limited Brands Inc 496,619 4,000 Linens N Things Inc* 86,280 3,800 Maytag Corp 124,032 5,400 MGM Grand Inc* 191,646 4,700 Michaels Stores Inc* 218,503 5,900 Mohawk Industries Inc* 292,050 7,700 Newell Rubbermaid Inc 266,420 8,400 Oakley Inc* 110,040 22,500 Office Depot Inc* 290,700 9,500 Outback Steakhouse Inc* 278,920 8,400 Pier 1 Imports Inc 150,360 2,200 Procurenet*(a) 0 9,900 RadioShack Corp 215,721 7,500 Robert Half International Inc* 129,900 3,400 Ross Stores Inc 122,774 36,900 Service Corp International* 137,268 15,700 Staples Inc* 218,230 10,000 Starbucks Corp* 201,000 5,200 Starwood Hotels and Resorts Worldwide Inc 134,056 13,600 Target Corp 465,120 2,400 The Cheesecake Factory Inc* 68,376 20,400 The Gap Inc 239,292 3,100 Tiffany & Co 76,880 3,100 Timberland Co* 116,839 3,700 Tribune Co 154,327 46,600 Wal Mart Stores Inc 2,492,168 13,500 Williams-Sonoma Inc* 310,500
2 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 5,400 Yum! Brands Inc* 163,782 ------------- 17,217,756 ------------- CONSUMER STAPLES -- 13.2% 15,800 Anheuser Busch Cos Inc 839,928 41,600 Coca Cola Co 2,121,600 15,700 Coca Cola Enterprises Inc 317,297 4,200 Dean Foods Co* 158,970 7,000 Dole Food Co 190,400 1,500 Dreyers Grand Ice Cream Inc 102,750 4,000 Hormel Foods Corp 91,320 932 JM Smucker Co 33,878 8,500 Pepsico Inc 336,175 82,084 Philip Morris Cos Inc 4,104,200 57,700 Procter and Gamble Co 5,115,105 20,326 Safeway Inc* 524,817 15,600 The Dial Corp 315,276 1,600 Walgreen Co 55,600 ------------- 14,307,316 ------------- FINANCIAL SERVICES -- 7.5% 4,500 AFLAC Corp 137,745 51,000 American Express Co 1,839,060 4,800 Automatic Data Processing Inc 181,296 1,600 Bank of America Corp 112,128 2,600 Bank of Hawaii Corp 75,088 1,100 Brown & Brown Inc 32,175 9,300 Capital One Financial Corp 331,731 2,800 Cigna Corp 238,336 2,100 Commerce Bancorp Inc 99,561 6,300 Deluxe Corp 286,398 15,400 Equifax Inc 358,512 2,900 Fidelity National Financial Inc 86,855 1,500 Fifth Third Bancorp 100,770 11,900 First Data Corp 413,525 4,800 Global Payments Inc 133,728 3,700 Greater Bay Bancorp 93,240 11,100 H&R Block Inc 542,790 8,800 Household International Inc 317,768
See accompanying notes to the financial statements. 3 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 2,800 Investors Financial Services Corp 84,168 6,400 MBNA Corp 129,280 6,800 Moody's Corp 328,576 6,300 National Processing Inc* 128,961 3,500 North Fork Bancorp 146,895 3,500 Progressive Corp 188,125 34,900 Providian Financial Corp* 198,232 1,700 Prudential Financial Inc.* 51,340 6,700 Silicon Valley Bancshares* 151,822 16,900 Stilwell Financial Inc 235,586 3,100 Total System Services Inc 52,700 1,900 UnionBanCal Corp 85,500 19,000 Wells Fargo & Co 991,610 ------------- 8,153,501 ------------- HEALTH CARE -- 19.2% 7,700 Abbott Laboratories 308,231 2,800 Accredo Health Inc* 143,444 13,500 Aetna Inc 575,235 1,800 AmerisourceBergen Corp 130,518 20,800 Boston Scientific Corp* 606,320 67,200 Bristol Myers Squibb Co 1,676,640 9,800 Caremark Rx Inc* 158,760 4,200 Charles River Laboratories International Inc* 166,110 3,600 Express Scripts Inc, Class A* 172,800 2,900 Forest Laboratories Inc* 211,700 5,900 Genentech Inc* 193,461 5,100 Gilead Sciences Inc* 163,608 16,600 Guidant Corp* 610,880 4,800 HCA - The Healthcare Company 223,440 2,200 Health Management Associates Inc* 42,350 27,764 Johnson & Johnson 1,507,863 1,500 Medimmune Inc* 38,505 103,400 Merck & Co Inc 5,223,768 2,900 Mid Atlantic Medical Services Inc* 104,719 7,300 Oxford Health Plans Inc* 296,015 123,636 Pfizer Inc 4,089,879 2,500 Quest Diagnostics Inc* 140,125 90,700 Schering Plough Corp 2,093,356 5,600 St Jude Medical Inc* 208,376
4 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 700 Stericycle Inc* 21,728 6,000 Tenet Healthcare Corp* 283,020 1,500 Triad Hospitals Inc* 54,765 8,100 UnitedHealth Group Inc 715,635 1,700 Varian Medical Systems Inc* 72,301 7,400 Wellpoint Health Network Inc* 550,338 ------------- 20,783,890 ------------- INTEGRATED OILS -- 0.1% 700 Murphy Oil Corp 59,955 ------------- MATERIALS & PROCESSING -- 2.5% 4,000 3 M Co 499,800 2,800 AptarGroup Inc 89,880 2,700 Avery Dennison Corp 170,424 6,600 Ball Corp 328,746 300 Bemis Co 15,894 3,600 Harsco Corp 109,260 4,300 IMC Global Inc 56,932 3,500 Kinder Morgan Energy Partners 113,960 1,400 Lafarge Corp 47,614 16,000 Lowes Cos Inc 662,080 3,500 Lubrizol Corp 109,200 9,400 RPM Inc 143,632 14,200 Sealed Air Corp* 219,958 3,500 Valspar Corp 141,890 ------------- 2,709,270 ------------- OTHER -- 1.3% 27,100 General Electric Co 817,065 15,700 Honeywell International Inc 470,215 3,200 Westwood One Inc* 111,776 ------------- 1,399,056 ------------- OTHER ENERGY -- 1.3% 5,800 Apache Corp 319,348 5,000 BJ Services Co* 152,500 8,100 Enron Corp(b)* 1,823 8,000 Ensco International Inc 213,360
See accompanying notes to the financial statements. 5 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OTHER ENERGY -- CONTINUED 4,100 Nabors Industries Ltd.* 135,382 5,200 Patterson-UTI Energy Inc* 129,896 11,300 Schlumberger Ltd 488,273 ------------- 1,440,582 ------------- PRODUCER DURABLES -- 3.8% 7,300 Agco Corp* 139,576 2,400 Applied Materials Inc* 32,064 4,900 Boeing Co 181,643 2,500 Danaher Corp 150,375 13,400 Horton (DR) Inc 278,184 3,400 KB HOME 163,030 1,800 Kennametal Inc 62,550 4,700 L-3 Communications Holdings Inc* 239,183 11,400 Lockheed Martin Corp 721,848 3,000 Mettler-Toledo International Inc* 88,680 2,100 Northrop Grumman Corp 257,880 600 NVR Inc* 177,900 2,800 Pentair Inc 121,632 8,800 Pitney Bowes Inc 319,000 4,800 Ryland Group Inc 204,720 6,000 Toll Brothers Inc* 150,000 8,900 United Technologies Corp 528,571 43,900 Xerox Corp* 307,739 ------------- 4,124,575 ------------- TECHNOLOGY -- 22.4% 15,600 Adaptec Inc* 95,628 8,100 Adobe Systems Inc 162,810 20,300 Agilent Technologies Inc* 272,629 9,300 Analog Devices Inc* 224,130 4,500 Apple Computer Inc* 66,375 5,500 Applera Corp-Applied Biosystems Group 108,955 45,400 AT & T Wireless Services Inc* 224,276 26,900 BMC Software Inc* 373,910 11,300 Brocade Communications Systems Inc* 163,511 353,500 Cisco Systems Inc* 4,885,370 14,200 Computer Associates International Inc 159,040 13,800 Computer Sciences Corp* 508,254
6 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 10,800 Compuware Corp* 39,204 64,100 Corning Inc* 128,200 9,000 Cymer Inc* 217,800 70,200 Dell Computer Corp* 1,868,724 24,100 EMC Corp* 162,916 6,600 Emulex Corp* 111,408 10,100 Fairchild Semiconductor Corp, Class A* 121,907 14,800 Fiserv Inc* 544,788 59,500 Gateway Inc* 208,250 32,100 Ingram Micro Inc* 438,165 260,108 Intel Corp 4,336,000 7,600 Intuit Inc* 339,188 15,000 J.D. Edwards & Co* 195,750 7,600 Keane Inc* 61,560 10,700 Maxim Integrated Products Inc* 338,227 9,100 Microchip Technology Inc* 191,555 20,700 Microsoft Corp* 1,015,956 26,900 Motorola Inc 322,800 30,500 Network Appliance Inc* 290,970 259,000 Oracle Corp* 2,483,810 9,200 Perot Systems Corp* 109,020 17,500 PMC-Sierra Inc* 122,675 13,400 Raytheon Co 469,000 6,700 Reynolds & Reynolds Inc, Class A 166,495 2,400 Rockwell International Corp 44,208 39,500 Siebel Systems Inc* 334,565 9,300 Storage Technology Corp* 126,945 13,700 Symantec Co* 391,820 53,500 Tellabs Inc* 302,275 15,200 Texas Instruments Inc 299,440 25,100 Xilinx Inc* 484,932 70,300 Yahoo! Inc* 723,387 ------------- 24,236,828 ------------- U.S. GOVERNMENT AGENCY -- 5.8% 57,500 Fannie Mae 4,357,350 30,900 Freddie Mac 1,980,690 ------------- 6,338,040 -------------
See accompanying notes to the financial statements. 7 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UTILITIES -- 2.1% 18,700 AT & T Corp 228,514 9,000 Bellsouth Corp 209,880 24,600 Edison International* 294,708 29,300 PG & E Corp* 332,555 39,700 SBC Communications Inc 982,178 7,100 Verizon Communications Inc 220,100 ------------- 2,267,935 ------------- TOTAL COMMON STOCKS (COST $124,653,392) 104,978,498 ------------- SHORT-TERM INVESTMENTS -- 8.5% CASH EQUIVALENTS -- 4.2% 1,821,585 Dreyfus Money Market Fund(c) 1,821,585 $ 1,656,452 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(c) 1,656,452 1,076,694 Merrimac Money Market Fund(c) 1,076,694 ------------- 4,554,731 ------------- U.S. GOVERNMENT -- 0.6% $ 615,000 U.S. Treasury Bill, 1.64%, due 9/5/02(d) 614,855 ------------- REPURCHASE AGREEMENTS -- 3.7% $ 4,033,348 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $4,033,729, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.13%, maturity date of 8/15/19, and a market value, including accrued interest of $4,116,850. 4,033,348 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $9,202,934) 9,202,934 ------------- TOTAL INVESTMENTS -- 105.4% (Cost $133,856,326) 114,181,432 Other Assets and Liabilities (net) -- (5.4%) (5,850,222) ------------- TOTAL NET ASSETS -- 100.0% $ 108,331,210 =============
8 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Bankrupt issuer. (c) Represents investment of security lending collateral (Note 1). (d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $4,333,864 (cost $133,856,326) (Note 1) $114,181,432 Cash 427 Receivable for investments sold 2,762,440 Dividends and interest receivable 63,630 Receivable for variation margin on open futures contracts (Notes 1 and 6) 3,190 Receivable for expenses reimbursed by Manager (Note 2) 9,424 ------------ Total assets 117,020,543 ------------ LIABILITIES: Payable for investments purchased 4,063,534 Payable upon return of securities loaned (Note 1) 4,554,731 Payable to affiliate for (Note 2): Management fee 29,933 Shareholder service fee 13,606 Accrued expenses 27,529 ------------ Total liabilities 8,689,333 ------------ NET ASSETS $108,331,210 ============ NET ASSETS CONSIST OF: Paid-in capital $166,399,973 Accumulated undistributed net investment income 80,571 Accumulated net realized loss (38,463,056) Net unrealized depreciation (19,686,278) ------------ $108,331,210 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $108,331,210 ============ SHARES OUTSTANDING: Class III 7,143,961 ============ NET ASSET VALUE PER SHARE: Class III $ 15.16 ============
10 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 529,924 Interest (including securities lending income of $9,727) 25,577 ------------ Total income 555,501 ------------ EXPENSES: Management fee (Note 2) 181,315 Custodian and transfer agent fees 20,516 Audit fees 17,848 Registration fees 6,256 Legal fees 2,528 Trustees fees (Note 2) 1,247 Miscellaneous 1,393 Fees reimbursed by Manager (Note 2) (48,497) ------------ 182,606 Shareholder service fee (Note 2) - Class III 82,416 ------------ Net expenses 265,022 ------------ Net investment income 290,479 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on: Investments (5,089,818) Closed futures contracts (753,034) ------------ Net realized loss (5,842,852) ------------ Change in net unrealized appreciation (depreciation) on: Investments (13,416,238) Open futures contracts 7,278 ------------ Net unrealized loss (13,408,960) ------------ Net realized and unrealized loss (19,251,812) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(18,961,333) ============
See accompanying notes to the financial statements. 11 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 290,479 $ 611,554 Net realized loss (5,842,852) (28,648,788) Change in net unrealized appreciation (depreciation) (13,408,960) 11,637,650 ------------ ------------ Net decrease in net assets from operations (18,961,333) (16,399,584) ------------ ------------ Distributions to shareholders from: Net investment income Class III (306,245) (515,217) ------------ ------------ Total distributions from net investment income (306,245) (515,217) ------------ ------------ Net share transactions: (Note 5) Class III 11,292,923 18,232,801 ------------ ------------ Increase in net assets resulting from net share transactions 11,292,923 18,232,801 ------------ ------------ Total increase (decrease) in net assets (7,974,655) 1,318,000 NET ASSETS: Beginning of period 116,305,865 114,987,865 ------------ ------------ End of period (including accumulated undistributed net investment income of $80,571 and $96,337, respectively) $108,331,210 $116,305,865 ============ ============
12 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------- (UNAUDITED) 2002 2001* 2000* 1999* 1998* ---------------- ----------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 18.23 $ 21.19 $ 54.45 $ 45.54 $ 48.18 $ 56.98 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.05 0.10 0.14 0.22 0.33 0.44 Net realized and unrealized gain (loss) (3.07) (2.97) (10.78) 18.84 9.79 15.51 -------- -------- -------- -------- -------- -------- Total from investment operations (3.02) (2.87) (10.64) 19.06 10.12 15.95 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.05) (0.09) (0.15) (0.26) (0.33) (0.66) From net realized gains -- -- (22.47) (9.89) (12.43) (24.09) -------- -------- -------- -------- -------- -------- Total distributions (0.05) (0.09) (22.62) (10.15) (12.76) (24.75) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 15.16 $ 18.23 $ 21.19 $ 54.45 $ 45.54 $ 48.18 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) (16.60)%+ (13.57)% (25.76)% 45.24% 22.90% 36.37% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $108,331 $116,306 $114,988 $204,662 $158,084 $202,923 Net expenses to average daily net assets 0.48%** 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 0.53%** 0.54% 0.27% 0.50% 0.64% 0.79% Portfolio turnover rate 45% 101% 111% 48% 50% 60% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09%** 0.07% 0.07% 0.06% 0.23% 0.23%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Amounts were restated to reflect a 1:11 reverse stock split effective March 16, 2001. ** Annualized. + Not annualized. See accompanying notes to the financial statements. 13 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Fund's benchmark is the Russell 1000 Growth Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an 14 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $4,333,864 collateralized by cash in the amount of $4,554,731 which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the 15 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of August 31, 2002, the Fund held no open swap agreements. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $29,677,991 expiring in 2010. The Fund elected to defer to March 1, 2002 post-October losses of $2,111,160. 16 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $1,247. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $59,733,764 and $47,166,400, respectively. 17 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $133,856,326 $3,964,260 $(23,639,067) $(19,674,807)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 91.3% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002* ---------------------- ---------------------- Shares Amount Shares Amount Class III: --------- ----------- --------- ----------- Shares sold 1,275,481 $19,352,302 1,047,429 $20,120,460 Shares issued to shareholders in reinvestment of distributions 17,375 298,111 27,067 501,089 Shares repurchased (527,539) (8,357,490) (122,608) (2,388,748) --------- ----------- --------- ----------- Net increase 765,317 $11,292,923 951,888 $18,232,801 ========= =========== ========= ===========
* Share amounts were restated to reflect a 1:11 reverse stock split effective March 16, 2001. 18 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Depreciation --------- ----------------------------- ----------------- ----------- -------------- Buys 11 S&P 500 September 2002 $2,519,275 $(11,384) ========
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 19 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 0.1% TECHNOLOGY -- 0.1% 1,181 Ascential Software Corp* 2,587 ------------ TOTAL COMMON STOCKS (COST $0) 2,587 ------------ MUTUAL FUNDS -- 99.9% 85,638 GMO Real Estate Fund, Class III 971,985 102,852 GMO Small Cap Value Fund, Class III 1,311,365 247,132 GMO U.S. Core Fund, Class III 2,673,967 ------------ TOTAL MUTUAL FUNDS (COST $5,936,740) 4,957,317 ------------ SHORT-TERM INVESTMENTS -- 0.2% REPURCHASE AGREEMENTS -- 0.2% $ 10,354 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $10,355 and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.13%, maturity date of 8/15/19 and market value, including accrued interest of $13,677. 10,354 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $10,354) 10,354 ------------ TOTAL INVESTMENTS -- 100.2% (Cost $5,947,094) 4,970,258 Other Assets and Liabilities (net) -- (0.2%) (9,927) ------------ TOTAL NET ASSETS -- 100.0% $ 4,960,331 ============ NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. See accompanying notes to the financial statements. 1 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $5,947,094) (Note 1) $4,970,258 Receivable for expenses reimbursed by Manager (Note 2) 4,202 ---------- Total assets 4,974,460 ---------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 1,376 Shareholder service fee 625 Accrued expenses 12,128 ---------- Total liabilities 14,129 ---------- NET ASSETS $4,960,331 ========== NET ASSETS CONSIST OF: Paid-in capital $5,965,032 Accumulated undistributed net investment income 58,964 Accumulated net realized loss (86,829) Net unrealized depreciation (976,836) ---------- $4,960,331 ========== NET ASSETS ATTRIBUTABLE TO: Class III shares $4,960,331 ========== SHARES OUTSTANDING: Class III 1,010,603 ========== NET ASSET VALUE PER SHARE: Class III $ 4.91 ==========
2 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 59,268 Interest 326 --------- Total income 59,594 --------- EXPENSES: Management fee (Note 2) 8,081 Audit fees 8,924 Registration fees 1,564 Custodian and transfer agent fees 920 Trustees fees (Note 2) 10 Miscellaneous 460 Fees reimbursed by Manager (Note 2) (11,868) --------- 8,091 Indirectly incurred fees reimbursed by Manager (Note 2) (8,036) --------- 55 --------- Shareholder service fee (Note 2) - Class III 3,673 Shareholder service fee waived (Note 2) - Class III (3,627) --------- 46 --------- Net expenses 101 --------- Net investment income 59,493 --------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 31,225 Realized gains distributions from investment company shares 51,927 --------- Net realized gain 83,152 --------- Change in net unrealized appreciation (depreciation) on investments (952,365) --------- Net realized and unrealized loss (869,213) --------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(809,720) =========
See accompanying notes to the financial statements. 3 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 59,493 $ 5,225 Net realized gain 83,152 18,064 Change in net unrealized appreciation (depreciation) (952,365) 1,196 ---------- -------- Net increase (decrease) in net assets from operations (809,720) 24,485 ---------- -------- Distributions to shareholders from: Net investment income Class III (6,056) (7,677) ---------- -------- Total distributions from net investment income (6,056) (7,677) ---------- -------- Net share transactions: (Note 5) Class III 5,506,057 -- ---------- -------- Increase in net assets resulting from net share transactions 5,506,057 -- ---------- -------- Total increase in net assets 4,690,281 16,808 NET ASSETS: Beginning of period 270,050 253,242 ---------- -------- End of period (including accumulated undistributed net investment income of $58,964 and $5,527, respectively) $4,960,331 $270,050 ========== ========
4 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------ (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ---------- ---------- ---------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 5.45 $ 5.11 $ 4.84 $ 4.63 $ 8.53 $ 13.03 ------ ------ ------ ------ ------- ------- Income from investment operations: Net investment income(a)+ 0.07 0.11 0.14 0.09 0.10 0.29 Net realized and unrealized gain (loss) (0.60) 0.39 0.35 0.54 0.27 2.61 ------ ------ ------ ------ ------- ------- Total from investment operations (0.53) 0.50 0.49 0.63 0.37 2.90 ------ ------ ------ ------ ------- ------- Less distributions to shareholders: From net investment income (0.01) (0.16) (0.17)++ (0.23) (0.25) (0.41) From net realized gains -- -- (0.05) (0.19) (4.02) (6.99) ------ ------ ------ ------ ------- ------- Total distributions (0.01) (0.16) (0.22) (0.42) (4.27) (7.40) ------ ------ ------ ------ ------- ------- NET ASSET VALUE, END OF PERIOD $ 4.91 $ 5.45 $ 5.11 $ 4.84 $ 4.63 $ 8.53 ====== ====== ====== ====== ======= ======= TOTAL RETURN(b) (9.80)%** 9.80% 10.14% 13.35% 3.13% 29.61% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $4,960 $ 270 $ 253 $1,602 $16,830 $70,823 Net expenses to average daily net assets(c) 0.00%*(d) 0.00%(d) 0.00% 0.00% 0.00% 0.27% Net investment income to average daily net assets(a) 2.43%* 1.99% 2.71% 1.85% 1.51% 2.53% Portfolio turnover rate 7% 2% 35% 22% 16% 150% Fees and expenses reimbursed by the Manager to average daily net assets: 0.48%* 8.97% 3.05% 0.52% 0.57% 0.36%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) On April 20, 1997, the Fund began to invest a substantial portion of its assets in other funds of GMO Trust and revised its voluntary expense waiver. Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (d) Net expenses were less than 0.01%. + Computed using average shares outstanding throughout the period. ++ The amount shown for a share outstanding does not correspond with the aggregated distributions for the year ended February 28, 2001 due to the timing of purchases and redemptions of Fund shares in relation to the declaration of distributions to shareholders. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 5 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO U.S. Sector Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than that of the S&P 500 Index through investment in common stocks, either directly or through investment in Class III shares of other Funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last quoted sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund 6 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $128,863 expiring in 2009. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Dividend income is recorded on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. Interest income is recorded on an accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other 7 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. (See Note 2.) 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. The Fund will invest in Class III shares of each underlying Fund being offered. Like the management fee (as described below), the shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying Funds. For the six months ended August 31, 2002, the shareholder service fees incurred indirectly by the Fund were 0.15% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees, and fund expenses (as defined above) incurred indirectly by the Fund through investment in underlying Funds exceed the management fee. Because GMO will not reimburse expenses incurred indirectly to the extent they exceed .33%, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses) incurred indirectly by the Fund through investment in underlying Funds may exceed .33% of the Fund's average daily net assets. For the six months ended August 31, 2002, operating expenses (excluding shareholder service fees and fund expenses) incurred indirectly by the Fund were 0.375% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $10. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 8 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $5,952,194 and $332,000, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $5,947,094 $2,586 $(979,422) $(976,836)
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 95.1% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------- ---------------------- Shares Amount Shares Amount Class III: ------- ----------- --------- ----------- Shares sold 959,860 $ 5,500,001 -- $ -- Shares issued to shareholders in reinvestment of distributions 1,214 6,056 -- -- Shares repurchased -- -- -- -- ------- ----------- --------- ----------- Net increase 961,074 $ 5,506,057 -- $ -- ======= =========== ========= ===========
9 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 99.0% AUTO & TRANSPORTATION -- 5.6% 346,300 AMR Corp* 3,528,797 477,200 Burlington Northern Santa Fe Railroad Co 13,724,272 106,500 Carnival Corp 2,606,055 132,200 CSX Corp 4,604,526 277,400 Delta Air Lines Inc 4,873,918 40,300 Eaton Corp 2,850,822 293,600 FedEx Corp 13,901,960 1,018,911 Ford Motor Co 11,992,582 809,116 General Motors Corp 38,724,292 96,100 Genuine Parts Co 3,195,325 204,500 Goodyear Tire & Rubber Co 2,764,840 134,600 Harley Davidson Inc 6,626,358 281,000 Norfolk Southern Corp 5,881,330 67,100 Paccar Inc 2,369,301 92,400 SPX Corp* 10,034,640 219,800 TRW Inc 12,616,520 43,700 Union Pacific Corp 2,646,035 -------------- 142,941,573 -------------- CONSUMER DISCRETIONARY -- 12.0% 249,600 Amazon.com Inc* 3,729,024 252,200 Autonation Inc* 3,329,040 186,200 Autozone Inc* 13,471,570 233,150 Best Buy Co Inc* 4,942,780 44,700 Black and Decker Corp 2,005,689 173,100 CDW Computer Centers Inc* 7,429,452 414,300 Circuit City Stores Inc 5,775,342 73,900 Clear Channel Communications Inc* 2,525,902 203,900 Clorox Co 8,779,934 266,900 Dollar Tree Stores Inc* 6,568,409 321,300 Eastman Kodak Co 9,812,502 126,000 Estee Lauder Cos Inc 3,773,700 49,900 Expedia Inc* 2,516,956 165,800 Federated Department Stores Inc* 5,952,220 86,400 Fortune Brands Inc 4,533,408 340,400 Fox Entertainment Group Inc, Class A* 7,601,132 458,200 Gillette Co 14,447,046 92,200 Harrahs Entertainment Inc* 4,383,188
See accompanying notes to the financial statements. 1 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 549,900 Hilton Hotels Corp 6,329,349 102,100 International Flavors & Fragrances Inc 3,292,725 165,800 Interpublic Group Inc 3,022,534 221,300 Jones Apparel Group Inc* 7,986,717 145,500 Kohls Corp* 10,144,260 9,300 Leggett & Platt Inc 215,295 801,700 Liberty Media Corp, Class A* 6,702,212 408,200 Limited Brands Inc 6,241,378 85,600 Manpower Inc 2,835,072 271,000 May Department Stores Co 7,948,430 165,100 MGM Grand Inc* 5,859,399 54,200 Mohawk Industries Inc* 2,682,900 125,200 Newell Rubbermaid Inc 4,331,920 162,800 Nike Inc, Class B 7,029,704 532,600 Office Depot Inc* 6,881,192 167,700 Penney (JC) Co Inc 2,911,272 66,300 R.R. Donnelley and Sons 1,748,994 206,300 RadioShack Corp 4,495,277 91,700 Robert Half International Inc* 1,588,244 74,600 Ross Stores Inc 2,693,806 421,200 Sears Roebuck & Co 19,168,812 601,600 Staples Inc* 8,362,240 326,000 Starbucks Corp* 6,552,600 82,000 Target Corp 2,804,400 238,400 The Gap Inc 2,796,432 120,600 Tiffany & Co 2,990,880 135,400 Toys R Us Inc* 1,804,882 60,800 VF Corp 2,469,088 241,800 Viacom Inc, Class A* 9,841,260 207,900 Viacom Inc, Class B* 8,461,530 626,600 Wal Mart Stores Inc 33,510,568 41,200 Whirlpool Corp 2,278,772 -------------- 307,559,438 -------------- CONSUMER STAPLES -- 11.2% 225,652 Albertsons Inc 5,803,769 224,900 Anheuser Busch Cos Inc 11,955,684 139,200 Campbell Soup Co 3,222,480 1,137,800 Coca Cola Co 58,027,800 57,200 Coca Cola Enterprises Inc 1,156,012
2 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER STAPLES -- CONTINUED 407,800 ConAgra Foods Inc 10,721,062 106,400 Heinz (HJ) Co 4,018,728 8,370 JM Smucker Co 304,249 183,500 Kellogg Co 5,901,360 123,100 Pepsico Inc 4,868,605 1,504,000 Philip Morris Cos Inc 75,200,000 778,600 Procter and Gamble Co 69,022,890 641,300 Rite Aid Corp* 1,346,730 89,100 RJ Reynolds Tobacco Holdings 5,242,644 353,900 Safeway Inc* 9,137,698 292,600 Sara Lee Corp 5,395,544 118,900 Supervalu Inc 2,469,553 134,500 UST Inc 4,668,495 243,200 Walgreen Co 8,451,200 -------------- 286,914,503 -------------- FINANCIAL SERVICES -- 17.2% 522,700 Allstate Corp 19,454,894 858,500 American Express Co 30,957,510 117,800 Amsouth Bancorp 2,646,966 217,100 Automatic Data Processing Inc 8,199,867 722,809 Bank of America Corp 50,654,455 339,300 Bank One Corp 13,894,335 155,179 Bear Stearns Cos Inc 9,920,593 88,275 Charter One Financial Inc 2,974,867 101,900 Cigna Corp 8,673,728 62,500 Citigroup Inc 2,046,875 91,500 CNA Financial Corp* 2,508,015 102,600 Comerica Inc 6,002,100 70,800 Compass Bankshares Inc 2,378,172 695,300 Conseco Inc* 93,866 141,900 Countrywide Credit Industries Inc 7,448,331 30,100 Dun & Bradstreet Corp* 1,062,229 209,700 Equifax Inc 4,881,816 436,088 FleetBoston Financial Corp 10,522,803 189,500 Franklin Resources Inc 6,632,500 43,400 Greenpoint Financial Corp 2,213,400 36,300 Hartford Financial Services Group Inc 1,815,726 320,600 Household International Inc 11,576,866 134,900 Hudson City Bancorp Inc 2,498,348
See accompanying notes to the financial statements. 3 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 275,000 Huntington Bancshares Inc 5,552,250 378,380 J.P. Morgan Chase & Co 9,989,232 240,200 Key Corp 6,444,566 81,200 Lehman Brothers Holdings Inc 4,629,212 69,800 Lincoln National Corp 2,586,090 238,400 Loews Corp 12,518,384 101,600 Marsh & McLennan Cos Inc 4,942,840 129,450 MBIA Inc 5,949,522 277,900 Merrill Lynch & Co Inc 10,065,538 235,700 MGIC Investment Corp 14,191,497 156,100 Moody's Corp 7,542,752 455,500 Morgan Stanley Dean Witter & Co 19,458,960 317,100 National City Corp 9,884,007 201,300 PMI Group Inc 6,824,070 89,200 PNC Bank Corp 4,111,228 58,300 Progressive Corp 3,133,625 318,700 Providian Financial Corp* 1,810,216 158,400 Radian Group Inc 6,884,064 142,500 Regions Financial Corp 5,090,100 18,600 Southtrust Corp 488,064 279,900 Stilwell Financial Inc 3,901,806 88,300 Suntrust Banks Inc 5,961,133 69,300 T. Rowe Price Group Inc 1,960,497 125,100 Torchmark Corp 4,672,485 97,500 Union Planters Corp 3,028,350 158,700 UnionBanCal Corp 7,141,500 359,200 Unumprovident Corp 8,319,072 532,500 Wachovia Corp 19,622,625 337,050 Washington Mutual Inc 12,743,861 436,900 Wells Fargo & Co 22,801,811 -------------- 441,307,619 -------------- HEALTH CARE -- 12.1% 391,700 Aetna Inc 16,690,337 357,400 Boston Scientific Corp* 10,418,210 731,600 Bristol Myers Squibb Co 18,253,420 104,200 Genentech Inc* 3,416,718 183,600 Gilead Sciences Inc* 5,889,888 332,600 Guidant Corp* 12,239,680 1,006,978 Johnson & Johnson 54,688,975
4 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 113,100 Lincare Holdings Inc* 3,624,855 291,900 Medtronic Inc 12,020,442 1,784,700 Merck & Co Inc 90,163,044 50,500 Millipore Corp 1,782,145 141,900 Oxford Health Plans Inc* 5,754,045 44,800 Patterson Dental Co* 2,136,960 868,500 Pfizer Inc 28,729,980 1,434,300 Schering Plough Corp 33,103,644 165,300 Wellpoint Health Network Inc* 12,293,361 -------------- 311,205,704 -------------- INTEGRATED OILS -- 2.5% 45,500 ChevronTexaco Corp 3,486,665 711,600 Conoco Inc 17,469,780 257,810 Exxon Mobil Corp 9,139,365 561,000 Marathon Oil Corp 13,884,750 217,100 Occidental Petroleum Corp 6,447,870 248,700 Phillips Petroleum Co 13,076,646 -------------- 63,505,076 -------------- MATERIALS & PROCESSING -- 2.3% 22,800 3 M Co 2,848,860 107,400 Ashland Inc 3,078,084 51,100 Avery Dennison Corp 3,225,432 54,900 Cooper Industries Ltd 1,796,328 324,800 Du Pont (E.I.) De Nemours 13,092,688 54,300 Kinder Morgan Energy Partners 1,768,008 106,300 Lowes Cos Inc 4,398,694 134,600 MeadWestvaco Corp 3,134,834 47,900 Nucor Corp 2,396,916 95,600 PPG Industries Inc 5,379,412 147,500 Praxair Inc 8,264,425 255,200 Sealed Air Corp* 3,953,048 231,500 Sherwin Williams Co 6,250,500 -------------- 59,587,229 -------------- OTHER -- 2.5% 918,500 Honeywell International Inc 27,509,075 88,400 Illinois Tool Works Inc 6,057,168
See accompanying notes to the financial statements. 5 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- OTHER -- CONTINUED 115,200 Ingersoll Rand Co 4,325,760 96,200 ITT Industries Inc 6,539,676 106,700 Johnson Controls Inc 9,207,143 154,800 Textron Inc 6,013,980 139,500 Westwood One Inc* 4,872,735 -------------- 64,525,537 -------------- OTHER ENERGY -- 0.5% 33,500 Apache Corp 1,844,510 72,100 Devon Energy Corp 3,388,700 183,300 Schlumberger Ltd 7,920,393 -------------- 13,153,603 -------------- PRODUCER DURABLES -- 4.6% 184,900 American Power Conversion Corp* 2,313,099 597,100 Applied Materials Inc* 7,977,256 287,800 Boeing Co 10,668,746 129,800 Caterpillar Inc 5,664,472 104,800 Danaher Corp 6,303,720 87,900 Deere (John) and Co 4,036,368 114,700 Emerson Electric Co 5,595,066 69,600 Grainger (WW) Inc 3,135,480 102,700 Horton (DR) Inc 2,132,052 89,900 Lexmark International Group Inc* 4,243,280 337,800 Lockheed Martin Corp 21,389,496 87,400 Northrop Grumman Corp 10,732,720 88,600 Parker-Hannifin Corp 3,593,616 189,100 Pitney Bowes Inc 6,854,875 114,500 Teradyne Inc* 1,448,425 292,300 Tyco International Ltd 4,586,187 194,100 United Technologies Corp 11,527,599 910,900 Xerox Corp* 6,385,409 -------------- 118,587,866 -------------- TECHNOLOGY -- 14.3% 338,400 Adobe Systems Inc 6,801,840 159,700 Analog Devices Inc* 3,848,770 375,700 Apple Computer Inc* 5,541,575 163,300 Applera Corp-Applied Biosystems Group 3,234,973
6 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 381,500 BMC Software Inc* 5,302,850 183,200 Brocade Communications Systems Inc* 2,650,904 138,400 Ceridian Corp* 2,224,088 100,000 ChoicePoint Inc* 4,297,000 4,911,500 Cisco Systems Inc* 67,876,930 617,000 Computer Associates International Inc 6,910,400 246,000 Computer Sciences Corp* 9,060,180 636,000 Compuware Corp* 2,308,680 686,000 Corning Inc* 1,372,000 1,127,200 Dell Computer Corp* 30,006,064 253,200 Fiserv Inc* 9,320,292 987,700 Gateway Inc* 3,456,950 910,000 Hewlett Packard Co 12,221,300 4,468,800 Intel Corp 74,494,896 87,100 Intuit Inc* 3,887,273 892,300 Lucent Technologies Inc* 1,543,679 205,700 Maxim Integrated Products Inc* 6,502,177 189,750 Microchip Technology Inc* 3,994,238 162,500 Microsoft Corp* 7,975,500 377,000 Motorola Inc 4,524,000 494,300 Network Appliance Inc* 4,715,622 198,400 Network Associates Inc* 2,579,200 3,535,500 Oracle Corp* 33,905,445 352,000 Raytheon Co 12,320,000 116,800 Rockwell International Corp 2,151,456 320,000 Symantec Co* 9,152,000 656,700 Tellabs Inc* 3,710,355 432,000 Xilinx Inc* 8,346,240 1,002,900 Yahoo! Inc* 10,319,841 -------------- 366,556,718 -------------- U.S. GOVERNMENT AGENCY -- 3.8% 892,200 Fannie Mae 67,610,916 458,900 Freddie Mac 29,415,490 -------------- 97,026,406 -------------- UTILITIES -- 10.4% 73,600 Ameren Corp 3,242,080 23,300 American Electric Power Inc 794,530
See accompanying notes to the financial statements. 7 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 5,242,858 AT & T Corp 64,067,725 531,300 Bellsouth Corp 12,389,916 86,900 Cinergy Corp 2,989,360 89,300 CMS Energy Corp 943,008 131,900 Consolidated Edison Inc 5,367,011 53,400 Constellation Energy Group Inc 1,495,734 88,900 DTE Energy Co 3,814,699 469,200 Edison International* 5,621,016 121,700 Entergy Corp 5,134,523 83,631 Firstenergy Corp 2,759,823 81,200 FPL Group Inc 4,634,896 552,600 PG & E Corp* 6,272,010 66,200 Pinnacle West Capital Corp 2,211,742 115,300 Public Service Enterprise Group Inc 4,058,560 166,200 Reliant Energy Inc 1,969,470 1,874,882 SBC Communications Inc 46,384,581 159,400 Sempra Energy 3,827,194 133,200 Southern Co 3,857,472 1,648,100 Sprint Corp (Fon Group) 19,117,960 117,000 TXU Corp 5,658,120 1,998,122 Verizon Communications Inc 61,941,782 -------------- 268,553,212 -------------- TOTAL COMMON STOCKS (COST $2,993,099,993) 2,541,424,484 -------------- SHORT-TERM INVESTMENTS -- 3.9% CASH EQUIVALENTS -- 2.8% 28,929,444 Dreyfus Money Market Fund(a) 28,929,444 $ 26,306,879 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(a) 26,306,879 17,099,472 Merrimac Money Market Fund(a) 17,099,472 -------------- 72,335,795 -------------- U.S. GOVERNMENT -- 0.4% $ 10,235,000 U.S. Treasury Bill, 1.64%, due 9/05/02 10,233,061 --------------
See accompanying notes to the financial statements. 8 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS -- 0.7% $ 16,961,468 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $16,963,070, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19, and a combined market value, including accrued interest of $17,301,711. 16,961,468 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $99,530,324) 99,530,324 -------------- TOTAL INVESTMENTS -- 102.9% (Cost $3,092,630,317) 2,640,954,808 Other Assets and Liabilities (net) -- (2.9%) (73,671,704) -------------- TOTAL NET ASSETS -- 100.0% $2,567,283,104 ============== NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). See accompanying notes to the financial statements. 9 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $69,237,253 (cost $3,092,630,317) (Note 1) $2,640,954,808 Cash 10,098 Receivable for investments sold 26,404,457 Receivable for Fund shares sold 2,624,387 Dividends and interest receivable 3,942,249 Receivable for expenses reimbursed by Manager (Note 2) 54,684 -------------- Total assets 2,673,990,683 -------------- LIABILITIES: Payable for investments purchased 32,183,761 Payable upon return of securities loaned (Note 1) 72,335,795 Payable for Fund shares repurchased 969,983 Payable to affiliate for (Note 2): Management fee 727,845 Shareholder service fee 284,809 12b-1 fee - Class M 26,988 Administration fee - Class M 13,619 Accrued expenses 164,779 -------------- Total liabilities 106,707,579 -------------- NET ASSETS $2,567,283,104 ============== NET ASSETS CONSIST OF: Paid-in capital $3,291,368,448 Accumulated undistributed net investment income 5,506,845 Accumulated net realized loss (277,916,680) Net unrealized depreciation (451,675,509) -------------- $2,567,283,104 ============== NET ASSETS ATTRIBUTABLE TO: Class II shares $ 191,223,492 ============== Class III shares $1,251,039,394 ============== Class IV shares $ 656,083,510 ============== Class V shares $ 389,615,072 ============== Class M shares $ 79,321,636 ============== SHARES OUTSTANDING: Class II 17,706,223 ============== Class III 115,661,016 ============== Class IV 60,727,362 ============== Class V 36,084,267 ============== Class M 7,354,523 ============== NET ASSET VALUE PER SHARE: Class II $ 10.80 ============== Class III $ 10.82 ============== Class IV $ 10.80 ============== Class V $ 10.80 ============== Class M $ 10.79 ==============
10 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 21,628,799 Interest (including securities lending income of $104,140) 641,320 ------------- Total income 22,270,119 ------------- EXPENSES: Management fee (Note 2) 4,469,570 Custodian and transfer agent fees 199,180 Legal fees 57,494 Audit fees 24,288 Registration fees 17,572 Trustees fees (Note 2) 28,331 Miscellaneous 21,239 Fees reimbursed by Manager (Note 2) (319,503) ------------- 4,498,171 Shareholder service fee (Note 2) - Class II 208,617 Shareholder service fee (Note 2) - Class III 1,001,192 Shareholder service fee (Note 2) - Class IV 384,488 Shareholder service fee (Note 2) - Class V 182,250 12B-1 fee (Note 2) - Class M 28,766 Administration fee (Note 2) - Class M 23,013 ------------- Net expenses 6,326,497 ------------- Net investment income 15,943,622 ------------- REALIZED AND UNREALIZED LOSS: Net realized loss on: Investments (76,994,787) Closed futures contracts (9,286,386) ------------- Net realized loss (86,281,173) ------------- Change in net unrealized appreciation (depreciation) on: Investments (363,179,211) Open futures contracts (578,984) ------------- Net unrealized loss (363,758,195) ------------- Net realized and unrealized loss (450,039,368) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(434,095,746) =============
See accompanying notes to the financial statements. 11 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 15,943,622 $ 37,068,955 Net realized loss (86,281,173) (164,915,777) Change in net unrealized appreciation (depreciation) (363,758,195) (28,658,516) -------------- -------------- Net decrease in net assets from operations (434,095,746) (156,505,338) -------------- -------------- Distributions to shareholders from: Net investment income Class II (1,527,536) (1,721,073) Class III (10,325,481) (17,730,889) Class IV (6,025,320) (12,297,927) Class V (3,462,441) (4,546,353) Class M (184,226) -- -------------- -------------- Total distributions from net investment income (21,525,004) (36,296,242) -------------- -------------- Net realized gains Class II -- (109,969) Class III -- (1,128,842) Class IV -- (648,375) Class V -- (350,905) -------------- -------------- Total distributions from net realized gains -- (2,238,091) -------------- -------------- (21,525,004) (38,534,333) -------------- -------------- Net share transactions: (Note 5) Class II 48,720,825 71,357,721 Class III 152,140,560 (104,317,667) Class IV 35,766,587 (495,915,214) Class V 16,851,655 478,135,957 Class M 80,783,744 -- -------------- -------------- Increase (decrease) in net assets resulting from net share transactions 334,263,371 (50,739,203) -------------- -------------- Total decrease in net assets (121,357,379) (245,778,874) NET ASSETS: Beginning of period 2,688,640,483 2,934,419,357 -------------- -------------- End of period (including accumulated undistributed net investment income of $5,506,845 and $11,088,227, respectively) $2,567,283,104 $2,688,640,483 ============== ==============
12 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998(1) ---------------- ----------- ----------- ---------- ---------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89 $ 13.94 $ 16.62 $ 18.57 $ 19.98 $ 17.65 -------- -------- -------- ------- ------- ------- Income from investment operations: Net investment income 0.07+ 0.17+ 0.20+ 0.23+ 0.25+ 0.04+ Net realized and unrealized gain (loss) (2.07) (1.04) 0.03** 2.29 2.55 2.29 -------- -------- -------- ------- ------- ------- Total from investment operations (2.00) (0.87) 0.23 2.52 2.80 2.33 -------- -------- -------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.09) (0.17) (0.18) (0.24) (0.29) -- From net realized gains -- (0.01) (2.73) (4.23) (3.92) -- -------- -------- -------- ------- ------- ------- Total distributions (0.09) (0.18) (2.91) (4.47) (4.21) 0.00 -------- -------- -------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 10.80 $ 12.89 $ 13.94 $ 16.62 $ 18.57 $ 19.98 ======== ======== ======== ======= ======= ======= TOTAL RETURN(a) (15.57)%++ (6.29)% 0.75% 13.61% 14.99% 13.20%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $191,223 $176,456 $114,454 $95,041 $41,684 $16,958 Net expenses to average daily net assets 0.55%* 0.55% 0.55% 0.55% 0.55% 0.55%* Net investment income to average daily net assets 1.10%* 1.27% 1.21% 1.21% 1.29% 1.53%* Portfolio turnover rate 28% 69% 81% 90% 71% 60% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.02% 0.02% 0.02% 0.22% 0.25%*
(1) Period from January 9, 1998 to February 28, 1998. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. ** The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/ loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. + Computed using average shares outstanding throughtout the period. ++ Not Annualized. See accompanying notes to the financial statements. 13 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 -------------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.90 $ 13.95 $ 16.63 $ 18.59 $ 19.99 $ 20.12 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.07+ 0.18+ 0.20+ 0.24+ 0.26+ 0.35 Net realized and unrealized gain (loss) (2.05) (1.05) 0.04* 2.28 2.55 5.89 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (1.98) (0.87) 0.24 2.52 2.81 6.24 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.10) (0.17) (0.19) (0.25) (0.29) (0.32) From net realized gains -- (0.01) (2.73) (4.23) (3.92) (6.05) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.10) (0.18) (2.92) (4.48) (4.21) (6.37) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.82 $ 12.90 $ 13.95 $ 16.63 $ 18.59 $ 19.99 ========== ========== ========== ========== ========== ========== TOTAL RETURN(a) (15.46)%++ (6.23)% 0.83% 13.66% 15.02% 36.69% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,251,039 $1,321,634 $1,532,124 $1,623,734 $1,780,011 $2,317,103 Net expenses to average daily net assets 0.48%** 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.16%** 1.33% 1.27% 1.27% 1.36% 1.67% Portfolio turnover rate 28% 69% 81% 90% 71% 60% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%** 0.02% 0.02% 0.02% 0.22% 0.21%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/ loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not Annualized. 14 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998(1) ---------------- ----------- ------------- ------------- ------------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89 $ 13.94 $ 16.62 $ 18.58 $ 19.99 $ 17.65 -------- -------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.07+ 0.18+ 0.21+ 0.25+ 0.27+ 0.04+ Net realized and unrealized gain (loss) (2.06) (1.04) 0.04** 2.28 2.55 2.30 -------- -------- ---------- ---------- ---------- ---------- Total from investment operations (1.99) (0.86) 0.25 2.53 2.82 2.34 -------- -------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.10) (0.18) (0.20) (0.26) (0.31) -- From net realized gains -- (0.01) (2.73) (4.23) (3.92) -- -------- -------- ---------- ---------- ---------- ---------- Total distributions (0.10) (0.19) (2.93) (4.49) (4.23) -- -------- -------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.80 $ 12.89 $ 13.94 $ 16.62 $ 18.58 $ 19.99 ======== ======== ========== ========== ========== ========== TOTAL RETURN(a) (15.53)%++ (6.20)% 0.92% 13.74% 15.07% 13.26%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $656,084 $744,813 $1,287,842 $1,343,460 $1,543,655 $1,370,535 Net expenses to average daily net assets 0.44%* 0.44% 0.44% 0.44% 0.44% 0.44%* Net investment income to average daily net assets 1.21%* 1.36% 1.31% 1.32% 1.41% 1.67%* Portfolio turnover rate 28% 69% 81% 90% 71% 60% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.02% 0.02% 0.02% 0.22% 0.20%*
(1) Period from January 9, 1998 (commencement of operations) to February 28, 1998. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. ** The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/ loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. + Computed using average shares outstanding throughout the period. ++ Not Annualized. See accompanying notes to the financial statements. 15 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS V SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD FROM JULY 2, 2001 AUGUST 31, 2002 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 28, 2002 ---------------- ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.88 $ 14.00 -------- -------- Income from investment operations: Net investment income 0.08+ 0.13+ Net realized and unrealized loss (2.06) (1.10) -------- -------- Total from investment operations (1.98) (0.97) -------- -------- Less distributions to shareholders: From net investment income (0.10) (0.14) From net realized gains -- (0.01) -------- -------- Total distributions (0.10) (0.15) -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.80 $ 12.88 ======== ======== TOTAL RETURN(a) (15.46)%++ (6.96)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $389,615 $445,738 Net expenses to average daily net assets 0.42%* 0.42%* Net investment income to average daily net assets 1.22%* 1.46%* Portfolio turnover rate 28% 69% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.02%*
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. + Computed using average shares outstanding throughout the period. ++ Not Annualized. 16 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM APRIL 15, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 2002 (UNAUDITED) ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89 ------- Income from investment operations: Net investment income 0.04+ Net realized and unrealized loss (2.08) ------- Total from investment operations (2.04) ------- Less distributions to shareholders: From net investment income (0.06) ------- Total distributions (0.06) ------- NET ASSET VALUE, END OF PERIOD $ 10.79 ======= TOTAL RETURN(a) (15.85)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $79,322 Net expenses to average daily net assets 0.78%* Net investment income to average daily net assets 0.94%* Portfolio turnover rate 28% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%*
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. + Computed using average shares outstanding throughout the period. ++ Not Annualized. See accompanying notes to the financial statements. 17 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO U.S. Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index. Throughout the six months ended August 31, 2002, the Fund had four classes of shares outstanding: Class II, Class III, Class IV, and Class V. Effective April 15, 2002, the Fund also had Class M shares outstanding. Class M shares bear an administrative fee and a 12b-1 fee, while Classes II, III, IV and V bear a shareholder service fee. (See Note 2) The principal economic difference among the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 18 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, the Fund held no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral 19 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $69,237,253, collateralized by cash in the amount of $72,335,795, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of August 31, 2002 the Fund held no open swap agreements. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 20 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $170,941,294 expiring in 2010. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class' operations. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, .105% for Class IV shares and .085% for Class V shares. 21 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund pays GMO an administrative fee monthly at the annual rate of .20% of the average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee, at the annual rate of .25% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees (Class II, Class III, Class IV and Class V only), administrative fee (Class M only), 12b-1 fee (Class M only) and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses") exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $28,331. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $1,228,237,646 and $716,431,276, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $3,092,630,317 $144,186,812 $(595,861,344) $(451,674,532)
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 13.7% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 22 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount ----------- ------------- ----------- ------------- Class II: Shares sold 5,146,149 $ 61,945,602 5,999,733 $ 78,192,785 Shares issued to shareholders in reinvestment of distributions 81,323 977,682 84,554 1,110,236 Shares repurchased (1,215,768) (14,202,459) (600,687) (7,945,300) ----------- ------------- ----------- ------------- Net increase 4,011,704 $ 48,720,825 5,483,600 $ 71,357,721 =========== ============= =========== =============
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount ----------- ------------- ----------- ------------- Class III: Shares sold 25,478,567 $ 301,120,728 14,080,984 $ 183,397,230 Shares issued to shareholders in reinvestment of distributions 610,560 7,369,491 1,022,084 13,448,177 Shares repurchased (12,864,782) (156,349,659) (22,459,839) (301,163,074) ----------- ------------- ----------- ------------- Net increase (decrease) 13,224,345 $ 152,140,560 (7,356,771) $(104,317,667) =========== ============= =========== =============
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount ----------- ------------- ----------- ------------- Class IV: Shares sold 18,610,327 $ 211,500,220 12,510,519 $ 150,062,926 Shares issued to shareholders in reinvestment of distributions 369,467 4,466,367 951,389 12,473,256 Shares repurchased (16,043,779) (180,200,000) (48,070,262) (658,451,396) ----------- ------------- ----------- ------------- Net increase (decrease) 2,936,015 $ 35,766,587 (34,608,354) $(495,915,214) =========== ============= =========== =============
23 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - --------------------------------------------------------------------------------
Period from July 2, 2001 Six Months Ended (commencement of August 31, 2002 operations) (Unaudited) through February 28, 2002 ---------------------- -------------------------- Shares Amount Shares Amount --------- ----------- ----------- ------------- Class V: Shares sold 1,497,429 $17,345,138 34,374,438 $475,050,242 Shares issued to shareholders in reinvestment of distributions 284,491 3,426,371 371,986 4,873,176 Shares repurchased (308,355) (3,919,854) (135,722) (1,787,461) --------- ----------- ---------- ------------ Net increase 1,473,565 $16,851,655 34,610,702 $478,135,957 ========= =========== ========== ============
Period from April 15, 2002 (commencement of operations) through August 31, 2002 (Unaudited) ---------------------------- Shares Amount ------------ -------------- Class M: Shares sold 9,248,186 $101,259,088 Shares issued to shareholders in reinvestment of distributions 16,104 184,226 Shares repurchased (1,909,767) (20,659,570) ---------- ------------ Net increase 7,354,523 $ 80,783,744 ========== ============
The Fund's Class V was started with an initial transfer of paid in capital of $446,606,316 from Class IV. This transfer is included in the transaction amounts above. 24 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 80.0% CORPORATE DEBT -- 4.9% 5,000,000 Bank Austria AG, 144A, 7.25%, due 02/15/17 5,598,000 -------------- FOREIGN GOVERNMENT OBLIGATIONS -- 5.7% 24,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 6,544,318 -------------- U.S. GOVERNMENT -- 1.2% 1,206,601 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(b) 1,328,015 -------------- U.S. GOVERNMENT AGENCY -- 68.2% 10,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 1.92%, due 02/01/27 9,850,000 6,250,000 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. LIBOR + .30%, 2.10%, due 12/01/14 6,250,000 5,345,368 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 2.42%, due 03/30/19 5,305,278 20,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR - .015%, 1.79%, due 02/01/25 19,500,000 23,125,000 Agency for International Development Floater (Support of Portugal), Variable Rate, 6 mo. LIBOR, 1.76%, due 01/01/21 23,096,094 6,950,000 Agency for International Development Floater (Support of Sri Lanka), Variable Rate, 6 mo. LIBOR + .20%, 2.00%, due 06/15/12 6,932,625 6,966,669 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 1.98%, due 01/01/12 6,862,169 -------------- 77,796,166 -------------- TOTAL DEBT OBLIGATIONS (COST $89,239,153) 91,266,499 -------------- MUTUAL FUND -- 10.6% 468,878 GMO Alpha LIBOR Fund 12,031,403 -------------- TOTAL MUTUAL FUND (COST $12,070,588) 12,031,403 --------------
See accompanying notes to the financial statements. 1 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- PREFERRED STOCKS -- 5.9% BANKING AND FINANCIAL SERVICES -- 5.9% 10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 6,732,940 -------------- TOTAL PREFERRED STOCKS (COST $7,274,557) 6,732,940 -------------- SHORT-TERM INVESTMENTS -- 1.0% COMMERCIAL PAPER -- 1.0% 1,176,000 Insured Asset Funding, 144A, 1.95%, due 9/03/02 1,175,809 -------------- REPURCHASE AGREEMENTS -- 0.0% 455 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/03/02, with a maturity value of $456 and an effective yield of 0.85%, collateralized by a U.S. Treasury Strip with a rate of 0.00%, maturity date of 11/15/14, a market value, including accrued interest of $5,491. 455 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,176,264) 1,176,264 -------------- TOTAL INVESTMENTS -- 97.5% (Cost $109,760,562) 111,207,106 Other Assets and Liabilities (net) -- 2.5% 2,801,152 -------------- TOTAL NET ASSETS -- 100.0% $ 114,008,258 ==============
NOTES TO THE SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. Variable rates - The rates shown on variable rate notes are the current interest rates at August 31, 2002, which are subject to change based on the terms of the security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 2 See accompanying notes to the financial statements. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $109,760,562) (Note 1) $111,207,106 Receivable for Fund shares sold 100,000 Interest receivable 557,175 Receivable for variation margin on open futures contracts (Notes 1 and 6) 51,740 Net receivable for open swap contracts (Notes 1 and 6) 2,501,777 Receivable for expenses reimbursed by Manager (Note 2) 5,766 ------------ Total assets 114,423,564 ------------ LIABILITIES: Payable for investments purchased 300,000 Payable for Fund shares repurchased 55,000 Payable to affiliate for (Note 2): Management fee 9,790 Shareholder service fee 14,685 Accrued expenses 35,831 ------------ Total liabilities 415,306 ------------ NET ASSETS $114,008,258 ============ NET ASSETS CONSIST OF: Paid-in capital $107,920,691 Accumulated undistributed net investment income 578,048 Accumulated net realized gain 1,467,079 Net unrealized appreciation 4,042,440 ------------ $114,008,258 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $114,008,258 ============ SHARES OUTSTANDING: Class III 11,194,102 ============ NET ASSET VALUE PER SHARE: Class III $ 10.18 ============
See accompanying notes to the financial statements. 3 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $1,542,406 Dividends from investment company shares 335,512 ---------- Total income 1,877,918 ---------- EXPENSES: Management fee (Note 2) 64,385 Audit fees 16,284 Custodian and transfer agent fees 12,880 Legal fees 3,141 Registration fees 1,472 Trustees fees (Note 2) 1,551 Miscellaneous 1,564 Fees reimbursed by Manager (Note 2) (35,315) ---------- 65,962 Shareholder service fee (Note 2) - Class III 96,499 ---------- Net expenses 162,461 ---------- Net investment income 1,715,457 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (826,616) Realized gains distributions from investment company shares 53,332 Closed futures contracts 1,104,967 Closed swap contracts 2,222,184 ---------- Net realized gain 2,553,867 ---------- Change in net unrealized appreciation (depreciation) on: Investments 1,846,716 Open futures contracts 84,390 Open swap contracts 969,136 ---------- Net unrealized gain 2,900,242 ---------- Net realized and unrealized gain 5,454,109 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,169,566 ==========
4 See accompanying notes to the financial statements. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,715,457 $ 7,133,724 Net realized gain 2,553,867 5,373,329 Change in net unrealized appreciation (depreciation) 2,900,242 (1,886,101) ------------ ------------ Net increase in net assets from operations 7,169,566 10,620,952 ------------ ------------ Distributions to shareholders from: Net investment income Class III (1,546,732) (8,152,095) ------------ ------------ Total distributions from net investment income (1,546,732) (8,152,095) ------------ ------------ Net realized gains Class III -- (6,876,138) ------------ ------------ Total distributions from net realized gains -- (6,876,138) ------------ ------------ (1,546,732) (15,028,233) ------------ ------------ Net share transactions: (Note 5) Class III (46,614,994) (11,126,261) ------------ ------------ Decrease in net assets resulting from net share transactions (46,614,994) (11,126,261) ------------ ------------ Total decrease in net assets (40,992,160) (15,533,542) NET ASSETS: Beginning of period 155,000,418 170,533,960 ------------ ------------ End of period (including accumulated undistributed net investment income of $578,048 and $409,323, respectively) $114,008,258 $155,000,418 ============ ============
See accompanying notes to the financial statements. 5 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001(C) 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.68 $ 9.98 $ 9.23 $ 9.65 $ 10.26 $ 10.18 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income(d) 0.13+ 0.43+ 0.61+ 0.60 0.68 0.67 Net realized and unrealized gain (loss) 0.48 0.20 0.72 (0.42) (0.15) 0.38 -------- -------- -------- -------- -------- -------- Total from investment operations 0.61 0.63 1.33 0.18 0.53 1.05 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.11) (0.50) (0.58) (0.58) (0.68) (0.70) From net realized gains -- (0.43) -- (0.02) (0.46) (0.27) -------- -------- -------- -------- -------- -------- Total distributions (0.11) (0.93) (0.58) (0.60) (1.14) (0.97) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.18 $ 9.68 $ 9.98 $ 9.23 $ 9.65 $ 10.26 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) 6.41%** 6.62% 14.91% 2.03% 5.03% 10.71% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $114,008 $155,000 $170,534 $164,457 $175,071 $431,410 Net operating expenses to average daily net assets 0.25%* 0.25% 0.25% 0.25% 0.25% 0.25% Interest expense to average daily net assets --* -- 0.07% 0.19% 0.02% -- Total net expenses to average daily net assets(e) 0.25% 0.25% 0.32%(b) 0.44%(b) 0.27%(b) 0.25% Net investment income to average daily net assets(d) 2.66%* 4.35% 6.41% 5.85% 6.21% 6.14% Portfolio turnover rate 13% 19% 65% 20% 17% 59% Fees and expenses voluntarily reimbursed by the Manager to average daily net assets: 0.05%* 0.05% 0.05% 0.05% 0.19% 0.18%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to increase net investment income per share by $0.001, decrease net realized and unrealized gains and losses per share by $0.001 and increase the ratio of net investment income to average net assets from 6.40% to 6.41%. Per share data and ratios/suppplemental data for periods prior to March 1, 2000 have not been restated to reflect this change in presentation. (d) Net investment income is affected by timing of the declaration of dividends by other GMO Funds in which the Fund invests. (e) Net expenses exclude expenses incurred indirectly through investment in other GMO Funds in which the Fund invests. + Computed using average shares outstanding throughout the period. * Annualized. ** Not Annualized. 6 See accompanying notes to the financial statements. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. investment grade securities. The Fund's benchmark is the Lehman Brothers Government Bond Index. At August 31, 2002, 10.6% of the Fund was invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. GMO Alpha LIBOR Fund invests primarily in relatively high quality, low volatility fixed income instruments. The financial statements of the GMO Alpha LIBOR Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of other GMO Funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their 7 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures or securities it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call 8 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future or security transaction to determine the realized gain or loss. If a written put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund as a writer of an option has no control over whether the underlying future or security may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 the Fund had no written option contracts outstanding. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future or security transaction to determine the realized gain or loss. The risk associated with the purchasing put and call options is limited to the premium paid. At August 31, 2002, the Fund had no purchased option contracts outstanding. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. 9 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. During the six months ended August 31, 2002, the Fund did not enter into any reverse repurchase agreements. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, there were no securities on loan. 10 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, forward swap spread lock and total return swap agreements to manage its exposure to interest rates. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically an emerging country, on its obligation. The fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of open swap agreements as of August 31, 2002. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. 11 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. The Fund elected to defer to March 1, 2002 post-October losses of $976,341. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Dividend income is recorded on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .10% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and 12 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding fund expenses, as defined above) incurred indirectly by the Fund through its investment in the GMO Alpha LIBOR Fund exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) rounded to less than 0.001% of the Fund's average daily net assets, and indirect investment expenses incurred by the Fund were 0.004% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $1,551. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the six months ended August 31, 2002, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ -- $ -- Investments (non-U.S. Government securities) 16,230,947 59,246,383
At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $109,760,562 $2,554,693 $(1,108,149) $1,446,544
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 45.1% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 13 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 1,396,132 $ 13,549,857 1,276,400 $ 12,796,444 Shares issued to shareholders in reinvestment of distributions 150,174 1,444,188 1,401,556 13,523,066 Shares repurchased (6,359,008) (61,609,039) (3,761,625) (37,445,771) ---------- ------------ ---------- ------------ Net decrease (4,812,702) $(46,614,994) (1,083,669) $(11,126,261) ========== ============ ========== ============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- -------------------------------- --------------- ---------- -------------- Buys 62 U.S. Long Bond December 2002 $6,800,625 $53,893 64 U.S. Treasury Note 5 Yr. December 2002 7,115,000 40,632 ------- $94,525 ======= Sales 19 U.S. Treasury Note 10 Yr. December 2002 $2,123,844 $ (406) =======
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 14 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Notional Expiration Net Unrealized Amount Date Description Appreciation -------------- ----------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 9,000,000 USD 3/27/10 Agreement with UBS AG dated 3/23/00 to receive the $1,725,919 notional amount multiplied by 7.23% and to pay the notional amount multiplied by the 3 month LIBOR. 24,000,000 USD 7/28/24 Agreement with JPMorgan Chase Bank dated 8/28/02 (143,952) to pay the notional amount multiplied by 0 and to receive the notional amount multiplied by 3 month Floating Rate LIBOR adjusted by a specific spread. TOTAL RETURN SWAPS 50,000,000 USD 7/1/03 Agreement with Lehman Brothers Special Financing 919,810 Inc. dated 6/29/01 to receive (pay) the notional amount multiplied by the return on the Lehman Brothers US Government Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. + ---------- $2,501,777 ==========
+ This swap agreement is fair valued (Note 1). 15 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ REAL ESTATE INVESTMENTS -- 95.4% COMMON STOCKS -- 6.2% DIVERSIFIED -- 2.6% 120,000 Catellus Development Corp* 2,364,000 11,500 Florida East Coast Industries 260,475 60,000 Forest City Enterprises, Class A 2,067,000 50,000 St. Joe Co 1,445,000 ------------ 6,136,475 ------------ LODGING -- 3.1% 45,000 Hilton Hotels Corp 517,950 252,500 Starwood Hotels and Resorts Worldwide Inc 6,509,450 624,800 Wyndham International Inc, Class A* 406,120 ------------ 7,433,520 ------------ OFFICE -- 0.5% 60,000 Brookfield Properties Corp 1,177,800 ------------ TOTAL COMMON STOCKS (COST $21,399,600) 14,747,795 ------------ REAL ESTATE INVESTMENT TRUSTS -- 89.2% APARTMENTS -- 16.1% 230,000 Apartment Investment & Management Co, Class A 10,039,500 135,000 Archstone-Smith Trust 3,557,250 142,500 Avalonbay Communities Inc 6,448,125 77,500 BRE Properties Inc 2,553,625 50,000 Camden Property Trust 1,792,500 272,500 Equity Residential Properties Trust 7,608,200 20,500 Gables Residential Trust 598,600 20,000 Mid America Apartment Community 504,000 45,000 Summit Properties Inc 927,000 280,000 United Dominion Realty Trust Inc 4,650,800 ------------ 38,679,600 ------------ DIVERSIFIED -- 13.5% 127,500 Chateau Communities Inc 3,594,225 90,000 Colonial Properties Trust 3,204,900 615,000 Crescent Real Estate Equities 10,332,000
See accompanying notes to the financial statements. 1 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ DIVERSIFIED -- CONTINUED 100,000 Glenborough Realty Trust Inc 2,105,000 25,000 iStar Financial Inc 730,000 110,000 The Rouse Co 3,558,500 215,000 Vornado Realty Trust 8,883,800 ------------ 32,408,425 ------------ HEALTH CARE -- 0.3% 56,700 Senior Housing Properties Trust 696,843 ------------ INDUSTRIAL -- 7.5% 60,000 AMB Property Corp 1,785,000 72,500 Eastgroup Properties Inc 1,858,175 95,000 First Industrial Realty Trust 3,144,500 140,000 Liberty Property Trust 4,568,200 262,500 Prologis Trust 6,546,750 ------------ 17,902,625 ------------ LODGING -- 3.0% 130,000 Felcor Lodging Trust Inc 1,924,000 40,000 Hospitality Properties Trust 1,387,200 385,000 Host Marriott Corp 3,903,900 ------------ 7,215,100 ------------ OFFICE -- 32.2% 82,500 Arden Realty Group Inc 2,067,450 90,000 Bedford Property Investors 2,270,700 77,500 Boston Properties Inc 2,935,700 265,000 Brandywine Realty Trust 5,999,600 50,000 CarrAmerica Realty Corp 1,365,000 275,000 Duke Realty Investments 7,213,250 614,200 Equity Office Properties Trust 17,123,896 270,000 Highwood Properties Inc 6,453,000 62,800 Koger Equity Inc 1,077,020 340,000 Mack-Cali Realty Corp 11,407,000 70,000 Parkway Properties Inc 2,583,700 110,000 Prentiss Properties Trust 3,217,500 150,000 Reckson Associates Realty Corp 3,495,000 36,000 Reckson Associates Realty Corp, Class B 882,720 22,500 SL Green Realty Corp 744,075
2 See accompanying notes to the financial statements. GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ OFFICE -- CONTINUED 56,980 Trizec Canada Inc 657,452 630,520 Trizec Properties Inc 7,553,630 ------------ 77,046,693 ------------ REGIONAL MALLS -- 11.8% 121,000 CBL & Associates Properties Inc 4,719,000 191,000 General Growth Properties 9,624,490 35,000 Macerich Co 1,066,800 135,000 Mills Corp 3,881,250 250,000 Simon Property Group Inc 8,897,500 ------------ 28,189,040 ------------ SELF STORAGE -- 0.5% 35,700 Public Storage Inc 1,138,830 ------------ SHOPPING/POWER CENTER -- 4.3% 65,000 Chelsea Property Group Inc 2,203,500 245,000 Developers Diversified Realty Corp 5,659,500 44,000 Kimco Realty Corp 1,397,000 50,000 New Plan Excel Realty Trust 979,000 ------------ 10,239,000 ------------ TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $204,073,038) 213,516,156 ------------ TOTAL REAL ESTATE INVESTMENTS (COST $225,472,638) 228,263,951 ------------ SHORT-TERM INVESTMENTS -- 9.6% CASH EQUIVALENTS -- 5.0% 4,831,739 Dreyfus Money Market Fund(a) 4,831,739 $ 4,393,721 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(a) 4,393,721 2,855,917 Merrimac Money Market Fund(a) 2,855,917 ------------ 12,081,377 ------------
See accompanying notes to the financial statements. 3 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ REPURCHASE AGREEMENTS -- 4.6% $ 10,893,937 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $10,894,966, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest of $11,119,598. 10,893,937 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $22,975,314) 22,975,314 ------------ TOTAL INVESTMENTS -- 105.0% (Cost $248,447,952) 251,239,265 Other Assets and Liabilities (net) -- (5.0%) (11,891,720) ------------ TOTAL NET ASSETS -- 100.0% $239,347,545 ============ NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). 4 See accompanying notes to the financial statements. GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $11,583,559 (cost $248,447,952) (Note 1) $251,239,265 Cash 1,486 Receivable for investments sold 390,253 Receivable for Fund shares sold 83,000 Dividends and interest receivable 37,196 Receivable for expenses reimbursed by Manager (Note 2) 7,285 ------------ Total assets 251,758,485 ------------ LIABILITIES: Payable for investments purchased 160,270 Payable upon return of securities loaned (Note 1) 12,081,377 Payable for Fund shares repurchased 1,714 Payable to affiliate for (Note 2): Management fee 108,283 Shareholder service fee 30,079 Accrued expenses 29,217 ------------ Total liabilities 12,410,940 ------------ NET ASSETS $239,347,545 ============ NET ASSETS CONSIST OF: Paid-in capital $259,564,602 Accumulated undistributed net investment income 5,647,970 Accumulated net realized loss (28,656,340) Net unrealized appreciation 2,791,313 ------------ $239,347,545 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $239,347,545 ============ SHARES OUTSTANDING: Class III 21,097,366 ============ NET ASSET VALUE PER SHARE: Class III $ 11.34 ============
See accompanying notes to the financial statements. 5 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $2,525) $6,379,156 Interest (including securities lending income of $15,152) 71,309 ---------- Total income 6,450,465 ---------- EXPENSES: Management fee (Note 2) 612,170 Audit fees 18,492 Custodian and transfer agent fees 14,260 Legal fees 4,711 Registration fees 1,656 Trustees fees (Note 2) 1,828 Miscellaneous 2,023 Fees reimbursed by Manager (Note 2) (40,755) ---------- 614,385 Shareholder service fee (Note 2) - Class III 170,129 ---------- Net expenses 784,514 ---------- Net investment income 5,665,951 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on investments 816,274 ---------- Change in net unrealized appreciation (depreciation) on investments (424,000) ---------- Net realized and unrealized gain 392,274 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,058,225 ==========
6 See accompanying notes to the financial statements. GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 5,665,951 $ 8,022,803 Net realized gain (loss) 816,274 (1,508,670) Change in net unrealized appreciation (depreciation) (424,000) 14,307,314 ------------ ------------ Net increase in net assets from operations 6,058,225 20,821,447 ------------ ------------ Distributions to shareholders from: Net investment income Class III (6,227,183) (7,471,215) ------------ ------------ Total distributions from net investment income (6,227,183) (7,471,215) ------------ ------------ Net share transactions: (Note 5) Class III 46,910,207 45,835,735 ------------ ------------ Increase in net assets resulting from net share transactions 46,910,207 45,835,735 ------------ ------------ Total increase in net assets 46,741,249 59,185,967 NET ASSETS: Beginning of period 192,606,296 133,420,329 ------------ ------------ End of period (including accumulated undistributed net investment income of $5,647,970 and $6,209,202, respectively) $239,347,545 $192,606,296 ============ ============
See accompanying notes to the financial statements. 7 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.17 $ 10.31 $ 8.26 $ 9.13 $ 12.92 $ 12.62 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.29+ 0.56+ 0.60 0.51+ 0.51+ 0.53 Net realized and unrealized gain (loss) 0.18 0.84 1.92 (0.87) (3.36) 1.26 -------- -------- -------- -------- -------- -------- Total from investment operations 0.47 1.40 2.52 (0.36) (2.85) 1.79 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.30) (0.54) (0.47) (0.51) (0.19) (0.60) From net realized gains -- -- -- -- (0.75) (0.89) -------- -------- -------- -------- -------- -------- Total distributions (0.30) (0.54) (0.47) (0.51) (0.94) (1.49) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 11.34 $ 11.17 $ 10.31 $ 8.26 $ 9.13 $ 12.92 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) 4.13%++ 13.73% 30.86% (4.69)% (23.27)% 14.29% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $239,348 $192,606 $133,420 $120,508 $143,129 $374,774 Net expenses to average daily net assets 0.69%* 0.69% 0.69% 0.69% 0.69% 0.69% Net investment income to average daily net assets 5.00%* 5.18% 5.85% 5.64% 4.60% 4.10% Portfolio turnover rate 9% 6% 11% 13% 59% 86% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04%* 0.05% 0.05% 0.06% 0.26% 0.26%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. + Computed using average shares outstanding throughout the period. ++ Not Annualized. * Annualized. 8 See accompanying notes to the financial statements. GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Real Estate Fund (the "Fund") (formerly GMO REIT Fund) is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in or exposure to real estate investment trusts ("REIT"), which are managed vehicles that invest in real estate, real estate-related assets and other real estate related companies. The Fund's benchmark is the Morgan Stanley REIT Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is 9 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, the Fund held no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $11,583,559, collateralized by cash in the amount of $12,081,377, which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax 10 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $8,368,927, $15,979,464, $3,875,337 and $323,175 expiring in 2007, 2008, 2009 and 2010, respectively. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in REITs rather than a more diversified portfolio of investments. Since the Fund's investments are concentrated in real-estate related securities, the value of its shares can be expected to change in light of factors affecting the real estate industry, including local or regional economic conditions, changes in zoning laws, changes in 11 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- real estate value and property taxes, and changes in interest rates. The value of the Fund's shares may fluctuate more widely than the value of shares of a portfolio that invests in a broader range of industries. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $1,828. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $64,405,657 and $19,891,524, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $248,447,952 $22,678,732 $(19,887,419) $2,791,313
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 12.4% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 12 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------- ------------------------- Shares Amount Shares Amount Class III: ----------- ------------ ----------- ------------ Shares sold 6,173,753 $ 74,538,295 5,244,492 $ 56,043,036 Shares issued to shareholders in reinvestment of distributions 390,294 4,550,832 451,024 4,887,978 Shares repurchased (2,703,193) (32,178,920) (1,401,885) (15,095,279) ----------- ------------ ----------- ------------ Net increase 3,860,854 $ 46,910,207 4,293,631 $ 45,835,735 =========== ============ =========== ============
13 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 98.3% AUTO & TRANSPORTATION -- 5.6% 82,400 AMR Corp* 839,656 89,800 Burlington Northern Santa Fe Railroad Co 2,582,648 23,300 CSX Corp 811,539 61,100 Delta Air Lines Inc 1,073,527 7,900 Eaton Corp 558,846 55,300 FedEx Corp 2,618,455 210,593 Ford Motor Co 2,478,680 143,013 General Motors Corp 6,844,602 16,400 Genuine Parts Co 545,300 34,000 Goodyear Tire & Rubber Co 459,680 24,100 Harley Davidson Inc 1,186,443 50,100 Norfolk Southern Corp 1,048,593 16,500 Paccar Inc 582,615 13,400 SPX Corp* 1,455,240 32,900 TRW Inc 1,888,460 9,000 Union Pacific Corp 544,950 ------------ 25,519,234 ------------ CONSUMER DISCRETIONARY -- 12.6% 58,200 Amazon.com Inc* 869,508 56,600 Autonation Inc* 747,120 30,300 Autozone Inc* 2,192,205 38,300 Best Buy Co Inc* 811,960 12,600 Black and Decker Corp 565,362 27,000 CDW Computer Centers Inc* 1,158,840 66,600 Circuit City Stores Inc 928,404 26,300 Clear Channel Communications Inc* 898,934 47,100 Clorox Co 2,028,126 37,100 Dollar Tree Stores Inc* 913,031 67,800 Eastman Kodak Co 2,070,612 18,800 Estee Lauder Cos Inc 563,060 8,600 Expedia Inc* 433,784 32,500 Federated Department Stores Inc* 1,166,750 12,200 Fortune Brands Inc 640,134 68,200 Fox Entertainment Group Inc, Class A* 1,522,906 85,900 Gillette Co 2,708,427 15,800 Harrahs Entertainment Inc* 751,132 90,700 Hilton Hotels Corp 1,043,957
See accompanying notes to the financial statements. 1 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY -- CONTINUED 22,900 Home Depot Inc 754,097 11,900 International Flavors & Fragrances Inc 383,775 36,300 Interpublic Group Inc 661,749 36,600 Jones Apparel Group Inc* 1,320,894 27,200 Kohls Corp* 1,896,384 5,500 Leggett & Platt Inc 127,325 144,900 Liberty Media Corp, Class A* 1,211,364 99,000 Limited Brands Inc 1,513,710 13,700 Manpower Inc 453,744 53,300 May Department Stores Co 1,563,289 31,700 MGM Grand Inc* 1,125,033 9,200 Mohawk Industries Inc* 455,400 25,100 Newell Rubbermaid Inc 868,460 23,000 Nike Inc, Class B 993,140 78,600 Office Depot Inc* 1,015,512 25,600 Penney (JC) Co Inc 444,416 14,000 R.R. Donnelley and Sons 369,320 47,900 RadioShack Corp 1,043,741 18,100 Robert Half International Inc* 313,492 13,200 Ross Stores Inc 476,652 91,700 Sears Roebuck & Co 4,173,267 93,500 Staples Inc* 1,299,650 49,400 Starbucks Corp* 992,940 14,400 Target Corp 492,480 26,800 Tiffany & Co 664,640 18,700 Toys R Us Inc* 249,271 9,200 VF Corp 373,612 33,400 Viacom Inc, Class A* 1,359,380 48,200 Viacom Inc, Class B* 1,961,740 115,400 Wal Mart Stores Inc 6,171,592 12,300 Whirlpool Corp 680,313 ------------ 57,424,634 ------------ CONSUMER STAPLES -- 8.8% 47,576 Albertsons Inc 1,223,655 48,200 Anheuser Busch Cos Inc 2,562,312 30,600 Campbell Soup Co 708,390 228,300 Coca Cola Co 11,643,300 19,100 Coca Cola Enterprises Inc 386,011 65,600 ConAgra Foods Inc 1,724,624
2 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER STAPLES -- CONTINUED 23,100 Heinz (HJ) Co 872,487 1,006 JM Smucker Co 36,568 27,300 Kellogg Co 877,968 52,900 Pepsico Inc 2,092,195 143,200 Procter and Gamble Co 12,694,680 95,900 Rite Aid Corp* 201,390 74,000 Safeway Inc* 1,910,680 53,500 Sara Lee Corp 986,540 21,200 Supervalu Inc 440,324 46,500 Walgreen Co 1,615,875 500 Winn-Dixie Stores Inc 8,075 ------------ 39,985,074 ------------ FINANCIAL SERVICES -- 17.4% 99,800 Allstate Corp 3,714,556 155,600 American Express Co 5,610,936 23,200 Amsouth Bancorp 521,304 15,700 Automatic Data Processing Inc 592,989 130,764 Bank of America Corp 9,163,941 51,800 Bank One Corp 2,121,210 32,221 Bear Stearns Cos Inc 2,059,889 19,675 Charter One Financial Inc 663,048 15,100 Cigna Corp 1,285,312 42,000 Citigroup Inc 1,375,500 13,700 CNA Financial Corp* 375,517 27,100 Comerica Inc 1,585,350 12,500 Compass Bankshares Inc 419,875 104,000 Conseco Inc* 14,040 27,700 Countrywide Credit Industries Inc 1,453,973 15,000 Dun & Bradstreet Corp* 529,350 6,800 Edwards (AG) Inc 255,952 44,500 Equifax Inc 1,035,960 89,146 FleetBoston Financial Corp 2,151,093 31,200 Franklin Resources Inc 1,092,000 8,100 Greenpoint Financial Corp 413,100 6,600 Hartford Financial Services Group Inc 330,132 47,900 Household International Inc 1,729,669 18,700 Hudson City Bancorp Inc 346,324 57,100 Huntington Bancshares Inc 1,152,849 66,240 J.P. Morgan Chase & Co 1,748,736
See accompanying notes to the financial statements. 3 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 46,800 Key Corp 1,255,644 11,900 Lehman Brothers Holdings Inc 678,419 13,400 Lincoln National Corp 496,470 17,600 Marsh & McLennan Cos Inc 856,240 25,300 MBIA Inc 1,162,788 62,500 Merrill Lynch & Co Inc 2,263,750 45,500 MGIC Investment Corp 2,739,555 23,400 Moody's Corp 1,130,688 81,500 Morgan Stanley Dean Witter & Co 3,481,680 47,400 National City Corp 1,477,458 9,700 Old Republic International Corp 311,370 35,800 PMI Group Inc 1,213,620 19,100 PNC Bank Corp 880,319 53,800 Providian Financial Corp* 305,584 16,100 Radian Group Inc 699,706 26,200 Regions Financial Corp 935,864 9,400 Southtrust Corp 246,656 56,900 Stilwell Financial Inc 793,186 16,000 Suntrust Banks Inc 1,080,160 13,800 T. Rowe Price Group Inc 390,402 23,700 Torchmark Corp 885,195 583 Travelers Property Casualty Corp, Class A* 9,165 1,198 Travelers Property Casualty Corp, Class B* 19,515 19,500 Union Planters Corp 605,670 21,100 UnionBanCal Corp 949,500 60,900 Unumprovident Corp 1,410,444 100,000 Wachovia Corp 3,685,000 64,200 Washington Mutual Inc 2,427,402 102,100 Wells Fargo & Co 5,328,599 ------------ 79,462,654 ------------ HEALTH CARE -- 12.1% 23,800 Abbott Laboratories 952,714 64,800 Aetna Inc 2,761,128 68,700 Boston Scientific Corp* 2,002,605 123,000 Bristol Myers Squibb Co 3,068,850 22,400 Genentech Inc* 734,496 50,200 Guidant Corp* 1,847,360 179,020 Johnson & Johnson 9,722,576 57,900 Medtronic Inc 2,384,322
4 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HEALTH CARE -- CONTINUED 336,500 Merck & Co Inc 16,999,980 7,300 Millipore Corp 257,617 25,200 Oxford Health Plans Inc* 1,021,860 7,800 Patterson Dental Co* 372,060 165,150 Pfizer Inc 5,463,162 252,100 Schering Plough Corp 5,818,468 23,500 Wellpoint Health Network Inc* 1,747,695 ------------ 55,154,893 ------------ INTEGRATED OILS -- 2.2% 116,600 Conoco Inc 2,862,530 30,554 Exxon Mobil Corp 1,083,139 107,600 Marathon Oil Corp 2,663,100 32,800 Occidental Petroleum Corp 974,160 44,000 Phillips Petroleum Co 2,313,520 ------------ 9,896,449 ------------ MATERIALS & PROCESSING -- 2.7% 7,600 3 M Co 949,620 20,800 Ashland Inc 596,128 15,000 Avery Dennison Corp 946,800 20,800 Cooper Industries Ltd 680,576 51,200 Du Pont (E.I.) De Nemours 2,063,872 9,300 Eastman Chemical Co 417,291 11,600 Ecolab Inc 522,464 3,100 Fluor Corp 85,746 9,500 Kinder Morgan Energy Partners 309,320 12,500 Lowes Cos Inc 517,250 23,200 MeadWestvaco Corp 540,328 7,000 Nucor Corp 350,280 17,700 PPG Industries Inc 995,979 26,400 Praxair Inc 1,479,192 51,000 Sealed Air Corp* 789,990 35,000 Sherwin Williams Co 945,000 ------------ 12,189,836 ------------ OTHER -- 2.7% 50,900 General Electric Co 1,534,635 157,700 Honeywell International Inc 4,723,115
See accompanying notes to the financial statements. 5 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ OTHER -- CONTINUED 12,500 Illinois Tool Works Inc 856,500 12,600 Ingersoll Rand Co 473,130 18,000 ITT Industries Inc 1,223,640 20,400 Johnson Controls Inc 1,760,316 28,900 Textron Inc 1,122,765 17,700 Westwood One Inc* 618,261 ------------ 12,312,362 ------------ OTHER ENERGY -- 0.7% 13,400 Apache Corp 737,804 16,300 Devon Energy Corp 766,100 34,700 Schlumberger Ltd 1,499,387 13,300 Transocean Sedco Forex Inc 325,850 ------------ 3,329,141 ------------ PRODUCER DURABLES -- 4.9% 27,700 American Power Conversion Corp* 346,527 98,100 Applied Materials Inc* 1,310,616 50,800 Boeing Co 1,883,156 23,600 Caterpillar Inc 1,029,904 15,000 Danaher Corp 902,250 17,000 Deere (John) and Co 780,640 21,700 Emerson Electric Co 1,058,526 13,000 Grainger (WW) Inc 585,650 21,300 Horton (DR) Inc 442,188 18,100 Lexmark International Group Inc* 854,320 59,900 Lockheed Martin Corp 3,792,868 16,500 Northrop Grumman Corp 2,026,200 17,100 Parker-Hannifin Corp 693,576 30,200 Pitney Bowes Inc 1,094,750 17,100 Teradyne Inc* 216,315 66,800 Tyco International Ltd 1,048,092 49,100 United Technologies Corp 2,916,049 188,100 Xerox Corp* 1,318,581 ------------ 22,300,208 ------------ TECHNOLOGY -- 14.2% 21,000 Adobe Systems Inc 422,100 1,065 Agere Systems Inc* 1,693
6 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TECHNOLOGY -- CONTINUED 23,100 Analog Devices Inc* 556,710 48,900 Apple Computer Inc* 721,275 17,200 Applera Corp-Applied Biosystems Group 340,732 2,500 Ascential Software Corp* 5,475 57,100 BMC Software Inc* 793,690 21,000 Ceridian Corp* 337,470 15,800 ChoicePoint Inc* 678,926 872,200 Cisco Systems Inc* 12,053,804 92,300 Computer Associates International Inc 1,033,760 37,900 Computer Sciences Corp* 1,395,857 95,100 Compuware Corp* 345,213 90,900 Corning Inc* 181,800 205,300 Dell Computer Corp* 5,465,086 45,500 Fiserv Inc* 1,674,855 140,400 Gateway Inc* 491,400 130,700 Hewlett Packard Co 1,755,301 18,300 IBM Corp 1,379,454 832,000 Intel Corp 13,869,440 98,900 Lucent Technologies Inc* 171,097 40,500 Maxim Integrated Products Inc* 1,280,205 28,350 Microchip Technology Inc* 596,768 47,600 Microsoft Corp* 2,336,208 63,800 Motorola Inc 765,600 75,300 Network Appliance Inc* 718,362 32,500 Network Associates Inc* 422,500 719,200 Oracle Corp* 6,897,128 68,700 Raytheon Co 2,404,500 23,100 Rockwell International Corp 425,502 72,600 Siebel Systems Inc* 614,922 46,000 Symantec Co* 1,315,600 106,700 Tellabs Inc* 602,855 45,900 Xilinx Inc* 886,788 163,300 Yahoo! Inc* 1,680,357 ------------ 64,622,433 ------------ U.S. GOVERNMENT AGENCY -- 3.8% 153,700 Fannie Mae 11,647,386 87,100 Freddie Mac 5,583,110 ------------ 17,230,496 ------------
See accompanying notes to the financial statements. 7 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UTILITIES -- 10.6% 14,400 Ameren Corp 634,320 11,900 American Electric Power Inc 405,790 894,032 AT & T Corp 10,925,071 93,300 Bellsouth Corp 2,175,756 16,900 Cinergy Corp 581,360 27,000 CMS Energy Corp 285,120 19,700 Consolidated Edison Inc 801,593 8,900 Constellation Energy Group Inc 249,289 17,200 DTE Energy Co 738,052 75,300 Edison International* 902,094 23,600 Entergy Corp 995,684 17,557 Firstenergy Corp 579,381 15,600 FPL Group Inc 890,448 105,100 PG & E Corp* 1,192,885 13,900 Pinnacle West Capital Corp 464,399 20,900 Public Service Enterprise Group Inc 735,680 24,700 Reliant Energy Inc 292,695 357,114 SBC Communications Inc 8,835,000 24,100 Sempra Energy 578,641 29,600 Southern Co 857,216 221,800 Sprint Corp (Fon Group) 2,572,880 17,700 TXU Corp 855,972 379,084 Verizon Communications Inc 11,751,604 ------------ 48,300,930 ------------ TOTAL COMMON STOCKS (COST $540,558,004) 447,728,344 ------------ SHORT-TERM INVESTMENTS -- 7.9% CASH EQUIVALENTS -- 3.0% 5,523,542 Dreyfus Money Market Fund(a) 5,523,542 $ 5,022,812 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(a) 5,022,812 3,264,828 Merrimac Money Market Fund(a) 3,264,828 ------------ 13,811,182 ------------ U.S. GOVERNMENT -- 0.4% $ 1,700,000 U.S. Treasury Bill, 1.64%, due 9/5/02(b) 1,699,680 ------------
See accompanying notes to the financial statements. 8 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ REPURCHASE AGREEMENTS -- 4.5% $ 20,358,423 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $20,360,346 and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest of $20,775,731. 20,358,423 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $35,869,285) 35,869,285 ------------ TOTAL INVESTMENTS -- 106.2% (Cost $576,427,289) 483,597,629 Other Assets and Liabilities (net) -- (6.2%) (28,283,116) ------------ TOTAL NET ASSETS -- 100.0% $455,314,513 ============ NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $13,177,511 (cost $576,427,289) (Note 1) $483,597,629 Cash 1,737 Receivable for investments sold 3,509,115 Dividends and interest receivable 699,759 Receivable for variation margin on open futures contracts (Notes 1 and 6) 86,239 Receivable for expenses reimbursed by Manager (Note 2) 15,934 ------------ Total assets 487,910,413 ------------ LIABILITIES: Payable for investments purchased 18,551,068 Payable upon return of securities loaned (Note 1) 13,811,182 Payable to affiliate for (Note 2): Management fee 126,908 Shareholder service fee 45,550 Accrued expenses 61,192 ------------ Total liabilities 32,595,900 ------------ NET ASSETS $455,314,513 ============ NET ASSETS CONSIST OF: Paid-in capital $592,492,063 Accumulated undistributed net investment income 1,017,370 Accumulated net realized loss (45,374,189) Net unrealized depreciation (92,820,731) ------------ $455,314,513 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $136,121,890 ============ Class IV shares $319,192,623 ============ SHARES OUTSTANDING: Class III 14,492,499 ============ Class IV 33,997,800 ============ NET ASSET VALUE PER SHARE: Class III $ 9.39 ============ Class IV $ 9.39 ============
10 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 3,578,709 Interest (including securities lending income of $19,856) 110,410 ------------ Total income 3,689,119 ------------ EXPENSES: Management fee (Note 2) 767,594 Custodian and transfer agent fees 54,280 Audit fees 17,664 Legal fees 9,862 Trustees fees (Note 2) 4,690 Registration fees 1,472 Miscellaneous 3,949 Fees reimbursed by Manager (Note 2) (87,117) ------------ 772,394 Shareholder service fee (Note 2) - Class III 145,780 Shareholder service fee (Note 2) - Class IV 142,188 ------------ Net expenses 1,060,362 ------------ Net investment income 2,628,757 ------------ REALIZED AND UNREALIZED LOSS: Net realized loss on: Investments (11,381,291) Closed futures contracts (3,360,488) ------------ Net realized loss (14,741,779) ------------ Change in net unrealized appreciation (depreciation) on: Investments (72,151,019) Open futures contracts (31,547) ------------ Net unrealized loss (72,182,566) ------------ Net realized and unrealized loss (86,924,345) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(84,295,588) ============
See accompanying notes to the financial statements. 11 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 2,628,757 $ 4,400,065 Net realized loss (14,741,779) (25,790,130) Change in net unrealized appreciation (depreciation) (72,182,566) (7,702,275) ------------ ------------- Net decrease in net assets from operations (84,295,588) (29,092,340) ------------ ------------- Distributions to shareholders from: Net investment income Class III (938,436) (2,265,734) Class IV (1,549,556) (1,907,569) ------------ ------------- Total distributions from net investment income (2,487,992) (4,173,303) ------------ ------------- Net share transactions: (Note 5) Class III 43,035,336 (111,901,886) Class IV 117,764,082 266,034,460 ------------ ------------- Increase in net assets resulting from net share transactions 160,799,418 154,132,574 ------------ ------------- Total increase in net assets 74,015,838 120,866,931 NET ASSETS: Beginning of period 381,298,675 260,431,744 ------------ ------------- End of period (including accumulated undistributed net investment income of $1,017,370 and $876,605, respectively) $455,314,513 $ 381,298,675 ============ =============
12 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ---------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23 $ 12.29 $ 14.35 $ 14.26 $ 14.05 $ 12.98 -------- -------- -------- -------- -------- ------------ Income from investment operations: Net investment income 0.06+ 0.15+ 0.17+ 0.20 0.18 0.22 Net realized and unrealized gain (loss) (1.85) (1.07) (0.20) 1.94 1.99 4.07 -------- -------- -------- -------- -------- ------------ Total from investment operations (1.79) (0.92) (0.03)++ 2.14 2.17 4.29 -------- -------- -------- -------- -------- ------------ Less distributions to shareholders: From net investment income (0.05) (0.14) (0.19) (0.19) (0.19) (0.22) From net realized gains -- -- (1.84) (1.86) (1.77) (3.00) -------- -------- -------- -------- -------- ------------ Total distributions (0.05) (0.14) (2.03) (2.05) (1.96) (3.22) -------- -------- -------- -------- -------- ------------ NET ASSET VALUE, END OF PERIOD $ 9.39 $ 11.23 $ 12.29 $ 14.35 $ 14.26 $ 14.05 ======== ======== ======== ======== ======== ============ TOTAL RETURN(a) (15.98)%** (7.53)% (0.83)% 15.10% 16.29% 37.82% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $136,122 $133,203 $260,432 $321,786 $227,158 $ 99,922 Net expenses to average daily net assets 0.48%* 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.09%* 1.24% 1.20% 1.34% 1.35% 1.66% Portfolio turnover rate 28% 85% 82% 108% 77% 70% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04%* 0.03% 0.05% 0.05% 0.25% 0.28%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. + Computed using averge shares outstanding throughout the period. ++ The amount shown for a share outstanding does not correspond with the net increase in net assets from operations due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 13 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JULY 2, 2001 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2002 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 28, 2002 ---------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23 $ 12.32 -------- -------- Income from investment operations: Net investment income 0.06+ 0.10+ Net realized and unrealized loss (1.84) (1.08) -------- -------- Total from investment operations (1.78) (0.98) -------- -------- Less distributions to shareholders: From net investment income (0.06) (0.11) -------- -------- Total distributions (0.06) (0.11) -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.39 $ 11.23 ======== ======== TOTAL RETURN(a) (15.95)%** (8.00)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $319,193 $248,095 Net expenses to average daily net assets 0.44%* 0.44%* Net investment income to average daily net assets 1.16%* 1.37%* Portfolio turnover rate 28% 85% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04%* 0.04%*
(a) The total returns would have been lower had certain expenses not been reimbursed during the period shown. + Computed using averge shares outstanding throughout the period. * Annualized. ** Not annualized. 14 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index. Throughout the six months ended August 31, 2002, the Fund had two classes of shares outstanding: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified 15 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $13,177,511 collateralized by cash in the amount of $13,811,182, which was invested in short-term instruments. 16 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by a specific spread. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of August 31, 2002 the Fund held no open swap agreements. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 17 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $24,719,851 expiring in 2010. The Fund elected to defer to March 1, 2002 post-October losses of $8,692. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .105% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. 18 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $4,690. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $288,188,311 and $120,835,909, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $576,427,289 $11,648,208 $(104,477,708) $(92,829,500)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 61.0% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 14,309,631 $ 159,937,269 9,762,326 $ 118,497,001 Shares issued in reinvestment of distributions 60,159 656,667 146,377 1,687,074 Shares repurchased (11,733,679) (117,558,600) (19,237,964) (232,085,961) ----------- ------------- ----------- ------------- Net increase (decrease) 2,636,111 $ 43,035,336 (9,329,261) $(111,901,886) =========== ============= =========== =============
19 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - --------------------------------------------------------------------------------
Period from July 2, 2001 Six Months Ended (commencement of August 31, 2002 operations) (Unaudited) through February 28, 2002 ------------------------ -------------------------- Shares Amount Shares Amount Class IV: ---------- ------------ ----------- ------------- Shares sold 11,756,320 $116,214,526 22,613,569 $272,126,891 Shares issued in reinvestment of distributions 148,188 1,549,556 169,378 1,907,569 Shares repurchased -- -- (689,655) (8,000,000) ---------- ------------ ---------- ------------ Net increase 11,904,508 $117,764,082 22,093,292 $266,034,460 ========== ============ ========== ============
The Fund's Class IV was started with an initial transfer of paid in capital of $100,653,595 from Class III. This transfer is included in the transaction amounts above. 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows:
Number of Contract Net Unrealized Contracts Type Expiration Date Value Appreciation --------------------------------------------- ----------- --------------- ---------- -------------- Buys 10 S&P 500 September 2002 $2,290,250 $8,929
At August 31, 2002 the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 20 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.0% 1,007,351 GMO Emerging Countries Fund, Class III 8,955,351 435,044 GMO Emerging Country Debt Fund, Class III 3,880,589 1,189,579 GMO Emerging Markets Fund, Class III 10,896,540 1,057,531 GMO International Growth Fund, Class III 19,828,714 2,482,108 GMO International Intrinsic Value Fund, Class III 44,826,870 812,142 GMO International Small Companies Fund, Class III 8,478,757 ------------ TOTAL MUTUAL FUNDS (COST $99,900,407) 96,866,821 ------------ SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENTS -- 0.0% $ 20,862 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $20,864 and an effective yield of 1.97%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19 and a market value, including accrued interest of $27,354. 20,862 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $20,862) 20,862 ------------ TOTAL INVESTMENTS -- 100.0% (Cost $99,921,269) 96,887,683 Other Assets and Liabilities (net) -- (0.0%) (8,641) ------------ TOTAL NET ASSETS -- 100.0% $ 96,879,042 ============
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $99,921,269) (Note 1) $96,887,683 Receivable for expenses reimbursed by Manager (Note 2) 2,852 ----------- Total assets 96,890,535 ----------- LIABILITIES: Accrued expenses 11,493 ----------- Total liabilities 11,493 ----------- NET ASSETS $96,879,042 =========== NET ASSETS CONSIST OF: Paid-in capital $107,212,595 Accumulated undistributed net investment income 500,718 Accumulated net realized loss (7,800,685) Net unrealized depreciation (3,033,586) ----------- $96,879,042 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $96,879,042 =========== SHARES OUTSTANDING: Class III 10,985,994 =========== NET ASSET VALUE PER SHARE: Class III $ 8.82 ===========
2 See accompanying notes to the financial statements. GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 505,187 Interest 1,486 ----------- Total income 506,673 ----------- EXPENSES: Audit fees 7,912 Custodian and transfer agent fees 4,784 Legal fees 1,472 Registration fees 1,472 Trustees fees (Note 2) 646 Miscellaneous 893 Fees reimbursed by Manager (Note 2) (16,533) ----------- Net expenses 646 ----------- Net investment income 506,027 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 77,190 Realized gains distributions from investment company shares 22,325 ----------- Net realized gain 99,515 ----------- Change in net unrealized appreciation (depreciation) on investments (1,976,293) ----------- Net realized and unrealized loss (1,876,778) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(1,370,751) ===========
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 506,027 $ 1,880,452 Net realized gain (loss) 99,515 (4,468,470) Change in net unrealized appreciation (depreciation) (1,976,293) (1,997,367) ----------- ----------- Net decrease in net assets from operations (1,370,751) (4,585,385) ----------- ----------- Distributions to shareholders from: Net investment income Class III (1,880,299) (1,638,687) ----------- ----------- Total distributions from net investment income (1,880,299) (1,638,687) ----------- ----------- Net share transactions: (Note 5) Class III 34,418,180 (1,039,236) ----------- ----------- Increase (decrease) in net assets resulting from net share transactions 34,418,180 (1,039,236) ----------- ----------- Total increase (decrease) in net assets 31,167,130 (7,263,308) NET ASSETS: Beginning of period 65,711,912 72,975,220 ----------- ----------- End of period (including accumulated undistributed net investment income of $500,718 and $1,874,990, respectively) $96,879,042 $65,711,912 =========== ===========
4 See accompanying notes to the financial statements. GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998* ---------------- ----------- ----------- ----------- ----------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.02 $ 9.67 $ 9.87 $ 8.28 $ 10.18 $ 10.41 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income(a) 0.06+ 0.25+ 0.16+ 0.22+ 0.19+ 0.33+ Net realized and unrealized gain (loss) (0.04) (0.66) (0.06) 1.73 (1.01) 0.31 ------- ------- ------- ------- ------- ------- Total from investment operations 0.02 (0.41) 0.10 1.95 (0.82) 0.64 ------- ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.22) (0.24) (0.30) (0.08) (0.50) (0.29) From net realized gains -- -- -- (0.28) (0.58) (0.58) ------- ------- ------- ------- ------- ------- Total distributions (0.22) (0.24) (0.30) (0.36) (1.08) (0.87) ------- ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.82 $ 9.02 $ 9.67 $ 9.87 $ 8.28 $ 10.18 ======= ======= ======= ======= ======= ======= TOTAL RETURN(b) 0.06%** (4.26)% 0.87% 23.58% (8.77)% 6.73% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $96,879 $65,712 $72,975 $76,047 $90,161 $85,876 Net expenses to average daily net assets(c) 0.00%(d)* 0.00%(d) 0.00% 0.00% 0.00% 0.00% Net investment income to average daily net assets(a) 1.30%* 2.83% 1.62% 2.24% 2.06% 3.13% Portfolio turnover rate 9% 50% 14% 8% 36% 16% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04%* 0.05% 0.05% 0.04% 0.05% 0.09%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The total returns would have been lower had cetain expenses not been reimbursed during the periods shown. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 1. (d) Net expenses to average daily net assets was less than 0.01%. * Annualized. ** Not annualized. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the MSCI All Country World Free ex-U.S. Index through investment to varying extents in other Funds of the Trust. The Fund will pursue its objective by investing in Class III shares of international equity and fixed income funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund 6 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $180,039 and $3,610,151 expiring in 2008 and 2010, respectively. The Fund elected to defer to March 1, 2002 post-October losses of $1,389,463. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Non cash dividends, if any, are recorded at fair market value of the securities received. Interest income is recorded on an accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other 7 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not charge an advisory fee for asset allocation advice provided to the Fund, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. No shareholder service fee is charged for Class III shares. Like the other operating expenses (as described below), the shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying Funds. For the six months ended August 31, 2002, the shareholder service fees incurred indirectly by the Fund were 0.15% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees, and fund expenses (as defined above) incurred indirectly by the Fund through 8 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- investment in underlying Funds. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.658% and 0.007% of the Fund's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $646. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $40,361,669 and $7,298,157, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $99,921,269 $2,210,587 $(5,244,173) $(3,033,586)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 28.2% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 9 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ---------------------- ------------------------ Shares Amount Shares Amount Class III: --------- ----------- ---------- ------------ Shares sold 3,688,308 $34,305,499 1,898,333 $ 17,425,743 Shares issued to shareholders in reinvestment of distributions 178,825 1,691,681 179,905 1,624,546 Shares repurchased (167,267) (1,579,000) (2,340,194) (20,089,525) --------- ----------- ---------- ------------ Net increase (decrease) 3,699,866 $34,418,180 (261,956) $ (1,039,236) ========= =========== ========== ============
10 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 98.9% UNITED STATES -- 98.9% ASSET BACKED SECURITIES -- 1.0% 2,932,896 Oasis CBO Ltd, 144A, Variable Rate, 6 mo. LIBOR + .38%, 2.50%, due 05/30/11 2,756,922 -------------- CORPORATE DEBT -- 2.5% 6,700,000 JP Morgan and Co. Series MTNA, Variable Rate, CPI + 4.00%, 4.97%, due 02/15/12 6,700,670 -------------- U.S. GOVERNMENT -- 89.6% 35,947,427 U.S. Treasury Inflation Indexed Bond, 3.88%, due 04/15/29 43,232,399 44,489,600 U.S. Treasury Inflation Indexed Bond, 3.63%, due 04/15/28 51,253,412 20,361,920 U.S. Treasury Inflation Indexed Bond, 3.50%, due 01/15/11 22,076,777 52,659,578 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 59,480,641 37,711,766 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(a) 41,506,512 21,156,690 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 22,872,366 -------------- 240,422,107 -------------- U.S. GOVERNMENT AGENCY -- 5.8% 14,760,720 Tennessee Valley Authority (Indexed Principal), 3.38%, due 01/15/07 15,536,950 -------------- TOTAL UNITED STATES 265,416,649 -------------- TOTAL DEBT OBLIGATIONS (COST $245,605,539) 265,416,649 -------------- MUTUAL FUNDS -- 5.8% 606,874 GMO Alpha LIBOR Fund 15,572,380 -------------- TOTAL MUTUAL FUNDS (COST $15,611,580) 15,572,380 --------------
See accompanying notes to the financial statements. 1 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.1% REPURCHASE AGREEMENTS -- 0.1% 172,590 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $172,606, and an effective yield of 0.85%, collateralized by a U.S. Treasury Strip with a rate of 0.00%, maturity date of 11/15/14, and market value of $181,210. 172,590 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $172,590) 172,590 -------------- TOTAL INVESTMENTS -- 104.8% (Cost $261,389,709) 281,161,619 Other Assets and Liabilities (net) -- (4.8%) (12,849,050) -------------- TOTAL NET ASSETS -- 100.0% $ 268,312,569 ============== NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. CBO - Collateralized Bond Obligation CPI - Consumer Price Index Variable rates - The rates shown on variable rate notes are the current interest rates at August 31, 2002, which are subject to change based on the terms of the security. (a) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 6). 2 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $261,389,709) (Note 1) $281,161,619 Receivable for Fund shares sold 70,000 Interest receivable 1,894,505 Receivable for expenses reimbursed by Manager (Note 2) 8,866 ------------ Total assets 283,134,990 ------------ LIABILITIES: Payable for Fund shares repurchased 500 Payable to affiliate for (Note 2): Management fee 23,152 Shareholder service fee 34,726 Payable for reverse repurchase agreements (Notes 1 and 6) 14,705,625 Accrued expenses and other liabilities 58,418 ------------ Total liabilities 14,822,421 ------------ NET ASSETS $268,312,569 ============ NET ASSETS CONSIST OF: Paid-in capital $240,574,619 Accumulated undistributed net investment income 6,560,993 Accumulated net realized gain 1,405,047 Net unrealized appreciation 19,771,910 ------------ $268,312,569 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $268,312,569 ============ SHARES OUTSTANDING: Class III 22,443,708 ============ NET ASSET VALUE PER SHARE: Class III $ 11.95 ============
See accompanying notes to the financial statements. 3 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 6,852,552 Dividends from investment company shares 109,936 ----------- Total income 6,962,488 ----------- EXPENSES: Management fee (Note 2) 111,956 Interest expense (Notes 1 and 6) 99,373 Custodian and transfer agent fees 25,852 Audit fees 13,800 Legal fees 3,884 Registration fees 1,932 Trustees fees (Note 2) 1,728 Miscellaneous 1,656 Fees reimbursed by Manager (Note 2) (46,920) ----------- 213,261 Shareholder service fee (Note 2) - Class III 167,936 ----------- Net expenses 381,197 ----------- Net investment income 6,581,291 ----------- REALIZED AND UNREALIZED GAIN: Net realized gain on: Investments 1,388,405 Realized gains distributions from investment company shares 57,138 ----------- Net realized gain 1,445,543 ----------- Change in net unrealized appreciation (depreciation) on investments 16,548,912 ----------- Net realized and unrealized gain 17,994,455 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $24,575,746 ===========
4 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 6,581,291 $ 3,750,662 Net realized gain 1,445,543 1,199,410 Change in net unrealized appreciation (depreciation) 16,548,912 (758,918) ------------ ------------ Net increase in net assets from operations 24,575,746 4,191,154 ------------ ------------ Distributions to shareholders from: Net investment income Class III -- (4,356,432) ------------ ------------ Total distributions from net investment income -- (4,356,432) ------------ ------------ Net realized gains Class III -- (663,955) ------------ ------------ Total distributions from net realized gains -- (663,955) ------------ ------------ -- (5,020,387) ------------ ------------ Net share transactions: (Note 5) Class III 94,463,038 84,216,157 ------------ ------------ Increase in net assets resulting from net share transactions 94,463,038 84,216,157 ------------ ------------ Total increase in net assets 119,038,784 83,386,924 NET ASSETS: Beginning of period 149,273,785 65,886,861 ------------ ------------ End of period (including accumulated undistributed net investment income of $6,560,993 and overdistributed net investment income of $20,298, respectively) $268,312,569 $149,273,785 ============ ============
See accompanying notes to the financial statements. 5 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 -------------------------------------------------- (UNAUDITED) 2002 2001(D) 2000 1999 1998* ---------------- ----------- -------- ------- ------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81 $ 10.64 $ 9.72 $ 9.88 $ 10.04 $ 10.00 -------- -------- ------- ------- ------- ------- Income from investment operations: Net investment income 0.33+ 0.30 0.71+ 0.65+ 0.61 0.42+ Net realized and unrealized gain (loss) 0.81 0.29 0.90 (0.30) (0.18) (0.04) -------- -------- ------- ------- ------- ------- Total from investment operations 1.14 0.59 1.61 0.35 0.43 0.38 -------- -------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income -- (0.37) (0.69) (0.51) (0.59) (0.32) From net realized gains -- (0.05) -- -- -- --(a) From tax return of capital -- -- -- -- -- (0.02) -------- -------- ------- ------- ------- ------- Total distributions -- (0.42) (0.69) (0.51) (0.59) (0.34) -------- -------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 11.95 $ 10.81 $ 10.64 $ 9.72 $ 9.88 $ 10.04 ======== ======== ======= ======= ======= ======= TOTAL RETURN(b) 10.55%++ 5.66% 16.86% 3.57% 4.28% 3.77%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $268,313 $149,274 $65,887 $51,951 $25,147 $25,660 Net operating expenses to average daily net assets(e) 0.25%** 0.25% 0.25% 0.25% 0.25% 0.25%** Interest expense to average daily net assets(c) 0.09%** 0.17% 0.37% 0.45% -- -- Total net expenses to average daily net assets 0.34%** 0.42% 0.62% 0.70% 0.25% 0.25%** Net investment income to average daily net assets 5.88%** 4.15% 6.87% 6.49% 4.93% 4.48%** Portfolio turnover rate 10% 40% 32% 112% 94% 9% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04%** 0.09% 0.11% 0.13% 0.30% 0.39%**
* Period from March 31, 1997 (commencement of operations) to February 28, 1998. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not annualized. (a) The per share distribution from net realized gains was $0.002. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.001, increase net realized and unrealized gains and losses per share by supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change in presentation. (e) Net expenses exclude expenses incurred indirectly through investment in GMO Alpha LIBOR Fund. 6 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Inflation Indexed Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in government bonds that are indexed or otherwise "linked" to general measures of inflation in the country of issue ("inflation indexed bonds"). The Fund's benchmark is the Lehman Brothers Treasury Inflation Notes Index. Inflation indexed securities issued by the U.S. Treasury are fixed income securities whose principal value is periodically adjusted according to the rate of U.S. inflation. Inflation indexed bonds issued by a foreign government are generally adjusted to reflect a comparable local inflation index. At August 31, 2002, 5.8% of the Fund is invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. GMO Alpha LIBOR Fund invests primarily in relatively high quality, low volatility fixed income instruments. The financial statements of the GMO Alpha LIBOR Fund should be read in conjunction with the Fund's financial statements The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of 7 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- sixty days or less are valued at amortized cost which approximates fair value. Shares of other GMO Funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain investments in securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. 8 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. At August 31, 2002, the Fund held no open forward currency contracts. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, forward swap spread lock and total return swap agreements to manage its exposure to interest rates. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in interest rates. At August 31, 2002, the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at 9 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund sold may decline below the price at which it is obligated to repurchase them under the agreement. At August 31, 2002, the Fund had entered into a reverse repurchase agreement having a market value of $14,705,625, collateralized by a security with a market value of $15,091,083. See Note 6 for a summary of open reverse repurchase agreements as of August 31, 2002. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 10 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statement as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon the inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .10% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding fund expenses, as defined above) incurred indirectly by the Fund through its investment in the GMO Alpha LIBOR Fund exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) rounded to less than 0.001% of the Fund's average daily net assets, and indirect investment expenses incurred by the Fund were 0.002% of the Fund's average daily net assets. 11 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $1,728. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the six months ended August 31, 2002, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ------------ ----------- U.S. Government securities $110,285,741 $14,448,887 Investments (non-U.S. Government securities) 14,284,159 7,567,104
At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $261,389,709 $19,862,234 $(90,324) $19,771,910
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 44.0% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 12 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount ---------- ------------ ---------- ------------ Class III: Shares sold 11,808,259 $131,303,552 9,048,815 $ 99,841,544 Shares issued to shareholders in reinvestment of distributions -- -- 435,023 4,642,847 Shares repurchased (3,175,369) (36,840,514) (1,865,029) (20,268,234) ---------- ------------ ---------- ------------ Net increase 8,632,890 $ 94,463,038 7,618,809 $ 84,216,157 ========== ============ ========== ============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: REVERSE REPURCHASE AGREEMENT
Face Value Description Market Value ----------- ------------------------------------------------------- ------------ Barclays Bank, 1.77%, dated 8/8/02, to be repurchased $14,705,625 on demand, at face value, plus accrued interest. $14,705,625 ===========
Average balance outstanding $11,051,851 Average interest rate 1.73% Maximum balance outstanding $14,705,625 Average shares outstanding 19,695,514 Average balance per share outstanding .56
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements. 13 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 201,489 GMO Currency Hedged International Equity Fund, Class III 1,263,333 244,077 GMO Emerging Countries Fund, Class III 2,169,841 147,961 GMO Emerging Country Debt Fund, Class III 1,319,810 337,088 GMO Emerging Markets Fund, Class III 3,087,728 5,810 GMO Growth Fund, Class III 88,080 95,250 GMO Inflation Indexed Bond Fund, Class III 1,138,235 75,694 GMO International Bond Fund, Class III 803,117 402,841 GMO International Intrinsic Value Fund, Class III 7,275,312 294,028 GMO International Small Companies Fund, Class III 3,069,655 337,911 GMO Real Estate Fund, Class III 3,835,291 160,566 GMO Small Cap Value Fund, Class III 2,047,220 1,493,236 GMO U.S. Core Fund, Class III 16,156,816 122,868 GMO Value Fund, Class III 921,510 ------------- TOTAL MUTUAL FUNDS (COST $50,827,138) 43,175,948 ------------- SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENTS -- 0.0% $ 8,243 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $8,244 and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest of $13,677. 8,243 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $8,243) 8,243 ------------- TOTAL INVESTMENTS -- 100.0% (Cost $50,835,381) 43,184,191 Other Assets and Liabilities (net) -- (0.0%) (8,505) ------------- TOTAL NET ASSETS -- 100.0% $ 43,175,686 =============
See accompanying notes to the financial statements. 1 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $50,835,381) (Note 1) $43,184,191 Receivable for expenses reimbursed by Manager (Note 2) 2,635 ----------- Total assets 43,186,826 ----------- LIABILITIES: Accrued expenses 11,140 ----------- Total liabilities 11,140 ----------- NET ASSETS $43,175,686 =========== NET ASSETS CONSIST OF: Paid-in capital $52,528,736 Accumulated undistributed net investment income 378,241 Accumulated net realized loss (2,080,101) Net unrealized depreciation (7,651,190) ----------- $43,175,686 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $43,175,686 =========== SHARES OUTSTANDING: Class III 5,319,017 =========== NET ASSET VALUE PER SHARE: Class III $ 8.12 ===========
2 See accompanying notes to the financial statements. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 378,870 Interest 352 ----------- Total income 379,222 ----------- EXPENSES: Audit fees 7,912 Custodian and transfer agent fees 3,772 Registration fees 1,472 Legal fees 920 Trustees fees (Note 2) 369 Miscellaneous 750 Fees reimbursed by Manager (Note 2) (14,826) ----------- Net expenses 369 ----------- Net investment income 378,853 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 230,667 Realized gains distributions from investment company shares 95,547 ----------- Net realized gain 326,214 ----------- Change in net unrealized appreciation (depreciation) on investments (2,883,825) ----------- Net realized and unrealized loss (2,557,611) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,178,758) ===========
See accompanying notes to the financial statements. 3 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 378,853 $ 1,132,202 Net realized gain (loss) 326,214 (1,055,568) Change in net unrealized appreciation (depreciation) (2,883,825) 334,258 ----------- ----------- Net increase (decrease) in net assets from operations (2,178,758) 410,892 ----------- ----------- Distributions to shareholders from: Net investment income Class III (551,632) (647,084) ----------- ----------- Total distributions from net investment income (551,632) (647,084) ----------- ----------- Net realized gains Class III -- (1,066,948) ----------- ----------- Total distributions from net realized gains -- (1,066,948) ----------- ----------- (551,632) (1,714,032) ----------- ----------- Net share transactions: (Note 5) Class III 5,781,728 (1,348,291) ----------- ----------- Increase (decrease) in net assets resulting from net share transactions 5,781,728 (1,348,291) ----------- ----------- Total increase (decrease) in net assets 3,051,338 (2,651,431) NET ASSETS: Beginning of period 40,124,348 42,775,779 ----------- ----------- End of period (including accumulated undistributed net investment income of $378,241 and $551,020, respectively) $43,175,686 $40,124,348 =========== ===========
4 See accompanying notes to the financial statements. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.66 $ 8.92 $ 9.49 $ 8.85 $ 10.48 $ 10.30 ------- ------- ------- ------- ------- ------- Income from investment operations:(a) Net investment income 0.06 0.23 0.24 0.25 0.16+ 0.26+ Net realized and unrealized gain (loss) (0.49) (0.14) 0.39 1.45 (0.40) 1.83 ------- ------- ------- ------- ------- ------- Total from investment operations (0.43) 0.09 0.63 1.70 (0.24) 2.09 ------- ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.11) (0.13) (0.51) (0.43) (0.56) (0.26) From net realized gains -- (0.22) (0.69) (0.63) (0.83) (1.65) ------- ------- ------- ------- ------- ------- Total distributions (0.11) (0.35) (1.20) (1.06) (1.39) (1.91) ------- ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.12 $ 8.66 $ 8.92 $ 9.49 $ 8.85 $ 10.48 ======= ======= ======= ======= ======= ======= TOTAL RETURN(b) (5.00)%** 1.12% 6.57% 19.14% (2.84)% 21.86% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $43,176 $40,124 $42,776 $36,669 $32,474 $45,101 Net expenses to average daily net assets(c) 0.00%(d)* 0.00%(d) 0.00% 0.00% 0.00% 0.00% Net investment income to average daily net assets(a) 1.70%* 2.73% 2.56% 2.63% 1.64% 2.39% Portfolio turnover rate 21% 13% 19% 18% 34% 32% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07%* 0.07% 0.07% 0.09% 0.07% 0.11%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 1.) (d) Net expenses to average daily net assets was less than 0.01%. * Annualized. ** Not annualized. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global (U.S.+) Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than that of the GMO Global (U.S.+) Equity Index, a benchmark developed by the Manager, through investment to varying extents in other funds of the Trust. The Fund will pursue its objective by investing in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/ dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market 6 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $555,072 expiring in 2010. The Fund elected to defer to March 1, 2002 post-October losses of $701,796. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on an accrual basis. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. 7 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not charge an advisory fee for asset allocation advice provided to the Fund, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. No shareholder service fee is charged for Class III shares. Like the other operating expenses (as described below), the shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying Funds. For the six months ended August 31, 2002, the shareholder service fees incurred indirectly by the Fund were 0.15% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) plus the amount of fees and expenses, excluding shareholder 8 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- service fees, and fund expenses (as defined above) incurred indirectly by the Fund through investment in underlying Funds. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.489% and 0.009% of the Fund's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $369. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $14,684,417 and $8,980,000, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $50,835,381 $807,787 $(8,458,977) $(7,651,190)
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 81.7% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 9 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 --------------------- --------------------- Shares Amount Shares Amount Class III: -------- ----------- -------- ----------- Shares sold 825,551 $ 6,999,057 40,603 $ 350,000 Shares issued to shareholders in reinvestment of distributions 8,519 71,389 132,919 1,152,336 Shares repurchased (150,990) (1,288,718) (330,893) (2,850,627) -------- ----------- -------- ----------- Net increase (decrease) 683,080 $ 5,781,728 (157,371) $(1,348,291) ======== =========== ======== ===========
10 GMO PELICAN FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO PELICAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- COMMON STOCKS -- 97.8% AUTO & TRANSPORTATION -- 1.7% 31,800 AMR Corp* 324,042 25,500 General Motors Corp 1,220,430 ----------- 1,544,472 ----------- CONSUMER DISCRETIONARY -- 5.3% 9,000 Estee Lauder Cos Inc 269,550 56,700 Federated Department Stores Inc* 2,035,530 59,000 Fox Entertainment Group Inc, Class A* 1,317,470 21,700 Hilton Hotels Corp 249,767 14,600 Kimberly-Clark Corp 873,664 ----------- 4,745,981 ----------- CONSUMER STAPLES -- 8.4% 41,500 CVS Corp 1,219,685 73,200 Kroger Co* 1,323,456 52,800 Philip Morris Cos Inc 2,640,000 30,000 Safeway Inc* 774,600 91,900 Smithfield Foods Inc* 1,629,387 ----------- 7,587,128 ----------- FINANCIAL SERVICES -- 27.2% 52,700 ACE Ltd 1,676,387 48,800 Allstate Corp 1,816,336 21,500 AON Corp 424,840 28,400 Bank of America Corp 1,990,272 8,500 Bear Stearns Cos Inc 543,405 40,500 Brandywine Realty Trust 916,920 51,000 Citigroup Inc 1,670,250 76,500 Equity Office Properties Trust, REIT 2,132,820 26,500 Equity Residential Properties Trust, REIT 739,880 14,300 FleetBoston Financial Corp 345,059 12,800 Greenpoint Financial Corp 652,800 36,000 Mack-Cali Realty Corp, REIT 1,207,800 57,000 Nationwide Financial Service, Class A 1,738,500 33,000 Simon Property Group Inc, REIT 1,174,470 66,503 Travelers Property Casualty Corp, Class A* 1,045,434 4,527 Travelers Property Casualty Corp, Class B* 73,745
See accompanying notes to the financial statements. 1 GMO PELICAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 33,700 Trizec Properties Inc 403,726 35,000 US Bancorp 752,150 81,000 Wachovia Corp 2,984,850 39,500 Washington Mutual Inc 1,493,495 14,100 Wells Fargo & Co 735,879 ----------- 24,519,018 ----------- HEALTH CARE -- 7.5% 72,500 Bristol Myers Squibb Co 1,808,875 60,000 Merck & Co Inc 3,031,200 82,000 Schering Plough Corp 1,892,560 ----------- 6,732,635 ----------- INTEGRATED OILS -- 7.3% 15,000 Amerada Hess Corp 1,096,500 54,000 Conoco Inc 1,325,700 24,500 ConocoPhillips 1,288,210 97,000 Occidental Petroleum Corp 2,880,900 ----------- 6,591,310 ----------- MATERIALS & PROCESSING -- 10.2% 83,500 Cabot Corp 1,990,640 30,000 Engelhard Corp 784,800 56,000 Freeport-McMoran Copper & Gold* 917,840 71,900 Hercules Inc* 754,950 35,000 Olin Corp 665,000 101,900 Placer Dome Inc 1,015,943 44,400 Sealed Air Corp* 687,756 75,100 Willis Group Holdings Ltd* 2,364,899 ----------- 9,181,828 ----------- OTHER -- 4.0% 19,200 FMC Corp* 543,552 16,500 Hewitt Associates Inc* 464,970 87,500 Honeywell International Inc 2,620,625 ----------- 3,629,147 -----------
See accompanying notes to the financial statements. 2 GMO PELICAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- OTHER ENERGY -- 1.3% 15,500 Anadarko Petroleum Corp 691,920 14,500 Valero Energy Corp 470,815 ----------- 1,162,735 ----------- PRODUCER DURABLES -- 3.4% 72,500 Clayton Homes Inc 962,075 19,500 Horton (DR) Inc 404,820 9,000 Lennar Corp 475,200 28,800 Pitney Bowes Inc 1,044,000 8,500 Toll Brothers Inc* 212,500 ----------- 3,098,595 ----------- TECHNOLOGY -- 5.4% 43,000 Avnet Inc 665,640 17,000 Electronic Data Systems Corp 684,420 50,800 Hewlett Packard Co 682,244 170,500 Oracle Corp* 1,635,095 13,000 Raytheon Co 455,000 54,500 Vishay Intertechnology Inc* 780,440 ----------- 4,902,839 ----------- U.S. GOVERNMENT AGENCY -- 5.5% 43,000 Fannie Mae 3,258,540 26,700 Freddie Mac 1,711,470 ----------- 4,970,010 ----------- UTILITIES -- 10.6% 100,400 Bellsouth Corp 2,341,328 38,600 Questar Corp 962,684 248,500 Qwest Communications International Inc* 807,625 28,200 TXU Corp 1,363,752 105,900 Verizon Communications Inc 3,282,900 78,300 Xcel Energy Inc 756,378 ----------- 9,514,667 ----------- TOTAL COMMON STOCKS (COST $95,943,054) 88,180,365 -----------
See accompanying notes to the financial statements. 3 GMO PELICAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 2.7% REPURCHASE AGREEMENT -- 2.7% $2,480,000 State Street Bank & Trust Co. Repurchase Agreement, dated 8/30/02, due 9/03/02, with a maturity value of 2,480,138 and an effective yield of 0.50%, collateralized by a U.S. Treasury Obligation with a rate of 8.87%, maturity date of 2/15/19 and market value, including accrued interest of $2,530,250. 2,480,000 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $2,480,000) 2,480,000 ----------- TOTAL INVESTMENTS -- 100.5% (Cost $98,423,054) 90,660,365 Other Assets and Liabilities (net) -- (0.5%) (473,923) ----------- TOTAL NET ASSETS -- 100.0% $90,186,442 =========== NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust * Non-income producing security. 4 See accompanying notes to the financial statements. GMO PELICAN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $98,423,054) (Note 1) $90,660,365 Cash 2,144 Receivable for Fund shares sold 1,000 Dividends and interest receivable 135,674 Receivable for expenses reimbursed by Manager (Note 2) 20,057 ----------- Total assets 90,819,240 ----------- LIABILITIES: Payable for Fund shares repurchased 543,309 Payable to affiliate for (Note 2): Management fee 56,904 Accrued expenses 32,585 ----------- Total liabilities 632,798 ----------- NET ASSETS $90,186,442 ----------- NET ASSETS CONSIST OF: Paid-in capital $99,845,062 Accumulated undistributed net investment income 222,599 Accumulated net realized loss (2,118,530) Net unrealized depreciation (7,762,689) ----------- $90,186,442 =========== SHARES OUTSTANDING 10,471,004 =========== NET ASSET VALUE PER SHARE $ 8.61 ===========
See accompanying notes to the financial statements. 5 GMO PELICAN FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $764) $ 1,094,597 Interest 15,651 ------------ Total income 1,110,248 ------------ EXPENSES: Management fee (Note 2) 396,500 Transfer agent fees 42,596 Custodian fees 38,916 Audit fees 18,952 Registration fees 8,556 Legal fees 2,158 Trustees fees (Note 2) 1,154 Miscellaneous 2,300 Fees reimbursed by Manager (Note 2) (113,436) ------------ Net expenses 397,696 ------------ Net investment income 712,552 ------------ REALIZED AND UNREALIZED LOSS: Net realized loss on: Investments (1,016,103) Change in net unrealized appreciation (depreciation) on: Investments (15,763,196) ------------ Net realized and unrealized loss (16,779,299) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(16,066,747) ============
6 See accompanying notes to the financial statements. GMO PELICAN FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 712,552 $ 2,296,627 Net realized gain (loss) (1,016,103) 6,723,940 Change in net unrealized appreciation (depreciation) (15,763,196) (6,915,483) ------------ ------------ Net increase (decrease) in net assets from operations (16,066,747) 2,105,084 ------------ ------------ Distributions to shareholders from: Net investment income (892,993) (2,074,342) Net realized gains (6,011,758) (6,043,272) ------------ ------------ (6,904,751) (8,117,614) ------------ ------------ FUND SHARE TRANSACTIONS: (NOTE 5) Proceeds from sale of shares 4,896,306 14,946,591 Net asset value of shares issued to shareholders in payment of distributions declared 6,781,266 7,889,110 Cost of shares repurchased (12,818,963) (18,590,852) ------------ ------------ Net increase (decrease) in net assets resulting from Fund share transactions (1,141,391) 4,244,849 ------------ ------------ Total decrease in net assets (24,112,889) (1,767,681) NET ASSETS: Beginning of period 114,299,331 116,067,012 ------------ ------------ End of period (including accumulated undistributed net investment income of $222,599 and $403,040, respectively) $ 90,186,442 $114,299,331 ============ ============
See accompanying notes to the financial statements. 7 GMO PELICAN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 -------------------------------------------------------------------- (UNAUDITED) 2002(B) 2001 2000 1999 1998 ---------------- ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.83 $ 11.37 $ 11.15 $ 15.73 $ 17.78 $ 16.31 ------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.07 0.22 0.28 0.30 0.30 0.32 Net realized and unrealized gain (loss) (1.60) 0.03(c) 2.68 (0.78) 0.43 4.13 ------- -------- -------- -------- -------- -------- Total from investment operations (1.53) 0.25 2.96 (0.48) 0.73 4.45 ------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.09) (0.20) (0.29) (0.36) (0.31) (0.40) From net realized gains (0.60) (0.59) (2.45) (3.74) (2.47) (2.58) ------- -------- -------- -------- -------- -------- Total distributions (0.69) (0.79) (2.74) (4.10) (2.78) (2.98) ------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.61 $ 10.83 $ 11.37 $ 11.15 $ 15.73 $ 17.78 ======= ======== ======== ======== ======== ======== TOTAL RETURN(a) (14.60)%** 2.17% 28.99% (5.80)% 3.89% 28.97% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $90,186 $114,299 $116,067 $117,033 $223,937 $236,286 Net expenses to average daily net assets 0.75%* 0.75% 0.75% 0.93% 0.95% 0.95% Net investment income to average daily net assets 1.35%* 1.97% 2.34% 1.79% 1.68% 1.77% Portfolio turnover rate 31% 72% 36% 32% 34% 28% Fees and expenses reimbursed by the Manager to average daily net assets 0.21% 0.19% 0.18% 0.09% 0.06% 0.05%
(a) The total return would have been lower had certain expenses not been waived during the period shown. (b) Effective March 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended Febuary 28, 2002 was to decrease net investment income per share by $0.02, increase net realized and unrealized gains and losses per share by $0.02 and decrease the ratio of net investment income to average net assets from 2.13% to 1.97%. Per share, ratios and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in presentation. (c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments for the year ended Feburary 28, 2002 due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund. * Annualized. ** Not Annualized. 8 See accompanying notes to the financial statements. GMO PELICAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES The Pelican Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC ("the Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital primarily through investment in equity securities. The Fund's benchmark is the Standard & Poor's 500 Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last quoted sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term debt obligations with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). 9 GMO PELICAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the prevailing exchange rates each business day. Income and expenses denominated in foreign currencies are translated at prevailing exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the 10 GMO PELICAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At August 31, 2002 there were no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax 11 GMO PELICAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .75% of average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed .75% of average daily net assets. 12 GMO PELICAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $1,154. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sale of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $31,451,202 and $31,709,395, respectively. At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $98,423,054 $7,081,451 $(14,844,140) $(7,762,689)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 74.6% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust premits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended February 28, (Unaudited) 2002 ------------------------ ----------------------- Shares Amount Shares Amount ---------- ------------ ---------- ----------- Shares sold 476,977 $ 4,896,306 1,344,982 $14,946,591 Shares issued to shareholders in reinvestment of distributions 731,736 6,781,266 720,167 7,889,110 Shares repurchased (1,292,043) (12,818,963) (1,716,773) (18,590,852) ---------- ------------ ---------- ----------- Net increase (83,330) $ (1,141,391) 348,376 $ 4,244,849 ========== ============ ========== ===========
13 GMO PELICAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. SUBSEQUENT EVENT On August 15, 2002, the Board of Trustees approved an Agreement and Plan of Reorganization that provides for the reorganization of the Fund into Evergreen Large Cap Value Fund, a mutual fund within Evergreen Family of Funds managed by Evergreen Investment Management Company, LLC, subject to the approval of the Fund's shareholders. 14 GMO VALUE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ COMMON STOCKS -- 96.9% AUTO & TRANSPORTATION -- 1.7% 68,200 AMR Corp* 694,958 53,700 General Motors Corp 2,570,082 ------------------------- 3,265,040 ------------------------- CONSUMER DISCRETIONARY -- 5.2% 19,000 Estee Lauder Cos Inc 569,050 123,200 Federated Department Stores Inc* 4,422,880 125,000 Fox Entertainment Group Inc, Class A* 2,791,250 46,300 Hilton Hotels Corp 532,913 31,000 Kimberly-Clark Corp 1,855,040 ------------------------- 10,171,133 ------------------------- CONSUMER STAPLES -- 8.3% 91,500 CVS Corp 2,689,185 156,300 Kroger Co* 2,825,904 113,500 Philip Morris Cos Inc 5,675,000 64,200 Safeway Inc* 1,657,644 196,600 Smithfield Foods Inc* 3,485,718 ------------------------- 16,333,451 ------------------------- FINANCIAL SERVICES -- 27.1% 112,200 ACE Ltd 3,569,082 104,700 Allstate Corp 3,896,934 45,400 AON Corp 897,104 60,700 Bank of America Corp 4,253,856 17,900 Bear Stearns Cos Inc 1,144,347 85,400 Brandywine Realty Trust, REIT 1,933,456 110,000 Citigroup Inc 3,602,500 162,200 Equity Office Properties Trust, REIT 4,522,136 55,600 Equity Residential Properties Trust, REIT 1,552,352 31,300 FleetBoston Financial Corp 755,269 28,100 Greenpoint Financial Corp 1,433,100 76,500 Mack-Cali Realty Corp, REIT 2,566,575 122,200 Nationwide Financial Service, Class A 3,727,100 69,900 Simon Property Group Inc, REIT 2,487,741 143,252 Travelers Property Casualty Corp, Class A* 2,251,921 9,764 Travelers Property Casualty Corp, Class B* 159,056
See accompanying notes to the financial statements. 1 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 70,878 Trizec Properties Inc 849,118 83,000 US Bancorp 1,783,670 185,600 Wachovia Corp 6,839,360 84,450 Washington Mutual Inc 3,193,055 29,800 Wells Fargo & Co 1,555,262 ------------------------- 52,972,994 ------------------------- HEALTH CARE -- 7.4% 153,900 Bristol Myers Squibb Co 3,839,805 129,700 Merck & Co Inc 6,552,444 173,300 Schering Plough Corp 3,999,764 ------------------------- 14,392,013 ------------------------- INTEGRATED OILS -- 7.2% 32,100 Amerada Hess Corp 2,346,510 111,200 Conoco Inc 2,729,960 208,500 Occidental Petroleum Corp 6,192,450 53,600 Phillips Petroleum Co 2,818,288 ------------------------- 14,087,208 ------------------------- MATERIALS & PROCESSING -- 10.1% 175,900 Cabot Corp 4,193,456 64,900 Engelhard Corp 1,697,784 119,300 Freeport-McMoran Copper & Gold* 1,955,327 154,600 Hercules Inc* 1,623,300 73,300 Olin Corp 1,392,700 219,200 Placer Dome Inc 2,185,424 95,000 Sealed Air Corp* 1,471,550 163,500 Willis Group Holdings Ltd* 5,148,615 ------------------------- 19,668,156 ------------------------- OTHER -- 4.0% 40,500 FMC Corp* 1,146,555 36,600 Hewitt Associates Inc* 1,031,388 188,600 Honeywell International Inc 5,648,570 ------------------------- 7,826,513 -------------------------
See accompanying notes to the financial statements. 2 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ OTHER ENERGY -- 1.3% 33,800 Anadarko Petroleum Corp 1,508,832 31,000 Valero Energy Corp 1,006,570 ------------------------- 2,515,402 ------------------------- PRODUCER DURABLES -- 3.4% 156,400 Clayton Homes Inc 2,075,428 41,250 Horton (DR) Inc 856,350 19,500 Lennar Corp 1,029,600 61,800 Pitney Bowes Inc 2,240,250 18,400 Toll Brothers Inc* 460,000 ------------------------- 6,661,628 ------------------------- TECHNOLOGY -- 5.3% 92,200 Avnet Inc 1,427,256 35,700 Electronic Data Systems Corp 1,437,282 108,600 Hewlett Packard Co 1,458,498 358,800 Oracle Corp* 3,440,892 27,100 Raytheon Co 948,500 118,300 Vishay Intertechnology Inc* 1,694,056 ------------------------- 10,406,484 ------------------------- U.S. GOVERNMENT AGENCY -- 5.5% 93,200 Fannie Mae 7,062,696 58,500 Freddie Mac 3,749,850 ------------------------- 10,812,546 ------------------------- UTILITIES -- 10.4% 214,500 Bellsouth Corp 5,002,140 82,500 Questar Corp 2,057,550 535,300 Qwest Communications International Inc* 1,739,725 61,000 TXU Corp 2,949,960 226,400 Verizon Communications Inc 7,018,400 165,400 Xcel Energy Inc 1,597,764 ------------------------- 20,365,539 ------------------------- TOTAL COMMON STOCKS (COST $212,720,514) 189,478,107 -------------------------
See accompanying notes to the financial statements. 3 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 6.7% CASH EQUIVALENTS -- 3.7% 2,894,777 Dreyfus Money Market Fund(a) 2,894,777 $ 2,632,354 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(a) 2,632,354 1,711,030 Merrimac Money Market Fund(a) 1,711,030 -------------------------------- 7,238,161 -------------------------------- REPURCHASE AGREEMENTS -- 3.0% $ 5,945,625 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/03/02, with a maturity value of $5,946,187, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest of $6,072,695. 5,945,625 -------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $13,183,786) 13,183,786 -------------------------------- TOTAL INVESTMENTS -- 103.6% (Cost $225,904,300) 202,661,893 Other Assets and Liabilities (net) -- (3.6%) (7,085,646) -------------------------------- TOTAL NET ASSETS -- 100.0% $ 195,576,247 ================================ NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust * Non-income producing security. (a) Represents investment of security lending collateral (Note 1).
4 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $6,960,765 (cost $225,904,300) (Note 1) $ 202,661,893 Cash 1,578 Dividends and interest receivable 271,312 Receivable for expenses reimbursed by Manager (Note 2) 10,881 ----------------- Total assets 202,945,664 ----------------- LIABILITIES: Payable upon return of securities loaned (Note 1) 7,238,161 Payable to affiliate for (Note 2): Management fee 72,891 Shareholder service fee 23,121 12b-1 fee - Class M 2,325 Administration fee - Class M 864 Accrued expenses 32,055 ----------------- Total liabilities 7,369,417 ----------------- NET ASSETS $ 195,576,247 ================= NET ASSETS CONSIST OF: Paid-in capital $ 236,617,294 Accumulated undistributed net investment income 510,264 Accumulated net realized loss (18,308,904) Net unrealized depreciation (23,242,407) ----------------- $ 195,576,247 ================= NET ASSETS ATTRIBUTABLE TO: Class III shares $ 190,149,791 ================= Class M shares $ 5,426,456 ================= SHARES OUTSTANDING: Class III 25,342,409 ================= Class M 724,446 ================= NET ASSET VALUE PER SHARE: Class III $ 7.50 ================= Class M $ 7.49 =================
See accompanying notes to the financial statements. 5 GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $1,644) $ 2,329,861 Interest (including securities lending income of $12,328) 50,414 ----------------- Total income 2,380,275 ----------------- EXPENSES: Management fee (Note 2) 491,894 Custodian and transfer agent fees 26,128 Audit fees 19,136 Registration fees 8,280 Legal fees 5,156 Trustees fees (Note 2) 2,026 Miscellaneous 2,482 Fees reimbursed by Manager (Note 2) (60,810) ----------------- 494,292 Shareholder service fee (Note 2) - Class III 157,486 12B-1 fee (Note 2) - Class M 4,708 Administration fee (Note 2) - Class M 3,767 ----------------- Net expenses 660,253 ----------------- Net investment income 1,720,022 ----------------- REALIZED AND UNREALIZED LOSS: Net realized loss on investments (6,277,485) ----------------- Change in net unrealized appreciation (depreciation) on investments (27,105,058) ----------------- Net realized and unrealized loss (33,382,543) ----------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (31,662,521) =================
6 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,720,022 $ 4,628,541 Net realized loss (6,277,485) (5,947,538) Change in net unrealized appreciation (depreciation) (27,105,058) (7,858,916) ------------ ------------ Net decrease in net assets from operations (31,662,521) (9,177,913) ------------ ------------ Distributions to shareholders from: Net investment income Class III (1,281,348) (4,387,005) Class M (10,084) -- ------------ ------------ Total distributions from net investment income (1,291,432) (4,387,005) ------------ ------------ Net realized gains Class III -- (6,580,353) ------------ ------------ Total distributions from net realized gains -- (6,580,353) ------------ ------------ (1,291,432) (10,967,358) ------------ ------------ Net share transactions: (Note 5) Class III (9,986,342) 4,470,782 Class M 5,741,719 478,524 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (4,244,623) 4,949,306 ------------ ------------ Total decrease in net assets (37,198,576) (15,195,965) NET ASSETS: Beginning of period 232,774,823 247,970,788 ------------ ------------ End of period (including accumulated undistributed net investment income of $510,264 and $81,674, respectively) $195,576,247 $232,774,823 ============ ============
See accompanying notes to the financial statements. 7 GMO VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 -------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.82 $ 9.57 $ 7.98 $ 10.40 $ 14.33 $ 14.85 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.07 0.18 0.18 0.21 0.26 0.31 Net realized and unrealized gain (loss) (1.34) (0.51) 2.32 (0.83) 0.13 3.81 -------- -------- -------- -------- -------- -------- Total from investment operations (1.27) (0.33) 2.50 (0.62) 0.39 4.12 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.05) (0.17) (0.18) (0.23) (0.27) (0.35) From net realized gains -- (0.25) (0.73) (1.57) (4.05) (4.29) -------- -------- -------- -------- -------- -------- Total distributions (0.05) (0.42) (0.91) (1.80) (4.32) (4.64) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 7.50 $ 8.82 $ 9.57 $ 7.98 $ 10.40 $ 14.33 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) (14.46)%+ (3.64)% 32.72% (8.45)% 2.24% 31.54% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $190,150 $232,289 $247,971 $178,329 $202,842 $332,103 Net expenses to average daily net assets 0.61%* 0.61% 0.61% 0.61% 0.61% 0.61% Net investment income to average daily net assets 1.61%* 1.89% 1.99% 2.06% 1.82% 1.89% Portfolio turnover rate 28% 95% 102% 104% 37% 40% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06%* 0.06% 0.05% 0.05% 0.30% 0.29%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized + Not Annualized
8 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 10, 2002 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2002 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 28, 2002 ---------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.82 $ 9.06 -------- ------- Income from investment operations: Net investment income 0.07 0.01 Net realized and unrealized loss (1.35) (0.25) -------- ------- Total from investment operations (1.28) (0.24) -------- ------- Less distributions to shareholders: From net investment income (0.05) -- -------- ------- Total distributions (0.05) -- -------- ------- NET ASSET VALUE, END OF PERIOD $ 7.49 $ 8.82 ======== ======= TOTAL RETURN(a) (14.61)%+ (2.65)%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 5,426 $ 486 Net expenses to average daily net assets 0.91%* 0.91%* Net investment income to average daily net assets 1.34%* 1.52%* Portfolio turnover rate 28% 95% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06%* 0.06%*
(a) The total returns would have been lower had certain expenses not been reimbursed during the period shown. * Annualized. + Not annualized. See accompanying notes to the financial statements. 9 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term capital growth primarily through investment in equity securities. The Fund's benchmark is the Russell 1000 Value Index. Throughout the six months ended August 31, 2002, the Fund had two classes of shares outstanding: Class III and Class M. Class M shares bear an administrative fee and a 12b-1 fee, while class III bears a shareholder service fee. (See Note 2) The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the 10 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, the Fund held no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $6,960,765 collateralized by cash in the amount of $7,238,161, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by 11 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- another instrument. The Fund may enter into swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of August 31, 2002, the Fund held no open swap agreements. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 12 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $394,435 expiring in 2010. The Fund elected to defer to March 1, 2002 post-October losses of $8,745,127. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and of discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .46% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III. The Fund pays GMO an administrative fee monthly at the annual rate of .20% of the average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee, at the annual rate of .25% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), administrative fee (Class M only), 12b-1 fee (Class M only) and the following expenses: fees and 13 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $2,026. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $62,887,420 and $57,549,340 respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $225,904,300 $9,275,322 $(32,517,729) $(23,242,407)
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 60.4% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 14 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 2,561,635 $ 20,274,048 1,292,173 $ 12,230,667 Shares issued to shareholders in reinvestment of distributions 29,196 254,259 820,723 7,601,535 Shares repurchased (3,573,896) (30,514,649) (1,699,329) (15,361,420) ---------- ------------ ---------- ------------ Net increase (decrease) (983,065) $ (9,986,342) 413,567 $ 4,470,782 ========== ============ ========== ============
Period from January 10, 2002 Six Months Ended (commencement August 31, 2002 of operations) through (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class M: ---------- ------------ ---------- ------------ Shares sold 703,745 $6,024,532 50,099 $478,524 Shares issued to shareholders in reinvestment of distributions 1,217 10,084 -- -- Shares repurchased (35,615) (292,897) -- -- ---------- ------------ ---------- ------------ Net increase 669,347 $5,741,719 50,099 $478,524 ========== ============ ========== ============
15 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 9.9% UNITED STATES -- 9.9% U.S. GOVERNMENT -- 9.9% USD 1,096,910 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(a) 1,207,286 ----------- TOTAL DEBT OBLIGATIONS (COST $1,089,096) 1,207,286 ----------- SHARES ------------- MUTUAL FUNDS -- 83.6% 381,222 GMO Alpha LIBOR Fund 9,782,145 43,295 GMO Emerging Country Debt Fund, Class III 386,196 ----------- TOTAL MUTUAL FUNDS (COST $10,367,766) 10,168,341 ----------- PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 1.2% CROSS CURRENCY OPTIONS -- 1.2% EUR 3,700,000 Euro Call/USD Put, Expires 09/19/02, Strike .95 112,850 GBP 700,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 22,838 USD 400,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 15,249 ----------- 150,937 ----------- TOTAL CALL OPTIONS PURCHASED (COST $125,757) 150,937 ----------- PUT OPTIONS PURCHASED -- 0.1% CROSS CURRENCY OPTIONS -- 0.1% GBP 900,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.43 9,885 ----------- TOTAL PUT OPTIONS PURCHASED (COST $36,779) 9,885 -----------
See accompanying notes to the financial statements. 1 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 5.1% COMMERCIAL PAPER -- 5.1% USD 624,000 Insured Asset Funding, 144A, 1.95%, due 9/03/02 623,899 ----------- REPURCHASE AGREEMENTS -- 0.0% USD 792 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/03/02, with a maturity value of $793 and an effective yield of 0.85%, collateralized by a U.S. Treasury Strip with a rate of 0.00%, maturity date of 11/15/14 and a market value of $5,491. 792 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $624,691) 624,691 ----------- TOTAL INVESTMENTS -- 99.9% (Cost $12,244,089) 12,161,140 Other Assets and Liabilities (net) -- 0.1% 7,236 ----------- TOTAL NET ASSETS -- 100.0% $12,168,376 ===========
See accompanying notes to the financial statements. 2 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 3 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $12,244,089) (Note 1) $12,161,140 Interest receivable 5,514 Receivable for open forward foreign currency contracts (Notes 1 and 6) 100,635 Receivable for variation margin on open futures contracts (Notes 1 and 6) 7,453 Net receivable for open swap contracts (Notes 1 and 6) 13,037 Receivable for expenses reimbursed by Manager (Note 2) 6,892 ----------- Total assets 12,294,671 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 2,668 Shareholder service fee 1,601 Payable for open forward foreign currency contracts (Notes 1 and 6) 74,644 Accrued expenses 47,382 ----------- Total liabilities 126,295 ----------- NET ASSETS $12,168,376 =========== NET ASSETS CONSIST OF: Paid-in capital $19,168,613 Accumulated undistributed net investment income 45,939 Accumulated net realized loss (7,143,204) Net unrealized appreciation 97,028 ----------- $12,168,376 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $12,168,376 =========== SHARES OUTSTANDING: Class III 1,381,497 =========== NET ASSET VALUE PER SHARE: Class III $ 8.81 ===========
4 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 73,675 Interest 44,740 ---------- Total income 118,415 ---------- EXPENSES: Management fee (Note 2) 19,723 Custodian and transfer agent fees 20,424 Audit fees 19,688 Legal fees 2,852 Registration fees 1,656 Trustees fees (Note 2) 736 Miscellaneous 1,104 Fees reimbursed by Manager (Note 2) (45,172) ---------- 21,011 Indirectly incurred fees reimbursed by Manager (Note 2) (1,115) ---------- 19,896 ---------- Shareholder service fee (Note 2) - Class III 11,834 Shareholder service fee reimbursed (Note 2) - Class III (408) ---------- 11,426 ---------- Net expenses 31,322 ---------- Net investment income 87,093 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (185,745) Closed futures contracts (57,148) Closed swap contracts 109,469 Foreign currency, forward contracts and foreign currency related transactions 142,138 Realized gain distributions from investment company shares 31,378 ---------- Net realized gain 40,092 ---------- Change in net unrealized appreciation (depreciation) on: Investments 241,070 Open futures contracts 248,396 Open swap contracts 37,398 Foreign currency, forward contracts and foreign currency related transactions (15,146) ---------- Net unrealized gain 511,718 ---------- Net realized and unrealized gain 551,810 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 638,903 ==========
See accompanying notes to the financial statements. 5 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 87,093 $ 914,257 Net realized gain 40,092 1,488,746 Change in net unrealized appreciation (depreciation) 511,718 (1,686,749) ----------- ----------- Net increase in net assets from operations 638,903 716,254 ----------- ----------- Distributions to shareholders from: Net investment income Class III (1,285,568) (1,723,251) ----------- ----------- Total distributions from net investment income (1,285,568) (1,723,251) ----------- ----------- Net share transactions: (Note 5) Class III (5,117,397) 837,205 ----------- ----------- Increase (decrease) in net assets resulting from net share transactions (5,117,397) 837,205 ----------- ----------- Total decrease in net assets (5,764,062) (169,792) NET ASSETS: Beginning of period 17,932,438 18,102,230 ----------- ----------- End of period (including accumulated undistributed net investment income of $45,939 and $1,244,414, respectively) $12,168,376 $17,932,438 =========== ===========
6 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------- (UNAUDITED) 2002 2001(C) 2000 1999 1998 ---------------- ----------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.04 $ 9.72 $ 9.70 $ 10.47 $ 10.66 $ 12.16 ------- ------- ------- -------- -------- -------- Income from investment operations: Net investment income(a) 0.05+ 0.50+ 0.59+ 0.65+ 0.74 0.88 Net realized and unrealized gain (loss) 0.32 (0.13) 0.71 (0.17) (0.39) 0.73 ------- ------- ------- -------- -------- -------- Total from investment operations 0.37 0.37 1.30 0.48 0.35 1.61 ------- ------- ------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.60) (1.05) (1.18) (1.11) (0.16) (0.88) From net realized gains -- -- (0.10) (0.14) (0.38) (2.23) ------- ------- ------- -------- -------- -------- Total distributions (0.60) (1.05) (1.28) (1.25) (0.54) (3.11) ------- ------- ------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.81 $ 9.04 $ 9.72 $ 9.70 $ 10.47 $ 10.66 ======= ======= ======= ======== ======== ======== TOTAL RETURN(b) 4.34%** 4.21% 14.06% 4.95% 3.20% 14.44% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $12,168 $17,932 $18,102 $283,340 $323,711 $320,905 Net expenses to average daily net assets 0.38%(d)* 0.38%(d) 0.40%(d) 0.40% 0.40% 0.40% Net investment income to average daily net assets(a) 1.10%* 5.45% 5.96% 6.51% 6.30% 6.50% Portfolio turnover rate 15% 44% 120% 65% 116% 135% Fees and expenses reimbursed by the Manager to average daily net assets: 0.59%* 0.54% 0.07% 0.08% 0.33% 0.35%
(a) Net investment income for the six months ended August 31, 2002 and years ended February 28, 2002 and 2001 and February 29, 2000 is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.01, increase net realized and unrealized gains and losses per share by $0.01 and decrease the ratio of net investment income to average net assets from 6.05% to 5.96%. Per share and ratio/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (d) Net expenses exclude expenses incurred indirectly through investment in underlying Funds. (See Note 2) + Computed using average shares outstanding throughout the period. * Annualized. ** Not Annualized. See accompanying notes to the financial statements. 7 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Currency Hedged International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in foreign bond and currency markets. The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index (Hedged). At August 31, 2002, 80.4% of the Fund was invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. GMO Alpha LIBOR Fund invests primarily in relatively high quality, low volatility fixed income instruments. At August 31, 2002, 3.2% of the Fund was invested in GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. GMO Emerging Country Debt Fund invests primarily in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa, and Europe. The financial statements of the GMO Alpha LIBOR Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining 8 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures 9 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from 10 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. There were no open written options contracts as of August 31, 2002. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. See the Schedule of Investments for all open purchased option contracts as of August 31, 2002. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. 11 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spreadlock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically an emerging country, on its obligation. The fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at 12 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. For the six months ended August 31, 2002, the Fund had not entered into any reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 13 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $7,153,353 expiring in 2009. The Fund elected to defer to March 1, 2002 post-October losses of $28,109. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis, and is adjusted for the amortization of premium and discounts. Dividend income is recorded on the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the 14 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund may invest in Class III shares of the GMO Emerging Country Debt Fund and the Class III shares of the GMO Alpha LIBOR Fund ("underlying funds"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in the underlying funds. For the six months ended August 31, 2002, shareholder service fees incurred indirectly by the Fund were 0.005% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.015% and 0.022% of the Fund's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during six months ended August 31, 2002 was $736. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $2,230,053 and $8,369,494, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $12,244,089 $159,276 $(242,225) $(82,949)
15 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 86.9% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's shares outstanding. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ --------------------- Shares Amount Shares Amount Class III: ---------- ------------ -------- ----------- Shares sold 425,110 $ 3,764,873 562,588 $ 4,992,607 Shares issued to shareholders in reinvestment of distributions 143,796 1,219,389 194,941 1,694,032 Shares repurchased (1,171,160) (10,101,659) (636,716) (5,849,434) ---------- ------------ -------- ----------- Net increase (decrease) (602,254) $ (5,117,397) 120,813 $ 837,205 ========== ============ ======== ===========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 9/17/02 AUD 1,300,000 $ 715,094 $ 18,206 9/24/02 CAD 1,900,000 1,216,987 (11,681) 10/29/02 CHF 7,700,000 5,140,530 19,419 10/22/02 EUR 300,000 293,527 2,710
16 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- 10/15/02 GBP 300,000 462,796 6,039 1/13/03 HKD 54,593,000 6,999,729 (271) 9/10/02 JPY 40,000,000 337,555 2,922 -------- $ 37,344 ======== Sales 9/17/02 AUD 1,500,000 $ 825,108 $ 5,495 9/24/02 CAD 1,300,000 832,675 (13,389) 9/03/02 CHF 19,239 12,822 30 10/29/02 CHF 300,000 200,280 1,682 10/22/02 EUR 6,000,000 5,870,550 (15,060) 10/15/02 GBP 1,300,000 2,005,451 (22,119) 1/13/03 HKD 54,564,300 6,996,049 3,951 9/10/02 JPY 180,000,000 1,518,996 (9,066) -------- $(48,476) ========
FORWARD CROSS CURRENCY CONTRACTS
Net Unrealized Settlement Deliver/Units of Receive/In Appreciation Date Currency Exchange For (Depreciation) ---------- ---------------- --------------- -------------- 9/03/02 CHF 4,837,140 EUR 3,300,000 12,111 9/03/02 EUR 3,300,000 CHF 4,856,379 711 11/05/02 CHF 4,834,500 EUR 3,300,000 (1,322) 10/08/02 EUR 1,100,000 SEK 10,395,000 27,359 10/08/02 SEK 1,859,520 EUR 200,000 (1,736) ------- $37,123 =======
See Notes for the Schedule of Investments for definitions of currency abbreviations. 17 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- ------------------ ------------ -------------- Buys 2 Australian Government Bond 10 Yr. September 2002 $ 112,673 $ 4,024 6 Australian Government Bond 3 Yr. September 2002 337,339 5,503 29 Canadian Government Bond 10 Yr. December 2002 1,968,654 15,062 10 Euro BOBL September 2002 1,065,236 34,288 18 Euro Bund September 2002 1,957,320 80,618 1 Japanese Government Bond 10 Yr. September 2002 1,191,751 20,683 1 Japanese Government Bond 10 Yr. December 2002 1,185,173 (344) 3 U.S. Treasury Note 10 Yr. December 2002 335,344 1,311 -------- $161,145 ======== Sales 1 Japanese Government Bond 10 Yr. September 2002 $1,191,752 $ 330 5 Swiss Government Bond September 2002 416,139 (13,916) 2 Swiss Government Bond December 2002 164,723 (1,679) 6 U.S. Treasury Note 5 Yr. December 2002 667,031 (3,878) 2 UK Gilt Long Bond December 2002 366,494 (1,029) -------- $(20,172) ========
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 18 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls ------------------------------ ------------------------------ Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ------------ ---------------- ------------ Outstanding, beginning of period -- $ -- -- $ -- Options written -- -- 7,100 334 Options closed -- -- -- -- Options exercised -- -- (7,100) (334) Options expired -- -- -- -- Options sold -- -- -- -- ----------- -------- ----------- -------- Outstanding, end of period -- $ -- -- $ -- =========== ======== =========== ========
SWAP AGREEMENTS
Notional Expiration Net Unrealized Amount Date Description Appreciation -------------- ---------- -------------------------------------------------- -------------- TOTAL RETURN SWAPS 5,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust Company dated 13,037 7/18/01 to receive (pay) the notional amount multiplied by the return on the JP Morgan Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. ------- $13,037 =======
See Notes to the Schedule of Investments for definitions of currency abbreviations. 19 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 102.6% ASSET BACKED SECURITIES -- 93.3% AIRLINES -- 3.3% 47,000,000 Aircraft Finance Trust Series 99-1A Class A1, Variable Rate, 1 mo. LIBOR + .48%, 2.26%, due 05/15/24 45,120,000 ------------- AUTOMOTIVE -- 4.1% 15,000,000 Americredit Automobile Receivables Trust Series 00-B Class A4, Variable Rate, 1 mo. LIBOR + .20%, 2.01%, due 04/05/07 14,981,250 20,000,000 General Motors Acceptance Corp, 7.50%, due 07/15/05 21,192,000 20,000,000 Volkswagen Credit Auto Master Trust Series 2000-1 Class A, Variable Rate, 1 mo. LIBOR +.16%, 1.95%, due 08/20/07 20,021,875 ------------- 56,195,125 ------------- BANK CREDIT CARDS -- 23.9% 30,000,000 Capital One Master Trust Series 00-4 Class A, Variable Rate, 1 mo. LIBOR + .14%, 1.92%, due 08/15/08 30,037,500 25,000,000 Chase Credit Card Master Trust Series 01-6 Class A, Variable Rate, 1 mo. LIBOR + .13%, 1.91%, due 03/16/09 25,030,600 15,650,000 Chase Credit Card Master Trust Series 02-1 Class A, Variable Rate, 1 mo. LIBOR + .10%, 1.88%, due 06/15/09 15,632,883 19,000,000 Citibank Credit Card Issuance Trust Series 00-B2 Class B2, Variable Rate, 3 mo. LIBOR + .25%, 2.11%, due 10/15/07 18,896,094 35,000,000 MBNA Credit Card Master Note Trust Series 02-A4 Class A4, Variable Rate, 1 mo. LIBOR + .11%, 1.89%, due 08/17/09 35,001,367 9,500,000 MBNA Master Credit Card Trust Series 00-K Class A, Variable Rate, 3 mo. LIBOR + .11%, 1.97%, due 03/17/08 9,515,580 40,000,000 MBNA Master Credit Card Trust Series 01-A Class A, Variable Rate, 1 mo. LIBOR + .15%, 1.93%, due 07/15/08(a) 40,060,800 28,750,000 MBNA Master Credit Card Trust Series 01-A3 Class A3, Variable Rate, 3 mo. LIBOR + .11%, 1.97%, due 12/15/08 29,084,650 27,000,000 MBNA Master Credit Card Trust Series 01-B1 Class B1, Variable Rate, 1 mo. LIBOR + .375%, 2.16%, due 10/15/08 26,975,700 5,000,000 MBNA Master Credit Card Trust Series 97-K Class B, Variable Rate, 1 mo. LIBOR + .32%, 2.10%, due 04/15/08 4,987,100 28,000,000 MBNA Master Credit Card Trust Series 99-D Class A, Variable Rate, 1 mo. LIBOR + .19%, 1.97%, due 11/17/08 28,067,760
See accompanying notes to the financial statements. 1 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------- BANK CREDIT CARDS -- CONTINUED 26,069,269 Team Fleet Financing Corp Series 98-3A Class A, 144A, 6.13%, due 10/25/04 26,020,389 11,180,779 Team Fleet Financing Corp Series 99-3A Class A, 144A, 6.70%, due 06/25/03 11,173,791 30,000,000 World Financial Network Credit Card Master Series 01-A Class A, Variable Rate, 1 mo. LIBOR + .24%, 2.02%, due 06/16/08 29,963,400 ------------- 330,447,614 ------------- BANKING AND FINANCIAL SERVICES -- 19.6% 29,879,220 Anfield Road I Ltd. Series 1 Class A, Variable Rate, 6 mo. LIBOR + .25%, 2.14%, due 11/06/06 29,356,334 13,223,259 Augusta Funding Ltd Series 96-AX, Variable Rate, 1 mo. LIBOR + .25%, 1.93%, due 10/21/08 13,049,770 6,768,919 Augusta Funding Ltd Series 97-B Class A, 144A, Variable Rate, 6 mo. LIBOR + .19%, 2.43%, due 04/10/10 6,654,727 4,138,383 Augusta Funding Ltd X Class A-1 144A, Step-Up, 6.65%, due 06/30/04 4,241,843 35,000,000 Augusta Funding Ltd. Series 10A Class F-1 144A, Step-Up, 3mo. LIBOR + .25%, 2.11%, due 06/30/17 33,600,000 30,100,000 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due 06/15/10 21,070,000 GBP 20,000,000 Earls Five Ltd Series EMTN, 3 mo. GBP LIBOR + .14%, 4.16%, due 02/27/08 30,722,053 12,000,000 EMAC Series 98-1 Class A2, 144A, 6.38%, due 01/15/25 10,320,000 25,000,000 Meridian Funding Co. LLC, 144A, Variable Rate, Step Up, 1 mo. LIBOR +.37%, 2.18%, due 12/22/10 24,995,000 41,000,000 Meridian Funding Co. LLC, MBIA, Variable Rate, 1 mo. LIBOR + .38%, 2.19%, due 06/22/11 40,918,000 28,650,000 Pemex Finance Ltd. Series MKWL, AMBAC 144A, 6.30%, due 05/15/10 29,067,430 15,000,000 PFS Financing Corp Series 01-FA Class A, 144A, Variable Rate, 1 mo. LIBOR + .33%, 2.11%, due 06/15/08 14,976,562 12,390,042 The Money Store Business Loan Backed Trust Series 99-1 Class AN, Variable Rate, 1 mo. LIBOR +.50%, 2.28%, due 09/15/17 12,371,605 ------------- 271,343,324 ------------- COLLATERALIZED DEBT OBLIGATIONS -- 15.5% 14,575,000 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due 01/15/10 9,473,750 3,327,361 Cigna CBO Ltd Series 96-1 Class A2, 144A, 6.46%, due 11/15/08 3,343,998
2 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------- COLLATERALIZED DEBT OBLIGATIONS -- CONTINUED 9,565,548 DLJ CBO Ltd Series 1A Class A2, 144A, 6.68%, due 04/15/11 9,565,548 27,923,077 Great Point CBO Ltd. Series 98-1A Class A1, 144A, Variable Rate, 6 mo. LIBOR + .30%, 2.54%, due 10/15/10 27,306,815 10,983,359 Merrill Lynch CBO Series 97-F1, Variable Rate, 3 mo. LIBOR + .42%, 2.19%, due 05/23/09 8,896,521 10,000,000 Nomura CBO Ltd Series 97-2 Class A2, Step up, 6.26%, due 10/30/09 9,944,600 31,593,107 Northstar CBO Ltd. Series 97-2 Class A2, 144A, Variable Rate, Step Up, 6.62%, due 07/15/09 29,697,520 15,000,407 Northstar CBO Ltd. Series 97-2I Class A2, 144A, Variable Rate, Step Up, 4.12%, due 07/15/09 14,843,953 5,596,489 Pacific Life CBO Series 98-1A Class A2A, 144A, Step Up, 6.56%, due 02/15/10 5,505,434 33,500,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, 6.33%, due 09/15/09 33,546,230 46,990,973 SHYPPCO Finance Company Series 1I Class A-2B, 6.64%, due 06/15/10 39,002,508 24,104,176 Starvest Emerging Markets CBO-I Series 1A, Class A, Variable Rate, 6 mo. LIBOR + .19%, 2.01%, due 07/30/11 23,532,907 ------------- 214,659,784 ------------- EQUIPMENT LEASES -- 0.4% 5,579,668 Xerox Equipment Lease Owner Trust Series 01-1 Class A, 144A, Variable Rate, 1 mo. LIBOR + 2.00%, 3.78%, due 02/15/08 5,586,642 ------------- HEALTH CARE -- 10.0% 8,000,000 DVI Business Credit Receivables Corp. III 1998-1A Class A, Variable Rate, 1 mo. LIBOR + .35%, 2.19%, due 01/15/04 7,982,500 49,500,000 NPF VI, Inc. Series 02-1A Class A, 144A, Variable Rate, 1 mo. LIBOR +.95%, 2.27%, due 02/01/08 48,249,779 22,000,000 NPF XII, Inc. Series 00-3 Class A, 144A, Variable Rate, 1 mo. LIBOR +.45%, 2.27%, due 12/01/03 21,958,200 60,000,000 NPF XII, Inc. Series 02-1A Class A, 144A, Variable Rate, 1 mo. LIBOR + .65%, 2.47%, due 05/02/05 59,383,020 ------------- 137,573,499 -------------
See accompanying notes to the financial statements. 3 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------- NON-BANK CREDIT CARDS -- 8.6% 15,000,000 American Express Credit Account Master Trust Series 01-6 Class A, Variable Rate, 1 mo. LIBOR + .12%, 1.90%, due 12/15/08 15,002,850 23,000,000 Discover Card Master Trust I series 00-5 Class A, Variable Rate, 1 mo. LIBOR + .18%, 1.96%, due 11/15/07 23,075,440 15,000,000 Discover Card Master Trust I Series 01-2 Class A, Variable Rate, 1 mo. LIBOR + .16%, 1.94%, due 07/15/08 15,030,450 17,895,000 Discover Card Master Trust I Series 01-2 Class B, Variable Rate, 1 mo. LIBOR + .46%, 2.24%, due 07/15/08 17,932,043 20,000,000 Discover Card Master Trust I Series 02-3 Class A, Variable Rate, 1 mo. LIBOR + .11%, 1.89%, due 11/17/09 19,981,200 8,000,000 Neiman Marcus Group Credit Card Master Trust Series 00-1 Class A, Variable Rate, 1 mo. LIBOR + .27%, 2.05%, due 04/15/08 8,025,000 20,000,000 Providian Gateway Master Trust Series 00-C Class A, 144A, Variable Rate, 1 mo. LIBOR + .22%, 2.00%, due 03/15/07 19,962,500 ------------- 119,009,483 ------------- RATE REDUCTION BONDS -- 2.5% 12,417,000 California Infrastructure PG&E Series 97-1 Class A7, 6.42%, due 09/25/08 13,430,732 21,354,089 California Infrastructure SCE Series 97-1 Class A5, 6.28%, due 09/25/05 21,833,722 ------------- 35,264,454 ------------- STUDENT LOANS -- 5.4% 3,861,900 Banc One Student Loan Trust Series 94-A Class A2, Variable Rate, 1 mo. LIBOR + .30%, 2.11%, due 10/25/16 3,870,674 12,000,000 Keycorp Student Loan Trust Series 94-B Certificates, Variable Rate, 1 mo. LIBOR + .73%, 2.57%, due 11/25/21 12,022,500 10,000,000 Keycorp Student Loan Trust Series 95-A Class B, Variable Rate, 1 mo. LIBOR + .75%, 2.57%, due 10/27/21 10,020,313 4,932,000 SMS Student Loan Trust 95-A Certificates, Variable Rate, 1 mo. LIBOR + .65%, 2.46%, due 04/25/25 4,939,706 5,966,000 SMS Student Loan Trust Series 94-A Certificates, Variable Rate, 1 mo. LIBOR + .70%, 2.54%, due 07/26/21 5,977,186 5,257,000 SMS Student Loan Trust Series 94-B Certificates, Variable Rate, 1 mo. LIBOR + .75%, 2.56%, due 10/25/23 5,273,428 1,743,325 SMS Student Loan Trust Series 94-B Class A2, Variable Rate, 1 mo. LIBOR + .30%, 2.11%, due 04/25/16 1,748,501
4 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------- STUDENT LOANS -- CONTINUED 19,993,928 SMS Student Loan Trust Series 97-A Class A, Variable Rate, 3 mo. U.S. Treasury Bill + .60%, 2.39%, due 10/27/25(b) 19,903,330 5,008,000 Society Student Loan Trust Series 93-A Class B, Variable Rate, 1 mo. LIBOR + .75%, 2.59%, due 07/25/03 5,015,863 5,200,396 Student Loan Marketing Association Series 96-4 Class A2, Variable Rate, 3 mo. U.S. Treasury Bill + .64%, 2.38%, due 07/25/09 5,171,118 ------------- 73,942,619 ------------- Total Asset Backed Securities 1,289,142,544 ------------- CORPORATE DEBT -- 4.0% 11,750,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 12,524,360 22,421,126 Continental Airlines Series 99-1A, 6.55%, due 02/02/19 20,165,561 20,500,000 Westralia Airports Corp, 144A, 6.48%, due 04/01/10 22,008,800 ------------- 54,698,721 ------------- STRUCTURED NOTES -- 0.3% 4,833,330 Polaris Funding Company, Series EMTN, Variable Rate, 1 mo. LIBOR + .45%, 2.24%, due 01/07/05 4,828,497 ------------- U.S. GOVERNMENT -- 0.2% 2,227,020 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08(b) 2,407,618 ------------- U.S. GOVERNMENT AGENCY -- 4.8% 1,150,000 Agency for International Development Floater (Support of Belize), Variable Rate, 6 mo. U.S. Treasury Bill + .50%, 2.17%, due 01/01/14 1,132,750 4,376,875 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 2.07%, due 10/01/12 4,294,809 1,902,228 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 2.01%, due 10/01/11 1,890,339 15,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 1.92%, due 02/01/27 14,775,000
See accompanying notes to the financial statements. 5 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- CONTINUED 5,345,368 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 2.42%, due 03/30/19 5,305,278 15,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR + .15%, 1.95%, due 10/29/26 14,962,500 1,401,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. U.S. Treasury Bill + .45%, 2.12%, due 11/15/14 1,372,980 2,621,046 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 2.01%, due 05/01/14 2,594,836 14,100,000 Agency for International Development Floater (Support of Tunisia), Variable Rate, 6 mo. LIBOR, 1.81%, due 07/01/23 13,818,000 1,583,334 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 1.98%, due 01/01/12 1,559,584 2,700,000 Federal Home Loan Bank, Variable Rate, 3 mo. LIBOR + .25%, 2.06%, due 11/05/03 2,696,625 1,583,633 Small Business Administration Series 95-10C, 6.88%, due 09/01/05 1,638,938 ------------- 66,041,639 ------------- TOTAL DEBT OBLIGATIONS (COST $1,427,758,956) 1,417,119,019 -------------
See accompanying notes to the financial statements. 6 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PRINCIPAL AMOUNT/ PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------- CALL OPTIONS PURCHASED -- 0.1% OPTIONS ON BONDS -- 0.1% 25,000,000 Asian Development Bank, 5.593%, 07/16/18, Expires 07/16/03, Strike 100.00 405,000 25,000,000 Bellsouth Telecommunications, 7.00%, 12/01/95, Expires 10/26/06, Strike 100.00 495,000 ------------- 900,000 ------------- TOTAL CALL OPTIONS PURCHASED (COST $687,500) 900,000 ------------- SHORT-TERM INVESTMENTS -- 2.4% COMMERCIAL PAPER -- 2.4% $ 32,587,000 Insured Asset Funding, 144A, 1.95%, due 9/03/02 32,581,705 ------------- REPURCHASE AGREEMENTS -- 0.0% $ 7,962 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/03/02, with a maturity value of $7,963, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 0.00%, maturity date of 11/15/14, and a market value, including accrued interest of $10,982. 7,962 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $32,589,667) 32,589,667 ------------- TOTAL INVESTMENTS -- 105.1% (Cost $1,461,036,123) 1,450,608,686 Other Assets and Liabilities (net) -- (5.1%) (69,988,313) ------------- TOTAL NET ASSETS -- 100.0% $1,380,620,373 =============
See accompanying notes to the financial statements. 7 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) NOTES TO THE SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation CBO - Collateralized Bond Obligation EMTN - Euromarket Medium Term Note GBP - British Pound MBIA - Insured as to the payment of principal and interest by Municipal Bond Insurance Association USD - United States Dollar
(a) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 6). (b) All or a portion of this security is held as collateral for open swap contracts (Note 6). 8 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $1,461,036,123) (Note 1) $1,450,608,686 Cash 192 Receivable for Fund shares sold 2,200,000 Interest receivable 6,810,724 Receivable for expenses reimbursed by Manager (Note 2) 23,591 -------------- Total assets 1,459,643,193 -------------- LIABILITIES: Payable for investments purchased 28,029,038 Payable for Fund shares repurchased 200,000 Payable for open forward foreign currency contracts (Notes 1 and 6) 340,294 Interest payable for open swap contracts (Notes 1 and 6) 768,580 Net payable for open swap contracts (Notes 1 and 6) 10,215,255 Payable for reverse repurchase agreements (Notes 1 and 6) 39,328,000 Accrued expenses 141,653 -------------- Total liabilities 79,022,820 -------------- NET ASSETS $1,380,620,373 ============== NET ASSETS CONSIST OF: Paid-in capital $1,380,499,165 Accumulated undistributed net investment income 23,448,186 Accumulated net realized loss (2,344,895) Net unrealized depreciation (20,982,083) -------------- $1,380,620,373 ============== SHARES OUTSTANDING 53,806,438 ============== NET ASSET VALUE PER SHARE $ 25.66 ==============
See accompanying notes to the financial statements. 9 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $2,142) $24,361,318 ----------- Total income 24,361,318 ----------- EXPENSES: Interest expense (Notes 1 and 6) 146,939 Custodian and transfer agent fees 85,410 Legal fees 27,567 Audit fees 16,376 Trustees fees (Note 2) 14,845 Registration fees 276 Miscellaneous 13,582 Fees reimbursed by Manager (Note 2) (142,876) ----------- Net expenses 162,119 ----------- Net investment income 24,199,199 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 373,781 Foreign currency, forward contracts and foreign currency related transactions (2,685,900) ----------- Net realized loss (2,312,119) ----------- Change in net unrealized appreciation (depreciation) on: Investments (3,849,832) Open swap contracts (5,081,837) Foreign currency, forward contracts and foreign currency related transactions (258,970) ----------- Net unrealized loss (9,190,639) ----------- Net realized and unrealized loss (11,502,758) ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,696,441 ===========
10 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 24,199,199 $ 67,631,921 Net realized gain (loss) (2,312,119) 10,857,842 Change in net unrealized appreciation (depreciation) (9,190,639) (26,022,121) -------------- -------------- Net increase in net assets from operations 12,696,441 52,467,642 -------------- -------------- Distributions to shareholders from: Net investment income (8,124,881) (76,537,894) Net realized gains (4,222,800) -- -------------- -------------- (12,347,681) (76,537,894) -------------- -------------- Fund share transactions: (Note 5) Proceeds from sale of shares 263,509,000 866,500,000 Net asset value of shares issued to shareholders in payment of distributions declared 12,347,681 76,537,894 Cost of shares repurchased (336,296,358) (998,429,701) -------------- -------------- Net decrease in net assets resulting from Fund share transactions (60,439,677) (55,391,807) -------------- -------------- Total decrease in net assets (60,090,917) (79,462,059) NET ASSETS: Beginning of period 1,440,711,290 1,520,173,349 -------------- -------------- End of period (including accumulated undistributed net investment income of $23,448,186 and $7,373,868, respectively) $1,380,620,373 $1,440,711,290 ============== ==============
See accompanying notes to the financial statements. 11 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------ (UNAUDITED) 2002 2001(C) 2000* ---------------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 25.66 $ 26.14 $ 25.29 $ 25.00 ---------- ---------- ---------- -------- Income from investment operations: Net investment income 0.44++ 1.23++ 1.83++ 0.26 Net realized and unrealized gain (loss) (0.21) (0.27) 0.07 0.03 ---------- ---------- ---------- -------- Total from investment operations 0.23 0.96 1.90 0.29 ---------- ---------- ---------- -------- Less distributions to shareholders: From net investment income (0.15) (1.44) (1.05) -- From net realized gains (0.08) -- -- -- ---------- ---------- ---------- -------- Total distributions (0.23) (1.44) (1.05) -- ---------- ---------- ---------- -------- NET ASSET VALUE, END OF PERIOD $ 25.66 $ 25.66 $ 26.14 $ 25.29 ========== ========== ========== ======== TOTAL RETURN(a) 0.90%+ 3.69% 7.61% 1.16%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,380,620 $1,440,711 $1,520,173 $338,101 Net operating expenses to average daily net assets --**(d) --(d) --(d) --**(d) Interest expense to average daily net assets 0.02%**(b) 0.05%(b) 0.20%(b) 0.40%**(b) Total net expenses to average daily net assets 0.02%** 0.05% 0.20% 0.40%** Net investment income to average daily net assets 3.42%** 4.67% 7.05% 6.77%** Portfolio turnover rate 14% 29% 39% 4% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%** 0.02% 0.02% 0.02%**
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown. (b) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change on net investment income and net realized and unrealized gains and losses per share for the year ended February 28, 2001 was less than $0.01 per share. The effect of this change decreased the ratio of net investment income to average net assets from 7.06% to 7.05%. Per share and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (d) Net operating expenses as a percentage of average daily net assets was less than 0.01%. * Period from December 31, 1999 (commencement of operations) to February 29, 2000. ** Annualized. + Not annualized. ++ Computed using average shares outstanding throughout the period. 12 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Alpha LIBOR Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return by investing primarily in relatively high quality, low volatility fixed income instruments. The Fund's benchmark is the J.P. Morgan U.S. 3-month Cash Index. Shares of GMO Alpha LIBOR Fund are only offered to other Funds of the Trust and other GMO separately managed accounts. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 13 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying 14 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At August 31, 2002, the Fund held no open futures contracts. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002, the Fund held no written option contracts outstanding. 15 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. See Schedule of Investments for all open purchased option contracts as of August 31, 2002. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange 16 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically an emerging country, on its obligation. The fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. At August 31, 2002, $12,716,032 was set aside as collateral for swaps. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. 17 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. At August 31, 2002, the Fund had entered into one reverse repurchase agreement having a market value of $39,328,000, collateralized by securities with a market value of $40,060,800. See Note 6 for a summary of open reverse repurchase agreements as of August 31, 2002. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 18 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Dividend income is recorded on the ex-dividend date. Non cash dividends, if any, are recorded at fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in principal or face amount of these securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO does not charge the Fund any management or service fees. In addition, GMO has contractually agreed to reimburse all of the Fund's expenses (excluding brokerage commissions and other investment-related costs, hedging transaction fees, fees and expenses of the independent trustees of the Trust, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) until June 30, 2003. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $14,845. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended ended August 31, 2002, aggregated $203,582,410 and $244,875,165, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,461,036,123 $13,702,333 $(24,129,770) $(10,427,437)
19 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 83.2% of the outstanding shares of the Fund were held by five shareholders, two of which were other funds of GMO Trust, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount ----------- ------------- ----------- ------------- Shares sold 10,220,941 $ 263,509,000 32,903,902 $ 866,500,000 Shares issued to shareholders in reinvestment of distributions 480,081 12,347,681 2,974,284 76,537,894 Shares repurchased (13,049,267) (336,296,358) (37,889,038) (998,429,701) ----------- ------------- ----------- ------------- Net decrease (2,348,245) $ (60,439,677) (2,010,852) $ (55,391,807) =========== ============= =========== =============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Settlement Units Net Unrealized Date Deliver of Currency Value Depreciation ---------- -------- ------------ ----------- -------------- Sales 10/15/02 GBP 20,000,000 $30,853,094 $(340,294) =========
See Notes to the Schedule of Investments for definitions of currency abbreviations. 20 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- REVERSE REPURCHASE AGREEMENTS
Face Value Description Market Value ----------- ------------------------------------------------------- ------------ Barclays Bank, 1.860%, dated 8/13/02, to be repurchased $39,328,000 on demand at face value plus accrued interest. $39,328,000 ===========
Average balance outstanding $24,811,333 Average interest rate 1.86% Maximum balance outstanding $44,303,000 Average shares outstanding 54,216,287 Average balance per share outstanding $ 0.46
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements. SWAP AGREEMENTS
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 20,000,000 USD 8/14/07 Agreement with JP Morgan Chase Bank dated 8/9/02 $ 1,090,602 to receive 4.75% per year times the notional amount. The Fund pays only upon a default event, the notional amount times the difference between the par value and the then-market value of the Ford Motor Credit Company, 7.25% due 10/25/11. FORWARD SWAP SPREAD LOCK SWAPS 250,000,000 USD 3/10/03 Agreement with Bear Stearns Bank Plc dated 3/06/01 2,171,534 to pay (receive) the notional amount multiplied by the difference between the 2 year swap spread and a fixed spread times the duration of the 2 year swap rate.
21 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 100,000,000 USD 1/18/06 Agreement with Goldman Sachs International dated $ (8,500,612) 1/16/01 to pay the notional amount multiplied by 5.82% and to receive the notional amount multiplied by the 3 month LIBOR adjusted for a specified spread. 40,000,000 USD 1/24/11 Agreement with Goldman Sachs International dated (4,538,129) 1/19/01 to pay the notional amount multiplied by 6.0675% and to receive the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 7,000,000 USD 10/17/11 Agreement with Bear Stearns Bank Plc dated (438,650) 10/11/01 to pay the notional amount multiplied by 5.396% and to receive the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. ------------ $(10,215,255) ============
See Notes to the Schedule of Investments for definitions of currency abbreviations. 22 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 97.9% ADVERTISING -- 0.1% 1,600 Getty Images Inc* 28,832 ------------ AUTO & TRANSPORTATION -- 6.6% 5,700 AMR Corp* 58,083 2,400 ArvinMeritor Inc 56,136 3,000 Autoliv Inc 65,700 9,700 Burlington Northern Santa Fe Railroad Co 278,972 1,900 Carnival Corp 46,493 2,400 Continental Airlines Inc, Class B* 24,408 2,100 Cooper Tire & Rubber Co 43,848 4,900 Dana Corp 83,006 4,400 Delta Air Lines Inc 77,308 800 Eaton Corp 56,592 3,200 FedEx Corp 151,520 23,754 Ford Motor Co 279,585 17,782 General Motors Corp 851,047 5,800 Goodyear Tire & Rubber Co 78,416 2,100 Lear Corp* 97,860 2,200 Navistar International Corp 55,000 2,300 Norfolk Southern Corp 48,139 800 SPX Corp* 86,880 3,100 TRW Inc 177,940 4,900 UAL Corp* 14,063 ------------ 2,630,996 ------------ CONSUMER DISCRETIONARY -- 11.0% 1,200 AnnTaylor Stores Corp* 32,040 8,500 Autonation Inc* 112,200 1,400 Autozone Inc* 101,290 3,800 Big Lots Inc* 64,030 1,000 Black and Decker Corp 44,870 4,200 Blockbuster Inc 95,550 3,000 Catalina Marketing Corp* 94,290 1,200 CBRL Group Inc 30,816 11,900 Cendant Corp* 170,289 4,900 Circuit City Stores Inc 68,306 2,000 Clorox Co 86,120 2,100 Cox Radio Inc* 50,358
See accompanying notes to the financial statements. 1 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY -- CONTINUED 8,300 Eastman Kodak Co 253,482 3,400 Federated Department Stores Inc* 122,060 5,900 Fox Entertainment Group Inc, Class A* 131,747 800 Furniture Brands International Inc* 20,200 3,000 Gillette Co 94,590 800 Harman International Industries 41,144 800 Harrahs Entertainment Inc* 38,032 2,300 Hasbro Inc 30,245 6,600 Hilton Hotels Corp 75,966 900 Hispanic Broadcasting Corp* 17,415 6,500 Ikon Office Solutions Inc 60,125 2,500 Jones Apparel Group Inc* 90,225 13,500 Kmart Corp* 8,775 7,530 Limited Brands Inc 115,134 1,800 Linens N Things Inc* 38,826 1,700 Mandalay Resort Group* 51,170 1,600 Manpower Inc 52,992 4,300 May Department Stores Co 126,119 1,100 Maytag Corp 35,904 1,800 MGM Grand Inc* 63,882 2,200 Michaels Stores Inc* 102,278 1,700 Mohawk Industries Inc* 84,150 1,800 Newell Rubbermaid Inc 62,280 1,200 Nike Inc, Class B 51,816 2,700 Office Depot Inc* 34,884 2,400 Outback Steakhouse Inc* 70,464 4,400 Penney (JC) Co Inc 76,384 1,800 Pier 1 Imports Inc 32,220 2,800 R.R. Donnelley and Sons 73,864 1,800 Robert Half International Inc* 31,176 5,900 Saks Inc* 62,658 10,600 Sears Roebuck & Co 482,406 13,800 Service Corp International* 51,336 3,600 Staples Inc* 50,040 1,400 Starwood Hotels and Resorts Worldwide Inc 36,092 5,100 The Gap Inc 59,823 3,100 Toys R Us Inc* 41,323 1,100 Tribune Co 45,881 2,500 VF Corp 101,525 7,900 Viacom Inc, Class A* 321,530
2 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY -- CONTINUED 1,600 Viacom Inc, Class B* 65,120 900 Whirlpool Corp 49,779 ------------ 4,405,221 ------------ CONSUMER STAPLES -- 7.6% 1,300 Anheuser Busch Cos Inc 69,108 1,200 Campbell Soup Co 27,780 1,800 Coca Cola Co 91,800 1,900 Coca Cola Enterprises Inc 38,399 3,000 ConAgra Foods Inc 78,870 700 Coors (Adolph) Co, Class B 42,035 1,100 Dean Foods Co* 41,635 2,400 Dole Food Co 65,280 600 Hormel Foods Corp 13,698 34 JM Smucker Co 1,236 2,100 PepsiAmericas Inc 30,072 800 Pepsico Inc 31,640 24,400 Philip Morris Cos Inc 1,220,000 7,100 Procter and Gamble Co 629,415 7,300 Rite Aid Corp* 15,330 3,000 RJ Reynolds Tobacco Holdings 176,520 4,900 Safeway Inc* 126,518 2,100 Sara Lee Corp 38,724 1,400 Smithfield Foods Inc* 24,822 2,000 Supervalu Inc 41,540 13,524 Tyson Foods Inc, Class A 167,968 2,200 UST Inc 76,362 ------------ 3,048,752 ------------ ELECTRONIC EQUIPMENT -- 0.1% 500 3 Com Corp* 2,465 2,500 Broadcom Corp, Class A* 41,225 ------------ 43,690 ------------ FINANCIAL SERVICES -- 22.7% 700 Affiliated Computer Services Inc* 31,150 1,100 Allmerica Financial Corp 24,475 7,600 Allstate Corp 282,872 7,100 American Express Co 256,026
See accompanying notes to the financial statements. 3 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 1,300 American Financial Group Inc 32,526 200 American National Insurance Co 15,250 15,600 Bank of America Corp 1,093,248 3,900 Bank of Hawaii Corp 112,632 5,600 Bank One Corp 229,320 2,980 Bear Stearns Cos Inc 190,511 50 Berkshire Hathaway Inc, Class B* 122,000 309 BOK Financial Corp* 10,293 1,597 Charter One Financial Inc 53,819 1,700 Cigna Corp 144,704 5,300 Citigroup Inc 173,575 400 City National Corp 21,568 2,000 CNA Financial Corp* 54,820 3,400 Comerica Inc 198,900 400 Commerce Group Inc 15,480 12,300 Conseco Inc* 1,660 3,300 Countrywide Credit Industries Inc 173,217 300 Cullen Frost Bankers Inc 11,220 2,200 Deluxe Corp 100,012 2,200 Dun & Bradstreet Corp* 77,638 6,200 E*trade Group Inc* 26,908 1,000 Edwards (AG) Inc 37,640 2,100 Fidelity National Financial Inc 62,895 8,784 FleetBoston Financial Corp 211,958 1,100 GATX Corp 26,763 1,600 Global Payments Inc 44,576 2,600 Greater Bay Bancorp 65,520 2,000 Greenpoint Financial Corp 102,000 500 H&R Block Inc 24,450 2,100 Hibernia Corp, Class A 43,932 700 Hospitality Properties Trust, REIT 24,276 1,300 Hudson City Bancorp Inc 24,076 1,800 Huntington Bancshares Inc 36,342 8,080 J.P. Morgan Chase & Co 213,312 9,500 Key Corp 254,885 900 Lehman Brothers Holdings Inc 51,309 1,100 Lincoln National Corp 40,755 8,000 Loews Corp 420,080 800 Marsh & McLennan Cos Inc 38,920 8,700 MBNA Corp 175,740
4 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 2,800 Metris Companies Inc 11,200 3,100 MGIC Investment Corp 186,651 900 Mony Group Inc 24,435 7,900 Morgan Stanley Dean Witter & Co 337,488 9,600 National City Corp 299,232 900 National Processing Inc* 18,423 2,800 Nationwide Financial Services, Class A 85,400 2,700 Old Republic International Corp 86,670 3,100 PMI Group Inc 105,090 1,400 PNC Bank Corp 64,526 500 Provident Financial Group 14,480 13,400 Providian Financial Corp* 76,112 2,200 Radian Group Inc 95,612 5,500 Regions Financial Corp 196,460 1,800 Ryder System Inc 47,052 1,000 Silicon Valley Bancshares* 22,660 2,200 Southtrust Corp 57,728 15,400 Sovereign Bancorp Inc 235,928 2,200 Stilwell Financial Inc 30,668 400 Student Loan Group 37,368 1,300 Suntrust Banks Inc 87,763 3,500 Torchmark Corp 130,725 228 Travelers Property Casualty Corp, Class A* 3,584 470 Travelers Property Casualty Corp, Class B* 7,656 1,500 Union Planters Corp 46,590 4,000 UnionBanCal Corp 180,000 7,900 Unumprovident Corp 182,964 11,900 Wachovia Corp 438,515 5,400 Washington Mutual Inc 204,174 7,600 Wells Fargo & Co 396,644 ------------ 9,065,051 ------------ HEALTH CARE -- 8.6% 5,700 Aetna Inc 242,877 6,000 Boston Scientific Corp* 174,900 6,400 Bristol Myers Squibb Co 159,680 4,700 Health Net Inc* 109,416 2,700 Johnson & Johnson 146,637 37,300 Merck & Co Inc 1,884,396 100 Renal Care Group Inc* 3,283
See accompanying notes to the financial statements. 5 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HEALTH CARE -- CONTINUED 27,800 Schering Plough Corp 641,624 1,100 Wellpoint Health Network Inc* 81,807 ------------ 3,444,620 ------------ INTEGRATED OILS -- 2.6% 800 Amerada Hess Corp 58,480 500 ChevronTexaco Corp 38,315 15,200 Conoco Inc 373,160 5,900 Exxon Mobil Corp 209,155 9,000 Marathon Oil Corp 222,750 2,700 Phillips Petroleum Co 141,966 ------------ 1,043,826 ------------ MANUFACTURING -- 0.2% 4,000 Brunswick Corp 97,800 ------------ MATERIALS & PROCESSING -- 4.1% 1,500 AK Steel Holding Corp* 13,650 3,600 Allegheny Technologies Inc 31,284 800 AptarGroup Inc 25,680 2,300 Ashland Inc 65,918 700 Avery Dennison Corp 44,184 3,000 Cooper Industries Ltd 98,160 5,100 Du Pont (E.I.) De Nemours 205,581 600 Eastman Chemical Co 26,922 2,100 Engelhard Corp 54,936 400 Harsco Corp 12,140 8,500 Hercules Inc* 89,250 3,900 IMC Global Inc 51,636 2,400 Kinder Morgan Energy Partners 78,144 2,500 Lafarge Corp 85,025 1,600 Lubrizol Corp 49,920 4,100 Lyondell Petro Chemical Co 58,753 1,900 MeadWestvaco Corp 44,251 800 Nucor Corp 40,032 1,100 Owens Illinois Inc* 12,870 2,500 PPG Industries Inc 140,675 3,900 RPM Inc 59,592 4,800 Sealed Air Corp* 74,352
6 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MATERIALS & PROCESSING -- CONTINUED 2,800 Sherwin Williams Co 75,600 2,500 Sonoco Products Co 58,950 6,700 United States Steel Corp 91,991 1,300 Valspar Corp 52,702 ------------ 1,642,198 ------------ OTHER -- 2.0% 600 Carlisle Cos Inc 26,880 2,400 Crane Co 54,840 1,700 FMC Corp* 48,127 11,700 Honeywell International Inc 350,415 3,500 Ingersoll Rand Co 131,425 500 ITT Industries Inc 33,990 1,000 Johnson Controls Inc 86,290 100 Lancaster Colony Corp 4,119 1,300 Textron Inc 50,505 900 Westwood One Inc* 31,437 ------------ 818,028 ------------ OTHER ENERGY -- 1.5% 4,700 AES Corp* 14,194 1,300 Apache Corp 71,578 2,200 Devon Energy Corp 103,400 1,400 Ensco International Inc 37,338 1,200 Nabors Industries Ltd.* 39,624 2,400 Patterson-UTI Energy Inc* 59,952 800 Pioneer Natural Resources Co* 19,912 2,300 Schlumberger Ltd 99,383 5,900 Transocean Sedco Forex Inc 144,550 ------------ 589,931 ------------ PRODUCER DURABLES -- 5.2% 3,700 Agco Corp* 70,744 4,600 Boeing Co 170,522 1,100 Caterpillar Inc 48,004 2,000 Centex Corp 100,980 100 Clayton Homes Inc 1,327 1,300 Cummins Inc 38,727 2,000 Deere (John) and Co 91,840
See accompanying notes to the financial statements. 7 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PRODUCER DURABLES -- CONTINUED 900 Grainger (WW) Inc 40,545 5,500 Horton (DR) Inc 114,180 1,800 Hubbell Inc, Class B 57,780 1,700 KB HOME 81,515 1,800 Lennar Corp 95,040 4,200 Lockheed Martin Corp 265,944 1,700 Northrop Grumman Corp 208,760 600 Parker-Hannifin Corp 24,336 600 Pentair Inc 26,064 3,000 Pitney Bowes Inc 108,750 2,100 Pulte Corp 100,254 800 Ryland Group Inc 34,120 1,500 Steelcase Inc 18,690 1,200 Teradyne Inc* 15,180 3,000 Thomas & Betts Corp* 48,450 1,600 Toll Brothers Inc* 40,000 1,800 Tyco International Ltd 28,242 1,100 United Technologies Corp 65,329 26,200 Xerox Corp* 183,662 ------------ 2,078,985 ------------ RETAIL TRADE -- 0.2% 900 Brinker International Inc* 24,948 2,000 Nordstrom Inc 38,660 ------------ 63,608 ------------ TECHNOLOGY -- 8.4% 1,200 Acxiom Corp* 21,180 2,800 Adaptec Inc* 17,164 59 Agere Systems Inc* 94 3,900 Agilent Technologies Inc* 52,377 2,200 Apple Computer Inc* 32,450 2,400 Applera Corp-Applied Biosystems Group 47,544 2,600 Arrow Electronics Inc* 42,354 8,800 AT & T Wireless Services Inc* 43,472 1,300 AVX Corp 15,964 5,000 BMC Software Inc* 69,500 5,600 Ceridian Corp* 89,992 15,900 Cisco Systems Inc* 219,738
8 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TECHNOLOGY -- CONTINUED 5,800 Computer Associates International Inc 64,960 3,000 Computer Sciences Corp* 110,490 12,000 Corning Inc* 24,000 1,800 Cypress Semiconductor Corp* 18,954 2,300 Dell Computer Corp* 61,226 2,400 Emulex Corp* 40,512 3,100 Fairchild Semiconductor Corp, Class A* 37,417 1,600 Harris Corp 51,120 12,187 Hewlett Packard Co 163,671 6,100 Ingram Micro Inc* 83,265 23,900 Intel Corp 398,413 1,000 Intuit Inc* 44,630 2,200 J.D. Edwards & Co* 28,710 4,200 Keane Inc* 34,020 5,500 Lucent Technologies Inc* 9,515 1,700 Macromedia Inc* 11,628 3,900 Micron Technology Inc* 67,275 5,900 Motorola Inc 70,800 2,600 Network Associates Inc* 33,800 62,300 Oracle Corp* 597,457 1,900 Perot Systems Corp* 22,515 8,200 Raytheon Co 287,000 1,700 Reynolds & Reynolds Inc, Class A 42,245 5,600 Rockwell International Corp 103,152 2,600 Storage Technology Corp* 35,490 3,100 Symantec Co* 88,660 8,700 Tellabs Inc* 49,155 2,100 Tibco Software Inc* 8,841 6,000 VeriSign Inc* 43,080 1,900 Veritas Software Corp* 30,761 2,500 Vishay Intertechnology Inc* 35,800 400 Zebra Technologies Corp* 21,724 ------------ 3,372,115 ------------ U.S. GOVERNMENT AGENCY -- 4.8% 17,600 Fannie Mae 1,333,728 9,000 Freddie Mac 576,900 ------------ 1,910,628 ------------
See accompanying notes to the financial statements. 9 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UTILITIES -- 12.2% 2,000 Ameren Corp 88,100 1,400 American Electric Power Inc 47,740 1,400 Aquila Inc 5,502 126,655 AT & T Corp 1,547,724 3,600 Bellsouth Corp 83,952 2,000 Cinergy Corp 68,800 3,500 CMS Energy Corp 36,960 4,000 Consolidated Edison Inc 162,760 1,300 DQE Inc 19,513 1,900 DTE Energy Co 81,529 10,900 Edison International* 130,582 2,500 Energy East Corp 52,300 1,200 Entergy Corp 50,628 1,877 Firstenergy Corp 61,941 2,300 FPL Group Inc 131,284 1,100 Great Plains Energy Inc 22,957 900 Nicor Inc 25,560 2,400 Pepco Holdings Inc 51,792 13,700 PG & E Corp* 155,495 1,400 Pinnacle West Capital Corp 46,774 2,700 Public Service Enterprise Group Inc 95,040 2,200 Puget Energy Inc 47,740 3,300 Reliant Energy Inc 39,105 16,153 SBC Communications Inc 399,625 1,300 SCANA Corp 36,374 2,200 Sempra Energy 52,822 2,400 Southern Co 69,504 28,200 Sprint Corp (Fon Group) 327,120 2,300 TXU Corp 111,228 23,952 Verizon Communications Inc 742,512 2,900 Wisconsin Energy Corp 73,689 ------------ 4,866,652 ------------ TOTAL COMMON STOCKS (COST $44,805,654) 39,150,933 ------------
See accompanying notes to the financial statements. 10 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ RIGHTS AND WARRANTS -- 0.0% TECHNOLOGY -- 0.0% 800 Seagate Technology Inc Rights(a) 8 ------------ TOTAL RIGHTS AND WARRANTS (COST $0) 8 ------------ SHORT-TERM INVESTMENTS -- 9.5% CASH EQUIVALENTS -- 5.8% 936,692 Dreyfus Money Market Fund(b) 936,692 $ 851,777 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(b) 851,777 553,655 Merrimac Money Market Fund(b) 553,655 ------------ 2,342,124 ------------ U.S. GOVERNMENT -- 0.2% $ 75,000 U.S. Treasury Bill, 1.64%, due 12/5/02(c) 74,677 ------------ REPURCHASE AGREEMENTS -- 3.5% $ 1,404,936 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $1,405,069, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest of $1,436,110. 1,404,936 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $3,821,747) 3,821,737 ------------ TOTAL INVESTMENTS -- 107.4% (Cost $48,627,401) 42,972,678 Other Assets and Liabilities (net) -- (7.4%) (2,978,728) ------------ TOTAL NET ASSETS -- 100.0% $ 39,993,950 ============ NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Represents investment of security lending collateral (Note 1). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 11 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $2,232,150 (cost $48,627,401) (Note 1) $42,972,678 Cash 344 Receivable for investments sold 430,252 Dividends and interest receivable 73,401 Receivable for variation margin on open futures contracts (Notes 1 and 6) 2,965 Receivable for expenses reimbursed by Manager (Note 2) 8,773 ----------- Total assets 43,488,413 ----------- LIABILITIES: Payable for investments purchased 1,100,307 Payable upon return of securities loaned (Note 1) 2,342,124 Payable to affiliate for (Note 2): Management fee 11,049 Shareholder service fee 5,022 Accrued expenses 35,961 ----------- Total liabilities 3,494,463 ----------- NET ASSETS $39,993,950 =========== NET ASSETS CONSIST OF: Paid-in capital $45,041,901 Accumulated undistributed net investment income 97,392 Accumulated net realized gain 511,094 Net unrealized depreciation (5,656,437) ----------- $39,993,950 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $39,993,950 =========== SHARES OUTSTANDING: Class III 4,385,673 =========== NET ASSET VALUE PER SHARE: Class III $ 9.12 ===========
12 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 519,444 Interest (including securities lending income of $6,895) 13,135 ----------- Total income 532,579 ----------- EXPENSES: Management fee (Note 2) 97,081 Custodian and transfer agent fees 23,920 Audit fees 18,400 Legal fees 1,478 Registration fees 1,196 Trustees fees (Note 2) 639 Miscellaneous 1,128 Fees reimbursed by Manager (Note 2) (46,024) ----------- 97,818 Shareholder service fee (Note 2) -- Class III 44,128 ----------- Net expenses 141,946 ----------- Net investment income 390,633 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 1,063,267 Closed futures contracts (132,182) ----------- Net realized gain 931,085 ----------- Change in net unrealized appreciation (depreciation) on: Investments (6,656,890) Open futures contracts 2,872 ----------- Net unrealized loss (6,654,018) ----------- Net realized and unrealized loss (5,722,933) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(5,332,300) ===========
See accompanying notes to the financial statements. 13 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 390,633 $ 1,572,950 Net realized gain 931,085 2,676,637 Change in net unrealized appreciation (depreciation) (6,654,018) (2,302,982) ------------ ----------- Net increase (decrease) in net assets from operations (5,332,300) 1,946,605 ------------ ----------- Distributions to shareholders from: Net investment income Class III (531,891) (1,733,415) ------------ ----------- Total distributions from net investment income (531,891) (1,733,415) ------------ ----------- Net realized gains Class III (1,083,279) (1,287,553) ------------ ----------- Total distributions from net realized gains (1,083,279) (1,287,553) ------------ ----------- (1,615,170) (3,020,968) ------------ ----------- Net share transactions: (Note 5) Class III (50,681,044) 47,832,361 ------------ ----------- Increase (decrease) in net assets resulting from net share transactions (50,681,044) 47,832,361 ------------ ----------- Total increase (decrease) in net assets (57,628,514) 46,757,998 NET ASSETS: Beginning of period 97,622,464 50,864,466 ------------ ----------- End of period (including accumulated undistributed net investment income of $97,392 and $238,650, respectively) $ 39,993,950 $97,622,464 ============ ===========
14 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ----------------------------------- (UNAUDITED) 2002 2001 2000* ---------------- ----------- ----------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.73 $ 10.84 $ 8.79 $ 10.00 ------- ------- ------- ------- Income from investment operations: Net investment income 0.07+ 0.18+ 0.20 0.11+ Net realized and unrealized gain (loss) (1.48) 0.05 2.06 (1.24) ------- ------- ------- ------- Total from investment operations (1.41) 0.23 2.26 (1.13) ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.08) (0.20) (0.14) (0.08) From net realized gains (0.12) (0.14) (0.07) -- ------- ------- ------- ------- Total distributions (0.20) (0.34) (0.21) (0.08) ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.12 $ 10.73 $ 10.84 $ 8.79 ======= ======= ======= ======= TOTAL RETURN(a) (13.40)%++ 2.16% 26.00% (11.36)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $39,994 $97,622 $50,864 $38,650 Net expenses to average daily net assets 0.48%** 0.48% 0.48% 0.48%** Net investment income to average daily net assets 1.33%** 1.67% 2.04% 1.94%** Portfolio turnover rate 29% 61% 89% 26% Fees and expenses reimbursed by the Manager to average daily net assets: 0.16%** 0.09% 0.17% 0.25%**
(a) The total return would have been lower had certain expenses not been reimbursed during the periods shown. * Period from August 2, 1999 (commencement of operations) through February 29, 2000. ** Annualized + Computed using average shares outstanding throughout the period. ++ Not annualized. See accompanying notes to the financial statements. 15 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 25, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term capital growth through investment in equity securities. The Fund's benchmark is the Russell 1000 Value Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin 16 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $2,232,150 collateralized by cash in the amount of $2,342,124 which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a 17 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- payment from or make a payment to the counterparty. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of August 31, 2002, the Fund had no open swap contracts. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual 18 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $639. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $16,606,290 and $65,040,942, respectively. 19 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $48,627,401 $1,957,144 $(7,611,867) $(5,654,723)
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 74.3% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ ---------------------- Shares Amount Shares Amount Class III: ---------- ------------ --------- ----------- Shares sold 68,019 $ 614,750 4,322,392 $46,854,135 Shares issued to shareholders in reinvestment of distributions 104,675 1,127,993 129,480 1,378,226 Shares repurchased (4,887,980) (52,423,787) (41,624) (400,000) ---------- ------------ --------- ----------- Net increase (decrease) (4,715,286) $(50,681,044) 4,410,248 $47,832,361 ========== ============ ========= ===========
20 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Depreciation --------- ------------------ ------------------- ----------- -------------- Buys 2 S&P 500 September 2002 $458,050 $(1,714) =======
At August 31, 2002 the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 21 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 94.7% AUTO & TRANSPORTATION -- 7.2% 25,900 Airborne Inc 333,074 16,200 American Axle & Manufacturing Holdings Inc* 481,950 14,525 Arctic Cat Inc 217,149 42,650 ArvinMeritor Inc 997,583 36,200 Autoliv Inc 792,780 8,100 Bandag Inc 283,176 10,500 Borg Warner Automotive Inc 632,520 30,000 Continental Airlines Inc, Class B* 305,100 11,800 Cooper Tire & Rubber Co 246,384 47,900 Dana Corp 811,426 14,800 Dura Automotive Systems Inc* 202,760 5,700 Hunt (JB) Transportation Services Inc* 135,147 6,200 Landstar System Inc* 314,030 22,800 Lear Corp* 1,062,480 2,900 Mesa Airline Group Inc* 17,719 27,200 Navistar International Corp 680,000 25,200 Northwest Airlines Corp* 256,284 4,800 Oglebay Norton Co 53,664 26,749 Paccar Inc 944,507 10,300 Polaris Industries Inc 755,505 15,550 Smith (AO) Corp, Class B 473,497 2,800 SPX Corp* 304,080 4,800 Thor Industries 161,040 29,000 UAL Corp* 83,230 37,600 Visteon Corp 428,264 ------------- 10,973,349 ------------- CONSUMER DISCRETIONARY -- 21.0% 500 1-800 Contacts Inc* 5,125 14,700 4Kids Entertainment Inc* 288,855 14,800 Amerco* 144,300 31,400 American Greetings Corp 524,380 6,400 AnnTaylor Stores Corp* 170,880 25,650 Applebees International Inc 569,686 15,700 Autozone Inc* 1,135,895 9,500 Aztar Corp* 135,850 16,950 Banta Corp 636,303 16,500 Black and Decker Corp 740,355
See accompanying notes to the financial statements. 1 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 11,000 Blockbuster Inc 250,250 14,300 Blyth Industries Inc 422,851 6,600 Bob Evans Farms Inc 160,116 19,800 Bowne and Co Inc 239,580 14,900 Boyd Gaming Corp* 242,870 17,940 Burlington Coat Factory Warehouse 353,597 26,700 Callaway Golf Co 395,961 20,100 Catalina Marketing Corp* 631,743 6,400 CBRL Group Inc 164,352 11,000 CDI Corp* 299,200 17,000 CDW Computer Centers Inc* 729,640 13,400 Children's Place Retail Stores Inc* 248,168 32,000 Circuit City Stores Inc 446,080 13,600 Claire's Stores Inc 289,408 19,800 Consolidated Graphics Inc* 338,976 10,900 CPI Inc 163,282 16,300 CSK Auto Corp* 206,195 6,100 CSS Industries Inc* 226,005 8,100 Cumulus Media Inc* 113,076 35,100 Dillard's Inc 862,056 22,600 Dollar Tree Stores Inc* 556,186 22,500 DoubleClick Inc* 126,675 20,500 Dover Motorsports Inc 94,300 4,600 Fastenal Co 162,012 8,550 Fossil Inc* 186,903 5,200 Fred's Inc 174,200 18,000 Furniture Brands International Inc* 454,500 4,400 G & K Services Inc 140,976 22,900 G TECH Holdings Corp* 438,535 28,600 Goody's Family Clothing Inc* 163,020 11,900 Group 1 Automotive Inc* 324,870 13,700 GSI Commerce Inc* 69,596 4,200 Harman International Industries 216,006 19,200 Hasbro Inc 252,480 4,800 Hotels.com* 199,872 66,700 Ikon Office Solutions Inc 616,975 14,800 Intermet Corp 141,932 8,500 International Flavors & Fragrances Inc 274,125 7,500 Isle of Capri Casinos Inc* 159,000 13,900 Kelly Services, Class A 327,901
2 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 13,100 Liz Claiborne Inc 369,682 18,000 Lone Star Steakhouse and Saloon Inc 359,640 30,900 Luby's Cafeterias Inc* 155,118 16,800 Manpower Inc 556,416 13,650 Marcus Corp 191,100 14,000 Maytag Corp 456,960 5,100 Michaels Stores Inc* 237,099 23,400 Mohawk Industries Inc* 1,158,300 64,600 MPS Group Inc* 345,610 17,000 Nautilus Group Inc* 539,070 16,900 Neiman Marcus Group Inc, Class A* 493,480 8,900 Nelson (Thomas) Inc* 94,340 38,100 Nu Skin Enterprises Inc 476,250 53,300 Office Depot Inc* 688,636 72,100 OfficeMax Inc* 306,425 16,000 Outback Steakhouse Inc* 469,760 18,800 Papa Johns International Inc* 568,512 9,400 Pegasus Solutions Inc* 144,948 19,800 Penn National Gaming Inc* 362,340 4,900 Petsmart Inc* 81,879 15,000 Pier 1 Imports Inc 268,500 30,900 Prime Hospitality Corp* 279,954 7,300 ProQuest Co* 242,360 20,300 QRS Corp* 129,108 19,100 R.R. Donnelley and Sons 503,858 6,800 Racing Champions Corp* 133,008 8,800 Rent-A-Center Inc* 480,832 23,200 Ross Stores Inc 837,752 20,500 Russell Corp 327,590 33,000 Ryan's Family Steak Houses Inc* 393,360 63,800 Saks Inc* 677,556 13,500 Salton Inc* 121,635 11,500 Sonic Automotive Inc* 234,600 19,300 Spanish Broadcasting System* 136,451 50,900 Spherion Corp* 419,925 52,500 Spiegel Inc, Class A 33,075 16,700 Steven Madden Ltd* 302,771 19,000 Tech Data Corp* 628,330 9,400 The Pep Boys - Manny, Moe & Jack 133,480 17,800 Ticketmaster* 286,402
See accompanying notes to the financial statements. 3 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 39,300 Trans World Entertainment Corp* 188,247 15,900 United Stationers Inc* 437,250 7,100 Urban Outfitters Inc* 183,819 19,600 Wallace Computer Services 362,992 ------------- 32,013,519 ------------- CONSUMER STAPLES -- 4.2% 4,100 Coors (Adolph) Co, Class B 246,205 10,400 Dean Foods Co* 393,640 17,500 Dole Food Co 476,000 2,200 Farmer Brothers Co 741,400 15,400 Great Atlantic & Pacific Tea Co* 161,854 22,500 Ingles Markets Inc, Class A 253,125 17,600 Interstate Bakeries Corp 428,560 57,000 PepsiAmericas Inc 816,240 860 Seaboard Corp 238,564 47,600 Supervalu Inc 988,652 84,397 Tyson Foods Inc, Class A 1,048,211 15,200 Universal Corp 582,920 ------------- 6,375,371 ------------- ELECTRONIC EQUIPMENT -- 0.7% 70,100 3 Com Corp* 345,593 6,900 Benchmark Electronics Inc* 175,260 18,300 C-cor Electronics Inc* 87,291 39,700 Conexant Systems Inc* 58,756 10,600 ESS Technology* 126,670 11,600 Inter-Tel Inc 275,848 ------------- 1,069,418 ------------- FINANCIAL SERVICES -- 25.8% 17,000 Allmerica Financial Corp 378,250 18,800 American Financial Group Inc 470,376 9,200 American National Insurance Co 701,500 19,300 Annaly Mortgage Management Inc 392,369 21,100 Anthracite Capital Inc 260,585 13,200 Anworth Mortgage Asset Corp 182,160 14,800 Apex Mortgage Capital Inc 206,312 7,600 Argonaut Group Inc 141,284
4 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 22,500 Associated Estates Realty Corp 175,500 16,000 Astoria Financial Corp 535,680 16,300 Baldwin and Lyons Inc, Class B 336,432 10,900 Bank of Hawaii Corp 314,792 24,300 BankAtlantic Bancorp Inc 249,075 8,400 Bedford Property Investors 211,932 8,688 BOK Financial Corp* 289,397 56,100 Boykin Lodging Co, REIT 516,120 19,500 Capstead Mortgage Corp 413,400 6,500 Coastal Bancorp Inc 195,000 27,900 Colonial BancGroup Inc 378,045 16,800 Commerce Group Inc 650,160 37,300 Commercial Net Lease Realty Inc 585,983 6,700 Compass Bankshares Inc 225,053 22,215 Corrections Corporation Of America* 327,671 11,199 Delphi Financial Group Inc 446,840 12,000 Deluxe Corp 545,520 7,300 Developers Diversified Realty Corp, REIT 168,630 8,400 Doral Financial Corp 356,076 20,700 Dun & Bradstreet Corp* 730,503 37,500 E*trade Group Inc* 162,750 10,500 Edwards (AG) Inc 395,220 22,500 Electro Rent Corp* 229,500 20,100 Entertainment Properties Trust, REIT 457,275 31,000 Equity Inns Inc 204,910 13,700 Erie Indemnity Co, Class A 598,690 14,100 FBR Asset Investment Corp 476,580 25,064 Felcor Lodging Trust Inc, REIT 370,947 22,100 Fidelity National Financial Inc 661,895 14,100 First Bancorp Puerto Rico 582,330 4,100 First Citizens Bancshares, Class A 443,784 15,700 Flagstar Bancorp Inc 360,315 6,600 FPIC Insurance Group Inc* 59,994 40,000 Fremont General Corp 210,000 5,100 GBC Bancorp (California) 107,100 7,200 Global Payments Inc 200,592 7,500 Greater Bay Bancorp 189,000 12,400 Health Care Inc 352,160 5,400 Healthcare Realty Trust Inc, REIT 173,556 11,662 Highwood Properties Inc, REIT 278,722
See accompanying notes to the financial statements. 5 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 20,900 Host Marriott Corp, REIT 211,926 131,500 HRPT Properties Trust, REIT 1,107,230 9,600 Hudson City Bancorp Inc 177,792 10,100 Hudson United Bancorp 291,688 25,600 Huntington Bancshares Inc 516,864 41,100 IndyMac Bancorp Inc* 937,080 20,500 Innkeepers USA Trust 181,630 23,800 Interpool Inc 316,778 37,400 IRT Property Co 443,190 13,125 iStar Financial Inc, REIT 383,250 29,100 JDN Realty Corp 366,660 10,400 John Nuveen and Co Inc, Class A 234,000 15,600 Kansas City Life Insurance Co 561,600 4,800 Klamath First Bancorp Inc 71,856 11,500 Koger Equity Inc 197,225 131,100 La Quinta Corp 679,098 16,600 Lasalle Hotel Properties 207,500 15,500 LNR Property Corp 538,625 5,400 Macerich Co 164,592 11,106 Mack-Cali Realty Corp, REIT 372,606 28,900 Meristar Hospitality Corp, REIT 325,125 29,200 Metris Companies Inc 116,800 40,400 National Health Investors 590,648 14,800 Nationwide Financial Service, Class A 451,400 12,100 Nationwide Health Properties Inc 208,604 16,900 Net.B@nk Inc* 189,787 18,800 New Century Financial Corp 577,912 33,689 New Plan Excel Realty Trust, REIT 659,631 4,300 Novastar Financial Inc 123,668 18,500 Ohio Casualty Corp* 310,430 18,200 Old Republic International Corp 584,220 24,500 Omega Healthcare Investors Inc* 126,175 29,700 PMI Group Inc 1,006,830 7,056 Prentiss Properties Trust, REIT 206,388 13,900 Presidential Life Corp 222,400 24,700 Prime Group Realty Trust 130,416 25,000 Protective Life Corp 821,250 12,700 Provident Financial Group 367,792 9,000 Public Storage Inc, REIT 287,100 15,600 R & G Financial Corp, Class B 367,848
6 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 10,400 Redwood Trust Inc 310,336 34,000 RFS Hotel Investors Inc, REIT 433,500 12,000 Riggs National Corp 174,480 31,200 Ryder System Inc 815,568 15,800 Safeco Corp 523,138 19,100 Senior Housing Properties Trust, REIT 234,739 7,200 Silicon Valley Bancshares* 163,152 60,896 Sovereign Bancorp Inc 932,927 13,600 Sovran Self Storage, REIT 415,480 6,700 Student Loan Group 625,914 29,300 UICI* 518,610 7,256 UMB Financial Corp 291,038 8,700 Urstadt Biddle Properties Inc 99,354 7,900 Value Line Inc 336,469 11,305 Washington Federal Inc 289,860 2,650 Wintrust Financial Corp 84,800 22,700 WSFS Financial Corp 701,430 ------------- 39,486,374 ------------- HEALTH CARE -- 3.6% 34,700 Aetna Inc 1,478,567 8,300 American Med Security Group* 123,670 5,100 American Medical Systems Holdings Inc* 113,934 4,700 Bio-Rad Laboratories Inc, Class A* 197,165 6,200 Cooper (The) Companies Inc 281,418 4,850 Dentsply International Inc 192,400 18,000 Hanger Orthopedic Group Inc* 312,300 31,210 Health Net Inc* 726,569 17,700 Humana Inc* 235,410 10,700 ICN Pharmaceuticals Inc 108,712 5,800 Osteotech Inc* 54,172 28,600 Pacificare Health Systems Inc* 657,514 7,500 Prime Medical Service Inc* 80,250 34,000 Res-Care Inc* 163,200 20,900 Sierra Health Services Inc* 403,788 13,400 Versicor Inc* 145,792 29,900 WebMD Corp* 176,410 ------------- 5,451,271 -------------
See accompanying notes to the financial statements. 7 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MANUFACTURING -- 0.5% 29,200 Brunswick Corp 713,940 ------------- MATERIALS & PROCESSING -- 11.0% 10,700 Airgas Inc* 164,780 58,600 AK Steel Holding Corp* 533,260 9,200 Albemarle Corp 283,636 31,600 Allegheny Technologies Inc 274,604 24,600 Ashland Inc 705,036 5,900 Ball Corp 293,879 6,500 Barnes Group Inc 130,000 13,400 Carpenter Technology Corp 279,256 11,300 Cleveland Cliffs Inc 297,416 21,500 Commercial Metals Co 406,780 26,200 CompX International Inc 279,030 21,600 Cooper Industries Ltd 706,752 13,600 Crown Cork & Seal Inc* 79,152 13,900 Cytec Industries Inc* 369,740 7,700 Energizer Holdings Inc* 219,604 21,400 Engelhard Corp 559,824 7,350 Ferro Corp 192,203 3,900 Florida Rock Industries 131,664 21,900 GrafTech International Ltd* 189,654 11,700 Greif Brothers Corp 305,136 15,900 Griffon Corp* 186,030 11,600 Harsco Corp 352,060 44,600 Hercules Inc* 468,300 17,600 Holly Corp 301,840 5,200 Hughes Supply Inc 149,396 33,700 IMC Global Inc 446,188 29,200 Lafarge Corp 993,092 31,100 Lyondell Petro Chemical Co 445,663 10,600 MeadWestvaco Corp 246,874 6,800 Mueller Industries Inc* 182,240 18,400 Olin Corp 349,600 67,700 Owens Illinois Inc* 792,090 10,100 Quanex Corp 409,050 21,300 Rock-Tenn Co, Class A 347,190 22,400 RPM Inc 342,272 19,300 Sealed Air Corp* 298,957 28,300 Sherwin Williams Co 764,100
8 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MATERIALS & PROCESSING -- CONTINUED 8,000 Silgan Holdings Inc* 252,880 12,700 Sonoco Products Co 299,466 21,900 Southern Peru Copper Corp 293,022 7,600 Standard Register Co 193,420 14,000 Stepan Co 389,900 49,300 Tesoro Petroleum Corp* 178,466 7,700 Texas Industries Inc 216,447 19,300 Timken Co 352,418 52,100 United States Steel Corp 715,333 13,000 York International Corp 414,700 ------------- 16,782,400 ------------- OTHER -- 1.3% 7,900 Carlisle Cos Inc 353,920 15,900 Cornell Companies Inc* 126,882 11,200 Kaman Corp, Class A 125,664 14,400 Lancaster Colony Corp 593,136 5,200 Sequa Corp, Class A* 277,316 33,120 US Industries Inc* 102,010 10,600 Westwood One Inc* 370,258 ------------- 1,949,186 ------------- OTHER ENERGY -- 1.0% 19,400 Clayton Williams Energy Inc* 190,120 16,650 Patina Oil & Gas Corp 463,703 14,500 Pogo Producing Co 476,325 13,600 Valero Energy Corp 441,592 ------------- 1,571,740 ------------- PRODUCER DURABLES -- 8.7% 25,500 Agco Corp* 487,560 49,300 American Power Conversion Corp* 616,743 42,300 Axcelis Technologies Inc* 286,244 21,900 Centex Corp 1,105,731 3,800 Curtiss Wright Corp 208,620 3,600 Diebold Inc 129,744 8,300 Donaldson Co Inc 313,906 42,400 General Cable Corp 178,928 12,000 HON Industries Inc 329,640
See accompanying notes to the financial statements. 9 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PRODUCER DURABLES -- CONTINUED 62,837 Horton (DR) Inc 1,304,496 2,500 Hovnanian Enterprises Inc* 77,800 9,300 Hubbell Inc, Class B 298,530 22,600 KB HOME 1,083,670 17,600 Kimball International, Class B 259,952 17,100 Lennar Corp 902,880 28,100 McDermott International Inc* 198,105 12,900 MDC Holdings Inc 518,580 48,000 Measurements Specialties Inc* 27,000 13,200 Miller Herman Inc 204,468 5,100 Mine Safety Appliances Co 197,370 12,600 MTS Systems Inc 145,908 6,000 Nacco Industries Inc, Class A 242,100 1,900 NVR Inc* 563,350 19,000 Plantronics Inc* 348,840 19,028 Pulte Corp 908,397 3,800 Ryland Group Inc 162,070 11,700 Standex International Corp 250,380 27,900 Steelcase Inc 347,634 8,200 Tecumseh Products Co 398,684 8,400 Tecumseh Products Co, Class B 372,372 23,900 Toll Brothers Inc* 597,500 12,300 Watts Industries Inc, Class A 215,865 ------------- 13,283,067 ------------- RETAIL TRADE -- 0.7% 9,500 Central Garden and Pet Co* 128,440 6,600 Jo-ann Stores* 198,000 17,500 Nordstrom Inc 338,275 8,500 Shopko Stores Inc* 122,060 14,400 Sports Authority Inc* 77,472 7,400 Tractor Supply* 245,902 ------------- 1,110,149 ------------- TECHNOLOGY -- 6.4% 49,600 Adaptec Inc* 304,048 19,500 Advanced Fibre Communication Inc* 343,980 5,100 Allied Research Corp* 113,577 18,800 American Management Systems Inc* 282,000
10 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 12,600 Ametek Inc 433,440 50,500 Arrow Electronics Inc* 822,645 40,500 Avnet Inc 626,940 22,200 AVX Corp 272,616 8,800 Caci International Inc* 327,800 46,100 Ceridian Corp* 740,827 38,400 Ciber Inc* 234,624 17,000 Comcast Corp, Class A* 417,520 7,800 Compuware Corp* 28,314 14,600 Fairchild Semiconductor Corp, Class A* 176,222 25,700 Harmonic Lightwaves Inc* 65,535 10,300 Harris Corp 329,085 16,100 Hologic Inc* 173,075 8,300 Hyperion Solutions Corp* 188,410 8,100 Inforte Corp* 61,560 82,200 Ingram Micro Inc* 1,122,030 12,700 JDA Software Group Inc* 160,909 10,100 Network Associates Inc* 131,300 12,800 Oak Technology Inc* 55,936 19,600 Pomeroy Computer Resources Inc* 232,064 26,500 Rainbow Technologies Inc* 111,300 19,900 Roxio Inc* 81,590 8,400 SCM Microsystems Inc* 63,672 26,700 Storage Technology Corp* 364,455 17,600 Sykes Enterprises Inc* 113,696 23,100 Tibco Software Inc* 97,251 17,200 United Online Inc* 197,972 26,100 Vishay Intertechnology Inc* 373,752 55,600 Western Digital Corp* 225,736 6,200 Zebra Technologies Corp* 336,722 54,728 Zilog Inc*(a) 547 37,700 Zomax Inc* 143,637 8,850 Zoran Corp* 116,555 ------------- 9,871,342 ------------- UTILITIES -- 2.6% 20,100 Avista Corp 255,672 17,200 CMS Energy Corp 181,632 18,900 DQE Inc 283,689 56,100 Edison International* 672,078
See accompanying notes to the financial statements. 11 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 15,200 Energy East Corp 317,984 10,200 Great Plains Energy Inc 212,874 7,900 Northwestern Corp 100,725 14,200 OGE Energy Corp 272,640 20,700 Pepco Holdings Inc 446,706 15,900 Puget Energy Inc 345,030 9,100 SCANA Corp 254,618 14,640 UniSource Energy Corp 248,587 14,100 Wisconsin Energy Corp 358,281 ------------- 3,950,516 ------------- TOTAL COMMON STOCKS (COST $150,428,585) 144,601,642 ------------- RIGHTS AND WARRANTS -- 0.0% CONSUMER DISCRETIONARY -- 0.0% 6,934 Sunbeam Corporation Warrants, Expires 08/24/03* 7 ------------- TOTAL RIGHTS AND WARRANTS (COST $4,334) 7 ------------- SHORT-TERM INVESTMENTS -- 18.3% CASH EQUIVALENTS -- 11.8% 7,237,800 Dreyfus Money Market Fund(b) 7,237,800 $ 6,581,666 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(b) 6,581,666 4,278,083 Merrimac Money Market Fund(b) 4,278,083 ------------- 18,097,549 ------------- U.S. GOVERNMENT -- 1.1% $ 1,660,000 U.S. Treasury Bill, 1.64%, due 9/5/02(c) 1,659,607 ------------- REPURCHASE AGREEMENTS -- 5.4% $ 578,155 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $578,210 and an effective yield of 0.85%, collateralized by a U.S. Treausry Strip with a rate of 0.00%, maturity date of 11/15/14 and market value of $593,050. 578,155
12 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS -- CONTINUED $ 7,638,124 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $7,638,845 and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest of $7,796,028. 7,638,124 ------------- 8,216,279 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $27,973,435) 27,973,435 ------------- TOTAL INVESTMENTS -- 113.0% (Cost $178,406,354) 172,575,084 Other Assets and Liabilities (net) -- (13.0%) (19,883,070) ------------- TOTAL NET ASSETS -- 100.0% $ 152,692,014 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Represents investment of security lending collateral (Note 1). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 13 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $17,283,241 (cost $178,406,354) (Note 1) $172,575,084 Cash 4,083 Receivable for investments sold 2,067,596 Receivable for Fund shares sold 29,916 Dividends and interest receivable 190,043 Receivable for expenses waived or borne by Manager (Note 2) 15,376 ------------ Total assets 174,882,098 ------------ LIABILITIES: Payable for investments purchased 3,914,938 Payable upon return of securities loaned (Note 1) 18,097,549 Payable for Fund shares repurchased 13,349 Payable to affiliate for (Note 2): Management fee 42,247 Shareholder service fee 19,203 Payable for variation margin on open futures contracts (Notes 1 and 6) 60,300 Accrued expenses 42,498 ------------ Total liabilities 22,190,084 ------------ NET ASSETS $152,692,014 ============ NET ASSETS CONSIST OF: Paid-in capital $134,413,421 Accumulated undistributed net investment income 313,339 Accumulated net realized gain 23,940,157 Net unrealized depreciation (5,974,903) ------------ $152,692,014 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $152,692,014 ============ SHARES OUTSTANDING: Class III 11,972,987 ============ NET ASSET VALUE PER SHARE: Class III $ 12.75 ============
14 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 1,765,002 Interest (including securities lending income of $61,075) 84,998 ------------ Total income 1,850,000 ------------ EXPENSES: Management fee (Note 2) 367,586 Custodian and transfer agent fees 45,540 Audit fees 19,688 Registration fees 6,624 Legal fees 5,341 Trustees fees (Note 2) 2,391 Miscellaneous 2,711 Fees reimbursed by Manager (Note 2) (79,531) ------------ 370,350 Shareholder service fee (Note 2) -- Class III 167,070 ------------ Net expenses 537,420 ------------ Net investment income 1,312,580 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 33,023,908 Closed futures contracts (1,070,549) ------------ Net realized gain 31,953,359 ------------ Change in net unrealized appreciation (depreciation) on: Investments (43,900,236) Open futures contracts (104,675) ------------ Net unrealized loss (44,004,911) ------------ Net realized and unrealized loss (12,051,552) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(10,738,972) ============
See accompanying notes to the financial statements. 15 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,312,580 $ 4,830,025 Net realized gain 31,953,359 29,733,253 Change in net unrealized appreciation (depreciation) (44,004,911) 3,505,145 ------------- ------------ Net increase (decrease) in net assets from operations (10,738,972) 38,068,423 ------------- ------------ Distributions to shareholders from: Net investment income Class III (1,557,509) (4,491,724) ------------- ------------ Total distributions from net investment income (1,557,509) (4,491,724) ------------- ------------ Net realized gains Class III (5,901,608) (11,393,594) ------------- ------------ Total distributions from net realized gains (5,901,608) (11,393,594) ------------- ------------ (7,459,117) (15,885,318) ------------- ------------ Net share transactions: (Note 5) Class III (142,706,230) (13,764,934) ------------- ------------ Decrease in net assets resulting from net share transactions (142,706,230) (13,764,934) ------------- ------------ Total increase (decrease) in net assets (160,904,319) 8,418,171 NET ASSETS: Beginning of period 313,596,333 305,178,162 ------------- ------------ End of period (including accumulated undistributed net investment income of $313,339 and $558,268, respectively) $ 152,692,014 $313,596,333 ============= ============
16 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.91 $ 13.86 $ 12.41 $ 11.69 $ 18.28 $ 15.89 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.12 0.23 0.23 0.15 0.18 0.27 Net realized and unrealized gain (loss) (1.63) 1.58 2.38 1.11 (2.50) 4.85 -------- -------- -------- -------- -------- -------- Total from investment operations (1.51) 1.81 2.61 1.26 (2.32) 5.12 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.12) (0.21) (0.20) (0.14) (0.19) (0.29) From net realized gains (0.53) (0.55) (0.96) (0.40) (4.08) (2.44) -------- -------- -------- -------- -------- -------- Total distributions (0.65) (0.76) (1.16) (0.54) (4.27) (2.73) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 12.75 $ 14.91 $ 13.86 $ 12.41 $ 11.69 $ 18.28 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) (10.52)%** 13.39% 22.14% 10.66% (14.74)% 34.43% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $152,692 $313,596 $305,178 $265,778 $347,684 $769,612 Net expenses to average daily net assets 0.48%* 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.18%* 1.60% 1.73% 1.12% 0.99% 1.51% Portfolio turnover rate 23% 59% 111% 50% 49% 56% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07%* 0.04% 0.06% 0.06% 0.21% 0.22% Purchase and redemption fees consisted of the following per share amounts:(b) $ 0.06 $ 0.01 $ 0.03 N/A N/A N/A
(a) The total returns would have been lower had certain expenses not been reimbursed during the period shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 17 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Small Cap Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Fund's benchmark is Russell 2500 Value Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an 18 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $17,283,241, collateralized by cash in the amount of $18,097,549, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund may also enter into contracts for 19 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At August 31, 2002 the Fund held no open swap contracts. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, 20 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .50% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase is offset by a corresponding cash redemption occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is either substantially underweight/overweight in cash so that a purchase or redemption will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 28, 2002 and the six months ended August 31, 2002, the Fund received $60,393 and $87,647 in purchase premiums, respectively and $200,901 and $837,111 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. 21 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $2,391. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $49,213,777 and $195,492,060, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $178,406,354 $16,846,212 $(22,677,245) $(5,831,033)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 29.7% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- ------------------------ Shares Amount Shares Amount Class III: ----------- ------------- ---------- ------------ Shares sold 1,246,069 $ 18,028,791 1,166,998 $ 16,074,205 Shares issued to shareholders in reinvestment of distributions 505,677 7,060,734 993,426 14,156,265 Shares repurchased (10,814,355) (167,795,755) (3,149,015) (43,995,404) ----------- ------------- ---------- ------------ Net decrease (9,062,609) $(142,706,230) (988,591) $(13,764,934) =========== ============= ========== ============
22 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Depreciation --------- ---------------- ------------------ ------------ -------------- Buys 36 Russell 2000 September 2002 $7,038,900 $(143,633) =========
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 23 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUND -- 99.0% 5,788,141 GMO Emerging Country Debt Fund, Class III (Cost $48,841,787) 51,630,214 ------------- SHORT-TERM INVESTMENTS -- 0.8% REPURCHASE AGREEMENTS -- 0.8% $ 422,202 Salomon Smith Barney Inc. Repurchase Agreement, dated 8/30/02, due 9/03/02, with a maturity value of $422,242 and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 8.125%, maturity date of 8/15/19 and a market value, including accrued interest of $437,672. 422,202 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $422,202) 422,202 ------------- TOTAL INVESTMENTS -- 99.8% (Cost $49,263,989) 52,052,416 Other Assets and Liabilities (net) -- 0.2% 89,336 ------------- TOTAL NET ASSETS -- 100.0% $ 52,141,752 =============
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $49,263,989) (Note 1) $52,052,416 Receivable for Fund shares sold 89,593 Interest receivable 257 Receivable for expenses reimbursed by Manager (Note 2) 3,596 ----------- Total assets 52,145,862 ----------- LIABILITIES: Accrued expenses 4,110 ----------- Total liabilities 4,110 ----------- NET ASSETS $52,141,752 =========== NET ASSETS CONSIST OF: Paid-in capital $49,444,677 Accumulated undistributed net investment income 879,845 Accumulated net realized loss (971,197) Net unrealized appreciation 2,788,427 ----------- $52,141,752 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $52,141,752 =========== SHARES OUTSTANDING: Class III 5,720,159 =========== NET ASSET VALUE PER SHARE: Class III $ 9.12 ===========
2 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 882,926 Interest 2,121 ---------- Total income 885,047 ---------- EXPENSES: Registration fees 8,158 Custodian and transfer agent fees 7,043 Audit fees 4,941 Legal fees 1,910 Trustees fees (Note 2) 1,017 Miscellaneous 1,005 Fees reimbursed by Manager (Note 2) (23,057) ---------- Net expenses 1,017 ---------- Net investment income 884,030 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 1,004,675 Realized gain distributions from investment company shares 461,146 ---------- Net realized gain 1,465,821 ---------- Change in net unrealized appreciation (depreciation) on investments (3,105,596) ---------- Net realized and unrealized loss (1,639,775) ---------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (755,745) ==========
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 884,030 $ 9,967,725 Net realized gain (loss) 1,465,821 (2,435,702) Change in net unrealized appreciation (depreciation) (3,105,596) 7,536,465 ------------ ------------ Net increase (decrease) in net assets from operations (755,745) 15,068,488 ------------ ------------ Distributions to shareholders from: Net investment income Class III (11,426) (9,960,484) ------------ ------------ Total distributions from net investment income (11,426) (9,960,484) ------------ ------------ Net share transactions: (Note 5) Class III (37,042,704) (17,637,823) ------------ ------------ Decrease in net assets resulting from net share transactions (37,042,704) (17,637,823) ------------ ------------ Total decrease in net assets (37,809,875) (12,529,819) NET ASSETS: Beginning of period 89,951,627 102,481,446 ------------ ------------ End of period (including accumulated undistributed net investment income of $879,845 and $7,241, respectively) $ 52,141,752 $ 89,951,627 ============ ============
4 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999* ---------------- ----------- ------------ ----------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.25 $ 8.90 $ 8.70 $ 6.84 $ 10.00 ------- ------- -------- ------- ------- Income from investment operations:(a) Net investment income 0.11++ 1.03++ 1.33++ 1.10 0.03 Net realized and unrealized gain (loss) (0.24) 0.51 0.23 1.97 (3.16) ------- ------- -------- ------- ------- Total from investment operations (0.13) 1.54 1.56 3.07 (3.13) ------- ------- -------- ------- ------- Less distributions to shareholders: From net investment income --(b) (1.19) (1.36) (1.20) (0.03) From net realized gains -- -- -- (0.01) -- ------- ------- -------- ------- ------- Total distributions -- (1.19) (1.36) (1.21) (0.03) ------- ------- -------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.12 $ 9.25 $ 8.90 $ 8.70 $ 6.84 ======= ======= ======== ======= ======= TOTAL RETURN(c) (1.38)%+ 18.47% 18.71% 46.71% (31.32)%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $52,142 $89,952 $102,481 $86,280 $41,216 Net expenses to average daily net assets(d) 0.00%(e)** 0.00%(e) 0.00% 0.00% 0.00%** Net investment income to average daily net assets(a) 2.36%** 11.43% 14.39% 14.22% 0.64%** Portfolio turnover rate 10% 14% 0% 0% 0% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06%** 0.06% 0.03% 0.04% 0.09%**
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by GMO Emerging Country Debt Fund. (b) The distribution from net investment income was less than $0.01. (c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (d) Net expenses exclude expenses incurred indirectly through investment in underlying fund. (See Note 1.) (e) The ratio of net expenses to average daily net assets was less than 0.01%. * Period from July 20, 1998 (commencement of operations) through February 28, 1999. ** Annualized. + Not Annualized. ++ Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Country Debt Share Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in the Class III Shares of the GMO Emerging Country Debt Fund ("ECDF"), a portfolio of the Trust. GMO also serves as investment manager to ECDF. ECDF pursues its objectives by investing primarily in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Europe ("Emerging Countries"). The Fund's benchmark is the J.P. Morgan Emerging Markets Bond Index Global. The financial statements of ECDF should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of ECDF are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Certain securities held by the underlying fund in which the Fund invests were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to 6 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $2,165,893 expiring in 2010. The Fund elected to defer to March 1, 2002 post-October losses of $4,466. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions are recorded on the ex-dividend date of ECDF. Interest income is recorded on an accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. 7 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in ECDF (See Note 2). PURCHASES AND REDEMPTIONS OF FUNDS SHARES The Fund does not charge any purchase premium or redemption fee in connection with the purchase and sale of Fund shares. As a shareholder in ECDF, the Fund will indirectly bear ECDF's purchase premium and redemption fees which are .50% and .25%, respectively. These fees are paid to and retained by ECDF. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in ECDF. Investments in emerging country debt present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability, which may result in the Fund's inability to collect on a timely basis, or in full, principal and interest payments. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. ECDF may acquire interests in securities or bank loans which are in default at the time of acquisition in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging country debt are relatively illiquid. Accordingly, ECDF may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager does not directly charge an advisory fee or shareholder service fee. GMO has contractually agreed to reimburse all expenses directly incurred by the Fund until June 30, 2003 (excluding brokerage commissions, certain other transaction costs (including transfer taxes), fees and expenses of the independent trustees of the Trust, and extraordinary expenses). As a shareholder in ECDF, the Fund will indirectly bear all fees and expenses associated with an investment in ECDF. GMO, in its capacity as Manager of ECDF, earns a management fee of .35% of average daily net assets. Class III shares of ECDF also bear an annual shareholder service fee of .15% of ECDF's average daily net assets. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.570% and 0.104% of the Fund's average daily net assets, respectively. 8 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $1,017. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $7,548,072 and $43,250,869, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $49,263,989 $2,788,427 $ -- $2,788,427
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 91.5% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------- ------------------------- Shares Amount Shares Amount Class III: ----------- ------------ ----------- ------------ Shares sold 698,816 $ 6,503,137 441,370 $ 3,958,889 Shares issued to shareholders in reinvestment of distributions 1,274 11,426 1,170,445 9,960,484 Shares repurchased (4,702,183) (43,557,267) (3,399,153) (31,557,196) ----------- ------------ ----------- ------------ Net decrease (4,002,093) $(37,042,704) (1,787,338) $(17,637,823) =========== ============ =========== ============
9 GMO ASIA FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 93.7% CHINA -- 9.6% 2,400,000 Brilliance China Automotive Holdings Ltd 335,387 1,764,000 China Eastern Airlines Corp Ltd 235,201 594,000 China Everbright Ltd 226,559 1,045,000 China Mobile Ltd* 2,893,864 2,400,000 China Petroleum & Chemical Corp 366,156 346,000 China Resources Enterprise 394,797 450,000 China Southern Airlines Co Ltd 135,578 1,092,000 China Unicom* 805,005 24,000 China Unicom ADR* 176,400 573,000 CNOOC Ltd 797,063 5,800 CNOOC Ltd ADR 164,140 938,000 Cosco Pacific Ltd 643,376 1,605,000 Denway Investment Ltd 473,272 834,000 Founder Holdings Ltd* 84,470 5,088,000 Guangdong Investments Ltd* 469,665 6,000 Huaneng Power International Inc ADR 180,000 358,000 Huaneng Power International Inc Class H 270,797 5,132,000 PetroChina Co Ltd 1,046,145 1,406,000 Shandong International Power Development Co Ltd 319,056 80,000 Shanghai Industrial Holdings 127,180 1,378,000 Sinopec Shanghai Petrochemical Co Ltd* 181,968 626,000 Yanzhou Coal Mining Co Ltd 218,700 480,000 Zhejiang Southeast Electric Power Co-B 346,560 -------------- 10,891,339 -------------- INDONESIA -- 21.6% 1,638,000 Astra International Tbk* 591,937 18,220,300 Bank Central Asia Tbk 4,629,664 17,470,000 Bentoel International Investama Tbk PT* 256,477 9,188,800 Citra Marga Nusaphala Persad* 389,136 502,500 Gudang Garam 479,517 9,215,000 HM Sampoerna Tbk 4,032,538 13,929,500 Indah Kiat Pulp & Paper(a)* 121,913 20,883,500 Indofood Sukses Makmur Tbk 2,181,506 5,135,000 Indorama Synthetics* 275,452 1,012,500 Indosat Tbk 1,046,231 1,529,000 International Nickel* 897,888 1,038,000 Jakarta International Hotel & Development Tbk PT* 79,125
See accompanying notes to the financial statements. 1 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- INDONESIA -- CONTINUED 1,552,000 PT Bank Pan Indonesia Tbk* 84,129 2,296,600 PT Bimantara Citra 654,875 21,000 PT Indosat (Persero) Tbk Class B ADR 215,250 15,393,500 PT Matahari Putra Prima Tbk 956,118 389,000 Ramayana Lestari Sentosa 137,281 93,200 Telekomunikasi Indonesia Class B ADR 736,280 16,233,000 Telekomunikasi Tbk 6,645,356 -------------- 24,410,673 -------------- MALAYSIA -- 3.7% 460,600 Affin Holdings Berhad 173,331 507,000 Arab-Malaysian Corp Berhad* 160,105 38,000 Edaran Otomobil Berhad 129,000 781,000 Highlands and Lowlands Berhad 616,579 95,400 Hong Leong Credit Berhad 115,986 358,000 Intria BHD* 86,203 108,200 Malayan Banking Berhad 249,145 242,000 Malaysia Mining Corp 147,747 229,000 Malaysian International Shipping (Foreign Registered) 436,908 298,000 Pernas International Hldgs Berhad* 62,737 339,000 Perusahaan Otomobil Nasional 883,184 70,000 Petronas Dagangan Berhad 103,158 1,210,000 Renong Berhad* 269,066 161,000 Resorts World Berhad 440,632 1,141,000 TA Enterprise Berhad 202,678 31,000 Unisem (M) Berhad 80,355 -------------- 4,156,814 -------------- PHILIPPINES -- 13.9% 3,736,325 Aboitiz Equity Ventures Inc* 164,313 4,632,756 Ayala Corp 464,661 50,736,700 Ayala Land Inc 5,382,425 141,000 Bank of the Philippine Islands 118,305 342,495 Equitable Banking Corp* 184,972 15,208,850 Filinvest Land Inc* 357,890 2,323,720 First Philippine Holdings* 582,667 108,912 Globe Telecom Inc* 1,018,851 3,266,319 Ionics Circuits Inc 289,807 1,866,642 La Tondena Distillers Inc 1,116,133
2 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- PHILIPPINES -- CONTINUED 14,213,000 Megaworld Corp* 167,228 302,500 Metropolitan Bank & Trust Co 198,380 303,770 Philippine Long Distance Telephone* 1,669,871 815,092 RFM Corp 12,263 1,218,275 San Miguel Corp Class B 1,221,917 25,081,000 SM Prime Holdings 2,757,483 -------------- 15,707,166 -------------- SINGAPORE -- 3.0% 148,000 DBS Group Holdings Ltd 1,006,486 273,000 Oversea-Chinese Banking Corp 1,684,944 90,690 United Overseas Bank 684,120 -------------- 3,375,550 -------------- SOUTH KOREA -- 3.7% 105,000 Chohung Bank* 494,447 47,400 Daegu Bank* 240,165 3,600 Hyundai Mobis 85,511 4,000 Hyundai Motor Co 113,149 34,000 KIA Motors Corp* 282,874 23,800 Korea Electric Power Corp 416,814 2,800 Korea Reinsurance 71,983 6,200 KT Corp ADR 140,802 5,500 KT Freetel* 157,868 12,800 LG Chemicals Ltd 463,247 19,300 LG Engineering & Construction Ltd 219,984 4,400 LG Household & Health Care Ltd 150,089 15,900 LG Investment & Securities Co Ltd 227,530 2,100 Pohang Iron & Steel 188,693 1,800 Samsung Electronics 495,694 8,800 Shin Young Securities Co 107,625 8,900 SK Global* 82,562 43,210 Woongjin.com Co Ltd 179,570 -------------- 4,118,607 -------------- TAIWAN -- 10.4% 1,030,400 Acer Communications & Multimedia Inc 1,745,166 830,000 Ambassador Hotel* 192,685 496,100 Arima Computer Corp* 260,762
See accompanying notes to the financial statements. 3 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TAIWAN -- CONTINUED 289,500 Asustek Computer Inc 697,438 451,000 Cathay Financial Holding Co Ltd 545,230 4,060 Chang Hwa Bank 1,707 2,164,000 China Development Financial Holding Corp* 1,251,196 705,000 China Petrochemical Development Corp* 86,259 1,440,000 Chinatrust Financial Holding Co* 1,122,733 276,420 International Commercial Bank China 154,979 1,509,200 Inventec Co Ltd 1,092,953 314,000 Lite-On Technology Corp 495,138 4,231,700 Macronix International* 1,618,784 786,210 Nan Ya Plastic Corp 720,893 1,731,800 Pacific Construction* 77,373 816,000 Shinkong Synthetic Fibers* 141,778 949,716 Taiwan Cement Corp* 282,876 51,480 Taiwan Semiconductor* 75,014 607,000 Tatung Co* 143,574 1,215,000 Waterland Financial Holdings* 214,652 1,685,880 Yageo Corp* 595,683 640,000 Yieh Loong Co Ltd* 108,395 219,000 Yulon Motor Co 164,993 -------------- 11,790,261 -------------- THAILAND -- 27.8% 630,000 Adkinson Securities Ltd (Foreign Registered)* 185,162 2,623,000 Advanced Info Service Pcl (Foreign Registered) 1,802,963 40,000 Advanced Info Service Pcl NVDR 26,784 838,600 Ban Pu Coal Pcl (Foreign Registered) 735,440 5,831,300 Bangkok Expressway Pcl (Foreign Registered) 2,266,730 1,791,400 Bank of Ayudhya Pcl (Foreign Registered)* 301,468 556,900 Central Pattana Pcl NVDR* 1,267,182 9,545,200 Charoen Pokphand Foods Pcl (Foreign Registered) 1,031,669 548,000 DBS Thai Danu Bank Pcl* 77,933 1,137,330 Delta Electronics Pcl (Foreign Registered)(b) 741,057 309,600 Electricity Generating Pcl (Foreign Registered) 273,349 414,100 Electricity Generating Pcl NVDR 365,613 2,750,000 Industrial Finance Corp of Thailand (Foreign Registered)* 433,456 129,000 Italian-Thai Development Pcl (Foreign Registered)* 94,021 217,000 Italian-Thai Development Pcl NVDR* 158,159 1,006,000 Jasmine International Pcl (Foreign Registered)* 62,473 430,500 Krung Thai Bank Pcl (Foreign Registered)* 109,181
4 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- THAILAND -- CONTINUED 1,718,900 Land & House Pcl (Foreign Registered) 2,913,045 968,400 Land & House Pcl NVDR 1,549,348 2,274,000 National Finance Pcl NVDR* 743,807 671,000 National Petrochemical (Foreign Registered) 787,260 1,228,200 PTT Exploration & Production Pcl (Foreign Registered)(b)* 3,551,562 119,000 PTT PCL (Foreign Registered) 107,182 624,000 Quality House Co Ltd (Foreign Registered)* 121,280 676,850 Sahaviriya Steel Industry* 107,487 139,000 Siam Cement Pcl (Foreign Registered) 3,406,637 55,300 Siam Cement Pcl NVDR 1,190,149 3,811,300 Siam Commercial Bank Pcl (Foreign Registered)* 2,371,335 7,723,100 Siam Industrial Credit Pcl NVDR* 1,757,330 353,000 Siam Panich Leasing Ltd (Foreign Registered) 294,934 2,439,000 Tanayong Co Ltd (Foreign Registered)(a)* 578 204,100 Thai Airways International (Foreign Registered)* 178,993 1,350,000 Thai Farmers Bank NVDR* 815,952 1,956,265 Thai Petrochemical (Foreign Registered)* 178,053 1,098,500 Thai Union Frozen Products Pcl (Foreign Registered)(b) 434,557 240,000 Thai Union Frozen Products Pcl NVDR 94,430 1,190,000 Tisco Finance Pcl (Foreign Registered)* 682,579 710,000 Vinythai Pcl (Foreign Registered)* 143,885 -------------- 31,363,023 -------------- TOTAL COMMON STOCKS (COST $107,899,862) 105,813,433 -------------- MUTUAL FUNDS -- 2.4% UNITED STATES -- 2.4% 104,257 GMO Alpha LIBOR Fund(c) 2,675,232 -------------- TOTAL MUTUAL FUNDS (COST $2,738,215) 2,675,232 -------------- PREFERRED STOCKS -- 1.0% SOUTH KOREA -- 1.0% 8,000 Samsung Electronics (Non Voting) 1,098,215 -------------- TOTAL PREFERRED STOCKS (COST $954,180) 1,098,215 --------------
See accompanying notes to the financial statements. 5 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 0.9% UNITED STATES -- 0.9% $ 470,000 U.S. Treasury Inflation Indexed Bond, 3.50%, due 01/15/11 526,705 $ 450,000 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10(c) 543,478 -------------- 1,070,183 -------------- TOTAL DEBT OBLIGATIONS (COST $1,007,058) 1,070,183 -------------- RIGHTS AND WARRANTS -- 0.2% MALAYSIA -- 0.1% 162,600 Affin Holdings Berhad Warrants, Expires 7/08/05* 10,911 120,200 IJM Corp Berhad Warrants, Expires 8/24/04* 67,692 -------------- 78,603 -------------- THAILAND -- 0.1% 315,000 Adkinson Sec - Warrants Exp. 6/14/03* 17,919 315,000 Adkinson Sec - Warrants Exp. 6/14/05* 17,919 247,600 Banpu Pcl Warrants, Expires 1/14/03* 41,668 1,138,620 Charoen Pokphand Foods PCL Warrants, Expires 4/29/05 (Foreign Registered)* 97,156 480,663 Telecomasia Corp Pcl Warrants, Expires 12/31/49(b)* -- -------------- 174,662 -------------- TOTAL RIGHTS AND WARRANTS (COST $278,359) 253,265 -------------- CONVERTIBLE SECURITIES -- 0.1% MALAYSIA -- 0.1% $ 153,900 Berjaya Sports Toto BHD, 0.08%, due 06/25/12 128,790 -------------- TOTAL CONVERTIBLE SECURITIES (COST $130,745) 128,790 --------------
See accompanying notes to the financial statements. 6 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.9% CASH EQUIVALENTS -- 1.9% $ 2,100,000 Societe Generale GC Time Deposit, 1.81%, due 9/03/02 2,100,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $2,100,000) 2,100,000 -------------- TOTAL INVESTMENTS -- 100.2% (Cost $115,108,419) 113,139,118 Other Assets and Liabilities (net) -- (0.2%) (197,957) -------------- TOTAL NET ASSETS -- 100.0% $ 112,941,161 ============== NOTES TO SCHEDULE OF INVESTMENTS:
NVDR - Non-Voting Depositary Receipt
* Non-income producing security. (a) Bankrupt issuer. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (c) All or a portion of this security is held as collateral for open swap contracts (Note 6). See accompanying notes to the financial statements. 7 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 29.0% Telecommunication Services 15.8 Materials 11.1 Consumer Staples 10.4 Information Technology 9.3 Consumer Discretionary 8.4 Energy 5.6 Industrials 5.5 Utilities 2.5 Miscellaneous 2.4 ----- 100.0% =====
8 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $115,108,419) (Note 1) $113,139,118 Cash 9,998 Foreign currency, at value (cost $61,476) (Note 1) 61,473 Receivable for investments sold 927 Dividends and interest receivable 240,045 Receivable for expenses reimbursed by Manager (Note 2) 6,820 ------------ Total assets 113,458,381 ------------ LIABILITIES: Payable for investments purchased 14,123 Payable to affiliate for (Note 2): Management fee 77,226 Shareholder service fee 14,301 Net payable for open swap contracts (Notes 1 and 6) 335,870 Accrued expenses 75,700 ------------ Total liabilities 517,220 ------------ NET ASSETS $112,941,161 ============ NET ASSETS CONSIST OF: Paid-in capital $144,178,938 Accumulated undistributed net investment income 879,055 Accumulated net realized loss (29,810,006) Net unrealized depreciation (2,306,826) ------------ $112,941,161 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $112,941,161 ============ SHARES OUTSTANDING: Class III 14,656,105 ============ NET ASSET VALUE PER SHARE: Class III $ 7.71 ============
See accompanying notes to the financial statements. 9 GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $274,816) $ 1,743,041 Interest 37,313 Dividends from investment company shares 20,143 ----------- Total income 1,800,497 ----------- EXPENSES: Management fee (Note 2) 502,761 Custodian fees 199,364 Audit fees 21,160 Transfer agent fees 14,076 Legal fees 4,482 Trustees fees (Note 2) 1,498 Registration fees 736 Miscellaneous 1,380 Fees reimbursed by Manager (Note 2) (40,020) ----------- 705,437 Shareholder service fee (Note 2) - Class III 93,104 ----------- Net expenses 798,541 ----------- Net investment income 1,001,956 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 1,789,479 Realized gains distributions from investment company shares 10,469 Closed swap contracts (211,343) Foreign currency, forward contracts and foreign currency related transactions 49,340 ----------- Net realized gain 1,637,945 ----------- Change in net unrealized appreciation (depreciation) on: Investments (6,737,395) Open swap contracts (460,080) Foreign currency, forward contracts and foreign currency related transactions (1,537) ----------- Net unrealized loss (7,199,012) ----------- Net realized and unrealized loss (5,561,067) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,559,111) ===========
10 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,001,956 $ 1,008,347 Net realized gain (loss) 1,637,945 (19,000,561) Change in net unrealized appreciation (depreciation) (7,199,012) 22,814,983 ------------ ------------ Net increase (decrease) in net assets from operations (4,559,111) 4,822,769 ------------ ------------ Distributions to shareholders from: Net investment income Class III (749,692) (1,563,464) ------------ ------------ Total distributions from net investment income (749,692) (1,563,464) ------------ ------------ Net share transactions: (Note 5) Class III 372,034 691,462 ------------ ------------ Increase in net assets resulting from net share transactions 372,034 691,462 ------------ ------------ Total increase (decrease) in net assets (4,936,769) 3,950,767 NET ASSETS: Beginning of period 117,877,930 113,927,163 ------------ ------------ End of period (including accumulated undistributed net investment income of $879,055 and $626,791, respectively) $112,941,161 $117,877,930 ============ ============
See accompanying notes to the financial statements. 11 GMO ASIA FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------ (UNAUDITED) 2002 2001 2000 1999 1998+ ---------------- ----------- ----------- ----------- ---------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.09 $ 7.87 $ 12.35 $ 7.67 $ 10.44 $ 10.00 -------- -------- -------- -------- ------- ------- Income from investment operations: Net investment income 0.07 0.07 0.09 0.03 0.08(b) 0.01(b) Net realized and unrealized gain (loss) (0.40) 0.26 (3.32) 5.01 (2.69) 0.43 -------- -------- -------- -------- ------- ------- Total from investment operations (0.33) 0.33 (3.23) 5.04 (2.61) 0.44 -------- -------- -------- -------- ------- ------- Less distributions to shareholders: From net investment income (0.05) (0.11) (0.01) (0.02) (0.16) -- From net realized gains -- -- (1.24) (0.34) -- -- -------- -------- -------- -------- ------- ------- Total distributions (0.05) (0.11) (1.25) (0.36) (0.16) -- -------- -------- -------- -------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 7.71 $ 8.09 $ 7.87 $ 12.35 $ 7.67 $ 10.44 ======== ======== ======== ======== ======= ======= TOTAL RETURN(a) (4.10)%** 4.41% (27.45)% 65.57% (25.03)% 4.40%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $112,941 $117,878 $113,927 $119,218 $77,404 $40,161 Net expenses to average daily net assets 1.29%* 1.28% 1.30% 1.25% 1.26% 2.52%* Net investment income to average daily net assets 1.61%* 1.01% 1.22% 0.22% 1.04% 2.86%* Portfolio turnover rate 41% 68% 84% 121% 61% 1% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06%* 0.09% 0.07% 0.07% 0.30% 4.22% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.00(d) $ 0.00(d) $ 0.03 -- -- --
+ Period from February 18, 1998 (commencement of operations) to February 28, 1998. * Annualized ** Not annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes subscription and redemption fees. (b) Computed using average shares outstanding throughout the period. (c) Effective March 1, 2000 the fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this. Amounts calculated using average shares oustanding throughout the period. (d) Purchase and redemption fees were less than $0.01 per share. 12 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Asia Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the Asian securities markets. The Fund's benchmark is the GMO Asia 7 Index. At August 31, 2002, 2.4% of the Fund is invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. The financial statements of the GMO Alpha Libor Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 13 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the 14 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- amounts paid on the underlying future, security, or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security, or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security, or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian and agency, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, there were no outstanding futures contracts. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed 15 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreements. The Fund earns interest on cash set aside as collateral. See Note 6 for a summary of the open swap agreement as of August 31, 2002. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund did not have any securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax 16 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distrbutions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $6,035,369 and $17,265,440 expiring in 2009 and 2010, respectively. The Fund has elected to defer to March 1, 2002 post-October capital losses of $7,441,385. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. 17 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES Effective April 1, 2002, the level of purchase premiums and redemption fees are each 0.80%. Prior to April 1, 2002 the premium on cash purchases of Fund shares was 1.20% of the amount invested. In the case of cash redemptions, the fee was .40% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption fee is offset by a corresponding cash redemption or purchase occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is either substantially overweighted or underweighted in cash so that a redemption or purchase will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 28, 2002 and six months ended August 31, 2002, the Fund received $366 and $32,024 in purchase premiums and $31 and $18,117 in redemption fees, respectively. There was no premium for reinvested distributions. INVESTMENT RISK Investments in emerging countries present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. 18 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, custody fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding fund expenses, as defined above) incurred indirectly by the Fund through its investment in the GMO Alpha LIBOR Fund exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses, and indirect investment expenses incurred by the Fund were less than 0.001% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $736. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchase and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ 496,344 $ -- Investments (non-U.S. Government securities) 49,495,375 48,892,851
At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $115,108,419 $15,439,253 $(17,408,554) $(1,969,301)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 68.9% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 19 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 --------------------- ----------------- Shares Amount Shares Amount Class III: -------- ----------- ------- -------- Shares sold 497,414 $ 4,003,000 6,316 $ 44,516 Shares issued to shareholders in reinvestment of distributions 39,072 330,158 97,208 668,789 Shares repurchased (457,833) (3,961,124) (3,197) (21,843) -------- ----------- ------- -------- Net increase 78,653 $ 372,034 100,327 $691,462 ======== =========== ======= ========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: TOTAL RETURN SWAP AGREEMENT
Expiration Net Unrealized Notional Amount Date Description Depreciation ---------------- ----------- -------------------------------------------------- --------------- $3,708,556 10/02/02 Agreement with Credit Agricole Indosuez (W.I. $(335,870) Carr) dated 8/17/01 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread --------- $(335,870) =========
20 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.3% UNITED STATES -- 100.3% 171,197 GMO International Growth Fund, Class III 3,209,938 766,638 GMO International Intrinsic Value Fund, Class IV 13,837,819 ------------ 17,047,757 ------------ TOTAL MUTUAL FUNDS (COST $18,189,504) 17,047,757 ------------ COMMON STOCKS -- 0.0% HONG KONG -- 0.0% 796 China Digicontent Co Ltd* 1 ------------ UNITED KINGDOM -- 0.0% 19,018 British Energy Plc (Deferred Shares)(a)* -- 55,540 Viglen Technology Plc (Entitlement Letters)(a)* -- ------------ -- ------------ TOTAL COMMON STOCKS (COST $19) 1 ------------ SHORT-TERM INVESTMENTS -- 10.0% CASH EQUIVALENTS -- 10.0% $ 1,700,000 Societe Generale GC Time Deposit, 1.81%, due 9/03/02 1,700,000 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $1,700,000) 1,700,000 ------------ TOTAL INVESTMENTS -- 110.3% (Cost $19,889,523) 18,747,758 Other Assets and Liabilities (net) -- (10.3%) (1,745,068) ------------ TOTAL NET ASSETS -- 100.0% $ 17,002,690 ============
NOTES TO SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). See accompanying notes to the financial statements. 1 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $19,889,523) (Note 1) $18,747,758 Cash 29,181 Foreign currency, at value (cost $169,066) (Note 1) 172,633 Interest receivable 86 Foreign taxes receivable 7,387 Receivable for open forward foreign currency contracts (Notes 1 and 6) 27,510,329 Receivable for expenses reimbursed by Manager (Note 2) 20,224 ----------- Total assets 46,487,598 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 7,719 Shareholder service fee 2,144 Payable for open forward foreign currency contracts (Notes 1 and 6) 29,427,368 Accrued expenses 47,677 ----------- Total liabilities 29,484,908 ----------- NET ASSETS $17,002,690 =========== NET ASSETS CONSIST OF: Paid-in capital $25,525,316 Accumulated undistributed net investment income 310,263 Accumulated net realized loss (5,783,772) Net unrealized depreciation (3,049,117) ----------- $17,002,690 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $17,002,690 =========== SHARES OUTSTANDING: Class III 2,710,453 =========== NET ASSET VALUE PER SHARE: Class III $ 6.27 ===========
2 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 82,979 Dividends (net of withholding taxes of $1,212) 64,543 Interest 10,648 ---------- Total income 158,170 ---------- EXPENSES: Management fee (Note 2) 67,676 Custodian fees 36,800 Audit fees 17,664 Transfer agent fees 13,892 Registration fees 1,564 Legal fees 718 Trustees fees (Note 2) 294 Miscellaneous 1,752 Fees reimbursed by Manager (Note 2) (72,312) ---------- 68,048 Indirectly incurred fees reimbursed by Manager (Note 2) (66,577) ---------- 1,471 ---------- Shareholder service fee (Note 2) - Class III 18,799 Shareholder service fee reimbursed (Note 2) - Class III (12,516) ---------- 6,283 ---------- Net expenses 7,754 ---------- Net investment income 150,416 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on: Investments (451,778) Foreign currency, forward contracts and foreign currency related transactions (1,221,656) ---------- Net realized loss (1,673,434) ---------- Change in net unrealized appreciation (depreciation) on: Investments 2,492,204 Foreign currency, forward contracts and foreign currency related transactions (1,593,674) ---------- Net unrealized gain 898,530 ---------- Net realized and unrealized loss (774,904) ---------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (624,488) ==========
See accompanying notes to the financial statements. 3 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 150,416 $ 3,187,114 Net realized loss (1,673,434) (3,898,941) Change in net unrealized appreciation (depreciation) 898,530 (154,340) ------------ ------------ Net decrease in net assets from operations (624,488) (866,167) ------------ ------------ Distributions to shareholders from: Net investment income Class III (1,412,055) (6,827,386) Class IV -- (325,033) ------------ ------------ Total distributions from net investment income (1,412,055) (7,152,419) ------------ ------------ Net realized gains Class III -- (187,380) Class IV -- (247,025) ------------ ------------ Total distributions from net realized gains -- (434,405) ------------ ------------ (1,412,055) (7,586,824) ------------ ------------ Net share transactions: (Note 5) Class III (18,542,231) (2,273,739) Class IV -- (61,034,872) ------------ ------------ Decrease in net assets resulting from net share transactions (18,542,231) (63,308,611) ------------ ------------ Total decrease in net assets (20,578,774) (71,761,602) NET ASSETS: Beginning of period 37,581,464 109,343,066 ------------ ------------ End of period (including accumulated undistributed net investment income of $310,263 and $1,571,902, respectively) $ 17,002,690 $ 37,581,464 ============ ============
4 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ---------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.14 $ 9.25 $ 10.04 $ 9.28 $ 11.92 $ 12.68 ------- ------- ------- ------- ------- -------- Income from investment operations: Net investment income 0.04+(d) 0.46+(d) 0.23+ 0.23+ 0.23+ 0.27+ Net realized and unrealized gain (loss) (0.64) (1.00) 1.34 1.26 (0.36)(b) 1.72 ------- ------- ------- ------- ------- -------- Total from investment operations (0.60) (0.54) 1.57 1.49 (0.13) 1.99 ------- ------- ------- ------- ------- -------- Less distributions to shareholders: From net investment income (0.27) (1.53) (0.21) (0.42) (0.29) (0.27) From net realized gains -- (0.04) (2.15) (0.31) (2.22) (2.48) ------- ------- ------- ------- ------- -------- Total distributions (0.27) (1.57) (2.36) (0.73) (2.51) (2.75) ------- ------- ------- ------- ------- -------- NET ASSET VALUE, END OF PERIOD $ 6.27 $ 7.14 $ 9.25 $ 10.04 $ 9.28 $ 11.92 ======= ======= ======= ======= ======= ======== TOTAL RETURN(a) (8.92)%** (5.38)% 16.69% 15.86% (1.84)% 17.98% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $17,003 $37,581 $49,332 $75,054 $97,450 $207,653 Net expenses to average daily net assets 0.06%* 0.31%(c) 0.69% 0.69% 0.69% 0.69% Net investment income to average daily net assets 1.20%*(d) 5.33%(d) 2.23% 2.25% 2.07% 2.15% Portfolio turnover rate 4% 120% 39% 68% 68% 96% Fees and expenses reimbursed by the Manager to average daily net assets: 1.21%* 0.79% 0.38% 0.33% 0.42% 0.38%
* Annualized. ** Not Annualized. + Computed using average shares outstanding throughout the period. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investmensts for the year ended February 28, 1999 due to timing purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund. (c) On July 3, 2001, the Fund began to invest a substantial portion of its assets in other funds of GMO Trust and revised its reimbursement. Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (d) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. See accompanying notes to the financial statements. 5 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Currency Hedged International Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers and through management of the Fund's foreign currency positions. On July 3, 2001, the Fund began to invest a substantial portion of its assets in other Funds of the Trust ("underlying funds"). The Fund's benchmark is the MSCI EAFE Index (Hedged). At August 31, 2002, 81.4% of the Fund was invested in GMO International Intrinsic Value Fund and 18.9% of the Fund was invested in GMO International Growth Fund, separate funds of GMO Trust managed by GMO. GMO International Intrinsic Value Fund and GMO International Growth Fund invest primarily in equity securities of developed countries in Asia and Europe. The financial statements of GMO International Intrinsic Value Fund and GMO International Growth Fund should be read in conjunction with the Fund's financial statements. Until July 19, 2001, the Fund had two classes of shares outstanding: Class III and Class IV. Effective July 19, 2001, Class IV shares ceased operations. The principal economic difference between the classes of shares was the level of shareholder service fee borne by the classes. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds and other mutual funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent 6 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's or the underlying funds' portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the 7 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is 8 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, there were no outstanding futures contracts. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. At August 31, 2002, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund did not have any securities on loan. 9 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $3,271,105 expiring in 2010. The Fund has elected to defer to March 1, 2002 post-October capital losses of $639,795. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, 10 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. As described in Note 1, effective July 3, 2001, the Fund began investing in Class III shares of certain underlying funds. Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of the underlying funds. For the six months ended August 31, 2002, shareholder service fees incurred indirectly by the Class III shares of the Fund were .10% of Class III's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and expenses (excluding shareholder service fees and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds exceed the management fee. Because GMO will not reimburse expenses incurred indirectly by the Fund to the extent they exceed .54%, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds may exceed .54% of the Fund's average daily net assets. For the six months ended August 31, 2002, indirect operating expenses (excluding 11 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- shareholder service fees and fund expenses, as defined above) and indirect investment expenses incurred by Class III shares of the Fund were .532% and .001% of Class III's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $294. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $1,082,979 and $23,000,000, respectively. At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $19,889,523 $ -- $(1,141,765) $(1,141,765)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 66.7% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the Fund. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 12 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 160,235 $ 1,039,000 85,017 $ 776,898 Shares issued to shareholders in reinvestment of distributions 189,880 1,365,235 1,237,611 11,675,143 Shares repurchased (2,904,988) (20,946,466) (3,462,680) (36,181,926) ---------- ------------ ---------- ------------ Net decrease (2,554,873) $(18,542,231) (2,140,052) $(23,729,885) ========== ============ ========== ============ Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount Class IV: ---------- ------------ ---------- ------------ Shares sold -- $ -- -- $ -- Shares issued to shareholders in reinvestment of distributions -- -- 26,251 247,025 Shares repurchased -- -- (6,526,919) (61,281,897) ---------- ------------ ---------- ------------ Net decrease -- $ -- (6,500,668) $(61,034,872) ========== ============ ========== ============
13 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- --------------------------------------------- -------------- ------------ -------------- Buys 10/25/02 AUD 11,543,278 $ 6,330,339 $ 193,111 10/25/02 CAD 12,813,776 8,199,557 76,278 9/27/02 CHF 19,338,889 12,896,207 1,130,533 9/27/02 DKK 47,139,635 6,219,502 669,517 9/27/02 EUR 101,032,366 98,986,527 10,222,257 9/27/02 GBP 31,112,727 48,063,285 3,921,046 10/25/02 HKD 175,102,510 22,451,523 16,886 10/25/02 JPY 5,533,070,904 46,790,941 3,681,435 9/27/02 NOK 194,537,364 25,741,318 4,074,994 10/25/02 NZD 16,025,052 7,449,158 428,583 9/27/02 SEK 294,522,783 31,324,778 3,030,587 10/25/02 SGD 3,346,630 1,915,111 65,102 ------------ $ 27,510,329 ============ Sales 10/25/02 AUD 12,035,037 $ 6,600,020 $ (199,646) 10/25/02 CAD 13,330,659 8,530,311 (80,498) 9/27/02 CHF 20,855,043 13,907,260 (1,326,172) 9/27/02 DKK 50,000,224 6,596,922 (708,248) 9/27/02 EUR 107,077,007 104,908,767 (10,990,106) 9/27/02 GBP 33,777,958 52,180,565 (4,464,918) 10/25/02 HKD 177,351,266 22,739,857 (19,549) 10/25/02 JPY 5,893,853,555 49,841,934 (3,953,945) 9/27/02 NOK 197,097,886 26,080,128 (4,209,969) 10/25/02 NZD 15,654,033 7,276,691 (421,704) 9/27/02 SEK 297,066,194 31,595,290 (2,999,230) 10/25/02 SGD 2,867,814 1,641,108 (53,383) ------------ $(29,427,368) ============
CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar
14 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 92.9% AUSTRALIA -- 6.3% 92,141 Australia and New Zealand Banking Group Ltd 962,331 120,857 Australian Gas Light Co Ltd 665,741 84,845 Boral Ltd 200,969 20,835 CSL Ltd 263,970 85,180 CSR Ltd 308,274 196,867 Insurance Australia Group Ltd 347,021 58,044 Lend Lease Corp Ltd 352,348 443,161 Lihir Gold Ltd* 297,821 24,101 Macquarie Bank Ltd 322,608 64,644 National Australia Bank Ltd 1,233,857 169,907 National Mutual Holdings 240,535 70,999 Orica Ltd 375,845 275,227 Qantas Airways Ltd 633,725 18,483 Rio Tinto Ltd 334,254 95,651 Santos Ltd 338,793 45,421 Suncorp-Metway Ltd 313,753 171,455 Telstra Corp Ltd 459,007 31,054 Wesfarmers Ltd 508,051 76,834 Westfield Holdings Ltd 568,835 86,303 Westpac Banking Corp 718,805 132,358 Woodside Petroleum Ltd 951,468 78,179 Woolworths Ltd 516,779 ------------- 10,914,790 ------------- AUSTRIA -- 1.2% 2,645 Bau Holdings AG 99,348 2,241 Brau Union AG 109,865 7,260 Erste Bank Der Oesterreichischen Sparkassen AG 486,430 6,062 Mayr-Melnhof Karton AG (Bearer) 377,508 4,652 Oesterreichische Brau Beteiligungs AG 240,429 6,164 OMV AG 550,098 16,870 Wienerberger Baustoffindustrie AG 253,791 ------------- 2,117,469 ------------- BELGIUM -- 1.8% 10,239 Almanij NV 395,129 89,222 Dexia 1,177,750 41,138 Fortis B 733,858
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- BELGIUM -- CONTINUED 7,881 Groupe Bruxelles Lambert SA 348,882 17,607 UCB SA 502,648 ------------- 3,158,267 ------------- CANADA -- 5.1% 29,500 Bank of Nova Scotia 888,782 12,100 Biovail Corp* 328,872 33,100 Canadian Natural Resources 1,096,968 64,400 CGI Group Inc* 259,664 13,200 Cognos Inc* 239,715 15,000 EnCana Corp 440,192 10,300 Imperial Oil Ltd 290,909 31,900 Investors Group Inc 531,667 9,900 Loblaw Cos Ltd 379,754 15,900 Magna International Inc 1,008,223 19,800 MDS Inc 311,596 21,000 Molson Inc 399,135 22,200 Onex Corp 287,035 45,400 Rogers Communications Inc* 378,333 29,200 Royal Group Technologies Ltd* 372,862 11,800 Saputo Inc 204,004 12,800 Shell Canada Ltd 408,205 10,200 Sobeys Inc 258,269 6,000 Talisman Energy Inc 249,115 4,900 Weston (George) Ltd 360,778 ------------- 8,694,078 ------------- DENMARK -- 0.4% 14,600 Danske Bank A/S 256,463 15,750 Tele Danmark A/S Class B 423,317 ------------- 679,780 ------------- FINLAND -- 3.0% 355,550 Nokia Oyj 4,749,129 61,300 Sampo Oyj 430,437 ------------- 5,179,566 -------------
See accompanying notes to the financial statements. 2 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FRANCE -- 2.8% 15,776 BNP Paribas 735,826 6,747 L'Oreal SA 486,664 8,328 Renault SA 402,646 25,819 Sanofi-Synthelabo SA 1,548,360 10,112 Societe Generale Class A 599,473 7,752 Total Fina Elf SA 1,105,387 ------------- 4,878,356 ------------- GERMANY -- 8.0% 5,700 Adidas Salomon AG 406,392 2,700 Allianz AG 343,961 11,400 Altana AG 561,235 21,400 BASF AG 884,601 27,100 DaimlerChrysler AG 1,166,729 13,400 Deutsche Bank AG 825,279 7,800 Deutsche Boerse AG 301,006 63,800 E. On AG 3,272,341 44,000 Infineon Technologies AG* 505,727 1,100 Munich Reinsurance AG 196,876 8,300 SAP AG 643,045 13,300 Schering AG 736,947 61,000 Siemens AG 2,883,454 33,900 T-Online International* 287,576 17,600 Volkswagen AG 806,057 ------------- 13,821,226 ------------- GREECE -- 0.2% 18,685 National Bank of Greece SA 345,598 ------------- HONG KONG -- 1.4% 142,000 Bank of East Asia 270,348 115,500 CLP Holdings Ltd 464,965 302,500 Hong Kong Electric Holdings Ltd 1,178,982 45,600 Kowloon Motor Bus Holdings Ltd 222,740 1,424,000 Pacific Century CyberWorks Ltd* 253,766 ------------- 2,390,801 ------------- IRELAND -- 2.7% 115,133 Allied Irish Banks Plc 1,490,424
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- IRELAND -- CONTINUED 191,896 Bank of Ireland 2,243,253 30,994 CRH Plc 442,259 21,888 Irish Life & Permanent Plc 283,345 42,766 Ryanair Holdings Plc* 248,288 ------------- 4,707,569 ------------- ITALY -- 2.0% 62,797 Autostrade Concessioni e Costruzioni Autostrade SPA 538,253 310,115 Banca Intesa SPA 757,283 46,427 Enel SPA 235,850 70,670 ENI-Ente Nazionale Idrocarburi SPA 1,070,086 445,982 Olivetti and Co SPA* 490,297 22,086 Olivetti SPA 332,477 ------------- 3,424,246 ------------- JAPAN -- 17.9% 7,200 Acom Co Ltd 424,476 144,000 Bridgestone Corp 1,852,149 26,000 Chubu Electric Power Co Inc 486,822 26,000 Daiichi Pharmaceuticals Co Ltd 419,938 65 East Japan Railway Co 312,487 15,000 Eisai Co Ltd 389,660 21,300 FamilyMart 513,794 10,300 Fanuc Ltd 468,241 77,000 Fuji Heavy Industries Ltd 304,584 10,000 Fuji Photo Film Co Ltd 305,318 18,000 Fujisawa Pharmaceutical Co Ltd 382,575 50,000 Honda Motor Co Ltd 2,116,982 7,000 Ito-Yokado Co Ltd 298,149 131 Japan Telecom Co Ltd 387,813 42 Japan Tobacco Inc 285,160 18,000 Jusco Co Ltd 469,110 3,200 Keyence Corp 558,411 8,000 Matsushita Communication IND 276,641 104,000 Mitsubishi Electric Corp* 359,634 29,000 Mitsubishi Pharma Corp 250,217 7,400 Nidec Corp 405,685 4,000 Nintendo Co Ltd 483,785 68,000 Nippon Express Co Ltd 316,012
4 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- JAPAN -- CONTINUED 181 Nippon Telegraph & Telephone Corp 711,390 7,000 Nitto Denko Corp 185,974 291 NTT Docomo Inc 618,496 19,000 Ono Pharmaceutical Co Ltd 698,688 5,400 ORIX Corp 383,941 11,000 Rohm Co Ltd 1,501,118 44,000 Sankyo Co Ltd 594,138 4,200 Shimamura Co Ltd 289,057 5,800 SMC Corp 580,171 65,700 Sony Corp 2,864,834 32,000 Suzuki Motor Corp 345,464 41,000 Taisho Pharmaceutical Co Ltd 658,407 58,000 Takeda Chemical Industries Ltd 2,450,808 8,500 Takefuji Corp 579,977 19,600 TDK Corp 895,981 25,300 Terumo Corp 365,742 20,900 Tohoku Electric Power Co Inc 298,433 14,900 Tokyo Electric Power 307,262 19,700 Tokyo Electron Ltd 908,860 35,000 Toppan Printing Co Ltd 314,680 66,100 Toyota Motor Corp 1,636,263 9,900 Uni-Charm Corp 367,393 43,000 Yamanouchi Pharmaceutical Co Ltd 1,010,037 13,000 Yamato Transport Co Ltd 220,934 ------------- 30,855,691 ------------- NETHERLANDS -- 2.9% 24,073 ASML Holding NV* 246,236 26,399 ING Groep NV 576,300 189,817 Koninklijke Philips Electronics NV 3,797,532 19,842 Numico NV 390,543 ------------- 5,010,611 ------------- NEW ZEALAND -- 0.5% 346,936 Telecom Corp of New Zealand 820,782 ------------- NORWAY -- 0.2% 33,800 Tandberg ASA* 401,612 -------------
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PORTUGAL -- 0.2% 50,089 Portugal Telecom SA 323,716 ------------- SINGAPORE -- 2.2% 320,000 Chartered Semiconductor Manufacturing Ltd* 384,033 97,000 DBS Group Holdings Ltd 659,657 73,000 Singapore Airlines Ltd (Registered) 483,927 83,000 Singapore Press Holdings Ltd 929,680 54,000 United Overseas Bank 407,349 126,000 Venture Manufacturing Singapore Ltd 928,880 ------------- 3,793,526 ------------- SPAIN -- 3.1% 107,901 Endesa SA 1,280,404 21,932 FENOSA SA 271,440 35,386 Gas Natural SDG SA 640,618 140,436 Repsol SA 1,831,750 32,030 Tabacalera SA Class A 722,158 32,497 Telefonica de Espana SA* 297,983 65,567 Terra Networks SA* 346,585 ------------- 5,390,938 ------------- SWEDEN -- 2.4% 75,400 Hennes & Mauritz AB 1,385,527 15,000 Securitas AB 233,291 98,000 Skandinaviska Enskilda Banken Class A 908,239 19,900 Svenska Handelsbanken Class A 276,642 153,500 Swedish Match AB 1,242,730 ------------- 4,046,429 ------------- SWITZERLAND -- 7.3% 9,800 Adecco SA 428,401 588 Givaudan 246,461 11,771 Logitech International SA* 385,922 5,293 Nestle SA 1,135,738 16,926 Novartis AG 686,898 9,434 Roche Holding AG (Bearer) 1,122,160 77,973 Roche Holding AG (Genusschein) 5,598,634 4,515 Swiss Reinsurance Co 318,922 7,486 Swisscom AG 1,987,919
6 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- SWITZERLAND -- CONTINUED 6,146 UBS AG* 289,556 3,518 Zurich Financial Services AG 348,131 ------------- 12,548,742 ------------- UNITED KINGDOM -- 21.3% 138,696 Abbey National Plc 1,600,534 26,459 Alliance & Leicester Plc 356,291 13,841 AstraZeneca Plc 390,102 126,685 Barclays Plc 909,296 49,559 BBA Group Plc 167,125 192,868 BG Group Plc 804,047 58,383 BP Amoco Plc 452,015 120,811 British American Tobacco 1,403,488 109,679 BT Group Plc 339,325 100,663 Cable & Wireless 249,924 31,753 Cadbury Schweppes Plc 229,753 285,480 Centrica Plc 830,225 123,762 Chubb Plc 254,625 90,759 Compass Group Plc 461,198 18,603 Diageo Plc 225,036 144,967 Dixons Group Plc (New Shares) 367,769 20,893 Gallaher Group Plc 213,308 141,392 GlaxoSmithKline Plc 2,659,626 56,283 Great Universal Stores Plc 436,192 108,314 Hays Plc 224,099 102,585 HBOS Plc 1,148,906 176,699 Imperial Tobacco Group Plc 2,946,559 276,122 Kingfisher Plc 908,726 259,504 Lattice Group Plc 690,454 254,357 Legal & General Group Plc 482,978 196,599 Lloyds TSB Group Plc 1,700,025 98,055 Morrison Supermarkets 302,225 170,735 National Grid Group Plc 1,192,457 107,585 Next Plc 1,402,948 78,137 Northern Rock Plc 872,682 131,996 Nycomed Amersham Plc 1,161,810 47,124 Ocean Group Plc 537,973 271,612 Rentokil Initial Plc 1,001,023 74,785 Royal Bank of Scotland Group 1,785,018 51,889 Scottish Hydro-Electric Plc 537,790
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 134,031 Scottish Power Plc 762,984 108,383 Smiths Group Plc 1,223,901 163,736 Tesco 535,694 105,009 Tomkins Plc 393,101 23,332 Travis Perkins Plc 371,750 38,832 Unilever Plc 353,808 1,510,909 Vodafone Group Plc 2,419,028 67,358 Wolseley 613,715 111,011 WPP Group Plc 817,401 ------------- 36,736,934 ------------- TOTAL COMMON STOCKS (COST $171,568,947) 160,240,727 ------------- PREFERRED STOCKS -- 0.7% GERMANY -- 0.7% 1,400 Porsche AG 0.83% 653,538 15,800 Volkswagen AG 4.71% 505,139 ------------- 1,158,677 ------------- TOTAL PREFERRED STOCKS (COST $1,128,001) 1,158,677 ------------- SHORT-TERM INVESTMENTS -- 4.9% CASH EQUIVALENTS -- 4.4% $ 7,600,000 Societe Generale GC Time Deposit, 1.81%, due 9/03/02 7,600,000 -------------
See accompanying notes to the financial statements. 8 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- U.S. GOVERNMENT -- 0.5% $ 900,000 U.S. Treasury Bill, 1.61%, due 11/14/02(a) 897,030 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $8,496,713) 8,497,030 ------------- TOTAL INVESTMENTS -- 98.5% (Cost $181,193,661) 169,896,434 Other Assets and Liabilities (net) -- 1.5% 2,639,249 ------------- TOTAL NET ASSETS -- 100.0% $ 172,535,683 ============= NOTES TO SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) All or a portion of this security is held as collateral for open futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 20.3% Consumer Discretionary 18.0 Health Care 14.3 Information Technology 9.3 Industrials 8.4 Consumer Staples 8.2 Utilities 8.1 Energy 5.9 Telecommunication Services 5.6 Materials 1.9 ----- 100.0% =====
10 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $181,193,661) (Note 1) $169,896,434 Cash 85,038 Foreign currency, at value (cost $739,449) (Note 1) 224,224 Dividends and interest receivable 271,601 Foreign taxes receivable 92,632 Receivable for open forward foreign currency contracts (Notes 1 and 6) 4,309,467 Receivable for expenses reimbursed by Manager (Note 2) 29,667 ------------ Total assets 174,909,063 ------------ LIABILITIES: Payable to affiliate for (Note 2): Management fee 73,074 Shareholder service fee 20,299 Payable for open forward foreign currency contracts (Notes 1 and 6) 2,167,589 Payable for variation margin on open futures contracts (Notes 1 and 6) 39,102 Accrued expenses 73,316 ------------ Total liabilities 2,373,380 ------------ NET ASSETS $172,535,683 ============ NET ASSETS CONSIST OF: Paid-in capital $182,569,041 Accumulated undistributed net investment income 1,211,455 Accumulated net realized loss (1,163,814) Net unrealized depreciation (10,080,999) ------------ $172,535,683 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $172,535,683 ============ SHARES OUTSTANDING: Class III 9,203,414 ============ NET ASSET VALUE PER SHARE: Class III $ 18.75 ============
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $235,701) $ 1,684,769 Interest 63,703 ----------- Total income 1,748,472 ----------- EXPENSES: Management fee (Note 2) 343,069 Custodian fees 114,172 Audit fees 20,056 Transfer agent fees 13,800 Legal fees 2,130 Trustees fees (Note 2) 998 Registration fees 920 Miscellaneous 735 Fees reimbursed by Manager (Note 2) (151,708) ----------- 344,172 Shareholder service fee (Note 2) - Class III 95,297 ----------- Net expenses 439,469 ----------- Net investment income 1,309,003 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,580,548) Closed futures contracts 73,510 Foreign currency, forward contracts and foreign currency related transactions 681,609 ----------- Net realized loss (825,429) ----------- Change in net unrealized appreciation (depreciation) on: Investments (8,222,040) Open futures contracts (401,846) Foreign currency, forward contracts and foreign currency related transactions 1,561,626 ----------- Net unrealized loss (7,062,260) ----------- Net realized and unrealized loss (7,887,689) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,578,686) ===========
12 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD FROM NOVEMBER 30, 2001 AUGUST 31, 2002 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 28, 2002 ---------------- ----------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,309,003 $ 52,612 Net realized loss (825,429) (332,890) Change in net unrealized appreciation (depreciation) (7,062,260) (3,018,739) ------------ ----------- Net decrease in net assets from operations (6,578,686) (3,299,017) ------------ ----------- Distributions to shareholders from: Net investment income Class III (155,655) -- ------------ ----------- Total distributions from net investment income (155,655) -- ------------ ----------- Net share transactions: (Note 5) Class III 94,386,058 88,182,983 ------------ ----------- Increase in net assets resulting from net share transactions 94,386,058 88,182,983 ------------ ----------- Total increase in net assets 87,651,717 84,883,966 NET ASSETS: Beginning of period 84,883,966 -- ------------ ----------- End of period (including accumulated undistributed net investment income of $1,211,455 and $58,107, respectively) $172,535,683 $84,883,966 ============ ===========
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM NOVEMBER 30, 2001 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2002 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 28, 2002 ---------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 19.65 $ 20.00 --------- -------- Income from investment operations: Net investment income 0.21(b) 0.01(b) Net realized and unrealized loss (1.09) (0.36) --------- -------- Total from investment operations (0.88) (0.35) --------- -------- Less distributions to shareholders: From net investment income (0.02) -- --------- -------- Total distributions (0.02) -- --------- -------- NET ASSET VALUE, END OF PERIOD $ 18.75 $ 19.65 ========= ======== TOTAL RETURN(a) (4.47)%** (1.75)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 172,536 $ 84,844 Net expenses to average daily net assets 0.69%* 0.69%* Net investment income to average daily net assets 2.06%* 0.36%* Portfolio turnover rate 21% 15% Fees and expenses reimbursed by the Manager to average daily net assets: 0.24%* 0.65%*
* Annualized ** Not annualized. (a) The total return would have been lower had certain expenses not been reimbursed during the period shown. (b) Computed using average shares outstanding throughout the period. 14 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Growth Fund (the "Fund"), which commenced operations on November 30, 2001, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks a high total return through investing primarily in equity securities of non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney PMI Growth EPAC. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign 15 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are offset against the proceeds or amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in 16 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premuims paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund 17 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreements. The Fund earns interest on cash set aside for collateral. At August 31, 2002, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. 18 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distrbutions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. The Fund has elected to defer to March 1, 2002 post-October capital losses of $255,460. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments of domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of the Fund at the annual rate of .15%. 19 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $998. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002 aggregated $120,204,350 and $24,091,567 respectively. At August 31, 2002 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $181,193,661 $4,022,431 $(15,319,658) $(11,297,227)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 56.8% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the outstanding shares of the Fund. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 20 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from November 30, 2001 Six Months Ended (commencement of August 31, 2002 operations) through (Unaudited) February 28, 2002 ----------------------- ---------------------- Shares Amount Shares Amount Class III: --------- ------------ --------- ----------- Shares sold 5,231,530 $101,524,302 4,406,481 $89,877,983 Shares issued to shareholders in reinvestment of distributions 4,988 101,756 -- -- Shares repurchased (353,499) (7,240,000) (86,086) (1,695,000) --------- ------------ --------- ----------- Net increase 4,883,019 $ 94,386,058 4,320,395 $88,182,983 ========= ============ ========= ===========
The Fund was formed with an initial tax-free contribution of securities in-kind, which had a market value of $41,670,412 on the date of contribution. 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- -------------- ----------- -------------- Buys 10/25/02 CAD 1,397,554 $ 894,297 $ (5,703) 9/27/02 CHF 3,389,437 2,260,258 217,996 9/27/02 DKK 38,001,169 5,013,793 218,234 9/27/02 EUR 27,349,647 26,795,835 2,360,753 9/27/02 GBP 2,676,864 4,135,250 240,856 10/25/02 HKD 3,119,888 400,030 30 10/25/02 JPY 796,205,000 6,733,183 241,435
21 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- -------------- ----------- -------------- 9/27/02 NOK 36,390,505 $ 4,815,217 $ 757,954 10/25/02 NZD 598,372 278,150 16,242 9/27/02 SEK 44,019,880 4,681,855 246,754 10/25/02 SGD 882,250 504,868 4,868 ----------- $ 4,299,419 =========== Sales 10/25/02 AUD 6,449,829 $ 3,537,090 $ (95,198) 10/25/02 CAD 13,092,524 8,377,928 (40,573) 9/27/02 DKK 2,549,610 336,390 (37,024) 9/27/02 EUR 8,087,479 7,923,713 (720,175) 9/27/02 GBP 3,505,073 5,414,676 (351,364) 10/25/02 HKD 19,110,610 2,450,349 (1,195) 10/25/02 JPY 1,935,901,300 16,371,134 (733,394) 9/27/02 NOK 4,088,930 541,050 (40,888) 10/25/02 NZD 1,969,088 915,320 (7,594) 9/27/02 SEK 12,988,650 1,381,443 (134,481) 10/25/02 SGD 866,150 495,655 4,345 ----------- $(2,157,541) ===========
CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar
22 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- --------------- -------------------- -------------- -------------- Buys 19 DAX September 2002 $1,734,061 $(251,067) 107 MSCI September 2002 2,264,926 (41,669) 14 S&P Toronto 60 September 2002 667,333 1,365 126 SPI 200 September 2002 5,385,991 (74,419) 2 TSI TOPIX September 2002 158,310 (6,916) --------- $(372,706) ========= Sales 53 FTSE 100 September 2002 $3,476,194 $ (45,379) 15 OMX September 2002 84,469 1,217 --------- $ (44,162) =========
At August 31, 2002 , the Fund had cash and/or securities to cover margin requirements of the relevant broker or exchange. 23 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- COMMON STOCKS -- 94.7% AUSTRALIA -- 4.6% 659,158 Australia and New Zealand Banking Group Ltd 6,884,323 96,719 Australian Gas Light Co Ltd 532,777 671,050 Boral Ltd 1,589,486 450,834 Caltex Australia Ltd* 432,115 341,504 Coca Cola Amatil Ltd 1,190,784 534,184 CSR Ltd 1,933,257 1,655,325 General Property Trust Units 2,507,548 2,251,433 Goodman Fielder Ltd 2,033,931 168,967 Jupiters Ltd 522,153 91,186 Leighton Holdings Ltd 559,058 916,718 National Australia Bank Ltd 17,497,353 1,200 National Australia Bank Ltd ADR 114,888 406,141 Orica Ltd 2,149,976 215,230 PaperlinX Ltd 608,210 1,989,770 Qantas Airways Ltd 4,581,551 831,485 Santos Ltd 2,945,091 803,581 Schroders Property 1,124,338 214,213 St. George Bank Ltd 2,265,585 238,587 Suncorp-Metway Ltd 1,648,078 124,829 TABCORP Holdings Ltd 880,154 1,311,432 Westfield Trust Units 2,362,256 144,243 Westpac Banking Corp 1,201,379 443,671 Woodside Petroleum Ltd 3,189,370 --------------- 58,753,661 --------------- AUSTRIA -- 4.5% 152,804 Austrian Airlines* 1,026,506 17,385 Bau Holdings AG 652,995 153,537 Boehler Uddeholm (Bearer) 6,745,703 79,010 Brau Union AG 3,873,480 10,345 EA-Generali AG 1,488,626 163,176 Erste Bank Der Oesterreichischen Sparkassen AG 10,933,024 86,357 Flughafen Wien AG 2,709,243 53,259 Mayr-Melnhof Karton AG (Bearer) 3,316,675 45,154 Oesterreichische Brau Beteiligungs AG 2,333,689 128,645 OMV AG 11,480,756 176,031 RHI AG* 1,312,015 309,099 Telekom Austria AG* 2,600,884
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- AUSTRIA -- CONTINUED 81,913 VA Technologie AG (Bearer) 1,646,808 219,353 Voest-Alpine Stahl AG 6,333,118 91,276 Wienerberger Baustoffindustrie AG 1,373,150 --------------- 57,826,672 --------------- BELGIUM -- 2.5% 149,631 Almanij NV 5,774,342 23,648 Bekaert SA 1,092,092 36,341 Delhaize-Le Lion 1,087,365 32,885 Electrabel SA 7,617,525 135,425 Fortis B 2,415,837 290,195 Kredietbank NPV 10,490,144 45,210 Solvay Et Cie 3,128,007 --------------- 31,605,312 --------------- CANADA -- 1.8% 149,300 Bank of Montreal 3,579,372 144,300 Bank of Nova Scotia 4,347,500 26,300 Canadian Natural Resources 871,609 79,000 EnCana Corp 2,318,346 47,500 Investors Group Inc 791,667 27,400 Magna International Inc 1,737,441 138,600 National Bank of Canada 2,615,631 14,900 Precision Drilling Corp* 481,671 75,300 Quebecor Inc 831,679 91,600 Royal Bank of Canada 3,288,205 26,500 Shell Canada Ltd 845,112 38,000 Talisman Energy Inc 1,577,731 --------------- 23,285,964 --------------- DENMARK -- 0.1% 35,650 Topdanmark A/S* 936,987 --------------- FINLAND -- 1.0% 53,700 Finnair Class A 234,353 431,800 Fortum Oyj 2,447,635 26,776 Instrumentarium Oyj 622,081 121,400 Kesko Oyj 1,308,436 23,400 Metra AB Class A 344,226
2 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- FINLAND -- CONTINUED 43,554 Rautaruukki Oyj 182,386 318,800 Sampo Oyj 2,238,554 271,600 Sonera Oyj* 1,201,275 38,100 Stockmann AB Class A 519,369 18,250 Stockmann AB Class B 252,359 162,500 Stora Enso Oyj 1,794,436 65,100 UPM-Kymmene Oyj 2,074,916 --------------- 13,220,026 --------------- FRANCE -- 5.0% 58,411 Air France 783,641 38,037 Assurances Generales de France (Bearer) 1,495,473 428,453 BNP Paribas 19,983,944 35,533 Bongrain SA 1,567,776 216,024 Cie de Saint-Gobain 6,461,569 76,731 Credit Agricole SA 1,647,977 5,470 Fromageries Bel 627,102 9,988 Imetal 1,303,745 54,979 Michelin SA Class B 1,968,004 25,141 Pernod Ricard 2,198,063 183 Remy Cointreau SA 5,452 49,197 Renault SA 2,378,602 4,557 Skis Rossignol 47,372 88,620 Societe Eurafrance SA 4,058,680 278,267 Societe Generale Class A 16,496,590 15,435 Total Fina Elf SA 2,200,935 --------------- 63,224,925 --------------- GERMANY -- 7.9% 36,200 Adidas Salomon AG 2,580,947 338,535 AGIV AG* 697,203 167,700 Bankgesellschaft Berlin AG* 353,596 80,000 BASF AG 3,306,920 1,300 BASF AG ADR 53,625 46,250 Bayer AG 1,097,648 49,100 Bayerische Motoren Werke AG 1,849,051 166,280 Berliner Kraft & Licht AG Class A 2,522,705 142,400 Commerzbank AG 1,551,530 173,556 Continental AG* 2,816,915
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- GERMANY -- CONTINUED 732,650 DaimlerChrysler AG 31,542,583 56,830 Degussa AG 1,688,715 42,800 Douglas Holdings AG 986,388 404,740 E. On AG 20,759,361 12,700 Gehe AG 557,979 59,297 Heidelberg Port-Zement 2,593,605 31,100 Linde AG 1,296,240 77,650 MAN AG 1,553,488 110,850 RWE AG 4,060,341 84,600 Schwarz Pharma AG 1,252,805 132,000 Siemens AG 6,239,606 49,723 Sudzucker AG 824,101 417,908 Thyssen Krupp AG 5,491,888 111,400 Volkswagen AG 5,101,974 --------------- 100,779,214 --------------- HONG KONG -- 2.6% 661,000 Cathay Pacific Airways 1,025,404 457,000 Cheung Kong Infrastructure Holdings Ltd 796,826 1,310,122 Chinese Estates Holdings Ltd* 136,052 1,297,098 CLP Holdings Ltd 5,221,684 623,409 Great Eagle Holdings Ltd 555,477 170,000 Guoco Group 967,699 2,153,511 Hang Lung Development Co Ltd 1,946,455 759,815 Henderson Land Development Co Ltd 2,488,897 1,083,500 Hong Kong Aircraft Engineering Co Ltd 2,708,767 1,903,969 Hong Kong Electric Holdings Ltd 7,420,645 622,700 Hong Kong Ferry Co Ltd 463,036 726,000 Hong Kong Land Holdings 1,009,140 641,362 Jardine Matheson Holdings Ltd 3,719,900 2,089,862 Mandarin Oriental ADR 982,235 468,500 Swire Pacific Ltd Class A 2,120,276 210,961 Wheelock and Co Ltd 148,755 291,200 Yue Yuen Industrial Holdings 910,939 --------------- 32,622,187 --------------- IRELAND -- 1.4% 680,415 Allied Irish Banks Plc 8,808,135 503,363 Bank of Ireland 5,884,285
4 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- IRELAND -- CONTINUED 263,417 Irish Life & Permanent Plc 3,409,996 --------------- 18,102,416 --------------- ITALY -- 2.4% 171,235 Autostrade Concessioni e Costruzioni Autostrade SPA 1,467,710 186,458 Banca Popolare di Bergamo Credit 3,616,958 1,069,100 Banca Popolare di Milano* 4,204,350 822,132 ENI-Ente Nazionale Idrocarburi SPA 12,448,729 134,676 Fiat SPA (Savings Shares) 957,556 588,000 Grassetto SPA(a)* 5,767 258,850 IFIL Finanziaria di Partecipazioni SPA 1,104,266 361,425 IFIL Finanziaria di Partecipazioni SPA (Savings Shares) 1,134,238 118,216 Italcementi SPA 575,035 29,437 Italmobiliare SPA 1,014,741 27,500 Natuzzi SPA ADR 327,800 893,691 Parmalat Finanziaria SPA 2,594,271 115,000 Saipem Spa 704,878 982,472 SMI (Societa Metallurgica Italy) 501,025 --------------- 30,657,324 --------------- JAPAN -- 20.9% 78,200 Acom Co Ltd 4,610,281 159,000 Alps Electric Co Ltd 1,827,833 480,000 Ashikaga Bank Ltd* 534,390 42,600 Autobacs Seven 1,203,644 72,000 Best Denki Co Ltd 224,687 325,000 Bridgestone Corp 4,180,197 489,000 Brother Industries Ltd 2,977,759 88,000 Canon Inc 3,013,368 244,000 Canon Sales Co Inc 1,749,251 704,000 Chiba Bank 2,351,318 240,100 Chubu Electric Power Co Inc 4,495,610 53,000 Chudenko Corp 666,942 192,700 Chugoku Electric Power Co Inc 2,745,079 1,493,000 Cosmo Oil Co Ltd 2,304,382 391,000 Daicel Chemical Industries Ltd 1,104,753 425,000 Daido Steel Co Ltd 745,583 145,000 Daiichi Pharmaceuticals Co Ltd 2,341,964 306,000 Dainippon Printing Co Ltd 3,517,716
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- JAPAN -- CONTINUED 101,000 Daio Paper Corp 726,631 5,079,000 Daiwa Bank Holdings Inc* 3,726,842 931,000 Daiwa House Industry Co Ltd 5,418,041 192,000 Daiwa Kosho Lease Co Ltd 467,996 36,000 Eisai Co Ltd 935,183 271,000 Ezaki Glico Co Ltd 1,483,397 50,500 FamilyMart 1,218,150 401,000 Fuji Heavy Industries Ltd 1,586,210 53,400 Fuji Photo Film Co Ltd 1,630,397 208,000 Fukuyama Transporting Co Ltd 724,531 384,000 General Sekiyu (KK) 2,429,047 155,000 Gunze Ltd 622,275 38,200 Heiwa Corp 708,810 289,000 Hino Motors 716,620 66,300 Hitachi Chemical Co Ltd 566,456 165,000 Hitachi Metals Ltd 477,333 203,300 Hokkaido Electric Power 2,762,335 101,000 Hokuriku Bank* 129,482 300,100 Honda Motor Co Ltd 12,706,127 209,000 House Foods Corp 1,910,817 1,134,000 Itochu Corp 3,031,907 184,000 Itoham Foods Inc 521,435 29,000 Japan Airport Terminal Co Ltd 210,593 2,463,000 Japan Energy Co Ltd 2,949,825 199,000 Japan Securities Finance Co 703,251 674 Japan Tobacco Inc 4,576,140 909,000 Kajima Corp 2,576,005 293,000 Kamigumi Co Ltd 1,351,756 242,000 Kandenko Co 828,676 255,100 Kansai Electric Power 3,980,390 2,117,000 Kawasaki Heavy Industries Ltd* 2,231,898 159,000 Kinden Corp 677,223 159,000 Kissei Pharmaceutical Co Ltd 1,897,567 3,188,000 Kobe Steel Ltd* 1,828,398 106,000 Kokusai Electric 389,795 456,000 Komatsu Ltd 1,549,935 666,000 Kubota Corp 1,909,838 15,900 Kyocera Corp 1,103,673 268,000 Kyushu Electric Power Co Inc 3,955,636 465,000 Maeda Corp 1,321,680
6 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- JAPAN -- CONTINUED 132,000 Maeda Road Construction 488,745 102,000 Makita Corp 600,481 53,000 Maruichi Steel Tube 607,490 466,000 Mazda Motor Corp 1,245,916 155,000 Mitsubishi Corp 1,037,996 731,000 Mitsubishi Material* 1,152,929 1,077,000 Mitsubishi Motors* 2,525,248 1 Mitsubishi Tokyo Finance Group Inc 1,382 396,000 Mitsui Petrochemical Industries Ltd 1,780,188 325,000 Mitsui Trust Holding Inc 742,841 40,000 Mitsumi Electric Co Ltd 553,620 1,183 Mizuho Holding Inc 2,534,323 79,000 Nagase & Co 364,467 63,000 National House Industrial 223,169 125,700 Nichiei Co Ltd (Kyoto) 624,445 643,000 Nippon Express Co Ltd 2,988,175 113,000 Nippon Hodo Co 445,081 812,000 Nippon Light Metal 664,311 474,000 Nippon Oil Co Ltd 2,094,851 845,000 Nippon Shinpan Co 1,346,983 390,000 Nippon Steel Corp 549,319 495,000 Nippon Suisan Kaisha Ltd 872,559 314 Nippon Telegraph & Telephone Corp 1,234,125 1 Nippon Unipac Holding 2,044 597,000 Nishimatsu Construction 1,706,937 350,000 Nissan Motor Co 2,556,404 290,000 Nisshin Oil Mills Ltd 787,585 1,053,000 Nisshin Steel Co Ltd* 479,585 206,000 Nisshinbo Industries Inc 955,594 2,403,000 Nissho Iwai Corp* 1,459,250 6,193,000 NKK Corp* 5,484,460 243,000 Nomura Securities Co Ltd 3,203,382 590,000 Obayashi Corp 1,557,542 389,000 Okumura Corp 1,292,675 122,000 Ono Pharmaceutical Co Ltd 4,486,316 843,000 Onoda Cement Co Ltd 1,592,645 778,000 Orient Corp* 518,382 88,900 Promise Co 4,131,396 32,600 Rinnai Corp 756,125 155,000 Royal Co Ltd 1,205,330
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- JAPAN -- CONTINUED 93,000 Ryosan Co 1,098,132 435,000 Sankyo Co Ltd 5,873,867 242,000 Sanwa Shutter Corp 740,910 346,000 Seino Transportation Co Ltd 2,042,761 895,000 Sekisui Chemical 2,657,108 366,000 Sekisui House Ltd 2,676,355 69,000 Sharp Corp 733,269 294,400 Shikoku Electric Power 4,236,043 562,000 Shimizu Corp 1,720,626 141,000 Shiseido Co Ltd 1,859,942 252,000 Showa Shell Sekiyu 1,530,300 167,600 Sony Corp 7,308,160 236,000 Sumitomo Chemical Co Ltd 943,482 158,000 Sumitomo Forestry Co Ltd 932,822 3,277,000 Sumitomo Metal Industries* 1,354,304 320,000 Sumitomo Realty and Development Co Ltd 1,692,236 366,000 Suzuki Motor Corp 3,951,250 1,253,000 Taisei Corp 2,652,579 223,000 Taisho Pharmaceutical Co Ltd 3,581,091 115,000 Takeda Chemical Industries Ltd 4,859,360 102,890 Takefuji Corp 7,020,454 123,000 Takuma Corp 927,441 39,500 TDK Corp 1,805,676 21,000 Teikoku Oil Co Ltd 83,068 197,000 Toagosei Co Ltd 264,184 528,700 Tohoku Electric Power Co Inc 7,549,354 407,000 Tokyo Electric Co Ltd* 916,535 123,900 Tokyo Electric Power 2,555,016 211,000 Tokyo Ink Manufacturing Co Ltd 594,391 105,600 Tokyo Steel Manufacturing Co 364,276 220,000 Tomen Corp* 155,864 423,000 Toppan Printing Co Ltd 3,803,129 1,360,000 Toshiba Corp* 4,645,553 123,000 Toyo Seikan Kaisha 1,421,246 60,000 Toyo Suisan Kaisha 610,804 155,000 Victor Co of Japan Ltd* 1,000,084 108,000 Wacoal Corp 891,764 76,000 Yamaha Corp 729,456 179,000 Yamazaki Baking Co Ltd 955,653
8 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- JAPAN -- CONTINUED 4,161,000 Yasuda Trust & Banking* 2,035,491 --------------- 266,765,390 --------------- LUXEMBOURG -- 0.1% 98,642 Arcelor* 1,199,554 --------------- MALAYSIA -- 0.0% 511,000 MBF Holdings Berhad(a) 6,724 751,000 Promet Berhad(a)* 1,976 234,000 Saship Holdings(a)* 616 36,540 Silverstone(a)* 96 --------------- 9,412 --------------- NETHERLANDS -- 4.1% 1,008,333 ABN Amro Holdings NV 16,435,056 87,327 Buhrmann NV 625,184 133,435 DSM NV 5,820,640 48,644 European Aeronautic Defense and Space Co 650,221 13,872 Gamma Holdings NV 423,093 151,466 KLM-Royal Dutch Airlines NV 1,705,270 43,435 Koninklijke Philips Electronics NV 868,973 47,757 Koninklijke Volker Wessels 1,030,376 317,439 Koninklijke Wessanen NV 2,322,391 108,759 Numico NV 2,140,665 287,653 OCE NV 2,708,172 2,230,103 Royal KPN NV* 12,225,677 41,677 Unilever NV 2,462,576 1,400 Unilever NV NY Shares 82,838 68,840 VIB NV 1,687,785 25,754 Wereldhave NV 1,275,476 --------------- 52,464,393 --------------- NEW ZEALAND -- 0.7% 544,100 BIL International Ltd (New Zealand Exchange)* 172,572 475,694 Lion Nathan Ltd 1,356,705 2,933,844 Telecom Corp of New Zealand 6,940,897 --------------- 8,470,174 ---------------
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- NORWAY -- 4.1% 88,544 Bergesen D.Y. ASA Class A 1,598,692 39,450 Bergesen D.Y. ASA Class B 628,485 2,369,129 Den Norske Bank Class A 11,983,407 79,010 Elkem AS Class A 1,741,233 361,428 Fred Olsen Energy* 839,704 70,250 Frontline Ltd 443,003 31,800 Gjensidige NOR Sparebank 1,030,110 2,930,504 Kvaerner ASA* 1,960,828 505,800 Merkantildata ASA* 268,600 335,137 Norsk Hydro AS 14,237,672 236,964 Norske Skogindustrier AS Class A 3,429,063 208,054 Orkla ASA 3,673,621 109,750 Smedvig A/S Class A 623,613 972,833 Statoil ASA 8,265,800 235,500 Storebrand* 928,569 284,542 Tandberg Data ASA* 109,550 --------------- 51,761,950 --------------- PORTUGAL -- 0.2% 43,637 Banco Espirito Santo e Commercial de Lisboa (Registered) 483,153 906,967 Electricidade de Portugal SA 1,485,402 99,076 Telecel-Comunicacoes Pessoai 757,878 --------------- 2,726,433 --------------- SINGAPORE -- 2.3% 284,457 BIL International Ltd (Singapore Exchange)* 85,119 90,000 Cerebos Pacific Ltd 96,694 4,197,500 Comfort Group 1,751,107 150,800 Creative Technology Ltd 1,232,357 491,000 DBS Group Holdings Ltd 3,339,086 149,000 Fraser & Neave Ltd 655,656 917,767 Haw Par Brothers International Ltd 2,255,278 1,075,104 Hotel Properties Ltd 632,830 2,109,911 Jardine Strategic Holdings Ltd 5,738,958 1,054,000 Keppel Corp Ltd 2,662,331 400,000 Singapore Airlines Ltd (Registered) 2,651,656 179,000 Singapore Land Ltd 329,388 2,732,000 Singapore Telecom 2,295,077 2,053,201 Straits Trading Co Ltd 1,947,775
10 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SINGAPORE -- CONTINUED 1,499,960 United Industrial Corp Ltd 540,032 375,000 United Overseas Bank 2,828,814 --------------- 29,042,158 --------------- SPAIN -- 2.2% 48,419 Banco Popular Espanol 1,922,648 158,449 Compania Espanola de Petroleos 2,686,709 467,917 Endesa SA 5,552,523 5,800 Endesa SA ADR 68,440 62,053 Gas Natural SDG SA 1,123,390 119,985 Iberdrola SA 1,547,351 1,017,955 Repsol YPF SA 13,277,503 3,200 Repsol YPF SA ADR 41,792 69,308 Tabacalera SA Class A 1,562,638 --------------- 27,782,994 --------------- SWEDEN -- 2.0% 157,900 Electrolux AB 2,716,498 61,000 Foreningssparbanken AB Class A 662,803 369,632 Gambro AB Class A 1,893,954 285,780 Gambro AB Class B 1,461,261 111,900 Mo Och Domsjo AB Class B 2,407,887 354,300 Nordbanken Holdings AB 1,664,426 67,100 Sandvik AB 1,558,238 114,317 SAS AB* 858,528 330,500 Skandinaviska Enskilda Banken Class A 3,062,989 88,200 SKF AB Class B 2,085,817 92,500 Svenska Cellulosa Class B 3,158,090 112,000 Svenska Handelsbanken Class A 1,556,981 37,700 Svenska Kullagerfabriken AB 895,573 89,100 Trelleborg AB Class B 802,027 56,700 Volvo AB Class A 896,942 --------------- 25,682,014 --------------- SWITZERLAND -- 5.2% 220,701 ABB Ltd* 1,205,976 3,584 Banque Cantonale Vaudoise (Bearer)* 326,600 15,522 BK Vision AG (Bearer)* 1,680,822 9,399 Ciba Specialty Chemicals AG 673,303
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SWITZERLAND -- CONTINUED 6,591 Merkur Holding AG (Registered) 1,317,629 31,135 Micronas Semiconductor Hold* 798,786 1,282 Pargesa Holdings SA (Bearer) 2,152,827 12,061 Pharma Vision 2000 AG* 1,022,732 60,725 Roche Holding AG (Bearer) 7,223,145 381,881 Roche Holding AG (Genusschein) 27,419,903 7,715 SIG Holding AG 897,123 2,035 Sika Finanz AG (Bearer) 514,632 12,679 Sulzer Medica AG* 1,865,118 23,000 Swiss Reinsurance Co 1,624,629 57,630 Swisscom AG 15,303,738 21,834 Zurich Financial Services AG 2,160,630 --------------- 66,187,593 --------------- UNITED KINGDOM -- 19.1% 1,539,738 Abbey National Plc 17,768,383 1,200 Abbey National Plc ADR 27,000 301,563 Alliance & Leicester Plc 4,060,776 71,135 Allied Domecq Plc 450,058 840,748 Associated British Food 7,738,291 492,063 AWG Plc* 3,748,773 174,929 BAA PLC 1,501,817 1,638,084 Barclays Plc 11,757,538 225,035 Barratt Development 1,461,178 298,648 Billiton Plc 1,409,035 883,796 Boots Co 7,491,949 409,705 BPB Industries Plc 1,971,033 589,055 British American Tobacco 6,843,181 229,372 British Energy Plc 299,819 511,082 British Energy Plc (Deferred Shares)(a)* -- 3,706,116 BT Group Plc 11,465,982 1,300 BT Group Plc ADR 40,638 1,239,927 BTR Siebe Plc 1,476,893 505,481 Coats Viyella 435,925 431,821 Diageo Plc 5,223,634 1,600 Diageo Plc ADR 77,296 132,195 Gallaher Group Plc 1,349,650 194,365 Great Portland Estates Plc 658,452 800,659 Great Universal Stores Plc 6,205,082 179,792 Hanson Plc 1,098,575
12 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 1,296,413 HBOS Plc 14,519,250 403,310 Imperial Tobacco Group Plc 6,725,429 184,559 Inchcape Plc 2,319,641 1,922,941 Kingfisher Plc 6,328,456 215,470 Ladbroke Group 636,623 341,309 Land Securities 4,213,208 941,568 Lattice Group Plc 2,505,200 1,585,582 Lloyds TSB Group Plc 13,710,799 473,314 Marks & Spencer Group Plc 2,507,680 316,451 National Power* 641,269 139,259 Next Plc 1,815,988 690,699 Northern Foods Plc 1,690,810 520,188 Northern Rock Plc 5,809,781 163,786 Premier Farnell Plc 487,719 526,032 Rank Group Plc 2,160,424 514,033 Rentokil Initial Plc 1,894,463 127,001 Rexam Plc 876,202 170,903 RMC Group 1,386,620 591,233 Rolls-Royce 1,287,269 808,260 Royal & Sun Alliance Insurance Group 1,556,620 241,780 Royal Bank of Scotland Group 5,770,966 819,040 Sainsbury (J) 4,009,969 613,463 Scottish & Newcastle Plc 5,224,057 701,296 Scottish Hydro-Electric Plc 7,268,393 1,461,906 Scottish Power Plc 8,322,034 2,650 Scottish Power Plc ADR 60,341 302,590 Severn Trent Plc 3,143,134 828,004 Six Continents Plc 7,774,695 1,092,180 Somerfield Plc 1,778,192 245,139 Southwest Water 2,571,013 840,619 Stagecoach Holdings Plc 435,618 474,454 Tate & Lyle 2,693,534 864,575 Taylor Woodrow Plc 2,300,347 164,683 Tomkins Plc 616,490 45,173 Transport Development Group Plc 141,503 96,661 Travis Perkins Plc 1,540,106 714,335 United Utilities 6,917,330 723,310 Viglen Technology Plc (Entitlement Letters)(a)* -- 316,054 Whitebread Plc 2,591,191 206,745 Wilson (Connolly) Holdings 534,089
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 601,731 Wimpey (George) 2,659,812 442,349 Wolseley 4,030,348 195,014 WPP Group Plc 1,435,936 524,165 Yorkshire Water 3,141,970 --------------- 242,595,477 --------------- TOTAL COMMON STOCKS (COST $1,347,698,464) 1,205,702,230 --------------- PREFERRED STOCKS -- 0.8% GERMANY -- 0.5% 89,446 RWE AG 4.35% 2,543,871 9,000 Villeroy & Boch AG (Non Voting) 5.78% 89,145 124,950 Volkswagen AG 5.30% 3,994,754 --------------- 6,627,770 --------------- ITALY -- 0.3% 135,802 Fiat SPA 4.95% 982,876 86,700 IFI Istituto Finanziario Industries 4.82% 1,363,828 88,449 Societa Assicuratrice Industriale SPA (SAI) 8.00% 539,535 --------------- 2,886,239 --------------- TOTAL PREFERRED STOCKS (COST $12,406,430) 9,514,009 --------------- RIGHTS AND WARRANTS -- 0.1% FRANCE -- 0.0% 42,538 Cap Gemini SA Warrants, Expires 3/31/03* 834 1,252,228 Eurotunnel SA Paris Warrants, Expires 10/31/03* 24,561 --------------- 25,395 --------------- ITALY -- 0.1% 274,456 Banca Intesa SPA Warrants, Expires 11/15/02* 1,092,786 --------------- UNITED KINGDOM -- 0.0% 2,311,000 Eurotunnel SA Warrants, Expires 10/31/03* 2,681 --------------- TOTAL RIGHTS AND WARRANTS (COST $805,909) 1,120,862 ---------------
See accompanying notes to the financial statements. 14 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 11.9% CASH EQUIVALENTS -- 11.2% 100,787,719 The Boston Global Investment Trust(b) 100,787,719 $ 41,700,000 Wachovia Bank Time Deposit, 1.81%, due 9/03/02 41,700,000 --------------- 142,487,719 --------------- U.S. GOVERNMENT -- 0.7% $ 9,000,000 U.S. Treasury Bill, 1.61%, due 11/14/02(c) 8,970,300 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $151,453,964) 151,458,019 --------------- TOTAL INVESTMENTS -- 107.5% (Cost $1,512,364,767) 1,367,795,120 Other Assets and Liabilities (net) -- (7.5%) (95,148,204) --------------- TOTAL NET ASSETS -- 100.0% $ 1,272,646,916 =============== NOTES TO SCHEDULE OF INVESTMENTS:
ADR - American Depositary Receipt
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Represents investment of security lending collateral (Note 1). (c) All or a portion of this security is held as collateral for open futures contracts (Note 6). See accompanying notes to the financial statements. 15 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Banks 20.8% Consumer Discretionary 14.6 Utilities 10.8 Industrials 10.6 Consumer Staples 8.2 Materials 7.9 Energy 6.5 Health Care 5.4 Diversified Financials 5.3 Telecommunication Services 4.3 Information Technology 2.2 Real Estate 2.1 Insurance 1.3 ----- 100.0% =====
16 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $93,256,338 (cost $1,512,364,767) (Note 1) $1,367,795,120 Cash 72,595 Foreign currency, at value (cost $1,601,512) (Note 1) 1,605,126 Receivable for Fund shares sold 126,471 Dividends and interest receivable 3,809,389 Foreign taxes receivable 1,167,137 Receivable for open forward foreign currency contracts (Notes 1 and 6) 54,025,949 Receivable for expenses reimbursed by Manager (Note 2) 110,112 -------------- Total assets 1,428,711,899 -------------- LIABILITIES: Payable upon return of securities loaned (Note 1) 100,787,719 Payable for Fund shares repurchased 14,583,895 Payable to affiliate for (Note 2): Management fee 589,203 Shareholder service fee 150,421 Payable for open forward foreign currency contracts (Notes 1 and 6) 39,647,196 Payable for variation margin on open futures contracts (Notes 1 and 6) 9,415 Accrued expenses 297,134 -------------- Total liabilities 156,064,983 -------------- NET ASSETS $1,272,646,916 ============== NET ASSETS CONSIST OF: Paid-in capital $1,542,140,190 Accumulated undistributed net investment income 14,717,805 Accumulated net realized loss (151,023,071) Net unrealized depreciation (133,188,008) -------------- $1,272,646,916 ============== NET ASSETS ATTRIBUTABLE TO: Class II shares $ 53,019,827 ============== Class III shares $ 912,381,593 ============== Class IV shares $ 307,245,496 ============== SHARES OUTSTANDING: Class II 2,951,839 ============== Class III 50,531,738 ============== Class IV 17,017,461 ============== NET ASSET VALUE PER SHARE: Class II $ 17.96 ============== Class III $ 18.06 ============== Class IV $ 18.05 ==============
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $3,479,707) $26,013,084 Interest (including securities lending income of $570,919) 1,088,688 ----------- Total income 27,101,772 ----------- EXPENSES: Management fee (Note 2) 3,725,592 Custodian fees 572,332 Audit fees 36,432 Legal fees 30,832 Transfer agent fees 27,140 Trustees fees (Note 2) 12,592 Registration fees 7,636 Miscellaneous 11,406 Fees reimbursed by Manager (Note 2) (684,020) ----------- 3,739,942 Shareholder service fee (Note 2) - Class II 57,536 Shareholder service fee (Note 2) - Class III 761,776 Shareholder service fee (Note 2) - Class IV 140,329 ----------- Net expenses 4,699,583 ----------- Net investment income 22,402,189 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (19,769,940) Closed futures contracts (3,736,850) Foreign currency, forward contracts and foreign currency related transactions 2,361,205 ----------- Net realized loss (21,145,585) ----------- Change in net unrealized appreciation (depreciation) on: Investments 39,068,277 Open futures contracts (2,896,060) Foreign currency, forward contracts and foreign currency related transactions 13,028,621 ----------- Net unrealized gain 49,200,838 ----------- Net realized and unrealized gain 28,055,253 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $50,457,442 ===========
18 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 22,402,189 $ 32,221,106 Net realized loss (21,145,585) (103,502,172) Change in net unrealized appreciation (depreciation) 49,200,838 (84,795,934) -------------- -------------- Net increase (decrease) in net assets from operations 50,457,442 (156,077,000) -------------- -------------- Distributions to shareholders from: Net investment income Class II (278,869) (1,302,950) Class III (5,303,073) (45,392,797) Class IV (1,925,757) (9,503,029) -------------- -------------- Total distributions from net investment income (7,507,699) (56,198,776) -------------- -------------- (7,507,699) (56,198,776) -------------- -------------- Net share transactions: (Note 5) Class II 10,147,695 29,909,052 Class III (180,588,419) (50,856,645) Class IV 55,959,432 125,957,168 -------------- -------------- Increase (decrease) in net assets resulting from net share transactions (114,481,292) 105,009,575 -------------- -------------- Total decrease in net assets (71,531,549) (107,266,201) NET ASSETS: Beginning of period 1,344,178,465 1,451,444,666 -------------- -------------- End of period (including accumulated undistributed net investment income of $14,717,805 and overdistributed net investment income of $176,685, respectively) $1,272,646,916 $1,344,178,465 ============== ==============
See accompanying notes to the financial statements. 19 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.41 $ 20.30 $ 20.85 $ 20.33 $ 23.16 $ 24.36 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income(b) 0.30 0.28 0.40 0.41 0.39 0.52 Net realized and unrealized gain (loss) 0.35 (2.44) 1.11 1.33 (0.46) 1.94 ------- ------- ------- ------- ------- ------- Total from investment operations 0.65 (2.16) 1.51 1.74 (0.07) 2.46 ------- ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.10) (0.73) (0.22) (0.56) (0.48) (0.74) From net realized gains -- -- (1.84) (0.66) (2.28) (2.92) ------- ------- ------- ------- ------- ------- Total distributions (0.10) (0.73) (2.06) (1.22) (2.76) (3.66) ------- ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 17.96 $ 17.41 $ 20.30 $ 20.85 $ 20.33 $ 23.16 ======= ======= ======= ======= ======= ======= TOTAL RETURN(a) 3.70%** (10.71)% 7.25% 8.09% (0.76)% 11.60% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $53,020 $42,495 $15,284 $21,162 $18,295 $12,500 Net expenses to average daily net assets 0.76%* 0.76% 0.76% 0.76% 0.76% 0.76% Net investment income to average daily net assets 3.14%* 1.56% 1.88% 1.84% 1.71% 2.14% Portfolio turnover rate 18% 51% 31% 53% 60% 68% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10%* 0.10% 0.08% 0.09% 0.28% 0.30%
* Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. 20 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.50 $ 20.37 $ 20.91 $ 20.38 $ 23.20 $ 24.37 -------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income(b) 0.31 0.44 0.44 0.47 0.42 0.54 Net realized and unrealized gain (loss) 0.35 (2.59) 1.09 1.28 (0.47) 1.96 -------- ---------- ---------- ---------- ---------- ---------- Total from investment operations 0.66 (2.15) 1.53 1.75 (0.05) 2.50 -------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.10) (0.72) (0.23) (0.56) (0.49) (0.75) From net realized gains -- -- (1.84) (0.66) (2.28) (2.92) -------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.10) (0.72) (2.07) (1.22) (2.77) (3.67) -------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 18.06 $ 17.50 $ 20.37 $ 20.91 $ 20.38 $ 23.20 ======== ========== ========== ========== ========== ========== TOTAL RETURN(a) 3.74%** (10.60)% 7.32% 8.20% (0.68)% 11.71% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $912,382 $1,053,104 $1,280,603 $1,799,929 $1,998,447 $3,046,510 Net expenses to average daily net assets 0.69%* 0.69% 0.69% 0.69% 0.69% 0.69% Net investment income to average daily net assets 3.26%* 2.37% 2.07% 2.09% 1.84% 2.19% Portfolio turnover rate 18% 51% 31% 53% 60% 68% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10%* 0.10% 0.08% 0.09% 0.28% 0.30%
* Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 21 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998+ ---------------- ----------- ----------- ----------- ----------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.50 $ 20.37 $ 20.90 $ 20.37 $ 23.19 $ 20.61 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income(b) 0.31 0.36 0.50 0.55 0.42 0.02 Net realized and unrealized gain (loss) 0.35 (2.49) 1.05 1.21 (0.46) 2.56 -------- -------- -------- -------- -------- -------- Total from investment operations 0.66 (2.13) 1.55 1.76 (0.04) 2.58 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.11) (0.74) (0.24) (0.57) (0.50) -- From net realized gains -- -- (1.84) (0.66) (2.28) -- -------- -------- -------- -------- -------- -------- Total distributions (0.11) (0.74) (2.08) (1.23) (2.78) -- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 18.05 $ 17.50 $ 20.37 $ 20.90 $ 20.37 $ 23.19 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) 3.71%** (10.52)% 7.45% 8.18% (0.60)% 12.52%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $307,245 $248,579 $155,558 $291,894 $567,219 $682,952 Net expenses to average daily net assets 0.63%* 0.63% 0.63% 0.63% 0.63% 0.63%* Net investment income to average daily net assets 3.23%* 1.97% 2.34% 2.47% 1.85% 0.68%* Portfolio turnover rate 18% 51% 31% 53% 60% 68% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10%* 0.10% 0.08% 0.09% 0.28% 0.30%
+ Period from January 9, 1998 (commencement of operations) to February 28, 1998. * Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. 22 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the SSB PMI Value EPAC Index. Throughout the six months ended August 31, 2002, the Fund had three classes of shares outstanding: Class II, Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully described in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Shares of mutual funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their 23 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the 24 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. 25 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. At August 31, 2002, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $93,256,338 collateralized by cash in the amount of $100,787,719 which was invested in a short-term instrument. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. 26 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $63,430,844 expiring in 2010. The Fund has elected to defer to March 1, 2002 post-October capital losses of $51,410,334. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. 27 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, and .09% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $12,592. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $237,122,943. and $347,922,317, respectively. At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,511,802,676 $69,559,072 $(214,128,719) $(144,569,647)
28 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDER At August 31, 2002, 11.5% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class II: ----------- ------------- ----------- ------------- Shares sold 1,294,673 $ 24,927,847 1,624,477 $ 28,823,075 Shares issued to shareholders in reinvestment of distributions 11,899 231,662 68,492 1,192,782 Shares repurchased (795,139) (15,011,814) (5,596) (106,805) ----------- ------------- ----------- ------------- Net increase 511,433 $ 10,147,695 1,687,373 $ 29,909,052 =========== ============= =========== =============
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 4,512,941 $ 86,231,272 9,555,643 $ 172,725,472 Shares issued to shareholders in reinvestment of distributions 197,833 3,871,598 1,736,570 31,031,226 Shares repurchased (14,364,750) (270,691,289) (13,971,133) (254,613,343) ----------- ------------- ----------- ------------- Net decrease (9,653,976) $(180,588,419) (2,678,920) $ (50,856,645) =========== ============= =========== =============
29 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - --------------------------------------------------------------------------------
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class IV: ----------- ------------- ----------- ------------- Shares sold 5,622,895 $ 107,896,315 7,356,392 $ 140,727,918 Shares issued to shareholders in reinvestment of distributions 82,428 1,613,117 387,104 6,911,650 Shares repurchased (2,895,714) (53,550,000) (1,170,451) (21,682,400) ----------- ------------- ----------- ------------- Net increase 2,809,609 $ 55,959,432 6,573,045 $ 125,957,168 =========== ============= =========== =============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- --------------- ------------ -------------- Buys 10/25/02 AUD 26,367,169 $ 14,459,769 $ 433,589 10/25/02 CAD 33,675,899 21,549,265 208,437 9/27/02 CHF 59,073,265 39,393,218 3,770,801 9/27/02 DKK 528,021,536 69,666,027 7,501,120 9/27/02 EUR 253,968,473 248,825,777 23,360,760 9/27/02 GBP 38,521,871 59,509,013 3,996,242 10/25/02 HKD 273,439,950 35,060,281 26,274 10/25/02 JPY 8,126,172,780 68,719,754 1,891,836 9/27/02 NOK 375,398,703 49,673,015 5,693,637 10/25/02 NZD 31,837,754 14,799,605 859,766 9/27/02 SEK 605,580,700 64,408,196 6,182,249 10/25/02 SGD 5,252,190 3,005,568 101,238 ------------ $ 54,025,949 ============
30 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- --------------- ------------ -------------- Sales 10/25/02 AUD 47,106,771 $ 25,833,377 $ (540,342) 10/25/02 CAD 57,695,049 36,919,161 (251,582) 9/27/02 CHF 50,263,060 33,518,102 (2,690,043) 9/27/02 DKK 120,529,930 15,902,460 (650,497) 9/27/02 EUR 147,204,920 144,224,116 (10,215,691) 9/27/02 GBP 35,020,278 54,099,714 (3,708,181) 10/25/02 HKD 521,995,878 66,929,949 (51,123) 10/25/02 JPY 17,927,974,913 151,609,628 (12,115,251) 9/27/02 NOK 348,849,355 46,159,987 (6,742,947) 10/25/02 NZD 47,090,887 21,889,940 (660,229) 9/27/02 SEK 333,985,036 35,521,894 (1,736,565) 10/25/02 SGD 24,819,240 14,202,822 (284,745) ------------ $(39,647,196) ============
CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar
FUTURES CONTRACTS
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) --------- ------------ ----------------- -------------- -------------- Buys 20 DAX September 2002 $ 1,825,328 $ (331,327) 470 FTSE 100 September 2002 30,826,623 (1,486,715) 482 MSCI September 2002 10,202,749 (187,704) 147 SPI 200 September 2002 6,283,656 (216,252)
31 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS -- CONTINUED
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) --------- ------------ ----------------- -------------- -------------- 58 HANG SENG September 2002 3,732,473 (72,724) 238 TSE TOPIX September 2002 18,838,864 (2,338,342) ----------- $(4,633,064) =========== Sales 1,006 CAC40 September 2002 $33,297,217 $ 1,486,726 ----------- $ 1,486,726 ===========
At August 31, 2002 , the Fund had cash and/or securities to cover margin requirements of the relevant broker or exchange. 32 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- COMMON STOCKS -- 94.3% AUSTRALIA -- 4.3% 35,457 Australia and New Zealand Banking Group Ltd 370,317 40,507 Boral Ltd 95,947 4,182 Commonwealth Bank of Australia 71,114 44,017 CSR Ltd 159,301 62,539 Foster's Group Ltd 170,526 146,306 General Property Trust Units 221,630 69,989 Goodman Fielder Ltd 63,228 54,765 National Australia Bank Ltd 1,045,297 22,203 Orica Ltd 117,535 7,070 Patrick Corp Ltd 62,195 119,843 Qantas Airways Ltd 275,945 46,890 Santos Ltd 166,083 110,100 Schroders Property 154,047 10,407 St. George Bank Ltd 110,068 9,680 TABCORP Holdings Ltd 68,253 148,269 Westfield Trust Units 267,074 8,820 Westpac Banking Corp 73,460 31,355 Woodside Petroleum Ltd 225,398 ----------- 3,717,418 ----------- AUSTRIA -- 3.3% 7,208 Austrian Airlines* 48,422 658 Bau Holdings AG 24,715 2,793 Boehler Uddeholm (Bearer) 122,711 1,166 Brau Union AG 57,163 256 EA-Generali AG 36,838 9,269 Erste Bank Der Oesterreichischen Sparkassen AG 621,036 4,667 Flughafen Wien AG 146,416 6,153 Immofinanz Immobilien Anlagen AG* 34,516 446 Lenzing AG 33,132 2,444 Mayr-Melnhof Karton AG (Bearer) 152,199 1,661 Oesterreichische Brau Beteiligungs AG 85,845 367 Oesterreichische Elektrizitaetswirtschafts AG 25,212 7,299 OMV AG 651,390 36,625 Telekom Austria AG* 308,178 5,625 VA Technologie AG (Bearer) 113,087 6,833 Voest-Alpine Stahl AG 197,281
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- AUSTRIA -- CONTINUED 10,046 Wienerberger Baustoffindustrie AG 151,131 ----------- 2,809,272 ----------- BELGIUM -- 2.8% 8,377 AGFA-Gevaert NV 160,117 10,875 Almanij NV 419,672 870 Bekaert SA 40,178 3,225 Colruyt SA 153,077 800 Compagnie Maritime Belge SA 39,267 3,200 Delhaize-Le Lion 95,748 1,975 Electrabel SA 457,492 10,402 Fortis B 185,561 13,640 Kredietbank NPV 493,067 2,327 Solvay Et Cie 161,001 7,014 UCB SA 200,237 ----------- 2,405,417 ----------- BRAZIL -- 0.3% 3,336,000 Electrobras 24,520 3,200 Petroleo Brasileiro SA (Petrobras) ADR 51,040 500 Souza Cruz (Registered) 2,439 5,632,000 Tele Nordeste Celular Participacoes SA 5,476 6,000 Vale Do Rio Doce 148,319 ----------- 231,794 ----------- CANADA -- 1.5% 9,600 Bank of Montreal 230,154 3,600 Bank of Nova Scotia 108,462 7,100 EnCana Corp 208,358 3,400 Imperial Oil Ltd 96,028 8,200 National Bank of Canada 154,749 9,500 Royal Bank of Canada 341,026 10,500 TransCanada PipeLines Ltd 155,817 ----------- 1,294,594 ----------- CHINA -- 0.0% 16,000 CNOOC Ltd 22,257
2 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- CHINA -- CONTINUED 12,000 Cosco Pacific Ltd 8,231 ----------- 30,488 ----------- CZECH REPUBLIC -- 0.5% 35,000 Ceske Energeticke Zavody AS 107,988 2,237 Ceske Radiokomunikace 18,791 5,735 Ceski Telecom AS* 51,602 3,000 Komercni Banka AS 160,892 180 Philip Morris CR AS 66,005 ----------- 405,278 ----------- DENMARK -- 0.0% 1,600 DFDS A/S 30,430 ----------- FINLAND -- 1.9% 33,300 Finnair Class A 145,325 31,200 Fortum Oyj 176,856 12,900 Kemira Oyj 90,455 47,300 Nokia Oyj 631,792 3,100 Orion-Yhtymae OY 68,708 22,600 Rautaruukki Oyj 94,640 27,300 Sampo Oyj 191,695 6,700 Stora Enso Oyj 73,986 3,300 Stora Enso Oyj Class A 36,894 3,300 UPM-Kymmene Oyj 105,180 ----------- 1,615,531 ----------- FRANCE -- 3.7% 16,196 BNP Paribas 755,415 3,555 Bongrain SA 156,853 11,119 Chargeurs International SA 261,160 9,476 Cie de Saint-Gobain 283,440 1,128 Eiffage SA 89,051 786 Elf Gabon 122,099 2,476 Eramet 64,348 3,398 Esso S.A.F. 273,258 1,561 L'Oreal SA 112,596 1,023 Renault SA 49,461 3,589 Sanofi-Synthelabo SA 215,232
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- FRANCE -- CONTINUED 14,361 Societe Generale Class A 851,368 ----------- 3,234,281 ----------- GERMANY -- 6.4% 2,200 Altana AG 108,309 61,400 Bankgesellschaft Berlin AG* 129,462 8,250 BASF AG 341,026 6,400 Bayer AG 151,891 8,400 Bayerische Motoren Werke AG 316,335 8,150 Commerzbank AG 88,799 36,750 DaimlerChrysler AG 1,582,188 5,809 Degussa AG 172,616 17,200 E. On AG 882,198 10,800 IWKA AG 118,625 2,800 Merck KGaA 55,743 8,400 RWE AG 307,685 2,900 Schering AG 160,688 7,000 Siemens AG 330,888 3,900 Sudzucker AG 64,638 24,700 Thyssen Krupp AG 324,592 5,700 T-Online International* 48,353 8,100 Volkswagen AG 370,969 ----------- 5,555,005 ----------- HONG KONG -- 1.7% 50,000 Brilliance China Automotive Holdings Ltd 6,987 69,000 Cathay Pacific Airways 107,039 4,000 China Mobile Ltd* 11,077 30,000 China Unicom* 22,116 76,900 CLP Holdings Ltd 309,574 100,000 Guangdong Investments Ltd* 9,231 113,000 Hang Lung Development Co Ltd 102,135 17,000 Henderson Land Development Co Ltd 55,686 97,500 Hong Kong Electric Holdings Ltd 380,002 57,000 Hong Kong Land Holdings 79,230 37,700 Jardine Matheson Holdings Ltd 218,660 36,000 Li & Fung Ltd 39,462 177,000 Pacific Century CyberWorks Ltd* 31,543 168,000 Regal Hotels International Ltd* 1,809
4 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- HONG KONG -- CONTINUED 29,000 Swire Pacific Ltd Class A 131,244 ----------- 1,505,795 ----------- HUNGARY -- 0.1% 123 Delmagyarorszagi Aramszol 4,760 500 Matav Rt ADR 8,365 500 MOL Magyar Olaj es Gazipari Rt (New Shares) 10,645 2,900 OTP Bank Rt 25,649 1,300 Pannonplast Rt 7,856 ----------- 57,275 ----------- INDIA -- 0.1% 1,300 Bajaj Auto Ltd GDR 11,245 200 Infosys Technologies ADR 11,320 1,700 Mahanagar Telephone Nigam* 8,925 300 Ranbaxy Laboratories Ltd GDR 5,850 1,500 Reliance Industries Ltd GDR 144A* 15,750 800 Satyam Computer Services Ltd ADR* 8,320 5,300 Silverline Technologies Ltd ADR* 5,035 1,000 State Bank of India Ltd GDR 11,650 1,800 Tata Engineering & Locomotive GDR* 5,148 ----------- 83,243 ----------- INDONESIA -- 0.4% 76,000 Astra International Tbk* 27,465 433,000 Bank Central Asia Tbk 110,023 987,000 Bentoel International Investama Tbk PT* 14,490 32,500 Gudang Garam 31,014 20,000 HM Sampoerna Tbk 8,752 275,500 Indofood Sukses Makmur Tbk 28,779 743,000 PT Matahari Putra Prima Tbk 46,149 282,000 Telekomunikasi Tbk 115,443 ----------- 382,115 ----------- IRELAND -- 0.8% 28,801 Allied Irish Banks Plc 372,836 15,946 Bank of Ireland 186,408 16,000 Greencore Group 42,052
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- IRELAND -- CONTINUED 6,661 Irish Life & Permanent Plc 86,228 ----------- 687,524 ----------- ITALY -- 1.4% 15,000 Autostrade Concessioni e Costruzioni Autostrade SPA 128,570 38,250 Banco Ambrosiano Veneto SPA (Savings Shares) 69,397 56,317 ENI-Ente Nazionale Idrocarburi SPA 852,752 10,790 Fiat SPA (Savings Shares) 76,718 3,800 Fila Holding SPA ADR* 4,636 28,600 IFIL Finanziaria di Partecipazioni SPA (Savings Shares) 89,754 ----------- 1,221,827 ----------- JAPAN -- 20.3% 2,600 Acom Co Ltd 153,283 11,000 Alps Electric Co Ltd 126,454 6,900 Aoki International 25,781 14,000 Banyu Pharmaceutical Co Ltd 164,602 19,000 Bridgestone Corp 244,381 22,000 Brother Industries Ltd 133,969 8,000 Canon Inc 273,943 17,800 Chubu Electric Power Co Inc 333,286 12,700 Chugoku Electric Power Co Inc 180,916 141,000 Cosmo Oil Co Ltd 217,627 17,000 Daiichi Pharmaceuticals Co Ltd 274,575 18,000 Dainippon Printing Co Ltd 206,924 27,000 Daio Paper Corp 194,248 3,400 Daito Trust Construction Co Ltd 69,540 37,000 Daiwa House Industry Co Ltd 215,325 4,000 Eisai Co Ltd 103,909 29,000 Ezaki Glico Co Ltd 158,740 36,000 Fuji Heavy Industries Ltd 142,403 8,000 Fuji Photo Film Co Ltd 244,254 5,000 Fujisawa Pharmaceutical Co Ltd 106,271 24,000 General Sekiyu (KK) 151,815 1,800 Hirose Electric Co Ltd 136,634 13,000 Hitachi Ltd 69,405 12,900 Honda Motor Co Ltd 546,181 2,000 Hoya Corp 125,501 72,000 Itochu Corp 192,502
6 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- JAPAN -- CONTINUED 41,000 Itoham Foods Inc 116,189 18,000 Izumiya Co Ltd* 94,885 40,000 JACCS Co 132,586 50 Japan Tobacco Inc 339,476 66,000 Kajima Corp 187,037 49,000 Kamigumi Co Ltd 226,062 41,000 Kandenko Co 140,396 20,600 Kansai Electric Power 321,427 61,000 Kansai Paint Co 147,143 109,000 Kawasaki Steel Corp* 127,786 400 Keyence Corp 69,801 13,000 Kirin Brewery Co Ltd 84,755 1,000 Kyocera Corp 69,413 50,000 Kyudenko Corp 177,540 19,000 Kyushu Electric Power Co Inc 280,437 27,000 Maeda Road Construction 99,970 79,000 Mazda Motor Corp 211,217 50,000 Misawa Homes 64,100 9,000 Mitsubishi Belting 21,330 21,000 Mitsubishi Corp 140,632 39,000 Mitsubishi Electric Corp* 134,863 90,000 Mitsubishi Motors* 211,023 72,000 Mitsubishi Paper Mills Ltd* 87,446 10,000 Mitsui Marine & Fire Insurance 49,846 24,000 Mitsui Petrochemical Industries Ltd 107,890 14,000 Mitsui Trust Holding Inc 31,999 68 Mizuho Holding Inc 145,675 34,000 Mizuno Corp 91,764 10,000 MOS Food Services 77,595 3,000 Murata Manufacturing Co Ltd 170,033 60,000 Nagase & Co 276,810 2,100 Nidec Corp 115,127 38,000 Nippon Express Co Ltd 176,595 27,000 Nippon Fire & Marine Insurance 103,614 34,000 Nippon Flour Mills Co Ltd 75,705 57,000 Nippon Hodo Co 224,510 27,000 Nippon Oil Co Ltd 119,327 27,000 Nippon Paint Co 65,357 53,000 Nippon Suisan Kaisha Ltd 93,426 45 Nippon Telegraph & Telephone Corp 176,865
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- JAPAN -- CONTINUED 35,000 Nissan Motor Co 255,640 303,000 Nisshin Steel Co Ltd* 138,000 23,000 Nisshinbo Industries Inc 106,693 5,000 Nitto Denko Corp 132,839 207,000 NKK Corp* 183,317 48,000 NOF Corp 127,120 43,000 Okumura Corp 142,892 9,000 Ono Pharmaceutical Co Ltd 330,958 6,100 Promise Co 283,482 2,100 Rohm Co Ltd 286,577 7,000 Ryosan Co 82,655 29,000 Sankyo Co Ltd 391,591 29,000 Seino Transportation Co Ltd 171,214 21,000 Sekisui House Ltd 153,561 5,000 Sharp Corp 53,135 3,000 Shikoku Electric Power 43,166 28,000 Shimizu Corp 85,725 5,000 Shin-Etsu Chemical Co Ltd 180,492 6,000 Shiseido Co Ltd 79,146 1,300 SMC Corp 130,038 13,100 Sony Corp 571,223 12,000 Suzuki Motor Corp 129,549 17,000 Taisho Pharmaceutical Co Ltd 272,998 11,000 Takeda Chemical Industries Ltd 464,808 4,430 Takefuji Corp 302,270 2,000 TDK Corp 91,427 36,000 The Dai-Tokyo Fire & Marine Insurance Co 78,337 28,000 TOA Corp 28,575 40,700 Tohoku Electric Power Co Inc 581,159 10,000 Tokyo Electric Power 206,216 3,000 Tokyo Electron Ltd 138,405 45,000 Tokyo Ink Manufacturing Co Ltd 126,766 20,000 Toppan Printing Co Ltd 179,817 86,000 Toshiba Corp* 293,763 2,000 Trend Micro Inc* 52,292 6,000 Yamanouchi Pharmaceutical Co Ltd 140,935 12,000 Yasuda Fire & Marine Insurance 72,264 46,000 Yodogawa Steel Works 117,556 ----------- 17,586,722 -----------
See accompanying notes to the financial statements. 8 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- LUXEMBOURG -- 0.4% 24,934 Arcelor* 303,214 ----------- NETHERLANDS -- 3.2% 51,357 ABN Amro Holdings NV 837,080 4,187 Boskalis Westminster NV 123,186 2,309 Gamma Holdings NV 70,424 1,253 Heineken NV 50,947 15,933 Koninklijke Philips Electronics NV 318,760 2,003 Koninklijke Ten Cate 51,073 1,051 Koninklijke Volker Wessels 22,676 7,193 Koninklijke Wessanen NV 52,624 1,930 Nedlloyd NV 28,183 126,563 Royal KPN NV* 693,833 5,993 Unilever NV 354,109 4,088 Van Ommeren Vopak* 44,501 1,706 Wereldhave NV 84,490 ----------- 2,731,886 ----------- NEW ZEALAND -- 0.5% 60,543 Fletcher Building Ltd 80,958 149,114 Telecom Corp of New Zealand 352,774 ----------- 433,732 ----------- NORWAY -- 2.8% 127,986 Den Norske Bank Class A 647,372 1,100 Fred Olsen Energy* 2,556 1,450 Gjensidige NOR Sparebank 46,970 3,400 Hafslund ASA Class B 10,788 174,800 Kvaerner ASA* 116,960 18,471 Norsk Hydro AS 784,706 12,318 Norske Skogindustrier AS Class A 178,252 16,314 Orkla ASA 288,057 33,800 Statoil ASA 287,186 12,900 Storebrand* 50,864 ----------- 2,413,711 ----------- PHILIPPINES -- 0.3% 93,046 Aboitiz Equity Ventures Inc* 4,092 148,000 Ayala Corp 14,844
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- PHILIPPINES -- CONTINUED 1,320,000 Ayala Land Inc 140,033 81,600 First Philippine Holdings* 20,461 1,000 Globe Telecom Inc* 9,355 18,520 La Tondena Distillers Inc 11,074 23,000 Metropolitan Bank & Trust Co 15,083 134,000 Petron Corp 4,239 8,940 Philippine Long Distance Telephone* 49,145 321,554 RFM Corp 4,838 24,000 San Miguel Corp Class B 24,072 ----------- 297,236 ----------- POLAND -- 0.1% 1,500 Bank Rozwoju Eksportu SA 32,288 6,300 KGHM Polska Miedz SA* 16,761 3,400 Polski Koncern Naftowy Orlen 14,103 11,500 Telekomunikacja Polska SA* 36,018 ----------- 99,170 ----------- PORTUGAL -- 0.2% 80,841 Electricidade de Portugal SA 132,399 1,400 Inapa-Invest Particip Gesta* 5,547 1,964 Salvador Caetano Industrias 5,162 ----------- 143,108 ----------- RUSSIA -- 0.9% 3,200 AO Tatneft ADR 42,752 6,000 JSC Mining & Smelting Co ADR* 111,000 2,900 Lukoil Holding Co ADR 184,875 100 Sberbank RF 15,200 4,400 Sibneft ADR* 81,840 8,000 Surgutneftegaz ADR 138,000 1,400 Unified Energy Systems ADR 12,600 1,000 Vimpel-Communications ADR* 23,550 22,000 Yukos Oil 189,860 ----------- 799,677 -----------
See accompanying notes to the financial statements. 10 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- SINGAPORE -- 3.0% 123,900 Asia Food & Properties Ltd* 3,540 30,000 Chartered Semiconductor Manufacturing Ltd* 36,003 6,800 Creative Technology Ltd 55,570 18,000 Cycle & Carriage Ltd 44,232 29,000 DBS Group Holdings Ltd 197,217 27,000 Fraser & Neave Ltd 118,810 45,000 Haw Par Brothers International Ltd 110,581 117,500 Hotel Properties Ltd 69,163 167,000 Jardine Strategic Holdings Ltd 454,240 59,000 Keppel Corp Ltd 149,030 63,100 Singapore Airlines Ltd (Registered) 418,299 17,000 Singapore Press Holdings Ltd 190,416 248,100 Singapore Telecom 208,422 35,000 ST Assembly Test Services Ltd* 32,203 173,680 Straits Trading Co Ltd 164,762 26,000 United Overseas Bank 196,131 12,478 Van Der Horst Ltd(a)* 5,290 19,000 Venture Manufacturing Singapore Ltd 140,069 ----------- 2,593,978 ----------- SOUTH KOREA -- 1.7% 500 Cheil Industries Inc 6,635 5,100 Daegu Bank* 25,841 5,900 Dongbu Steel 15,757 1,300 Hyosung Corp 14,169 700 Korea Electric Power Corp 12,259 5,700 Korea Exchange Bank* 28,501 8,000 Korean Air Lines* 104,497 900 KT Freetel* 25,833 2,200 LG Chemicals Ltd 79,621 600 LG Electronics Co 8,436 5,400 LG Electronics Inc* 201,722 1,000 LG Engineering & Construction Ltd 11,398 14,300 LG Investment & Securities Co Ltd 204,634 1,500 Pacific Chemical Corp 159,740 2,600 Pusan Bank* 13,238 1,640 Samsung Electronics 451,633 100 Samsung SDI Co Ltd 7,945 1,600 SK Global* 14,843 200 SK Telecom 39,353
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 5,300 Ssangyong Cement* 8,753 50 Taekwang Industrial Co Ltd 5,408 3,200 Taihan Electric Wire 14,217 ----------- 1,454,433 ----------- SPAIN -- 1.9% 3,170 Banco Popular Espanol 125,876 7,799 Compania Espanola de Petroleos 132,242 28,507 Endesa SA 338,277 13,250 Iberdrola SA 170,875 61,694 Repsol YPF SA 804,694 2,181 Tabacalera SA Class A 49,173 8,837 Tableros Defibras Class B* 45,932 ----------- 1,667,069 ----------- SWEDEN -- 1.6% 9,100 Electrolux AB 156,556 23,400 Gambro AB Class A 119,899 3,600 Hennes & Mauritz AB 66,153 42,300 Nordbanken Holdings AB 198,716 2,100 Sandvik AB 48,768 13,400 Skandinaviska Enskilda Banken Class A 124,188 4,700 SSAB Swedish Steel Class A 47,313 5,700 SSAB Swedish Steel Class B 53,737 4,500 Svenska Cellulosa Class B 153,637 9,900 Svenska Handelsbanken Class A 137,626 7,700 Svenska Handelsbanken Class B 104,582 17,500 Swedish Match AB 141,679 ----------- 1,352,854 ----------- SWITZERLAND -- 5.5% 692 BK Vision AG (Bearer)* 74,934 7,110 Bobst Group AG (Registered)* 227,895 517 Hero AG 54,951 3,055 Logitech International SA* 100,161 266 Merkur Holding AG (Registered) 53,177 1,883 Micronas Semiconductor Hold* 48,309 263 Movenpick Holdings (Bearer)* 94,639 817 Nestle SA 175,307
12 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- SWITZERLAND -- CONTINUED 11,724 Novartis AG 475,788 18 Pargesa Holdings SA (Bearer) 30,227 4,392 Roche Holding AG (Bearer) 522,422 25,400 Roche Holding AG (Genusschein) 1,823,776 840 SIG Holding AG 97,678 1,137 Sulzer Medica AG* 167,256 2,583 Swisscom AG 685,920 1,437 Zurich Financial Services AG 142,201 ----------- 4,774,641 ----------- TAIWAN -- 1.7% 62,040 Acer Communications & Multimedia Inc 105,076 217,800 Arima Computer Corp* 114,481 13,000 Asustek Computer Inc 31,318 19,000 AU Optronics Corp* 14,703 1,200 AU Optronics Corp ADR* 9,192 43,000 Cathay Financial Holding Co Ltd 51,984 84,000 Cheng Loong Corp* 18,642 135,000 China Development Financial Holding Corp* 78,055 152,000 Chinatrust Financial Holding Co* 118,511 50,470 Evergreen Marine Corp 20,117 9,000 GigaByte Technology Co Ltd* 19,842 118,800 Inventec Co Ltd 86,034 132,000 Lite-On Technology Corp 208,147 266,400 Macronix International* 101,908 254,660 Nan Ya Plastic Corp 233,503 59,000 Tatung Co* 13,955 121,900 United Microelectronics* 100,026 213,000 Walsin Lihwa Corp* 50,381 19,000 WUS Printed Circuit Co Ltd* 10,542 125,280 Yageo Corp* 44,266 34,980 Yulon Motor Co 26,354 ----------- 1,457,037 ----------- THAILAND -- 0.9% 118,000 Advanced Info Service Pcl (Foreign Registered) 81,109 8,000 Bangkok Bank Pcl (Foreign Registered)* 11,946 332,000 Bangkok Expressway Pcl (Foreign Registered) 129,054 85,000 BIG C Supercenter Pcl NVDR* 41,100
See accompanying notes to the financial statements. 13 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- THAILAND -- CONTINUED 55,700 Delta Electronics Pcl (Foreign Registered)(a) 36,293 68,000 Electricity Generating Pcl (Foreign Registered) 60,038 71,000 Land & House Pcl (Foreign Registered) 120,325 22,000 PTT Exploration & Production Pcl (Foreign Registered)(a)* 63,617 29,000 Quality House Co Ltd (Foreign Registered)* 5,636 1,000 Siam Cement Pcl NVDR 21,522 135,000 Siam Commercial Bank Pcl (Foreign Registered)* 83,995 196,000 Siam Industrial Credit Pcl NVDR* 44,598 8,000 Siam Panich Leasing Ltd (Foreign Registered) 6,684 12,000 Thai Airways International (Foreign Registered)* 10,524 78,000 Thai Petrochemical (Foreign Registered)* 7,099 68,000 Thai Union Frozen Products Pcl (Foreign Registered)(a) 26,900 ----------- 750,440 ----------- TURKEY -- 0.4% 35,101,629 Akbank TAS* 101,089 600,000 Anadolu Efes Biracilik Ve Malt Sanayii AS* 9,283 9,080,100 Dogan Yayin Holding* 13,492 1,925,000 Eregli Demir ve Celik Fabrikalari TAS* 22,411 30,000,000 Finansbank* 12,868 17,933,260 Hurriyet Gazeteci* 43,954 4,977,333 Sabanci Holding* 11,894 23,901,610 Trakya Cam Sanayii 69,567 2,350,000 Turkcell Iletisim Hizmet AS* 12,384 30,721,585 Turkiye Garanti Bankasi* 31,060 27,726,000 Yapi VE Kredi Bankasi* 20,811 ----------- 348,813 ----------- UNITED KINGDOM -- 19.7% 6,292 3i Group Plc 56,014 80,484 Abbey National Plc 928,775 12,645 Alliance & Leicester Plc 170,275 21,900 Allied Domecq Plc 138,557 8,154 Arriva Plc 41,624 28,069 Associated British Food 258,349 15,099 AWG Plc* 115,031 29,581 BAA PLC 253,962 87,612 Barclays Plc 628,845 35,043 BG Group Plc 146,091
14 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 16,817 BHP Billiton Plc 79,343 70,499 Boots Co 597,621 34,350 British Aerospace 162,596 41,175 British American Tobacco 478,339 261,651 BT Group Plc 809,496 113,900 BTR Siebe Plc 135,668 64,461 Cable & Wireless 160,042 13,100 De Vere Group Plc 61,857 34,052 Diageo Plc 411,919 24,073 Gallaher Group Plc 245,774 3,750 GlaxoSmithKline Plc 70,539 11,727 Great Portland Estates Plc 39,728 57,428 Great Universal Stores Plc 445,065 73,403 HBOS Plc 822,081 19,480 HSBC Holdings Plc 221,633 37,150 Imperial Chemical Industries Plc 146,398 29,746 Imperial Tobacco Group Plc 496,032 15,679 Inchcape Plc 197,063 131,625 Kingfisher Plc 433,182 33,901 Laird Group 78,138 25,748 Land Securities 317,840 78,425 Lattice Group Plc 208,663 61,820 Legal & General Group Plc 117,385 122,412 Lloyds TSB Group Plc 1,058,518 118,196 Marks & Spencer Group Plc 626,218 15,600 Next Plc 203,430 12,485 Northern Rock Plc 139,440 10,250 Nycomed Amersham Plc 90,219 28,182 Premier Farnell Plc 83,920 11,689 Reckitt Benckiser Plc 216,257 29,240 Reed International Plc 260,985 37,626 Rentokil Initial Plc 138,670 14,615 Rexam Plc 100,831 10,100 RMC Group 81,946 131,713 Rolls-Royce 286,774 64,415 Royal & Sun Alliance Insurance Group 124,056 13,394 Royal Bank of Scotland Group 319,697 80,078 Sainsbury (J) 392,057 43,538 Scottish & Newcastle Plc 370,756 38,256 Scottish Hydro-Electric Plc 396,494
See accompanying notes to the financial statements. 15 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 71,361 Scottish Power Plc 406,229 11,368 Severn Trent Plc 118,084 55,326 Six Continents Plc 519,494 4,387 Smiths Group Plc 49,540 35,831 Somerfield Plc 58,337 55,387 Stagecoach Holdings Plc 28,702 28,471 Tate & Lyle 161,633 29,463 Taylor Woodrow Plc 78,391 36,252 Thistle Hotels Plc 67,574 25,696 United Utilities 248,830 153,713 Vodafone Group Plc 246,101 12,832 Whitebread Plc 105,204 29,032 Wilson (Connolly) Holdings 74,999 26,223 Wolseley 238,924 15,888 WPP Group Plc 116,987 19,548 Yorkshire Water 117,175 ----------- 17,000,397 ----------- TOTAL COMMON STOCKS (COST $88,301,104) 81,475,405 ----------- PREFERRED STOCKS -- 1.6% BRAZIL -- 0.2% 8,958,000 Electrobras Class B (Registered) 64,365 2,500 Embratel Participacoes SA ADR* 2,250 3,845,710 Gerdau SA 41,639 76,363 Investimentos Itau SA 45,053 1,505,000 Petrobras Distribuidora SA 1.62% 20,338 760 Petroleo Brasileiro SA (Petrobras) 3.01% 11,022 12,316,000 Tele Nordeste Celular Participacoes SA 1.88% 10,392 ----------- 195,059 ----------- GERMANY -- 1.3% 16,200 Dyckerhoff AG (Non Voting) 11.72% 153,313 4,100 Krones AG 2.00% 208,683 100 Porsche AG 0.83% 46,681 2,068 RWE AG 4.35% 58,814 24,807 Villeroy & Boch AG (Non Voting) 5.78% 245,715
16 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- GERMANY -- CONTINUED 11,014 Volkswagen AG 5.30% 352,127 ----------- 1,065,333 ----------- ITALY -- 0.1% 13,860 Fiat SPA 4.95% 100,313 ----------- SOUTH KOREA -- 0.0% 150 Samsung Electronics (Non Voting) 20,591 ----------- TOTAL PREFERRED STOCKS (COST $1,861,404) 1,381,296 ----------- INVESTMENT FUNDS -- 0.1% TAIWAN -- 0.1% 10,000 Taiwan Fund* 92,700 ----------- TOTAL INVESTMENT FUNDS (COST $119,490) 92,700 ----------- MUTUAL FUNDS -- 0.1% TAIWAN -- 0.1% 23,000 R.O.C. Taiwan Fund* 88,320 ----------- TOTAL MUTUAL FUNDS (COST $123,970) 88,320 ----------- RIGHTS AND WARRANTS -- 0.0% THAILAND -- 0.0% 75,000 Quality House Co Ltd Warrants, Expires 04/19/03* 5,226 ----------- TOTAL RIGHTS AND WARRANTS (COST $0) 5,226 -----------
See accompanying notes to the financial statements. 17 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.4% CASH EQUIVALENTS -- 0.1% 100,000 Societe Generale GC Time Deposit, 1.81%, due 9/03/02 100,000 ----------- U.S. GOVERNMENT -- 0.3% 230,000 U.S. Treasury Bill, 1.61%, due 11/14/02(b) 229,241 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $329,138) 329,241 ----------- TOTAL INVESTMENTS -- 96.5% (Cost $90,735,106) 83,372,188 Other Assets and Liabilities (net) -- 3.5% 3,062,144 ----------- TOTAL NET ASSETS -- 100.0% $86,434,332 ===========
NOTES TO SCHEDULE OF INVESTMENTS: ADR American Depositary Receipt GDR Global Depository Receipt NVDR Non-Voting Depositary Receipt * Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security is held as collateral for open futures contracts. As of August 31, 2002, the Fund does not hold any open futures contracts. 18 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 23.9% Consumer Discretionary 14.9 Industrials 11.4 Consumer Staples 8.7 Utilities 8.5 Health Care 7.4 Materials 7.4 Energy 6.6 Information Technology 5.9 Telecommunication Services 4.9 Miscellaneous 0.4 ----- 100.0% =====
See accompanying notes to the financial statements. 19 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $90,735,106) (Note 1) $83,372,188 Cash 42,831 Foreign currency, at value (cost $2,741,080) (Note 1) 2,720,996 Receivable for investments sold 6,980 Dividends and interest receivable 223,307 Foreign taxes receivable 78,614 Receivable for open forward foreign currency contracts (Notes 1 and 6) 307,755 Receivable for expenses reimbursed by Manager (Note 2) 24,552 ----------- Total assets 86,777,223 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 39,053 Shareholder service fee 10,848 Payable for open forward foreign currency contracts (Notes 1 and 6) 237,497 Accrued expenses 55,493 ----------- Total liabilities 342,891 ----------- NET ASSETS $86,434,332 =========== NET ASSETS CONSIST OF: Paid-in capital $104,149,674 Accumulated undistributed net investment income 1,076,944 Accumulated net realized loss (11,485,117) Net unrealized depreciation (7,307,169) ----------- $86,434,332 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $86,434,332 =========== SHARES OUTSTANDING: Class III 8,907,354 =========== NET ASSET VALUE PER SHARE: Class III $ 9.70 ===========
20 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $215,032) $1,575,887 Interest 37,817 ---------- Total income 1,613,704 ---------- EXPENSES: Management fee (Note 2) 231,768 Custodian fees 109,296 Audit fees 19,136 Transfer agent fees 13,800 Legal fees 1,544 Registration fees 1,104 Trustees fees (Note 2) 1,032 Miscellaneous 2,684 Fees reimbursed by Manager (Note 2) (146,096) ---------- 234,268 Shareholder service fee (Note 2) - Class III 64,420 ---------- Net expenses 298,688 ---------- Net investment income 1,315,016 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,511,008) Closed futures contracts (286,762) Foreign currency, forward contracts and foreign currency related transactions 628,716 ---------- Net realized loss (1,169,054) ---------- Change in net unrealized appreciation (depreciation) on: Investments (529,509) Foreign currency, forward contracts and foreign currency related transactions (106,300) ---------- Net unrealized loss (635,809) ---------- Net realized and unrealized loss (1,804,863) ---------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (489,847) ==========
See accompanying notes to the financial statements. 21 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,315,016 $ 1,808,064 Net realized loss (1,169,054) (5,585,599) Change in net unrealized appreciation (depreciation) (635,809) (1,474,411) ----------- ----------- Net decrease in net assets from operations (489,847) (5,251,946) ----------- ----------- Distributions to shareholders from: Net investment income Class III (314,930) (2,315,695) ----------- ----------- Total distributions from net investment income (314,930) (2,315,695) ----------- ----------- Net share transactions: (Note 5) Class III 11,952,466 7,316,648 ----------- ----------- Increase in net assets resulting from net share transactions 11,952,466 7,316,648 ----------- ----------- Total increase (decrease) in net assets 11,147,689 (250,993) NET ASSETS: Beginning of period 75,286,643 75,537,636 ----------- ----------- End of period (including accumulated undistributed net investment income of $1,076,944 and $76,858, respectively) $86,434,332 $75,286,643 =========== ===========
22 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999+ ---------------- ----------- ----------- ------------ --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.70 $ 10.79 $ 10.43 $ 9.71 $ 10.00 ------- ------- ------- -------- ------- Income from investment operations: Net investment income 0.16(b) 0.25(b) 0.23(b) 0.15(b) 0.04 Net realized and unrealized gain (loss) (0.12) (1.03) 0.29 0.70 (0.28) ------- ------- ------- -------- ------- Total from investment operations 0.04 (0.78) 0.52 0.85 (0.24) ------- ------- ------- -------- ------- Less distributions to shareholders: From net investment income (0.04) (0.31) (0.16) (0.13) (0.05) ------- ------- ------- -------- ------- Total distributions (0.04) (0.31) (0.16) (0.13) (0.05) ------- ------- ------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 9.70 $ 9.70 $ 10.79 $ 10.43 $ 9.71 ======= ======= ======= ======== ======= TOTAL RETURN(a) 0.34%** (7.16)% 5.03% 8.65% (2.44)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $86,434 $75,287 $75,538 $112,623 $18,529 Net expenses to average daily net assets 0.69%* 0.69% 0.69% 0.69% 0.69%* Net investment income to average daily net assets 3.06%* 2.49% 2.11% 1.36% 0.87%* Portfolio turnover rate 26% 50% 56% 5% 20% Fees and expenses reimbursed by the Manager to average daily net assets: 0.34%* 0.41% 0.34% 0.34% 2.34%*
+ Period from July 29, 1998 (commencement of operations) to February 28, 1999. * Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 23 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax-Managed International Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high after-tax total return primarily through investment in non-U.S. equity securities. The Fund's benchmark is the MSCI EAFE (After-Tax). The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign 24 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2002. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is 25 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At August 31, 2002, there were no open futures contracts. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. At August 31, 2002, there were no open swap agreements. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security, or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, 26 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- security, or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security, or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purhasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. 27 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $323,163, $1,004,023, and $6,951,109 expiring in 2008, 2009, and 2010, respectively. The Fund has elected to defer to March 1, 2002 post-October capital losses of $2,018,433. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 28 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $1,032. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $32,517,833 and $20,787,749, respectively. At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $90,735,106 $5,687,552 $(13,050,470) $(7,362,918)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 55.4% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 29 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ---------------------- ------------------- Shares Amount Shares Amount Class III: --------- ----------- ------- ---------- Shares sold 1,128,656 $11,785,097 597,030 $5,719,988 Shares issued to shareholders in reinvestment of distributions 18,900 198,640 171,255 1,632,167 Shares repurchased (2,995) (31,271) (3,659) (35,507) --------- ----------- ------- ---------- Net increase 1,144,561 $11,952,466 764,626 $7,316,648 ========= =========== ======= ==========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- --------------------------------------------- ----------------- ------------ -------------- Buys 4/17/03 EUR 3,500,000 $3,400,180 $ 307,755 ========= Sales 4/17/03 JPY 390,425,000 $3,329,922 $(237,497) =========
CURRENCY ABBREVIATIONS: EUR - Euro JPY - Japanese Yen 30 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 86.8% AUSTRALIA -- 3.6% 414,900 Amcor Ltd 2,024,932 1,393,304 Brazin Ltd 1,611,753 371,875 Brian McGuigan Wines Ltd 942,298 480,797 Consolidated Rutile Ltd 270,144 2,420,614 David Jones Ltd 1,466,735 32,000 Foodland Associated Ltd* 331,391 797,045 Insurance Australia Group Ltd 1,404,967 654,372 John Fairfax Holdings Ltd 1,088,592 201,000 Lihir Gold Ltd* 135,079 6,000 Lihir Gold Ltd ADR+* 81,594 744,781 Lion Nathan Ltd 2,125,160 1,508,112 MIM Holdings Ltd 988,585 371,000 Oil Search Ltd* 177,798 608,500 Pacifica Group Ltd 1,340,769 825,000 Pasminco Ltd(a)* -- 501,000 Sons of Gwalia Ltd 1,299,846 ------------ 15,289,643 ------------ AUSTRIA -- 0.9% 14,550 Erste Bank Der Oesterreichischen Sparkassen AG 974,871 26,248 Oesterreichische Brau Beteiligungs AG 1,356,573 15,480 OMV AG 1,381,492 ------------ 3,712,936 ------------ BELGIUM -- 1.0% 167 Cie Francois D'Enterprises 37,669 35,300 Fortis NV* 634,561 40,820 Omega Pharma SA 1,801,448 21,490 Solvay Et Cie 1,486,858 5,006 Unibra SA 363,785 ------------ 4,324,321 ------------ BRAZIL -- 0.7% 479,600 Cia de Concessoes Rodoviarias* 1,500,133 49,060,000 Cia Saneamento Basico SAO PA 1,376,235 ------------ 2,876,368 ------------
See accompanying notes to the financial statements. 1 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CANADA -- 4.1% 525,000 Atacama Minerals Corp* 198,558 440,000 Hudson's Bay Co 2,180,256 73,800 Inco Ltd* 1,334,077 90,600 KAP Resources Ltd(a)* 581 479,100 Norske Skog Canada Ltd* 1,765,913 20,000 Placer Dome Inc 199,359 14,000 Rothmans Inc 291,756 1,000,000 SFK Pulp Fund* 6,858,974 260,300 Teck Corp Class B 1,745,345 237,600 Tembec Inc* 1,777,431 153,400 Timberwest Forest Corp 1,258,667 ------------ 17,610,917 ------------ FINLAND -- 2.6% 160,000 Asko Oyj 3,240,233 216,900 Aspocomp Group Oyj* 1,086,968 252,000 Jaakko Poyry Group 3,758,945 297,300 Metso Oyj 3,297,567 ------------ 11,383,713 ------------ FRANCE -- 5.5% 39,100 Assurances Generales de France (Bearer) 1,537,266 6,800 Bail-Investissement 914,954 22,800 BIC SA 872,038 20,216 Buffalo Grill 317,213 391,900 Canal Plus 1,783,321 7,012 Christian Dalloz* 529,503 7,320 Christian Dior SA 237,257 44,100 Cie Generale D'Optique Essilor International SA 1,734,280 10,356 Clarins 446,870 5,900 Compagnie Fonciere Klepierre 691,443 9,407 Credit National 710,359 7,250 Damart SA 696,787 6,450 Damartex SA* 72,743 3,700 Etablissements Economiques du Casino Guichard-Perrachon SA 261,984 369,100 Eurotunnel SA Units (Bearer)* 322,159 161,900 Fimatex* 279,445 6,300 Gaumont SA* 284,207
2 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FRANCE -- CONTINUED 55,200 GFI Industries SA 952,770 90,469 GrandVision SA 1,490,546 4,444 Groupe Partouche 326,431 9,000 Guyenne et Gascogne SA 759,944 5,400 Imetal 704,868 9,100 Lagardere Groupe 353,137 1,351 SAGA* 50,347 18,500 Seb SA 1,416,964 34,169 Societe Eurafrance SA 1,564,895 41,203 Sophia (EX-SFI) 1,232,841 4,600 SPIE Batignolles 211,576 51,872 Virbac SA 1,424,384 34,100 Worms et Compagnie SA 548,112 42,400 Zodiac SA 935,172 ------------ 23,663,816 ------------ GERMANY -- 5.7% 8,028 Aareal Bank AG* 130,299 26,600 Adidas Salomon AG 1,896,497 98,200 Bilfinger & Berger 2,109,074 2,650 Brau und Brunnen* 97,197 88,600 Commerzbank AG 965,348 190,200 Continental AG* 3,087,057 100,007 Fraport AG Frankfurt Airport Services Worldwide 2,442,114 78,200 Gildemeister AG 521,497 85,673 K&S AG 1,638,380 160,500 Lufthansa AG* 2,032,064 119,840 Repower Systems AG* 3,149,726 73,600 Stada Arzneimittel AG 2,908,835 64,900 Stinnes AG 2,068,541 100,622 Sudzucker AG 1,667,692 ------------ 24,714,321 ------------ GREECE -- 0.1% 45,000 Greek Organization of Football Prognostics SA 459,850 ------------ HONG KONG -- 3.0% 843,401 Akai Holdings Ltd(a)(b)* 1,081
See accompanying notes to the financial statements. 3 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HONG KONG -- CONTINUED 1,757,000 Amoy Properties Ltd 1,802,063 1,080,000 Goldlion Holdings Ltd 65,770 2,092,325 Great Eagle Holdings Ltd 1,864,327 2,083,000 Hang Lung Development Co Ltd 1,882,724 228,650 Hanison Construction Holdings Ltd* 7,329 5,298,800 HKR International Ltd* 1,080,147 2,266,993 Hysan Development Co Ltd 2,005,430 145,200 Jardine Matheson Holdings Ltd 842,160 329,000 Liu Chong Hing Bank Ltd 301,585 3,186,490 New World Development Co Ltd 2,083,488 918,000 Orient Overseas International Ltd 411,926 1,104,000 South China Morning Post Ltd 470,618 ------------ 12,818,648 ------------ INDIA -- 0.1% 385,000 Aptech Ltd GDR* 221,375 18,200 Videsh Sanchar Nigam Ltd ADR 96,642 ------------ 318,017 ------------ INDONESIA -- 0.3% 279,000 International Nickel* 163,840 9,084,000 Surya Citra Media 1,154,094 ------------ 1,317,934 ------------ IRELAND -- 1.5% 493,173 Anglo Irish Bank Corp 3,116,403 8,028 DePfa Bank Plc 425,145 1,307,600 Fyffes Plc 1,876,079 246,000 Greencore Group 646,556 379,440 IFG Group Plc 446,540 ------------ 6,510,723 ------------ ITALY -- 2.7% 839,000 Banca Intesa SPA 2,048,790 209,800 Benetton Group SPA 2,436,090 174,200 Buzzi Unicem SPA 1,230,033 9,700 Davide Campari-Milano Spa* 294,896
4 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ ITALY -- CONTINUED 663,800 ERG SPA 2,356,579 3,400 Ericsson SPA 75,524 57,716 Grouppo Editoriale L'Espresso 197,541 718,852 Locazione Attrezzature SPA 453,301 130,700 Marzotto (Gaetano&figli) SPA 735,739 30,000 Pagnossin SPA 66,786 212,000 Parmalat Finanziaria SPA 615,409 385,900 Rinascente per l'Esercizio di Grandi Magazzini SPA 1,275,384 ------------ 11,786,072 ------------ JAPAN -- 22.4% 112,000 Arisawa Manufacturing 2,172,648 600,000 Bank of Yokohama 2,429,047 106,300 Cawachi Ltd 8,068,992 600,000 Central Glass Co Ltd 3,137,520 144,300 CSK Corp 5,221,161 365,000 Daikin Industries Ltd 6,449,416 416,000 Dainippon Pharmaceutical Co Ltd 4,041,935 375,000 Daito Trust Construction Co Ltd 7,669,844 105,000 Funai Electric Co Ltd 11,486,105 259,400 Izumi Co Ltd 3,651,487 1,050,000 JACCS Co 3,480,369 129,500 Koei Co Ltd 3,779,109 98,600 Kose Corp 3,110,226 1,250,000 Nippon Paint Co 3,025,766 240,000 Nissin Company Ltd 1,831,907 210,000 Okamura Corp 1,062,708 1,100 Orix REIT Inc* 4,583,140 200,000 Sanyo Chemical Industries 1,379,834 1,085,000 Showa Shell Sekiyu 6,588,791 900,000 Sumitomo Realty and Development Co Ltd 4,759,415 265,000 Tokai Rubber Industries 2,362,459 110,000 Tokyo Style Co Ltd 945,389 480,000 Toyo Suisan Kaisha 4,886,434 ------------ 96,123,702 ------------ MEXICO -- 0.4% 1,346,700 Grupo Imsa SA 1,836,780 ------------
See accompanying notes to the financial statements. 5 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ NETHERLANDS -- 1.2% 3,760 Fugro NV 180,684 14,704 Geveke 351,853 97,365 Hagemeyer NV 1,093,313 49,800 Imtech NV 825,377 53,050 Kas Bank NV 801,202 27,200 Laurus NV* 27,209 36,021 Nutreco Holding NV 808,961 54,741 Vendex NV 569,056 12,604 VNU NV 309,019 25,263 Wegener Arcade NV 148,653 ------------ 5,115,327 ------------ NEW ZEALAND -- 0.5% 230,000 Air New Zealand Class B* 64,522 1,207,475 Evergreen Forests Ltd* 299,214 1,927,200 Tourism Holdings Ltd 819,967 1,376,000 Tranz Rail Holdings Ltd* 1,125,860 ------------ 2,309,563 ------------ NORWAY -- 1.8% 203,900 Ekornes AS 2,327,996 275,300 Hydralift ASA 1,538,703 175,300 Nordlandsbanken 1,280,004 51,800 Norske Skogindustrier AS Class A 749,588 60,500 Ocean RIG ASA* 26,506 900,300 PAN Fish ASA* 298,809 41,400 Prosafe ASA* 604,588 132,800 Smedvig A/S Class A 754,586 ------------ 7,580,780 ------------ SINGAPORE -- 1.2% 2,003,000 Allgreen Properties Ltd 1,327,817 1,233,800 Singapore Land Ltd 2,270,387 1,400,000 United Overseas Land 1,408,121 ------------ 5,006,325 ------------
See accompanying notes to the financial statements. 6 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SOUTH AFRICA -- 0.9% 9,202,800 Allan Gray Property Trust 1,987,381 10,317,337 Marriott Property Fund 1,688,229 123,700 Western Areas Gold Mining Co Ltd* 388,346 ------------ 4,063,956 ------------ SOUTH KOREA -- 2.6% 100,000 Asia Cement Co Ltd 1,917,717 225,000 Dongkuk Steel Mill 917,259 263,920 Handsome Corp 2,371,426 30,000 Hanil Cement Manufacturing 848,621 75,000 Hanmi Pharmaceutical Industrial Co. Ltd 1,372,769 113,270 Korea Electric Terminal Co 1,677,446 50,000 Sam Yang 852,781 2,490 Samil Pharmaceutical Co 65,567 240,000 Woongjin.com Co Ltd 997,379 ------------ 11,020,965 ------------ SPAIN -- 2.4% 64,000 Actividades de Construccion y Servicios SA 1,745,489 60,000 Aguas de Barcelona 594,304 70,000 Amadeus Global Travel Distribution 381,002 10,000 Cia de Distribucion Integral Logista SA 192,708 137,000 Cortefiel SA 513,240 90,000 FENOSA SA 1,113,879 106,800 Gas Natural SDG SA 1,933,478 70,000 Red Electrica de Espana 690,609 74,400 Tabacalera SA Class A 1,677,444 265,034 Uralita SA 1,465,942 ------------ 10,308,095 ------------ SWEDEN -- 2.3% 110,300 Autoliv Inc SDR 2,402,833 124,000 Billerud AB 1,169,014 170,500 PerBio Science AB* 2,651,746 324,200 SAAB AB Class B 3,505,369 ------------ 9,728,962 ------------
See accompanying notes to the financial statements. 7 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SWITZERLAND -- 2.5% 2,500 Belimo Automation AG 691,367 16,470 Bobst Group AG (Registered)* 527,909 700 Eichhof Holding AG 300,870 2,120 Forbo Holdings AG (Registered) 635,725 6,110 Geberit International AG* 1,710,059 4,990 Helvetia Patria Holding 548,662 2,600 Hero AG 276,347 1,000 Jelmoli (Bearer) 798,987 3,250 Jelmoli (Registered) 513,278 24,970 Lonza Group AG 1,594,060 6,250 Merkur Holding AG (Registered) 1,249,459 1,000 Schaffner Holding AG (Registered) 157,932 2,220 Sika Finanz AG (Bearer) 561,417 3,880 Unique Zurich Airport* 253,384 1,480 Valiant Holding 981,308 ------------ 10,800,764 ------------ THAILAND -- 0.1% 588,900 Electricity Generating Pcl (Foreign Registered) 519,946 ------------ UNITED KINGDOM -- 16.4% 984,540 Aggregate Industries Plc 1,180,313 175,000 Alliance & Leicester Plc 2,356,509 161,800 Alliance Unichem Plc 1,439,158 600,000 Amey Plc 1,067,361 574,400 BICC Group 1,750,423 549,800 Bodycote International Plc 1,233,204 348,600 BPB Industries Plc 1,677,065 200,000 Brambles Industries Plc 726,270 866,436 Caradon Plc 1,628,452 839,100 Carphone Warehouse Group Plc* 1,070,853 402,711 Cattle's Plc 1,931,156 130,000 Computacenter Plc 492,688 260,000 Cookson Group Plc 119,653 463,424 Crest Nicholson 1,652,387 696,493 FKI Plc 1,174,371 200,000 Galen Holdings Plc 1,345,803 127,400 Imperial Tobacco Group Plc 2,124,469
8 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 311,700 Jarvis Plc 1,301,856 850,000 John Wood Group Plc* 2,721,771 1,540,000 Kidde Plc 1,572,269 262,344 Kier Group Plc 2,384,192 205,000 Kingston Communications Plc* 174,413 60,376 Lonmin Plc 821,882 362,200 Matalan Plc 1,344,689 314,600 Misys Plc 1,099,840 235,000 Morgan Crucible 267,188 209,800 Mothercare Plc 486,809 220,300 Northern Rock Plc 2,460,447 1,050,000 PHS Group Plc 1,413,093 220,000 Premier Farnell Plc 655,112 135,000 Provident Financial Plc 1,169,456 405,000 Rank Group Plc 1,663,343 323,700 Rexam Plc 2,233,263 750,000 RM Plc 916,538 629,300 Smith (David S.) Holdings Plc 1,392,054 230,000 Smith (WH) Group Plc 1,201,671 689,300 Somerfield Plc 1,122,258 234,800 Southwest Water 2,462,578 155,000 SSL International Plc 751,677 288,600 Tate & Lyle 1,638,418 550,300 Tomkins Plc 2,060,047 90,000 Travis Perkins Plc 1,433,976 195,000 Trinity Mirror Plc 1,176,417 780,000 TT Group Plc 1,659,050 230,700 Ultra Electronics Holdings 1,605,914 315,000 Viridian Group Plc 2,404,695 388,100 Westbury Plc 2,122,244 165,100 William Hill Plc* 658,914 167,800 Wolseley 1,528,866 245,000 Yorkshire Water 1,468,588 ------------ 70,343,663 ------------
See accompanying notes to the financial statements. 9 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED STATES -- 0.3% 77,000 Freeport-McMoran Copper & Gold* 1,262,030 ------------ TOTAL COMMON STOCKS (COST $381,180,793) 372,808,137 ------------ PREFERRED STOCKS -- 1.9% AUSTRALIA -- 0.2% 1,150,000 Village Roadshow Ltd 608,138 ------------ BRAZIL -- 0.3% 370,000 Tele Centro Oeste Celular SA ADR 1,172,900 ------------ FRANCE -- 0.1% 6,800 Etablissements Economiques du Casino Guichard Perrachon 352,111 ------------ GERMANY -- 1.1% 37,530 Dyckerhoff AG (Non Voting) 11.72% 355,175 15,686 Koegel Fahrzeugwerke AG* 50,765 10,000 Rheinmetall AG 2.51% 196,140 57,826 Rheinmetall AG 3.92% 737,229 10,000 Villeroy & Boch AG (Non Voting) 5.78% 99,051 100,000 Volkswagen AG 5.30% 3,197,082 ------------ 4,635,442 ------------ ITALY -- 0.0% 10,000 IFI Istituto Finanziario Industries 4.82% 157,304 ------------ SOUTH KOREA -- 0.2% 21,760 Samsung SDI Co Ltd 3.63% 1,037,354 ------------ TOTAL PREFERRED STOCKS (COST $8,343,493) 7,963,249 ------------ CONVERTIBLE SECURITIES -- 0.1% JAPAN -- 0.1% $ 80,000,000 UMC Japan, 144A, Zero Coupon, due 03/26/07 570,150 ------------ TOTAL CONVERTIBLE SECURITIES (COST $614,981) 570,150 ------------
See accompanying notes to the financial statements. 10 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ RIGHTS AND WARRANTS -- 0.0% SINGAPORE -- 0.0% 60,000 United Overseas Land Warrants, Expires 6/12/04* 22,288 ------------ TOTAL RIGHTS AND WARRANTS (COST $18,234) 22,288 ------------ SHORT-TERM INVESTMENTS -- 5.7% CASH EQUIVALENTS -- 5.7% $ 24,300,000 Royal Bank of Canada Time Deposit, 1.81%, due 9/03/02 24,300,000 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $24,300,000) 24,300,000 ------------ TOTAL INVESTMENTS -- 94.5% (Cost $414,457,501) 405,663,824 Other Assets and Liabilities (net) -- 5.5% 23,756,778 ------------ TOTAL NET ASSETS -- 100.0% $429,420,602 ============ NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. ADR - American Depositary Receipt GDR - Global Depository Receipt NVDR - Non-Voting Depositary Receipt SDR - Swedish Depository Receipt * Non-income producing security. + Direct placement securities are restricted as to resale. They have been valued at fair value by the Trustees after consideration of restricitions as to resale, financial condition and prospects of the issuer, general market conditions, and pertinent information in accordance with the Fund's By-Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to those restricted securities. See accompanying notes to the financial statements. 11 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) Additional information on each restricted security is as follows:
MARKET VALUE AS A MARKET PERCENTAGE VALUE AS OF ACQUISITION ACQUISITION OF FUND'S AUGUST 31, ISSUER, DESCRIPTION DATE COST NET ASSETS 2002 ------------------- ----------- ----------- ---------- ------------ Lihir Gold Ltd ADR 7/03/00 $47,302 0.02% $81,594
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Bankrupt issuer. 12 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Industrials 22.1% Consumer Discretionary 20.7 Financials 18.2 Materials 14.6 Consumer Staples 8.6 Health Care 5.1 Energy 4.3 Utilities 3.3 Information Technology 2.7 Telecommunication Services 0.4 ----- 100.0% =====
See accompanying notes to the financial statements. 13 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $414,457,501) (Note 1) $405,663,824 Cash 21,768 Foreign currency, at value (cost $24,267,176) (Note 1) 24,222,932 Receivable for investments sold 1,150,898 Dividends and interest receivable 806,683 Foreign taxes receivable 99,173 Receivable for expenses reimbursed by Manager (Note 2) 32,519 ------------ Total assets 431,997,797 ------------ LIABILITIES: Payable for investments purchased 2,227,387 Payable to affiliate for (Note 2): Management fee 246,621 Shareholder service fee 45,844 Accrued expenses 57,343 ------------ Total liabilities 2,577,195 ------------ NET ASSETS $429,420,602 ============ NET ASSETS CONSIST OF: Paid-in capital $436,432,714 Accumulated undistributed net investment income 2,209,444 Accumulated net realized loss (386,714) Net unrealized depreciation (8,834,842) ------------ $429,420,602 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $228,209,119 ============ Class IV shares $201,211,483 ============ SHARES OUTSTANDING: Class III 23,093,092 ============ Class IV 20,349,674 ============ NET ASSET VALUE PER SHARE: Class III $ 9.88 ============ Class IV $ 9.89 ============
14 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $464,792) $ 3,483,479 Interest 287,602 ------------ Total income 3,771,081 ------------ EXPENSES: Management fee (Note 2) 972,523 Custodian fees 131,284 Audit fees 18,676 Transfer agent fees 13,984 Legal fees 3,590 Trustees fees (Note 2) 1,838 Registration fees 736 Miscellaneous 1,930 Fees reimbursed by Manager (Note 2) (170,108) ------------ 974,453 Shareholder service fee (Note 2) - Class III 156,551 Shareholder service fee (Note 2) - Class IV 34,565 ------------ Net expenses 1,165,569 ------------ Net investment income 2,605,512 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (157,984) Foreign currency, forward contracts and foreign currency related transactions 1,095,727 ------------ Net realized gain 937,743 ------------ Change in net unrealized appreciation (depreciation) on: Investments (13,671,555) Foreign currency, forward contracts and foreign currency related transactions 9,082 ------------ Net unrealized loss (13,662,473) ------------ Net realized and unrealized loss (12,724,730) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(10,119,218) ============
See accompanying notes to the financial statements. 15 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 2,605,512 $ 1,412,935 Net realized gain 937,743 135,673 Change in net unrealized appreciation (depreciation) (13,662,473) 3,585,081 ------------ ------------ Net increase (decrease) in net assets from operations (10,119,218) 5,133,689 ------------ ------------ Distributions to shareholders from: Net investment income Class III -- (2,447,282) ------------ ------------ Total distributions from net investment income -- (2,447,282) ------------ ------------ Net share transactions: (Note 5) Class III 76,614,336 85,636,249 Class IV 213,359,202 -- ------------ ------------ Increase in net assets resulting from net share transactions 289,973,538 85,636,249 ------------ ------------ Total increase in net assets 279,854,320 88,322,656 NET ASSETS: Beginning of period 149,566,282 61,243,626 ------------ ------------ End of period (including accumulated undistributed net investment income of $2,209,444 and overdistributed net investment income of $396,068, respectively) $429,420,602 $149,566,282 ============ ============
16 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED FEBRUARY 28, AUGUST 31, 2002 ----------------------- (UNAUDITED) 2002 2001 ---------------- ----------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.59 $ 9.68 $ 10.00+ -------- -------- ------- Income from investment operations: Net investment income 0.11 0.15 0.06 Net realized and unrealized gain (loss) 0.18(b) 0.00(c) (0.33)(b) -------- -------- ------- Total from investment operations 0.29 0.15 (0.27) -------- -------- ------- Less distributions to shareholders: From net investment income -- (0.24) (0.05) -------- -------- ------- Total distributions -- (0.24) (0.05) -------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 9.88 $ 9.59 $ 9.68 ======== ======== ======= TOTAL RETURN(a) 3.02%** 1.59% (2.64)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $228,209 $149,566 $61,244 Net expenses to average daily net assets 0.85%* 0.86%(d) 0.85%* Net investment income to average daily net assets 2.14%* 1.48% 1.08%* Portfolio turnover rate 9% 17% 16% Fees and expenses reimbursed by the Manager to average daily net assets 0.13% 0.26% 0.43%
+ Period from June 30, 2000 (commencement of operations) to February 28, 2001. * Annualized ** Not annualized. (a) Total return would have been lower had certain expenses not been reimbursed during the period shown. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund. (c) Net realized and unrealized loss was less than $0.01 per share (d) Includes transfer taxes not reimbursed by the Manager, which approximate .01% of average daily net assets. See accompanying notes to the financial statements. 17 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JUNE 14, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 2002 (UNAUDITED) ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.60 -------- Income from investment operations: Net investment income 0.02 Net realized and unrealized loss (0.73) -------- Total from investment operations (0.71) -------- NET ASSET VALUE, END OF PERIOD $ 9.89 ======== TOTAL RETURN(a) (6.70)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $201,211 Net expenses to average daily net assets 0.80%* Net investment income to average daily net assets 1.06%* Portfolio turnover rate 9% Fees and expenses reimbursed by the Manager to average daily net assets 0.13%
* Annualized ** Not annualized. (a) Total return would have been lower had certain expenses not been reimbursed during the period shown. 18 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Foreign Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in a diversified portfolio of equity securities of non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney EMI World Ex-U.S. Index. Throughout the six months ended August 31, 2002, the Fund had one class of shares outstanding: Class III. Effective June 14, 2002, the Fund also had Class IV shares outstanding. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Shares of investment trusts and other Funds of the Trust are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or 19 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability 20 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are offset against the proceeds or amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premuims paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, there were no outstanding futures contracts. 21 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreements. The Fund earns interest on cash set aside for collateral. At August 31, 2002, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. 22 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distrbutions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $506,847 and $777,168 expiring in 2009 and 2010, respectively. The Fund has elected to defer to March 1, 2002 post-October capital losses of $336,639. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. 23 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .70% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .10% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $1,838. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002 aggregated $272,440,552 and $22,074,497, respectively. At August 31, 2002 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $414,457,501 $24,182,007 $(32,975,684) $(8,793,677)
24 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 55.1% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ ---------------------- Shares Amount Shares Amount Class III: ---------- ------------ --------- ----------- Shares sold 11,073,214 $112,257,193 9,093,131 $84,040,770 Shares issued to shareholders in reinvestment of distributions -- -- 173,775 1,595,479 Shares repurchased (3,571,429) (35,642,857) -- -- ---------- ------------ --------- ----------- Net increase 7,501,785 $ 76,614,336 9,266,906 $85,636,249 ========== ============ ========= ===========
Period from June 17, 2002 (commencement of operations) through August 31, 2002 -------------------------- Shares Amount Class IV: ----------- ------------- Shares sold 20,349,674 $213,359,202 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased -- -- ---------- ------------ Net increase 20,349,674 $213,359,202 ========== ============
25 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 29.8% ALBANIA -- 1.1% USD 15,681,227 Republic of Albania Par Bond, Zero Coupon, due 08/31/25 3,214,652 ------------ AUSTRIA -- 1.9% GBP 500,000 Bank Austria AG Series EMTN, 8.38%, due 11/04/11 906,406 USD 4,175,000 Bank Austria AG, 144A, 7.25%, due 02/15/17 4,674,330 ------------ 5,580,736 ------------ BRAZIL -- 0.9% USD 10,000,000 Brazil Discount Bond, Principal Strip, Series D1A, 0.00%, due 04/15/24(a) 2,766,273 ------------ CAYMAN ISLANDS -- 1.9% CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 2,858,974 USD 3,000,000 Pemex Finance Ltd. Series MKWL, AMBAC 144A, 6.30%, due 05/15/10 3,043,710 ------------ 5,902,684 ------------ CHILE -- 0.3% USD 750,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 799,427 ------------ LUXEMBOURG -- 2.2% USD 8,000,000 Tyco International Group SA, 5.80%, due 08/01/06 6,640,000 ------------ UNITED STATES -- 21.5% CORPORATE DEBT -- 0.5% USD 1,600,000 Ford Motor Credit, 7.25%, due 10/25/11 1,531,472 ------------ U.S. GOVERNMENT -- 12.5% USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/10(a) 7,047,009 USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/12(a) 6,178,857 USD 10,100,000 U.S. Treasury 0.00% Receipts, due 08/15/12(a) 5,973,303 USD 16,702,650 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08(b) 18,057,131 ------------ 37,256,300 ------------
See accompanying notes to the financial statements. 1 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- 8.5% USD 25,000,000 Federal National Mortgage Association, TBA, 6.00%, due 10/01/31 25,406,250 ------------ TOTAL UNITED STATES 64,194,022 ------------ TOTAL DEBT OBLIGATIONS (COST $87,046,097) 89,097,794 ------------ SHARES ------------- MUTUAL FUNDS -- 74.1% 8,257,272 GMO Alpha LIBOR Fund(c) 211,881,589 1,067,977 GMO Emerging Country Debt Fund, Class III 9,526,355 ------------ TOTAL MUTUAL FUNDS (COST $227,284,541) 221,407,944 ------------ PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 1.0% CROSS CURRENCY OPTIONS -- 1.0% EUR 77,800,000 Euro Call/USD Put, Expires 09/19/02, Strike .95 2,372,900 GBP 11,100,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 362,150 USD 8,600,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 327,847 ------------ 3,062,897 ------------ TOTAL CALL OPTIONS PURCHASED (COST $2,455,138) 3,062,897 ------------ PUT OPTIONS PURCHASED -- 0.1% CROSS CURRENCY OPTIONS -- 0.1% GBP 19,500,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.43 214,168 ------------ TOTAL PUT OPTIONS PURCHASED (COST $796,887) 214,168 ------------
See accompanying notes to the financial statements. 2 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- PREFERRED STOCKS -- 2.3% UNITED STATES -- 2.3% 10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 6,732,940 ------------ TOTAL PREFERRED STOCKS (COST $6,837,197) 6,732,940 ------------ SHORT-TERM INVESTMENTS -- 0.3% CASH EQUIVALENTS -- 0.1% 113,081 Dreyfus Money Market Fund(d) 113,081 USD 102,830 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.80%, due 9/18/02(d) 102,830 66,839 Merrimac Money Market Fund(d) 66,839 ------------ 282,750 ------------ REPURCHASE AGREEMENTS -- 0.2% USD 433,630 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $433,671, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 0.00%, maturity date of 11/15/14, and a market value, including accrued interest of $444,787. 433,630 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $716,380) 716,380 ------------ TOTAL INVESTMENTS -- 107.6% (Cost $325,136,240) 321,232,123 Other Assets and Liabilities (net) -- (7.6%) (22,569,163) ------------ TOTAL NET ASSETS -- 100.0% $298,662,960 ============
See accompanying notes to the financial statements. 3 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation EMTN - Euromarket Medium Term Note MBIA - Insured as to the payment of principal and interest by Municipal Bond Insurance Association TBA - To Be Announced (Note 1) CURRENCY ABBREVIATIONS:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). (c) All or a portion of this security has been segregated to cover collateral requirements on TBA obligations (Note 1). (d) Represents investment of security lending collateral (Note 1). 4 See accompanying notes to the financial statements. GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $276,143 (cost $325,136,240) (Note 1) $321,232,123 Cash 239 Receivable for investments sold 218,750 Receivable for Fund shares sold 70,000 Interest receivable 295,103 Receivable for open forward foreign currency contracts (Notes 1 and 6) 1,973,817 Receivable for variation margin on open futures contracts (Notes 1 and 6) 161,914 Net receivable for open swap contracts (Notes 1 and 6) 2,104,193 Receivable for expenses reimbursed by Manager (Note 2) 22,809 ------------ Total assets 326,078,948 ------------ LIABILITIES: Payable for forward commitments (Note 1) 25,335,937 Payable upon return of securities loaned (Note 1) 282,750 Payable to affiliate for (Note 2): Management fee 64,345 Shareholder service fee 38,607 Payable for open forward foreign currency contracts (Notes 1 and 6) 1,632,966 Accrued expenses 61,383 ------------ Total liabilities 27,415,988 ------------ NET ASSETS $298,662,960 ============ NET ASSETS CONSIST OF: Paid-in capital $294,990,022 Accumulated undistributed net investment income 1,038,207 Accumulated net realized gain 4,770,839 Net unrealized depreciation (2,136,108) ------------ $298,662,960 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $298,662,960 ============ SHARES OUTSTANDING: Class III 27,793,901 ============ NET ASSET VALUE PER SHARE: Class III $ 10.75 ============
See accompanying notes to the financial statements. 5 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $1,497) $ 2,229,356 Dividends from investment company shares 1,859,738 ----------- Total income 4,089,094 ----------- EXPENSES: Management fee (Note 2) 398,509 Custodian and transfer agent fees 67,712 Audit fees 20,148 Legal fees 7,321 Trustees fees (Note 2) 3,903 Registration fees 2,024 Miscellaneous 2,943 Fees reimbursed by Manager (Note 2) (99,911) ----------- 402,649 Indirectly incurred fees reimbursed by Manager (Note 2) (24,198) ----------- 378,451 ----------- Shareholder service fee (Note 2) - Class III 239,105 Shareholder service fee reimbursed (Note 2) - Class III (8,911) ----------- 230,194 ----------- Net expenses 608,645 ----------- Net investment income 3,480,449 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (861,528) Realized gains distributions from investment company shares 682,824 Closed futures contracts 1,047,739 Closed swap contracts 3,341,383 Foreign currency, forward contracts and foreign currency related transactions 2,533,363 ----------- Net realized gain 6,743,781 ----------- Change in net unrealized appreciation (depreciation) on: Investments 3,346,874 Open futures contracts (552,896) Open swap contracts 1,777,479 Foreign currency, forward contracts and foreign currency related transactions (428,802) ----------- Net unrealized gain 4,142,655 ----------- Net realized and unrealized gain 10,886,436 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $14,366,885 ===========
6 See accompanying notes to the financial statements. GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,480,449 $ 15,863,393 Net realized gain 6,743,781 5,916,925 Change in net unrealized appreciation (depreciation) 4,142,655 (9,292,020) ------------ ------------ Net increase in net assets from operations 14,366,885 12,488,298 ------------ ------------ Distributions to shareholders from: Net investment income Class III (174,271) (17,797,440) ------------ ------------ Total distributions from net investment income (174,271) (17,797,440) ------------ ------------ Net realized gains Class III (3,979,180) (130,656) ------------ ------------ Total distributions from net realized gains (3,979,180) (130,656) ------------ ------------ (4,153,451) (17,928,096) ------------ ------------ Net share transactions: (Note 5) Class III (51,589,637) 189,067,102 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (51,589,637) 189,067,102 ------------ ------------ Total increase (decrease) in net assets (41,376,203) 183,627,304 NET ASSETS: Beginning of period 340,039,163 156,411,859 ------------ ------------ End of period (including accumulated undistributed net investment income of $1,038,207 and overdistributed net investment income of $2,267,971, respectively) $298,662,960 $340,039,163 ============ ============
See accompanying notes to the financial statements. 7 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------- (UNAUDITED) 2002 2001(D) 2000 1999 1998* ---------------- ----------- ----------- ----------- ----------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.39 $ 10.17 $ 9.64 $ 10.23 $ 10.60 $ 10.00 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.12(a)+ 0.77(a)+ 0.62(a)+ 0.62+ 0.64+ 0.55+ Net realized and unrealized gain (loss) 0.39 0.07 0.73 (0.40) (0.58) 0.66 -------- -------- -------- -------- -------- -------- Total from investment operations 0.51 0.84 1.35 0.22 0.06 1.21 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.01) (0.62) (0.82) (0.70) (0.12) (0.27) From net realized gains (0.14) --(f) -- (0.11) (0.31) (0.34) -------- -------- -------- -------- -------- -------- Total distributions (0.15) (0.62) (0.82) (0.81) (0.43) (0.61) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.75 $ 10.39 $ 10.17 $ 9.64 $ 10.23 $ 10.60 ======== ======== ======== ======== ======== ======== TOTAL RETURN(b) 4.88%++ 8.53% 14.52% 2.26% 0.44% 12.16%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $298,663 $340,039 $156,412 $120,276 $143,703 $228,386 Net operating expenses to average daily net assets 0.38%**(e) 0.38%(e) 0.39%(e) 0.40% 0.40% 0.40%** Interest expense to average daily net assets -- -- -- 0.01%(c) -- -- Total net expenses to average daily net assets 0.38%** 0.38% 0.39% 0.41% -- -- Net investment income to average daily net assets 2.18%**(a) 7.39%(a) 6.34%(a) 6.19% 5.97% 6.05%** Portfolio turnover rate 56% 113% 181% 40% 113% 58% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08%** 0.09% 0.12% 0.10% 0.25% 0.30%**
(a) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.04, increase net realized gains and losses per share by $0.04, and decrease the ratio of net investment income to average net assets from 6.70% to 6.34%. Per share and ratio/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (f) The distribution from net realized gains was less than $0.01 per share. + Calculated using average shares outstanding throughout the period. ++ Not annualized. * For the period from April 30, 1997 (commencement of operations) to February 28, 1998. ** Annualized. 8 See accompanying notes to the financial statements. GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Core Plus Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks a high total return relative to its performance benchmark through investment in U.S. investment grade securities. The Fund achieves exposure to international bond and currency markets by investing, directly or through other Funds of the Trust, in a combination of foreign bond and currency derivatives, effectively adding to or subtracting from the U.S. bond return the performance of the Fund's international bond and currency investments. The Fund's benchmark is the Lehman Brothers Aggregate Bond Index. At August 31, 2002, 70.9% of the net assets of the Fund is invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. GMO Alpha LIBOR Fund invests primarily in relatively high quality, low volatility fixed income instruments. At August 31, 2002, 3.2% of the Fund is invested in GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. GMO Emerging Country Debt Fund invests primarily in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Europe. The financial statements of the GMO Alpha LIBOR Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid 9 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. 10 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the 11 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 the Fund had no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. See the Schedule of Investments for all open purchased option contracts as of August 31, 2002. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain 12 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically an emerging country, on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of August 31, 2002. 13 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. For the six months ended August 31, 2002, the Fund had not entered into any reverse repurchase agreements. DELAYED DELIVERY COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained in an amount at least equal to these commitments with the custodian. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $276,143 collateralized by cash in the amount of $282,750, which was invested in short term instruments. 14 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. The Fund elected to defer to March 1, 2002 post-October losses of $1,552,882. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premium and discount. Dividend income is recorded on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in principal or face amount of these securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental 15 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund may invest in Class III shares of the GMO Emerging Country Debt Fund and the Class III shares of the GMO Alpha LIBOR Fund ("underlying funds"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in the underlying funds. For the six months ended August 31, 2002, shareholder service fees incurred indirectly by the Fund were 0.006% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.016% and 0.020% of the Fund's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002 was $3,903. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 16 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES For the six months ended August 31, 2002, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ------------ ------------ U.S. Government securities $176,587,500 $192,822,656 Investments (non-U.S. Government securities) 19,109,664 66,157,419
At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $325,136,240 $4,885,833 $(8,789,950) $(3,904,117)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 88.6% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------- ------------------------- Shares Amount Shares Amount Class III: ----------- ------------ ----------- ------------ Shares sold 935,470 $ 9,870,900 19,956,747 $216,580,773 Shares issued to shareholders in reinvestment of distributions 391,307 4,104,818 1,654,864 16,728,562 Shares repurchased (6,264,189) (65,565,355) (4,254,015) (44,242,233) ----------- ------------ ----------- ------------ Net increase (decrease) (4,937,412) $(51,589,637) 17,357,596 $189,067,102 =========== ============ =========== ============
17 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 9/17/02 AUD 30,100,000 $16,557,167 $ 399,825 9/24/02 CAD 38,100,000 24,403,785 (234,243) 10/29/02 CHF 138,500,000 92,462,781 349,292 10/22/02 EUR 8,100,000 7,925,243 73,184 10/15/02 GBP 6,800,000 10,490,052 136,845 9/10/02 JPY 1,060,000,000 8,945,195 54,839 ----------- $ 779,742 =========== Sales 9/17/02 AUD 34,600,000 $19,032,491 $ 126,740 9/24/02 CAD 29,500,000 18,895,319 (308,721) 9/03/02 CHF 260,669 173,720 408 10/29/02 CHF 5,300,000 3,538,287 29,703 10/22/02 EUR 102,100,000 99,897,192 (257,352) 10/15/02 GBP 29,200,000 45,045,518 (496,830) 1/13/03 HKD 38,974,500 4,997,178 (7,763) 9/10/02 JPY 4,870,000,000 41,097,266 (274,789) ----------- $(1,188,604) ===========
FORWARD CROSS CURRENCY CONTRACTS Net Unrealized Settlement Deliver/Units of Receive/In Appreciation Date Currency Exchange For (Depreciation) ---------- ------------------ ---------------- -------------- 9/03/02 CHF 67,875,800 EUR 46,300,000 163,743 11/05/02 CHF 67,829,500 EUR 46,300,000 (18,541) 9/03/02 EUR 46,300,000 CHF 68,136,469 9,976 10/08/02 EUR 25,300,000 SEK 239,085,000 629,262 10/08/02 SEK 37,190,400 EUR 4,000,000 (34,727) ----------- $ 749,713 ===========
18 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- ------------------ ------------- -------------- Buys 52 Australian Government Bond 10 Yr. September 2002 $ 2,929,507 $ 96,537 126 Australian Government Bond 3 Yr. September 2002 7,084,125 100,408 616 Canadian Government Bond 10 Yr. December 2002 41,816,923 317,873 7 Japanese Government Bond 10 Yr. September 2002 8,342,260 (2,407) 101 U.S. Long Bond December 2002 11,078,438 105,552 197 U.S. Treasury Note 10 Yr. December 2002 22,020,906 125,070 64 U.S. Treasury Note 5 Yr. December 2002 7,115,000 24,226 ----------- $ 767,259 =========== Sales 21 Euro BOBL September 2002 $ 2,236,996 $ (1,814) 35 Euro Bund September 2002 3,805,900 (2,199) 39 Japanese Government Bond 10 Yr. September 2002 46,478,303 (1,088,859) 7 Japanese Government Bond 10 Yr. December 2002 8,296,209 2,316 120 Swiss Government Bond September 2002 9,987,339 (334,909) 53 Swiss Government Bond December 2002 4,365,163 (44,490) 114 U.K. Gilt December 2002 20,890,154 (58,673) ----------- $(1,528,628) ===========
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 19 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls ---------------------------- -------------------------------- Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ---------- ---------------- -------------- Outstanding, beginning of period -- $ -- -- $ -- Options written -- -- 143,100 6,707,775 Options closed -- -- -- -- Options exercised -- -- (143,100) (6,707,775) Options expired -- -- -- -- Options sold -- -- -- -- ---------- ---------- --------- ----------- Outstanding, end of period -- $ -- -- $ -- ========== ========== ========= ===========
20 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) -------------------- -------------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 126,425,696 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ 24,761 10/31/01 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. 76,846,993 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated (39,698) 05/04/01 to pay 0.07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. 10,000,000 USD 1/17/07 Agreement with JP Morgan Chase Bank dated 1/14/02 (959,550) to receive 1.46% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value upon a default event and the then-market value of AT&T Corp., 6.5% due 11/15/06.
21 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) -------------------- -------------- -------------------------------------------------- -------------- 5,000,000 USD 4/2/07 Agreement with Lehman Brothers Special Financing (46,538) Inc. dated 3/27/02 to receive .52% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event of General Electric Capital Corporation, 5.875% due 2/15/12. 3,000,000 USD 4/17/07 Agreement with UBS Warburg dated 4/12/02 to (40,396) receive .8% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event of Equity Office Properties Trust, 6.75% due 2/15/12. 3,000,000 USD 4/17/07 Agreement with UBS Warburg dated 4/12/02 to (37,614) receive .47% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event of Goldman Sachs Group, Inc., 6.6% due 1/15/12. 3,000,000 USD 4/17/07 Agreement with Bear Stearns dated 4/12/02 to (61,264) receive 1.28% per year times the motional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event of National Rural Utilities Cooperative Finance Corp., 7.25% due 3/1/12.
22 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) -------------------- -------------- -------------------------------------------------- -------------- TOTAL RETURN SWAPS 28,000,000 USD 9/1/02 Agreement with Lehman Brothers Special Financing 181,028 Inc. dated 10/31/01 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of the Lehman Brothers MBS Fixed Rate Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. + 90,500,000 USD 12/2/02 Agreement with Goldman Sachs International dated 2,990,476 11/07/01 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of the Lehman Brothers Aggregate Index and to pay initial market value multiplied by the 3 month LIBOR adjusted by a specified spread.+ 28,000,000 USD 8/1/03 Agreement with UBS AG dated 6/28/02 to receive 183,058 (pay) the notional amount multiplied by the return on the Lehman MBS Fixed Rate Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specific spread. + ---------- $2,194,263 ==========
+ Swap agreements are fair valued (Note 1). See Notes to the Schedule of Investments for definitions of currency abbreviations. 23 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- MUTUAL FUNDS -- 80.3% UNITED STATES -- 80.3% 53,955 GMO Emerging Countries Fund, Class III 479,660 60,622 GMO Emerging Markets Fund, Class III 555,297 193,906 GMO International Intrinsic Value Fund, Class III 3,501,949 27,670 GMO International Small Companies Fund, Class III 288,873 58,378 GMO Real Estate Fund, Class III 662,596 42,154 GMO Small Cap Value Fund, Class III 537,458 299,277 GMO U.S. Core Fund, Class III 3,238,178 -------------- 9,264,011 -------------- TOTAL MUTUAL FUNDS (COST $9,999,195) 9,264,011 -------------- COMMON STOCKS -- 0.0% ITALY -- 0.0% 12,500 Grassetto SPA(a)* 123 -------------- UNITED KINGDOM -- 0.0% 17,870 Viglen Technology Plc (Entitlement Letters)(a)* -- -------------- TOTAL COMMON STOCKS (COST $7,041) 123 -------------- SHORT-TERM INVESTMENTS -- 24.0% CASH EQUIVALENTS -- 17.3% $ 500,000 Bank One Corp Time Deposit, 1.80%, due 9/03/02 500,000 $ 500,000 Royal Bank of Canada Time Deposit, 1.81%, due 9/03/02 500,000 $ 500,000 Societe Generale GC Time Deposit, 1.81%, due 9/03/02 500,000 $ 500,000 Wachovia Bank Time Deposit, 1.81%, due 9/03/02 500,000 -------------- 2,000,000 --------------
See accompanying notes to the financial statements. 1 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- U.S. GOVERNMENT -- 6.7% $ 770,000 U.S. Treasury Bill, 1.61%, due 11/14/02(b) 767,459 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $2,767,224) 2,767,459 -------------- TOTAL INVESTMENTS -- 104.3% (Cost $12,773,460) 12,031,593 Other Assets and Liabilities (net) -- (4.3%) (500,758) -------------- TOTAL NET ASSETS -- 100.0% $ 11,530,835 ============== NOTES TO SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security is held as collateral for open futures contracts (Note 6). 2 See accompanying notes to the financial statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $12,773,460) (Note 1) $12,031,593 Cash 33,391 Interest receivable 100 Receivable for open forward foreign currency contracts (Notes 1 and 6) 1,196,218 Receivable for expenses reimbursed by Manager (Note 2) 10,059 ----------- Total assets 13,271,361 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 4,878 Shareholder service fee 1,463 Payable for open forward foreign currency contracts (Notes 1 and 6) 1,676,905 Payable for variation margin on open futures contracts (Notes 1 and 6) 27,504 Accrued expenses 29,776 ----------- Total liabilities 1,740,526 ----------- NET ASSETS $11,530,835 =========== NET ASSETS CONSIST OF: Paid-in capital $17,945,975 Distributions in excess of net investment income (279,484) Accumulated net realized loss (5,870,735) Net unrealized depreciation (264,921) ----------- $11,530,835 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $11,530,835 =========== SHARES OUTSTANDING: Class III 1,206,825 =========== NET ASSET VALUE PER SHARE: Class III $ 9.55 ===========
See accompanying notes to the financial statements. 3 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 81,186 Interest 18,206 --------- Total income 99,392 --------- EXPENSES: Management fee (Note 2) 32,803 Custodian fees 33,212 Transfer agent fees 13,892 Audit fees 13,800 Registration fees 1,472 Legal fees 198 Trustees fees (Note 2) 170 Miscellaneous 734 Fees reimbursed by Manager (Note 2) (30,084) --------- 66,197 Indirectly incurred fees waived or borne by Manager (Note 2) (27,053) --------- 39,144 --------- Shareholder service fee (Note 2) - Class III 9,841 Shareholder service fee waived (Note 2) - Class III (8,456) --------- 1,385 --------- Net expenses 40,529 --------- Net investment income 58,863 --------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 3,253 Realized gains distributions from investment company shares 17,602 Closed futures contracts 1,006,712 Foreign currency, forward contracts and foreign currency related transactions 215,499 --------- Net realized gain 1,243,066 --------- Change in net unrealized appreciation (depreciation) on: Investments (306,014) Open futures contracts 775,837 Foreign currency, forward contracts and foreign currency related transactions (822,240) --------- Net unrealized loss (352,417) --------- Net realized and unrealized gain 890,649 --------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 949,512 =========
4 See accompanying notes to the financial statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 58,863 $ 483,321 Net realized gain 1,243,066 2,286,789 Change in net unrealized appreciation (depreciation) (352,417) (38,162) ----------- ------------ Net increase in net assets from operations 949,512 2,731,948 ----------- ------------ Distributions to shareholders from: Net investment income Class III (525,883) (1,324,504) ----------- ------------ Total distributions from net investment income (525,883) (1,324,504) ----------- ------------ Net share transactions: (Note 5) Class III (5,520,827) (41,278,455) ----------- ------------ Decrease in net assets resulting from net share transactions (5,520,827) (41,278,455) ----------- ------------ Total decrease in net assets (5,097,198) (39,871,011) NET ASSETS: Beginning of period 16,628,033 56,499,044 ----------- ------------ End of period (including distributions in excess of net investment income of $279,484 and accumulated undistributed net investment income of $187,536, respectively) $11,530,835 $ 16,628,033 =========== ============
See accompanying notes to the financial statements. 5 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, AUGUST 31, 2002 ---------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.23 $ 8.73 $ 7.72 $ 7.59 $ 8.72 $ 10.69 ------- ------- ------- ------- ------- -------- Income from investment operations: Net investment income(d) 0.04(b) 0.17(b) 0.15 0.16 0.17(b) 0.35 Net realized and unrealized gain (loss) 0.57 0.96 1.68 0.20 (0.88) (0.52) ------- ------- ------- ------- ------- -------- Total from investment operations 0.61 1.13 1.83 0.36 (0.71) (0.17) ------- ------- ------- ------- ------- -------- Less distributions to shareholders: From net investment income (0.29) (0.63) (0.82) (0.23) (0.42) (0.35) From net realized gains -- -- -- -- -- (1.45) ------- ------- ------- ------- ------- -------- Total distributions (0.29) (0.63) (0.82) (0.23) (0.42) (1.80) ------- ------- ------- ------- ------- -------- NET ASSET VALUE, END OF PERIOD $ 9.55 $ 9.23 $ 8.73 $ 7.72 $ 7.59 $ 8.72 ======= ======= ======= ======= ======= ======== TOTAL RETURN(a) 6.71%** 13.32% 24.84% 4.74% (8.13)% (1.63)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's)(c) $11,531 $16,628 $56,499 $46,718 $50,671 $170,706 Net expenses to average daily net assets 0.62%* 0.37% 0.25% 0.21% 0.17% 0.58% Net investment income to average daily net assets(d) 0.90%* 1.88% 1.80% 1.89% 1.99% 2.93% Portfolio turnover rate 24% 22% 15% 13% 21% 277% Fees and expenses reimbursed by the Manager to average daily net assets: 1.00%* 0.78% 0.64% 0.54% 0.61% 0.37%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. (c) On August 20, 1997, the Fund began to invest a substantial portion of its assets in other funds of GMO Trust and revised its reimbursement. Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (d) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. * Annualized. ** Not Annualized. 6 See accompanying notes to the financial statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global Hedged Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return consistent with minimal exposure to general equity market risk. The Fund invests a substantial portion of its assets in other Funds of the Trust ("underlying funds"). The Fund's benchmark is the Salomon Smith Barney 3 Month T-Bill Index. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 7 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the 8 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amount paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a 9 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. At August 31, 2002, there were no open swap agreements. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward of $26,615,864. However, restrictions on annual utilization of this carryforward under the Code resulting from significant 10 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- shareholder activity are expected to limit maximum utilization to offset future capital gains prior to expiration to approximately $5,184,638 of which $4,248,415 expires in 2006 and $900,223 expires in 2007. The Fund has elected to defer to March 1, 2002 post-October capital losses of $712,608. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. See Note 2. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund will invest in Class III shares of each underlying fund being offered. Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder 11 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- service fees paid in connection with the Fund's investment in shares of the underlying funds. For the six months ended August 31, 2002, shareholder service fees incurred indirectly by the Fund were .129% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. Because GMO will not reimburse expenses incurred indirectly by the Fund to the extent they exceed .50%, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fee and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds may exceed .50% of the Fund's average daily net assets. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses, as defined above) and indirect investment expenses incurred by the Fund were .443% and .001% of Class III's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $170. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002 aggregated $2,773,788 and $7,525,000, respectively. At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $12,773,460 $30,146 $(772,013) $(741,867)
12 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 74.8% of the outstanding shares of the Fund were held by five shareholders, each holding in excess of 10% of the Fund's outstanding shares. Two of these shareholders are affiliates of the Manager. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 --------------------- ------------------------ Shares Amount Shares Amount Class III: -------- ----------- ---------- ------------ Shares sold 231,836 $ 2,200,000 158,832 $ 1,450,027 Shares issued to shareholders in reinvestment of distributions 54,717 509,414 131,282 1,152,335 Shares repurchased (880,867) (8,230,241) (4,957,264) (43,880,817) -------- ----------- ---------- ------------ Net decrease (594,314) $(5,520,827) (4,667,150) $(41,278,455) ======== =========== ========== ============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------- ------------------ ------------ -------------- Sales 14 CAC40 September 2002 $ 463,381 $ 20,690 3 DAX September 2002 273,799 49,781 21 FTSE 100 September 2002 1,377,390 158,223 1 HANG SENG September 2002 64,353 1,195
13 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS -- CONTINUED
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------- ------------------ ------------ -------------- 2 IBEX 35 September 2002 $ 126,393 $ (4,584) 2 MIB30 September 2002 250,971 23,904 17 OMX September 2002 95,732 1,379 6 SPI 200 September 2002 256,476 12,350 21 S&P 500 September 2002 4,809,525 486,248 16 TSE TOPIX September 2002 1,266,478 208,662 -------- $957,848 ========
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- ------------ ---------- -------------- Buys 10/25/02 AUD 263,639 $ 144,580 $ 4,245 9/27/02 CHF 1,904,130 1,269,776 112,516 9/27/02 DKK 1,549,792 204,476 22,355 9/27/02 EUR 4,690,855 4,595,868 469,031 9/27/02 GBP 2,623,192 4,052,336 332,775 10/25/02 HKD 2,574,662 330,121 246 10/25/02 JPY 338,644,000 2,863,775 225,681 9/27/02 SEK 2,156,180 229,327 22,777 10/25/02 SGD 341,715 195,547 6,592 ---------- $1,196,218 ==========
14 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- ------------ ---------- -------------- Sales 10/25/02 AUD 717,398 $ 393,421 $ (12,483) 9/27/02 CHF 2,333,848 1,556,335 (147,813) 9/27/02 DKK 2,161,810 285,225 (31,134) 9/27/02 EUR 6,377,657 6,248,514 (675,347) 9/27/02 GBP 3,341,930 5,162,650 (445,785) 10/25/02 HKD 3,878,896 497,349 (406) 10/25/02 JPY 444,300,010 3,757,265 (300,563) 9/27/02 NOK 790,000 104,533 (16,872) 9/27/02 SEK 3,855,178 410,028 (40,211) 10/25/02 SGD 341,040 195,160 (6,291) ----------- $(1,676,905) ===========
CURRENCY ABBREVIATIONS: AUD - Australian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone SEK - Swedish Krona SGD - Singapore Dollar
15 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- COMMON STOCKS -- 79.5% ARGENTINA -- 0.1% 220,500 Perez Companc SA ADR* 1,102,500 18,000 Siderca SAIC ADR 338,400 -------------- 1,440,900 -------------- BRAZIL -- 2.1% 131,170,000 Cesp-Cia Energetica Sao Paulo* 301,769 46,000 Cia Vale do Rio Doce ADR* 1,177,600 537,690,500 Companhia Siderurgica Nacional SA 7,177,477 959,615,000 Electrobras 7,053,202 69,000 Petroleo Brasileiro SA (Petrobras) 1,098,451 178,000 Petroleo Brasileiro SA (Petrobras) ADR 2,839,100 971,700 Souza Cruz (Registered) 4,740,000 202,491,000 Tele Norte Leste Participacoes SA 1,358,171 441,000 Vale Do Rio Doce 10,901,450 -------------- 36,647,220 -------------- CHILE -- 0.4% 97,400 Banco Santander Chile SA ADR 1,780,472 81,400 Compania de Telecommunicaciones de Chile ADR 820,512 79,400 Cristalerias de Chile SA ADR 1,286,280 236,681 Enersis SA ADR* 1,384,584 103,100 Masisa SA ADR 792,839 13,500 Sociedad Quimica y Minera de Chile ADR 300,375 -------------- 6,365,062 -------------- CHINA -- 5.2% 10,716,000 Brilliance China Automotive Holdings Ltd 1,497,502 4,271,000 Chaoda Modern Agriculture 1,368,919 10,834,000 China Eastern Airlines Corp Ltd 1,444,543 9,770,000 China Everbright Ltd 3,726,402 4,188,000 China Insurance International Holdings Co Ltd 1,731,588 5,904,000 China Mobile Ltd* 16,349,643 64,800 China Mobile Ltd ADR* 897,480 34,815,000 China Petroleum & Chemical Corp 5,311,553 1,918,000 China Resources Enterprise 2,188,501 16,511,000 China Unicom* 12,171,649 358,800 China Unicom ADR* 2,637,180
See accompanying notes to the financial statements. 1 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- CHINA -- CONTINUED 7,360,000 CNOOC Ltd 10,238,014 7,956,000 Cosco Pacific Ltd 5,457,035 21,320,800 Denway Investment Ltd 6,286,943 3,956,000 Huaneng Power International Inc Class H 2,992,378 2,607,000 People's Food Holdings Ltd 1,623,928 29,587,000 PetroChina Co Ltd 6,031,235 7,590,000 Shandong International Power Development Co Ltd 1,722,357 2,093,000 Shanghai Industrial Holdings 3,327,355 5,121,847 TPV Technology Ltd 1,707,293 6,418,959 Zhejiang Southeast Electric Power Co-B 4,634,488 -------------- 93,345,986 -------------- CZECH REPUBLIC -- 2.4% 4,275,578 Ceske Energeticke Zavody AS 13,191,794 402,476 Ceske Radiokomunikace 3,380,796 632,565 Ceski Telecom AS* 5,691,622 259,700 Komercni Banka AS 13,927,902 48,000 Komercni Banka AS GDR 861,600 14,530 Philip Morris CR AS 5,328,036 -------------- 42,381,750 -------------- EGYPT -- 0.5% 12,000 Al Ahram Beverage Co* 101,025 496,650 Al Ahram Beverage Co GDR* 3,749,707 20,000 Al Ahram Beverage Co GDR 144A* 151,000 94,175 Eastern Tobacco Co 914,814 523,336 Egyptian International Pharmaceuticals Industries Co 929,747 536,585 MobiNil-Egyptian Mobile Services Co 3,331,286 -------------- 9,177,579 -------------- GREECE -- 0.0% 8,940 Econ Viomihanies(a)* 88 4,200 National Bank of Greece SA 77,683 -------------- 77,771 -------------- HUNGARY -- 0.3% 15,000 BorsodChem Rt 300,150 2,062 Delmagyarorszagi Aramszol 79,798
2 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- HUNGARY -- CONTINUED 8,150 Gedeon Richter Rt 439,179 9,748 Globus Konzervipari Rt 103,966 78,700 Matav Rt ADR 1,316,651 31,300 MOL Magyar Olaj es Gazipari Rt (New Shares) 666,397 182,500 OTP Bank Rt 1,614,107 26,900 Pannonplast Rt 162,557 -------------- 4,682,805 -------------- INDIA -- 0.8% 575,300 Bharat Heavy Electricals Ltd 2,102,035 1,060 BSES Ltd 4,965 900 Cipla Ltd 17,439 3,000 Cipla Ltd (New Shares) 1 850 Escorts Ltd 931 133,200 e-Serve International Ltd 1,483,969 203,900 Galaxy Entertainment Corp* 57,632 87 Gesco Corp Ltd 31 1,318 Great Eastern Shipping Co 744 2,990 HCL Infosytems Ltd 6,601 400 ITC Ltd 5,776 45,000 ITC Ltd GDR 659,250 299,750 Mahanagar Telephone Nigam* 1,573,687 21,500 Mastek Ltd 184,194 21,275 NIIT Ltd 63,557 102,750 Polaris Software Lab* 417,614 44,600 Ranbaxy Laboratories Ltd GDR 869,700 8,029 Reliance Industries 42,290 179,500 Reliance Industries Ltd GDR 144A* 1,884,750 95,400 Satyam Computer Services Ltd ADR* 992,160 230,600 State Bank of India Ltd GDR 2,686,490 339,900 Tata Engineering & Locomotive GDR* 972,114 524,200 U TV Software Comm Ltd(a)+* 270,373 206,046 Venky's (India) Ltd* 177,692 200 Wockhardt Life Sciences Ltd* 115 2,100 Wockhardt Ltd 19,540 -------------- 14,493,650 -------------- INDONESIA -- 5.5% 16,057,100 Astra International Tbk* 5,802,679
See accompanying notes to the financial statements. 3 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- INDONESIA -- CONTINUED 49,041,000 Bank Central Asia Tbk 12,461,011 162,532,000 Bentoel International Investama Tbk PT* 2,386,128 30,109,200 Citra Marga Nusaphala Persad* 1,275,093 5,577,500 Gudang Garam 5,322,403 36,085,500 HM Sampoerna Tbk 15,791,227 28,275,800 Indah Kiat Pulp & Paper(b)* 247,473 43,384,500 Indofood Sukses Makmur Tbk 4,531,978 29,868,000 Indorama Synthetics* 1,602,180 1,253,000 Indosat Tbk 1,294,743 3,154,000 International Nickel* 1,852,151 41,841,000 Mayora Indah Tbk 1,842,800 14,455,400 PT Bimantara Citra 4,121,952 186,900 PT Indosat (Persero) Tbk Class B ADR 1,915,725 25,036,000 PT Matahari Putra Prima Tbk 1,555,031 2,680,000 Semen Gresik 2,224,506 13,626,500 Surya Citra Media 1,731,204 301,969 Telekomunikasi Indonesia Class B ADR 2,385,555 71,454,280 Telekomunikasi Tbk 29,251,470 20,240,000 United Tractors* 880,000 -------------- 98,475,309 -------------- ISRAEL -- 0.0% 11,736 Clal Industries Ltd* 41,531 -------------- LEBANON -- 0.0% 24,118 Banque Libanaise* 132,649 -------------- MALAYSIA -- 3.0% 301,000 Affin Holdings Berhad 113,271 18,636,000 Arab-Malaysian Corp Berhad* 5,885,053 368,000 Berjaya Sports Toto 364,126 822,000 Edaran Otomobil Berhad 2,790,474 4,310,000 Highlands and Lowlands Berhad 3,402,632 788,000 Hong Leong Bank Berhad 1,130,158 2,120,400 Hong Leong Credit Berhad 2,577,960 1,598,000 Hume Industries-Malaysia Berhad 2,712,395 3,051,000 IJM Corp Berhad Class A 4,094,763 2,327,800 IOI Corp Berhad 3,583,587 1,439,873 Malakoff Berhad 1,599,017
4 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- MALAYSIA -- CONTINUED 1,379,000 Malayan Banking Berhad 3,175,329 1,159,000 Malaysian International Shipping (Foreign Registered) 2,211,250 632,000 Malaysian Oxygen Berhad 1,696,421 2,467,000 Perusahaan Otomobil Nasional 6,427,184 4,867,000 Renong Berhad* 1,082,267 419,000 Resorts World Berhad 1,146,737 3,491,700 Saship Holdings(a)* 9,189 109,620 Silverstone(a)* 288 2,371,000 Sime Darby Berhad 3,182,132 1,206,000 Sime UEP Properties Berhad 1,275,821 6,045,000 TA Enterprise Berhad 1,073,783 14,130,000 Tan Chong International Ltd 1,902,128 719,700 Tanjong 1,808,720 -------------- 53,244,685 -------------- MEXICO -- 1.6% 2,666,415 Altos Hornos de Mexico(a)(b)* 2,694 461,410 America Movil SA de CV ADR 6,390,528 157,747 Cemex SA de CV ADR (Participating Certificates) 3,714,942 280,524 Cemex SA de CV CPO 1,337,718 998,000 Corporacion GEO SA de CV Series B* 2,143,613 2,814,000 Grupo Cementos de Chihuahua SA de CV* 1,765,502 8,232,755 Grupo Financiero Serfin SA de CV Class B(a)(b)* 8,318 681,607 Grupo Gigante* 413,179 4,900,000 Grupo Herdez SA de CV* 1,980,198 80,200 Grupo Mexico Desarollo Class B ADR(a)* 200 2,380,000 Grupo Posadas SA Class L* 1,118,105 6,255,000 Grupo Situr SA de CV Class B(a)* 6,319 154,300 Pepsi-Gemex SA GDS 1,587,747 232,400 Telefonos de Mexico Class L ADR 6,886,012 292,000 TV Azteca SA ADR 2,000,200 -------------- 29,355,275 -------------- PERU -- 0.0% 146,238 Cervecerias 39,595 -------------- PHILIPPINES -- 2.4% 32,567,184 Ayala Corp 3,266,455 108,264,000 Ayala Land Inc 11,485,235
See accompanying notes to the financial statements. 5 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- PHILIPPINES -- CONTINUED 2,221,400 Bank of the Philippine Islands 1,863,842 66,520,450 Filinvest Land Inc* 1,565,338 8,528,960 First Philippine Holdings* 2,138,615 189,212 Globe Telecom Inc* 1,770,042 14,673,043 Ionics Circuits Inc 1,301,881 6,497,000 Ionics EMS Inc 742,578 2,245,000 Metropolitan Bank & Trust Co 1,472,273 865,110 Philippine Long Distance Telephone* 4,755,644 50,000 Philippine Long Distance Telephone GDR 144A 887,500 6,506,851 San Miguel Corp Class B 6,526,304 41,339,000 SM Prime Holdings 4,544,938 -------------- 42,320,645 -------------- POLAND -- 0.1% 900 Bank Rozwoju Eksportu SA 19,373 858,700 Telekomunikacja Polska SA* 2,689,473 -------------- 2,708,846 -------------- RUSSIA -- 6.5% 115,550 AO Tatneft ADR 1,543,748 632,610 Bashneft* 1,897,830 2,649,789 Chelabinsky Tube Works* 294,127 7,500 Cherepovets MK Severstal* 397,500 17,100 Dalmoreproduct 3,420 90,000 Divot Holdings NV(a)+* 44,730 272,800 Electrosila* 682,000 29,221 Elsib 58,442 472,700 Irkutskelectrosviaz* 134,719 308,287 JSC Mining & Smelting Co ADR* 5,703,309 267,500 Lukoil Holding Co ADR 17,053,125 785,700 North-West Telecom* 306,423 350,000 Onaco Oil Co* 409,500 40,000 Orenburgneft* 352,000 218,400 Rostelecom ADR 1,428,336 135,000 Russia Petroleum 843,750 68,500 Sberbank RF 10,412,000 10,000 Seversky Tube Works ADR* 62,000 385,100 Sibneft ADR* 7,162,860 116,810 Sun Interbrew Ltd Class A GDR* 671,657
6 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- RUSSIA -- CONTINUED 718,000 Sun Interbrew Ltd Class B GDR* 4,200,300 919,900 Surgutneftegaz ADR 15,868,275 37,000 Trade House GUM ADR 88,800 2,400 Udmurtneft* 181,200 1,418,180 United Heavy Machinery ADR* 6,353,446 450,000 United Heavy Machinery ADR 144A* 2,016,000 594,240 Uralmash Zavody* 2,662,195 64,200 Vimpel-Communications ADR* 1,511,910 130,500 Yukos Corp ADR 16,834,500 1,913,900 Yukos Oil 16,516,957 -------------- 115,695,059 -------------- SOUTH AFRICA -- 4.0% 2,274,800 AECI Ltd 5,191,690 2,727,000 African Bank Investments Ltd 1,491,723 111,345 AngloGold Ltd 5,190,415 1,592,493 Anglovaal Industries Inc 2,136,151 2,904,000 Foschini Ltd 2,624,554 899,000 Gencor Ltd 3,763,117 543,900 Goldfields Ltd 6,478,265 122,000 Harmony Gold Mining Co Ltd 1,723,541 139,000 Impala Platinum Holdings Ltd 7,061,409 1,259,080 Iscor Ltd* 2,713,044 1,108,279 Kumba Resources Ltd* 3,795,657 246,008 Liberty International Plc 2,281,861 2,186,442 Nampak Ltd 2,724,862 2,793,200 Premier Group Ltd 2,657 1,201,770 Remgro Ltd 7,984,742 2,583,255 Sage Group Ltd 1,007,596 5,775,300 Sanlam Ltd 4,516,288 659,110 Sasol Ltd 7,273,630 843,200 Tongaat-Hulett Group 3,914,585 -------------- 71,875,787 -------------- SOUTH KOREA -- 19.7% 117,200 Cheil Industries Inc 1,555,256 2,279,500 Chohung Bank* 10,734,199 38,400 CJ39 Shopping 2,958,393 1,553,000 Daegu Bank* 7,868,688
See accompanying notes to the financial statements. 7 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 4 Daegu Department Store Co 64 154,020 Daelim Industrial Co Ltd 1,954,162 12,330 Gwangju Shinsegae Co Ltd 639,094 449,400 Hana Bank 6,991,788 78,450 Hanil Cement Manufacturing 2,219,144 940,600 Hankook Tire Co Ltd 1,893,799 221,840 Hanssem Co Ltd* 1,854,896 923,448 Hanwha Corp* 2,135,850 31,900 Hynix Semiconductor* 14,199 293,000 Hyosung Corp 3,193,394 89,500 Hyundai Fire & Marine Insurance Co 2,717,875 493,000 Hyundai Merchant Marine* 1,304,330 68,300 Hyundai Mobis 1,622,335 125,400 Hyundai Motor Co 3,547,236 33,700 Kangwon Land Inc 4,093,515 678,600 KIA Motors Corp* 5,645,826 33,074 Kookmin Bank 1,546,453 74,079 Kookmin Bank ADR* 3,466,897 96,130 Korea Computer Inc 1,343,637 1,074,370 Korea Electric Power Corp 18,815,665 1,754,400 Korea Exchange Bank* 8,772,365 62,590 Korea Reinsurance 1,609,078 384,700 Korean Air Lines* 5,024,993 512,200 KT Freetel* 14,701,859 300,820 Kyeryong Construction Industrial Co Ltd 2,139,865 371,300 LG Chemicals Ltd 13,437,789 451,410 LG Electronics Inc* 16,862,855 252,400 LG Engineering & Construction Ltd 2,876,892 123,950 LG Household & Health Care Ltd 4,228,088 2,510,500 LG Investment & Securities Co Ltd 35,925,454 35,980 Pacific Chemical Corp 3,831,640 147,876 Pohang Iron & Steel 13,287,248 274,800 Poongsan Corp 2,972,170 363,400 Pusan Bank* 1,850,333 475,800 Samsung Corp 3,356,865 312,000 Samsung Electronics 85,920,379 113,860 Samsung Fire & Marine Insurance 7,815,175 30,300 Samsung SDI Co Ltd 2,407,463 92,341 Shin Young Securities Co 1,129,342 27,100 Shinsegae Co Ltd 4,622,072
8 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 449,470 SK Corp 6,170,186 438,268 SK Global* 4,065,634 21,400 SK Telecom 4,210,741 214,000 SK Telecom ADR 4,656,640 1,524,043 Ssangyong Cement* 2,516,931 270,710 Sungshin Cement Manufacturing Co Ltd 3,063,069 584,262 Taihan Electric Wire 2,595,748 25,500 Tongyang Confectionery Co 1,135,031 468,800 Woongjin.com Co Ltd 1,948,214 -------------- 351,250,814 -------------- SRI LANKA -- 0.0% 1,981,170 Blue Diamonds Jewelry Ltd* 41,163 333,600 Lanka Walltile Ltd 100,503 1,591,169 Millenium Information Technology(a)+* 787,470 -------------- 929,136 -------------- TAIWAN -- 13.1% 12,793,040 Acer Communications & Multimedia Inc 21,667,289 12,342,290 Ambassador Hotel* 2,865,271 334,010 Ambit Microsystems Corp 921,710 7,219,050 Asustek Computer Inc 17,391,491 3,604,000 AU Optronics Corp* 2,788,903 524,950 AU Optronics Corp ADR* 4,021,117 6,115,000 Cathay Financial Holding Co Ltd 7,392,641 5,547,055 Chang Hwa Bank 2,332,533 31,044,000 China Development Financial Holding Corp* 17,949,225 12,560,400 China Housing Food & Synthetic* 1,144,355 5,118,000 China Manmade Fibers* 1,247,928 26,084,000 Chinatrust Financial Holding Co* 20,337,065 3,703,000 Chung Hwa Pulp* 1,129,985 3,643,110 Evergreen Marine Corp 1,452,138 4,870,710 First Bank* 2,929,964 6,494,785 Formosa Taffeta Co 2,626,742 5,775,000 Formosan Rubber Group Inc* 1,500,876 1,455,000 GigaByte Technology Co Ltd* 3,207,841 1,036,288 Hon Hai Precision Industry Co Ltd 3,933,930 12,539,880 Hsinchu International Bank* 3,808,286 9,216,720 International Commercial Bank China 5,167,500
See accompanying notes to the financial statements. 9 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- TAIWAN -- CONTINUED 19,076,200 Inventec Co Ltd 13,814,856 271,000 Lite-On IT Corp* 1,519,404 6,024,000 Lite-On Technology Corp 9,499,080 29,960,300 Macronix International* 11,460,941 4,961,350 Megamedia Corp* 738,878 8,148,050 Nan Ya Plastic Corp 7,471,128 6,861,100 Orient Semiconductor Electronics Ltd* 1,803,180 17,464,466 Pacific Construction* 780,278 2,546,000 Prodisc Technology Inc* 1,420,020 1,236,000 Sunplus Technology Co Ltd 2,309,943 19,291,010 Taiwan Cement Corp* 5,745,899 9,434,909 Taiwan Semiconductor* 13,748,050 24,626,050 Tatung Co* 5,824,821 16,550,914 Teco Electric & Machinery* 5,340,564 7,293,472 United Microelectronics* 5,984,715 632,167 United Microelectronics ADR* 2,825,786 637,000 Wan Yu Paper(a)(b)* 186 15,549,000 Waterland Financial Holdings* 2,747,013 26,609,040 Yageo Corp* 9,401,938 6,990,810 Yang Ming Marine Transport 1,500,437 6,460,000 Yieh Loong Co Ltd* 1,094,116 3,950,000 Yulon Motor Co 2,975,909 -------------- 233,823,932 -------------- THAILAND -- 8.4% 7,380,000 Advanced Info Service Pcl (Foreign Registered) 5,072,766 552,000 Advanced Info Service Pcl NVDR 369,614 2,297,100 Ban Pu Coal Pcl (Foreign Registered) 2,014,522 1,410,000 Bangkok Bank Pcl (Foreign Registered)* 2,105,475 2,801,000 Bangkok Bank Pcl NVDR* 3,385,897 16,767,700 Bangkok Expressway Pcl (Foreign Registered) 6,517,902 12,689,000 Bank of Ayudhya Pcl (Foreign Registered)* 2,135,385 853,400 BIG C Supercenter Pcl (Foreign Registered)* 412,642 9,633,400 BIG C Supercenter Pcl NVDR* 4,658,008 900,100 Central Pattana Pcl NVDR* 2,048,106 21,105,640 Charoen Pokphand Foods Pcl (Foreign Registered) 2,281,150 1,549,450 Delta Electronics Pcl (Foreign Registered)(a) 1,009,585 705,460 Electricity Generating Pcl (Foreign Registered) 622,858 4,394,000 Electricity Generating Pcl NVDR 3,879,509 7,707,400 Italian-Thai Development Pcl (Foreign Registered)* 5,617,505
10 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- THAILAND -- CONTINUED 1,482,200 Italian-Thai Development Pcl NVDR* 1,080,295 630,000 KCE Electronics (Foreign Registered)* 813,818 2,389,000 Kiatnakin Finance & Securities (Foreign Registered) 1,953,555 976,400 Land & House Pcl (Foreign Registered) 1,654,719 6,204,800 Land & House Pcl NVDR 9,927,092 409,200 National Finance Pcl (Foreign Registered)* 153,244 38,412,200 National Finance Pcl NVDR* 12,564,313 3,927,000 National Petrochemical (Foreign Registered) 4,607,407 1,376,000 Phatra Leasing Plc (Foreign Registered) 880,588 5,240,058 PTT Exploration & Production Pcl (Foreign Registered)* 15,152,574 2,271,000 PTT PCL (Foreign Registered) 2,045,461 590,000 Regional Container Lines (Foreign Registered)* 727,187 1,707,000 Saha Pathana International Holdings Pcl (Foreign Registered) 3,034,487 1,547,500 Saha Union Pcl (Foreign Registered) 583,201 64,570 Siam Cement Pcl (Foreign Registered) 1,582,493 895,100 Siam Cement Pcl NVDR 19,264,063 7,449,300 Siam Commercial Bank Pcl (Foreign Registered)* 4,634,845 20,299,600 Siam Industrial Credit Pcl NVDR* 4,619,013 3,108,050 Star Block Co Ltd (Foreign Registered)(a)* 737 11,882,000 Thai Farmers Bank NVDR* 7,181,583 5,703,650 Thai German Ceramics Industry (Foreign Registered) 4,326,068 3,315,800 Thai Union Frozen Products Pcl (Foreign Registered)(a) 1,311,702 2,315,000 Thai Union Frozen Products Pcl NVDR 910,856 13,563,000 Tisco Finance Pcl (Foreign Registered)* 7,779,678 -------------- 148,919,903 -------------- TURKEY -- 3.0% 4,927,181,136 Akbank TAS* 14,189,799 230,279,000 Anadolu Isuzu Otomotiv Sanay* 1,157,039 971,000,000 Dogan Sirketler Grubu Hldgs* 1,204,825 1,033,980,000 Dogan Yayin Holding* 1,536,398 550,149,000 Eregli Demir ve Celik Fabrikalari TAS* 6,404,921 78,619,000 Galatasaray Sportif Sinai ve Ticari Yatirimlar AS* 2,119,630 1,722,808,260 Hurriyet Gazeteci* 4,222,569 112,000,000 KOC Holding AS* 1,115,196 42,150,000 Medya Holding(a)* -- 93,017,000 Petrol Ofisi* 1,424,893 1,573,938,362 Trakya Cam Sanayii 4,581,009 757,881,000 Turkcell Iletisim Hizmet AS* 3,993,736 4,979,810,415 Turkiye Garanti Bankasi* 5,034,735
See accompanying notes to the financial statements. 11 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- TURKEY -- CONTINUED 505,000,000 Turkiye IS Bankasi* 1,144,914 6,032,558,000 Yapi VE Kredi Bankasi* 4,528,115 -------------- 52,657,779 -------------- VENEZUELA -- 0.4% 50,000 Banco Provincial* 13,565 479,712 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 5,276,832 778 International Briquettes Holding* 8 40,181 Mantex SA Class A ADR* 100,453 328,533 Mercantil Servicios Financieros ADR 963,423 32 Siderurgica Venezolana Sivensa SACA* -- 723,926 Venepal SA Class B GDR 144A(a)* 7,239 -------------- 6,361,520 -------------- TOTAL COMMON STOCKS (COST $1,491,856,166) 1,416,445,188 -------------- PREFERRED STOCKS -- 6.9% BRAZIL -- 4.5% 5,020,000 Alpargatas de Sao Paolo 4.06% 190,260 1,319,000 Aracruz Celulose SA 3.40% 2,282,383 1,609,102,000 Banco Bradesco SA 1.23% 5,372,513 875,838,000 Banco do Brasil SA 8.92% 3,273,567 148,940,000 Banco Nacional(a)(b)* 491 20,801,000 Belgo Mineira (Registered) 1,954,156 234,451,000 Brasil Telecom Participacoes SA 2.19% 1,363,896 1,035,000 Centrais Eletricas de Santa Catarina SA Class B* 201,269 73,317,908 Cia Energetica de Minas Gerais 2.88% 674,215 54,737,000 Cia Energetica de Sao Paolo SA (Registered)* 142,525 34,000,000 Cia Energetica Perna Class A 89,651 339,000 Cia Paranaense de Energia-Copel ADR 5.19% 1,169,550 470,000 Companhia Vale do Rio Doce 10,688,860 13,238,000 Copene-Petroquimica do Nordeste SA Class A 12.04% 1,374,413 685,444,860 Electrobras Class B (Registered) 4,925,082 429,500 Embratel Participacoes SA ADR* 386,550 757,312,648 Gerasul 0.96% 711,385 534,492,000 Gerdau SA 5,787,100 12,013,178 Investimentos Itau SA 7,087,537 60,204,000 Itaubanco SA (Registered) 2,916,937 42,420,000 Mesbla (Registered)(a)(b)* 140
12 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- BRAZIL -- CONTINUED 335,746,000 Olvebra(a)(b)* 1,107 585,500 Petroleo Brasileiro SA (Petrobras) 3.01% 8,491,101 521,700 Petroleo Brasileiro SA ADR 6.93% 7,616,820 290,003,000 Siderurgica de Tubarao 2,485,194 682,000 Suzano (Registered) 4.28% 1,238,569 346,549,000 Tele Centro Oeste Celular SA 6.78% 364,368 407,300 Tele Centro Oeste Celular SA ADR 1,291,141 74,732 Tele Norte Leste Participacoes ADR 4.11% 650,168 260,974,414 Tele Norte Leste Participacoes SA 3.44% 2,270,839 63,000 Telecomunicacoes Brasileiras SA ADR 0.21% 1,319,220 9,347,654 Unipar 2.52% 2,926,919 34,362,000 Votorantim Celulose e Papel SA 2.53% 1,160,992 -------------- 80,408,918 -------------- RUSSIA -- 0.0% 100,800 Krasny Oktyabr 144A 0.76% 95,760 -------------- SOUTH KOREA -- 2.4% 242,100 LG Electronics Inc* 4,431,299 275,163 Samsung Electronics (Non Voting) 37,773,530 -------------- 42,204,829 -------------- TOTAL PREFERRED STOCKS (COST $143,521,875) 122,709,507 -------------- PRIVATE EQUITY SECURITIES -- 2.9% POLAND -- 2.9% 21,635,077 CHP Investors(a)+* 28,980,186 17,000,000 MHP Investors(a)+* 17,000,000 9,204,400 Polimex Investment Partners(a)+* 6,145,778 -------------- 52,125,964 -------------- TOTAL PRIVATE EQUITY SECURITIES (COST $50,842,104) 52,125,964 -------------- RIGHTS AND WARRANTS -- 1.6% INDIA -- 1.3% 205,900 Bajaj Auto Warrants, Expires 6/30/03* 1,769,937 161,200 Digital Globalsoft Warrants, Expires 6/30/03* 2,039,905 471,000 Hero Honda Warrants, Expires 6/5/03* 2,612,684
See accompanying notes to the financial statements. 13 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- INDIA -- CONTINUED 871,000 Hindustan Petroleum Warrants, Expires 6/30/03* 4,881,432 435,000 ICICI Bank Warrants, Expires 5/8/03* 1,283,119 39,230 Infosys Warrants, Expires 10/11/02* 2,908,897 399,115 Mahanagar Telephone Warrants, Expires 7/3/03* 1,068,950 91,500 Ranbaxy Warrants, Expires 2/14/03* 1,682,685 545,000 Reliance Industries Warrants, Expires 7/3/03* 2,849,097 261,500 Satyam Computer Warrants, Expires 11/18/02* 1,284,854 619,000 Tata Engineering Warrants, Expires 7/3/03* 1,774,487 -------------- 24,156,047 -------------- MALAYSIA -- 0.0% 200,750 Affin Holdings Berhad Warrants, Expires 7/08/05* 13,471 265,600 IJM Corp Berhad Warrants, Expires 8/24/04* 149,575 -------------- 163,046 -------------- THAILAND -- 0.3% 1,098,500 Banpu Pcl Warrants, Expires 1/14/03* 184,863 4,226,464 Charoen Pokphand Foods PCL Warrants, Expires 4/29/05 (Foreign Registered)* 360,637 940,000 Kiatnakin Finance & Securities Warrants, Expires 01/19/11* 425,551 1,250,000 Kiatnakin Finance Ltd Warrants, Expires 03/30/09* 755,511 3,056,900 Land & House Warrants, Expires 9/02/08 (Foreign Registered)* 2,952,564 2,689,393 Telecomasia Corp Pcl Warrants, Expires 12/31/49(a)* -- -------------- 4,679,126 -------------- TOTAL RIGHTS AND WARRANTS (COST $31,192,072) 28,998,219 -------------- DEBT OBLIGATION -- 1.5% UNITED STATES -- 1.5% $ 22,000,000 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(c) 26,560,314 -------------- TOTAL DEBT OBLIGATION (COST $24,680,816) 26,560,314 --------------
See accompanying notes to the financial statements. 14 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- EQUITY LINKED SECURITIES -- 1.2% RUSSIA -- 1.2% 33,304,000 Renaissance Gazprom Note(a)(d)+* 21,504,393 -------------- TOTAL EQUITY LINKED SECURITIES (COST $17,523,956) 21,504,393 -------------- INVESTMENT FUNDS -- 1.0% BRAZIL -- 0.0% 18,400 Brazil Fund Inc 210,312 -------------- CHILE -- 0.0% 14,353 Chile Fund Inc 110,518 -------------- INDIA -- 0.0% 170 SPG Infinity Technology Fund I(a)+ 242,420 1,125,400 TDA India Technology Fund II LP(a)+* 394,543 10,500 UTI Masterplus 1991 Units* 3,394 -------------- 640,357 -------------- KAZAKHSTAN -- 0.0% 450,000 Kazakhstan Investment Fund(a)+* 44,809 -------------- POLAND -- 0.1% 1,749,150 The Emerging Europe Fund II, LP(a)+* 944,891 -------------- ROMANIA -- 0.1% 3,600 Romanian Investment Fund(a)+* 1,170,000 -------------- RUSSIA -- 0.7% 10,000,000 New Century Holdings LP(a)+* 12,964,000 -------------- THAILAND -- 0.0% 70 Thailand International Fund IDR* 542,500 -------------- UKRAINE -- 0.1% 16,667 Societe Generale Thalmann Ukraine Fund(a)+* 866,684 -------------- TOTAL INVESTMENT FUNDS (COST $24,563,114) 17,494,071 --------------
See accompanying notes to the financial statements. 15 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- MUTUAL FUNDS -- 0.6% UNITED STATES -- 0.6% 401,529 GMO Alpha LIBOR Fund(c) 10,303,227 87,053 Morgan Stanley Emerging Markets Fund* 761,714 -------------- 11,064,941 -------------- TOTAL MUTUAL FUNDS (COST $11,492,635) 11,064,941 -------------- CONVERTIBLE SECURITIES -- 0.3% INDONESIA -- 0.1% $ 26,000,000 APP Finance (VI), Zero Coupon, due 11/18/12 1,354,080 -------------- MALAYSIA -- 0.2% $ 4,271,400 Berjaya Sports Toto BHD, 0.08%, due 06/25/12 3,574,487 -------------- RUSSIA -- 0.0% $ 46,624 Divot Holdings(a)+* 11,656 $ 124,330 Divot Holdings NV(a)+* 31,083 -------------- 42,739 -------------- TOTAL CONVERTIBLE SECURITIES (COST $8,839,313) 4,971,306 -------------- SHORT-TERM INVESTMENTS -- 5.4% CASH EQUIVALENTS -- 5.2% $ 66,600,000 Dresdner Bank GC Time Deposit, 1.81%, due 9/03/02 66,600,000 26,203,100 The Boston Global Investment Trust(e) 26,203,100 -------------- 92,803,100 --------------
See accompanying notes to the financial statements. 16 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- U.S. GOVERNMENT -- 0.2% $ 2,500,000 United States Treasury Bill, 1.62%, due 11/21/02(c) 2,490,947 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $95,292,797) 95,294,047 -------------- TOTAL INVESTMENTS -- 100.9% (Cost $1,899,804,848) 1,797,167,950 Other Assets and Liabilities (net) -- (0.9%) (16,087,317) -------------- TOTAL NET ASSETS -- 100.0% $1,781,080,633 ==============
NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. ADR - American Depositary Receipt GDR - Global Depository Receipt GDS - Global Depository Share NVDR - Non-Voting Depositary Receipt
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). + Direct placement securities are restricted as to resale. They have been valued at fair value by the Trustees after consideration of restricitions as to resale, financial condition and prospects of the issuer, general market conditions, and pertinent information in accordance with the Fund's By-Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to those restricted securities. See accompanying notes to the financial statements. 17 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) Additional information on each restricted security is as follows:
MARKET VALUE AS A MARKET PERCENTAGE VALUE AS OF ACQUISITION ACQUISITION OF FUND'S AUGUST 31, ISSUER, DESCRIPTION DATE COST NET ASSETS 2002 - ---------------------------------------------------------------------------------------------------------- CHP Investors 12/13/99 - 3/5/01 $22,825,006 1.63% $ 28,980,186 Divot Holdings 3/27/02 46,624 0.00 11,656 Divot Holdings NV, Common Stocks 6/26/00 124,330 0.00 31,083 Divot Holdings NV, Convertible Securities 9/21/01 1,502,100 0.00 44,730 Kazakhstan Investment Fund 10/16/97 3,285,000 0.00 44,809 MHP Investors 11/27/01 18,310,093 0.95 17,000,000 Millenium Information Technology 10/21/99 2,252,570 0.04 787,470 New Century Holdings LP 1/21/97 10,000,000 0.73 12,964,000 Polimex Investment Partners 7/07/99 - 9/21/01 9,707,005 0.35 6,145,778 Renaissance Gazprom Note 5/24/01 - 1/17/02 17,523,955 1.21 21,504,393 Romanian Investment Fund 5/12/97 3,600,000 0.07 1,170,000 Societe Generale Thalmann Ukraine Fund 7/15/97 1,666,700 0.05 866,684 SPG Infinity Technology Fund I 12/23/99 1,105,000 0.01 242,420 TDA India Technology Fund II LP 2/23/00 - 10/2/01 1,125,400 0.02 394,543 The Emerging Europe Fund II, LP 12/05/97 - 3/17/00 1,749,150 0.05 944,891 U TV Software Comm Ltd 2/29/00 3,004,959 0.02 270,373
(b) Bankrupt issuer. (c) All or a portion of this security is held as collateral for open swap contracts (Note 6). (d) A derivative security whose price is linked to the return on the specified Russian security. (e) Represents investment of security lending collateral (Note 1). 18 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 21.5% Information Technology 17.2 Materials 13.5 Energy 11.0 Telecommunication Services 9.7 Consumer Discretionary 8.3 Industrials 6.8 Consumer Staples 5.2 Utilities 4.2 Health Care 0.4 Miscellaneous 2.2 ----- 100.0% =====
See accompanying notes to the financial statements. 19 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $25,059,530 (cost $1,899,804,848) (Note 1) $1,797,167,950 Cash 796,351 Foreign currency, at value (cost $9,374,129) (Note 1) 9,387,858 Receivable for investments sold 4,999,752 Receivable for Fund shares sold 66,580 Dividends and interest receivable 4,605,903 Foreign taxes receivable 991,876 Receivable for expenses reimbursed by Manager (Note 2) 19,406 -------------- Total assets 1,818,035,676 -------------- LIABILITIES: Payable for investments purchased 3,443,653 Payable upon return of securities loaned (Note 1) 26,203,100 Payable to affiliate for (Note 2): Management fee 1,204,675 Shareholder service fee 191,966 Net payable for open swap contracts (Notes 1 and 6) 2,799,583 Accrued expenses 3,112,066 -------------- Total liabilities 36,955,043 -------------- NET ASSETS $1,781,080,633 ============== NET ASSETS CONSIST OF: Paid-in capital $2,211,940,734 Accumulated undistributed net investment income 2,868,727 Accumulated net realized loss (328,043,914) Net unrealized depreciation (105,684,914) -------------- $1,781,080,633 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 963,090,853 ============== Class IV shares $ 817,989,780 ============== SHARES OUTSTANDING: Class III 105,103,563 ============== Class IV 89,366,153 ============== NET ASSET VALUE PER SHARE: Class III $ 9.16 ============== Class IV $ 9.15 ==============
20 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $2,704,581) $ 21,318,606 Interest (including securities lending income of $66,865) 1,930,454 Dividends from investment company shares 137,259 ------------- Total income 23,386,319 ------------- EXPENSES: Management fee (Note 2) 7,405,407 Custodian fees 1,578,812 Legal fees 74,428 Audit fees 35,512 Transfer agent fees 24,104 Trustees fees (Note 2) 22,264 Registration fees 9,660 Miscellaneous 30,104 Fees reimbursed by Manager (Note 2) (115,044) ------------- 9,065,247 Shareholder service fee (Note 2) - Class III 714,780 Shareholder service fee (Note 2) - Class IV 459,614 ------------- Net expenses 10,239,641 ------------- Net investment income 13,146,678 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (net of foreign capital gains tax of $13,349) 29,533,304 Realized gains distributions from investment company shares 71,338 Closed swap contracts (1,653,502) Foreign currency, forward contracts and foreign currency related transactions (891,514) ------------- Net realized gain 27,059,626 ------------- Change in net unrealized appreciation (depreciation) on: Investments (169,640,061) Open swap contracts (4,373,220) Foreign currency, forward contracts and foreign currency related transactions (226,325) ------------- Net unrealized loss (174,239,606) ------------- Net realized and unrealized loss (147,179,980) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(134,033,302) =============
See accompanying notes to the financial statements. 21 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 13,146,678 $ 25,084,464 Net realized gain (loss) 27,059,626 (109,659,468) Change in net unrealized appreciation (depreciation) (174,239,606) 237,597,552 -------------- -------------- Net increase (decrease) in net assets from operations (134,033,302) 153,022,548 -------------- -------------- Distributions to shareholders from: Net investment income Class III (8,303,460) (12,628,140) Class IV (7,799,045) (10,389,852) -------------- -------------- Total distributions from net investment income (16,102,505) (23,017,992) -------------- -------------- (16,102,505) (23,017,992) -------------- -------------- Net share transactions: (Note 5) Class III 206,391,533 195,960,013 Class IV 162,409,508 208,626,765 -------------- -------------- Increase in net assets resulting from net share transactions 368,801,041 404,586,778 -------------- -------------- Total increase in net assets 218,665,234 534,591,334 NET ASSETS: Beginning of period 1,562,415,399 1,027,824,065 -------------- -------------- End of period (including accumulated undistributed net investment income of $2,868,727 and $5,824,554, respectively) $1,781,080,633 $1,562,415,399 ============== ==============
22 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.84 $ 9.04 $ 11.16 $ 6.31 $ 9.56 $ 12.49 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.07+ 0.18+ 0.17+ 0.13+ 0.25 0.16+ Net realized and unrealized gain (loss) (0.66) 0.80 (2.27) 4.77 (3.19) (1.76) -------- -------- -------- -------- -------- -------- Total from investment operations (0.59) 0.98 (2.10) 4.90 (2.94) (1.60) -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.09) (0.18) (0.02) (0.05) (0.19) (0.25) From net realized gains -- -- -- -- (0.12) (1.08) -------- -------- -------- -------- -------- -------- Total distributions (0.09) (0.18) (0.02) (0.05) (0.31) (1.33) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.16 $ 9.84 $ 9.04 $ 11.16 $ 6.31 $ 9.56 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) (6.11)%** 11.15% (18.79)% 77.43% (30.96)% (12.94)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $963,091 $826,960 $560,205 $727,197 $524,741 $913,615 Net expenses to average daily net assets 1.14%* 1.19%(b) 1.23% 1.18% 1.16% 1.24%(b) Net investment income to average daily net assets 1.43%* 2.32% 1.69% 1.41% 2.75% 1.30% Portfolio turnover rate 34% 74% 90% 73% 76% 88% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%* 0.02% 0.02% 0.03% 0.21% 0.21% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.03 $ 0.05 $ 0.03 -- -- --
* Annualized. ** Not Annualized. + Computed using average shares outstanding throughout the period. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Includes stamp duties and transfer taxes not reimbursed by the Manager, which approximate .035% of average daily net assets. (c) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. See accompanying notes to the financial statements. 23 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998* ---------------- ----------- ----------- ----------- ----------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.83 $ 9.03 $ 11.16 $ 6.31 $ 9.56 $ 8.62 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.08+ 0.17+ 0.17+ 0.13+ 0.28 0.01+ Net realized and unrealized gain (loss) (0.67) 0.82 (2.28) 4.77 (3.21) 0.93 -------- -------- -------- -------- -------- -------- Total from investment operations (0.59) 0.99 (2.11) 4.90 (2.93) 0.94 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.09) (0.19) (0.02) (0.05) (0.20) -- From net realized gains -- -- -- -- (0.12) -- -------- -------- -------- -------- -------- -------- Total distributions (0.09) (0.19) (0.02) (0.05) (0.32) -- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.15 $ 9.83 $ 9.03 $ 11.16 $ 6.31 $ 9.56 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) (6.10)%*** 11.22% (18.82)% 77.76% (31.01)% 10.90%*** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $817,990 $735,455 $467,619 $480,208 $261,187 $672,020 Net expenses to average daily net assets 1.10%** 1.14%(b) 1.18% 1.13% 1.12% 1.22%**(b) Net investment income to average daily net assets 1.45%** 2.27% 1.73% 1.45% 2.87% 0.65%** Portfolio turnover rate 34% 74% 90% 73% 76% 88% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%** 0.02% 0.02% 0.03% 0.21% 0.21% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.00(d) $ 0.03 $ 0.03 -- -- --
* Period from January 9, 1998 (commencement of operations) to February 28, 1998. ** Annualized. *** Not annualized. + Computed using average shares outstanding throughout the period. (a) The total return would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .04% of average daily net assets. (c) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (d) Purchase and redemption fees were less than $0.01 per share. 24 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the securities markets of developing countries in Asia, Latin America, the Middle East, Africa, and Europe ("Emerging Markets"). The Fund's benchmark is the IFC Investable Index. Throughout six months ended August 31, 2002, the Fund had two classes of shares outstanding: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully described in the Trust's prospectus. At August 31, 2002, 0.6% of the Fund was invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. The financial statements of the GMO Alpha Libor Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which 25 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. These prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. Indian regulators have alleged that the Fund violated certain conditions under which it was granted permission to operate in India and have restricted a portion of the Fund's locally held assets pending resolution of the dispute. The amount of these restricted assets is small relative to the size of the Fund, representing approximately 0.15% of the Fund's total assets as of August 31, 2002. The valuation of this possible claim and all matters relating to the Fund's response to these allegations are subject to the supervision and control of the Trust's Board of Trustees, and all costs in respect of this matter are being borne by the fund. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the 26 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or 27 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, there were no outstanding futures contracts. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreements. The Fund earns interest on cash set aside as collateral. See Note 6 for a summary of all open swap agreements as of August 31, 2002. 28 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $25,059,530 collateralized by cash in the amount of $26,203,100 which was invested in a short-term instrument. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $184,283,079 and $114,357,984 expiring in 2007 and 2010, respectively. The Fund has elected to defer to March 1, 2002 post-October capital losses of $35,544,915. 29 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES Effective April 1, 2002, the level of purchase premium and redemption fee charged to the Fund are each .80%. Prior to April 1, 2002, the premium on cash purchases of Fund shares was 1.20% of the amount invested and the fee for cash redemptions was .40% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption fee is offset by a corresponding cash redemption or purchase occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is either substantially overweighted or underweighted in cash so that a redemption or purchase will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. For the six months ended August 31, 2002 and the year ended February 28, 2002, the Fund received $3,043,521 and $4,883,014 in purchase premiums and $40,718 and $73,894 in redemption fees, respectively. There is no premium for reinvested distributions. INVESTMENT RISK Investments in securities of emerging countries present certain risks that are not inherent in many other investments. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may 30 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .105% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding fund expenses, as defined above) incurred indirectly by the Fund through its investment in the GMO Alpha LIBOR Fund exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses), and indirect investment expenses incurred by the Fund were less than 0.001% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $22,264. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, were as follows:
Purchases Sales ------------ ------------ U.S. Government securities $ 59,611,605 $ 41,169,858 Investments (non-U.S. Government securities) 852,527,557 543,348,359
31 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,899,804,848 $203,492,194 $(306,129,092) $(102,636,898)
4. PRINCIPAL SHAREHOLDER At August 31, 2002, 12.8% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- ------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------ Shares sold 34,529,996 $ 357,682,636 32,338,323 $282,585,254 Shares issued to shareholders in reinvestment of distributions 542,101 5,415,451 1,004,357 8,683,208 Shares repurchased (14,040,338) (156,706,554) (11,259,655) (95,308,449) ----------- ------------- ----------- ------------ Net increase 21,031,759 $ 206,391,533 22,083,025 $195,960,013 =========== ============= =========== ============
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- ------------------------- Shares Amount Shares Amount Class IV: ----------- ------------- ----------- ------------ Shares sold 15,059,977 $ 168,530,063 22,755,584 $206,010,111 Shares issued to shareholders in reinvestment of distributions 398,811 3,980,135 303,239 2,616,654 Shares repurchased (936,522) (10,100,690) -- -- ----------- ------------- ----------- ------------ Net increase 14,522,266 $ 162,409,508 23,058,823 $208,626,765 =========== ============= =========== ============
32 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: TOTAL RETURN SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ---------- ---------- -------------------------------------------------- -------------- $1,022,663 11/27/02 Agreement with Merrill Lynch International dated $ (73,362) 11/27/01 to receive the notional amount multiplied by the change in market value of Quanta Computer Inc. common stock (including dividends) and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 2,666,823 12/14/02 Agreement with Morgan Stanley & Co. International 365,040 Limited dated 12/14/01 to receive the notional amount multiplied by the change in market value of Benq Corporation common stock (including dividends) and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 5,499,875 2/20/03 Agreement with Morgan Stanley & Co. International (262,169) Limited dated 2/20/02 to receive the notional amount multiplied by the change in market value of Samsung Electronics common stock (including dividends) and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread. 1,670,195 2/26/03 Agreement with Morgan Stanley & Co. International (204,577) Limited dated 2/22/02 to receive the notional amount multiplied by the change in market value of Quanta Computer Inc. common stock (including dividends) and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread.
33 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- TOTAL RETURN SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ---------- ---------- -------------------------------------------------- -------------- $3,103,812 2/26/03 Agreement with Morgan Stanley & Co. International $ (280,532) Limited dated 2/22/02 to receive the notional amount multiplied by the change in market value of Macronix International common stock (including dividends) and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread. 1,187,972 2/28/03 Agreement with Morgan Stanley & Co. International (66,465) Limited dated 2/25/02 to receive the notional amount multiplied by the change in market value of Macronix International common stock (including dividends) and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 471,418 3/13/03 Agreement with Morgan Stanley & Co. International 3,206 Limited dated 3/08/02 to receive the notional amount multiplied by the change in market value of Macronix International common stock (including dividends) and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread. 2,888,608 3/17/03 Agreement with Morgan Stanley & Co. International (968,618) Limited dated 3/12/02 to receive the notional amount multiplied by the change in market value of Macronix International common stock (including dividends) and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 3,714,258 3/18/03 Agreement with Morgan Stanley & Co. International (1,312,106) Limited dated 3/13/02 to receive the notional amount multiplied by the change in market value of Macronix International common stock (including dividends) and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. ----------- $(2,799,583) ===========
34 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- COMMON STOCKS -- 91.1% AUSTRALIA -- 3.5% 1,088,555 Amcor Ltd 5,312,726 411,040 Capral Aluminum Ltd 586,431 535,709 Foodland Associated 5,630,418 105,000 Foodland Associated Ltd* 1,087,378 2,491,621 Insurance Australia Group Ltd 4,392,030 2,180,080 John Fairfax Holdings Ltd 3,626,709 824,550 Lihir Gold Ltd* 554,128 76,000 Lihir Gold Ltd ADR+* 1,033,524 1,536,900 Lion Nathan Ltd 4,385,395 3,204,100 Menzies Gold NL* 70,599 14,515,766 MIM Holdings Ltd 9,515,252 59,800 News Corp Ltd 1,094,340 6,703,027 Oil Search Ltd* 3,212,355 10,946,321 Pasminco Ltd(a)* -- 163,200 Publishing & Broadcasting Ltd 824,371 562,000 Sons of Gwalia Ltd 1,458,111 991,407 Westpac Banking Corp 8,257,282 ------------- 51,041,049 ------------- AUSTRIA -- 0.3% 22,445 Erste Bank Der Oesterreichischen Sparkassen AG 1,503,847 9,860 Flughafen Wien AG 309,334 6,327 Oesterreichische Brau Beteiligungs AG 326,998 12,710 OMV AG 1,134,287 4,684 VA Technologie AG (Bearer) 94,169 28,720 Wienerberger Baustoffindustrie AG 432,062 ------------- 3,800,697 ------------- BELGIUM -- 1.9% 18,864 Almanij NV 727,972 25,192 Cie Francois D'Enterprises 5,682,333 290,770 Dexia 3,838,229 23,813 Electrabel SA 5,516,075 133,045 Fortis B 2,373,381 103,850 Fortis NV* 1,866,832 100,135 Fortis Strip* 982 20,357 GIB Holdings Ltd 788,582 30,515 Groupe Bruxelles Lambert SA 1,350,862
See accompanying notes to the financial statements. 1 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- BELGIUM -- CONTINUED 17,933 Kredietbank NPV 648,253 38,522 Solvay Et Cie 2,665,275 68,479 UCB SA 1,954,951 ------------- 27,413,727 ------------- BRAZIL -- 0.8% 450,300 Cia de Concessoes Rodoviarias* 1,408,486 57,440,000 Cia Saneamento Basico SAO PA 1,611,311 189,300 Petroleo Brasileiro SA (Petrobras) ADR 3,019,335 109,800 Ultrapar Participacoes SA ADR 736,758 136,100 Unibanco SA GDR 1,732,553 181,600 Votorantim Celulose e Papel SA ADR 3,078,120 ------------- 11,586,563 ------------- CANADA -- 2.0% 137,200 BCE Inc 2,497,744 622,000 Hudson's Bay Co 3,082,090 100,840 Inco Ltd* 1,822,877 220,100 KAP Resources Ltd(a)* 1,411 250,750 Norske Skog Canada Ltd* 924,239 3,512,030 Nortel Networks Corp* 3,782,186 55,800 Placer Dome Inc 556,212 113,500 Rothmans Inc 2,365,311 393,740 Teck Corp Class B 2,640,077 977,610 Tembec Inc* 7,313,275 435,860 Timberwest Forest Corp 3,576,287 99,296 Trizec Canada Inc 1,145,723 ------------- 29,707,432 ------------- DENMARK -- 0.6% 159,220 Carlsberg A/S Class B 8,138,222 ------------- FINLAND -- 1.5% 124,000 Asko Oyj 2,511,180 1,016,927 Metso Oyj 11,279,467 651,700 Nokia Oyj 8,704,844 ------------- 22,495,491 -------------
See accompanying notes to the financial statements. 2 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- FRANCE -- 5.3% 29,360 Accor SA 1,022,164 39,325 Alcatel SA 199,772 54,740 Assurances Generales de France (Bearer) 2,152,172 23,782 Aventis SA Class A 1,400,547 56,940 Axa 780,100 13,299 Beghin-Say 482,566 71,905 BIC SA 2,750,172 111,182 BNP Paribas 5,185,761 6,082 Cap Gemini SA 182,458 25,220 Christian Dior SA 817,434 131,360 Cie de Saint-Gobain 3,929,155 17,910 Etablissements Economiques du Casino Guichard-Perrachon SA 1,268,145 688,100 Eurotunnel SA Units (Bearer)* 600,590 37,018 Groupe Danone 4,617,812 11,875 Guyenne et Gascogne SA 1,002,704 14,998 Imetal 1,957,706 11,290 Lafarge Coppee SA 1,044,653 39,166 Lagardere Groupe 1,519,888 57,804 Michelin SA Class B 2,069,126 16,607 Pernod Ricard 1,451,940 129,292 Peugeot SA 5,784,464 30,763 Sophia (EX-SFI) 920,465 46,955 SPIE Batignolles 2,159,687 533,220 Suez SA 12,241,764 18,010 Technip SA 1,377,668 69,614 Thomson CSF 2,614,758 115,563 Total Fina Elf SA 16,478,565 73,731 Wendel Investissement 1,697,792 25,496 Worms et Compagnie SA 409,814 ------------- 78,119,842 ------------- GERMANY -- 10.7% 44,130 Aareal Bank AG* 716,256 201,020 Adidas Salomon AG 14,332,101 78,943 Allianz AG 10,056,780 40,952 Bankgesellschaft Berlin AG* 86,348 118,640 Bilfinger & Berger 2,548,070 35,380 Brau und Brunnen* 1,297,674 112,290 Celanese AG* 2,235,493 333,910 Commerzbank AG 3,638,142
See accompanying notes to the financial statements. 3 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- GERMANY -- CONTINUED 988,920 Continental AG* 16,050,750 512,380 DaimlerChrysler AG 22,059,358 151,715 Deutsche Bank AG 9,343,817 340,720 Deutsche Post AG 3,712,341 1,380,530 Deutsche Telekom 15,366,604 188,350 Fraport AG Frankfurt Airport Services Worldwide 4,599,400 94,499 Gehe AG 4,151,848 225,240 K&S AG 4,307,411 36,310 Koelnische Rueckversicherungs-Gesellschaft AG (New Shares)* 2,278,990 112,710 Koelnische Rueckversicherungs-Gesellschaft AG (Registered)* 7,079,747 845,770 Lufthansa AG* 10,708,156 90,590 Metallgesellschaft 677,862 66,800 Munich Reinsurance AG 11,955,714 73,713 Repower Systems AG* 1,937,381 296,480 Stinnes AG 9,449,633 ------------- 158,589,876 ------------- GREECE -- 0.0% 68,000 Greek Organization of Football Prognostics SA 694,885 ------------- HONG KONG -- 5.1% 7,460,882 Akai Holdings Ltd(a)(b)* 9,565 5,747,420 Amoy Properties Ltd 5,894,828 1,029,290 Beijing Enterprises Class H 1,042,493 913,010 Cathay Pacific Airways 1,416,345 3,346,440 China Mobile Ltd* 9,267,124 883,340 Goldlion Holdings Ltd 53,793 2,158,449 Great Eagle Holdings Ltd 1,923,246 7,785,430 Hang Lung Development Co Ltd 7,036,876 522,225 Hanison Construction Holdings Ltd* 16,738 558,690 Henderson Land Development Co Ltd 1,830,080 4,465,050 HKR International Ltd* 910,189 6,164,001 Hong Kong Land Holdings 8,567,961 3,491,865 Hysan Development Co Ltd 3,088,977 109,859 Jardine Matheson Holdings Ltd 637,182 1,263,016 Liu Chong Hing Bank Ltd 1,157,772 7,881,323 New World Development Co Ltd 5,153,206 2,528,790 New World Infrastructure* 515,487 17,382,620 Pacific Century CyberWorks Ltd* 3,097,692
4 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- HONG KONG -- CONTINUED 3,190,166 Regal Hotels International Ltd* 34,356 2,823,230 Shanghai Industrial Holdings 4,488,241 7,336,440 South China Morning Post Ltd 3,127,413 762,240 Swire Pacific Ltd Class A 3,449,647 3,631,290 Swire Pacific Ltd Class B 2,467,431 3,117,790 Wharf Holdings Ltd 6,495,437 6,001,810 Wheelock and Co Ltd 4,232,073 ------------- 75,914,152 ------------- INDIA -- 0.7% 435,000 Gas Authority of India Ltd GDR 144A* 3,719,250 155,800 Hindalco Industries Ltd GDR 144A 2,084,604 111,400 ICICI Banking Ltd ADR 738,582 216,600 ITC Ltd GDR 3,173,190 44,500 State Bank of India Ltd GDR 518,425 116,327 Videsh Sanchar Nigam Ltd ADR 617,696 ------------- 10,851,747 ------------- INDONESIA -- 0.2% 1,776,500 Indosat Tbk 1,835,683 690,404 PT Daya Guna Samudera* 2,729 35,700 PT Indosat (Persero) Tbk Class B ADR 365,925 2,982,000 PT Matahari Putra Prima Tbk 185,217 300,000 Tambang Timah Persero (Foreign Registered) 13,890 ------------- 2,403,444 ------------- IRELAND -- 0.8% 439,737 Allied Irish Banks Plc 5,662,313 389,070 Bank of Ireland 4,525,313 44,130 DePfa Bank Plc 2,337,028 ------------- 12,524,654 ------------- ITALY -- 3.6% 239,331 Assicurazioni Generali SPA 4,548,717 549,466 Banca Intesa SPA 1,341,765 160,039 Banca Nazionale Del Lavoro SPA* 230,717 247,438 Banca Toscana 934,250 433,859 Banco Ambrosiano Veneto SPA (Savings Shares) 787,148
See accompanying notes to the financial statements. 5 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- ITALY -- CONTINUED 106,354 Buzzi Unicem SPA 750,970 168,447 Danieli and Co SPA (Savings Shares) 248,620 756,935 Enel SPA 3,845,249 999,721 ENI-Ente Nazionale Idrocarburi SPA 15,137,783 32,934 Ericsson SPA 731,558 98,310 Fiat SPA 1,125,135 83,946 Grouppo Editoriale L'Espresso 287,317 89,553 IFIL Finanziaria di Partecipazioni SPA (Savings Shares) 281,039 678,160 Industriali Riunite SPA 681,033 192,770 Italcementi SPA 937,686 657,651 Italgas SPA 6,707,567 58,000 Pagnossin SPA 129,119 194,481 RAS SPA 2,231,512 420,307 Rinascente per l'Esercizio di Grandi Magazzini SPA 1,389,097 60,252 San Paolo IMI SPA 500,485 361,206 Telecom Italia Mobile SPA (Savings Shares) 1,438,193 353,092 Telecom Italia SPA 2,808,309 562,582 Telecom Italia SPA (Savings Shares) 3,012,414 875,632 UniCredito Italiano SPA 3,314,707 ------------- 53,400,390 ------------- JAPAN -- 21.2% 61,500 Acom Co Ltd 3,625,733 311,000 Aisin Seiki Co Ltd 3,934,551 497,000 Alps Electric Co Ltd 5,713,415 159,803 Arisawa Manufacturing 3,099,961 157,200 Bandai Co 5,807,245 444,000 Bank of Fukuoka Ltd 1,737,579 537,000 Canon Inc 18,388,395 605,700 Chubu Electric Power Co Inc 11,341,070 155,076 Circle K Japan Co Ltd 3,237,153 174,600 Credit Saison Co 4,160,123 268,300 CSK Corp 9,707,814 166,000 Daiichi Pharmaceuticals Co Ltd 2,681,145 480,000 Daikin Industries Ltd 8,481,424 736,000 Daimaru Inc 3,370,708 338,000 Daiwa Securities Co Ltd 1,756,066 431,000 Denso Corp 6,852,233 1,099 East Japan Railway Co 5,283,431 599,500 Honda Motor Co Ltd 25,382,617
6 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- JAPAN -- CONTINUED 86,000 Japan Airport Terminal Co Ltd 624,518 1,262,000 Japan Energy Co Ltd 1,511,441 336,000 Jusco Co Ltd 8,756,716 553,000 Kao Corp 12,663,054 142,100 Kirin Beverage Corp 2,456,922 859,000 Konica Corp 5,361,279 48,000 Kose Corp 1,514,106 426,000 Minebea Co Ltd 2,450,403 1,037,000 Mitsubishi Corp 6,944,528 2,094,000 Mitsubishi Electric Corp* 7,241,091 784,000 Mitsubishi Heavy Industries 2,268,056 1,229,000 Mitsubishi Motors* 2,881,643 455,000 Mitsubishi Rayon Co Ltd 1,262,556 571,000 Mitsui & Co 3,014,768 611,000 Mitsui Fudosan Co Ltd 4,689,495 589,000 Nikko Securities 2,459,031 71,000 Nintendo Co Ltd 8,587,188 137,000 Nippon Meat Packers Inc 1,076,911 776,000 Nippon Oil Co Ltd 3,429,545 1,420,000 Nissan Motor Co 10,371,695 150,800 Nissin Food Products 3,039,784 5,076 NTT Docomo Inc 10,788,614 46,300 ORIX Corp 3,291,941 607,000 Ricoh Company Ltd 10,853,456 117,000 Rinnai Corp 2,713,701 264,100 Sega Corp* 6,337,153 178,000 Sekisui House Ltd 1,301,615 88,000 Shimachu Co 1,514,106 390,000 Shiseido Co Ltd 5,144,520 308,000 Showa Corp 2,673,065 764,000 Sumitomo Chemical Co Ltd 3,054,325 804,000 Sumitomo Trust & Banking 3,471,918 302,000 Takeda Chemical Industries Ltd 12,761,102 388,000 Tanabe Seiyaku Co Ltd 3,112,116 186,000 Tokyo Broadcasting System Inc 3,333,614 1,147,000 Tokyo Gas Co 3,269,818 352,000 Toppan Printing Co Ltd 3,164,779 265,640 Tostem Corp 4,021,624 82,000 Tsubaki Nakashima Co Ltd 615,527 1,970 UFJ Holdings Inc 4,436,301
See accompanying notes to the financial statements. 7 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- JAPAN -- CONTINUED 287,000 Ushio Inc 2,967,672 734 West Japan Railway Co 2,686,763 222,000 Yamaha Corp 2,130,781 98,000 Yamanouchi Pharmaceutical Co Ltd 2,301,944 137,000 Yamato Kogyo Co 744,132 ------------- 313,855,980 ------------- MALAYSIA -- 0.1% 1,059,000 Maxis Communications BHD* 1,560,632 ------------- NETHERLANDS -- 3.1% 113,472 Aegon NV 1,624,717 101,802 Akzo Nobel NV 3,795,811 180,042 Elsevier NV 2,283,014 15,499 Fugro NV 744,794 39,886 Hagemeyer NV 447,880 129,174 Hal Trust (Participating Units) 2,375,268 237,844 ING Groep NV 5,192,225 143,113 Koninklijke Ahold NV 2,387,369 65,520 Koninklijke BAM NBM NV 1,204,790 146,332 Koninklijke Philips Electronics NV 2,927,559 92,391 Koninklijke Philips Electronics NV ADR 1,866,298 95,487 Koninklijke Volker Wessels 2,060,170 45,931 Koninklijke Wessanen NV 336,032 168,820 Laurus NV* 168,873 176,570 Royal Dutch Petroleum 7,965,461 69,352 TNT Post Group NV 1,367,752 57,623 Unilever NV 3,404,780 21,060 Univar NV* 139,411 42,121 Van Ommeren Vopak* 458,520 225,784 Vendex NV 2,347,120 24,321 VNU NV 596,290 111,910 Wegener Arcade NV 658,501 32,487 Wereldhave NV 1,608,930 ------------- 45,961,565 ------------- NEW ZEALAND -- 1.3% 1,898,386 Air New Zealand Class B* 532,554 5,046,877 Carter Holt Harvey Ltd 4,082,225
8 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- NEW ZEALAND -- CONTINUED 1,592,474 Fletcher Building Ltd 2,129,445 4,719,987 Telecom Corp of New Zealand 11,166,559 7,797,337 Trans Tasman Properties Ltd* 838,498 ------------- 18,749,281 ------------- NORWAY -- 2.1% 222,800 Ekornes AS 2,543,784 203,000 Hydralift ASA 1,134,605 358,910 Norske Skogindustrier AS Class A 5,193,722 1,590,300 PAN Fish ASA* 527,820 311,720 Prosafe ASA* 4,552,228 504,730 Smedvig A/S Class A 2,867,936 1,733,320 Statoil ASA 14,727,375 ------------- 31,547,470 ------------- PORTUGAL -- 0.1% 217,420 Electricidade de Portugal SA 356,084 264,863 Portugal Telecom SA 1,711,760 ------------- 2,067,844 ------------- SINGAPORE -- 1.2% 2,471,840 Allgreen Properties Ltd 1,638,617 937,780 DBS Group Holdings Ltd 6,377,451 2,198,073 Jardine Strategic Holdings Ltd 5,978,759 868,450 Singapore Land Ltd 1,598,085 6,039,820 SMRT Corp Ltd 2,174,522 ------------- 17,767,434 ------------- SOUTH AFRICA -- 0.2% 273,500 Allied Technologies Ltd 559,411 276,553 Liberty Life Association of Africa Ltd 1,402,300 1,065,539 Sun International Ltd* 161,177 231,500 Western Areas Gold Mining Co Ltd* 726,775 ------------- 2,849,663 ------------- SOUTH KOREA -- 1.5% 19,865 Hansol Paper Manufacturing Ltd* 116,518 718,100 KT Corp ADR 16,308,051
See accompanying notes to the financial statements. 9 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 226,000 Samsung Corp 1,594,476 61,040 Samsung Fire & Marine Insurance 4,189,692 ------------- 22,208,737 ------------- SPAIN -- 2.5% 34,670 Actividades de Construccion y Servicios SA 945,564 140,000 Amadeus Global Travel Distribution 762,004 278,752 Banco Bilbao Vizcaya SA 2,736,455 59,470 Banco Popular Espanol 2,361,467 413,442 Banco Santander Central Hispano 2,761,200 362,618 Endesa SA 4,302,996 92,390 FENOSA SA 1,143,459 213,400 Gas Natural SDG SA 3,863,334 316,433 Iberdrola SA 4,080,785 15,900 Inditex SA 310,303 116,650 Red Electrica de Espana 1,150,850 367,480 Repsol YPF SA 4,793,156 69,160 Tabacalera SA Class A 1,559,302 612,804 Telefonica de Espana SA* 5,619,134 114,877 Transportes Azkar SA 483,311 ------------- 36,873,320 ------------- SWEDEN -- 1.2% 290,590 Autoliv Inc SDR 6,330,364 503,700 Billerud AB 4,748,647 652,800 SAAB AB Class B 7,058,312 ------------- 18,137,323 ------------- SWITZERLAND -- 2.8% 179,460 ABB Ltd* 980,623 2,822 Banque Cantonale Vaudoise (Bearer)* 257,161 2,186 Belimo Automation AG 604,531 17,580 Bobst Group AG (Registered)* 563,488 119,248 Credit Suisse Group* 2,773,302 1,905 Fischer (George) AG (Registered) 288,165 5,017 Forbo Holdings AG (Registered) 1,504,448 9,058 Geberit International AG* 2,535,141 21,980 Hero AG 2,336,194 4,935 Holcim Ltd 917,512
10 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SWITZERLAND -- CONTINUED 640 Jelmoli (Bearer) 511,352 3,706 Jelmoli (Registered) 585,294 7,445 Kraftwerk Laufenberg (Bearer) 1,786,026 2,849 Merkur Holding AG (Registered) 569,553 23,640 Nestle SA 5,072,522 127,010 Novartis AG 5,154,372 504 Schweizerische National-Versicherungs-Gesellschaft 224,687 4,870 Societe Generale de Surveillance Holding SA (Registered) 1,288,368 1,674 Sulzer Gebrueder AG (Registered)* 263,262 5,866 Sulzer Medica AG* 862,906 18,180 Swatch Group AG 1,353,823 37,686 Swiss Reinsurance Co 2,661,990 18,620 Swisscom AG 4,944,571 3,480 Unique Zurich Airport* 227,262 42,410 Zellweger Luwa AG 1,948,602 12,351 Zurich Financial Services AG 1,222,219 ------------- 41,437,374 ------------- TAIWAN -- 0.5% 3,791,340 China Steel Corp 1,760,324 258,480 Compal Electronics GDR 144A* 1,207,102 646,070 Standard Foods Taiwan Ltd 157,532 4,037,160 Taiwan Cement Corp* 1,202,483 110,300 Taiwan Semiconductor Manufacturing Co ADR* 901,151 1,797,000 United Microelectronics* 1,474,542 ------------- 6,703,134 ------------- THAILAND -- 0.3% 1,291,800 Jasmine International Pcl (Foreign Registered)* 80,221 821,000 PTT Exploration & Production Pcl (Foreign Registered)* 2,374,070 81,000 Siam Cement Pcl (Foreign Registered) 1,985,162 487,700 Thai Telephone & Telecommunications (Foreign Registered)* 29,824 214,800 Total Access Communication (Foreign Registered)* 173,988 ------------- 4,643,265 ------------- UNITED KINGDOM -- 15.7% 467,440 Abbey National Plc 5,394,199 624,591 Allied Domecq Plc 3,951,675 121,400 AstraZeneca Plc 3,421,600
See accompanying notes to the financial statements. 11 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 207,827 AWG Plc* 1,583,326 497,428 BAA PLC 4,270,566 842,247 Barclays Plc 6,045,326 116,043 Berkley Group 1,211,672 1,056,746 BG Group Plc 4,405,464 250,747 BHP Billiton Plc 1,183,036 251,790 Boots Co 2,134,427 1,335,188 BP Amoco Plc 10,337,339 349,833 BPB Industries Plc 1,682,997 880,510 British Aerospace 4,167,906 501,600 British Energy Plc (Deferred Shares)(a)* -- 697,876 British Sky Broadcasting Plc* 6,585,221 2,087,701 BT Group Plc 6,458,929 1,330,378 BTR Siebe Plc 1,584,631 240,432 Cable & Wireless 596,938 173,200 Cadbury Schweppes Plc 1,253,210 1,086,964 Centrica Plc 3,161,078 556,622 Chubb Plc 1,145,181 457,906 Commercial Union Plc 3,534,591 490,755 Cookson Group Plc 225,847 585,883 Diageo Plc 7,087,285 233,822 Dixons Group Plc (New Shares) 593,187 418,898 FKI Plc 706,313 510,400 Gallaher Group Plc 5,210,949 451,696 GlaxoSmithKline Plc 8,496,539 266,470 Great Portland Estates Plc 902,723 469,989 Great Universal Stores Plc 3,642,400 395,358 Hanson Plc 2,415,738 426,700 HBOS Plc 4,778,851 518,483 HSBC Holdings Plc 5,899,014 302,193 Imperial Chemical Industries Plc 1,190,860 468,518 Imperial Tobacco Group Plc 7,812,810 395,000 John Wood Group Plc* 1,264,823 81,570 Johnson Matthey 1,123,008 605,273 Kidde Plc 617,956 1,254,017 Kingfisher Plc 4,127,007 532,860 Ladbroke Group 1,574,377 1,569,186 Lattice Group Plc 4,175,083 904,480 Legal & General Group Plc 1,717,444 665,120 Lloyds TSB Group Plc 5,751,406
12 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 39,438 Lonmin Plc 536,858 318,669 Marks & Spencer Group Plc 1,688,351 1,512,501 mmO2 Plc* 1,158,145 71,490 Morgan Crucible 81,282 211,600 National Grid Group Plc 1,477,868 634,940 National Power* 1,286,667 237,339 Nycomed Amersham Plc 2,089,025 177,717 P&O Princess Cruises Plc 1,154,624 377,717 Peninsular & Oriental Steam Navigation Co 1,321,957 330,596 Prudential Corp 2,603,021 328,240 Rank Group Plc 1,348,088 210,690 Reed International Plc 1,880,537 792,020 Rentokil Initial Plc 2,918,981 214,669 Reuters Holdings Plc 941,423 102,200 Rexam Plc 705,096 125,441 RMC Group 1,017,764 124,300 Rolls-Royce 270,634 245,332 Royal & Sun Alliance Insurance Group 472,483 298,895 Royal Bank of Scotland Group 7,134,225 578,000 Safeway Plc 1,922,333 221,370 Sainsbury (J) 1,083,814 407,421 Scottish & Newcastle Plc 3,469,469 336,960 Scottish Hydro-Electric Plc 3,492,331 397,000 Scottish Power Plc 2,259,959 452,863 Severn Trent Plc 4,704,084 1,162,850 Shell Transport & Trading (Registered) 7,797,853 254,310 Six Continents Plc 2,387,890 412,160 Smith (David S.) Holdings Plc 911,726 130,000 South African Breweries Plc 917,002 143,400 SSL International Plc 695,423 140,434 Standard Chartered Plc 1,607,556 213,417 THUS Group Plc* 25,585 226,228 TI Automotive Ltd(a)* -- 389,546 Tomkins Plc 1,458,265 233,447 Trinity Mirror Plc 1,408,365 477,632 Unilever Plc 4,351,820 338,384 United Utilities 3,276,773 271,030 Viglen Technology Plc (Entitlement Letters)(a)* -- 325,980 Viridian Group Plc 2,488,516 6,268,273 Vodafone Group Plc 10,035,765
See accompanying notes to the financial statements. 13 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 188,354 Whitebread Plc 1,544,233 208,676 Wolseley 1,901,297 ------------- 231,250,020 ------------- UNITED STATES -- 0.3% 227,900 Freeport-McMoran Copper & Gold* 3,735,281 ------------- TOTAL COMMON STOCKS (COST $1,444,911,298) 1,346,030,494 ------------- PREFERRED STOCKS -- 2.0% AUSTRALIA -- 0.0% 119,448 News Corporation Ltd 0.93% 518,488 ------------- BRAZIL -- 0.1% 88,610,000 Gerdau SA 959,406 ------------- FRANCE -- 0.1% 16,158 Etablissements Economiques du Casino Guichard Perrachon 836,677 ------------- GERMANY -- 1.6% 276,660 Bayerische Motoren Werke AG 2.41% 6,918,672 55,000 Rheinmetall AG 2.51% 1,078,770 187,604 Rheinmetall AG 3.92% 2,391,782 53,890 Villeroy & Boch AG (Non Voting) 5.78% 533,784 410,749 Volkswagen AG 5.30% 13,131,982 ------------- 24,054,990 ------------- ITALY -- 0.1% 90,433 Fiat SPA 4.95% 654,515 38,571 IFI Istituto Finanziario Industries 4.82% 606,738 70,578 Societa Assicuratrice Industriale SPA (SAI) 8.00% 430,523 ------------- 1,691,776 ------------- THAILAND -- 0.1% 1,443,380 Siam Commercial Bank Ltd* 906,603 ------------- TOTAL PREFERRED STOCKS (COST $28,768,249) 28,967,940 -------------
See accompanying notes to the financial statements. 14 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- CONVERTIBLE SECURITIES -- 0.4% JAPAN -- 0.4% JPY456,000,000 Internet Initiative Japan Inc, 144A, 1.75%, due 03/31/05 3,230,633 JPY400,000,000 UMC Japan, 144A, Zero Coupon, due 03/26/07 2,850,757 ------------- 6,081,390 ------------- TOTAL CONVERTIBLE SECURITIES (COST $7,121,880) 6,081,390 ------------- DEBT OBLIGATIONS -- 0.0% UNITED KINGDOM -- 0.0% GBP 102,000 BG Transco Holdings Plc Index Linked, 4.186%, due 12/14/22 190,776 GBP 102,000 BG Transco Holdings Plc, 4.98%, Variable Rate, due 12/14/09 157,268 GBP 102,000 BG Transco Holdings Plc, 7.00%, due 12/16/24 172,975 GBP 35,888 British Aerospace Plc, 7.45%, due 11/30/03 26,092 ------------- 547,111 ------------- TOTAL DEBT OBLIGATIONS (COST $409,871) 547,111 ------------- INVESTMENT FUNDS -- 0.0% UNITED STATES -- 0.0% 38,500 Alliance Korean Investment Fund A* 355,355 ------------- TOTAL INVESTMENT FUNDS (COST $327,839) 355,355 ------------- RIGHTS AND WARRANTS -- 0.0% FRANCE -- 0.0% 85,957 Cap Gemini SA Warrants, Expires 3/31/03* 1,686 ------------- ITALY -- 0.0% 68,334 Banca Intesa SPA Warrants, Expires 11/15/02* 272,082 ------------- THAILAND -- 0.0% 24,385 Thai Telephone & Telecom Warrants, Expires 9/29/06 (Foreign Registered)* 647 ------------- TOTAL RIGHTS AND WARRANTS (COST $237,238) 274,415 -------------
See accompanying notes to the financial statements. 15 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 5.4% CASH EQUIVALENTS -- 5.4% USD 39,700,000 Royal Bank of Canada Time Deposit, 1.81%, due 9/03/02 39,700,000 39,991,277 The Boston Global Investment Trust(c) 39,991,277 ------------- 79,691,277 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $79,691,277) 79,691,277 ------------- TOTAL INVESTMENTS -- 98.9% (Cost $1,561,467,652) 1,461,947,982 Other Assets and Liabilities (net) -- 1.1% 15,640,236 ------------- TOTAL NET ASSETS -- 100.0% $1,477,588,218 ============= NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. ADR - American Depositary Receipt GDR - Global Depository Receipt SDR - Swedish Depository Receipt
* Non-income producing security. + Direct placement securities are restricted as to resale. They have been valued at fair value by the Trustees after consideration of restricitions as to resale, financial condition and prospects of the issuer, general market conditions, and pertinent information in accordance with the Fund's By-Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to those restricted securities. 16 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) Additional information on each restricted security is as follows:
MARKET VALUE AS A MARKET PERCENTAGE VALUE AS OF ACQUISITION ACQUISITION OF FUND'S AUGUST 31, ISSUER, DESCRIPTION DATE COST NET ASSETS 2002 ------------------- ----------- ----------- ---------- ------------ Lihir Gold Ltd ADR 10/07/99 $1,454,640 0.07% $1,033,524
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Bankrupt issuer. (c) Represents investment of security lending collateral (Note 1). CURRENCY ABBREVIATIONS: GBP - British Pound JPY - Japanese Yen USD - United States Dollar
See accompanying notes to the financial statements. 17 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 20.8% Consumer Discretionary 19.2 Industrials 13.0 Consumer Staples 8.6 Telecommunication Services 8.1 Energy 7.9 Materials 7.3 Utilities 6.8 Information Technology 4.8 Health Care 3.5 ----- 100.0% =====
18 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $37,837,535 (cost $1,561,467,652) (Note 1) $1,461,947,982 Cash 13,354 Foreign currency, at value (cost $55,317,004) (Note 1) 57,464,809 Receivable for investments sold 914,655 Receivable for Fund shares sold 152 Dividends and interest receivable 2,469,430 Foreign taxes receivable 822,828 Receivable for expenses reimbursed by Manager (Note 2) 109,058 -------------- Total assets 1,523,742,268 -------------- LIABILITIES: Payable for investments purchased 5,027,638 Payable upon return of securities loaned (Note 1) 39,991,277 Payable for Fund shares repurchased 42,672 Payable to affiliate for (Note 2): Management fee 742,668 Shareholder service fee 184,249 12b-1 fee - Class M 28 Administration fee - Class M 16 Accrued expenses 165,502 -------------- Total liabilities 46,154,050 -------------- NET ASSETS $1,477,588,218 ============== NET ASSETS CONSIST OF: Paid-in capital $1,588,439,475 Accumulated undistributed net investment income 16,753,129 Accumulated net realized loss (30,331,799) Net unrealized depreciation (97,272,587) -------------- $1,477,588,218 ============== NET ASSETS ATTRIBUTABLE TO: Class II shares $ 155,725,825 ============== Class III shares $1,112,871,692 ============== Class IV shares $ 208,878,541 ============== Class M shares $ 112,160 ==============
See accompanying notes to the financial statements. 19 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- (CONTINUED) -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SHARES OUTSTANDING: Class II 15,832,555 ============== Class III 112,894,834 ============== Class IV 21,182,414 ============== Class M 11,406 ============== NET ASSET VALUE PER SHARE: Class II $ 9.84 ============== Class III $ 9.86 ============== Class IV $ 9.86 ============== Class M $ 9.83 ==============
20 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $2,819,819) $ 22,936,480 Interest (including securities lending income of $787,465) 2,282,455 ------------- Total income 25,218,935 ------------- EXPENSES: Management fee (Note 2) 4,429,341 Custodian fees 474,260 Transfer agent fees 31,464 Audit fees 26,220 Legal fees 27,158 Trustees fees (Note 2) 15,898 Registration fees 12,144 Miscellaneous 14,168 Fees reimbursed by Manager (Note 2) (584,844) ------------- 4,445,809 Shareholder service fee (Note 2) - Class II 161,957 Shareholder service fee (Note 2) - Class III 852,706 Shareholder service fee (Note 2) - Class IV 86,513 ------------- 12B-1 fee (Note 2) - Class M 28 ------------- Administration fee (Note 2) - Class M 23 ------------- Net expenses 5,547,036 ------------- Net investment income 19,671,899 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 1,313,841 Foreign currency, forward contracts and foreign currency related transactions 5,876,380 ------------- Net realized gain 7,190,221 ------------- Change in net unrealized appreciation (depreciation) on: Investments (43,698,852) Foreign currency, forward contracts and foreign currency related transactions 2,944,260 ------------- Net unrealized loss (40,754,592) ------------- Net realized and unrealized loss (33,564,371) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (13,892,472) =============
See accompanying notes to the financial statements. 21 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 19,671,899 $ 22,627,904 Net realized gain (loss) 7,190,221 (31,941,438) Change in net unrealized appreciation (depreciation) (40,754,592) (99,343,365) -------------- -------------- Net decrease in net assets from operations (13,892,472) (108,656,899) -------------- -------------- Distributions to shareholders from: Net investment income Class II (1,268,767) (913,145) Class III (9,304,745) (11,258,163) Class IV (1,854,709) (1,559,674) Class M (51) -- -------------- -------------- Total distributions from net investment income (12,428,272) (13,730,982) -------------- -------------- Net realized gains Class II -- (667,887) Class III -- (10,672,198) Class IV -- (1,492,707) -------------- -------------- Total distributions from net realized gains -- (12,832,792) -------------- -------------- (12,428,272) (26,563,774) -------------- -------------- Net share transactions: (Note 4) Class II 60,182,565 43,713,899 Class III 76,579,150 143,493,669 Class IV 83,094,069 6,306,235 Class M 112,573 858 -------------- -------------- Increase in net assets resulting from net share transactions 219,968,357 193,514,661 -------------- -------------- Total increase in net assets 193,647,613 58,293,988 NET ASSETS: Beginning of period 1,283,940,605 1,225,646,617 -------------- -------------- End of period (including accumulated undistributed net investment income of $16,753,129 and $9,509,502, respectively) $1,477,588,218 $1,283,940,605 ============== ==============
22 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ----------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.94 $ 11.21 $ 13.14 $ 11.79 $ 12.09 $ 10.65 -------- -------- ------- ------- ------- ------- Income from investment operations: Net investment income(b) 0.14 0.16 0.20 0.17 0.20 0.18 Net realized and unrealized gain (loss) (0.15) (1.20) (0.41) 2.89 (0.14) 1.48 -------- -------- ------- ------- ------- ------- Total from investment operations (0.01) (1.04) (0.21) 3.06 0.06 1.66 -------- -------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.09) (0.11) (0.29) (0.21) (0.25) (0.22) From net realized gains -- (0.12) (1.43) (1.50) (0.11) (0.00)(c) -------- -------- ------- ------- ------- ------- Total distributions (0.09) (0.23) (1.72) (1.71) (0.36) (0.22) -------- -------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.84 $ 9.94 $ 11.21 $ 13.14 $ 11.79 $ 12.09 ======== ======== ======= ======= ======= ======= TOTAL RETURN(a) (0.21)%** (9.37)% (1.84)% 25.63% 0.36% 15.94% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $155,726 $100,127 $61,681 $60,278 $33,780 $53,949 Net expenses to average daily net assets 0.82%* 0.82% 0.82% 0.82% 0.82% 0.82% Net investment income to average daily net assets 2.57%* 1.56% 1.63% 1.28% 1.64% 1.60% Portfolio turnover rate 10% 22% 38% 35% 27% 19% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08%* 0.09% 0.09% 0.10% 0.25% 0.25%
* Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. (c) The distribution from net realized gains was less than $.01 per share. See accompanying notes to the financial statements. 23 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ---------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ------------ ------------ ------------ ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 11.22 $ 13.16 $ 11.81 $ 12.10 $ 10.66 ---------- ---------- ---------- ---------- -------- -------- Income from investment operations: Net investment income(b) 0.14 0.19 0.21 0.20 0.20 0.21 Net realized and unrealized gain (loss) (0.14) (1.23) (0.43) 2.86 (0.12) 1.45 ---------- ---------- ---------- ---------- -------- -------- Total from investment operations 0.00 (1.04) (0.22) 3.06 0.08 1.66 ---------- ---------- ---------- ---------- -------- -------- Less distributions to shareholders: From net investment income (0.09) (0.11) (0.29) (0.21) (0.26) (0.22) From net realized gains -- (0.12) (1.43) (1.50) (0.11) (0.00)(c) ---------- ---------- ---------- ---------- -------- -------- Total distributions (0.09) (0.23) (1.72) (1.71) (0.37) (0.22) ---------- ---------- ---------- ---------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.86 $ 9.95 $ 11.22 $ 13.16 $ 11.81 $ 12.10 ========== ========== ========== ========== ======== ======== TOTAL RETURN(a) (0.11)%** (9.33)% (1.85)% 25.65% 0.48% 15.95% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,112,872 $1,049,456 $1,019,541 $1,022,498 $927,108 $847,427 Net expenses to average daily net assets 0.75%* 0.75% 0.75% 0.75% 0.75% 0.75% Net investment income to average daily net assets 2.67%* 1.88% 1.71% 1.48% 1.60% 1.80% Portfolio turnover rate 10% 22% 38% 35% 27% 19% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08%* 0.09% 0.09% 0.10% 0.25% 0.25%
* Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. (c) The distribution from net realized gains was less than $.01 per share. 24 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 -------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998+ ---------------- -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.96 $ 11.22 $ 13.16 $ 11.81 $ 12.11 $ 10.90 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.14 0.20 0.22 0.21 0.22 0.00(b)(c) Net realized and unrealized gain (loss) (0.15) (1.22) (0.43) 2.86 (0.15) 1.21 -------- -------- -------- -------- -------- -------- Total from investment operations (0.01) (1.02) (0.21) 3.07 0.07 1.21 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.09) (0.12) (0.30) (0.22) (0.26) -- From net realized gains -- (0.12) (1.43) (1.50) (0.11) -- -------- -------- -------- -------- -------- -------- Total distributions (0.09) (0.24) (1.73) (1.72) (0.37) -- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.86 $ 9.96 $ 11.22 $ 13.16 $ 11.81 $ 12.11 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) (0.19)%** (9.19)% (1.79)% 25.74% 0.53% 11.10%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $208,879 $134,357 $144,425 $141,175 $130,760 $219,785 Net expenses to average daily net assets 0.69%* 0.69% 0.69% 0.69% 0.69% 0.69%* Net investment income to average daily net assets 2.69%* 1.97% 1.77% 1.55% 1.81% 0.26%* Portfolio turnover rate 10% 22% 38% 35% 27% 19% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08%* 0.09% 0.09% 0.10% 0.25% 0.25%
+ Period from January 9, 1998 (commencement of operations) to February 28, 1998. * Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Net investment income earned was less than $.01 per share. (c) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 25 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 25, 2002 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2002 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 28, 2002 ---------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.93 $ 9.85 ----------- ---------- Income from investment operations: Net investment income 0.05 0.00(b)(c) Net realized and unrealized gain (loss) (0.07) 0.08 ----------- ---------- Total from investment operations (0.02) 0.08 ----------- ---------- Less distributions to shareholders: From net investment income (0.08) -- ----------- ---------- Total distributions (0.08) -- ----------- ---------- NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.93 =========== ========== TOTAL RETURN(a) (0.26)%** 0.81%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 112 $ 1 Net expenses to average daily net assets 1.05%* 1.05%* Net investment income to average daily net assets 0.97%* 0.35%* Portfolio turnover rate 10% 22% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08%* 0.09%*
* Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. (c) Net investment income earned was less than $.01 per share. 26 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the Morgan Stanley Capital International EAFE Index. Throughout the six months ended August 31, 2002, the Fund had four classes of shares outstanding: Class II, Class III, Class IV, and Class M. Class M shares bear an administrative fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee. (see Note 2) The principal economic difference among the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their 27 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. These prices may differ from the value that would have been used had a broader market for the securities existed and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of August 31, 2002. 28 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. At August 31, 2002, there were no open swap agreements. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect 29 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- the current value of the option. Premuims paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, there were no outstanding futures contracts. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $37,837,535 collateralized by cash in the amount of $39,991,277 which was invested in a short-term instrument. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax 30 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $23,898,414 expiring in 2010. The Fund has elected to defer to March 1, 2002 post-October capital losses of $11,953,014. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. 31 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments of domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, and .09% for Class IV shares. The Fund pays GMO an administrative fee monthly at the annual rate of .20% of average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee, at the annual rate of 0.25% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees (Class II, Class III and Class IV only), administrative fee (Class M only), 12b-1 fee (Class M only) and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $15,898. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 32 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002 aggregated $336,611,789 and $141,169,364, respectively. At August 31, 2002 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,561,467,652 $118,807,798 $ (218,327,468) $(99,519,670)
4. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class II: ----------- ------------- ----------- ------------- Shares sold 6,722,597 $ 70,231,796 6,901,919 $ 66,851,376 Shares issued to shareholders in reinvestment of distributions 107,329 1,150,570 147,774 1,500,948 Shares repurchased (1,075,195) (11,199,801) (2,475,524) (24,638,425) ----------- ------------- ----------- ------------- Net increase 5,754,731 $ 60,182,565 4,574,169 $ 43,713,899 =========== ============= =========== =============
33 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - --------------------------------------------------------------------------------
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 18,907,527 $ 199,006,821 26,800,942 $ 274,364,642 Shares issued to shareholders in reinvestment of distributions 457,144 4,909,728 1,685,173 17,307,866 Shares repurchased (11,901,226) (127,337,399) (13,914,112) (148,178,839) ----------- ------------- ----------- ------------- Net increase 7,463,445 $ 76,579,150 14,572,003 $ 143,493,669 =========== ============= =========== =============
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class IV: ----------- ------------- ----------- ------------- Shares sold 7,592,306 $ 82,072,832 423,565 $ 4,206,000 Shares issued to shareholders in reinvestment of distributions 106,181 1,141,442 203,713 2,100,235 Shares repurchased (11,514) (120,205) -- -- ----------- ------------- ----------- ------------- Net increase 7,686,973 $ 83,094,069 627,278 $ 6,306,235 =========== ============= =========== =============
Period from January 25, 2002 Six Months Ended (commencement of August 31, 2002 operations) (Unaudited) through February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class M: ----------- ------------- ----------- ------------- Shares sold 11,313 $ 112,522 87 $ 858 Shares issued to shareholders in reinvestment of distributions 6 51 -- -- Shares repurchased -- -- -- -- ----------- ------------- ----------- ------------- Net increase 11,319 $ 112,573 87 $ 858 =========== ============= =========== =============
34 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 3.3% CANADA -- 0.6% GBP 1,000,000 Province of Quebec, 8.63%, due 11/04/11 1,902,996 ------------ UNITED STATES -- 2.7% STRUCTURED NOTES -- 1.4% USD 4,200,000 Ford Motor Credit, 7.25%, due 10/25/11 4,020,114 ------------ U.S. GOVERNMENT -- 1.3% USD 3,290,730 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(a) 3,621,860 ------------ TOTAL UNITED STATES 7,641,974 ------------ TOTAL DEBT OBLIGATIONS (COST $9,363,804) 9,544,970 ------------ SHARES ------------- MUTUAL FUNDS -- 94.3% 10,151,922 GMO Alpha LIBOR Fund 260,498,307 1,039,631 GMO Emerging Country Debt Fund, Class III 9,273,507 ------------ TOTAL MUTUAL FUNDS (COST $273,134,922) 269,771,814 ------------ PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 1.0% CROSS CURRENCY OPTIONS -- 1.0% EUR 70,500,000 Euro Call/USD Put, Expires 09/19/02, Strike .95 2,150,250 GBP 9,600,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 313,211 USD 8,000,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 304,973 ------------ 2,768,434 ------------ TOTAL CALL OPTIONS PURCHASED (COST $2,207,474) 2,768,434 ------------
See accompanying notes to the financial statements. 1 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- PUT OPTIONS PURCHASED -- 0.1% CROSS CURRENCY OPTIONS -- 0.1% GBP 17,600,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.43 193,301 ------------ TOTAL PUT OPTIONS PURCHASED (COST $719,242) 193,301 ------------ PAR VALUE ($) ------------- SHORT-TERM INVESTMENTS -- 0.9% COMMERCIAL PAPER -- 0.9% USD 2,569,000 Insured Asset Funding, 144A, 1.95%, due 9/03/02 2,568,583 ------------ REPURCHASE AGREEMENTS -- 0.0% USD 1,544 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $1,545, and an effective yield of 0.85%, collateralized by a U.S. Treasury Bond with a rate of 0.00%, maturity date of 11/15/14, and a market value of $5,491. 1,544 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $2,570,127) 2,570,127 ------------ TOTAL INVESTMENTS -- 99.6% (Cost $287,995,569) 284,848,646 Other Assets and Liabilities (net) -- 0.4% 1,194,695 ------------ TOTAL NET ASSETS -- 100.0% $286,043,341 ============
See accompanying notes to the financial statements. 2 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. CURRENCY ABBREVIATIONS:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 3 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $287,995,569) (Note 1) $284,848,646 Interest receivable 468,287 Receivable for open forward foreign currency contracts (Notes 1 and 6) 2,642,260 Receivable for variation margin on open futures contracts (Notes 1 and 6) 261,695 Net receivable for open swap contracts (Notes 1 and 6) 911,024 Receivable for expenses reimbursed by Manager (Note 2) 18,915 ------------ Total assets 289,150,827 ------------ LIABILITIES: Payable for investments purchased 800,000 Payable for Fund shares repurchased 1,000,000 Payable to affiliate for (Note 2): Management fee 46,286 Shareholder service fee 36,542 Payable for open forward foreign currency contracts (Notes 1 and 6) 1,169,104 Accrued expenses 55,554 ------------ Total liabilities 3,107,486 ------------ NET ASSETS $286,043,341 ============ NET ASSETS CONSIST OF: Paid-in capital $259,235,535 Distribution in excess of net investment income (651,755) Accumulated net realized gain 26,261,780 Net unrealized appreciation 1,197,781 ------------ $286,043,341 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $286,043,341 ============ SHARES OUTSTANDING: Class III 26,868,948 ============ NET ASSET VALUE PER SHARE: Class III $ 10.65 ============
4 See accompanying notes to the financial statements. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 1,743,639 Interest (including securities lending income of $61) 658,045 ----------- Total income 2,401,684 ----------- EXPENSES: Management fee (Note 2) 270,985 Custodian and transfer agent fees 53,452 Audit fees 20,516 Legal fees 6,247 Trustees fees (Note 2) 2,585 Registration fees 1,472 Miscellaneous 2,484 Fees reimbursed by Manager (Note 2) (83,812) ----------- 273,929 Indirectly incurred fees reimbursed by Manager (Note 2) (19,205) ----------- 254,724 ----------- Shareholder service fee (Note 2) - Class III 213,936 Shareholder service fee reimbursed (Note 2) - Class III (7,062) ----------- 206,874 ----------- Net expenses 461,598 ----------- Net investment income 1,940,086 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 106,397 Realized gains distributions from investment company shares 780,570 Closed futures contracts 2,868,371 Closed swap contracts 3,025,722 Foreign currency, forward contracts and foreign currency related transactions 20,722,251 ----------- Net realized gain 27,503,311 ----------- Change in net unrealized appreciation (depreciation) on: Investments (640,186) Open futures contracts 2,912,177 Open swap contracts 762,556 Foreign currency, forward contracts and foreign currency related transactions 5,053,876 ----------- Net unrealized gain 8,088,423 ----------- Net realized and unrealized gain 35,591,734 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $37,531,820 ===========
See accompanying notes to the financial statements. 5 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,940,086 $ 14,901,012 Net realized gain (loss) 27,503,311 (6,033,954) Change in net unrealized appreciation (depreciation) 8,088,423 (13,106,609) ------------ ------------ Net increase (decrease) in net assets from operations 37,531,820 (4,239,551) ------------ ------------ Distributions to shareholders from: Net investment income Class III -- (10,755,169) ------------ ------------ Total distributions from net investment income -- (10,755,169) ------------ ------------ Net realized gains Class III -- (5,266,132) ------------ ------------ Total distributions from net realized gains -- (5,266,132) ------------ ------------ -- (16,021,301) ------------ ------------ Net share transactions: (Note 5) Class III (24,562,321) 2,222,393 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (24,562,321) 2,222,393 ------------ ------------ Total increase (decrease) in net assets 12,969,499 (18,038,459) NET ASSETS: Beginning of period 273,073,842 291,112,301 ------------ ------------ End of period (including distribution in excess of net investment income of $651,755 and $2,591,841, respectively) $286,043,341 $273,073,842 ============ ============
6 See accompanying notes to the financial statements. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001(D) 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.33 $ 10.04 $ 9.41 $ 9.87 $ 10.15 $ 10.16 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.07(a)+ 0.53(a)+ 0.51(a)+ 0.51 0.55 0.65+ Net realized and unrealized gain (loss) 1.25 (0.66) 0.12 (0.71) (0.25) 0.36 -------- -------- -------- -------- -------- -------- Total from investment operations 1.32 (0.13) 0.63 (0.20) 0.30 1.01 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income -- (0.39) -- (0.26) (0.46) (0.56) From net realized gains -- (0.19) -- -- (0.12) (0.46) -------- -------- -------- -------- -------- -------- Total distributions -- (0.58) -- (0.26) (0.58) (1.02) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.65 $ 9.33 $ 10.04 $ 9.41 $ 9.87 $ 10.15 ======== ======== ======== ======== ======== ======== TOTAL RETURN(b) 14.15%** (1.34)% 6.70% (2.07)% 2.69% 10.19% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $286,043 $273,074 $291,112 $182,730 $163,210 $105,052 Net operating expenses to average daily net assets 0.32%*(e) 0.32%(e) 0.33%(e) 0.34% 0.34% 0.34% Interest expense to average daily net assets -- -- -- 0.16%(c) -- -- Total net expenses to average daily net assets 0.32%* 0.32% 0.33% 0.50% 0.34% 0.34% Net investment income to average daily net assets 1.36%*(a) 5.36%(a) 5.34%(a) 5.09% 5.86% 6.21% Portfolio turnover rate 11% 28% 35% 116% 75% 103% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08%* 0.08% 0.08% 0.08% 0.28% 0.37%
* Annualized. ** Not annualized. + Computed using average shares outstanding throughout the period. (a) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change on net investment income and net realized and unrealized gains and losses per share for the year ended February 28, 2001 was less than $0.01 per share. The effect of this change decreased the ratio of net investment income to average net assets from 5.36% to 5.34%. Per share and ratio/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. See accompanying notes to the financial statements. 7 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in global bond and currency markets. The Fund's benchmark is the J.P. Morgan Global Government Bond Index. At August 31, 2002, 91.1% of the net assets of the Fund was invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. GMO Alpha LIBOR Fund invests primarily in relatively high quality, low volatility fixed income instruments. At August 31, 2002, 3.2% of the net assets of the Fund was invested in GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. GMO Emerging Country Debt Fund invests in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Europe. The financial statements of the GMO Alpha LIBOR Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities 8 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. 9 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the 10 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002, the Fund had no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. See the Schedule of Investments for all open purchased option contracts as of August 31, 2002. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. 11 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically an emerging country, on its obligation. The fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at 12 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. For the six months ended August 31, 2002, the Fund did not enter into any reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 13 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. The Fund elected to defer to March 1, 2002 post-October losses of $7,396,659. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis, and is adjusted for the amortization of premiums and of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .19% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund may invest in Class III shares of the GMO Emerging Country Debt Fund and the Class III shares of the GMO Alpha LIBOR Fund 14 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ("underlying funds"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in the underlying funds. For the six months ended August 31, 2002, shareholder service fees incurred indirectly by the Fund were 0.005% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding Fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.014% and 0.023% of the Fund's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $2,585. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $36,424,208 and $30,988,497, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $287,995,569 $1,114,917 $(4,261,840) $(3,146,923)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 62.3% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 15 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------- ------------------------- Shares Amount Shares Amount Class III: ----------- ------------ ----------- ------------ Shares sold 1,013,375 $ 10,380,000 1,298,968 $ 12,839,268 Shares issued to shareholders in reinvestment of distributions -- -- 1,624,503 15,156,606 Shares repurchased (3,427,876) (34,942,321) (2,644,157) (25,773,481) ----------- ------------ ----------- ------------ Net increase (decrease) (2,414,501) $(24,562,321) 279,314 $ 2,222,393 =========== ============ =========== ============
16 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- -------------- ----------- -------------- Buys 9/17/02 AUD 28,900,000 $15,897,081 $ 401,853 9/24/02 CAD 54,200,000 34,716,145 (333,228) 10/29/02 CHF 121,700,000 81,247,079 306,923 10/22/02 EUR 36,600,000 35,810,355 150,381 10/15/02 GBP 6,400,000 9,872,990 128,744 9/10/02 JPY 8,380,000,000 70,717,678 641,914 ---------- $1,296,587 ========== Sales 9/17/02 AUD 31,300,000 $17,217,254 $ 114,652 9/24/02 CAD 32,100,000 20,560,669 (358,263) 9/03/02 CHF 200,991 133,948 315 10/29/02 CHF 5,600,000 3,738,567 31,385 10/22/02 EUR 6,000,000 5,870,550 43,650 10/15/02 GBP 19,300,000 29,773,236 (328,384) 1/13/03 HKD 62,359,200 7,995,485 4,515 9/10/02 JPY 2,530,000,000 21,350,325 (93,260) ---------- $ (585,390) ==========
FORWARD CROSS CURRENCY CONTRACTS Net Unrealized Settlement Deliver/Units of Receive/In Appreciation Date Currency Exchange For (Depreciation) ---------- ----------------- ---------------- -------------- 9/03/02 CHF 52,336,200 EUR 35,700,000 126,256 9/03/02 EUR 35,700,000 CHF 52,537,191 7,692 11/05/02 CHF 52,300,500 EUR 35,700,000 (14,297) 10/08/02 EUR 27,500,000 SEK 259,875,000 683,980 10/08/02 SEK 44,628,480 EUR 4,800,000 (41,672) -------- $761,959 ========
17 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- ------------------ ------------- -------------- Buys 54 Australian Goernment Bond 10 Yr. September 2002 $ 3,042,180 $ 99,984 129 Australian Government Bond 3 Yr. September 2002 7,252,795 104,907 665 Canadian Government Bond 10 Yr. December 2002 45,143,269 343,161 92 Euro BOBL September 2002 9,800,173 227,993 237 Euro Bund September 2002 25,771,379 930,433 1 Japanese Government Bond 10 Yr. September 2002 1,191,751 (344) 236 U.S. Long Bond December 2002 25,886,250 261,244 131 U.S. Treasury Note 10 Yr. December 2002 14,643,344 83,169 82 U.S. Treasury Note 5 Yr. December 2002 9,116,094 52,060 ---------- $2,102,607 ========== Sales 4 Japanese Government Bond 10 Yr. September 2002 $ 4,767,005 $ (75,493) 1 Japanese Government Bond 10 Yr. December 2002 1,185,173 331 34 Swiss Government Bond September 2002 2,829,746 (94,733) 14 Swiss Government Bond December 2002 1,153,062 (11,752) 65 U.K. Gilt December 2002 11,911,053 (33,454) ---------- $ (215,101) ==========
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 18 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls ---------------------------- -------------------------------- Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ---------- ---------------- -------------- Outstanding, beginning of period -- $ -- -- $ -- Options written -- -- 122,100 5,706,685 Options closed -- -- -- -- Options exercised -- -- (122,100) (5,706,685) Options expired -- -- -- -- Options sold -- -- -- -- ---------- ---------- --------- ----------- Outstanding, end of period -- $ -- -- $ -- ========== ========== ========= ===========
SWAPS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) -------------------- -------------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 85,188,610 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ 24,107 5/04/01 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. 56,110,669 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated (28,986) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08.
19 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAPS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) -------------------- -------------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 15,000,000 EUR 3/21/05 Agreement with UBS AG dated 3/17/00 to receive the 517,629 notional amount multiplied by 5.222% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR adjusted by a specified spread. 11,500,000 CHF 5/11/11 Agreement with Morgan Guaranty Trust Company dated (322,875) 5/09/01 to pay the notional amount multiplied by 3.73% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 3,000,000 EUR 3/21/30 Agreement with UBS AG dated 3/17/00 to receive the 349,363 notional amount multiplied by 5.895% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR adjusted by a specified spread.
20 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAPS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) -------------------- -------------- -------------------------------------------------- -------------- TOTAL RETURN SWAPS 30,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust Company dated 78,225 7/18/01 to receive (pay) the notional amount multiplied by the return on the JP Morgan Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. + 75,000,000 USD 9/24/03 Agreement with Morgan Guaranty Trust Company dated 361,674 9/20/01 to receive (pay) the notional amount multiplied by the return on the JP Morgan Hedged Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specific spread. + -------- $979,137 ========
+ Swap agreements are fair valued (Note 1). See Notes to the Schedule of Investments for definitions of currency abbreviations. 21 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 28.6% BULGARIA -- 2.0% USD 10,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 2,726,799 ------------ CANADA -- 6.0% CAD 2,000,000 Province of British Columbia, 7.88%, due 11/30/23 1,547,436 GBP 3,500,000 Province of Quebec, 8.63%, due 11/04/11 6,660,487 ------------ 8,207,923 ------------ CAYMAN ISLANDS -- 12.6% GBP 4,000,000 BA Credit Card Corp Series 97-1, 7.13%, due 09/15/02 6,192,550 CAD 2,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 1,429,487 EUR 10,000,000 MBNA America Euro Structured Offering, Variable Rate, 3 mo. EURIBOR + .14%, 3.48%, due 05/19/04 9,811,904 ------------ 17,433,941 ------------ JAPAN -- 0.8% USD 1,030,000 Japan Highway Public Corporation, 7.63%, due 09/22/04 1,127,335 ------------ SUPRA NATIONAL -- 0.4% CAD 700,000 European Investment Bank, 8.50%, due 08/30/05 502,340 ------------ UNITED STATES -- 6.8% STRUCTURED NOTES -- 2.1% USD 3,000,000 Ford Motor Credit, 7.25%, due 10/25/11 2,871,510 ------------ U.S. GOVERNMENT -- 3.5% USD 4,454,040 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08(b) 4,815,235 ------------ U.S. GOVERNMENT AGENCY -- 1.2% AUD 3,000,000 Federal National Mortgage Association, Series EMTN, 6.38%, due 08/15/07 1,697,795 ------------ TOTAL UNITED STATES 9,384,540 ------------ TOTAL DEBT OBLIGATIONS (COST $38,092,277) 39,382,878 ------------
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- MUTUAL FUNDS -- 67.1% 3,430,511 GMO Alpha LIBOR Fund 88,026,912 483,966 GMO Emerging Country Debt Fund, Class III 4,316,978 ------------ TOTAL MUTUAL FUNDS (COST $93,764,082) 92,343,890 ------------ PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 1.0% CROSS CURRENCY OPTIONS -- 1.0% EUR 36,300,000 Euro Call/USD Put, Expires 09/19/02, Strike .95 1,107,150 GBP 4,700,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 153,343 USD 4,200,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 160,111 ------------ 1,420,604 ------------ TOTAL CALL OPTIONS PURCHASED (COST $1,126,397) 1,420,604 ------------ PUT OPTIONS PURCHASED -- 0.1% CROSS CURRENCY OPTIONS -- 0.1% GBP 9,100,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.43 99,945 ------------ TOTAL PUT OPTIONS PURCHASED (COST $371,881) 99,945 ------------ PAR VALUE ($) ------------- SHORT-TERM INVESTMENTS -- 0.6% COMMERCIAL PAPER -- 0.6% USD 850,000 Insured Asset Funding, 144A, 1.95%, due 9/03/02 849,862 ------------
See accompanying notes to the financial statements. 2 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS -- 0.0% USD 821 Morgan Stanley Dean Witter & Co. Repurchase Agreement, dated 8/30/02, due 9/3/02, with a maturity value of $822, and an effective yield of 0.85%, collateralized by a U.S. Treasury Strip with a rate of 0.00%, maturity date of 11/15/14, and a market value, including accrued interest of $5,491. 821 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $850,683) 850,683 ------------ TOTAL INVESTMENTS -- 97.4% (Cost $134,205,320) 134,098,000 Other Assets and Liabilities (net) -- 2.6% 3,635,429 ------------ TOTAL NET ASSETS -- 100.0% $137,733,429 ============
NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. Variable rates - The rates shown on variable rate notes are the current interest rates at August 31, 2002, which are subject to change based on the terms of the security. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen USD - United States Dollar
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 6). See accompanying notes to the financial statements. 3 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $134,205,320) (Note 1) $134,098,000 Interest receivable 1,487,513 Receivable for open forward foreign currency contracts (Notes 1 and 6) 1,545,266 Receivable for variation margin on open futures contracts (Notes 1 and 6) 92,743 Net receivable for open swap contracts (Notes 1 and 6) 1,367,572 Receivable for expenses reimbursed by Manager (Note 2) 13,011 ------------ Total assets 138,604,105 ------------ LIABILITIES: Payable for Fund shares repurchased 948 Payable to affiliate for (Note 2): Management fee 29,978 Shareholder service fee 17,987 Payable for open forward foreign currency contracts (Notes 1 and 6) 770,930 Accrued expenses 50,833 ------------ Total liabilities 870,676 ------------ NET ASSETS $137,733,429 ============ NET ASSETS CONSIST OF: Paid-in capital $126,769,121 Distribution in excess of net investment income (451,811) Accumulated net realized gain 8,839,140 Net unrealized appreciation 2,576,979 ------------ $137,733,429 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $137,733,429 ============ SHARES OUTSTANDING: Class III 12,985,054 ============ NET ASSET VALUE PER SHARE: Class III $ 10.61 ============
4 See accompanying notes to the financial statements. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $835) $ 1,512,094 Dividends from investment company shares 728,749 ----------- Total income 2,240,843 ----------- EXPENSES: Management fee (Note 2) 179,811 Custodian and transfer agent fees 35,880 Audit fees 21,528 Legal fees 3,144 Registration fees 1,748 Trustees fees (Note 2) 1,548 Miscellaneous 1,564 Fees reimbursed by Manager (Note 2) (63,664) ----------- 181,559 Indirectly incurred fees reimbursed by Manager (Note 2) (12,202) ----------- 169,357 ----------- Shareholder service fee (Note 2) - Class III 107,887 Shareholder service fee reimbursed (Note 2) - Class III (4,496) ----------- 103,391 ----------- Net expenses 272,748 ----------- Net investment income 1,968,095 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,589,728) Realized gains distributions from investment company shares 295,748 Closed futures contracts (335,322) Closed swap contracts 1,435,576 Foreign currency, forward contracts and foreign currency related transactions 11,393,690 ----------- Net realized gain 11,199,964 ----------- Change in net unrealized appreciation (depreciation) on: Investments 4,417,975 Open futures contracts 1,041,488 Open swap contracts 722,541 Foreign currency, forward contracts and foreign currency related transactions 3,169,608 ----------- Net unrealized gain 9,351,612 ----------- Net realized and unrealized gain 20,551,576 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $22,519,671 ===========
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- -------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,968,095 $ 8,164,480 Net realized gain (loss) 11,199,964 (10,470,647) Change in net unrealized appreciation (depreciation) 9,351,612 (4,431,557) ------------ ------------ Net increase (decrease) in net assets from operations 22,519,671 (6,737,724) ------------ ------------ Distributions to shareholders from: Net investment income Class III -- (499,961) ------------ ------------ Total distributions from net investment income -- (499,961) ------------ ------------ Net share transactions: (Note 5) Class III (19,834,046) (70,305,217) ------------ ------------ Decrease in net assets resulting from net share transactions (19,834,046) (70,305,217) ------------ ------------ Total increase (decrease) in net assets 2,685,625 (77,542,902) NET ASSETS: Beginning of period 135,047,804 212,590,706 ------------ ------------ End of period (including distribution in excess of net investment income of $451,811 and $2,419,906, respectively) $137,733,429 $135,047,804 ============ ============
6 See accompanying notes to the financial statements. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001(D) 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.05 $ 9.44 $ 9.19 $ 10.06 $ 10.45 $ 10.78 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.14(a)+ 0.45(a)+ 0.63(a)+ 0.70(a) 0.71 0.59 Net realized and unrealized gain (loss) 1.42 (0.81) (0.34) (0.99) (0.42) 0.08 -------- -------- -------- -------- -------- -------- Total from investment operations 1.56 (0.36) 0.29 (0.29) 0.29 0.67 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income -- (0.03) -- (0.39) (0.45) (0.54) From net realized gains -- -- (0.04) (0.19) (0.23) (0.46) -------- -------- -------- -------- -------- -------- Total distributions -- (0.03) (0.04) (0.58) (0.68) (1.00) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.61 $ 9.05 $ 9.44 $ 9.19 $ 10.06 $ 10.45 ======== ======== ======== ======== ======== ======== TOTAL RETURN(b) 17.24%++ (3.80)% 3.20% (2.98)% 2.48% 6.32% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $137,733 $135,048 $212,591 $145,373 $181,829 $293,022 Net operating expenses to average daily net assets 0.38%**(e) 0.38%(e) 0.39%(e) 0.40% 0.40% 0.40% Interest expense to average daily net assets -- -- -- 0.03%(c) -- -- Total net expenses to average daily net assets 0.38%** 0.38% 0.39% 0.43% 0.40% 0.40% Net investment income to average daily net assets 2.74%**(a) 4.85%(a) 6.82%(a) 6.51%(a) 6.45% 6.24% Portfolio turnover rate 16% 36% 114% 39% 106% 105% Fees and expenses reimbursed by the Manager to average daily net assets: 0.11%** 0.11% 0.04% 0.98% 0.24% 0.25%
(a) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.01, increase net realized and unrealized gains and losses per share by $0.01 and decrease the ratio of net investment income to average net assets from 6.97% to 6.82%. Per share and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. + Computed using average shares outstanding throughout the period. ++ Not annualized. ** Annualized. See accompanying notes to the financial statements. 7 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in foreign bond and currency markets. The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index. At August 31, 2002, 63.9% of the net assets of the Fund was invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. GMO Alpha LIBOR Fund invests primarily in relatively high quality, low volatility fixed income instruments. At August 31, 2002, 3.2% of the net assets of the Fund was invested in GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. GMO Emerging Country Debt Fund invests primarily in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa, and Europe. The financial statements of the GMO Alpha LIBOR Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which 8 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market maker may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. 9 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against amounts 10 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002, the Fund had no written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. See the Schedule of Investments for all open purchased option contracts as of August 31, 2002. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. 11 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically an emerging country, on its obligation. The fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. At August 31, 2002, $201,083 was set aside as collateral for swaps. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of August 31, 2002. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund 12 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. For the six months ended August 31, 2002, the Fund did not enter into any reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 13 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $2,090,500 expiring in 2009. The Fund elected to defer to March 1, 2002 post-October losses of $4,665,510. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis, and is adjusted for the amortization of premium and discounts. Dividend income is recorded on the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of these securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the 14 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund may invest in Class III shares of the GMO Emerging Country Debt Fund and Class III shares of the GMO Alpha LIBOR Fund ("underlying funds"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in the underlying funds. For the six months ended August 31, 2002, the shareholder service fees incurred indirectly by the Fund were 0.006% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) and the amount of fees and operating expenses (excluding fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds exceed the management fee. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) and indirect investment expenses incurred by the Fund were 0.017% and 0.018% of the Fund's average daily net assets, respectively The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $1,548. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $22,399,497 and $27,591,689, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $134,205,320 $1,953,066 $(2,060,386) $(107,320)
15 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 74.8% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ ------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ----------- ------------ Shares sold 257,372 $ 2,626,420 2,426,506 $ 22,049,789 Shares issued to shareholders in reinvestment of distributions -- -- 49,148 450,690 Shares repurchased (2,187,170) (22,460,466) (10,077,404) (92,805,696) ---------- ------------ ----------- ------------ Net decrease (1,929,798) $(19,834,046) (7,601,750) $(70,305,217) ========== ============ =========== ============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 9/17/02 AUD 15,000,000 $ 8,251,080 $ 202,659 9/24/02 CAD 25,200,000 16,141,086 (154,932) 10/29/02 CHF 61,200,000 40,857,200 154,344 10/22/02 EUR 21,900,000 21,427,507 85,479 10/15/02 GBP 3,200,000 4,936,495 64,227 9/10/02 JPY 6,260,000,000 52,827,287 493,895 --------- $ 845,672 =========
16 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED Sales 9/17/02 AUD 18,900,000 $10,396,361 $ 69,231 9/24/02 CAD 16,800,000 10,760,724 (186,846) 9/03/02 CHF 107,533 71,664 168 10/29/02 CHF 2,400,000 1,602,243 13,451 10/22/02 EUR 2,300,000 2,250,377 16,733 10/15/02 GBP 15,600,000 24,065,414 (265,430) 1/13/03 HKD 38,974,500 4,997,178 2,822 9/10/02 JPY 1,870,000,000 15,780,675 (123,951) --------- $(473,822) =========
FORWARD CROSS CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Units of Currency Receive/In Exchange For (Depreciation) ---------- ------------------------- ----------------------- -------------- 9/03/02 CHF 28,000,600 EUR 19,100,000 67,549 11/05/02 CHF 27,981,500 EUR 19,100,000 (7,649) 9/03/02 EUR 19,100,000 CHF 28,108,133 4,115 10/08/02 EUR 14,900,000 SEK 140,805,000 370,593 10/08/02 SEK 34,401,120 EUR 3,700,000 (32,122) -------- $402,486 ========
17 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- ------------------ ------------- -------------- Buys 21 Australian Government Bond 10 Yr. September 2002 $ 1,183,070 $ 37,632 30 Australian Government Bond 3 Yr. September 2002 1,686,696 20,582 274 Canadian Government Bond 10 Yr. December 2002 18,600,385 141,564 20 Euro BOBL September 2002 2,130,472 29,987 115 Euro Bund September 2002 12,505,100 410,662 5 Japanese Government Bond 10 Yr. September 2002 5,958,757 136,477 5 Japanese Government Bond 10 Yr. December 2002 5,925,863 (1,719) 3 U.S. Long Bond December 2002 329,063 733 --------- $ 775,918 ========= Sales 5 Japanese Government Bond 10 Yr. September 2002 $ 5,958,757 $ 1,654 51 Swiss Government Bond September 2002 4,244,619 (142,138) 21 Swiss Government Bond December 2002 1,729,593 (17,628) 50 U.K. Gilt December 2002 9,162,348 (25,733) 1 U.S. Treasury Note 10 Yr. December 2002 111,781 (647) 32 U.S. Treasury Note 5 Yr. December 2002 3,557,500 (20,684) --------- $(205,176) =========
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 18 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- WRITTEN OPTIONS TRANSACTIONS
Puts Calls ------------------------------ -------------------------------- Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ------------ ---------------- -------------- Outstanding, beginning of period -- $ -- -- $ -- Options written -- -- 60,900 2,846,153 Options closed -- -- -- -- Options exercised -- -- (60,900) (2,846,153) Options expired -- -- -- -- Options sold -- -- -- -- ----------- -------- ------------ ----------- Outstanding, end of period -- $ -- -- $ -- =========== ======== ============ ===========
SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- --------------- --------------------------------------- ------------------------------------------ CREDIT DEFAULT SWAPS 100,117,997 EUR 3/31/03 Agreement with Morgan Guaranty Trust $ (51,719) Company dated 5/4/01 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08.
19 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED INTEREST RATE SWAPS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- --------------- --------------------------------------- ------------------------------------------ 20,000,000 EUR 3/21/05 Agreement with UBS AG dated 3/17/00 to 700,734 receive the notional amount multiplied by 5.222% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR adjusted by a specified spread. 5,000,000 EUR 3/21/30 Agreement with UBS AG dated 3/17/00 to 582,967 receive the notional amount multiplied by 5.895% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR adjusted by a specified spread. TOTAL RETURN SWAPS 52,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust 135,590 Company dated 7/18/01 to receive (pay) the notional amount multiplied by the return on the JP Morgan Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread.+ ---------- $1,367,572 ==========
+ Swap agreement is fair valued (Note 1). See Notes to the Schedule of Investments for definitions of currency abbreviations. 20 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 95.3% AUSTRALIA -- 4.4% 32,600 Australia and New Zealand Banking Group Ltd 340,478 42,288 BHP Billiton Ltd 212,211 11,485 Commonwealth Bank of Australia 195,299 45,600 CSR Ltd 165,030 86,717 General Property Trust Units 131,362 13,869 Leighton Holdings Ltd 85,030 42,800 National Australia Bank Ltd 816,922 33,234 Orica Ltd 175,930 91,500 Qantas Airways Ltd 210,684 18,379 St. George Bank Ltd 194,382 20,212 TABCORP Holdings Ltd 142,512 86,993 Westfield Trust Units 156,699 23,608 Woodside Petroleum Ltd 169,708 27,622 Woolworths Ltd 182,587 ------------- 3,178,834 ------------- AUSTRIA -- 3.7% 10,500 Austrian Airlines* 70,537 1,600 Bau Holdings AG 60,097 2,800 Boehler Uddeholm (Bearer) 123,019 2,500 Brau Union AG 122,563 640 EA-Generali AG 92,095 7,002 Erste Bank Der Oesterreichischen Sparkassen AG 469,144 3,600 Flughafen Wien AG 112,941 3,800 Mayr-Melnhof Karton AG (Bearer) 236,643 2,900 Oesterreichische Brau Beteiligungs AG 149,880 927 Oesterreichische Elektrizitaetswirtschafts AG 63,683 6,115 OMV AG 545,725 39,900 Telekom Austria AG* 335,735 4,200 VA Technologie AG (Bearer) 84,438 4,504 Voest-Alpine Stahl AG 130,039 8,900 Wienerberger Baustoffindustrie AG 133,891 ------------- 2,730,430 ------------- BELGIUM -- 2.8% 11,899 Almanij NV 459,189 1,988 Bekaert SA 91,808 2,393 Delhaize-Le Lion 71,601
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- BELGIUM -- CONTINUED 2,466 Electrabel SA 571,228 6,711 Interbrew 179,082 12,294 Kredietbank NPV 444,411 3,547 Solvay Et Cie 245,411 ------------- 2,062,730 ------------- CANADA -- 1.0% 11,000 Bank of Montreal 263,718 3,200 EnCana Corp 93,908 2,400 Magna International Inc 152,185 7,000 Royal Bank of Canada 251,282 ------------- 761,093 ------------- FINLAND -- 1.7% 75,500 Nokia Oyj 1,008,464 23,400 Sampo Oyj 164,310 1,800 UPM-Kymmene Oyj 57,371 ------------- 1,230,145 ------------- FRANCE -- 4.0% 4,403 Assurances Generales de France (Bearer) 173,110 19,003 BNP Paribas 886,340 6,600 Cie de Saint-Gobain 197,415 4,362 L'Oreal SA 314,633 1,400 Pernod Ricard 122,401 8,746 Sanofi-Synthelabo SA 524,496 11,900 Societe Generale Class A 705,471 ------------- 2,923,866 ------------- GERMANY -- 8.2% 3,800 Adidas Salomon AG 270,928 1,900 Altana AG 93,539 87,200 Bankgesellschaft Berlin AG* 183,862 8,400 BASF AG 347,227 5,500 Bayer AG 130,531 10,300 Bayerische Motoren Werke AG 387,886 15,000 Continental AG* 243,459 22,400 DaimlerChrysler AG 964,381
2 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- GERMANY -- CONTINUED 5,400 Degussa AG 160,462 17,300 E. On AG 887,328 10,500 Infineon Technologies AG* 120,685 2,300 Linde AG 95,863 10,200 RWE AG 373,617 4,700 Schering AG 260,425 12,400 Siemens AG 586,145 6,900 Sudzucker AG 114,359 26,100 Thyssen Krupp AG 342,990 8,700 Volkswagen AG 398,449 ------------- 5,962,136 ------------- HONG KONG -- 1.9% 81,500 CLP Holdings Ltd 328,092 115,000 Hang Lung Development Co Ltd 103,943 50,000 Henderson Land Development Co Ltd 163,783 90,500 Hong Kong Electric Holdings Ltd 352,720 45,000 Hong Kong Land Holdings 62,550 655,000 Pacific Century CyberWorks Ltd* 116,725 93,000 Yue Yuen Industrial Holdings 290,925 ------------- 1,418,738 ------------- IRELAND -- 1.1% 30,943 Allied Irish Banks Plc 400,565 22,299 Bank of Ireland 260,674 13,485 Irish Life & Permanent Plc 174,567 ------------- 835,806 ------------- ITALY -- 1.8% 47,238 Autostrade Concessioni e Costruzioni Autostrade SPA 404,892 60,507 ENI-Ente Nazionale Idrocarburi SPA 916,197 ------------- 1,321,089 ------------- JAPAN -- 22.3% 6,400 Acom Co Ltd 377,312 17,000 Bridgestone Corp 218,656 39,000 Brother Industries Ltd 237,490 16,000 Canon Inc 547,885
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- JAPAN -- CONTINUED 27,000 Canon Sales Co Inc 193,565 14,600 Chubu Electric Power Co Inc 273,369 13,200 Chugoku Electric Power Co Inc 188,039 72,000 Cosmo Oil Co Ltd 111,129 15,000 Daiichi Pharmaceuticals Co Ltd 242,272 20,000 Dainippon Printing Co Ltd 229,916 171,000 Daiwa Bank Holdings Inc* 125,475 59,000 Daiwa House Industry Co Ltd 343,356 31,000 Fuji Heavy Industries Ltd 122,625 16,700 Honda Motor Co Ltd 707,072 3,000 Hoya Corp 188,251 49,000 Itochu Corp 131,008 163,000 Japan Energy Co Ltd 195,218 52 Japan Tobacco Inc 353,055 102,000 Kajima Corp 289,057 15,800 Kansai Electric Power 246,531 154,000 Kawasaki Heavy Industries Ltd* 162,358 67 KDDI Corp 193,261 436,000 Kobe Steel Ltd* 250,057 29,000 Komatsu Ltd 98,570 11,700 Kyushu Electric Power Co Inc 172,690 84,000 Mazda Motor Corp 224,586 44,000 Mitsubishi Corp 294,657 115,000 Mitsubishi Motors* 269,641 34 Mizuho Holding Inc 72,838 4,700 Nidec Corp 257,665 63,000 Nippon Express Co Ltd 292,776 48 Nippon Telegraph & Telephone Corp 188,656 43 Nippon Unipac Holding 219,778 14,000 Nitto Denko Corp 371,948 331,000 NKK Corp* 293,130 9,000 Ono Pharmaceutical Co Ltd 330,958 100,000 Onoda Cement Co Ltd 188,926 2,600 Oriental Land Co Ltd 174,554 2,800 ORIX Corp 199,081 5,800 Promise Co 269,540 1,000 Ricoh Company Ltd 17,880 3,700 Rohm Co Ltd 504,921 25,000 Sankyo Co Ltd 337,579 76,000 Sekisui Chemical 225,632
4 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- JAPAN -- CONTINUED 13,000 Sekisui House Ltd 95,062 6,000 Seven - Eleven Japan 220,132 4,700 Shikoku Electric Power 67,627 63,000 Shimizu Corp 192,882 5,000 Shin-Etsu Chemical Co Ltd 180,492 10,000 Showa Shell Sekiyu 60,726 3,300 SMC Corp 330,097 17,700 Sony Corp 771,805 503,000 Sumitomo Metal Industries* 207,878 13,000 Suzuki Motor Corp 140,345 110,000 Taisei Corp 232,868 15,000 Taisho Pharmaceutical Co Ltd 240,881 17,000 Takeda Chemical Industries Ltd 718,340 5,500 Takefuji Corp 375,279 12,300 Tohoku Electric Power Co Inc 175,633 11,000 Tokyo Electric Power 226,838 5,000 Tokyo Electron Ltd 230,675 17,000 Toppan Printing Co Ltd 152,844 80,000 Toshiba Corp* 273,268 4,500 Trend Micro Inc* 117,657 4,600 Uni-Charm Corp 170,708 23,000 Yasuda Fire & Marine Insurance 138,506 ------------- 16,253,506 ------------- NETHERLANDS -- 3.4% 45,127 ABN Amro Holdings NV 735,536 10,999 ASML Holding NV* 112,505 2,876 DSM NV 125,456 24,769 Koninklijke Philips Electronics NV 495,536 110,494 Royal KPN NV* 605,741 7,135 Unilever NV 421,587 410 Wolters Kluwer NV 7,334 ------------- 2,503,695 ------------- NEW ZEALAND -- 0.5% 147,183 Telecom Corp of New Zealand 348,206 ------------- NORWAY -- 3.1% 112,100 Den Norske Bank Class A 567,018
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- NORWAY -- CONTINUED 6,800 Elkem AS Class A 149,859 160,500 Kvaerner ASA* 107,392 12,580 Norsk Hydro AS 534,438 10,750 Norske Skogindustrier AS Class A 155,561 17,300 Orkla ASA 305,467 39,800 Statoil ASA 338,166 8,400 Tandberg ASA* 99,809 ------------- 2,257,710 ------------- PORTUGAL -- 0.5% 55,833 Electricidade de Portugal SA 91,442 38,105 Portugal Telecom SA 246,265 ------------- 337,707 ------------- SINGAPORE -- 2.0% 49,000 DBS Group Holdings Ltd 333,229 3,000 Great Eastern Holdings Ltd 15,944 53,000 Singapore Airlines Ltd (Registered) 351,344 27,000 Singapore Press Holdings Ltd 302,426 35,000 United Overseas Bank 264,023 26,000 Venture Manufacturing Singapore Ltd 191,674 ------------- 1,458,640 ------------- SPAIN -- 2.5% 1,500 Banco Popular Espanol 59,563 14,600 Compania Espanola de Petroleos 247,562 32,270 Endesa SA 382,931 10,300 Gas Natural SDG SA 186,468 48,141 Repsol YPF SA 627,918 14,526 Tabacalera SA Class A 327,507 ------------- 1,831,949 ------------- SWEDEN -- 1.2% 13,300 Hennes & Mauritz AB 244,397 9,300 Sandvik AB 215,970 8,600 Securitas AB 133,754 8,000 Svenska Cellulosa Class B 273,132 ------------- 867,253 -------------
See accompanying notes to the financial statements. 6 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- SWITZERLAND -- 6.6% 1,060 BK Vision AG (Bearer)* 114,784 4,004 Logitech International SA* 131,274 1,999 Nestle SA 428,933 23,687 Novartis AG 961,276 4,943 Roche Holding AG (Bearer) 587,962 24,083 Roche Holding AG (Genusschein) 1,729,213 2,533 Swisscom AG 672,642 2,076 Zurich Financial Services AG 205,435 ------------- 4,831,519 ------------- UNITED KINGDOM -- 22.6% 52,100 Abbey National Plc 601,227 17,100 Alliance & Leicester Plc 230,265 40,300 Associated British Food 370,923 23,632 BAA PLC 202,888 100,400 Barclays Plc 720,633 127,484 BG Group Plc 531,467 42,416 BHP Billiton Plc 200,121 55,300 Boots Co 468,779 44,383 British American Tobacco 515,607 17,998 British Sky Broadcasting Plc* 169,831 238,488 BT Group Plc 737,834 145,055 BTR Siebe Plc 172,777 34,768 Carlton Communications Plc 79,195 125,500 Corus Group Plc* 106,775 43,400 Diageo Plc 524,999 27,297 GlaxoSmithKline Plc 513,465 51,300 Great Universal Stores Plc 397,573 75,434 HBOS Plc 844,827 37,869 Imperial Chemical Industries Plc 149,231 37,055 Imperial Tobacco Group Plc 617,914 123,552 Kingfisher Plc 406,613 14,800 Land Securities 182,695 135,287 Legal & General Group Plc 256,886 89,221 Lloyds TSB Group Plc 771,509 116,328 Marks & Spencer Group Plc 616,321 23,272 Next Plc 303,475 23,702 Nycomed Amersham Plc 208,622 15,452 Reckitt Benckiser Plc 285,876 39,916 Reed International Plc 356,275
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 115,679 Rentokil Initial Plc 426,334 109,221 Rolls-Royce 237,803 87,855 Royal & Sun Alliance Insurance Group 169,199 25,932 Royal Bank of Scotland Group 618,962 50,856 Sainsbury (J) 248,988 31,204 Scottish & Newcastle Plc 265,723 40,276 Scottish Hydro-Electric Plc 417,430 80,009 Scottish Power Plc 455,459 20,376 Severn Trent Plc 211,654 42,331 Six Continents Plc 397,475 14,349 Smiths Group Plc 162,034 47,200 Tate & Lyle 267,960 42,734 THUS Group Plc* 5,123 351,385 Vodafone Group Plc 562,582 35,445 Wolseley 322,948 26,625 WPP Group Plc 196,046 ------------- 16,510,323 ------------- TOTAL COMMON STOCKS (COST $71,722,406) 69,625,375 ------------- PREFERRED STOCKS -- 0.4% GERMANY -- 0.4% 1,800 RWE AG 4.35% 51,193 7,800 Volkswagen AG 5.30% 249,372 ------------- 300,565 ------------- TOTAL PREFERRED STOCKS (COST $295,433) 300,565 ------------- SHORT-TERM INVESTMENTS -- 2.6% CASH EQUIVALENTS -- 2.2% $ 1,600,000 Societe Generale GC Time Deposit, 1.81%, due 9/03/02 1,600,000 -------------
See accompanying notes to the financial statements. 8 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- U.S. GOVERNMENT -- 0.4% $ 290,000 U.S. Treasury Bill, 1.61%, due 11/14/02(a) 289,043 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,888,926) 1,889,043 ------------- TOTAL INVESTMENTS -- 98.3% (Cost $73,906,765) 71,814,983 Other Assets and Liabilities (net) -- 1.7% 1,210,533 ------------- TOTAL NET ASSETS -- 100.0% $ 73,025,516 ============= NOTES TO SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) All or a portion of this security is held as collateral for open futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 21.9% Consumer Discretionary 16.2 Industrials 10.7 Health Care 9.6 Consumer Staples 9.4 Utilities 8.2 Materials 6.7 Information Technology 6.3 Energy 5.5 Telecommunication Services 5.5 ----- 100.0% =====
10 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $73,906,765) (Note 1) $71,814,983 Cash 40,615 Foreign currency, at value (cost $258,137) (Note 1) 218,062 Dividends and interest receivable 144,660 Foreign taxes receivable 63,850 Receivable for open forward foreign currency contracts (Notes 1 and 6) 1,786,299 Receivable for variation margin on open futures contracts (Notes 1 and 6) 7,684 Receivable for expenses reimbursed by Manager (Note 2) 35,464 ----------- Total assets 74,111,617 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 24,759 Shareholder service fee 9,284 Payable for open forward foreign currency contracts (Notes 1 and 6) 961,380 Accrued expenses 90,678 ----------- Total liabilities 1,086,101 ----------- NET ASSETS $73,025,516 =========== NET ASSETS CONSIST OF: Paid-in capital $73,617,587 Accumulated undistributed net investment income 938,061 Accumulated net realized loss (115,299) Net unrealized depreciation (1,414,833) ----------- $73,025,516 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $73,025,516 =========== SHARES OUTSTANDING: Class III 3,591,792 =========== NET ASSET VALUE PER SHARE: Class III $ 20.33 ===========
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $174,843) $ 1,159,000 Interest 24,116 ----------- Total income 1,183,116 ----------- EXPENSES: Management fee (Note 2) 151,660 Custodian fees 139,656 Audit fees 22,816 Transfer agent fees 14,260 Legal fees 1,372 Registration fees 1,288 Trustees fees (Note 2) 560 Miscellaneous 457 Fees reimbursed by Manager (Note 2) (179,768) ----------- 152,301 Shareholder service fee (Note 2) Class III 56,872 ----------- Net expenses 209,173 ----------- Net investment income 973,943 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (99,162) Closed futures contracts (172,516) Foreign currency, forward contracts and foreign currency related transactions 182,434 ----------- Net realized loss (89,244) ----------- Change in net unrealized appreciation (depreciation) on: Investments (2,986,909) Open futures contracts (139,733) Foreign currency, forward contracts and foreign currency related transactions 772,685 ----------- Net unrealized loss (2,353,957) ----------- Net realized and unrealized loss (2,443,201) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(1,469,258) ===========
12 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD FROM JANUARY 29, 2002 AUGUST 31, 2002 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 28, 2002 ---------------- ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 973,943 $ 53,760 Net realized loss (89,244) (11,583) Change in net unrealized appreciation (depreciation) (2,353,957) 939,124 ----------- ----------- Net increase (decrease) in net assets from operations (1,469,258) 981,301 ----------- ----------- Distributions to shareholders from: Net investment income Class III (104,114) -- ----------- ----------- Total distributions from net investment income (104,114) -- ----------- ----------- Net share transactions: (Note 5) Class III 27,517,587 46,100,000 ----------- ----------- Increase in net assets resulting from net share transactions 27,517,587 46,100,000 ----------- ----------- Total increase in net assets 25,944,215 47,081,301 NET ASSETS: Beginning of period 47,081,301 -- ----------- ----------- End of period (including accumulated undistributed net investment income of $938,061 and $68,232, respectively) $73,025,516 $47,081,301 =========== ===========
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 29, 2002 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2002 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 28, 2002 ---------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.40 $ 20.00 ------- ------- Income from investment operations: Net investment income+ 0.28 0.02 Net realized and unrealized gain (loss) (0.32) 0.38 ------- ------- Total from investment operations (0.04) 0.40 ------- ------- Less distributions to shareholders: From net investment income (0.03) -- ------- ------- Total distributions (0.03) -- ------- ------- NET ASSET VALUE, END OF PERIOD $ 20.33 $ 20.40 ======= ======= TOTAL RETURN(a) (0.21)%** 2.00%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $73,026 $47,081 Net expenses to average daily net assets 0.55%* 0.55%* Net investment income to average daily net assets 2.57%* 1.56%* Portfolio turnover rate 35% 0%(b) Fees and expenses reimbursed by the Manager to average daily net assets: 0.47%* 1.89%*
* Annualized ** Not annualized + Computed using average shares outstanding throughout the period. (a) Total return would have been lower had certain expenses not been reimbursed during the period shown. (b) Portfolio turnover rate was less than 1%. 14 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Disciplined Equity Fund (the "Fund"), which commenced operations on January 29, 2002, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the Morgan Stanley Capital International EAFE Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign 15 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an 16 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premuims paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund 17 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreements. The Fund earns interest on cash set aside as collateral. At August 31, 2002, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. 18 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. The Fund has elected to defer to March 1, 2002 post-October capital losses of $26,055. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .40% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of the Fund at the annual rate of .15%. 19 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund for the Fund's total annual operating expenses (excluding shareholder service fees and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $560. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002 aggregated $52,133,664 and $24,019,318, respectively. At August 31, 2002 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $73,906,765 $3,290,871 $(5,382,653) $(2,091,782)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 98.9% of the outstanding shares of the Fund were held by two shareholders. Investment activities of these shareholders may have a material effect on the Fund. 20 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from January 29, 2002 Six Months Ended (commencement of August 31, 2002 operations) through (Unaudited) February 28, 2002 ---------------------- ---------------------- Shares Amount Shares Amount Class III: --------- ----------- --------- ----------- Shares sold 1,282,101 $27,480,406 2,308,021 $46,100,000 Shares issued to shareholders in reinvestment of distributions 1,670 37,181 -- -- Shares repurchased -- -- -- -- --------- ----------- --------- ----------- Net increase 1,283,771 $27,517,587 2,308,021 $46,100,000 ========= =========== ========= ===========
The Fund was formed with a $12,023,655 purchase and an initial taxable contribution of securities in-kind, which had a market value of $34,076,345 on the date of contribution. 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ---------- ------------------ ---------- -------------- Buys 4 CAC40 September 2002 $132,394 $ (5,200) 11 FTSE100 September 2002 721,474 (78,447) 34 MSCI September 2002 719,696 (13,240) 3 SPI 200 September 2002 128,238 (4,413) 1 TOPIX September 2002 79,155 (10,796) --------- $(112,096) =========
21 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS -- CONTINUED At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------- ---------------- ------------ ---------- -------------- Buys 10/25/02 CAD 206,863 $ 132,372 $ 1,280 9/27/02 CHF 2,377,270 1,585,291 149,741 9/27/02 DKK 9,238,520 1,218,911 66,157 9/27/02 EUR 9,605,675 9,411,166 935,705 9/27/02 GBP 1,835,356 2,835,278 135,278 10/25/02 HKD 3,119,748 400,012 12 10/25/02 JPY 181,046,900 1,531,040 31,040 9/27/02 NOK 7,120,500 942,189 139,378 10/25/02 NZD 435,709 202,537 11,697 9/27/02 SEK 30,444,300 3,237,987 296,813 10/25/02 SGD 792,761 453,658 3,658 ---------- $1,770,759 ========== Sales 10/25/02 CAD 854,237 $ 546,628 $ (4,686) 9/27/02 CHF 369,925 246,686 3,314 9/27/02 EUR 2,166,569 2,122,697 (22,697) 9/27/02 GBP 3,422,118 5,286,525 (440,847) 10/25/02 HKD 13,261,160 1,700,337 (930) 10/25/02 JPY 641,818,000 5,427,595 (403,588) 9/27/02 NOK 4,766,460 630,701 (30,701) 10/25/02 NZD 834,202 387,774 12,226 9/27/02 SEK 11,417,350 1,214,324 (14,324) 10/25/02 SGD 3,188,863 1,824,828 (43,607) ---------- $ (945,840) ==========
22 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- CURRENCY ABBREVIATIONS: CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar
23 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 92.5% AUSTRALIA -- 4.7% 231,111 Ansell Ltd* 886,060 628,307 Australian Gas Light Co Ltd 3,461,029 103,762 Bank of Western Australia 237,774 844,580 Boral Ltd 2,000,519 1,216,333 BT Office Trust 964,825 83,588 Coca Cola Amatil Ltd 291,461 569,974 Colonial First State Property Trust Group 756,668 1,776,379 General Property Trust Units 2,690,926 96,799 James Hardie Industries NV* 361,521 199,409 Leighton Holdings Ltd 1,222,569 574,984 Lihir Gold Ltd* 386,411 24,265 Macquarie Infrastructure Group Unit 38,762 395,661 Mayne Nickless Ltd 808,594 383,591 Orica Ltd 2,030,604 57,517 Patrick Corp Ltd 505,981 178,421 QBE Insurance Group Ltd 724,347 546,637 Santos Ltd 1,936,169 1,011,219 Schroders Property 1,414,856 674,495 Stockland Trust Group Units 1,642,231 184,940 TABCORP Holdings Ltd 1,303,990 ------------ 23,665,297 ------------ AUSTRIA -- 2.9% 74,886 Austrian Airlines* 503,069 11,261 Bau Holdings AG 422,971 56,328 Boehler Uddeholm (Bearer) 2,474,791 11,136 Brau Union AG 545,945 106 BWT AG 1,684 52,603 Flughafen Wien AG 1,650,292 14,591 Immofinanz Immobilien Anlagen AG* 81,850 43,955 Mayr-Melnhof Karton AG (Bearer) 2,737,273 12,952 Oesterreichische Brau Beteiligungs AG 669,397 45,237 RHI AG* 337,166 75,834 VA Technologie AG (Bearer) 1,524,593 80,903 Voest-Alpine Stahl AG 2,335,816 85,528 Wienerberger Baustoffindustrie AG 1,286,678 ------------ 14,571,525 ------------
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ BELGIUM -- 1.7% 15,491 AGFA-Gevaert NV 296,093 15,966 Barco NV 676,419 21,174 Bekaert SA 977,840 29,564 Colruyt SA 1,403,281 4,660 Compagnie Maritime Belge SA 228,732 42,621 Delhaize-Le Lion 1,275,270 10,370 Sofina SA 376,285 8,021 Solvay Et Cie 554,960 22,126 Tessenderlo Chemie 618,421 65,259 UCB SA 1,863,025 5,870 Union Miniere NPV 233,435 ------------ 8,503,761 ------------ BRAZIL -- 0.1% 19,000 Vale Do Rio Doce 469,677 ------------ CANADA -- 5.4% 107,800 Air Canada* 380,064 146,900 ATI Technologies Inc* 861,625 158,500 Brascan Corp 3,373,205 23,601 Canadian Natural Resources 782,161 122,900 Canadian Tire Corp 2,372,128 94,700 CGI Group Inc* 381,835 55,300 Cognos Inc* 1,004,262 20,560 Cott Corp* 339,240 77,000 Dofasco Inc 1,504,955 39,000 Extendicare Inc* 124,500 7,400 Fairfax Financial Holdings Ltd 635,641 38,400 Fairmont Hotels & Resorts Inc 924,308 94,800 Hudson's Bay Co 469,746 64,900 MDS Inc 1,021,343 91,300 Methanex Corp* 740,935 84,800 Moore Corp Ltd* 1,030,646 107,000 National Bank of Canada 2,019,282 58,100 Nexen Inc 1,465,535 43,600 Nova Chemicals Corp 911,967 148,800 Onex Corp 1,923,908 134,300 Quebecor Inc 1,483,326 23,300 Quebecor World Inc 594,449 16,900 Rio Alto Resources International Inc* 8,450 25,000 Saputo Inc 432,212
2 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CANADA -- CONTINUED 72,300 Sears Canada Inc 811,058 29,800 Sobeys Inc 754,551 34,400 Torstar Corp 539,154 18,400 TransAlta Corp 234,128 ------------ 27,124,614 ------------ CHINA -- 0.5% 1,112,000 China Eastern Airlines Corp Ltd 148,268 2,256,000 China Petroleum & Chemical Corp 344,187 270,000 China Resources Enterprise 308,079 586,000 China Southern Airlines Co Ltd 176,552 404,000 Cosco Pacific Ltd 277,104 382,000 Huaneng Power International Inc Class H 288,951 762,000 Legend Holdings Ltd 283,309 2,356,000 PetroChina Co Ltd 480,265 542,000 Yanzhou Coal Mining Co Ltd 189,354 ------------ 2,496,069 ------------ CZECH REPUBLIC -- 0.4% 175,900 Ceske Energeticke Zavody AS 542,719 20,600 Ceske Radiokomunikace 173,040 49,700 Ceski Telecom AS* 447,185 6,700 Komercni Banka AS 359,326 1,600 Philip Morris CR AS 586,707 143,900 Unipetrol* 146,446 ------------ 2,255,423 ------------ DENMARK -- 0.0% 800 Hafnia Holdings (Registered) Class A(a)(b)* 1 ------------ FINLAND -- 3.5% 22,850 Amer Group Class A 683,474 45,400 Asko Oyj 919,416 133,750 Elisa Communications Oyj* 767,336 57,900 Finnair Class A 252,682 253,400 Huhtamaki Oyj Class I 2,969,687 122,100 Instrumentarium Oyj 2,836,723 13,500 KCI Konecranes International 362,761 174,200 Kemira Oyj 1,221,491 69,900 Kesko Oyj 753,375
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINLAND -- CONTINUED 5,700 Metra AB Class A 83,850 73,100 Metra AB Class B 1,057,415 34,600 Metso Oyj 383,773 22,500 Orion-Yhtymae OY 498,686 161,200 Outokumpu Class A 1,724,749 127,200 Pohjola Group Plc 1,747,678 191,429 Rautaruukki Oyj 801,626 59,400 Sponda Oyj 334,958 3,200 Stockmann AB Class A 43,622 27,347 Stockmann AB Class B 378,151 ------------ 17,821,453 ------------ FRANCE -- 4.8% 82,750 Air France 1,110,172 253,956 Alstom* 1,877,872 44,345 Altran Technologies SA 730,618 46,889 Business Objects SA* 889,791 52,064 Cie Generale D'Optique Essilor International SA 2,047,472 1,321 Credit National 99,754 20,635 Dassault Systemes SA 668,420 9,095 Eiffage SA 718,017 219,872 Euro Disney SCA* 142,315 186,764 Havas Advertising 815,060 5,097 Hermes International 706,806 44,824 Infogrames Entertainment* 181,550 100,022 JC Decaux SA* 1,177,099 130,809 Michelin SA Class B 4,682,380 40,282 Pernod Ricard 3,521,831 7,693 Remy Cointreau SA 229,203 91,876 Rhodia SA 781,191 37,415 SCOR SA 716,612 2,210 Seb SA 169,270 3,963 Simco Union Habit (Registered) 330,742 12,258 Societe Eurafrance SA 561,400 25,703 Valeo SA 990,632 5,141 Vallourec 268,223 2,456 Vivarte* 81,772 160,322 Wanadoo* 753,121 ------------ 24,251,323 ------------
See accompanying notes to the financial statements. 4 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ GERMANY -- 4.0% 36,530 Adidas Salomon AG 2,604,475 318,900 AGIV AG* 656,765 250 AMB Aachener & Muenchener Beteiligungs AG 20,104 4,000 AVA Allg Handels DER Verbrau 113,761 78,570 Bankgesellschaft Berlin AG* 165,665 9,550 Bayerische Hypotheken und Wechsel-Bank AG 95,998 38,670 Berliner Kraft & Licht AG Class A 586,679 65,950 Bilfinger & Berger 1,416,430 24,110 Buderus AG 508,361 20,592 Celanese AG* 409,950 159,080 Continental AG* 2,581,961 36,200 Deutsche Boerse AG 1,396,978 19,290 Douglas Holdings AG 444,566 8,960 Gehe AG 393,661 21,895 Heidelberg Port-Zement 957,670 32,480 Hochtief AG 571,764 17,600 IKB Deutsche Industriebank AG 241,644 46,375 IWKA AG 509,376 18,700 Karstadt Quelle AG 396,124 87,500 Lufthansa AG* 1,107,823 30,450 MAN AG 609,191 33,600 Merck KGaA 668,916 83,390 Metallgesellschaft 623,986 77,240 Schwarz Pharma AG 1,143,814 1,893 Springer (Axel) Verlag AG* 94,123 51,168 Sudzucker AG 848,050 168,200 WCM Beteiligungs & Grundbesi* 506,408 8,521 Wella AG 370,195 ------------ 20,044,438 ------------ HONG KONG -- 2.6% 868,000 Amoy Properties Ltd 890,262 192,000 Asia Satellite Telecom 285,540 109,000 ASM Pacific Technology 198,437 924,000 Chinese Estates Holdings Ltd* 95,954 48,400 Dah Sing Financial Services 212,217 248,000 Esprit Holdings Ltd 403,797 259,000 Great Eagle Holdings Ltd 230,777 345,000 Guoco Group 1,963,859 1,362,000 Hang Lung Development Co Ltd 1,231,046 93,500 Hanison Construction Holdings Ltd* 2,997
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HONG KONG -- CONTINUED 1,603,200 HKR International Ltd* 326,808 85,500 Hong Kong Aircraft Engineering Co Ltd 213,751 681,000 Hopewell Holdings Ltd 462,734 184,800 Kowloon Motor Bus Holdings Ltd 902,683 28,000 Mandarin Oriental ADR 13,160 1,629,000 New World Development Co Ltd 1,065,122 1,112,400 New World Infrastructure* 226,760 1,801,000 QPL International Holdings Ltd* 457,180 108,000 Shanghai Industrial Holdings 171,693 3,023,000 Shun Tak Holdings Ltd 499,961 1,238,000 Sino Land 404,733 34,000 South China Morning Post Ltd 14,494 308,000 Television Broadcasts Ltd 997,058 1,842,000 Tom.com Ltd* 625,812 457,000 Yue Yuen Industrial Holdings 1,429,599 ------------ 13,326,434 ------------ HUNGARY -- 0.0% 12,900 Matav Rt ADR 215,817 ------------ INDONESIA -- 0.4% 970,000 Astra International Tbk* 350,536 1,459,000 Bank Central Asia Tbk 370,723 435,000 HM Sampoerna Tbk 190,359 2,739,000 Indofood Sukses Makmur Tbk 286,118 328,000 Indosat Tbk 338,927 1,181,000 Telekomunikasi Tbk 483,470 ------------ 2,020,133 ------------ IRELAND -- 0.5% 59,080 DCC Ord 631,543 497,945 Fyffes Ord 712,969 126,997 Independent News & Media Plc 210,483 91,196 Irish Life & Permanent Plc 1,180,554 ------------ 2,735,549 ------------ ITALY -- 1.0% 54,908 Banca Popolare di Bergamo Credit 1,065,119 400,616 Banca Popolare di Milano* 1,575,465 102,000 Fornara SPA(b)* --
6 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ ITALY -- CONTINUED 213,400 Grassetto SPA(b)* 2,093 107,032 Olivetti SPA 1,611,232 225,300 Parmalat Finanziaria SPA 654,017 ------------ 4,907,926 ------------ JAPAN -- 18.6% 154,000 Alps Electric Co Ltd 1,770,354 56,400 Aoyama Trading 670,721 358,000 Brother Industries Ltd 2,180,036 104,000 Canon Sales Co Inc 745,583 17,000 Chudenko Corp 213,925 52,000 Citizen Watch Co Ltd 315,776 647,000 Cosmo Oil Co Ltd 998,617 174,000 Daido Steel Co Ltd 305,250 628,500 Daiei Inc* 1,038,974 28,600 Daiichikosho Co Ltd 644,052 39,000 Daimaru Inc 178,611 83,000 Dainippon Screen Manufacturing Co Ltd* 389,921 17,000 Daio Paper Corp 122,304 49,800 Daito Trust Construction Co Ltd 1,018,555 197,000 Daiwa House Industry Co Ltd 1,146,460 59,000 Dowa Mining Co 265,230 42,000 Enix Corp 804,116 51,000 Ezaki Glico Co Ltd 279,163 106,200 FamilyMart 2,561,734 39,100 Fast Retailing Co Ltd 1,131,135 214,000 Furukawa Electric Co Ltd 610,062 86,000 Gunze Ltd 345,262 12,800 H I S Co Ltd 239,666 56,000 Hankyu Department Stores Inc 361,793 332,400 Haseko Corp* 199,050 26,100 Heiwa Corp 484,291 85,000 Hino Motors 210,770 58,000 Hitachi Metals Ltd 167,790 1,498,000 Hitachi Zosen Corp* 758,065 67,300 Hokkaido Electric Power 914,438 29,000 House Foods Corp 265,137 61,000 Ibiden Co Ltd 748,577 1,272,000 Isuzu Motors Ltd* 718,796 101,000 Itoham Foods Inc 286,223 72,000 Izumiya Co Ltd* 379,539
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 4,000 Japan Airport Terminal Co Ltd 29,047 2,172,000 Japan Energy Co Ltd 2,601,307 48,000 Japan Securities Finance Co 169,628 54,000 Japan Synthetic Rubber Co Ltd 424,021 972,000 Kajima Corp 2,754,540 32,000 Kaken Pharmaceutical Co Ltd 160,587 238,000 Kamigumi Co Ltd 1,098,014 144,000 Kandenko Co 493,097 525,000 Kanebo Ltd* 841,311 1,623,000 Kawasaki Heavy Industries Ltd* 1,711,087 61,000 Keihin Electric Express Railway Co Ltd 281,938 292,000 Keisei Electric Railway Co 911,230 31,000 Kissei Pharmaceutical Co Ltd 369,966 4,084,000 Kobe Steel Ltd* 2,342,276 60,000 Kureha Chemical Industry Co Ltd 199,890 54,000 Kyudenko Corp 191,743 187,000 Maeda Corp 531,514 61,000 Maeda Road Construction 225,859 39,000 Makita Corp 229,596 900,000 Marubeni Corp* 1,085,481 16,200 Matsumotokiyoshi Co Ltd 717,328 250,000 Mazda Motor Corp 668,410 419,000 Minolta Co Ltd* 1,127,323 152,000 Mitsubishi Gas Chemical Co Inc 257,681 569,000 Mitsubishi Material* 897,423 93,000 Mitsubishi Paper Mills Ltd* 112,951 362,000 Mitsui Engineer & Shipbuilding* 427,445 786,000 Mitsui Trust Holding Inc 1,796,534 18,000 Mitsumi Electric Co Ltd 249,129 70,000 Nagase & Co 322,945 291,000 Nagoya Railroad Co Ltd 785,392 9,000 Nankai Electric Railway Co Ltd* 24,139 637,000 New Japan Securities Co Ltd* 1,010,045 87,000 Nichiei Co Ltd (Kyoto) 432,193 14,300 Nichii Gakkan Co 808,080 619,000 Nichimen Corp* 412,440 193,000 Nichiro Corp 193,708 121,000 Nippon Chemi-Con Corp* 467,406 96,000 Nippon Hodo Co 378,122 932,000 Nippon Light Metal 762,485 5,000 Nippon Paint Co 12,103
8 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 752,000 Nippon Shinpan Co 1,198,735 95,000 Nippon Soda Co Ltd* 195,505 337,000 Nippon Suisan Kaisha Ltd 594,045 508,000 Nishimatsu Construction 1,452,469 52,000 Nisshin Oil Mills Ltd 141,222 1,328,000 Nisshin Steel Co Ltd* 604,833 1,558,000 Nissho Iwai Corp* 946,114 2,936,000 NKK Corp* 2,600,093 6,000 Noritake Co Ltd 19,837 71,000 NSK Ltd 250,909 135,000 Obayashi Corp 356,387 25,000 Okamoto Industries Inc 48,497 76,000 Okasan Securities Co Ltd 265,373 69,000 Okumura Corp 229,292 945,600 Onoda Cement Co Ltd 1,786,483 50,000 Onward Kashiyama Co Ltd 465,989 872,000 Orient Corp* 581,015 22,000 Royal Co Ltd 171,079 93,000 Ryobi Ltd* 121,579 36,300 Ryosan Co 428,626 21,000 Sanki Engineering 108,750 55,700 Sankyo Co Ltd 1,644,246 14,000 Sanrio Co Ltd 110,640 145,000 Sanyo Securities Co Ltd(a)(b)* 1,223 6 Sapporo Hokuyo Holdings Inc 21,406 182,000 Seino Transportation Co Ltd 1,074,516 482,000 Sekisui Chemical 1,430,979 30,700 Shimachu Co 528,217 13,800 Shimamura Co Ltd 949,758 524,000 Shimizu Corp 1,604,285 23,300 Shinko Electric Industries 409,737 7,890 Shohkoh Fund & Co 848,459 325,000 Showa Denko* 501,624 146,000 Showa Shell Sekiyu 886,602 99,500 Snow Brand Milk Products Co Ltd* 169,519 843,000 Sumitomo Heavy Industries Ltd* 767,883 5,733,000 Sumitomo Metal Industries* 2,369,308 66,000 Sumitomo Metal Mining Co Ltd 273,875 294,000 Sumitomo Realty and Development Co Ltd 1,554,742 140,000 Sumitomo Rubber Industries 629,359 1,255,000 Taisei Corp 2,656,813
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 50,000 Taiyo Yuden Co Ltd 751,487 39,000 Takuma Corp 294,067 61,000 Tanabe Seiyaku Co Ltd 489,276 508,000 The Dai-Tokyo Fire & Marine Insurance Co 1,105,419 71,300 THK Co Ltd 1,150,999 271,000 Toda Corp 516,561 147,000 Toho Gas Co Ltd 334,753 35,000 Tokuyama Corp 102,728 142,000 Tokyo Electric Co Ltd* 319,774 127,000 Tokyo Ink Manufacturing Co Ltd 357,762 225,000 Tokyu Land Corp* 296,040 50,000 Toshiba Ceramics Co Ltd* 128,621 35,000 Toshiba Tungaloy Co Ltd 81,474 17,000 Toyo Suisan Kaisha 173,061 29,800 Uni-Charm Corp 1,105,891 34,000 UNY Co Ltd 368,777 162,000 Victor Co of Japan Ltd* 1,045,249 66,000 Wacoal Corp 544,967 160,000 Yamaha Motor Co 1,234,766 62,000 Yodogawa Steel Works 158,445 192,000 Yokohama Rubber Co* 438,848 ------------ 93,984,378 ------------ LUXEMBOURG -- 1.1% 450,468 Arcelor* 5,477,997 ------------ MALAYSIA -- 0.1% 170,000 Berjaya Sports Toto 168,211 49,000 Genting Berhad 183,105 88,000 Perusahaan Otomobil Nasional 229,263 357,000 Promet Berhad(b)* 939 312,000 Rekapacific Berhad(b)* 821 ------------ 582,339 ------------ MEXICO -- 0.1% 21,000 America Movil SA de CV ADR 290,850 ------------ NETHERLANDS -- 4.0% 241,701 Buhrmann NV 1,730,364 65,601 CSM 1,524,737
10 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ NETHERLANDS -- CONTINUED 45,381 DSM NV 1,979,589 770,191 Getronics NV* 747,773 176,649 Hagemeyer NV 1,983,594 20,683 Hunter Douglas NV 578,089 83,872 KLM-Royal Dutch Airlines NV 944,268 25,054 Koninklijke Volker Wessels 540,550 177,450 Numico NV 3,492,686 134,383 OCE NV 1,265,178 95,438 Randstad Holdings NV 921,921 162,283 Vendex NV 1,687,000 64,716 VIB NV 1,586,675 23,425 Wereldhave NV 1,160,131 ------------ 20,142,555 ------------ NEW ZEALAND -- 0.1% 296,811 Fletcher Building Ltd 396,894 85,686 Sky City Entertainment Group Ltd 280,037 ------------ 676,931 ------------ NORWAY -- 0.2% 27,350 Gjensidige NOR Sparebank 885,959 ------------ PHILIPPINES -- 0.2% 2,309,000 Ayala Land Inc 244,951 293,000 Bank of the Philippine Islands 245,839 6,700 La Tondena Distillers Inc 4,006 41,000 Philippine Long Distance Telephone* 225,383 1,415,000 SM Prime Holdings 155,569 ------------ 875,748 ------------ POLAND -- 0.2% 9,900 Bank Pekao SA* 210,944 58,400 KGHM Polska Miedz SA* 155,368 69,000 Polski Koncern Naftowy Orlen 286,200 140,600 Telekomunikacja Polska SA* 440,363 ------------ 1,092,875 ------------
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PORTUGAL -- 0.2% 101,885 Multimedia Servicos de Telecomunicacoes e Multimedia SGPS SA PT* 714,418 39,025 Telecel-Comunicacoes Pessoai 298,520 ------------ 1,012,938 ------------ RUSSIA -- 0.4% 28,500 AO Tatneft ADR 380,760 16,400 JSC Mining & Smelting Co ADR* 303,400 7,500 Mobile Telesystems ADR 220,875 84,900 Mosenergo ADR 212,250 55,300 Rostelecom ADR 361,662 37,700 Unified Energy Systems GDR 338,169 12,000 Vimpel-Communications ADR* 282,600 ------------ 2,099,716 ------------ SINGAPORE -- 1.5% 458,000 Comfort Group 191,068 321,750 Creative Technology Ltd 2,629,383 345,000 Datacraft Asia Ltd* 257,025 343,000 Elec & Eltek International Co Ltd 706,580 240,000 Hotel Properties Ltd 141,269 115,000 Marco Polo Developments Ltd 121,582 309,000 NatSteel Ltd 312,558 3,557,000 Neptune Orient Lines Ltd* 1,544,887 4,904,100 Pacific Century Region Developments Ltd* 924,852 194,000 ST Assembly Test Services Ltd* 178,495 15,057 Van Der Horst Ltd(b)* 6,384 1,443,000 Want Want Holdings Ltd 779,220 ------------ 7,793,303 ------------ SOUTH AFRICA -- 0.1% 4,000 Impala Platinum Holdings Ltd 203,206 18,000 Nedcor Ltd 179,461 38,000 Remgro Ltd 252,478 ------------ 635,145 ------------ SOUTH KOREA -- 1.7% 47,900 Dongkuk Steel Mill 195,274 20,200 Hana Bank 314,273
12 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SOUTH KOREA -- CONTINUED 5,000 Hankuk Electric Glass 269,562 46,100 Hansol Paper Manufacturing Ltd* 270,398 565,900 Hynix Semiconductor* 251,888 8,900 Hyundai Department Store Co Ltd 247,685 22,400 Hyundai Mobis 532,069 24,300 Hyundai Motor Co 687,383 44,300 Inchon Iron & Steel Co 211,926 48,900 KIA Motors Corp* 406,839 48,400 Korea Exchange Bank* 242,010 21,300 Korean Air Lines* 278,223 13,200 KT Freetel* 378,884 8,900 LG Chemicals Ltd 322,102 16,800 LG Electronics Co 236,216 12,500 LG Electronics Inc* 466,950 8,500 LG Household & Health Care Ltd 289,946 27,500 LG Investment & Securities Co Ltd 393,527 40,600 Samsung Corp 286,441 6,300 Samsung Electro Mechanics 301,385 7,600 Samsung SDI Co Ltd 603,852 24,700 Shinhan Financial Group Co Ltd 347,294 1,700 Shinsegae Co Ltd 289,946 33,700 SK Corp 462,623 20,300 SK Global* 188,315 ------------ 8,475,011 ------------ SPAIN -- 2.3% 14,124 Acciona SA 549,901 34,090 Aurea Concesiones de Infraestructuras del Estado SA 740,520 42,822 Azucarera Ebro Agricolas 436,754 105,414 Corp Mapfre Compania Internacional de Reaseguros 649,223 19,470 Fomento de Construcciones y Contratas SA 400,979 36,685 Grupo Ferrovial SA 899,424 1,627,931 Iberia (Lineas AER DE Espana) 2,825,826 59,474 Metrovacesa SA 1,086,616 30,404 Prosegur Comp Securidad 351,843 42,878 Sogecable SA* 518,062 116,200 Sol Melia SA 569,787 146,076 Telefonica Publicidad e Informacion SA 497,101 256,606 Vallehermoso SA 2,013,228
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SPAIN -- CONTINUED 26,762 Zardoya-Otis SA 317,046 ------------ 11,856,310 ------------ SWEDEN -- 3.7% 19,900 Custos AB 324,339 72,700 Europolitan Holdings AB* 347,725 313,048 Gambro AB Class A 1,604,023 209,712 Gambro AB Class B 1,072,307 28,500 Getinge Industrier AB Class B 531,297 25,310 Kinnevik Investment Class B 204,909 29,800 Lundbergforetagen AB 546,008 38,170 Mo Och Domsjo AB Class B 821,350 5,600 Nobel Biocare AB 243,211 49,800 SAAB AB Class B 538,456 262,600 Skanska AB Class B 1,594,499 83,900 SKF AB Class B 1,984,128 47,370 SSAB Swedish Steel Class A 476,859 20,935 Svenska Kullagerfabriken AB 497,316 657,200 Swedish Match AB 5,320,664 72,775 Tele2 AB Class B* 1,368,301 373,200 Telelogic AB* 268,349 1,298 Transcom WorldWide SA Class A* 1,272 2,412 Transcom WorldWide SA Class B* 2,903 125,500 Trelleborg AB Class B 1,129,679 ------------ 18,877,595 ------------ SWITZERLAND -- 2.4% 8,186 BK Vision AG (Bearer)* 886,433 1,252 Forbo Holdings AG (Registered) 375,437 3,006 Givaudan 1,259,970 1,393 Helvetia Patria Holding 153,164 12 Hilti AG (Participating Certificate) 7,997 299 Intershop Holdings AG (Bearer)* 158,401 190 Jelmoli (Registered) 30,007 2,829 Kuoni Reisen Holdings AG (Registered)* 631,536 46,617 Logitech International SA* 1,528,375 2,736 Merkur Holding AG (Registered) 546,963 27,418 Micronas Semiconductor Hold* 703,424 50 Motor-Columbus (Bearer) 84,630
14 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SWITZERLAND -- CONTINUED 848 Movenpick Holdings (Bearer)* 305,148 6,400 Nobel Biocare Holding AG* 308,840 353 Pargesa Holdings SA (Bearer) 592,783 5,425 Pharma Vision 2000 AG* 460,021 5,364 Schweizerische Lebensversicherungs-und Rentenanstalt* 812,294 2,508 SIG Holding AG 291,638 457 Sika Finanz AG (Bearer) 115,571 3,473 Societe Generale de Surveillance Holding SA (Registered) 918,789 5,256 Sulzer Gebrueder AG (Registered)* 826,586 5,527 Sulzer Medica AG* 813,038 27,005 Vontobel Holdings AG 493,977 ------------ 12,305,022 ------------ TAIWAN -- 1.2% 98,000 Ambit Microsystems Corp 270,434 117,000 Asustek Computer Inc 281,866 911,000 Cheng Loong Corp* 202,178 731,000 China Development Financial Holding Corp* 422,654 1,600,000 China Petrochemical Development Corp* 195,766 567,000 China Steel Corp 263,259 462,000 Chinatrust Financial Holding Co* 360,210 371,000 Compal Electronics Inc 349,928 197,000 Delta Electronics Inc 272,676 102,000 Elitegroup Computer Systems 269,558 258,000 Formosa Chemicals & Fibre Co 237,319 216,000 Formosa Plastics Corp 259,238 273,000 Fubon Financial Holding Co Ltd 242,348 101,000 GigaByte Technology Co Ltd* 222,675 521,220 International Commercial Bank China 292,230 513,000 Inventec Co Ltd 371,511 322,000 Nan Ya Plastic Corp 295,249 393,000 Prodisc Technology Inc* 219,194 121,000 Quanta Computer Inc 268,536 128,000 Sunplus Technology Co Ltd 239,217 735,000 Taiwan Cement Corp* 218,922 428,000 Yulon Motor Co 322,453 ------------ 6,077,421 ------------
See accompanying notes to the financial statements. 15 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ THAILAND -- 0.8% 346,000 Advanced Info Service Pcl (Foreign Registered) 237,829 232,000 Bangkok Bank Pcl NVDR* 280,446 522,000 Bangkok Expressway Pcl (Foreign Registered) 202,911 2,200,000 Charoen Pokphand Foods Pcl (Foreign Registered) 237,781 3,845,000 Jasmine International Pcl (Foreign Registered)* 238,775 3,079,400 KGI Securities One Pcl (Foreign Registered)* 262,760 228,000 Kiatnakin Finance & Securities (Foreign Registered) 186,442 211,000 Land & House Pcl NVDR 337,580 947,000 National Finance Pcl NVDR* 309,756 104,000 PTT Exploration & Production Pcl (Foreign Registered)* 300,735 290,000 PTT PCL (Foreign Registered) 261,199 15,000 Siam Cement Pcl NVDR 322,825 395,000 Siam Commercial Bank Pcl (Foreign Registered)* 245,763 491,000 Thai Farmers Bank NVDR* 296,765 1,050,000 Thai Petrochemical (Foreign Registered)* 95,568 ------------ 3,817,135 ------------ TURKEY -- 0.2% 100,000,000 Akbank TAS* 287,990 19,000,000 Aksa Akrilik Kimya Sanayii 171,722 61,000,000 Hurriyet Gazeteci* 149,510 61,990,000 Trakya Cam Sanayii 180,424 174,503,000 Turkiye Garanti Bankasi* 176,428 122,000,000 Vestel Elektronik Sanayi* 224,265 ------------ 1,190,339 ------------ UNITED KINGDOM -- 20.9% 44,034 3i Group Plc 392,009 408,922 Aegis Group Plc 468,095 252,320 Airtours Plc 539,609 22,484 Alliance & Leicester Plc 302,764 114,863 ARM Holdings Plc* 272,741 183,803 Arriva Plc 938,272 27,313 Associated British Ports 172,171 321,577 AWG Plc* 2,449,929 358,729 Barratt Development 2,329,268 502,485 Berisford International* 446,944 37,766 Berkley Group 394,337 160,429 BICC Group 488,890
16 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 257,251 BPB Industries Plc 1,237,598 129,885 Britannic Plc 723,309 244,100 British Energy Plc 319,071 1,335,015 BTR Siebe Plc 1,590,154 387,679 Caradon Plc 728,636 399,385 Carlton Communications Plc 909,723 1,500 Carlton Communications Plc ADR 17,233 64,897 Charter Plc (Registered)* 154,599 145,200 Chubb Plc 298,731 531,582 Coats Viyella 458,435 30,373 Cobham Group Plc 482,761 844,622 Cookson Group Plc 388,697 811,951 Cordiant Communications Group Plc* 697,084 2,324,053 Corus Group Plc* 1,977,293 41,344 Daily Mail & General Trust Plc 360,067 63,386 De La Rue Plc 298,077 98,620 De Vere Group Plc 465,675 213,150 Debenhams Plc 985,868 8,347 Egg Plc* 18,690 91,218 Eidos Plc* 169,326 58,268 Emap Plc 634,549 306,943 EMI Group Plc 845,162 51,962 Express Dairies Plc* 20,698 106,218 Gallaher Group Plc 1,084,437 241,603 GKN Plc 1,027,773 761,702 Granada Compass Plc 942,621 376,723 IMI Plc 1,509,330 373,239 Imperial Chemical Industries Plc 1,470,833 97,358 Inchcape Plc 1,223,650 69,529 Jarvis Plc 290,397 165,717 Laird Group 381,958 73,980 Lex Service 502,390 215,244 London Stock Exchange Plc 1,215,307 55,645 MAN Group Plc 911,558 230,998 Morgan Crucible 262,638 98,120 Mothercare Plc 227,673 302,880 National Power* 613,768 363,459 Next Plc 4,739,639 599,466 Northern Foods Plc 1,467,474 356,250 Northern Rock Plc 3,978,820
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 22,702 Nycomed Amersham Plc 199,820 35,962 Ocean Group Plc 410,547 42,652 P&O Princess Cruises Plc 277,109 719,345 Peninsular & Oriental Steam Navigation Co 2,517,608 134,942 Premier Farnell Plc 401,828 146,093 Provident Financial Plc 1,265,551 425,422 Rank Group Plc 1,747,216 366,195 Rexam Plc 2,526,443 152,614 RMC Group 1,238,232 1,706,223 Rolls-Royce 3,714,894 787,449 Royal & Sun Alliance Insurance Group 1,516,541 96,027 Safeway Plc 319,370 360,318 Sage Group Plc 719,015 630,646 Severn Trent Plc 6,550,793 204,928 Shire Pharmaceuticals Plc* 1,968,589 632,929 Signet Group Plc 822,425 185,110 Slough Estates 963,557 134,970 Smith & Nephew Plc 777,724 106,482 Smith (WH) Group Plc 556,332 549,912 Somerfield Plc 895,318 151,164 Southwest Water 1,585,405 1,319,263 Stagecoach Holdings Plc 683,657 499,171 Tate & Lyle 2,833,855 738,925 Taylor Woodrow Plc 1,966,034 1,397,019 THUS Group Plc* 167,481 664,239 Tomkins Plc 2,486,577 72,314 Transport Development Group Plc 226,522 72,681 Travis Perkins Plc 1,158,031 202,194 Trinity Mirror Plc 1,219,818 280,959 United Business Media Plc 1,238,654 303,530 United Utilities 2,939,261 96,926 Viglen Technology Plc (Entitlement Letters)(b)* -- 501,912 Whitebread Plc 4,114,961 215,283 Wilson (Connolly) Holdings 556,146 509,257 Wimpey (George) 2,251,052 433,460 Wolseley 3,949,359 679,673 Yorkshire Water 4,074,121 ------------ 105,666,577 ------------ TOTAL COMMON STOCKS (COST $511,150,231) 468,225,584 ------------
See accompanying notes to the financial statements. 18 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PREFERRED STOCKS -- 1.2% BRAZIL -- 0.4% 21,000 Companhia Vale do Rio Doce 477,587 26,912,000 Electrobras Class B (Registered) 193,369 4,478,000 Itaubanco SA (Registered) 216,963 15,325,000 Petrobras Distribuidora SA 1.62% 207,095 36,000 Petroleo Brasileiro SA (Petrobras) 3.01% 522,083 35,702,000 Tele Norte Leste Participacoes SA 3.44% 310,657 ------------ 1,927,754 ------------ GERMANY -- 0.7% 48,100 Dyckerhoff AG (Non Voting) 11.72% 455,207 4,580 Fresenius Medical Care AG (Non Voting) 4.08% 146,876 10,100 Hugo Boss AG 8.17% 108,956 5,300 Porsche AG 0.83% 2,474,110 35,500 Rheinmetall AG 3.92% 452,593 1,521 Wella AG 1.24% 71,002 ------------ 3,708,744 ------------ ITALY -- 0.0% 14,456 IFI Istituto Finanziario Industries 4.82% 227,399 ------------ SOUTH KOREA -- 0.1% 20,000 Hyundai Motor Co Pfd 5.05% 253,754 ------------ TOTAL PREFERRED STOCKS (COST $6,643,000) 6,117,651 ------------ RIGHTS AND WARRANTS -- 0.0% FRANCE -- 0.0% 13,893 Cap Gemini SA Warrants, Expires 3/31/03* 272 ------------ TOTAL RIGHTS AND WARRANTS (COST $31,230) 272 ------------
See accompanying notes to the financial statements. 19 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 14.5% CASH EQUIVALENTS -- 13.5% $ 9,600,000 Bank One Corp Time Deposit, 1.80%, due 9/03/02 9,600,000 $ 10,000,000 Societe Generale GC Time Deposit, 1.81%, due 9/03/02 10,000,000 48,592,549 The Boston Global Investment Trust(c) 48,592,549 ------------ 68,192,549 ------------ U.S. GOVERNMENT -- 1.0% $ 5,025,000 U.S. Treasury Bill, 1.61%, due 11/14/02(d) 5,008,418 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $73,200,269) 73,200,967 ------------ TOTAL INVESTMENTS -- 108.2% (Cost $591,024,730) 547,544,474 Other Assets and Liabilities (net) -- (8.2%) (41,716,858) ------------ TOTAL NET ASSETS -- 100.0% $505,827,616 ============ NOTES TO SCHEDULE OF INVESTMENTS:
ADR - American Depositary Receipt NVDR - Non-Voting Depositary Receipt * Non-income producing security. (a) Bankrupt issuer. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (c) Represents investment of security lending collateral (Note 1). (d) All or a portion of this security is held as collateral for open futures contracts (Note 6). 20 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Consumer Discretionary 20.7% Industrials 20.7 Financials 15.2 Materials 13.4 Consumer Staples 8.8 Information Technology 7.1 Utilities 5.4 Health Care 4.5 Energy 2.5 Telecommunication Services 1.7 ----- 100.0% =====
See accompanying notes to the financial statements. 21 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $44,618,101 (cost $591,024,730) (Note 1) $547,544,474 Cash 30,340 Foreign currency, at value (cost $1,167,524) (Note 1) 607,965 Receivable for Fund shares sold 50,000 Dividends and interest receivable 906,599 Foreign taxes receivable 203,509 Receivable for open forward foreign currency contracts (Notes 1 and 6) 17,659,869 Receivable for variation margin on open futures contracts (Notes 1 and 6) 55,547 Receivable for expenses reimbursed by Manager (Note 2) 44,981 ------------ Total assets 567,103,284 ------------ LIABILITIES: Payable upon return of securities loaned (Note 1) 48,592,549 Payable for Fund shares repurchased 701,493 Payable to affiliate for (Note 2): Management fee 252,274 Shareholder service fee 63,068 Payable for open forward foreign currency contracts (Notes 1 and 6) 11,579,055 Accrued expenses 87,229 ------------ Total liabilities 61,275,668 ------------ NET ASSETS $505,827,616 ============ NET ASSETS CONSIST OF: Paid-in capital $561,266,530 Accumulated undistributed net investment income 3,738,770 Accumulated net realized loss (19,285,588) Net unrealized depreciation (39,892,096) ------------ $505,827,616 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $505,827,616 ============ SHARES OUTSTANDING: Class III 48,436,950 ============ NET ASSET VALUE PER SHARE: Class III $ 10.44 ============
22 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $651,826) $ 5,384,915 Interest (including securities lending income of $149,813) 538,943 ------------ Total income 5,923,858 ------------ EXPENSES: Management fee (Note 2) 1,169,051 Custodian fees 198,628 Audit fees 26,588 Transfer agent fees 14,168 Legal fees 6,014 Trustees fees (Note 2) 2,450 Registration fees 1,104 Miscellaneous 2,671 Fees reimbursed by Manager (Note 2) (248,676) ------------ 1,171,998 Shareholder service fee (Note 2) Class III 292,263 ------------ Net expenses 1,464,261 ------------ Net investment income 4,459,597 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,378,303) Closed futures contracts (9,548,973) Foreign currency, forward contracts and foreign currency related transactions 1,109,665 ------------ Net realized loss (9,817,611) ------------ Change in net unrealized appreciation (depreciation) on: Investments (18,385,156) Open futures contracts (2,023,959) Foreign currency, forward contracts and foreign currency related transactions 5,555,445 ------------ Net unrealized loss (14,853,670) ------------ Net realized and unrealized loss (24,671,281) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(20,211,684) ============
See accompanying notes to the financial statements. 23 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,459,597 $ 4,386,723 Net realized loss (9,817,611) (4,506,586) Change in net unrealized appreciation (depreciation) (14,853,670) (14,191,285) ------------ ------------ Net decrease in net assets from operations (20,211,684) (14,311,148) ------------ ------------ Distributions to shareholders from: Net investment income Class III (927,772) (7,227,558) ------------ ------------ Total distributions from net investment income (927,772) (7,227,558) ------------ ------------ Net realized gains Class III -- (9,648) ------------ ------------ Total distributions from net realized gains -- (9,648) ------------ ------------ (927,772) (7,237,206) ------------ ------------ Net share transactions: (Note 5) Class III 273,354,690 88,068,118 ------------ ------------ Increase in net assets resulting from net share transactions 273,354,690 88,068,118 ------------ ------------ Total increase in net assets 252,215,234 66,519,764 NET ASSETS: Beginning of period 253,612,382 187,092,618 ------------ ------------ End of period (including accumulated undistributed net investment income of $3,738,770 and $206,945, respectively) $505,827,616 $253,612,382 ============ ============
24 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.44 $ 11.68 $ 11.54 $ 11.02 $ 12.22 $ 13.46 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.09 0.22 0.23 0.25 0.55 0.27 Net realized and unrealized gain (loss) (0.07) (1.11) 1.02 0.83 (1.15) 0.42 -------- -------- -------- -------- -------- -------- Total from investment operations 0.02 (0.89) 1.25 1.08 (0.60) 0.69 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.02) (0.35) (0.25) (0.15) (0.21) (0.26) From net realized gains -- (0.00)(c) (0.86) (0.41) (0.39) (1.67) -------- -------- -------- -------- -------- -------- Total distributions (0.02) (0.35) (1.11) (0.56) (0.60) (1.93) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.44 $ 10.44 $ 11.68 $ 11.54 $ 11.02 $ 12.22 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) 0.18%** (7.57)% 11.09% 9.62% (5.06)% 6.92% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $505,828 $253,612 $187,093 $173,362 $158,142 $234,155 Net expenses to average daily net assets 0.75%* 0.75% 0.75% 0.75% 0.75% 0.75% Net investment income to average daily net assets 2.29%* 2.02% 2.05% 2.19% 1.67% 1.93% Portfolio turnover rate 13% 34% 60% 55% 8% 79% Fees and expenses reimbursed by the Manager to average daily net assets: 0.13%* 0.22% 0.22% 0.24% 0.81% 0.86% Purchase and redemption fees consisted of the following per share amounts: $ 0.04(b) $ 0.05(b) $ 0.04(b) -- -- --
* Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000 the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (c) The distribution from net realized gains was less than $.01 per share. See accompanying notes to the financial statements. 25 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney EMI World Ex-U.S. Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manger has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains 26 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6, and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's 27 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of 28 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- contractual terms in the agreements, that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. At August 31, 2002, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund loaned securities having a market value of $44,618,101 collateralized by cash in the amount of $48,592,549, which was invested in a short-term instrument. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $6,078,276 expiring in 2010. The Fund has elected to defer to March 1, 2002 post-October capital losses of $3,265,822. 29 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. PURCHASES AND REDEMPTIONS OF FUND SHARES Effective June 13, 2002, the premium on cash purchases of Fund shares is .60% of the amount invested. Prior to June 13, 2002, the premium on cash purchases of Fund shares was 1.00% of the amount invested. In the case of cash redemptions, the fee is .60% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption fee is offset by a corresponding cash redemption or purchase occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is either substantially overweighted or underweighted in cash so that a redemption or purchase will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2002 and the year ended February 28, 2002, the Fund received $2,064,299 and $879,541 in purchase premiums and $16,115 and $24,542 in redemption fees, respectively. There is no premium for reinvested distributions. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 30 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $2,450. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $305,480,299 and $44,142,931, respectively. At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $591,024,730 $25,417,612 $(68,897,868) $(43,480,256)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 42.0% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 31 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------- ----------------------- Shares Amount Shares Amount Class III: ----------- ------------ ---------- ----------- Shares sold 24,527,510 $277,572,056 8,537,304 $91,049,348 Shares issued to shareholders in reinvestment of distributions 36,633 426,401 220,972 2,296,421 Shares repurchased (424,228) (4,643,767) (480,530) (5,277,651) ----------- ------------ ---------- ----------- Net increase 24,139,915 $273,354,690 8,277,746 $88,068,118 =========== ============ ========== ===========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Deliver/ Appreciation Date Receive Units of Currency Value (Depreciation) ---------- --------------------------------------------- ----------------- ------------- -------------- Buys 10/25/02 AUD 18,598,316 $ 10,199,326 $ 194,593 10/25/02 CAD 9,140,861 5,849,253 59,041 9/27/02 CHF 49,977,548 33,327,706 2,333,348 9/27/02 DKK 119,924,800 15,822,621 1,303,541 9/27/02 EUR 105,991,062 103,844,812 5,756,179 9/27/02 GBP 39,521,829 61,053,760 3,462,531 10/25/02 HKD 38,157,820 4,892,569 3,415 10/25/02 JPY 3,848,871,250 32,548,346 945,514 9/27/02 NOK 148,974,219 19,712,371 2,341,867 10/25/02 NZD 7,505,122 3,488,715 202,514 9/27/02 SEK 107,611,320 11,445,297 903,838 10/25/02 SGD 11,625,120 6,652,481 148,535 ------------ $ 17,654,916 ============
32 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED Sales 10/25/02 AUD 15,818,906 $ 8,675,096 $ 4,953 10/25/02 CAD 50,905,679 32,574,631 (136,115) 9/27/02 CHF 21,412,402 14,278,937 (956,794) 9/27/02 DKK 16,344,470 2,156,454 (235,513) 9/27/02 EUR 55,635,351 54,508,772 (1,849,365) 9/27/02 GBP 50,770,587 78,430,966 (4,288,165) 10/25/02 HKD 96,773,282 12,408,203 (8,798) 10/25/02 JPY 7,327,561,326 61,966,221 (3,031,168) 9/27/02 NOK 28,340,644 3,750,054 (598,116) 10/25/02 NZD 6,926,482 3,219,737 (1,172) 9/27/02 SEK 72,466,728 7,707,398 (450,934) 10/25/02 SGD 1,187,865 679,756 (22,915) ------------ $(11,574,102) ============
CURRENCY ABBREVIATIONS: AUD Australian Dollar CAD Canadian Dollar CHF Swiss Franc DKK Danish Krona EUR Euro GBP British Pound HKD Hong Kong Dollar JPY Japanese Yen NOK Norwegian Krone NZD New Zealand Dollar SEK Swedish Krona SGD Singapore Dollar
33 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) --------- ------------ ------------------ -------------- -------------- Buys 145 DAX September 2002 $13,233,627 $(1,706,068) 128 TSE TOPIX September 2002 10,131,827 (644,635) 231 MSCI September 2002 4,889,699 (89,957) ----------- $(2,440,660) =========== Sales 349 CAC40 September 2002 $11,551,420 $ 515,773 35 FTSE 100 September 2002 2,295,600 (32,690) ----------- $ 483,083 ===========
At August 31, 2002 , the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 34 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 77.3% ARGENTINA -- 3.7% ARS 113,873 Lecop Letras de Cancelacion de Obligation Series 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate, 5.42%, due 04/01/09(a)(b) 24,000 ARS 20,260,256 Prestamos Garantizados, 5.42%, due 04/01/10(a)(b) 1,077,846 ARS 6,400,000 Provincia Corrientes Series 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate, 3.21%, due 04/01/09(a)(b) 178,560 ARS 2,500,000 Provincia Corrientes Series 2, PIK, Variable Rate, 1 mo. Peso Deposit Rate, 3.21%, due 04/01/09(a)(b) 69,750 DEM 5,000,000 Republic of Argentina, 9.00%, due 11/19/08(a)(b) 476,353 USD 32,000,000 Republic of Argentina Discount Bond Series L-GL, Variable Rate, 6 mo. LIBOR + .81%, 2.94%, due 03/31/23(a) 15,520,000 DEM 3,830,000 Republic of Argentina Discount Bond, Variable Rate, 6 mo. DEM LIBOR + .81%, 4.50%, due 03/31/23(a) 835,397 USD 25,825,900 Republic of Argentina Global Bond, 12.25%, due 06/19/18(c)(a) 5,423,439 USD 24,445,000 Republic of Argentina Global Bond, 12.13%, due 02/25/19(a) 4,766,775 USD 4,040,000 Republic of Argentina Global Bond, 8.88%, due 03/01/29(a) 656,662 ARS 27,436,201 Republic of Argentina INDER Certificates, 6.00%, due 04/15/06(a)(b) 605,489 USD 2,000,000 Republic of Argentina Pro 4, 2.00%, due 12/28/10(a) 143,600 EUR 2,500,000 Republic of Argentina Series EMTN, Variable Rate, 3 mo. EURIBOR +5.10%, 8.57%, due 12/22/04(a) 441,315 USD 63,210,000 Republic of Argentina, 12% Capitalization Bond, PIK, due 06/19/31(a) 12,009,900 ------------- 42,229,086 ------------- BOSNIA & HERZEGOVINA -- 0.4% DEM 25,244,000 Bosnia & Herzegovina Series A, Step Up, 3.00%, due 12/11/17 4,620,150 ------------- BRAZIL -- 15.1% USD 307,853 Brazil Capitalization Bond Series L, PIK, 8.00%, due 04/15/14 190,484 USD 90,000,000 Brazil DCB (Bearer), Variable Rate, 6 mo. LIBOR + .88%, 3.13%, due 04/15/12 44,325,000 USD 67,500,000 Brazil DCB (Registered) Series RG, Variable Rate, 6 mo. LIBOR + .88%, 3.13%, due 04/15/12 33,243,750 USD 73,025,000 Brazil Discount ZL Bond, Variable Rate, 6 mo. LIBOR + .81%, 3.06%, due 04/15/24 42,719,625 USD 52,320,000 Brazil FLIRB (Registered), Variable Rate, Step Up, 3.06%, due 04/15/09 28,514,400
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- BRAZIL -- CONTINUED USD 9,410,661 Brazil MYDFA Trust Certificates Reg S, Variable Rate, 6 mo. LIBOR + .81%, 3.06%, due 09/15/07 5,811,083 USD 19,764,720 Brazil New Money Bond Series L, Variable Rate, 6 mo. LIBOR + .88%, 3.13%, due 04/15/09 12,056,479 USD 5,700,000 Republic of Brazil Global Bonds, 11.00%, due 08/17/40 3,194,850 ------------- 170,055,671 ------------- BULGARIA -- 5.2% USD 5,000,000 Bulgaria Discount Bond Series A, Variable Rate, 6 mo. LIBOR + .81%, 2.69%, due 07/28/24 4,506,250 USD 9,809,153 Bulgaria Discount Bond Series B, Variable Rate, 6 mo. LIBOR + 1.31%, 3.19%, due 07/28/24 8,828,238 USD 42,000,000 Bulgaria Discount Bond, Interest Strips, Series 62, 0.00%, due 01/28/10 7,949,760 USD 42,000,000 Bulgaria Discount Bond, Interest Strips, Series 63, 0.00%, due 01/28/17 5,131,980 USD 31,822,000 Republic of Bulgaria Reg S, 8.25%, due 01/15/15(c) 32,736,883 ------------- 59,153,111 ------------- COLOMBIA -- 0.6% USD 2,000,000 Republic of Colombia, 11.85%, due 03/09/28 1,560,000 USD 8,000,000 Republic of Colombia, 8.70%, due 02/15/16 5,520,000 ------------- 7,080,000 ------------- COSTA RICA -- 0.1% USD 800,000 Central Bank of Costa Rica Principal Bond Series A, 6.25%, due 05/21/10 808,000 ------------- DOMINICAN REPUBLIC -- 2.7% USD 29,807,000 Dominican Republic Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.94%, due 08/30/24 24,739,810 USD 5,000,000 Dominican Republic Reg S, 9.50%, due 09/27/06 5,225,000 ------------- 29,964,810 ------------- ECUADOR -- 1.1% USD 546,000 Republic of Ecuador Global Bond Reg S, 12.00%, due 11/15/12 313,950 USD 2,900,628 Republic of Ecuador PDI (Global Bearer Capitalization Bond), PIK, Variable Rate, 6 mo. LIBOR + .81%, 2.63%, due 02/27/15(b) 926,589
2 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- ECUADOR -- CONTINUED USD 25,587,000 Republic of Ecuador Reg S, Variable Rate, Step Up, 6.00%, due 08/15/30 10,746,540 ------------- 11,987,079 ------------- EGYPT -- 0.2% USD 2,000,000 Arab Republic of Egypt, 8.75%, due 07/11/11(c) 2,005,000 ------------- EL SALVADOR -- 0.6% USD 6,000,000 Republic of El Salvador, 144A, 8.50%, due 07/25/11 6,480,000 ------------- IVORY COAST -- 2.3% FRF 37,500,000 Ivory Coast Discount Bond, Variable Rate, Step Up, 3.00%, due 03/31/28(a) 1,674,943 USD 79,600,000 Ivory Coast FLIRB Series YR20, Variable Rate, Step Up, 2.00%, due 03/29/18(a) 15,323,000 FRF 34,905,000 Ivory Coast FLIRB, Variable Rate, Step Up, 2.00%, due 03/29/18(a) 965,429 FRF 256,889,500 Ivory Coast PDI, Variable Rate, Step Up, 1.90%, due 03/29/18(a) 8,257,444 ------------- 26,220,816 ------------- JAMAICA -- 0.3% USD 3,000,000 Government of Jamaica Global Bond, 11.63%, due 01/15/22 3,405,000 ------------- JORDAN -- 1.3% USD 2,486,841 Hashemite Kingdom of Jordan IAB, Variable Rate, 6 mo. LIBOR + .81%, 2.81%, due 12/23/05 2,399,801 USD 14,750,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step Up, 6.00%, due 12/23/23 11,947,500 ------------- 14,347,301 ------------- KAZAKHSTAN -- 0.3% USD 4,000,000 Kaztransoil Reg S, 8.50%, due 07/06/06 3,930,000 ------------- MACEDONIA -- 1.2% USD 19,445,786 Macedonia Capitalization Bond, PIK, Variable Rate, 6 mo. LIBOR + .81%, 2.77%, due 07/13/12 13,806,508 ------------- MALAYSIA -- 0.8% USD 8,000,000 Malaysia Global Bond, 7.50%, due 07/15/11 9,024,581 -------------
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- MEXICO -- 6.5% USD 71,500,000 Mexico Global Bond Series MTN, 8.30%, due 08/15/31 70,606,250 DEM 5,000,000 Mexico Par Bond, 5.01%, due 12/31/19 2,105,981 USD 159,000 Mexico Par Bond, Series B Odd Lot, 6.25%, due 12/31/19(b) 146,280 ------------- 72,858,511 ------------- NIGERIA -- 2.5% USD 22,698,569 Central Bank of Nigeria Par Bond Odd Lot, Variable Rate, Step Up, 6.25%, due 11/15/20(b) 12,257,226 USD 27,000,000 Central Bank of Nigeria Par Bond Series WW, Variable Rate, Step Up, 6.25%, due 11/15/20 15,930,000 ------------- 28,187,226 ------------- PANAMA -- 2.2% USD 15,000,000 Republic of Panama, 9.63%, due 02/08/11 14,775,000 USD 5,000,000 Republic of Panama, 9.38%, due 07/23/12 4,875,000 USD 8,000,000 Republic of Panama Par Bond, Variable Rate, Step Up, 4.75%, due 07/17/26 4,840,000 ------------- 24,490,000 ------------- PERU -- 1.7% USD 4,325,000 Peru Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.94%, due 03/07/27 2,984,250 USD 12,925,000 Peru FLIRB, Variable Rate, Step Up, 4.00%, due 03/07/17 8,175,062 USD 19,000,000 Peru Par Bond, Variable Rate, Step Up, 3.00%, due 03/07/27 8,550,000 ------------- 19,709,312 ------------- PHILIPPINES -- 1.5% USD 4,310,000 Central Bank of the Philippines Par Bond Series B, Variable Rate, Step Up, 6.50%, due 12/01/17 4,051,400 USD 15,375,000 Central Bank of the Philippines Series A, 8.60%, due 06/15/27 12,607,500 ------------- 16,658,900 ------------- POLAND -- 0.6% USD 6,000,000 Poland Government International Bond, 6.25%, due 07/03/12 6,330,000 ------------- RUSSIA -- 15.3% RUB 82,710,346 Russia Federal Loan Bond Series 26003, 10.00%, due 03/15/05(b) 2,054,851
4 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- RUSSIA -- CONTINUED USD 243,685,961 Russia Federation Reg S, Variable Rate, Step Up, 5.00%, due 03/31/30 170,580,173 ------------- 172,635,024 ------------- SOUTH KOREA -- 0.6% USD 6,000,000 Export Import Bank of Korea, 7.10%, due 03/15/07 6,705,180 ------------- TRINIDAD & TOBAGO -- 0.3% USD 3,000,000 Republic of Trinidad & Tobago, 144A , 9.88%, due 10/01/09 3,405,000 ------------- TUNISIA -- 0.1% JPY 200,000,000 Banque Centrale De Tunisie Series 6RG, 4.35%, due 08/15/17 1,665,753 ------------- TURKEY -- 0.5% USD 2,000,000 Republic of Turkey, 11.88%, due 01/15/30 1,740,000 USD 4,000,000 Republic of Turkey Global Bond, 12.00%, due 12/15/08 4,040,000 ------------- 5,780,000 ------------- UKRAINE -- 0.2% USD 1,780,000 Ukraine Government International Bond, 11.00%, due 03/15/07 1,837,850 ------------- UNITED STATES -- 1.4% CORPORATE DEBT -- 1.0% USD 12,000,000 Pemex Master Trust, 8.63%, due 02/01/22 11,820,000 ------------- U.S. GOVERNMENT -- 0.4% USD 4,454,040 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08(d) 4,815,235 ------------- TOTAL UNITED STATES 16,635,235 ------------- URUGUAY -- 0.3% USD 5,250,000 Banco Central Del Uruguay Series B, 6.75%, due 03/21/21 3,570,000 ------------- VENEZUELA -- 5.9% DEM 665,000 Banco Central Venezuela New Money Bond Series B, Variable Rate, DEM 6 mo. LIBOR + .88%, 4.50%, due 12/18/05(b) 220,075 USD 1,134,574 Republic of Venezuela DCB DL Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 2.88%, due 12/18/07(b) 839,585
See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- VENEZUELA -- CONTINUED USD 9,326,087 Republic of Venezuela DCB IL, Variable Rate, 6 mo. LIBOR + .88%, 2.88%, due 12/18/08 6,994,565 USD 19,107,000 Republic of Venezuela Discount Bond Series W-A, Variable Rate, 6 mo. LIBOR + .81%, 3.00%, due 03/31/20 13,661,505 USD 5,225,000 Republic of Venezuela Discount Bond Series W-B, Variable Rate, 6 mo. LIBOR + .81%, 2.94%, due 03/31/20 3,735,875 DEM 34,500,000 Republic Of Venezuela Discount Bond, Variable Rate, 6mo. LIBOR + 81.25%, 4.38%, due 03/31/20 12,109,388 USD 121,429 Republic of Venezuela FLIRB Series A Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 3.31%, due 03/31/07(b) 91,072 USD 348,571 Republic of Venezuela FLIRB Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 3.31%, due 03/31/07(b) 261,428 CHF 19,047,544 Republic of Venezuela FLIRB Series Sfr, Variable Rate, CHF 6 mo. LIBOR + .88%, 2.75%, due 03/31/07 9,138,557 USD 5,114,342 Republic of Venezuela New Money Bond Series A Odd Lot, Variable Rate, 6 mo. LIBOR + 1%, 3.00%, due 12/18/05(b) 3,886,899 USD 3,582,352 Republic of Venezuela New Money Bond Series A, Variable Rate, 6 mo. LIBOR + 1%, 3.00%, due 12/18/05 2,901,705 USD 1,072,238 Republic of Venezuela New Money Bond Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 2.88%, due 12/18/05(b) 814,901 USD 411,765 Republic of Venezuela New Money Bond Series B, Variable Rate, 6 mo. LIBOR + .88%, 2.88%, due 12/18/05 333,529 DEM 15,000,000 Republic of Venezuela Par Bond , 6.66%, due 03/31/20 5,114,524 FRF 54,175,000 Republic of Venezuela Par Bond Series WOIL, 7.71%, due 03/31/20 6,489,747 ------------- 66,593,355 ------------- VIETNAM -- 1.7% USD 19,750,000 Vietnam Par Bond, Variable Rate, Step Up, 3.50%, due 03/12/28 11,060,000 USD 4,000,000 Vietnam Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 3.06%, due 03/13/28 3,080,000 USD 6,000,000 Vietnam PDI, Variable Rate, Step Up, 4.00%, due 03/14/16 4,800,000 ------------- 18,940,000 ------------- YUGOSLAVIA -- 0.1% USD 4,000,000 Second Emerging Markets Series EMTN, 0.00%, due 07/15/06 1,015,001 ------------- TOTAL DEBT OBLIGATIONS (COST $967,875,853) 872,133,460 -------------
See accompanying notes to the financial statements. 6 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- LOAN ASSIGNMENTS -- 10.4% ALGERIA -- 3.8% JPY 342,990,054 Algeria Tranche 1, JPY 6 mo. LIBOR + .8125%, (0.9375%) 2,574,631 JPY 5,600,155,681 Algeria Tranche 3 Loan Agreement, JPY LIBOR + .8125% (0.9375%) 39,675,543 ------------- 42,250,174 ------------- CAMEROON -- 0.1% NLG 23,084,718 Cameroon Loan Agreement, (No Tranche specified, dated January 31, 1981)* 1,130,053 FRF 18,396,841 Republic of Cameroon Tranche B, (dated January 30, 1979)* 302,550 ------------- 1,432,603 ------------- CONGO REPUBLIC (BRAZZAVILLE) -- 0.2% FRF 102,097,963 Republic of Congo Loan Agreement* 1,297,468 USD 7,689,405 Republic of Congo Loan Agreement* 653,599 EUR 8,195,761 Republic of Congo Loan Agreement* 683,195 ------------- 2,634,262 ------------- INDONESIA -- 1.7% JPY 265,140,000 Republic of Indonesia Loan Agreement, dated January 1, 1994 (1.00417%) 1,162,846 USD 2,455,000 Republic of Indonesia Loan Agreement, dated January 1, 1994 (3.3125%) 1,227,500 USD 3,900,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625% (2.85875%) 1,677,000 USD 5,200,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.8125%) 2,236,000 USD 3,900,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.925%) 1,677,000 USD 3,800,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.8125%) 1,900,000 USD 2,850,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.83125%) 1,425,000 USD 2,850,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.925%) 1,425,000 USD 5,320,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.8125%) 2,633,400 USD 3,990,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.83125%) 1,975,050
See accompanying notes to the financial statements. 7 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- INDONESIA -- CONTINUED USD 3,990,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.925%) 1,975,250 ------------- 19,314,046 ------------- JAMAICA -- 0.0% USD 173,861 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (2.625%) 165,168 ------------- MOROCCO -- 0.8% USD 9,750,000 Morocco Restructuring and Consolidating Agreement Tranche A, 6 mo. LIBOR + .8125%, (2.5625%) 8,799,375 ------------- RUSSIA -- 3.7% EUR 5,000,000 International Bank for Economic Cooperation Loan Agreement* 3,588,774 DEM 15,000,000 International Bank for Economic Cooperation Loan Agreement* 5,504,732 USD 5,000,000 International Investment Bank Loan Agreement* 3,712,500 DEM 14,789,560 Russia Foreign Trade Obligations*(b) 5,279,336 ATS 9,298,112 Russia Foreign Trade Obligations*(b) 471,761 USD 23,431,775 Russia Foreign Trade Obligations*(b) 16,681,081 ITL 5,150,000,000 Russia Foreign Trade Obligations*(b) 1,856,934 SEK 13,835,548 Russia Foreign Trade Obligations(b)* 1,049,228 CHF 2,450,481 Russia Foreign Trade Obligations*(b) 1,162,456 EUR 4,147,629 Russia Foreign Trade Obligations*(b) 2,895,710 ------------- 42,202,512 ------------- YUGOSLAVIA -- 0.1% USD 1,400,368 Yugoslavia New Financing Agreement Tranche A* 560,147 USD 1,499,573 Yugoslavia New Financing Agreement Tranche C* 599,828 ------------- 1,159,975 ------------- TOTAL LOAN ASSIGNMENTS (COST $94,679,825) 117,958,115 ------------- LOAN PARTICIPATIONS -- 7.5% ALGERIA -- 1.0% JPY 200,000,000 Algeria Tranche 3 Loan Agreement, JPY Long Term Prime +.8125% (2.35479%), (Participation with Salomon) 1,416,944 JPY 1,345,263,159 Algeria Tranche S1, JPY Long Term Prime + .8125%, (3.0125%), (Participation with Merrill Lynch) 9,445,718 ------------- 10,862,662 -------------
See accompanying notes to the financial statements. 8 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- CAMEROON -- 0.0% NLG 4,968,184 Cameroon Loan Agreement, (No Tranche specified, dated January 31, 1981), (Participation with Salomon)* 243,205 ------------- INDONESIA -- 0.4% USD 1,669,868 Republic of Indonesia Loan Agreement, 6 mo. LIBOR +.70%, (3.00%), (Participation with Deutsche Bank) 1,419,388 USD 480,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625% (2.85875%), (Participation with Salomon) 206,400 USD 640,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.8125%), (Participation with Salomon) 275,000 USD 480,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.925%), (Participation with Salomon) 206,400 USD 744,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.8125%), (Participation with Salomon) 372,000 USD 558,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.83125%), (Participation with Salomon) 279,000 USD 558,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.925%), (Participation with Salomon) 279,000 USD 760,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.8125%), (Participation with Salomon) 376,200 USD 570,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.83125%), (Participation with Salomon) 282,150 USD 570,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.925%), (Participation with Salomon) 282,150 ------------- 3,977,688 ------------- JAMAICA -- 0.1% USD 281,250 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125% (7.5225%), (Participation with Chase Manhattan Bank) 267,188 USD 1,406,250 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (2.625%), (Participation with Salomon) 1,335,938 ------------- 1,603,126 ------------- RUSSIA -- 5.9% DEM 3,500,000 International Bank for Economic Cooperation Loan Agreement, (Participation with Salomon)* 1,284,438 USD 2,000,000 International Bank for Economic Cooperation Loan Agreement, (Participation with UBS)* 1,495,000 JPY 900,000,000 International Investment Bank Loan Agreement, (Participation with Bank of America)* 5,522,287
See accompanying notes to the financial statements. 9 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- RUSSIA -- CONTINUED DEM 7,500,000 International Investment Bank Loan Agreement, (Participation with Mizuho)* 2,867,518 EUR 11,671,592 Russia Paris Club Debt, Variable Rate, (6.45%), (Participation with Deutsche Bank) 7,068,109 EUR 16,985,125 Russia Paris Club Debt, Variable Rate, (6.45%), (Participation with Deutsche Bank) 10,534,084 EUR 12,000,000 Russia Paris Club Debt, Variable Rate, (6.45%), (Participation with Deutsche Bank) 7,266,987 EUR 49,314,603 Russia Paris Club Debt, Variable Rate, (6.70%), (Participation with Deutsche Bank)* 30,816,796 ------------- 66,855,219 ------------- YUGOSLAVIA -- 0.1% USD 2,100,416 Yugoslavia New Financing Agreement Tranche B, (Participation with Chase Manhattan Bank)* 840,166 USD 352,445 Yugoslavia New Financing Agreement Tranche C, (Participation with Chase Manhatten Bank)* 140,978 ------------- 981,144 ------------- TOTAL LOAN PARTICIPATIONS (COST $72,416,063) 84,523,044 ------------- PROMISSORY NOTES -- 0.2% KENYA -- 0.1% GBP 672,890 Republic of Kenya Promissory Notes, 0.00%, due 1/30/03(b) 156,134 GBP 672,890 Republic of Kenya Promissory Notes, 0.00%, due 1/30/02 156,134 GBP 1,856,250 Republic of Kenya Promissory Notes, 0.00%, due 7/30/01 430,715 GBP 1,856,250 Republic of Kenya Promissory Notes, 0.00%, due 7/30/02 430,715 ------------- 1,173,698 ------------- NIGERIA -- 0.1% USD 3,000,000 Central Bank of Nigeria Promissory Notes Series RC, 5.09%, due 1/5/10* 780,000 ------------- TOTAL PROMISSORY NOTES (COST $6,661,791) 1,953,698 -------------
See accompanying notes to the financial statements. 10 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- MUTUAL FUND -- 3.7% 1,613,460 GMO Alpha LIBOR Fund 41,401,372 ------------- TOTAL MUTUAL FUND (COST $41,549,585) 41,401,372 ------------- PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 0.0% OPTIONS ON BONDS -- 0.0% USD 10,000,000 China, 6.8%, 5/23/11, Expires 11/12/02, Strike 99.50 51 USD 30,000,000 Malaysia Global Bond, 7.5%, 2011, Expires 09/13/02, Strike 100.00 -- ------------- 51 ------------- TOTAL CALL OPTIONS PURCHASED (COST $410,500) 51 ------------- PUT OPTIONS PURCHASED -- 0.5% OPTIONS ON INTEREST RATE SWAPS -- 0.5% USD 50,000,000 KRW Swaption, Expires 06/01/05, Strike 7.5 2,147,602 USD 75,000,000 KRW Swaption, Expires 06/07/05, Strike 7.42 3,167,526 ------------- 5,315,128 ------------- TOTAL PUT OPTIONS PURCHASED (COST $4,025,000) 5,315,128 ------------- SHARES ------------- RIGHTS AND WARRANTS -- 0.0% MEXICO -- 0.0% 33,077,000 Mexico Par Bond Series B Warrants, Expires 6/30/04** 49,615 33,077,000 Mexico Par Bond Series C Warrants, Expires 6/30/05** 13,231 33,077,000 Mexico Par Bond Series D Warrants, Expires 6/30/06** 13,231 29,000 United Mexican States Recovery Warrants Odd Lot, Expires 6/30/03** 73 192,813,000 United Mexican States Warrants, Expires 6/30/03** 482,032 ------------- 558,182 -------------
See accompanying notes to the financial statements. 11 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- NIGERIA -- 0.0% 45,224 Central Bank of Nigeria Payment Adjusted Warrants, Expires 11/15/20** -- ------------- URUGUAY -- 0.0% 4,000,000 Banco Central Del Uruguay Warrants, Expires 1/2/21** -- ------------- VENEZUELA -- 0.0% 164,215 Republic of Venezuela Bond Warrants, Expires 4/18/20** -- 277,160 Republic of Venezuela Recovery Warrants, Expires 4/15/20** -- ------------- -- ------------- TOTAL RIGHTS AND WARRANTS (COST $20,880) 558,182 ------------- SHORT-TERM INVESTMENTS -- 0.3% COMMERCIAL PAPER -- 0.3% USD 3,372,000 Insured Asset Funding, 144A, 1.95%, due 9/03/02 3,371,452 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $3,371,452) 3,371,452 ------------- TOTAL INVESTMENTS -- 99.9% (Cost $1,191,010,949) 1,127,214,502 Other Assets and Liabilities (net) -- 0.1% 1,607,178 ------------- TOTAL NET ASSETS -- 100.0% $1,128,821,680 =============
See accompanying notes to the financial statements. 12 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. DCB - Debt Conversion Bond EMTN - Euromarket Medium Term Note FLIRB - Front Loaded Interest Reduction Bond PDI - Past Due Interest PIK - Payment In Kind Variable and step up rates - The rates shown on variable and step up rate notes are the current interest rates at August 31, 2002, which are subject to change based on the terms of the security, including varying reset dates. CURRENCY ABBREVIATIONS: ARS - Argentine Peso ATS - Austrian Schilling CHF - Swiss Franc DEM - German Mark EUR - Euro FRF - French Franc GBP - British Pound HKD - Hong Kong Dollar ITL - Italian Lira JPY - Japanese Yen KRW - South Korean Won NLG - Netherlands Guilder RUB - Russian Ruble SEK - Swedish Krona USD - United States Dollar
(a) Security is in default. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (c) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 6). (d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). * Non-performing. Borrower not currently paying interest. ** Non-income producing security. See accompanying notes to the financial statements. 13 (THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.) 14 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $1,191,010,949) (Note 1) $1,127,214,502 Cash 1,006 Receivable for investments sold 10,092,791 Receivable for Fund shares sold 22,581 Interest receivable 17,674,034 Receivable for open forward foreign currency contracts (Notes 1 and 6) 20,226 Receivable for variation margin on open futures contracts (Notes 1 and 6) 201,118 Net receivable for open swap contracts (Notes 1 and 6) 23,074,826 -------------- Total assets 1,178,301,084 -------------- LIABILITIES: Payable for investments purchased 9,635,641 Payable for Fund shares repurchased 900 Payable to affiliate for (Note 2): Management fee 323,062 Shareholder service fee 118,402 Payable for open forward foreign currency contracts (Notes 1 and 6) 859,949 Payable for reverse repurchase agreements (Notes 1 and 6) 38,200,378 Accrued expenses 341,072 -------------- Total liabilities 49,479,404 -------------- NET ASSETS $1,128,821,680 ============== NET ASSETS CONSIST OF: Paid-in capital $1,149,249,397 Accumulated undistributed net investment income 20,570,147 Accumulated net realized gain 3,715,065 Net unrealized depreciation (44,712,929) -------------- $1,128,821,680 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 632,610,753 ============== Class IV shares $ 496,210,927 ============== SHARES OUTSTANDING: Class III 70,936,579 ============== Class IV 55,619,139 ============== NET ASSET VALUE PER SHARE: Class III $ 8.92 ============== Class IV $ 8.92 ==============
See accompanying notes to the financial statements. 15 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 53,630,983 Dividends from investment company shares 239,836 ------------ Total income 53,870,819 ------------ EXPENSES: Management fee (Note 2) 1,901,910 Interest expense (Notes 1 and 6) 561,101 Custodian fees 291,548 Audit fees 41,032 Legal fees 19,980 Transfer agent fees 17,664 Trustees fees (Note 2) 13,140 Registration fees 1,748 Miscellaneous 8,832 Fees reimbursed by Manager (Note 2) (60,430) ------------ 2,796,525 Shareholder service fee (Note 2) - Class III 456,143 Shareholder service fee (Note 2) - Class IV 242,379 ------------ Net expenses 3,495,047 ------------ Net investment income 50,375,772 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 27,460,425 Realized gains distributions from investment company shares 124,651 Closed futures contracts (37,283) Closed swap contracts 475,339 Written options 911,250 Foreign currency, forward contracts and foreign currency related transactions (10,983,067) ------------ Net realized gain 17,951,315 ------------ Change in net unrealized appreciation (depreciation) on: Investments (87,870,044) Open futures contracts (90,400) Open swap contracts 10,881,475 Written options (768,963) Foreign currency, forward contracts and foreign currency related transactions (3,012,451) ------------ Net unrealized loss (80,860,383) ------------ Net realized and unrealized loss (62,909,068) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(12,533,296) ============
16 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 50,375,772 $ 110,823,631 Net realized gain 17,951,315 49,361,236 Change in net unrealized appreciation (depreciation) (80,860,383) 7,066,008 -------------- -------------- Net increase (decrease) in net assets from operations (12,533,296) 167,250,875 -------------- -------------- Distributions to shareholders from: Net investment income Class III (10,550,493) (58,047,624) Class IV (8,039,854) (65,295,506) -------------- -------------- Total distributions from net investment income (18,590,347) (123,343,130) -------------- -------------- Net realized gains Class III (5,510,448) -- Class IV (4,172,583) -- -------------- -------------- Total distributions from net realized gains (9,683,031) -- -------------- -------------- (28,273,378) (123,343,130) -------------- -------------- Net share transactions: (Note 5) Class III 85,495,223 115,721,050 Class IV 24,059,654 (109,470,121) -------------- -------------- Increase in net assets resulting from net share transactions 109,554,877 6,250,929 -------------- -------------- Total increase in net assets 68,748,203 50,158,674 NET ASSETS: Beginning of period 1,060,073,477 1,009,914,803 -------------- -------------- End of period (including accumulated undistributed net investment income of $20,570,147 and overdistributed net investment income of $11,215,278, respectively) $1,128,821,680 $1,060,073,477 ============== ==============
See accompanying notes to the financial statements. 17 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 --------------------------------------------------------------- (UNAUDITED) 2002 2001(B) 2000 1999 1998 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.30 $ 8.96 $ 8.74 $ 6.89 $ 11.64 $ 14.09 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.43+ 1.01+ 1.13+ 0.84+ 0.92+ 1.13+ Net realized and unrealized gain (loss) (0.57) 0.52 0.41 2.20 (4.41) 1.51 -------- -------- -------- -------- -------- -------- Total from investment operations (0.14) 1.53 1.54 3.04 (3.49) 2.64 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.16) (1.19) (1.32) (1.07) (0.23) (0.84) From net realized gains (0.08) -- -- (0.12) (1.03) (4.25) -------- -------- -------- -------- -------- -------- Total distributions (0.24) (1.19) (1.32) (1.19) (1.26) (5.09) -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.92 $ 9.30 $ 8.96 $ 8.74 $ 6.89 $ 11.64 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) (1.43)%* 18.53% 18.78% 46.81% (32.94)% 22.27% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $632,611 $570,459 $430,003 $378,593 $450,336 $460,387 Net operating expenses to average daily net assets 0.57%(f)++ 0.57%(f) 0.56% 0.56% 0.56% 0.53% Interest expense to average daily net assets 0.10%(d)++ 0.14%(d) -- -- -- -- Total net expenses to average daily net assets 0.67%++ 0.71% 0.56% 0.56% 0.56% 0.53% Net investment income to average daily net assets 9.26%++ 11.17% 12.57% 10.82% 10.99% 8.62% Portfolio turnover rate 43% 130% 139% 123% 272% 255% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%++ 0.02% 0.03% 0.03% 0.18% 0.19% Purchase and redemption fees consisted of the following per share amounts:(c) --(e) --(e) $ 0.01 N/A N/A N/A
18 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - -------------------------------------------------------------------------------- + Computed using average shares outstanding throughout the period. ++ Annualized. * Not annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities.The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains and losses per share by $0.04 and decrease the ratio of net investment income to average net assets from 13.06% to 12.57%. Per share data and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (c) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change in presentation. Amounts calculated using average shares outstanding throughout the period. (d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (e) Purchase and redemption fees were less than $0.01 per share. (f) Net expenses exclude expenses incurred indirectly through investment in GMO Alpha LIBOR Fund. See Note 2. See accompanying notes to the financial statements. 19 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------------ (UNAUDITED) 2002 2001(B) 2000 1999 1998** ---------------- ----------- ----------- ----------- ----------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.29 $ 8.95 $ 8.74 $ 6.90 $ 11.63 $ 10.99 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.43+ 1.01+ 1.14+ 0.84+ 0.91+ 0.10+ Net realized and unrealized gain (loss) (0.56) 0.52 0.40 2.20 (4.37) 0.54 -------- -------- -------- -------- -------- -------- Total from investment operations (0.13) 1.53 1.54 3.04 (3.46) 0.64 -------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.16) (1.19) (1.33) (1.08) (0.24) -- From net realized gains (0.08) -- -- (0.12) (1.03) -- -------- -------- -------- -------- -------- -------- Total distributions (0.24) (1.19) (1.33) (1.20) (1.27) 0.00 -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.92 $ 9.29 $ 8.95 $ 8.74 $ 6.90 $ 11.63 ======== ======== ======== ======== ======== ======== TOTAL RETURN(a) (1.32)%++ 18.60% 18.71% 47.00% (32.82)% 5.82% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $496,211 $489,615 $579,912 $545,869 $323,285 $310,580 Net operating expenses to average daily net assets 0.51%(f)* 0.52%(f) 0.51% 0.51% 0.51% 0.50%* Interest expense to average daily net assets 0.10%(d)* 0.14%(d) -- -- -- -- Total net expenses to average daily net assets 0.61%* 0.66% 0.51% 0.51% 0.51% 0.50%* Net investment income to average daily net assets 9.29%* 11.22% 12.62% 10.87% 10.87% 7.17%* Portfolio turnover rate 43% 130% 139% 123% 272% 255% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%* 0.02% 0.03% 0.03% 0.18% 0.19%* Purchase and redemption fees consisted of the following per share amounts:(c) --(e) --(e) $ 0.01 N/A N/A N/A
20 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - -------------------------------------------------------------------------------- * Annualized. ** Period from January 9, 1998 (commencement of operations ) to February 28, 1998. + Computed using average shares outstanding throughout the period. ++ Not annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains and losses per share by $0.04 and decrease the ratio of net investment income to average net assets from 13.11% to 12.62%. Per share data and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (c) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (e) Purchase and redemption fees were less than $0.01 per share. (f) Net expenses exclude expenses incurred indirectly through invesment in GMO Alpha LIBOR Fund. See Note 2. See accompanying notes to the financial statements. 21 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks to earn high total return through investment in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Europe. The Fund's benchmark is the J.P. Morgan Emerging Markets Bond Index Global. Throughout the six months ended August 31, 2002, the Fund had two classes of shares outstanding: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. At August 31, 2002, 3.7% of the Fund was invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. GMO Alpha LIBOR Fund invests primarily in relatively high quality, low volatility fixed income instruments. The financial statements of the GMO Alpha LIBOR Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding 22 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of other GMO Funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. 23 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of August 31, 2002. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2002. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the 24 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002, the Fund had no open written options contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. See the Schedule of Investments for all open purchased option contracts as of August 31, 2002. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain 25 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically an emerging country, on its obligation. The fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of August 31, 2002. 26 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. At August 31, 2002, the Fund had entered into reverse repurchase agreements having a market value of $38,200,378, collateralized by securities with a market value of $39,432,233. See Note 6 for a summary of open reverse repurchase agreements as of August 31, 2002. DELAYED DELIVERY COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained with the custodian in an amount at least equal to these commitments. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2002, the Fund had no securities on loan. 27 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earinings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis, and is adjusted for the amortization of premium and discounts. Income is not recognized, nor are premium and discount amortized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of these securities is recorded as interest income. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .50% of the amount invested. In the case of cash redemptions, the fee is .25% of the amount redeemed. If the Manager determines that any portion of 28 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- a cash purchase is offset by a corresponding cash redemption occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is substantially underweighted/overweighted in cash so that a purchase or redemption will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in-capital. For the six months ended August 31, 2002 and the year ended February 28, 2002, the Fund received $509,609 and $142,331 in purchase premiums and $45,170 and $365,848 in redemption fees, respectively. There is no premium for reinvested distributions. INVESTMENT RISK Investments in emerging country debt present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability, which may result in the Fund's inability to collect on a timely basis, or in full, principal and interest payments. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities or bank loans which are in default at the time of acquisition in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging country debt are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. GMO Emerging Country Debt Fund owns loans and bonds representing significant exposure to the risk of default in many countries, but has the most sizeable of such positions relating to Russia and Brazil. The Fund's financial position would be substantially adversely affected in the case of a default by either of these countries on obligations held by the Fund, or on obligations issued by those countries generally. The Fund has purchased default protection in the form of credit default swap agreements with respect to both countries, which may offset some of the losses that the Fund might experience in the case of a default on bonds issued by such countries. However, it is important to note that (i) such protection would not cover losses due to defaults on loan instruments, (ii) such protection will generally not be sufficient to cover all of the Fund's losses in the case of default, and (iii) due to the privately negotiated nature of such instruments, under some circumstances, the protection offered by such instruments may not be realized, despite that the Fund incurs substantial losses due to weakening of the credit or virtual default by the countries. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .35% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder 29 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .10% for Class IV shares. Effective June 30, 2002, the Manager will no longer reimburse any Fund fees or expenses. Prior to June 30, 2002, GMO had an agreement to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees and the following expenses: fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed the management fee. The Fund incurs fees and operating expenses indirectly through its investment in the GMO Alpha LIBOR Fund. For the six months ended August 31, 2002, indirect operating expenses (excluding shareholder service fees and fund expenses) rounded to less than 0.001% of the Fund's average daily net assets, and indirect investment expenses incurred by the Fund were 0.001% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $13,140. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, aggregated $523,833,116 and $480,209,927, respectively. At August 31, 2002, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,191,010,949 $101,264,015 $(165,060,462) $(63,796,447)
4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 32.5% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's shares outstanding. Investment activities of these shareholders may have a material effect on the Fund. 30 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ ------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ----------- ------------ Shares sold 15,840,188 $144,272,152 18,610,565 $166,106,864 Shares issued to shareholders in reinvestment of distributions 1,579,040 13,643,483 5,226,345 44,398,759 Shares repurchased (7,844,295) (72,420,412) (10,466,626) (94,784,573) ---------- ------------ ----------- ------------ Net increase 9,574,933 $ 85,495,223 13,370,284 $115,721,050 ========== ============ =========== ============
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------ -------------------------- Shares Amount Shares Amount Class IV: ---------- ------------ ----------- ------------- Shares sold 5,134,685 $ 46,014,362 3,577,633 $ 31,523,144 Shares issued to shareholders in reinvestment of distributions 1,381,389 11,935,198 7,423,129 63,116,014 Shares repurchased (3,581,494) (33,889,906) (23,086,937) (204,109,279) ---------- ------------ ----------- ------------- Net increase (decrease) 2,934,580 $ 24,059,654 (12,086,175) $(109,470,121) ========== ============ =========== =============
31 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: FORWARD CURRENCY CONTRACTS
Settlement Appreciation Date Deliver Units of Currency Value (Depreciation) ---------- ------- ----------------- ------------- -------------- Sales 10/29/02 CHF 2,800,000 $ 1,869,284 $ (7,061) 10/22/02 EUR 69,900,000 68,391,908 (211,448) 10/15/02 GBP 1,500,000 2,313,982 (25,522) 5/27/03 HKD 194,972,500 24,996,314 3,686 12/16/02 HKD 194,852,000 24,983,460 16,540 9/10/02 JPY 6,100,000,000 51,477,068 (499,724) 12/10/02 KRW 5,061,875,000 4,178,694 (116,194) --------- $(839,723) =========
FUTURES CONTRACTS
Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- --------------------------------------------- ----------------- ----------- -------------- Buys 1 Japanese Government Bond 10 Yr. September 2002 $1,191,751 $ (344) 7 U.S. Treasury Note 10 Yr. December 2002 782,469 4,444 --------- $ 4,100 ========= Sales 6 Japanese Government Bond 10 Yr. September 2002 $7,150,508 $(171,858) 1 Japanese Government Bond 10 Yr. December 2002 1,185,173 331 --------- $(171,527) =========
At August 31, 2002, the Fund had sufficient cash and/or securities to cover margin requirements of the relevant broker or exchange. 32 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls -------------------------- ------------------------------ Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- -------- ---------------- ------------ Outstanding, beginning of period -- $ -- 27,000 $ 911,250 Options written -- -- Options closed -- -- -- -- Options exercised -- -- Options expired (27,000) (911,250) Options sold -- -- ---------- ---- ------------ --------- Outstanding, end of period -- $ -- -- $ -- ========== ==== ============ =========
REVERSE REPURCHASE AGREEMENTS
Face Value Description Market Value ----------- ------------------------------------------------------- ------------ J.P Morgan Chase & Co., 0.45%, dated 7/23/02, to be repurchased on 9/3/02 at face value plus accrued $31,887,633 interest. $ 31,887,633 J.P Morgan Chase & Co., 0.40%, dated 8/15/02, to be repurchased on 9/1/02 at face value plus accrued 4,325,801 interest. 4,325,801 J.P Morgan Chase & Co., 0.00%, dated 7/11/02, to be repurchased on 9/1/02 at face value plus accrued 1,986,944 interest. 1,986,944 ------------ $ 38,200,378 ============
Average balance outstanding $78,116,150 Average interest rate 1.30% Maximum balance outstanding $124,075,330 Average shares outstanding 117,824,207 Average balance per share outstanding $ .66
33 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- --------------------------------------------- -------------- CREDIT DEFAULT SWAPS 5,000,000 USD 4/18/03 Agreement with Deutsche Bank AG dated $ (45,725) 04/12/01 to pay 2.75% per year times the notional amount. The fund receives payment only upon a default event in the Philippines, the notional amount times the difference between the par value and the then-market value of Republic of the Philippines, 8.875% due 04/15/08. 5,000,000 USD 4/21/03 Agreement with UBS AG, dated 10/16/01 to pay 435,352 7.30% per year times the notional amount. The Fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of the Republic of Brazil, 11.625% due 4/15/04. 15,000,000 USD 6/20/03 Agreement with Goldman Sachs International 684,311 dated 1/14/99 to receive 11.60% per year times the notional amount. The Fund pays only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 7.625% due 2/15/07. 7,500,000 USD 7/23/03 Agreement with Goldman Sachs International 85,602 dated 7/18/01 to pay 4.80% per year times the notional amount. The fund receives payment only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 9.75% due 4/23/09.
34 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- --------------------------------------------- -------------- 5,000,000 USD 10/16/03 Agreement with Deutsche Bank AG dated $ (58,961) 10/11/00 to pay 2.83% per year times the notional amount. The Fund receives payment only upon a default event in the Philippines, the notional amount times the difference between the par value and the then-market value of Republic of Philippines, 8.875% due 4/15/08. 5,000,000 USD 4/13/04 Agreement with Goldman Sachs International (130,764) dated 4/04/01 to pay 11.50% per year times the notional amount. The fund receives payment only upon a default event in Turkey, the notional amount times the difference between the par value and the then-market value of Republic of Turkey, 11.50% due 6/15/10. 8,000,000 USD 4/15/04 Agreement with Morgan Guaranty Trust Company 1,905,453 dated 3/13/02 to pay 5.75% per year times the notional amount. The fund receives payment only upon a default event in Brazil, the notional amount times the difference between the par value and the then-market value of the Federative Republic of Brazil, 8.00% due 4/15/14 5,000,000 USD 4/15/04 Agreement with Bank of America N.A. dated 1,036,600 11/28/01 to pay 7.95% per year times the notional amount. The Fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of the Republic of Brazil, 8.00% due 4/15/14.
35 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- --------------------------------------------- -------------- 5,000,000 USD 6/18/05 Agreement with Deutsche Bank AG dated $ 103,239 06/18/02 to pay 2.35% per year times the notional amount. The fund receives payment only upon a default event in the Philippines, the notional amount times the difference between the par value and the then-market value of Republic of the Philippines, 8.875% due 04/15/08. 12,000,000 USD 7/15/05 Agreement with BNP Paribas dated 7/10/02 to 759,087 pay 10.00% per year times the notional amount. The fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of Banco Latinoamericano de Exportaciones, S.A., 7.71% due 9/22/05. 7,000,000 USD 8/5/05 Agreement with Deutsche Bank to pay 3.35% per 23,885 year times the notional amount. The fund receives payment only upon a default event in the Philippines, the notional amount times the difference between the par value and the then-market value of Republic of Philippines, 8.875%, 4/15/08. 15,000,000 USD 4/3/06 Agreement Morgan Guaranty Trust Company dated 118,685 3/29/01 to pay 0.25% per year times the notional amount. The fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of any series of Banco Santander Senior Bonds or Loans.
36 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- --------------------------------------------- -------------- 15,000,000 USD 4/6/06 Agreement with Morgan Guaranty Trust Company $ 114,960 dated 04/03/01 to pay 0.26% per year times the notional amount. The Fund receives payment only upon a default event, the notional amount times the difference between and the par value and the then-market value of any series of Banco Santander Senior Bonds or Loans. 30,000,000 USD 4/10/06 Agreement with Morgan Guaranty Trust Company 217,480 dated 4/05/01 to pay 0.275% per year times the notional amount. The fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of any series of Banco Santander Senior Bonds or Loans. 10,000,000 USD 4/10/06 Agreement with Morgan Guaranty Trust Company 76,941 dated 4/04/01 to pay 0.26% per year times the notional amount. The fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of any series of Banco Santander Bonds or Loans. 25,000,000 USD 5/1/06 Agreement with Morgan Guaranty Trust Company 38,689 dated 4/25/01 to pay 0.27% per year times the notional amount. The fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of Banco Bilbao y Vizcaya Senior Bonds or Loans.
37 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- --------------------------------------------- -------------- 15,000,000 USD 6/8/06 Agreement with Morgan Guaranty Trust Company $ (180,885) dated 6/05/01 to receive 2.95% per year times the notional amount. The fund makes payment only upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 8.375% due 1/14/11. 20,000,000 USD 8/9/06 Agreement with JPMorgan Chase Bank dated 65,001 8/6/02 to pay 0.420% per year times the notional amount. The fund makes a payment only upon a default event, the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya Argentaria SA, 5% due 6/24/08. 10,000,000 USD 2/18/07 Agreement with Morgan Guaranty Trust Company 288,691 dated 2/13/02 to pay 4.6% per year times the notional amount. The Fund receives payment only upon a default event in Russia, the notional amount times the difference between the par value and the then-market value of Russia Eurobond, 5.0% due 3/31/30. 10,000,000 USD 2/26/07 Agreement Salomon Brothers International 30,700 Limited dated 2/21/02 to pay 2.15% per year times the notional amount. The fund receives payment only upon a default event in South Africa, the notional amount times the difference between the par value and the then-market value of the Republic of the Philippines, 9.125% due 05/19/09.
38 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- --------------------------------------------- -------------- 10,000,000 USD 6/27/07 Agreement with JPMorgan Chase Bank dated $ 35,127 06/24/02 to pay 0.330% per quarter times the notional amount. The fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya of Spain. 10,000,000 USD 7/2/07 Agreement with Citibank N.A. dated 6/27/02 to 89,100 pay 0.640% per year times the notional amount. The fund receives payment only upon a default event in China, the notional amount times the difference between the par value and the then-market value of the Bank of China. 3,000,000 USD 7/2/07 Agreement with Deutsche Bank AG dated 6/27/02 26,694 to pay 0.640% per year times the notional amount. The fund receives payment only upon a default event in China, the notional amount times the difference between the par value and the then-market value of the Bank of China, 8.25% due 03/15/14. 5,000,000 USD 7/30/12 Agreement with JPMorgan Chase Bank dated (45,120) 7/25/02 to receive 3.05% per year times the notional amount. The fund receives payment only upon a default event in Chile, the notional amount times the difference between the par value and the then-market value of Republic of Chile, 7.125%, due 1/11/12.
39 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- --------------------------------------------- -------------- 10,000,000 USD 8/12/12 Agreement with JPMorgan Chase Bank dated $ 300,892 8/7/02 to receive 4.42% per year times the notional amount. The fund only pays upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 7.5%, due 1/14/12. INTEREST RATE SWAPS 1,000,000,000 HKD 4/03/03 Agreement with Morgan Guaranty Trust Company (3,978,738) dated 3/30/00 to pay the notional amount multiplied by 7.12% and to receive the notional amount multiplied by the 3 month Floating Rate Hong Kong HIBOR adjusted by a specified spread. 129,500,000 USD 4/03/03 Agreement with Morgan Guaranty Trust Company 4,087,031 dated 3/30/00 to receive the notional amount multiplied by 7.23% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 1,000,000,000 HKD 8/09/04 Agreement with Morgan Guaranty Trust Company (5,699,750) dated 8/03/01 to pay the notional amount multiplied by 4.75% and to receive the notional amount multiplied by 3 month Floating Rate Hong Kong HIBOR adjusted by a specified spread. 130,600,000 USD 8/09/04 Agreement with Morgan Guaranty Trust Company 5,906,675 dated 8/03/01 to receive the notional amount multiplied by 4.835% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread.
40 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- --------------------------------------------- -------------- 15,000,000 EUR 2/22/07 Agreement with UBS AG dated 2/18/00 to pay $ (950,516) the notional amount multiplied by 5.76% and to receive the notional amount multiplied by the 6 month EURIBOR. 26,000,000 USD 3/31/10 Agreement with UBS AG dated 3/29/00 to 5,286,037 receive the notional amount multiplied by 7.406% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 35,000,000 USD 9/13/10 Agreement with Bear Stearns Bank Plc dated 6,300,571 9/08/00 to receive the notional amount multiplied by 7.01% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 20,000,000 USD 1/24/11 Agreement with UBS AG dated 1/22/01 to 2,388,017 receive the notional amount multiplied by 6.12% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 30,000,000 USD 1/25/11 Agreement with Bear Stearns Bank Plc dated 3,760,465 1/23/01 to receive the notional amount multiplied by 6.201% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. ----------- $23,074,826 ===========
See Notes to the Schedule of Investments for definitions of currency abbreviations. 41 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2002 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 88.1% ARGENTINA -- 0.8% 41,500 Perez Companc SA ADR* 207,500 16,700 Siderca SAIC ADR 313,960 ------------ 521,460 ------------ BRAZIL -- 2.8% 174,443 Cia Saneamento Basico SAO PA 4,893 42,338,000 Companhia Siderurgica Nacional SA 565,158 45,443,000 Electrobras 334,008 26,500 Petroleo Brasileiro SA (Petrobras) ADR 422,675 40,023 Souza Cruz (Registered) 195,234 11,049,000 Tele Norte Leste Participacoes SA 74,109 15,000 Vale Do Rio Doce 370,798 ------------ 1,966,875 ------------ CHINA -- 6.0% 2,214,000 Brilliance China Automotive Holdings Ltd 309,394 280,000 China Everbright Ltd 106,796 278,000 China Mobile Ltd* 769,851 9,600 China Mobile Ltd ADR* 132,960 546,000 China Petroleum & Chemical Corp 83,301 88,000 China Resources Enterprise 100,411 294,000 China Southern Airlines Co Ltd 88,578 462,000 China Unicom* 340,579 34,000 China Unicom ADR* 249,900 262,000 CNOOC Ltd 364,451 7,500 CNOOC Ltd ADR 212,250 338,000 Cosco Pacific Ltd 231,835 526,000 Founder Holdings Ltd* 53,275 3,194,000 Guangdong Investments Ltd* 294,833 3,600 Huaneng Power International Inc ADR 108,000 88,000 Huaneng Power International Inc Class H 66,565 1,460,000 PetroChina Co Ltd 297,617 368,000 Shandong International Power Development Co Ltd 83,508 102,000 Tsingtao Brewing Co Ltd 44,789 190,000 Yanzhou Coal Mining Co Ltd 66,379 212,000 Zhejiang Southeast Electric Power Co-B 153,064 ------------ 4,158,336 ------------
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CZECH REPUBLIC -- 3.3% 217,979 Ceske Energeticke Zavody AS 672,549 15,380 Ceske Radiokomunikace 129,192 33,355 Ceski Telecom AS* 300,118 14,925 Komercni Banka AS 800,439 767 Philip Morris CR AS 281,253 95,500 Unipetrol* 97,190 ------------ 2,280,741 ------------ EGYPT -- 1.0% 71,400 AIC* 28,514 43,500 Al Ahram Beverage Co GDR* 328,425 23,500 Export Development Bank of Egypt 96,435 25,600 MobiNil-Egyptian Mobile Services Co 158,933 32,500 Orascom Telecom Holding SAE* 64,895 ------------ 677,202 ------------ HUNGARY -- 1.4% 800 Delmagyarorszagi Aramszol 30,959 1,500 Gedeon Richter Rt 80,830 19,400 Matav Rt ADR 324,562 6,900 MOL Magyar Olaj es Gazipari Rt (New Shares) 146,905 34,200 OTP Bank Rt 302,479 18,900 Pannonplast Rt 114,213 ------------ 999,948 ------------ INDIA -- 1.5% 2,200 Indian Petrochemicals GDR 11,440 1,300 Infosys Technologies ADR 73,580 4,300 ITC Ltd GDR 62,995 18,100 Mahanagar Telephone Nigam* 95,025 42,300 Mahindra & Mahindra Ltd GDR* 76,140 3,700 Ranbaxy Laboratories Ltd GDR 72,150 20,500 Reliance Industries Ltd GDR 144A* 215,250 11,000 Satyam Computer Services Ltd ADR* 114,400 88,000 Silverline Technologies Ltd ADR* 83,600 12,900 State Bank of India Ltd GDR 150,285 23,500 Tata Engineering & Locomotive GDR* 67,210 ------------ 1,022,075 ------------
See accompanying notes to the financial statements. 2 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ INDONESIA -- 6.1% 568,000 Astra International Tbk* 205,263 4,432,700 Bank Central Asia Tbk 1,126,321 147,576,000 Bank Internasional Indonesia (Entitlement Letters)(a)+* -- 13,434,000 Bentoel International Investama Tbk PT* 197,224 1,000,000 Gajah Tunggal Tbk* 25,409 1,621,500 HM Sampoerna Tbk 709,578 632,000 Indofood Sukses Makmur Tbk 66,019 652,000 Jakarta International Hotel & Development Tbk PT* 49,701 8,115,000 Lippo Bank Tbk PT* 50,404 10,100 PT Indosat (Persero) Tbk Class B ADR 103,525 2,103,000 PT Matahari Putra Prima Tbk 130,621 496,000 Sinar Mas Agro Resources and Technology Tbk* 47,612 3,644,112 Telekomunikasi Tbk 1,491,802 ------------ 4,203,479 ------------ ISRAEL -- 0.0% 8,789 Bank Hapoalim Ltd* 14,119 9,211 Bank Leumi Le-Israel* 11,794 5,400 Bezeq* 6,011 1 IDB Development Corp Ltd* 3 5,049 Israel Discount Bank Class A* 3,154 ------------ 35,081 ------------ MALAYSIA -- 1.4% 168,000 Arab-Malaysian Corp Berhad* 53,053 32,900 Edaran Otomobil Berhad 111,687 41,400 Hong Leong Credit Berhad 50,334 25,000 Malayan Banking Berhad 57,566 203,000 Malaysia Mining Corp 123,937 77,000 Perusahaan Otomobil Nasional 200,605 562,000 Renong Berhad* 124,971 36,000 Resorts World Berhad 98,526 264,000 Tan Chong International Ltd 35,539 33,000 Tenaga Nasional Berhad 85,539 ------------ 941,757 ------------ PHILIPPINES -- 3.4% 571,140 Aboitiz Equity Ventures Inc* 25,117 9,444,900 Ayala Land Inc 1,001,966
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PHILIPPINES -- CONTINUED 192,000 Bank of the Philippine Islands 161,096 2,612,200 Filinvest Land Inc* 61,469 354,000 First Philippine Holdings* 88,765 14,612 Globe Telecom Inc* 136,692 362,738 La Tondena Distillers Inc 216,894 58,200 Philippine Long Distance Telephone* 319,934 3,280,000 SM Prime Holdings 360,613 ------------ 2,372,546 ------------ POLAND -- 3.5% 22,400 Bank Pekao SA* 477,287 18,600 Bank Rozwoju Eksportu SA 400,368 113,700 Elektrim SA (Bearer)* 72,322 96,600 KGHM Polska Miedz SA* 256,996 20,100 Orbis SA 87,989 68,700 Polski Koncern Naftowy Orlen 284,955 3,200 Prokom Software SA* 86,681 234,200 Telekomunikacja Polska SA* 733,521 ------------ 2,400,119 ------------ RUSSIA -- 9.7% 61,700 AO Tatneft ADR 824,312 3,800 Golden Telecom Inc* 51,300 22,300 JSC Mining & Smelting Co ADR* 412,550 12,675 Lukoil Holding Co ADR 808,031 44,500 Mosenergo ADR 111,250 800 Sberbank RF 121,600 76,750 Surgutneftegaz ADR 1,323,938 12,700 Vimpel-Communications ADR* 299,085 21,270 Yukos Corp ADR 2,743,830 ------------ 6,695,896 ------------ SOUTH AFRICA -- 0.8% 38,000 Gencor Ltd 159,064 5,000 Harmony Gold Mining Co Ltd 70,637 82,000 Pick'n Pay Stores Ltd 99,072 258,000 Sanlam Ltd 201,756 ------------ 530,529 ------------
See accompanying notes to the financial statements. 4 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SOUTH KOREA -- 19.1% 2,800 Cheil Industries Inc 37,156 142,600 Chohung Bank* 671,505 98,600 Daegu Bank* 499,583 19,000 Daegu Department Store Co 302,716 14,300 Hana Bank 222,480 16,600 Hanjin Heavy Industry 41,433 26,200 Hanwha Corp* 60,598 364,800 Hynix Semiconductor* 162,376 3,400 Hyosung Corp 37,056 1,900 Hyundai Fire & Marine Insurance Co 57,698 6,000 Hyundai Mobis 142,518 5,600 KIA Motors Corp* 46,591 11,848 Kookmin Bank 553,981 29,000 Korea Electric Power Corp 507,883 28,000 Korea Electric Power Corp ADR 280,000 83,900 Korea Exchange Bank* 419,517 2,950 Korea Reinsurance 75,839 16,200 Korean Air Lines* 211,606 29,000 KT Freetel* 832,397 41,700 KTBNetwork 117,958 79,500 Kumho Industrial Co Ltd* 171,309 16,100 LG Chemicals Ltd 582,678 33,300 LG Electronics Inc* 1,243,954 20,000 LG Engineering & Construction Ltd 227,963 11,800 LG Household & Health Care Ltd 402,513 39,800 LG Investment & Securities Co Ltd 569,541 17,800 LG Telecom Co Ltd* 92,262 1,200 Pacific Chemical Corp 127,792 9,490 Pohang Iron & Steel 852,714 13,700 Pusan Bank* 69,757 10,124 Samsung Electronics 2,788,006 1,614 Samsung Electronics GDS 144A (Non Voting) 110,559 13,936 SK Corp 191,309 15,400 SK Global* 142,860 65,200 Ssangyong Cement* 107,677 33,700 Woongjin.com Co Ltd 140,049 1,084 Yuhan Corp 47,889 ------------ 13,149,723 ------------
See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TAIWAN -- 13.5% 351,680 Acer Communications & Multimedia Inc 595,633 219,750 Asustek Computer Inc 529,402 218,000 AU Optronics Corp* 168,696 368,000 Cathay Financial Holding Co Ltd 444,888 328,000 Cheng Loong Corp* 72,793 1,894,000 China Development Financial Holding Corp* 1,095,085 1,190,000 Chinatrust Financial Holding Co* 927,814 238,000 Federal Corp* 157,763 360,950 First Bank* 217,129 233,580 Hsinchu International Bank* 70,937 1,580,700 Inventec Co Ltd 1,144,732 301,000 Lite-On Technology Corp 474,639 3,982,400 Macronix International* 1,523,418 496,480 Nan Ya Plastic Corp 455,234 165,000 Prodisc Technology Inc* 92,028 73,000 Ritek Corp 34,747 85,000 Sunplus Technology Co Ltd 158,855 323,000 Taiwan Cement Corp* 96,207 274,000 Taiwan Pulp & Paper Corp* 35,605 43,636 Taiwan Semiconductor* 63,584 302,000 Taiwan Synthetic Rubber Corp* 63,495 520,950 Tatung Co* 123,221 28,200 Via Technologies Inc 48,173 458,000 Walsin Lihwa Corp* 108,331 1,200,960 Yageo Corp* 424,343 326,000 Yieh Loong Co Ltd* 55,214 184,000 Yulon Motor Co 138,625 ------------ 9,320,591 ------------ THAILAND -- 10.5% 265,500 Adkinson Securities Ltd (Foreign Registered)* 78,033 422,000 Advanced Info Service Pcl (Foreign Registered) 290,069 260,000 BIG C Supercenter Pcl NVDR* 125,717 124,300 Electricity Generating Pcl NVDR 109,746 426,000 Italian-Thai Development Pcl (Foreign Registered)* 310,488 164,000 Italian-Thai Development Pcl NVDR* 119,531 990,000 Jasmine International Pcl (Foreign Registered)* 61,479 122,200 Land & House Pcl (Foreign Registered) 207,094 270,400 Land & House Pcl NVDR 432,614 130,000 Loxley Co Ltd (Foreign Registered)* 31,121
6 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ THAILAND -- CONTINUED 1,950,000 National Finance Pcl NVDR* 637,829 386,240 PTT Exploration & Production Pcl (Foreign Registered)* 1,116,883 498,000 Quality House Co Ltd NVDR* 96,791 145,000 Shin Satellite (Foreign Registered)* 69,424 9,000 Siam Cement Pcl (Foreign Registered) 220,574 33,600 Siam Cement Pcl NVDR 723,129 1,090,250 Siam Commercial Bank Pcl (Foreign Registered)* 678,338 2,249,300 Siam Industrial Credit Pcl NVDR* 511,810 61,000 Siam Panich Leasing Ltd (Foreign Registered) 50,966 238,000 Thai Airways International (Foreign Registered)* 208,722 710,000 Thai Farmers Bank NVDR* 429,130 1,689,000 Thai Petrochemical (Foreign Registered)* 153,727 95,200 Thai Union Frozen Products Pcl (Foreign Registered)(a) 37,660 250,000 Thai Union Frozen Products Pcl NVDR 98,365 224,000 Tipco Asphalt Pcl (Foreign Registered)* 164,589 236,000 Tisco Finance Pcl (Foreign Registered)* 135,369 270,000 TPI Polene Co (Foreign Registered)* 96,634 304,000 Vinythai Pcl (Foreign Registered)* 61,607 ------------ 7,257,439 ------------ TURKEY -- 3.3% 215,808,235 Akbank TAS* 621,507 75,413,280 Dogan Yayin Holding* 112,057 19,871,000 Eregli Demir ve Celik Fabrikalari TAS* 231,341 101,800,715 Hurriyet Gazeteci* 249,512 5,500,000 KOC Holding AS* 54,764 3,741,000 Petrol Ofisi* 57,307 42,855,999 Sabanci Holding* 102,413 97,625,501 Trakya Cam Sanayii 284,143 25,608,000 Turkcell Iletisim Hizmet AS* 134,944 176,978,000 Turkiye Garanti Bankasi* 178,930 310,584,000 Yapi VE Kredi Bankasi* 233,128 ------------ 2,260,046 ------------ TOTAL COMMON STOCKS (COST $62,839,146) 60,793,843 ------------ PREFERRED STOCKS -- 6.5% BRAZIL -- 3.0% 49,000 Aracruz Celulose SA 3.40% 84,789
See accompanying notes to the financial statements. 7 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ BRAZIL -- CONTINUED 20,970,098 Banco Bradesco SA 1.23% 70,016 10,763,198 Cia Energetica de Minas Gerais 2.88% 98,976 15,300 Companhia Vale do Rio Doce 347,956 22,622,000 Electrobras Class B (Registered) 162,544 112,723,000 Embratel Participacoes SA* 107,001 32,918,000 Gerdau SA 356,413 524,754 Investimentos Itau SA 309,594 1,808,000 Itaubanco SA (Registered) 87,599 15,070,000 Petrobras Distribuidora SA 1.62% 203,649 10,800 Petroleo Brasileiro SA (Petrobras) 3.01% 156,625 124,395,000 Tele Nordeste Celular Participacoes SA 1.88% 104,961 3,000 Usinas Siderrurgicas de Minas Gerais SA 4.57% 5,686 ------------ 2,095,809 ------------ RUSSIA -- 0.1% 822,000 Unified Energy Systems 5.68% 64,938 ------------ SOUTH KOREA -- 3.4% 33,000 Dongbu Steel 11.70% 68,638 15,300 Samsung Electronics (Non Voting) 2,100,337 3,000 Samsung SDI Co Ltd 3.63% 143,018 ------------ 2,311,993 ------------ TOTAL PREFERRED STOCKS (COST $4,692,572) 4,472,740 ------------ MUTUAL FUNDS -- 1.7% TAIWAN -- 0.2% 34,900 R.O.C. Taiwan Fund* 134,016 ------------ UNITED STATES -- 1.5% 35,363 GMO Alpha LIBOR Fund(b) 907,420 18,288 Morgan Stanley Emerging Markets Fund* 160,020 ------------ 1,067,440 ------------ TOTAL MUTUAL FUNDS (COST $1,431,943) 1,201,456 ------------
See accompanying notes to the financial statements. 8 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ RIGHTS AND WARRANTS -- 0.4% THAILAND -- 0.4% 132,750 Adkinson Sec - Warrants Exp. 6/14/03* 7,552 132,750 Adkinson Sec - Warrants Exp. 6/14/05* 7,551 266,500 Land & House Warrants, Expires 9/02/08 (Foreign Registered)* 257,404 116,526 Telecomasia Corp Pcl Warrants, Expires 12/31/49(a)* -- ------------ 272,507 ------------ TOTAL RIGHTS AND WARRANTS (COST $28,025) 272,507 ------------ DEBT OBLIGATION -- 0.2% UNITED STATES -- 0.2% $ 140,000 U.S. Treasury Inflation Indexed Bond, 3.50%, due 01/15/11(b) 156,891 ------------ TOTAL DEBT OBLIGATION (COST $147,847) 156,891 ------------ CONVERTIBLE SECURITIES -- 0.2% MALAYSIA -- 0.2% $ 149,850 Berjaya Sports Toto BHD, 0.08%, due 06/25/12 125,401 ------------ TOTAL CONVERTIBLE SECURITIES (COST $121,712) 125,401 ------------ SHORT-TERM INVESTMENTS -- 2.5% CASH EQUIVALENTS -- 2.5% $ 1,700,000 Societe Generale GC Time Deposit, 1.81%, due 9/03/02 1,700,000 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $1,700,000) 1,700,000 ------------ TOTAL INVESTMENTS -- 99.6% (Cost $70,961,245) 68,722,838 Other Assets and Liabilities (net) -- 0.4% 280,281 ------------ TOTAL NET ASSETS -- 100.0% $ 69,003,119 ============
See accompanying notes to the financial statements. 9 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. GDR - Global Depository Receipt GDS - Global Depository Share NVDR - Non-Voting Depositary Receipt
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). + Direct placement securities are restricted as to resale. They have been valued at fair value by the Trustees after consideration of restricitions as to resale, financial condition and prospects of the issuer, general market conditions, and pertinent information in accordance with the Fund's By-Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to those restricted securities. Additional information on each restricted security is as follows:
MARKET VALUE AS A MARKET PERCENTAGE VALUE AS OF ACQUISITION ACQUISITION OF FUND'S AUGUST 31, ISSUER, DESCRIPTION DATE COST NET ASSETS 2002 ------------------- ----------- ----------- ---------- ----------- Bank Internasional Indonesia (Entitlement Letters) 3/17/99 $0 0.00% $0
(b) All or a portion of this security is held as collateral for open swap contracts (Note 6). 10 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2002 (UNAUDITED) At August 31, 2002, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 23.6% Information Technology 16.6 Energy 14.1 Materials 12.4 Telecommunication Services 11.2 Consumer Discretionary 7.7 Utilities 4.4 Industrials 4.1 Consumer Staples 3.9 Health Care 0.3 Telecommunications 0.1 Miscellaneous 1.6 ----- 100.0% =====
See accompanying notes to the financial statements. 11 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $70,961,245) (Note 1) $68,722,838 Cash 10,436 Foreign currency, at value (cost $135,036) (Note 1) 133,819 Receivable for investments sold 78,191 Dividends and interest receivable 256,012 Foreign taxes receivable 335 Receivable for expenses reimbursed by Manager (Note 2) 22,010 ----------- Total assets 69,223,641 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 37,167 Shareholder service fee 8,576 12b-1 fee -- Class M 2 Administration fee -- Class M 2 Net payable for open swap contracts (Notes 1 and 6) 95,963 Accrued expenses 78,812 ----------- Total liabilities 220,522 ----------- NET ASSETS $69,003,119 =========== NET ASSETS CONSIST OF: Paid-in capital $76,708,814 Accumulated undistributed net investment income 202,220 Accumulated net realized loss (5,561,758) Net unrealized depreciation (2,346,157) ----------- $69,003,119 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $68,986,012 =========== Class M shares $ 17,107 =========== SHARES OUTSTANDING: Class III 7,758,553 =========== Class M 1,926 =========== NET ASSET VALUE PER SHARE: Class III $ 8.89 =========== Class M $ 8.88 ===========
12 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $127,229) $ 840,209 Interest 23,189 Dividends from investment company shares 6,589 ----------- Total income 869,987 ----------- EXPENSES: Management fee (Note 2) 241,551 Custodian fees 210,956 Audit fees 23,184 Transfer agent fees 14,352 Legal fees 3,705 Registration fees 1,012 Trustees fees (Note 2) 895 Miscellaneous 3,036 Fees reimbursed by Manager (Note 2) (83,937) ----------- 414,754 Shareholder service fee (Note 2) - Class III 55,741 12B-1 fee (Note 2) - Class M 2 Administration fee (Note 2) - Class M 2 ----------- Net expenses 470,499 ----------- Net investment income 399,488 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 6,724,957 Realized gains distributions from investment company shares 3,425 Closed swap contracts (60,384) Foreign currency, forward contracts and foreign currency related transactions (22,215) ----------- Net realized gain 6,645,783 ----------- Change in net unrealized appreciation (depreciation) on: Investments (10,501,589) Open swap contracts (131,451) Foreign currency, forward contracts and foreign currency related transactions (15,525) ----------- Net unrealized loss (10,648,565) ----------- Net realized and unrealized loss (4,002,782) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(3,603,294) ===========
See accompanying notes to the financial statements. 13 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 31, 2002 YEAR ENDED (UNAUDITED) FEBRUARY 28, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 399,488 $ 1,029,438 Net realized gain (loss) 6,645,783 (6,820,591) Change in net unrealized appreciation (depreciation) (10,648,565) 10,978,483 ------------ ----------- Net increase (decrease) in net assets from operations (3,603,294) 5,187,330 ------------ ----------- Distributions to shareholders from: Net investment income Class III (1,010,952) (414,875) ------------ ----------- Total distributions from net investment income (1,010,952) (414,875) ------------ ----------- Net share transactions: (Note 5) Class III 1,195,442 15,393,038 Class M 17,231 -- ------------ ----------- Increase in net assets resulting from net share transactions 1,212,673 15,393,038 ------------ ----------- Total increase (decrease) in net assets (3,401,573) 20,165,493 NET ASSETS: Beginning of period 72,404,692 52,239,199 ------------ ----------- End of period (including accumulated undistributed net investment income of $202,220 and $813,684, respectively) $ 69,003,119 $72,404,692 ============ ===========
14 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2002 ------------------------------------------------------------- (UNAUDITED) 2002 2001 2000 1999 1998+ ---------------- ----------- ----------- ----------- ----------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.65 $ 8.81 $ 11.41 $ 5.74 $ 8.61 $ 10.00 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income 0.07 0.14 0.08 0.05 0.23 0.03* Net realized and unrealized gain (loss) (0.68) 0.77 (2.48) 5.63 (2.94) (1.42) ------- ------- ------- ------- ------- ------- Total from investment operations (0.61) 0.91 (2.40) 5.68 (2.71) (1.39) ------- ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.15) (0.07) -- -- (0.16) -- From net realized gains -- -- (0.20) (0.01) -- -- ------- ------- ------- ------- ------- ------- Total distributions (0.15) (0.07) (0.20) (0.01) (0.16) -- ------- ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.89 $ 9.65 $ 8.81 $ 11.41 $ 5.74 $ 8.61 ======= ======= ======= ======= ======= ======= TOTAL RETURN(a) (6.47)%*** 10.49% (21.27)% 98.96% (31.60)% (13.90)%*** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $68,986 $72,405 $52,239 $65,191 $31,718 $39,698 Net expenses to average daily net assets 1.27%**(b) 1.40% 1.40% 1.28% 1.27% 1.65%**(b) Net investment income to average daily net assets 1.07%** 2.12% 0.91% 0.54% 3.65% 0.78%** Portfolio turnover rate 65% 109% 98% 157% 158% 56% Fees and expenses reimbursed by the Manager to average daily net assets: 0.23% 0.17% 0.15% 0.17% 0.34% 0.66% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.00(d) $ 0.04 $ 0.02 -- -- --
+ Period from August 29, 1997 (commencement of operations) to February 28, 1998. * Computed using average shares outstanding throughout the period. ** Annualized. *** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursd during the periods shown. (b) Include stamp duties and transfer taxes which approximate .16% of average daily net assets. (c) Effective March 1, 2000 the fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (d) Purchase and redemption fees were less than $0.01 per share. See accompanying notes to the financial statements. 15 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JULY 9, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 2002 (UNAUDITED) ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.85 ----------------- Income from investment operations: Net investment income 0.00(b) Net realized and unrealized loss (0.97) ----------------- Total from investment operations (0.97) ----------------- NET ASSET VALUE, END OF PERIOD $ 8.88 ================= TOTAL RETURN(a) (9.85)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 17 Net expenses to average daily net assets 1.56%* Net investment income to average daily net assets 0.11%* Portfolio turnover rate 65% Fees and expenses reimbursed by the Manager to average daily net assets: 0.23%
* Annualized. ** Not annualized. (a) The total returns would have been lower had certain expenses not been reimbursd during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Net investment income earned was less than $.01 per share. 16 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Countries Fund (the "Fund") (formerly GMO Evolving Countries Fund) is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the securities markets of developing countries of Asia, Latin America, the Middle East, Africa and Europe ("Emerging Markets"). The Fund's benchmark is the IFC Investable Composite. At August 31, 2002 1.3% of the Fund is invested in GMO Alpha LIBOR Fund, a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund are not publicly available for direct purchase. The financial statements of the GMO Alpha Libor Fund should be read in conjunction with the Fund's financial statements. Throughout the six months ended August 31, 2002, the Fund had one class of shares outstanding: Class III. Effective July 9, 2002, the Fund also had Class M shares outstanding. Class III shares bear a shareholder service fee while Class M shares bear an administrative fee and a 12-b1 fee. (See Note 2) The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. 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 and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of 17 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of August 31, 2002. 18 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2002, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premuims paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2002 there were no open purchased option contracts. FUTURES CONTRACTS The Fund may purchase and sell futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market 19 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of August 31, 2002, there were no outstanding futures contracts. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may be unfavorable changes in the price of the security or index underlying these transactions. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreements. The Fund earns interest on cash set aside as collateral. See Note 6 for a summary of the open swap agreement as of August 31, 2002. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax 20 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. At February 28, 2002, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $1,253,194 and $7,353,298 expiring in 2009 and 2010, respectively. The Fund has elected to defer to March 1, 2002 post-October capital losses of $2,900,513. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other 21 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES Effective April 1, 2002 the Fund ceased charging a purchase premium or redemption fee in connection with the purchase or sale of Fund shares. Prior to April 1, 2002, the premium on cash purchases of Fund shares was 1.20% of the amount invested. In the case of cash redemptions, the fee was .40% of the amount redeemed. All purchase premiums and redemption fees were paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2002 and year ended February 28, 2002 and the Fund received $0 and $230,775 in purchase premiums and $1,000 and $15,444 in redemption fees, respectively. INVESTMENT RISK Investments in securities of issuers in emerging countries present certain risks that are not inherent in many other investments. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .65% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund pays GMO an administrative fee monthly at an annual rate of .20% of average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee at the annual rate of 22 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- .25% of average daily Class M net assets for any activities or expenses intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. The Manager has contractually agreed to reimburse the Fund with respect to certain Fund expenses through at least June 30, 2003 to the extent the Fund's total annual operating expenses (excluding expenses indirectly incurred by investment in other Funds of the Trust, fees and expenses of the independent trustees of the Trust, brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes ("fund expenses")) exceed 1.25% and 1.55% of the Fund's average daily net assets for class III and class M respectively. For the six months ended August 31, 2002, indirect operating expenses incurred indirectly through the investment in the GMO Alpha Libor fund, and indirect investment expenses incurred by the Fund rounded to less than 0.001% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the six months ended August 31, 2002, was $895. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2002, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ 147,847 $ -- Investments (non-U.S. Government securities) 47,473,387 45,854,933
At August 31, 2002, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $70,961,245 $7,179,163 $(9,417,570) $(2,238,407)
23 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At August 31, 2002, 43.9% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2002 Year Ended (Unaudited) February 28, 2002 ------------------------- ----------------------- Shares Amount Shares Amount Class III: ----------- ------------ ---------- ----------- Shares sold 1,874,233 $ 18,476,769 2,036,289 $18,983,825 Shares issued to shareholders in reinvestment of distributions 99,670 970,789 47,640 393,508 Shares repurchased (1,715,835) (18,252,116) (514,676) (3,984,295) ----------- ------------ ---------- ----------- Net increase 258,068 $ 1,195,442 1,569,253 $15,393,038 =========== ============ ========== ===========
Period from July 10, 2002 (commencement of operations) through August 31, 2002 (Unaudited) --------------------------- Shares Amount Class M: ------------ ------------- Shares sold 2,273 $20,382 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased (347) (3,151) ----------- ------------ Net increase 1,926 $17,231 =========== ============
24 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at August 31, 2002 is as follows: TOTAL RETURN SWAP AGREEMENT
Expiration Net Unrealized Notional Amount Date Description Depreciation --------------- ---------- -------------------------------------------------- -------------- $1,059,590 10/02/02 Agreement with Credit Agricole Indosuez (W.I. $(95,963) Carr) dated 8/17/01 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. -------- $(95,963) ========
25 -----END PRIVACY-ENHANCED MESSAGE-----