As filed with the Securities and Exchange Commission
on May 31, 1995
File No. 33-43089
File No. 811-6431
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M N-1A
Registration Statement Under the Securities Act of 1933
Post-Effective Amendment No. 11
and
Registration Statement Under the Investment Company Act of 1940
Amendment No. 13
____________________
SMITH BREEDEN SERIES FUND
(Exact Name of Registrant as Specified in Charter)
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514
(Address of Principal Executive Office)
(919) 967-7221
(Registrant's Telephone Number, Including Area Code)
MICHAEL J. GIARLA
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514
(Name and Address of Agent for Service)
_______________
This filing shall become effective on August 1, 1995 pursuant to
paragraph (a)(1) of Rule 485 under the Securities Act of 1933.
The Registrant has previously registered an indefinite number of
shares of beneficial interest pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. The Rule 24f-2 notice for
the Registrant's most recent fiscal year was filed on May 23,
1995.
_______________
Please Send Copy of Communications to:
MARIANTHE S. MEWKILL
Smith Breeden Associates, Inc.
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
(919)-967-7221
SMITH BREEDEN SERIES FUND
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
(THE "SHORT SERIES")
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT SERIES
(THE "INTERMEDIATE SERIES")
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
N-1A
Item No. Item Location in the
Registration Statement
by Prospectus Heading
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial
Information Financial Highlights
4. General Description of
Registrant "The Short and Intermediate
Series"; "General Information"
5. Management of the Fund "Management of the Fund"
5a. Management's Discussion
of Fund's Performance Not Applicable
6. Capital Stock and Other
Securities "Dividends, Distributions and
Taxes"; "General Information"
7. Purchase of Securities
Being Offered "Purchase and Redemption of
Shares"; "Valuation of Fund
Shares"
8. Redemption or Repurchase "Purchase and Redemption
of Shares"
9. Pending Legal Proceedings Not Applicable
Part B: Information Required in
Statement of Additional Information
N-1A
Item No. Item Location in the
Registration Statement
by Prospectus Heading
10. Cover Page Cover Page
11. Table of Contents "Contents"
12. General Information and
History See Part A Item 4.
13. Investment Objective and
Policies "Miscellaneous Investment
Practices and Risk
Considerations"
14. Management of the
Registrant "Trustees and Officers"
15. Control Persons and
Principal Holders of
Securities "Trustees and Officers"
16. Investment Advisory and
Other Services "Investment Advisory and
Other Services"
17. Brokerage Allocation "Policies Regarding
Brokers Used in Portfolio
Transactions"
18. Capital Stock and Other
Securities "Additional Information
Regarding Purchases and
Redemptions of Fund Shares"
19. Purchase, Redemption and
Pricing of Securities
Being Offered "Additional Information
Regarding Purchases and
Redemptions of Fund Shares"
20. Tax Status "Additional Information
Regarding Taxation"
21. Underwriters "Additional Information
Regarding Purchases and
Redemptions of Fund Shares"
22. Calculation of
Performance Data "Standard Performance
Measures"
23. Financial Statements "Financial Statements"
SMITH BREEDEN SERIES FUND
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
SMITH BREEDEN INTERMEDIATE DURATION U.S.
GOVERNMENT SERIES
PROSPECTUS
August 1, 1995
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514-2310
(919) 967-7221
Smith Breeden Series Fund (the "Fund") is a no-load, open-end,
diversified management investment company registered under the
Investment Company Act of 1940 (the "Investment Company Act") whose
shares are offered in two separate series- the Smith Breeden Short Duration
U.S. Government Series and the Smith Breeden Intermediate Duration U.S.
Government Series. Each series generally operates as a separate fund with
its own investment objectives and policies to meet its specific investment
goals.
The Smith Breeden Short Duration U.S. Government Series,
^(the "Short Series") seeks a high level of current income, consistent with
low volatility of net asset value. The Short Series seeks to match the interest
- -rate risk of a portfolio that invests exclusively in six month U.S. Treasury
securities on a constant maturity basis. The dollar-weighted average maturity
of the portfolio securities of the Portfolio may significantly exceed six months
at times. See "Investment Objectives and Policies."
The Smith Breeden Intermediate Duration U.S. Government
Series (the "Intermediate Series") seeks a total return in excess of the total
return of the major market indices for mortgage-backed securities. The
Intermediate Series consistently seeks to achieve a volatility of net asset
value similar to that of a portfolio that invests exclusively in mortgage-backed
securities, as weighted in the major mortgage market indices.
The Short Series and Intermediate Series (the "Short and
Intermediate Series") seek to achieve their objectives through investing at
least 70% of their respective assets in securities which are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
by employing various hedging techniques. The Short and Intermediate
Series may invest a substantial portion of their respective assets in
mortgage-backed securities that directly or indirectly represent a
participation in, or are collateralized by and payable from, mortgage loans
on real property. The Short and Intermediate Series may employ various
hedging techniques to achieve their investment objectives. On occasion,
the Short and Intermediate Series may borrow or purchase additional
securities with borrowed funds, which may result in a leveraged capital
structure. The net asset values of the Short and Intermediate Series will
respond to increases and decreases in the values of their respective
securities.
1
An investment in the Short or Intermediate Series is neither
insured nor guaranteed by the U.S. Government. There can be no
assurance that the Short or Intermediate Series' investment objectives will
be achieved. The investment objectives of the Short and Intermediate
Series are fundamental and cannot be changed without shareholder
approval. Shares of the Short or Intermediate Series may be purchased at
net asset value with no sales charge with a minimum initial investment of
$1000.
This Prospectus is intended to set forth in a clear and concise manner
information about the Series that a prospective investor should know before
investing. Please retain this Prospectus for future reference. A Statement
of Additional Information dated August 1, 1995, provides additional
information about the Series. It has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. Copies are
available without charge from the Fund at 100 Europa Drive, Suite 200,
Chapel Hill, NC 27514, or by calling (800) 221-3138.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2<PAGE>
Contents
Expense Table 4
Financial Highlights - Short Series 6
Financial Highlights - Intermediate Series 7
The Short and Intermediate Series 8
Management of the Fund 28
Purchase and Redemption of Shares 35
Dividends, Distributions and Taxes 42
Valuation of Fund Shares 44
Performance 45
Reports to Depository Institutions 46
Appendix A 47
This Prospectus is not an offering of the securities described herein in any
state in which the offering is unauthorized. No sales representative, dealer
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus.
3 <PAGE>
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding
the various costs and expenses, as a percentage of the average net assets of
each of the Series, that a shareholder will bear directly or indirectly in
connection with an investment in the Short or Intermediate Series.
SHAREHOLDER TRANSACTION EXPENSES
Short Intermediate
Series Series
Maximum Sales Charge Imposed on Purchases None None
(as percentage of offering price)
Maximum Sales Charge Imposed on None None
Reinvested Dividends
(as percentage of offering price)
Deferred Sales Charge None None
Redemption Fees None (1) None (1)
(as percentage of amount redeemed)
ANNUAL SERIES OPERATING EXPENSES
(as percentage of average net assets)
Management Fee .70% .70%
Other Expenses .08% .20%
(after expense limitation)
Total Operating Expenses (2) .78% .90%
(after expense limitation)
_____________________________
1 A transaction cost of $10 may be imposed on redemptions by wire
transfer.
2 The Other Expenses in the table and
Total Series Operating Expenses reflect
undertakings by the Adviser to bear
expenses of each of the Series and/or waive
its fees to the extent necessary to limit Total
Operating Expenses to .78% and .90% for
the Short and Intermediate series,
respectively, through March 31, 1996, and
are estimates which are based upon Total
Series Operating Expenses for the fiscal year
ended March 31, 1995. Absent the expense
limitation, estimated Management Fees
would be .70% for the Short and
Intermediate Series. Absent the expense
limitation, Other Expenses and Total Series
Operating Expenses would be .22% and
.92% for the Short Series and .50% and
1.20% for the Intermediate Series. Actual
Total Operating Expenses both direct and
indirect for the fiscal year ended March 31,
1995 were .78% and .90%,
respectively.
4<PAGE>
The following example illustrates the expenses that apply to a
$1,000 investment in the Short or Intermediate Series over various time periods
assuming (1) a 5% annual rate of return and (2) redemption or no redemption at
the end of each time period. Except as noted in the table above, the Fund
charges no redemption fees.
Short Duration Series
1 Year 3 Years 5 Years 10 Years
$ 8 $ 25 $ 44 $ 96
Intermediate Duration Series
1 Year 3 Years 5 Years 10 Years
$ 9 $ 29 $ 50 $ 112
This example is based on the annual operating expenses shown
above and should not be considered a representation of past or future expenses
or performance. Actual expenses may be greater or less than those shown.
The annual rate of return may be more or less than 5%.
* * * *
The Short and Intermediate Series may be recommended by
registered investment advisors for use by investors. Such advisors customarily
impose advisory fees which would be in addition to any fees and expenses
presented in the above table. According to recent financial articles, such fees
may be as high as 2% of assets per year. Neither the Short nor Intermediate
Series nor the Adviser may exercise any control over such advisory fees and may
not be informed of the level of such fees
informed of the level of related to particular investments.
5<PAGE>
SHORT DURATION SERIES
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
The following selected per share data and ratios cover the
periods from March 31, 1992 through March 31, 1995 and are a part of the Short
Series' financial statements which have been audited by Deloitte & Touche LLP
independent auditors. This data should be read in conjunction with the Short
Series' most recent annual audited financial statements and the report of
Deloitte & Touche LLP which appear in the Series' Statement of Additional
Information.
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1995 1994 1993 (1)
Net Asset Value, Beginning of Period $ 9.90 $10.00 $10.00
Income From Investment Operations
Net Investment Income .628 .432 .552
Net Realized and Unrealized Gains (Loss)
on Investments -- (.070) .002
Total From Investment Operations .628 .362 .554
Less Distributions
Dividends from net investment income (.628) (.462) (.554)
Total Distributions (.628) (.462) (.554)
Net Asset Value, End of Period $9.90 $ 9.90 $10.00
Total Return 6.58% 3.67% 5.67%
______________________________________________
Ratios/Supplemental Data
Net Assets, End of Period $218,431,665 $218,167,491 $48,531,206
Ratio of Direct Expensesto Average Net Assets
Before expense limitation .17% .45% 1.63%
After expense limitation .11% .29% 4.53%
Ratio of Net Income to Average Net Assets
Before expense limitation 6.26% 3.72% 3.17%
After expense limitation 6.33% 4.17% 4.53%
Portfolio turnover rate 47% 112% 3%
Additional performance information is presented in the Short Series'
Annual Report which will be made available without charge upon request.
1 The Short Series commenced operations on March 31, 1992.
6<PAGE>
INTERMEDIATE DURATION SERIES
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
The following selected per share data and ratios cover the periods
from March 31, 1992 through March 31, 1995 and are a part of the Intermediate
Series' financial statements which have been audited by Deloitte & Touche LLP
independent auditors. This data should be read in conjunction with the
Intermediate Series' recent annual audited financial statements and the
report of Deloitte & Touche LLP thereon which appear in the Series'
Statement of Additional Information.
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1995 1994 1993 (1)
Net Asset Value, Beginning of Period $10.01 $10.62 $10.00
Income From Investment Operations
Net Investment Income .664 1.05 .826
Net Realized and Unrealized Gains (Loss)
on Investments (.049) (.601) .621
Total From Investment Operations .615 .449 1.447
Less Distributions
Dividends from net investment income (.664) (1.044) (.826)
Dividends in excess of net
investment income (0.108) -- --
Distributions from net realized gains
on investments -- (.015) --
Distributions in excess of net gains
on investments (0.022) -- --
_________ _________ _________
Total Distributions (0.794) (1.059) (.826)
Net Asset Value, End of Period $9.83 $10.01 $10.62
Total Return 6.10% 4.11% 14.93%
______________________________________________
Ratios/Supplemental Data
Net Assets, End of Period $34,797,495 $6,779,666 $2,923,913
Ratio of Direct Expenses to Average Net Assets
Before expense limitation 1.35% 1.30% 14.80%
After expense limitation .78% .00% .31%
Ratio of Net Income to Average Net Assets
Before expense limitation 5.64% 6.43% (6.31)%
After expense limitation 6.20% 7.74% 8.18%
Portfolio turnover rate 557% 84% 42%
Additional performance information is presented in the Intermediate Series'
Annual Report which will be made available without charge upon request.
1 The Intermediate Series commenced operations on March 31, 1992.
7<PAGE>
THE SHORT AND INTERMEDIATE SERIES
General
The Short and Intermediate Series are series of the Smith
Breeden Series Fund (the "Fund") , an open-end, diversified management
investment company organized as a Massachusetts business trust on
October 3, 1991. The Fund currently issues shares in two series, which are
the Short and Intermediate Series. The Trustees have authority to issue
shares in an unlimited number of series, the assets and liabilities of which
will each be separate and distinct. All shares, when issued, are fully paid,
non assessable, and redeemable and have equal voting, dividend and
liquidation rights.
Shareholders of the separate series will vote together in
electing trustees and in certain other matters. Shareholders in each series
should be aware that the outcome of the election of trustees and of
certain other matters could be controlled by the shareholders of another
series. The shares have noncumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of the
trustees can elect 100% of the trustees if they choose to do so.
The Fund is not required to hold annual meetings and
does not intend to do so; it may, however, hold special shareholder
meetings for such purposes as changing fundamental policies or new
management agreements. A meeting may also be called by a majority of
the Board of Trustees or by shareholders holding at least 10% of the shares
entitled to vote at the meeting. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or
removal of trustees similar to the provisions contained in Section 16(c) of the
1940 Act.
Under Massachusetts law, shareholders of a business
trust may, under certain circumstances, be held personally liable as partners
for its obligations. However, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both (i) any liability was greater than the Short or Intermediate Series'
insurance coverage and (ii) a Series itself was unable to meet its
obligations.
Shares of
each of the Short and Intermediate Series may
be purchased at net asset value. Generally, the
minimum initial investment is $1,000, with a
minimum of $50.00 for subsequent investments.
A minimum initial investment of $1,000 is
required for Fund-sponsored Individual
Retirement Accounts or pursuant to an
Automatic Investment Plan. See "Purchase and
Redemption of Shares."
Smith Breeden Associates, Inc., Overland Park, Kansas
66210, a registered investment adviser, acts as the investment adviser (the
"Adviser") to the Portfolios.
8
Investment Objectives
The Short
and Intermediate Series each have a different
investment objective and investment policies
and are designed to meet different investment
needs. The investment objective and certain
investment policies of each Series, as well as
certain investment restrictions, are fundamental
and may not be changed without a vote of
shareholders of either of the Series. There can
be no assurance that the Short or Intermediate
Series will be successful in achieving their
respective investment objectives. An
investment in the Short or Intermediate Series
does not constitute a complete investment
program.
Short Duration Series
The Short Series' investment objective is to provide
investors with a high level of current income, consistent with a volatility of
net asset value similar to that of a portfolio which invests exclusively in six-
month U.S. Treasury securities on a constant maturity basis. There is no
assurance that the Short Series will be able to maintain a low volatility of net
asset value.
Under normal circumstances the Short Series will seek
to achieve an interest-rate risk or duration similar to that of a six-month U.S.
Treasury security on a constant maturity basis.. The Short Series expects
that, under normal circumstances, the dollar-weighted average life (or period
until the next reset date) of its portfolio securities will be longer than six
months, sometimes significantly. This is because the maturity of a security
measures only the time until final payment is due; it takes no account of the
pattern of a security's cash flows over time, including how cash flow is
affected by prepayments and by changes in interest rates. This method of
computing duration is known as option-adjusted duration. The Adviser may
use the following techniques to lengthen or shorten the option-adjusted
duration: the acquisition of debt obligations at a premium or discount,
mortgage and interest -rate swaps, interest-rate caps and floors and interest-
rate futures and options and options on such futures.
The Adviser believes that by investing in mortgage
securities from a variety of market sectors on a selective basis and adjusting
the overall option-adjusted duration of the portfolio to approximate that of a
six-month Treasury security, the Short Series will achieve a more
consistent and less volatile net asset value than is characteristic of mutual
funds that invest primarily in mortgage securities paying a fixed rate of
interest or exclusively in adjustable rate mortgage securities. The securities
in which the Short Series may invest may not yield as high a level of
income as other securities which can be invested in by other funds.
However, such other securities may be more volatile and may be issued by
issuers which are less credit worthy.
The Short Series seeks to minimize risk of loss as a
result of default on any securities held by the Short Series by investing only
in high credit quality instruments. Like all investors in interest bearing
securities, however, the Short Series is exposed to the risk that the prices
of individual securities held by the Short Series can fluctuate, in some
cases significantly, in response to changes in prevailing interest rates.
9
There can also be no assurance that the Short Series will achieve at all
times its targeted option-adjusted duration, with the risk that the expected
relationship between general interest rate movements and the net asset
value of the Short Series will differ from what would be expected from an
investment in a six-month U.S. Treasury bill. This is because the Short
Series' computation of option-adjusted duration is based on estimated rather
than known factors (which typically affect investments in Mortgage-Backed
Securities), including expected prepayment rates, valuation of homeowners'
prepayment options, and the correlation of changes between the markets
for securities and the hedge instruments owned by the Short Series (as
described in Appendix A).
Intermediate Duration Series
The Intermediate Series' investment objective is to
provide investors with a total return in excess of the total return of major
market indices for mortgage-backed securities. Total return is the change
of value of the investment assuming reinvestment of all distributions. Under
normal circumstances, the Intermediate Series will seek to achieve an
interest-rate risk or duration similar to that of a portfolio that invests
exclusively in mortgage-backed securities, as weighted in the major market
indices There is no assurance that the Intermediate Series will be able to
maintain a total return in excess of the total return of major market indices
for mortgage-backed securities or that it will match the interest-rate risk of
a portfolio investing exclusively in these securities.
The Intermediate Series' duration is a measure of the
price sensitivity of the portfolio, including expected cash flow and mortgage
prepayments under a wide range of interest rate scenarios. The maturity of
a security measures only the time until final payment is due; it takes no
account of the pattern of a security's cash flows over time, including how
cash flow is affected by prepayments and by changes in interest rates. In
computing the duration of the Intermediate Series' portfolio, the Adviser will
estimate the duration of obligations that are subject to prepayment or
redemption by the issuer taking into account the influence of interest rates
on prepayments and coupon flows. As previously stated with respect to the
Short Series, this method of computing duration is known as option-adjusted
duration. The Adviser may use the following techniques to lengthen or
shorten the option-adjusted duration of its portfolio so as to achieve the
Fund's targeted option-adjusted duration: the acquisition of debt obligations
at a premium or discount, mortgage and interest rate swaps, interest rate
caps and floors and interest rate futures and options on such futures.
There can be no assurance that at all times the targeted
option-adjusted duration will be achieved by the Intermediate Series, with
the risk that the expected relationship between general interest rate
movements and the net asset value of the Intermediate Series will differ from
what would be expected from an investment in a portfolio investing in
mortgage-backed securities as weighted by the major mortgage market
indices. This is because the Intermediate Series' computation of option-
adjusted duration is based on estimated rather than known factors (which
typically affect investments in Mortgage-Backed Securities), including
expected prepayment rates, valuation of homeowners' prepayment options,
10
and the correlation of changes between the markets for securities and the
hedge instruments owned by the Fund (as described in Appendix A). The
Intermediate Series expects that, under normal circumstances, the dollar-
weighted average life (or period until the next reset date) of the Intermediate
Series' portfolio securities will be somewhat shorter or longer than that of a
portfolio that invests exclusively in mortgage-backed securities, as weighted
in the major mortgage indices.
When market interest rates decline, the value of a
portfolio invested in intermediate-term fixed rate obligations can be expected
to rise. Conversely, when market interest rates rise, the value of a portfolio
invested in intermediate-term fixed rate obligations can be expected to fall.
The Intermediate Series seeks to minimize risk of loss as a result of default
on any securities held by the Intermediate Series by investing only in high
credit quality instruments. Like all investors in interest bearing securities,
however, the Intermediate Series is exposed to the risk that the prices of
individual securities held by it can fluctuate, in some cases significantly, in
response to changes in prevailing interest rates.
Investment Policies
** 3 The Short and Intermediate Series each seek to
achieve their investment objective by investing, under normal circumstances,
at least 70% of their total assets in fixed-income U.S. Government
securities, including U.S. Treasury Bills, Notes, Bonds and other debt
securities issued by the U.S. Treasury, and obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities, including, but
not limited to Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") securities. With respect to their remaining assets,
the Short and Intermediate Series may invest in fixed rate and adjustable
rate Mortgage-Backed Securities issued by private originators of, or
investors in, mortgage loans issued by private entities that are rated AAA by
Standard & Poor's Corporation ("S&P") or Aaa by Moody's Investors Service
("Moody's") or of credit quality deemed equivalent by the Adviser and money
market instruments of a comparable short-term rating or credit quality. The
Short and Intermediate Series both may employ certain active management
techniques to hedge the interest rate risks associated with portfolio
securities and to seek to minimize fluctuation in net asset values in
accordance with their investment objectives. These investment policies are
fundamental and may not be changed without shareholder approval.
Both the Short and Intermediate Series will hedge the
interest rate risks associated with their securities and to seek to minimize
fluctuation in net asset value in accordance with their investment objectives
and targeted option-adjusted duration. Each Series may enter into
mortgage and interest rate swaps, interest rate futures and options on such
futures, engage in short sales and purchase interest rate caps, floors and
collars in order to hedge against interest rate fluctuations. In addition, the
Short and Intermediate Series may use stripped Mortgage-Backed Securities
to reduce the option-adjusted duration. Both Series may also employ loans
of portfolio securities, dollar rolls and reverse repurchase agreements as
11
investment techniques. These techniques will be undertaken to enhance
income in the Short Series and total return in the Intermediate Series.
As a
matter of fundamental policy, which may not be
changed except by vote of the majority of
shareholders, the Short and Intermediate
Series will both limit purchases to the following
classes of assets:
1. Securities issued directly or guaranteed
by the U.S. Government or its agencies
or instrumentalities;
2. Mortgage-Backed Securities rated AAA
by S&P or Aaa by Moody's or unrated
but deemed of equivalent quality by the
Adviser;
3. Assets fully collateralized by assets in
either of the above classes;
4. Assets which would qualify as liquidity
items under federal regulations if held by
a commercial bank or savings institution;
or
5. Hedge instruments, which may only be
used for risk management purposes.
Any securities described in the "Hedging"
section and any stripped Mortgage-
Backed Securities may only be used for
risk management purposes.
12<PAGE>
Characteristics of Securities in Which the
Short and Intermediate Series Invest
MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities are securities that directly or
indirectly represent a participation in, or are collateralized by and payable
from, mortgage loans secured by real property. The term Mortgage-Backed
Securities, as used herein, includes adjustable-rate mortgage securities,
fixed-rate mortgage securities, and derivative mortgage products such as
collateralized mortgage obligations, stripped Mortgage-Backed Securities
and other instruments described below.
There are currently three basic types of Mortgage-Backed
Securities: (i) those issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities, such as GNMA, FNMA and FHLMC,
described below; (ii) those issued by private issuers that represent an
interest in or are collateralized by Mortgage-Backed Securities issued or
guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or Mortgage-
Backed Securities without a government guarantee but usually having some
form of private credit enhancement.
The Short and Intermediate Series will only purchase
Mortgage-Backed Securities which constitute "Mortgage Related Securities"
for purposes of the Secondary Mortgage Enhancement Act of 1984.
The Nature of Adjustable and Fixed Rate Mortgage Loans
The following is a general description of the two general types of
mortgage loans which may be expected to underlie the Mortgage-Backed
Securities in which the Short and Intermediate Series may invest: fixed-rate
and adjustable-rate mortgages.
Adjustable-Rate Mortgage Loans ("ARMs")
ARMs eligible for inclusion in a mortgage pool will generally
provide for a fixed initial mortgage interest rate for a specified period of
time, generally for either the first three, six, twelve, thirteen,
thirty-six or sixty scheduled monthly payments. Thereafter, the interest rates
are subject to periodic adjustment based on changes in the index rate applicable
to the individual loans.
ARMs contain minimum and maximum rates beyond which the
mortgage interest rate may not vary over the lifetime of the loan. In addition,
certain ARMs provide for additional limitations on the maximum amount by
which the mortgage interest rate may adjust for any single adjustment
period. Alternatively, certain ARMs ("Negatively Amortizing ARMs") may
provide limitations on changes in the required monthly payment. Limitations
on monthly payments can result in monthly payments which are greater or
less than the amount necessary to amortize a Negatively Amortizing ARM
by its maturity at the interest rate in effect in any particular month. In the
event that a monthly payment is not sufficient to pay the interest accruing
on a Negatively Amortizing ARM, any such excess interest is added to the
principal balance of the loan, causing negative amortization, and will be
repaid through future monthly payments. It may take borrowers under
Negatively Amortizing ARMs longer periods of time to increase their net
equity in the mortgaged properties and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds
the sum of the interest accrued at the current rate and the principal payment
which would have been necessary to amortize the outstanding principal
balance over the remaining term of the loan, the excess further reduces the
principal balance of the ARM. Negatively Amortizing ARMs do not provide
13
for the extension of their original maturity to accommodate changes in their
mortgage interest rates. As a result, unless there is a periodic recalculation
of the payment amount, the final payment may be substantially larger than
the other payments. Generally, Negatively Amortizing ARMs do provide for
periodic recalculation of the payment amount. Limitations on periodic
increases in interest rates and on changes in monthly payments protect
borrowers from unlimited interest rate and payment increases.
There are two types of indices which provide the basis for rate
adjustments on ARMs: those based on market rates and those based on a
calculated measure such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year, three-year
and five-year constant maturity U.S. Treasury rates (as reported by the
Federal Reserve Board), the three-month Treasury Bill rate, the 180-day
Treasury Bill rate, rates on longer-term Treasury securities, the Eleventh
District Federal Home Loan Bank Cost of Funds Index ("COFI"), the National
Median Cost of Funds, the one-month, three-month, six-month or one year
London Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank,
or commercial paper rates. Some indices, such as the one-year constant
maturity Treasury rate or three-month LIBOR, are highly correlated with
changes in market interest rates. Other indices, such as COFI, tend to lag
changes in market rates and tend to be somewhat less volatile over short
periods of time.
Fixed Rate Mortgage Loans
Generally, fixed rate mortgage loans eligible for inclusion in a
mortgage pool will bear simple interest at fixed rates and have original terms
ranging from five to forty years. These loans generally provide for monthly
payments of principal and interest in substantially equal installments for the
contractual term of the mortgage note in sufficient amounts to fully amortize
principal by maturity although certain fixed rate mortgage loans provide for
a large final "balloon" payment at maturity.
14
Regulation of Mortgage Loans
Mortgage loans are subject to a variety of state and
federal regulations designed to protect mortgagors, which may impair the
ability of the mortgage lender to enforce its rights under the mortgage
documents. These regulations include legal restraints on foreclosures,
homeowner rights of redemption after foreclosure, federal and state
bankruptcy and debtor relief laws, restrictions on enforcement of mortgage
loan "due on sale" clauses and state usury laws. Even though the Short
and Intermediate Series will invest in Mortgage-Backed Securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, these
regulations may adversely affect the two Series' investments by delaying
their receipt of principal or interest on mortgage loans affected by such
regulations.
Government Agency Mortgage Pass-Through Securities
The Short and Intermediate Series will invest in
Mortgage-Backed Securities which are issued or guaranteed by the United
States Government or one of its agencies or instrumentalities, including but
not limited to GNMA, FNMA and FHLMC. Under normal circumstances,
such Mortgage-Backed Securities (along with other securities issued or
guaranteed by the U.S. Government or its agencies and instrumentalities)
will comprise at least 70% of the Portfolio. GNMA securities are backed by
the full faith and credit of the U.S. Government, which means that the U.S.
Government guarantees that the interest and principal will be paid when
due. FNMA securities and FHLMC securities are not backed by the full faith
and credit of the U.S. Government; however, the payment of principal and
interest is guaranteed by FNMA and FHLMC, as the case may be, both of
which may borrow from the U.S. Treasury at the discretion of the Secretary
of the Treasury. These guarantees do not extend to the securities' yield or
value, which are likely (except in the case of certain stripped Mortgage-
Backed Securities and CMO bonds) to vary inversely with fluctuations in
interest rates, nor do the guarantees extend to the yield or value of the Short
and Intermediate Series' shares.
U.S. Government Agency Mortgage-Backed Securities provide
for the pass-through to investors of their pro rata share of monthly
payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
GNMA Certificates
GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development.
GNMA is authorized to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration ("FHA Loans"), or
guaranteed by the Veterans Administration ("VA Loans"), or by pools of other
eligible mortgage loans. The National Housing Act of 1934, as amended,
provides that the full faith and credit of the U.S. Government is pledged to
the payment of all amounts that may be required to be paid under any
guaranty. In order to meet its obligations under any guaranty, GNMA is
authorized to borrow from the United States Treasury in an unlimited
amount.
15
FNMA Certificates
FNMA is a stockholder-owned corporation chartered under an
act of the United States Congress. Each FNMA Certificate is issued and
guaranteed by FNMA and represents an undivided interest in a pool of
mortgage loans (a "Pool") formed by FNMA. Each Pool consists of
residential mortgage loans either previously owned by FNMA or purchased
by it in connection with the formation of the Pool. The mortgage loans may
be either conventional mortgage loans (i.e., not insured or guaranteed by
any U.S. Government agency) or mortgage loans that are either insured by
the Federal Housing Administration or guaranteed by the Veterans
Administration. The lenders originating and servicing the mortgage loans
are subject to certain eligibility requirements established by FNMA.
FNMA has certain contractual responsibilities. With respect
to each Pool, FNMA is obligated to distribute scheduled monthly
installments of principal and interest after FNMA's servicing and guaranty
fee, whether or not received, to Certificate holders. FNMA also is obligated
to distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed mortgage loan in the Pool, whether or not such
principal balance is actually recovered. The obligations of FNMA under its
guaranty of its Certificates are obligations solely of FNMA.
FHLMC Certificates
FHLMC is a corporate instrumentality of the United States.
The principal activity of FHLMC currently is the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and their resale in the form of mortgage securities, primarily
FHLMC Certificates. A FHLMC Certificate represents a pro rata interest in
a group of mortgage loans or participation in mortgage loans purchased by
FHLMC.
FHLMC guarantees to each registered holder of a FHLMC
Certificate the timely payment of interest at the rate provided for by such
Certificate (whether or not received on the underlying loans). FHLMC also
guarantees to each registered Certificate holder ultimate collection of all
principal of the related mortgage loans, without any offset or deduction, but
does not, generally, guarantee the timely payment of scheduled principal.
However, FHLMC now issues certain mortgage-backed securities, called
"Gold PCs," which guarantee timely payment of principal reductions. The
obligations of FHLMC under its guaranty of FHLMC Certificates are
obligations solely of FHLMC.
Private Mortgage Pass-Through Securities
Private mortgage pass-through securities are structured
similarly to GNMA, FNMA and FHLMC mortgage pass-through securities and
are issued by originators of and investors in mortgage loans, including
depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of these entities. These securities usually are backed
by a pool of conventional fixed rate or adjustable rate mortgage loans.
Since private mortgage pass-through securities typically are not guaranteed
by an entity having the credit status of GNMA, FNMA and FHLMC, such
securities generally are structured with one or more types of credit
enhancement. The Series will invest in private mortgage pass-through
securities only if they are rated AAA by S&P or Aaa by Moody's or securities
which are unrated but deemed to be of comparable credit quality by the
Adviser.
16
Private mortgage pass-through securities are often
backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failures by obligors on underlying
assets to make payments, those securities may contain elements of credit
support, which fall into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters
of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of
such approaches. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquencies or losses in excess of
those anticipated could adversely affect the return on an investment in a
security. The Short and Intermediate Series will not pay any additional fees
for credit support. The existence of credit support may increase the price
of a security to reflect its credit protection and lower risk. If the Short or
Intermediate Series invests in securities backed by credit support, they may
realize a lower yield on a higher-grade security which contains credit
support than on a lower-grade security which does not.
Multiple Class Pass-Through Securities and Collateralized Mortgage
Obligations
Multiple class pass-through securities are interests in a trust
composed of GNMA, FNMA or FHLMC Certificates or whole loans or private
mortgage pass-through securities (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Types of multiple class pass-through
securities include, among others, collateralized mortgage obligations
("CMOs"), real estate mortgage investment conduit ("REMIC") pass-through
or participation certificates, and stripped mortgage-backed securities
("SMBS"), which are discussed below. A REMIC is a CMO that qualifies for
special tax treatment under the Internal Revenue Code and invests in certain
mortgages principally secured by interests in real property and other
permitted investments.
CMOs and guaranteed REMIC pass-through certificates
("REMIC Certificates") issued by FNMA and FHLMC are types of multiple
class pass-through securities. Investors may purchase "regular" beneficial
interests in REMICs. The REMIC Certificates represent beneficial ownership
interests in a REMIC trust, generally consisting of mortgage loans or FNMA,
FHLMC or GNMA guaranteed pass-through certificates. The obligations of
FNMA or FHLMC under their respective guaranty of the REMIC Certificates
are obligations solely of FNMA or FHLMC.
17
FNMA REMIC Certificates are issued and guaranteed as to
timely distribution of principal and interest by FNMA. In addition, FNMA will
be obligated to distribute on a timely basis to holders of FNMA REMIC
Certificates required installments of principal and interest and to distribute
the principal balance of each class of REMIC Certificates in full, whether or
not sufficient funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the
timely payment of interest and also guarantees the payment of principal as
payments are required to be made on the underlying mortgage participation
certificates ("PCs"). PCs represent undivided interests in specified level
payment, residential mortgages or participation therein purchased by
FHLMC and placed in a PC pool. With respect to principal payments on
PCs, FHLMC generally guarantees ultimate collection of all principal of the
related mortgage loans without offset or deduction. FHLMC also guarantees
timely payment of principal on Gold PCs.
CMOs and REMIC Certificates are issued in multiple classes.
Each class of CMO or REMIC Certificates, often referred to as a "tranche,"
is issued at a specific adjustable or fixed interest rate and must be fully
retired no later than its final distribution date. Principal payments on the
Mortgage Assets underlying the CMOs or REMIC Certificates may cause
some or all of the classes of CMOs or REMIC Certificates to be retired
substantially earlier than their final distribution dates. Generally, interest
is paid or accrues on all classes of CMOs or REMICs on a monthly or quarterly
basis.
The principal of and interest on the Mortgage Assets may be
allocated among the several classes of CMOs or REMIC Certificates in
several ways. In certain structures (known as "sequential pay" CMOs or
REMIC Certificates), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes
of CMOs or REMIC Certificates in the order of their respective final
distribution dates. Thus no payment of principal will be made on any class
of sequential pay CMOs or REMIC Certificates until all other classes having
an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include,
among others, "parallel pay" CMOs and REMIC Certificates. Parallel pay
CMOs and REMIC Certificates are those which are structured to apply
principal payments and prepayments of the Mortgage Assets to two or more
classes concurrently on a proportionate or disproportionate basis. These
simultaneous payments are taken into account in calculating the final
distribution date of each class.
A wide variety of REMIC Certificates may be issued in the
parallel pay or sequential pay structures. These securities include accrual
certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until all other certificates having an earlier final distribution
date have been retired and are converted thereafter to an interest-paying
security, and planned amortization class ("PAC") certificates, which are
parallel pay REMIC Certificates which generally require that specified
amounts of principal be applied on each payment date to one or more
classes of REMIC Certificates (the "PAC Certificates"), even though all other
principal payments and prepayments of the Mortgage Assets are then
required to be applied to one or more other classes of Certificates. The
scheduled principal payments for the PAC Certificates generally have the
highest priority on each payment date after interest due has been paid to all
18
classes entitled to receive interest currently. Shortfalls, if any, are added
to the amount payable on the next payment date. The PAC Certificate
payment schedule is taken into account in calculating the final distribution
date of each PAC. In order to create PACs, one or more tranches generally
must be created that absorb most of the volatility in the underlying mortgage
assets. These tranches tend to have market prices and yields that are much
more volatile than the PACs.
In reliance on an interpretation by the Securities and
Exchange Commission ("SEC"), the Short and Intermediate Series'
investments in certain qualifying CMOs and REMICs are not subject to the
Investment Company Act's limitation on acquiring interests in other
investment companies. See "Investment Restrictions" in the Statement of
Additional Information. CMOs and REMICs issued by an agency or
instrumentality of the U.S. Government are considered U.S. Government
securities for purposes of this Prospectus.
Stripped Mortgage-Backed Securities ("SMBS")
The Short and Intermediate Series may invest in SMBS,
which are derivative multi-class mortgage securities. In addition to SMBS
issued by the U.S. Government, its agencies or instrumentalities, the Short
and Intermediate Series may purchase SMBS issued by private originators
of, or investors in, mortgage loans, including depository institutions,
mortgage banks, investment banks and special purpose subsidiaries of
these entities. The two Series will purchase only SMBS that are
collateralized by U.S. Government Agency Mortgage-Backed
Securities.
SMBS are usually structures with two classes that receive
different proportions of the interest and principal distributions from a pool of
Mortgage Assets. A common type of SMBS will have one class receiving all
of the interest from the Mortgage Assets, while the other class will receive
all of the principal. However, in some instances, one class will receive some
of the interest and most of the principal while the other class will receive
most of the interest and the remainder of the principal. If the underlying
Mortgage Assets experience greater than anticipated prepayments of
principal, the Series may fail to fully recover its initial investment in these
securities, even if the SMBS are rated AAA by S&P or Aaa by Moody's.
SMBS are unusually volatile in response to changes in interest rates and, in
respect of SMBS that receive all or most of their interest from Mortgage
Assets, there is a risk that the initial investment will not be fully recouped.
The Adviser will seek to manage these risks (and potential benefits) by
investing in a variety of such securities and by using certain hedging
techniques, as described below in "Hedging." The Adviser expects that
interest-only SMBS will be purchased by the Series for their hedging
characteristics. Such SMBS will reduce the variance of the Series'
respective net asset values from targeted option-adjusted duration.
19
Under no circumstances will the Short or Intermediate
Series purchase SMBS if such purchase would cause SMBS to exceed 5%
of the assets of the Series.
New instruments and variations of existing Mortgage-
Backed Securities continue to be developed. The Short and Intermediate
Series may invest in any such instruments or variations as may be
developed, to the extent consistent with their investment objectives and
policies and applicable regulatory requirements.
YIELD, MARKET VALUE AND RISK CONSIDERATIONS OF
MORTGAGE-BACKED SECURITIES
The Short and Intermediate Series may invest in certain
Mortgage-Backed Securities, such as interest-only SMBS, that are extremely
sensitive to changes in prepayments and interest rates. Even though such
securities may be rated in the highest rating categories by S&P or Moody's
or be guaranteed by an agency or instrumentality of the U.S. Government,
under certain interest rate or prepayment rate scenarios, the Short and
Intermediate Series may fail to fully recover their investment in such
securities. The Short and Intermediate Series will purchase only SMBS that
are collateralized by U.S. Government Agency Mortgage-Backed
Securities.
The investment characteristics of adjustable and fixed
rate Mortgage-Backed Securities differ from those of traditional fixed income
securities. The major differences include the payment of interest and
principal on Mortgage-Backed Securities on a more frequent (usually
monthly) schedule, and the possibility that principal may be prepaid at any
time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, if the
Short or Intermediate Series purchases Mortgage-Backed Securities at a
premium, a faster than expected prepayment rate will reduce both the
market value and the yield to maturity from those which were anticipated.
A prepayment rate that is slower than expected will have the opposite effect
of increasing yield to maturity and market value. Conversely, if the Short
or Intermediate Series purchases Mortgage-Backed Securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will reduce, yield to maturity and market value. The Adviser
will seek to manage these potential risks and benefits by investing in a
variety of Mortgage-Backed Securities and by using certain hedging
techniques. See "Hedging."
Prepayments on a pool of mortgage loans are influenced
by a variety of factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgage properties
and servicing decisions. The timing and level of prepayments cannot be
predicted with certainty. As with fixed mortgage loans, adjustable rate
mortgage loans may be subject to greater prepayment rates in a declining
interest rate environment. The mortgage loans underlying the Mortgage-
Backed Securities generally may be prepaid at any time without penalty. In
a fluctuating interest rate environment, a predominant factor affecting the
prepayment rate on a pool of mortgage loans is the difference between the
interest rates on the mortgage loans and prevailing mortgage loan interest
rates (giving consideration to the cost of any refinancing). In general, if
mortgage loan interest rates fall sufficiently below the interest rates on fixed
rate mortgage loans underlying mortgage pass-through securities, the rate
of prepayment would be expected to increase. Conversely, if mortgage loan
20
interest rates rise above the interest rates on the fixed rate mortgage loans
underlying the Mortgage-Backed Securities, the rate of prepayment may be
expected to decrease. Since prepayments on fixed rate mortgage loans
generally are likely to increase during a period of falling mortgage interest
rates, the amounts of prepayments available for reinvestment by the Short
and Intermediate Series are likely to be greater during a period of falling
mortgage rates. If general interest rates also decline during such a period,
these higher prepayments are likely to be reinvested at lower rates than
that which the Short or Intermediate Series were earning on the Mortgage-
Backed Securities that were prepaid. Like most traditional fixed-income
securities, most Mortgage-Backed Securities, including those backed by
ARMs, decrease in value as a result of increases in interest rates. However,
many Mortgage-Backed Securities may benefit less than other fixed income
securities from declining interest rates because of the risk of
prepayment.
In general, changes in both prepayment rates and
interest rates will change the yield on Mortgage-Backed Securities backed
by ARMs. The rate of principal prepayments with respect to ARMs has
fluctuated in recent years. As is the case with fixed rate mortgage loans,
ARMs may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, ARMs could be subject to higher prepayment rates than if
prevailing interest rates remain constant because the availability of fixed rate
mortgage loans at competitive interest rates may encourage mortgagors to
refinance their ARMs to obtain a lower fixed interest rate. Conversely, if
prevailing interest rates rise significantly, ARMs may prepay at lower rates
than if prevailing rates were to remain at or below those in effect at the time
such ARMs were originated. There can be no certainty as to the rate of
prepayments on the ARMs in either stable or changing interest rate
environments. In addition, there can be no certainty as to whether increases
in the principal balances of the ARMs due to the addition of deferred interest
may result in a default rate higher than that on ARMs that do not provide for
negative amortization. Other factors affecting prepayment of ARMs include
changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgage properties and servicing decisions.
Unlike investments in fixed-income mortgages which decline in value during
periods of rising interest rates, investments in ARM-backed securities will
allow the Short and Intermediate Series to participate in increases in
interest rates through periodic adjustments in the coupons of the underlying
mortgages, resulting in both higher current yields and lower price
fluctuations. However, the Short and Intermediate Series will not benefit
from increases in interest rates if interest rates rise to the point where they
would cause the current interest rates on the ARMs underlying its Mortgage-
Backed Securities to exceed the maximum allowable annual or lifetime reset
limits, as described above, for a particular mortgage. The Adviser will seek
to manage these risks (and potential benefits) by using certain hedging
techniques. See "Hedging."
21
To the extent the Short and Intermediate Series invest
in ARMs, the adjustable rate feature of ARMs generally will act as a buffer
to reduce sharp changes in each Series' respective net asset values in
response to normal interest rate fluctuations. As the interest rates on the
ARMs underlying the each Series' investments are reset periodically, the
yields of each Series' adjustable rate Mortgage-Backed Securities will
gradually align themselves to reflect changes in market rates. As a result,
adjustable rate Mortgage-Backed Securities, on a stand-alone basis, should
fluctuate less dramatically in price than each Series' investments il fixed
rate Mortgage-Backed Securities on a stand-alone basis. Although having less
risk of decline during periods of rising market interest rates, adjustable rate
Mortgage-Backed Securities, because their coupon rates will decline in
response to market interest rate declines, generally have less potential for
market appreciation than fixed rate Mortgage-Backed Securities. As
described in "Hedging" below, the Adviser will seek to manage the expected
price fluctuations of each Series' securities on an aggregate basis, and
therefore of each Series' net asset values, by using certain hedging
techniques. See "Hedging."
The Short and Intermediate Series' reinvestment of
principal payments and prepayments received on a mortgage pass-through
security may be made at rates higher or lower than the rate payable on
such security, thus affecting the realized return.. In addition, the receipt
of interest payments monthly rather than semi-annually by the Short or
Intermediate Series has a compounding effect that may increase the yield
relative to that received on debt obligations that pay interest semi-annually.
Due to these factors, Mortgage-Backed Securities may also be less effective
than U.S. Treasury securities of similar maturity at maintaining yields during
periods of declining interest rates. Prepayments may have a
disproportionate effect on certain Mortgage-Backed Securities such as
SMBS and certain other multiple class pass-through securities. The Short
and Intermediate Series may purchase Mortgage-Backed Securities at a
premium or at a discount.
Negatively Amortizing ARMs that are not guaranteed as to full
and timely payment of principal and interest may be subject to increasing
credit exposure. ARMs that are guaranteed as to full and timely payment of
principal and interest may be subject to additional prepayment risk resulting
from increased default rates.
All of the Mortgage-Backed Securities in which the Short
or Intermediate Series may invest are traded in over-the-counter markets
rather than on exchanges. The size of spreads between bid and asked
prices in over-the-counter markets for Mortgage-Backed Securities depends
upon a number of factors, including the outstanding principal amount of the
particular security, the number of dealers making markets in the security, the
length of time that a particular type of security has been trading in the
market and the perceived volatility of the price of the security. Some of the
Mortgage-Backed Securities in which the Short and Intermediate Series
may invest, in particular certain SMBS and private mortgage pass-through
securities, may trade with a wider spread between the bid and asked
quotations than do other fixed-income securities, such as U.S. Government
securities or Mortgage-Backed Securities having current market fixed
coupons.
22
The spread between the bid and asked quotations is
taken into account, among other things, in the determination of the value of
each security and, therefore, in the determination of the net asset value per
share of each of the Series. See "Valuation of Fund Shares". If the Short
or Intermediate Series are forced on short notice to sell securities for which
the spread between bid and asked quotations is wide, as a result of
requests for redemption of a large number of shares or for some other
reason, the Short or Intermediate Series may not be able to obtain the
same price for such security as it would if it were able to take a longer
period of time to seek the most efficient execution of its proposed
sale.
ILLIQUID SECURITIES
Each of the Series may invest up to 15% of its net
assets in securities for which there are legal or contractual restrictions on
resale or for which there is no readily available market or other illiquid
securities, including non-terminable repurchase agreements having
maturities of more than seven days. See "Investment Restrictions" in the
Statement of Additional Information. The Adviser will monitor the illiquidity
of such restricted securities under the supervision of the Board of Trustees.
The determination of whether interest-only and principal-only SMBS issued
by the U.S. Government are liquid shall be made by the Adviser under
guidelines established by the Board of Trustees. Pursuant to SEC policy,
privately-issued SMBS shall be considered illiquid for purposes of the
limitation on investments in illiquid securities. The staff of the SEC has
taken the position that OTC options, interest-rate swaps, caps, floors and
collars (as discussed in Appendix A) are illiquid securities. The Adviser
disagrees with this position. Nevertheless, the Short and Intermediate Series
have agreed to treat OTC options, interest-rate swaps, caps, floors and collars
as illiquid securities so long as the SEC maintains this position.
HEDGING
The Short and Intermediate Series may employ certain
active management techniques to achieve their duration objectives as
described above in "Investment Objectives and Investment Policies" and to
hedge the interest rate risks associated with the securities in accordance
with such objectives. Since some of the securities may have longer
durations than the Short and Intermediate Series' duration objectives and
some of the securities may have shorter durations, hedging may be required
either to lengthen or to shorten the duration of the aggregate portfolio to
reduce the variance from the duration objectives. Rather than seeking to
profit from changes or "trends" in general interest rate levels, the Short and
Intermediate Series will seek continually to manage duration within a narrow
range.
The Short and Intermediate Series intend to use hedging
transactions as a hedge against interest rate fluctuations and not as
speculative transactions. Hedging transactions may also be used as a
temporary substitute for purchasing particular securities. Each Series may
enter into mortgage and interest rate swaps, purchase or sell interest rate
floors, caps or collars, enter into interest rate futures contracts and related
options, and engage in short sales to hedge against interest rate
fluctuations. In addition, the Short and Intermediate Series expect to use
SMBS to reduce their respective targeted option-adjusted durations.
23
Any or all of these techniques may be used at one time.
Use of any particular transaction is a function of market conditions. The
hedging transactions that the Short and Intermediate Series currently
contemplate using are described in detail in Appendix A.
Hedging transactions pose certain risks, which are described
in Appendix A.
OTHER INVESTMENTS AND PRACTICES
Repurchase Transactions
The Short and Intermediate Series may invest in
repurchase agreements, which are agreements pursuant to which securities
are acquired from a third party with the commitment that they will be
repurchased by the seller at a fixed price on an agreed upon date. These
agreements may be made with respect to any of the portfolio securities in
which the Short or Intermediate Series are authorized to invest.
Repurchase agreements may be characterized as loans secured by the
underlying securities. The resale price reflects the purchase price plus an
agreed upon market rate of interest which is unrelated to the coupon rate
or date of maturity of the purchased security. The securities underlying the
repurchase agreement will be held by the Custodian at all times in an
amount at least equal to the repurchase price, including accrued interest
earned on the underlying securities. If the seller defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, and the value of the collateral securing the repurchase agreement
declines, the Short and Intermediate Series may incur a loss.
Repurchase agreements facilitate portfolio management
and allow the two Series to earn additional revenue. The Short and
Intermediate Series may enter into repurchase agreements in order to
increase liquidity or as a temporary investment while the Series are
acquiring suitable long term investments. The Series may enter into
repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or dealers meet the creditworthiness
standards established by the Fund's Board of Trustees ("Qualified
Institutions"). The Adviser will monitor the continued creditworthiness of
Qualified Institutions, subject to the oversight of the Fund's Board of
Trustees.
The use of repurchase agreements involves certain risks.
For example, if the seller of securities under a repurchase agreement
defaults, the Short and Intermediate Series will seek to dispose of such
securities, which action could involve costs or delays.
24
Reverse Repurchase Agreements and Dollar Roll Agreements
The Short and Intermediate Series may enter into
reverse repurchase agreements and dollar roll agreements with Qualified
Institutions to seek to enhance returns.
Reverse repurchase agreements involve sales by the
Short and Intermediate Series of portfolio assets concurrently with an
agreement to repurchase the same assets at a later date at a fixed price.
During the reverse repurchase agreement period, the Short and
Intermediate Series continue to receive principal and interest payments on
these securities.
The Short and Intermediate Series may enter into dollar
rolls whereby the Short or Intermediate Series could sell securities for
delivery in the current month and simultaneously contract to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Short or Intermediate Series would forgo
principal and interest paid on the securities. The Short or Intermediate
Series would be compensated by the difference between the current sales
price and the forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale.
The Short or Intermediate Series will establish a
segregated account with their respective custodians in which each will
maintain cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to their respective obligations in respect of
reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by a Series may decline below the price of the securities
a Series would have sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Short or
Intermediate Series' use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver,
whether to enforce either Series' obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are considered borrowings
.
When-issued and Delayed Delivery Securities and Forward
Commitments
From time to time, in the ordinary course of business, the
Short and Intermediate Series may purchase securities on a when-issued or
delayed delivery basis or may purchase or sell securities on a forward
commitment basis. When such transactions are negotiated, the price is
fixed at the time of the commitment, but delivery and payment can take
place a month or more after the date of the commitment. While the Short
and Intermediate Series will purchase only securities on a when-issued,
delayed delivery or forward commitment basis with the intention of acquiring
the securities, the Short or Intermediate Series may sell the securities
before the settlement date, if it is deemed advisable. At the time the Short
or Intermediate Series makes the commitment to purchase securities on a
when-issued or delayed delivery basis, the Short or Intermediate Series will
record the transaction and thereafter reflect the value, each day, of such
security in determining its net asset value .. At the time of delivery of the
securities, the value may be more or less than the purchase price. An
increase in the percentage of each of the Series' assets committed to the
purchase of securities on a when-issued, delayed delivery or forward
commitment basis may increase the volatility of each of the Series' net
asset value. Any increased volatility will be factored into the Adviser's
evaluation of the net option-adjusted duration of net assets and offsetting
positions will generally be present. At the time either of the Series enters
into a transaction on a when-issued or forward commitment basis, a
segregated account consisting of cash, U.S. Government securities or other
liquid high-grade debt securities equal to at least 100% of the value of the
when-issued or forward commitment securities will be established and
maintained with the custodian. Subject to this requirement, the Series may
purchase securities on such basis without limit.
25
Settlements in the ordinary course, which may take
substantially more than five business days for Mortgage-Backed Securities,
are not treated by either Series as when-issued or forward commitment
transactions and, accordingly, are not subject to the foregoing limitations
even though some of the risks described above may be present in such
transactions.
Lending of Portfolio Securities
The Short or Intermediate Series may lend their
respective portfolio securities to Qualified Institutions. By lending their
portfolio securities, the Short or Intermediate Series will attempt to
increase income through the receipt of interest on the loan. Any gain or
loss in the market price of the securities loaned that may occur during the
term of the loan will be for the account of the Short or Intermediate Series.
Under present regulatory policies, the borrower must pledge and maintain with
either Series collateral consisting of cash, cash equivalents, U.S.
Government securities or other liquid high-grade debt securities in an
amount not less than 100% of the value of the loaned securities.
Neither the Short nor the Intermediate Series will lend
portfolio securities if, as a result, the aggregate of such loans exceeds 33
1/3% of the total asset value (including such loans). All relevant facts and
circumstances, including the creditworthiness of the Qualified Institution, will
be monitored by the Adviser, and will be considered in making decisions
with respect to lending of securities, subject to review by the Fund's Board
of Trustees. The Series may pay reasonable negotiated fees in connection
with loaned securities, so long as such fees are set forth in a written contract
and their reasonableness is determined by the Fund's Board of
Trustees.
Other Investments
The Short or Intermediate Series may also invest in other
instruments including obligations of the United States, notes, bonds, and
discount notes of other U.S. Government agencies or instrumentalities,
including but not limited to: Federal National Mortgage Association,
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, Federal Home Loan Banks, Bank for Cooperatives, Farm Credit
Banks, Tennessee Valley Authority, Federal Financing Bank, Small Business
Administration and Federal Agricultural Mortgage Corporation. The Series
may also invest in time and savings deposits (including fixed or adjustable
rate certificates of deposit) in commercial banks or in institutions whose
accounts are insured by the FDIC, BIF or SAIF.
26
Borrowing
The Short or Intermediate Series may borrow from banks
and enter into reverse repurchase agreements or dollar rolls up to 33 1/3%
of the value of the total assets for each of the Series (computed at the time
the loan is made) to take advantage of investment opportunities and for
temporary, extraordinary or emergency purposes, or for the clearance of
transactions. A Series may pledge up to 33 1/3% of the total assets for
each of the Series to secure these borrowings. If a Series' asset coverage
for borrowings falls below 300%, the Series will take prompt action to
reduce its borrowings even though it may be disadvantageous at that time
from an investment point of view. The Short and Intermediate Series will
incur borrowing costs when it leverages, including payment of interest and
any fee necessary to maintain a line of credit, and may be required to
maintain a minimum average balance. If the income and appreciation on
assets acquired with borrowed funds exceed their borrowing cost, the Short
or Intermediate Series' investment performances will increase, whereas if
the income and appreciation on assets acquired with borrowed funds are
less than their borrowing costs, investment performances will decrease. In
addition, if the Short or Intermediate Series borrows to invest in securities,
any investment gains made on the securities in excess of the costs of the
borrowing, and any gain or loss on hedging, will cause the net asset value
of the shares of each of the Series to rise faster than would otherwise be the
case. On the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any interest paid on
the money borrowed) to each of the Series, the net asset value of each of
the Series' shares will decrease faster than would otherwise be the case.
This is the speculative characteristic known as "leverage."
INVESTMENT RESTRICTIONS
The Short and Intermediate Series are subject to certain
investment restrictions which, as described in more detail in the Statement
of Additional Information, have been adopted by the Trustees on behalf of
each of the Series as fundamental policies that cannot be changed without
the approval of a majority of the outstanding shares of the respective
Series.
PORTFOLIO TURNOVER
Neither of the Series has a fixed policy with respect to
portfolio turnover. The portfolio turnover rate is calculated by dividing the
lesser of sales or purchases of portfolio securities by the average monthly
value of the portfolio securities, excluding securities having a maturity at the
date of purchase of one year or less. While the Short or Intermediate
Series will pay commissions in connection with its options and future
transactions, the other securities in which a Series will invest are generally
traded on a "net" basis with dealers acting as principals for their own
account without a stated commission. Nevertheless, high portfolio turnover
may involve correspondingly greater brokerage commissions and other
transaction costs which will be borne directly by a Series. See "Portfolio
Transactions" in the Statement of Additional Information. Another potential
consequence of high portfolio turnover is that, if 30% or more of each of the
Series' gross income for a taxable year were derived from gains from the
sale or other disposition of securities and certain other investments held for
less than three months, neither of the Series would qualify as a regulated
investment company and, therefore, a Series would be subject to corporate
income tax during that taxable year. The Adviser endeavors to manage the
investment compositions of the Series and to adjust the portfolio turnover
of each of the Series, if necessary, to insure the Series' treatment as
regulated investment companies. See "Additional Information Regarding
Taxation -- Taxation of the Fund" in the Statement of Additional Information.
The Portfolio turnover rates for the last fiscal period are shown in the
tables under the heading Financial Highlights.
27
MANAGEMENT OF THE FUND
Trustees and Officers
The Fund's Board of Trustees is responsible for deciding matters of
general policy and reviewing the actions of the Adviser, distributor and
transfer agent. The officers of the Series conduct and supervise the Fund's
daily business operations. The Fund's trustees and officers are identified
below. The Fund's trustees also serve as trustees of other mutual funds in
the Smith Breeden Family of Funds.
BOARD OF TRUSTEES
AFFILIATED WITH
TRUSTEE ADVISER SINCE
Douglas T. Breeden* 1982
President and Chairman of the Board of Smith Breeden Associates, Inc.
Research Professor of Finance, Fuqua School of Business, Duke University.
Dr. Breeden has directed the research and analysis of Smith Breeden
Associates from the founding of the firm and is responsible for the
disciplined valuation framework utilized by the firm. He is actively involved
in the review and direction of Smith Breeden's investment strategy.
Previously, Dr. Breeden taught corporate finance, investment, futures,
options and banking courses in MBA and Ph.D. programs at the University
of Chicago, Stanford University and the Sloan School of Management, M.I.T.
He is the editor of the Journal of Fixed Income, and was previously an
Associate Editor of the Journal of Finance, the Journal of Money, Credit, and
Banking, the Journal of Financial Economics, the Review of Financial
Studies and the Journal of Financial and Quantitative Analysis. His research
and publications have been on consumption and asset pricing, options,
banking and mortgage valuation and hedging. He is a former Director of
the American Finance Association. Dr. Breeden holds a Doctor of
Philosophy in Finance from Stanford University Graduate School of
Business, and a Bachelor of Science in Management Science from the
Massachusetts Institute of Technology. Dr. Breeden was a Rotary
International Graduate Fellow at the University of Edinburgh, Scotland, a
Dean Witter Fellow in Finance at Yale University School of Organization and
Management, and a Batterymarch Fellow. Dr Breeden taught in the Portfolio
Management Program at the Nomura School of Advanced Management in
Tokyo, Japan from 1987-1992, and has taught at the International
Management Institute in Geneva, Switzerland. He also serves as a Director
and Vice Chairman of the Board for Roosevelt Bank of Chesterfield,
Missouri. He is also the Director and Chairman of the Board of the Financial
Research Corporation.
Michael J. Giarla* 1985
Principal, Executive Vice President, Director and Chief Operating Officer,
Smith Breeden Associates, Inc., President, Smith Breeden Family of Funds,
Associate Editor, Journal of Fixed Income 1991-1993. He has published
several book chapters and articles regarding mortgage-backed securities
investments, risk management and hedging. MBA with concentration in
Finance, Arjay Miller Scholar, Stanford University. BS in statistics, summa
cum laude, Phi Beta Kappa, Harvard Club of Boston Scholar, Harvard
University. Trustee, the Roxbury Latin School, Boston, MA.
28
Stephen M. Schaefer
Stephen M. Schaefer is Esmee Fairbairn Professor of Finance and Dean of
Research at London Business School. Previously on the Faculty of the
Graduate School of Business of Stanford University, he has also taught at
the Universities of California (Berkeley), Chicago, British Columbia and
Venice. His research interests focus on capital markets and financial
regulation. He has served on the editorial board of a number of professional
journals including, currently, the Journal of Fixed Income, the Review of
Derivative Research and Ricerche Economiche. He consults for a number
of leading financial institutions and is an Independent Board Member of the
Securities and Futures Authority of Great Britain.
Myron S. Scholes
Myron S. Scholes is the Frank E. Buck Professor of Finance at the Graduate
School of Business Stanford University (since 1983); a Senior Research
Fellow at the Hoover Institution (since 1987); and is currently on leave as a
Professor of Law, Stanford Law School. He is a principal in the money
management firm, Long-Term Capital Management Co. (since 1993). He is
a Research Associate of the National Bureau of Economic Research and is
a member of the Econometric Society. Professor Scholes was also a
managing director and co-head of the fixed income derivatives group at
Salomon Brothers between 1991-1993. Prior to coming to Stanford
University, Professor Scholes was the Edward Eagle Brown Professor of
Finance at the Graduate School of Business, University of Chicago (1974-
1983). He served as the Director of the University of Chicago's Center for
Research in Security Prices from 1974-1980. Prior to coming to the
University of Chicago, Professor Scholes was first an Assistant Professor
then an Associate Professor at the Sloan School of Management, at M.I.T.
from 1968 to 1973. He received his PhD in 1969 from the Graduate School
of Business, University of Chicago. He has honorary Doctor of Law degrees
from the University of Paris and McMaster University. He is a past president
of the American Finance Association (1990).
Dr. Scholes has published numerous articles in academic journals and in
professional volumes. He is most noted as the co-originator of the Black-
Scholes Options Pricing Model as described in a paper, "The Pricing of
Options and Corporate Liabilities," published in the Journal of Political
Economy (May 1973) (with Fischer Black). His other papers include such
topics as risk-return relations, the effects of dividend policy on stock prices,
the effects of taxes and tax policy on corporate decision making. His book
with Mark Wolfson (Stanford University) "Taxes and Business Strategy: A
Planning Approach" was published by Prentice Hall in 1991.
William F. Sharpe
William F. Sharpe is a Professor of Finance at Stanford University's Graduate
School of Business. He is best known as one of the developers of the
Capital Asset Pricing Model, including the beta and alpha concepts used in
risk analysis and performance measurement. He developed the widely-used
binomial method for the valuation of options and other contingent claims.
He also developed the computer algorithm used in many asset allocation
procedures. Dr. Sharpe has published articles in a number of professional
journals. He has also written six books, including Portfolio Theory and
Capital Markets, (McGraw-Hill, 1970), Asset Allocation Tools, (Scientific
Press, 1987), Fundamentals of Investments (with Gordon J. Alexander and
Jeffery Bailey, Prentice-Hall, 1993) and Investments (with Gordon J.
Alexander, Prentice-Hall, 1990). Dr. Sharpe is a past President of the
American Finance Association. He has also served as consultant to a
number of corporations and investment organizations. He is also a member
of the Board of Trustees of Rosenberg Series Trust, an investment company.
He received the Nobel Prize in Economic Sciences in 1990.
*Interested party
29<PAGE>
OFFICERS
Affiliated With
Officer Title Adviser Since
Douglas T. Breeden Chairman 1982
Michael J. Giarla President and Chief 1985
Executive Officer
Daniel C. Dektar Vice President, 1986
Portfolio Adviser
Director of Trading, Principal and Director of Smith Breeden Associates, Inc.
Mr. Dektar has been primarily responsible for the day-to-day management
of the Portfolio and Series from their commencement of operations in 1992.
He currently manages four mortgage securities portfolios and serves as an
adviser on one account. While with Smith Breeden, Mr. Dektar has provided
trade and portfolio analysis in support of six mortgage security portfolios.
Previously employed in investment banking capacities at Morgan Stanley &
Co. Earned an MBA with a concentration in Finance, Arjay Miller Scholar,
Stanford University, and a B.S. in Business Administration, summa cum
laude, Phi Beta Kappa, Phi Eta Sigma, White Award as top student in
finance and Regents Scholar at the University of California at Berkeley.
Marianthe S. Mewkill Vice President, 1992
Secretary, Treasurer, and
Chief Accounting Officer
Associate of Smith Breeden Associates, Inc. She was previously
employed as a Controller for the Hunt Alternatives Fund and as an
Associate at Goldman Sachs & Co. and Arthur Anderson & Co. She earned
an M.B.A. with concentrations in Finance and Accounting from New York
University, and graduated from Wellesley College, magna cum laude with
a B.A. in History and French, and a minor in Economics.
30 <PAGE>
Investment Management
Smith Breeden Associates, Inc., Overland Park, Kansas 66210, a
registered investment adviser (the "Adviser"), acts as the investment adviser
to each Series. The Adviser also serves as the investment adviser to the
other fund in the Smith Breeden Family of Funds. Douglas T. Breeden,
Chairman and President of the Adviser, owns approximately 71% of the
Adviser's voting stock as of March 31, 1995.
Under its Investment Advisory Agreements with each of the
Series, the Adviser, subject to the general supervision of the Fund's Board
of Trustees, manages each Series and provides for the administration of
each of the Series' other affairs. It is the responsibility of the Adviser to
place purchase and sale orders for the each of the Series' security
transactions.
The Adviser has extensive experience providing investment
advisory services on a discretionary and non-discretionary basis to financial
institutions, insurance, pension and charitable foundation clients. The
Adviser has provided such services since 1982 with assets under
management exceeding $1 billion since 1984. Current mortgage security
assets under management exceed $10 billion. In addition, a number of
governmental agencies have engaged the Adviser to provide services in the
areas of securities risk analysis, securities disposition and portfolio
management. The Adviser has advised the Smith Breeden Family of Funds
since 1992.
The Federal Deposit Insurance Corporation, Federal Savings and Loan
Insurance Corporation, Resolution Trust Corporation, Office of Thrift
Supervision and various Federal Home Loan Regional Banks have engaged
the Adviser for various securities-related projects. One of the most
significant governmental agency projects involved the disposition of CMO
residuals, whose original cost totalled approximately $700 million, purchased
by the former Silverado Savings Bank of Denver. The Adviser is currently
advising the Federal Home Loan Banks of Boston and Pittsburgh regarding
mortgage-backed security portfolios totalling over $3 billion. None of the
government project activity is included in the advisory assets discussed
above.
The Adviser was one of the first market participants to develop effective
option adjusted evaluation models. For over ten years, the Adviser has
developed and traded on proprietary mortgage prepayment projections.
Such projections are available only to advisory clients and, in contrast to
prepayment projections developed by securities firms, are not used for any
broker trading or arbitrage operations.
The principals and staff of the Adviser collectively have
accumulated over 100 years of experience analyzing, investing in and
controlling the risks of mortgage securities while in the employ of the
Adviser. Key employees of the Adviser who may contribute investment
ideas, research and analysis for the benefit of each of the Series and who
are not officers or Trustees of the Fund are:
31
Associated with Adviser
Since
Michael L. Bamburg 1986
Principal, Smith Breeden Associates, Inc. Mr. Bamburg assists in analyzing,
trading, designing, and hedging mortgage asset portfolios for clients of
Smith Breeden Associates. He supervises client data for consistency and
integrity. He also supervises monthly analyses, including total rate of
return, mark-to-market net worth, spread income and hedge performance.
Previously was a corporate management associate with Volume Shoe
Corporation, a division of the May Company. Earned an MBA and a BS with
concentrations in Finance, University of Kansas. Received the Ford Finance
Scholarship for graduate business studies at Kansas University.
Carl D. Bell 1991
As a member of the firm's Research Group, Mr. Bell develops computer
programs to value and hedge interest rate sensitive securities and provides
research support to the client service and trading functions. Mr. Bell
manages Smith Breeden's library of analytical software and is active in the
analysis and modeling of mortgage prepayment behavior. Previously, Mr.
Bell has been a Staff Consultant at Andersen Consulting and a Research
Assistant with Putnam, Hayes & Bartlett. He received a Master of Business
Administration with a Concentration in Finance from the Fuqua School of
Business, Duke University, where he received the Hanes Scholarship and
was designated a Fuqua Scholar. Mr. Bell holds a Bachelor of Science in
Mathematics with a Minor in Industrial Management from Carnegie Mellon
University.
Craig J. Cerny 1985
Executive Vice President, Principal and Director of Smith Breeden
Associates, Inc. President of Financial Research Corporation, and Chairman
and CEO of Harrington Bank, FSB. Mr. Cerny has made numerous
presentations to financial institutions and federal regulators regarding
investments and risk management. While with Smith Breeden, he has
participated in trade and portfolio analysis in support of the management of
twenty-five mortgage security portfolios. Previously was the Director of
Financial Planning/Analysis and Region Controller for field operations for
Pizza Hut, Inc. Earned an MBA in Finance with Distinction and BS in
Finance, Honors Convocation from Arizona State University.
32
Stephen A. Eason 1988
Principal and Director of Smith Breeden Associates, Inc. While with Smith
Breeden, Mr. Eason has participated in trade and portfolio decisions
regarding the management of five mortgage security portfolios. Previously,
Vice President-Institutional Sales at Salomon Brothers and Assistant
Treasurer at Chase Manhattan Bank., N.A. Earned an MBA with a
concentration in Finance, Wharton School, and a BS in Business
Administration, University of Arkansas.
Lawrence E. Golaszewski 1987
Principal, Smith Breeden Associates, Inc. He is actively involved in the
analysis, trading and hedging of complex mortgage securities. His other
special projects have included the analysis of a proposed hedging program
for two Southwest Plan thrifts, the analysis and liquidation of a portfolio of
complex mortgage securities, and the comprehensive balance sheet
analysis of a multi-billion dollar savings bank for FDIC and OTS regional
offices. Earned an MBA with a concentration in Finance, University of
Chicago and a BS in Finance and Accounting, summa cum laude, New York
State Regents Scholar, State University of New York at Buffalo.
Gerald J. Madigan 1984
Executive Vice President, Principal and Director of Smith Breeden
Associates, Inc. President, Smith Breeden Mutual Funds 1992 to 1994.
Chairman, Peoples Federal Savings Association, Richmond, Indiana 1989
to 1992. Mr. Madigan has provided portfolio advice to ten of Smith
Breeden's financial institution clients. He oversaw the disposition of the
complex mortgage securities portfolio of Silverado Banking. Previously
employed by Touche Ross & Co. as Senior Management Consultant,
Hallmark Cards Incorporated, Arthur Andersen & Co., Indiana University as
an instructor, and Federal Deposit Insurance Corporation. MBA,
concentration in Finance, with distinction from the Honors Program, Indiana
University. BS in Accounting with High Distinction, Indiana University. Phi
Eta Sigma, Beta Alpha Psi and Beta Gamma Sigma, Indiana University.
William F. Quinn 1986
Principal, Director of Client Services, Smith Breeden Associates, Inc. Mr.
Quinn currently advises several mortgage securities portfolios and has
advised on seven additional portfolios during his tenure with Smith Breeden.
He is actively involved in the formulation and implementation of investment
and risk management policies and procedures as well as clients' strategic
plans and business plans. Earned an MS with concentrations in Finance,
MIS and System Dynamics, Sloan School of Management, M.I.T, and a BS
in Management Science from M.I.T.
Timothy D. Rowe 1988
Principal, Smith Breeden Associates. Mr. Rowe has expertise in mortgage
portfolio management, portfolio restructuring, financial institution loan and
deposit pricing, and the profitability of branch operations. He currently
advises two mortgage securities portfolios and has advised three other
mortgage security portfolios. Previously was an Assistant Economist at the
Federal Reserve Bank of Richmond. Earned an MBA with a concentration
in Finance, University of Chicago, a BA in Economics and History, magna
cum laude, Class Honors, Duke University.
33
John B. Sprow 1987
Portfolio Adviser for the Smith Breeden Market Tracking Fund, Principal,
Smith Breeden Associates, Inc. Mr. Sprow is the trading coordinator for all
client investments. He has been primarily responsible for the day-to-day
management of the Market Tracking Fund since its inception in 1992. Mr.
Sprow currently advises three mortgage securities portfolios. He previously
was a research assistant at Duke University and Cornell University. Earned
an MBA with a concentration in Finance, Duke University and a BS in
Materials Science and Engineering from Cornell University where he was
awarded the Carpenter Technology Scholarship for three consecutive years.
* * * *
As compensation for the services rendered to each of the Series
by the Adviser pursuant to the Investment Advisory Agreement, and the
assumption by the Adviser of the related expenses, each of the Series pays
the Adviser a fee, computed daily and payable monthly, at an annual rate
equal to 0.70% of each of the Series' average daily net asset value. As part
of the advisory fee, the Adviser provides administration services to each
Series.
Transfer Agent, Custodian and Principal Underwriter
Fund/Plan Services, Inc. (the "Transfer Agent") serves each of the
Series as transfer agent, acts as each Series' dividend disbursing agent
and performs certain shareholder service activities. Fund/Plan Services
Inc.'s main office is at #2 West Elm Street, P.O. Box 874, Conshohocken,
Pennsylvania 19428-0874. In addition, Fund/Plan Services, Inc. maintains
certain records of each of the Series pursuant to an Accounting Services
Agreement.
The Bank of New York acts as the custodian of each of the
Series' assets including its portfolio securities and cash. The Bank of New
York's office is at 48 Wall Street, New York, New York, 10286.
Fund/Plan Broker Services (the "Principal Underwriter") serves as
each of the Series'' underwriter. The Principal Underwriter's offices are
located at #2 West Elm Street P.O. Box 874, Conshohocken PA, 19428-
0894.
Expenses
The Short and Intermediate Series each pay all of their
respective expenses, including: the compensation of their respective
Trustees who are not affiliated with the Adviser; governmental fees; interest
charges; brokerage commissions; taxes; membership dues in the
Investment Company Institute allocable to each Series; fees and expenses
of independent auditors, tax preparers and tax consultants, of legal counsel
and of the transfer and dividend disbursing agent and custodian ; insurance
premiums; amortization of organizational expenses; expenses of calculating
the net asset value of the shares of each of the Series; and the investment
management fees paid by the Series to the Adviser. Each of the Series
34
also pays all expenses of issuing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing
prospectuses, reports, notices, proxy statements and reports to
shareholders and to governmental offices and commissions; expenses of
shareholder meetings; and expenses relating to the registration and
qualification of shares of each of the Series.
The Adviser has voluntarily agreed to bear the normal operating
expenses of the Series and, if necessary, to waive the advisory fees for the
Series, for the period ending March 31, 1996 so that the total normal
operating expenses would not exceed 0.78% of the average net assets of
the Short Series and .90% of the Intermediate Series. Normal operating
expenses do not include litigation costs, indemnification or other
extraordinary expenses.
Each of the Series has entered into a separate underwriting
agreement with the Principal Underwriter pursuant to which the Principal
Underwriter receives a fee of $5,000 that is paid by the Adviser under the
each Series' Distributions and Services Plan discussed below.
PURCHASE AND REDEMPTION OF SHARES
Shares of either of the Series may be purchased at net asset
value (with no sales charge) on a continuous basis . The minimum initial
investment is $1,000 and subsequent investments must be $50 or more.
The Series and the Principal Underwriter reserve the right to refuse any
order for the purchase of shares.
Investments may be made by mail or wire. Direct purchase orders
received by the Transfer Agent by 4:00 p.m., Eastern time, and
accompanied by check or wire, are confirmed at that day's net asset value.
Direct purchase orders accompanied by check or wire received by the
Transfer Agent after 4:00 p.m., Eastern time are confirmed at the net asset
value determined on the following business day.
Federal funds wires should be sent to United Missouri Bank, KC,
N.A., ABA #10-10-00695, for credit to Fund/Plan Services, Inc.
A/C 98-7037-071-9, for further credit to: Smith Breeden Short Duration U.S.
Government Series (include shareholder name and shareholder account
number) or Smith Breeden Intermediate Duration U.S. Government Series
(include shareholder name and shareholder account number). To obtain a
number for a new account, an investor should call the Transfer Agent at
(800) 221-3137 by 12:00 noon, Eastern time.
Shares of either of the Series may be purchased through
investment dealers who, as part of the services they provide, must transmit
orders promptly. They may charge for these services. The Fund will refer
shareholders to a dealer upon the shareholder's request. Wire orders for
shares of either of the Series received by dealers prior to 4:00 p.m., Eastern
time, and received by the Transfer Agent before 7:00 p.m., Eastern time, on
the same day are confirmed at that day's net asset value. Orders received
by dealers after 4:00 p.m., Eastern time, are confirmed at the net asset value
on the following business day. It is the dealer's obligation to place the order
with the Transfer Agent before 7:00 p.m., Eastern time.
35
Confirmations
Shareholders will receive confirmation statements each time there
is a transaction which affects an account. The reinvestment of dividends will
be reported on regular monthly statements which will also show the total
number of shares of the Short or Intermediate Series owned by a
shareholder.
Share Certificates
Shares for an initial investment as well as subsequent investments,
including the reinvestment of dividends and capital gain distributions, are
generally credited to an account in the name of an investor on the books of
the Fund, without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss
or theft of a share certificate. A certificate will be issued if requested in
writing by the shareholder or by his broker.
Telephone Transactions
Shareholders may elect the privilege to initiate transactions by
telephone by checking the appropriate box on the account application form.
The Fund, on behalf of each Series, will employ reasonable procedures to
ensure that instructions communicated by telephone are genuine. These
procedures include, but are not limited to, recording telephone instructions
and written confirmation of requests. In the event of a fraudulent telephone
transaction, the Fund will not be liable unless the Fund did not employ
reasonable procedures to ensure that the instructions were genuine.
Automatic Investment Plan
The plan provides a convenient method by which an investor may
have amounts deducted directly from his or her checking account for
investment in either the Short or Intermediate Series. The minimum initial
investment is $1,000 and minimum subsequent investments are $50 per
month pursuant to this plan.
Purchasing Shares of the Series in Connection with Retirement Plans
Shares of either of the Series may be used in a Fund-sponsored
individual retirement account ("IRA") providing for tax-deferred investments
for individuals. Shareholders wishing to establish an IRA account should
consult their tax adviser regarding (1) their individual qualifying status and
(2) any current changes to the tax regulations governing these accounts.
A shareholder may hold shares of a Series in an IRA sponsored by the
Fund for a $12.00 annual fee. The Short or Intermediate Series also may be
used as an investment for a variety of other retirement programs.
36
Purchases Through Securities Dealers
Shares of the Short or Intermediate Series may be purchased
through investment dealers who, as part of the services they provide, must
transmit orders promptly. They may charge for these services. The Fund,
on behalf of each Series, will refer shareholders to a dealer upon the
shareholder's request.
Securities dealers and other firms provide varying arrangements
for their clients to purchase and redeem shares in the Short or Intermediate
Series.. Some may establish higher minimum investment requirements than
set forth above. Firms may arrange with their clients for other investment or
administrative services. Such firms may independently establish and charge
additional amounts to their clients for such services, which charges would
reduce the clients' return. Firms also may hold shares in the Short or
Intermediate Series in nominee or street name as agent for and on behalf
of their customers. In such instances, the transfer agent for the Short and
Intermediate Series will have no information with respect to or control over
accounts of specific shareholders. Such shareholders may obtain access
to their accounts and information about their accounts only from their firm.
Certain of these firms may receive compensation from the Series'
shareholder service agent for record keeping and other expenses relating
to these nominee accounts. In addition, certain privileges with respect to
the purchase and redemption of shares or the reinvestment of dividends
may not be available through such firms. Some firms may participate in a
program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation
statements and disbursement of cash dividends. This Prospectus should
be read in connection with such firms' material regarding their fees and
services.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive
regular periodic payments from the account. An initial balance of $10,000
is required to establish an account. There are no service charges for
establishing or maintaining a Systematic Withdrawal Plan. The minimum
amount which the shareholder may withdraw periodically is $100. Capital
gain distributions and income dividends to the shareholder's account are
received in additional shares at net asset value. Payments are then made
from the liquidation of shares at net asset value to meet the specified
withdrawals. Liquidation of shares may reduce or possibly exhaust the
shares in the shareholder's account, to the extent withdrawals exceed
shares earned through dividends and distributions, particularly in the event
of a market decline. No payment pursuant to a Systematic Withdrawal Plan
will be made if there are insufficient shares on deposit on the date of the
scheduled distribution. A subsequent deposit of shares will not result in a
payment under the plan retroactive to the distribution date. As with other
redemptions, a liquidation to make a withdrawal payment is a sale for
federal income tax purposes. The entire Systematic Withdrawal Plan
payment cannot be considered as actual yield or income since part of such
a Systematic Withdrawal Plan payment may be a return of capital.
37
A Systematic Withdrawal Plan may be terminated on written
notice by the shareholder or the Fund on behalf of each Series, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below
the specified minimums), and schedule of withdrawal payments, or suspend
such payments, by giving written notice to the Transfer Agent at least seven
business days prior to the end of the month preceding a scheduled
payment. Share certificates may not be issued while a Systematic
Withdrawal Plan is in effect.
Exchange Privilege
Shares of either of the Series may be exchanged for shares of
any other fund in the Smith Breeden Family of Funds if it is eligible for sale
in the shareholder's state of residence. Exchanges are made on the basis
of the relative net asset values.. Because the exchange is considered a
redemption and purchase of shares, the shareholder may recognize gain or
loss for federal income tax purposes. Backup withholding and information
reporting may also apply. Additional information regarding the possible tax
consequences of such an exchange is included under the caption
"Additional Information on Distributions and Taxation" in the Statement of
Additional Information.
There are differences among funds. Before making an exchange,
a shareholder should obtain and review a current prospectus of the fund
into which the shareholder wishes to transfer. When exchanging shares,
shareholders should be aware that the funds may have different dividend
payment dates. The dividend payment schedules should be checked before
exchanging shares. The amount of any accumulated, but unpaid dividend
is included in the net asset value per share. Exchanges will be effected
upon receipt of written instructions signed by all account owners and
accompanied by any outstanding share certificates properly endorsed.
However, shareholders who complete the Telephone Exchange authorization
portion of the Shareholder Application will be able to effect exchanges from
either Series into an identically registered account in another mutual fund
in the Smith Breeden Family. The Telephone Exchange Privilege is available
only for uncertificated shares.
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be difficult to
implement. In this event, shareholders should follow the other exchange
procedures discussed in this section, including the procedures for
processing exchanges through broker/dealers. The Telephone Exchange
Privilege may be modified or discontinued by the Fund, on behalf of each
Series, at any time upon 60 days' notice to shareholders. Exchanges out
of any single series will be limited to four per calendar year. This limit
does not include reinvestment of dividends in a different fund.
38
Exchanges Through Securities Dealers.
As is the case with all purchases and redemptions of the Short
or Intermediate Series shares, the Fund will accept exchange orders by
telephone or other means of electronic transmission from securities dealers
who execute a dealer agreement with the Principal Underwriter. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited with Fund/Plan Services. A securities dealer may charge a
fee for handling an exchange. The use of the exchange program may be
discontinued or modified by the Fund at any time upon 60 day's written
notice to shareholders.
Distribution and Services Plans
The Fund has adopted a Distribution and Services Plan (the
"Plan") for each of the Series pursuant to Rule 12b-1 under the 1940 Act.
The purpose of the Plan is to permit the Adviser to compensate investment
dealers and other persons involved in servicing shareholder accounts for
services provided and expenses incurred in promoting the sale of shares of
the Short or Intermediate Series reducing redemptions, or otherwise
maintaining or improving services provided to shareholders by such dealers
or other persons. The Plan provides for payments by the Adviser out of
its advisory fee to dealers and other persons at the annual rate of up to
0.25% of the average net assets of either the Short or Intermediate Series
subject to the authority the Trustees of the Fund to reduce the amount of
payments permitted under the Plan or to suspend the Plan for such periods
as they may determine. Subject to these limitations, the amount of such
payments and the purposes for which they are made shall be determined
by the Adviser. (Pursuant to the terms of the Plan the Adviser currently
pays the Principal Underwriter $5,000 per annum for each of the Series as
compensation for its distribution and servicing activities.)
Any distribution and servicing related payments made by the Adviser
to investment dealers or other persons under a Plan is subject to the
continuation of such Plan, the terms of any related service agreements, and
any applicable limits imposed by the National Association of Securities
Dealers, Inc.
How to Sell Shares
If a shareholder has not elected the privilege to initiate
transactions by telephone, a shareholder may liquidate shares owned at any
time and receive from the Fund, on behalf of each Series, the value of the
shares redeemed by forwarding a written request signed by all registered
owners to Fund/Plan Services, Inc., P. O. Box 874, #2 West Elm Street,
Conshohocken, Pennsylvania 19428-0874. The shareholder will then
receive the value of the shares based upon the net asset value per share
of the respective Series next computed after the written request in proper
form is received by Fund/Plan Services, Inc. less the redemption fee, if any.
Redemption requests received after the time at which the net asset value is
calculated each day (as described herein) will receive the price calculated
on the following business day. In order to be in proper form, the
shareholder's written request must be accompanied by share certificates
which have been issued, if any, properly endorsed and in order for
transfer.
39
To be considered in proper form, signature(s) must be guaranteed if
the redemption request involves any of the following:
(1) the proceeds of the redemption are over $25,000;
(2) the proceeds (in any amount) are to be paid to
someone other than the registered owner(s) of the
account;
(3) the proceeds (in any amount) are to be sent to any
address other than the shareholder's address of
record, pre-authorized bank account or brokerage
firm account; or
(4) share certificates, if the redemption proceeds are in
excess of $25,000.
A shareholder will be charged $10 for redemptions by wire.
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934. Eligible
guarantor institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. A broker-dealer guaranteeing signatures must be
a member of a clearing corporation or maintain net capital of at least
$100,000. Credit unions must be authorized to issue signature guarantees.
Signature guarantees will be accepted from any eligible guarantor institution
which participates in a signature guarantee program. A notarized signature
will not be sufficient for the request to be in proper form.
The signature guarantee of a redemption may be waived for certain
broker-dealers, institutions, or service organizations which have been
previously approved by the Fund.
Where shares to be redeemed are represented by share certificates,
the request for redemption must be accompanied by the share certificate
and a share assignment form signed by the registered shareholders exactly
as the account is registered, with the signature(s) guaranteed as referenced
above. Shareholders are advised, for their own protection, to send the
share certificate and assignment form in separate envelopes if they are
being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, accounts under court jurisdiction and retirement plan accounts
may require additional documentation to be in proper form.
40
The redemption price is the net asset value per share next determined
after receipt of the redemption request in the proper form described above,
less the redemption fee, if any; however, wire redemption requests received
by dealers prior to 4:00 p.m., Eastern time, and received by the Transfer
Agent before 7:00 p.m., Eastern time, on the same day are confirmed at that
day's net asset value per share.
Payment for redeemed shares will be sent to the shareholder within
seven days after receipt of the request in proper form, except that the Fund
may delay the mailing of the redemption check, or a portion thereof, until
the Fund's depository bank has made fully available for withdrawal the
check used to purchase Fund shares, which may take up to 15 days or
more. Although the use of a certified or cashier's check will generally
reduce this delay, shares purchased with these checks will also be held
pending clearance. Shares purchased by federal funds wire are available
for immediate redemption. In addition, the right of redemption may be
suspended or the date of payment postponed if the New York Stock
Exchange is closed (other than customary closing) or upon the
determination of the SEC that trading on the New York Stock Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more
or less than the amount invested by the shareholder, depending on
fluctuations in the market value of securities owned by the Fund.
In order to reduce its expenses, the Fund, on behalf of the Short
or Intermediate Series may, from time to time (not more than semi-annually)
upon the authorization of the Board of Trustees, redeem at its option the
shares of any shareholder whose account has been in existence for at least
12 months and whose account contains, due to redemptions, less than a
minimum amount to be determined by the Board of Trustees (but not to
exceed $1,000). In the event it is determined that such a redemption should
be made by the Series, at least two months' written notice of the Series'
intention to redeem will be given, during which period the shareholder can
increase the value of its account to the minimum amount, thereby avoiding
the redemption of its account.
Selling Shares Through Securities Dealers
Shares of a Series may also be sold by contacting your
securities dealer or investment firm (by telephone or in writing). Securities
dealers and investment firms that have entered into a selling group
agreement with the Principal Underwriter can effect redemptions on the
shareholder's behalf by telephone or other expedited means at the net asset
value next calculated after receiving the shareholder's request in proper
form. The securities dealer or investment firm is responsible for prompt
transmission of redemption request to the Transfer Agent, and may charge
a fee for handling such requests.
41
Shareholder Inquiries
Any questions or communications regarding a shareholder's account
should be directed to Fund/Plan Services, Inc., #2 West Elm Street,
P. O. Box 874, Conshohocken, Pennsylvania 19428-0874, or by calling 1-
800-221-3137, Monday through Friday, from 9 a.m. to 7 p.m., Eastern time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Distributions to Shareholders
Each Series intends to make monthly distributions to its
shareholders of net investment income. Each Series reserves the right to
include net short-term gains, if any, in such monthly distributions.
The amount of income dividend payments by a Series is
dependent upon the amount of net investment income received by the
Series from its Portfolio holdings, is not guaranteed and is subject to the
discretion of the Board of Trustees. Thus, the amount of dividends paid
likely will vary month to month. Monthly notices will be provided in
accordance with Section 19(a) of the 1940 Act.
The Short Series' shares are quoted ex-dividend on the business
day after the record date. Shareholders may request to have their dividends
paid out monthly in cash with a dividend payment date generally one week
after record date.
The Intermediate Series will declare daily dividends for
shareholders of record at the close of business on the business day prior
to the dividend declaration date and will be paid generally on the last day
of the month. Shares begin accruing dividends on the business day after
federal funds (funds credited to a member bank's account at the Federal
Reserve Bank) are available from the purchase payment for such shares and
continue to accrue dividends through, and including, the day the redemption
order for the shares is executed. Net realized capital gains ( including short-
term capital gains), if any, will be declared and distributed by the
Intermediate Series at least annually. Distributions are payable in the form
of additional shares of the Intermediate Series which are valued at the net
asset value per share at the close of business on the payment date. If an
investor closes his account, any accrued dividends through, and including,
the day of redemption will be paid as part of the redemption proceeds.
Long-term capital gains and previously undistributed net short-
term gains, if any, will be distributed at least once annually. "Net investment
income," as used above, includes all dividends, interest and other income
earned by a Series, net of a Series' expenses and is the income from
which income dividends may be distributed. The Short and Intermediate
Series will each send written notice to shareholders regarding the tax status
of all distributions made during each calendar year.
42
In order to be entitled to a dividend or a distribution, an investor
must acquire a Series' shares on or before the record date. Caution should
be exercised, however, before purchasing shares immediately prior to a
distribution record date. Because the value of the Series' shares is based
directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in
a decrease in the value of its shares equal to the amount of the distribution.
While a dividend or capital gain distribution received shortly after purchasing
shares represents, in effect, a return of the shareholder's investment, it may
be taxable as dividend income or capital gain.
Tax Matters
The following discussion reflects some of the provisions of the tax
considerations that affect mutual funds and their shareholders.
Taxation of the Series. Each Series intends to qualify as a
regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended, (the "Code"), so that by distributing substantially
all of its net investment income and any net realized short-term and long-
term capital gains for a taxable year, a Series will not be liable for federal
income or excise taxes. Because the Short Series' current policy is to
declare distributions monthly on the record date and to pay cash dividends
generally one week after the record date, the Series may be subject to a
4% excise tax during a calendar year to the extent that the actual amount
distributed during that year falls short of the amount required to be
distributed in order to avoid the excise tax.
Under present law, the Series will not be subject to any excise or
income taxes in Massachusetts as long as they qualify as regulated
investment companies under the Code.
Taxation of Shareholders. For federal income tax purposes, any
income dividends received from the Short or Intermediate Series, as well
as any distributions derived from the excess of net short-term capital gain
over net long-term capital loss, are treated as ordinary income whether
received in cash or in additional shares. Distributions derived from the
excess of net long-term capital gain over net short-term capital loss are
treated as long-term capital gain regardless of the length of time a
shareholder may have owned a Series' shares and regardless of whether
distributions were received in cash or in additional shares. It is not expected
that any of the distributions to be paid by the Short or Intermediate Series
will qualify either for the corporate dividends-received deduction or tax-
exempt interest income. The Short and Intermediate Series will inform
shareholders of the source of dividends and distributions at the time they
are paid and will promptly after the close of each calendar year advise
shareholders of the status for federal income tax purposes of such dividends
and distributions.
Distributions also may be subject to state and local taxes
depending on each shareholder's tax situation. While many states grant tax-
free status to dividends paid to shareholders of mutual funds from interest
income earned from direct obligations of the U.S. Government, none of the
distributions of the Short or Intermediate Series generally are expected to
qualify for such tax-free treatment. Investments in mortgage-backed
securities (including GNMA, FNMA and FHLMC securities) and repurchase
agreements collateralized by U.S. Government securities do not qualify as
direct federal obligations in most states. Shareholders should consult their
tax advisers with respect to the applicability of state and local income taxes
to distributions and redemption proceeds received from a Series.
43
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisers regarding the
applicability of U.S. withholding taxes to distributions received by them from
the Series. Such distributions generally will be subject to U.S. withholding
tax.
The Short or Intermediate Series may be required to report to the
Internal Revenue Service ("IRS") any taxable dividend or other reportable
payment (including share redemption proceeds) and withhold the required
tax on any such payments made to individuals and other non-exempt
shareholders who have not provided a correct taxpayer identification number
and made certain required certifications that appear in the Shareholder
Application. A shareholder may also be subject to backup withholding if the
IRS or a broker notifies the Short or Intermediate Series that the number
furnished by the shareholder is incorrect or that the shareholder is subject
to backup withholding for previous under reporting of interest or dividend
income.
The foregoing discussion is a general summary of certain of the
current federal income tax laws regarding the two Series and investment in
their shares. The discussion does not purport to deal with all of the federal
income tax consequences applicable to an investment in either the Short
or Intermediate Series, or to all categories of investors, some of which may
be subject to special rules. Investors should consult their own tax advisors
regarding the tax consequences to them of investments in shares.
VALUATION OF FUND SHARES
The net asset values per share of the Short and Intermediate
Series are determined as of the close of trading (currently 4:00 p.m.,
Eastern time) each day that the Adviser and Transfer Agent are open for
business and on which there is a sufficient degree of trading in the
Portfolio's securities that the net asset value of each Series' shares might
be affected. As of the date of this Prospectus, current holiday schedules
indicate that the net asset value will not be calculated on the day after New
Year's Day, Presidents' Day, Martin Luther King Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veteran's Day,
Thanksgiving Day, the day following Thanksgiving, Christmas Eve, and
Christmas Day.
The net asset value per share of each of the Series is determined
in the following manner: The aggregate of all liabilities, including accrued
expenses and taxes and any necessary reserves, are deducted from the
aggregate gross value of all assets, and the difference is divided by the
number of shares of the Series outstanding at the time. For the purposes
of determining the aggregate net assets of the Short or Intermediate Series,
cash and receivables will be valued at their realizable amounts. Interest will
be recorded as accrued. Under procedures approved by the Board of
Trustees, the mortgage securities are valued at current market value
provided by a pricing service, bank or broker/dealer experienced in such
matters, when over-the-counter market quotations are readily available.
Securities and other assets for which market prices are not readily available
are valued at fair market value as determined following procedures
approved by the Board of Trustees.
44
All money market instruments with a maturity of more than 60 days are
valued at current market, as discussed above. The fair value of debt
securities originally purchased with remaining maturities of 60 days or less
shall be their amortized cost value, as determined in accordance with the
Investment Company Act and the rules and regulations promulgated
thereunder, unless conditions dictate otherwise.
PERFORMANCE
Advertisements, sales literature and communications to
shareholders may contain various measures of the Short or Intermediate
Series' performance including current yield, various expressions of total
return and current distribution rate. They may occasionally cite statistics to
reflect the Short or Intermediate Series' volatility or risk.
Average annual total return figures, as prescribed by the SEC,
represent the average annual percentage change in the value of $1,000 for
one, five and ten year periods, or portion thereof, to the extent applicable,
through the end of the most recent calendar quarter, assuming reinvestment
of all distributions. The Fund may also furnish total return quotations for
other periods, based on investments at net asset value. For such purposes
total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage
of the purchase price.
Current yield reflects the income per share earned by the Short
or Intermediate Series' portfolio investments; it is calculated by dividing a
Series' net investment income per share during a recent 30-day period by
a Series' net asset value on the last day of that period and annualizing the
result.
Yield, which is calculated according to a formula prescribed by
the SEC (see the Statement of Additional Information), is not indicative of the
dividends or distributions which were or will be paid to a Series'
shareholders. Dividends or distributions paid to shareholders are reflected
in the current distribution rate which may be quoted to shareholders.
In each case performance figures normally are based upon past
performance and reflect all recurring charges against the Short or
Intermediate Series' income; if, at any time, gross returns are compared to
gross returns of other portfolios, specific disclosure to that respect will be
made. The investment results of the Short and Intermediate Series, like all
others, will fluctuate over time; thus, performance figures should not be
considered to represent what an investment may earn in the future or what
a Series' yield, distribution rate or total return may be in any future
period.
45
REPORTS TO DEPOSITORY INSTITUTIONS
Upon a shareholder's written notification to the Adviser that it is
a depository institution, the Adviser will deliver to the shareholder a monthly
and quarterly reports which analyzes the Short or Intermediate Series'
investments according to regulatory risk-based asset categories. Due to
regulatory requirements applicable to each depository financial institution,
each such shareholder should consult with legal counsel regarding its
investment in the Short or Intermediate Series.
46<PAGE>
APPENDIX A
Hedging Transactions
Mortgage Swaps, Interest Rate Swaps, Caps, Floors and Collars
Interest rate swaps involve the exchange by a Series with
another party of their respective commitments to pay or receive interest, for
example, an exchange of floating rate payments for fixed rate payments.
Mortgage swaps are similar to interest rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount,
however, is tied to a reference pool or pools of mortgages. The purchase
of an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate cap.
The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling
such interest rate floor. An interest rate collar combines the elements of
purchasing a cap and selling a floor. The collar protects against an interest
rate rise above the maximum amount but gives up the benefits of an interest
rate decline below the minimum amount.
The Short or Intermediate Series will enter into interest rate
swaps only on a net basis, i.e., the two payment streams are netted out,
with a Series receiving or paying, as the case may be, only the net amount
of the two payments. Inasmuch as these hedging transactions are entered
into for good faith hedging purposes, the Adviser and the Series believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to its borrowing restrictions. The net amount of
the excess, if any, of a Series' obligations over its entitlement with respect
to each interest rate swap will be accrued on a daily basis and an amount
of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by
a custodian that satisfies the requirements of the 1940 Act. A Series will
not write interest rate caps, floors and collars and will not enter into any
interest rate swap, cap, floor or collar transaction unless the unsecured
commercial paper, unsecured senior debt or the claims-paying ability of the
other party thereto is rated either AA or A-1 or better by Standard & Poor's
Corporation or Aa or P-1 or better by Moody's Investors Service, Inc., at the
time of entering into such transaction. If there is a default by the other
party to such a transaction, a Series will have contractual remedies
pursuant to the agreements related to the transaction. There is no assurance
that interest-rate swap, cap, floor or collar counterparties will be able to
meet their obligations pursuant to their contracts, or that, in the event of
default, a Series will succeed in pursuing contractual remedies. The Short
or Intermediate Series thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to interest rate
swaps, caps, floors or collars. The swap market has grown substantially in
47
recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid,
although the Short and Intermediate Series will still treats swaps as illiquid
investments subject to the limitation on such investments described in the
Prospectus at "Illiquid Securities". Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. Caps, floors
and collars are accordingly also considered to be illiquid investments
subject to the same limitation.
There can be no assurance that the Short or Intermediate Series
will be able to enter into interest rate swaps, caps, floors or collars on
favorable terms. Furthermore, there can be no assurance that either Series
will be able to terminate an interest rate swap or sell or offset interest rate
caps, floors or collars notwithstanding any terms in the agreements
providing for such termination.
Hedging and risk management techniques require different skills
from those involved in the selection of portfolio securities. One such skill is
the ability to predict the correlation of interest rate changes between
markets. The Adviser has been engaged in hedging target duration
portfolios for more than ten years. There can be no assurance that the
Adviser will accurately predict market movements which accompany interest
rate changes, in which event a Series' overall performance may be less
than if the Portfolio had not entered into hedging transactions.
Short Sales
A Series may make short sales of securities. A short sale is a
transaction in which the sells a security it does not own in anticipation that
the market price of that security will decline. A Series expects to make
short sales both as a form of hedging to shorten the overall duration of the
portfolio and in order to maintain portfolio flexibility.
When the Short or Intermediate Series makes a short sale, it
may have to borrow the security sold short and deliver it to the broker-
dealer through which it made the short sale as collateral for its obligation to
deliver the security upon conclusion of the sale. A Series may have to pay
a fee to borrow particular securities and is often obligated to pay over any
payments received on such borrowed securities.
Until the Short or Intermediate Series owns the security which it
sold short or replaces a borrowed security, it will maintain daily a
segregated account with an institution (other than a broker) containing cash,
U.S. Government securities or other liquid high-grade debt securities, at
such a level that (i) the amount deposited in the account plus any cash, U.S.
Government securities or other liquid high-grade debt securities deposited
with the broker as collateral will equal the current value of the security sold
short and (ii) the amount deposited in the segregated account plus the
amount deposited with the broker as collateral will not be less than the
market value of the security at the time it was sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the
security regarding payment over of any payments received by a Series on
such security, a Series may not receive any payments (including interest)
on its collateral deposited with such broker-dealer.
48
If the price of the security sold short increases between the time
of the short sale and the time a Series replaces the borrowed security, the
Series will incur a loss; conversely, if the price declines, the Portfolio will
realize a capital gain. Although a Series' gain is limited to the price at
which it sold the security short, its potential loss is limited only by the
maximum attainable price of the security less the price at which the security
was sold. Unless market interest rates become negative, for a fixed income
security this maximum attainable price is equal to the undiscounted sum of
the largest possible payments of principal and interest.
The Short or Intermediate Series will not make a short sale if,
after giving effect to such sale, the market value of all securities sold short
exceeds 25% of the value of its net assets or the aggregate short sales of
a particular class of securities exceeds 25% of the outstanding securities of
that class. A Series may also make short sales "against the box" without
respect to such limitations. In this type of short sale, at the time of the
sale, the Short or Intermediate Series would own or has the immediate and
unconditional right to acquire at no additional cost the identical
security.
Calls and Puts on Securities; Futures and Related Options
In order to reduce fluctuations in net asset value relative to its
targeted option-adjusted duration, the Short or Intermediate Series may
purchase call or put options (or sell options which it owns) on United States
Treasury securities, Mortgage-Backed Securities and Eurodollar instruments
that are traded on United States and foreign-securities exchanges and in
over-the-counter markets ("OTC Options"). A Series will not sell options
which it does not own. Some contracts are "cash settled" (i.e., the seller
pays the difference between the call and market price in cash when the
market price is higher).
The Short and Intermediate Series will not purchase a put or call
option on U.S. Government securities or Mortgage-Backed Securities if, as
a result of such purchase, more than 10% of the total assets of its assets
would be invested in such options. The Short or Intermediate Series' ability
to purchase put and call options may be limited by the Code's requirements
for qualification as a regulated investment company.
The Adviser monitors the creditworthiness of dealers with whom
a Series would enter into OTC option transactions under the general
supervision of the Board of Trustees. The Short and Intermediate Series
will engage in OTC option transactions only with primary United States
government securities dealers recognized by the Federal Reserve Bank of
New York.
49
The general characteristics and risks of calls and puts on securities
and futures are described below.
In order to reduce fluctuations in net asset value relative to its
targeted option-adjusted duration or to employ temporary substitutes for
anticipated future transactions, the Short or Intermediate Series may buy or
sell financial futures contracts or purchase options (or sell options which it
owns) on such futures.
A Series' use of futures and options on futures contracts will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading
Commission with which a Series' must comply in order not to be deemed
a commodity pool operator within the meaning and intent of the Commodity
Exchange Act and the regulations promulgated thereunder. As a practical
matter, these regulations are not expected to impose substantive
limits.
Options and futures transactions involve costs and may result in
losses. The effective use of options and futures strategies depends on the
Short or Intermediate Series' ability to terminate options and futures
positions at times when the Advisor deems it desirable to do so.
The use of options and futures strategies also involves the risk of
imperfect correlation among movements in the values of the securities
underlying the futures and options purchased and sold by a Series, of the
option and futures contract itself, and of the securities which are the subject
of a hedge.
The Short or Intermediate Series' ability to engage in options and
futures transactions and to sell related securities may be limited by tax
considerations and by certain regulatory requirements. See "Additional
Information Regarding Taxation" in the Statement of Additional Information.
SMITH BREEDEN SERIES FUND
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT
SERIES
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT
SERIES
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1995
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514-2310
(919) 967-7221
Smith Breeden Series Fund (the "Fund") is a no-load open-end
management investment company offering redeemable shares of beneficial
interest in two separate series, the Smith Breeden Short Duration U.S.
Government Series (the "Short Series") and the Smith Breeden
Intermediate Duration U.S. Government Series ( the "Intermediate
Series").
Each Series generally operates as a separate fund with its own
investment objectives and policies to meet its specific investment goals.
A Prospectus for the Short and Intermediate Series, dated
August 1, 1995, as may be amended from time to time, provides the basic
information an investor should know before investing in the Short or
Intermediate Series and may be obtained without charge from the Fund at
the address listed above or from Fund/Plan Broker Services, Inc., #2 West
Elm Street, P.O. Box 874, Conshohocken, Pennsylvania 19428-0874.
This Statement of Additional Information is not a prospectus.
It contains information in addition to and in more detail than set forth in
the Prospectus. This Statement is intended to provide investors with
additional information regarding the activities and operations of the Short
and Intermediate Series, and should be read in conjunction with the Series'
Prospectus.
1 <PAGE>
Contents Page
MISCELLANEOUS INVESTMENT PRACTICES AND RISK
CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . 6
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . 9
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . 10
POLICIES REGARDING BROKERS USED IN PORTFOLIO
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . 12
ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES. . . . . . . . . . . . . . 13
ADDITIONAL INFORMATION REGARDING TAXATION. . . . . . . . . . . 15
STANDARD PERFORMANCE MEASURES. . . . . . . . . . . . . . . . . 19
ADDITIONAL INFORMATION FOR INSTITUTIONAL
INVESTORS . . . . . . . . . . . . . . . . . . . . . . . . . 23
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 24
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2 <PAGE>
MISCELLANEOUS INVESTMENT PRACTICES AND RISK
CONSIDERATIONS
Investment Policies
The following supplements the information contained in the
Prospectus about the investment policies of the Short and Intermediate
Series are invested. Terms used herein have the same meanings as in the
Prospectus.
General Characteristics and Risks of Options and Futures
Options
A put option gives the purchaser of the option the right to sell and
the writer the obligation, if the purchaser exercises his right, to buy the
underlying security at the exercise price during the option period. A call
option gives the purchaser of the option the right to buy and the writer the
obligation, if the purchaser exercises his right, to sell the underlying
security at the exercise price during the option period. Listed options are
issued by the Options Clearing Corporation ("OCC") which guarantees the
performance of the obligations of the parties to such options.
The purchaser of an option risks losing his entire investment in a
short period of time. If an option is not sold while it has remaining value,
or if during the life of an option the underlying interest does not
appreciate, in the case of a call option, or depreciate, in the case of a put
option, the purchaser of such option may lose his entire investment. On
the other hand, given the same market conditions, if the potential
purchaser of a call option purchases the underlying interest directly without
purchasing a call option or if the potential purchaser of a put option
decides not to purchase the put option, such potential purchaser might have
less of a loss. An option purchaser does not have the choice of "waiting
out" an unexpected decrease or increase in the underlying instrument's
price beyond the expiration date of the option. The more that an option is
out-of-the-money and the shorter its remaining term to expiration, the
greater the risk that a purchaser of the option will lose all or part of his
investment. Further, except where the value of the remaining life of an
option may be realized in the secondary market, for an option purchase to
be profitable the market price of the underlying interest must exceed or, as
applicable, be below the exercise price by more than the premium and
transaction costs paid in connection with the purchase of the option and its
sale or exercise.
A Series' ability to close out its position as a purchaser of an
exchange-listed option is dependent upon the existence of a liquid
secondary market on option exchanges. Among the possible reasons for
the absence of a liquid secondary market on an exchange are (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or the OCC to handle current
trading volume, or
3
(vi) a decision by one or more exchanges to discontinue
the trading of options (or a particular class or series of options), in which
event the secondary market on that exchange (or in that class or series of
options) would cease to exist, although outstanding options on that
exchange that had been listed by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with
their terms. OTC Options are purchased from or sold to dealers or
financial institutions which have entered into direct agreement a Series.
With OTC Options, such variables as expiration date, exercise price and
premium will be agreed upon between the Series and the transacting
dealer, without the intermediation of a third party such as the OCC. If the
transacting dealer fails to make or take delivery of the securities underlying
an option it has written, in accordance with the terms of that option as
written, a Series would lose the premium paid for the option as well as any
anticipated benefit of the transaction. OTC Options and their underlying
securities are considered illiquid. A Series will engage in OTC Option
transactions only with primary United States government securities dealers
recognized by the Federal Reserve Bank of New York. The Adviser
monitors the creditworthiness of dealers with whom the a Series enters
into OTC options transactions under the general supervision of the Fund's
Board of Trustees.
The hours of trading for options on debt securities may not conform
to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
Futures Contracts and Related Options
As a purchaser of an interest rate futures contract, a Series
incurs an obligation to take delivery of a specified amount of the obligation
underlying the futures contract at a specified time in the future for a
specified price or, in "cash settlement" futures contracts, to pay to (or
receive from) the seller in cash the difference between the original price in
the futures contract and the market price of the instrument on the specified
date, if the market price is lower (or higher, as the case may be). A futures
contract sale creates an obligation by a Series, as seller, to deliver the
specified type of financial instrument called for in the contract at a
specified future time for a specified price or, in "cash settlement" futures
contracts, to pay to (or receive from) the buyer in cash the difference
between the original price in the futures contract and the market price of
the instrument on the specified date, if the market price is higher (or lower,
as the case may be). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser
the right in return for the premium paid to assume a position in a futures
contract (a long position if the option is a call and short position if the
option is a put).
4
Although most futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. A futures
contract sale is closed out by effecting a futures contract purchase for the
same aggregate amount of the specific type of security and the same
delivery date. If the sale price exceeds the offsetting purchase price, the
seller would be paid the difference and would realize a gain. If the
offsetting purchase price exceeds the sale price, the seller would pay the
difference and would realize a loss. Similarly, a futures contract purchase is
closed out by effecting a futures contract sale for the same aggregate
amount of the specific type of security and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize
a gain, whereas if the purchase price exceeds the offsetting sale price, the
purchaser would realize a loss. There is no assurance that the Short or
Intermediate Series will be able to enter into a closing transaction.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Short or Intermediate Series
upon the proper termination of the futures contract. The margin deposits
made are marked to market daily and a Series may be required to make
subsequent deposits into the segregated account, maintained at its
Custodian for that purpose, or cash, U.S. Government securities or other
liquid high-grade debt securities, called "variation margin", in the name of
the broker, which are reflective of price fluctuations in the futures contract.
Currently, interest rate futures contracts can be purchased on debt
securities such as U.S. Treasury Bills and Bonds, Eurodollar instruments,
U.S. Treasury Notes and GNMA Certificates.
Exchanges limit the amount by which the price of a futures
contract may move on any day. If the price moves equal the daily limit on
successive days, then it may prove impossible to liquidate a futures position
until the daily limit moves have ceased. In the event of adverse price
movements, a Series would continue to be required to make daily cash
payments of variation margin on open futures positions. In such situations,
if a Short Series has insufficient cash, it may be disadvantageous to do so.
In addition, a Series may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time
when it is disadvantageous to do so. An inability to close out options and
futures positions could also have an adverse impact a Series' ability to
effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the
Short or Intermediate Series engages in transactions in futures or options ,
either Series could experience delays and/or losses in liquidating open
positions purchased or sold through the broker and/or incur a loss of all or
part of its margin deposits with the broker. Transactions are entered into
by a Series only with broker or financial institutions deemed creditworthy
by the Adviser.
The variable degree of correlation between price movements of
futures contracts and price movements in the position being hedged creates
the possibility that losses on the hedge may be greater than gains in the
value of the Short Intermediate's position. In addition, futures and futures
option markets may not be liquid in all circumstances. As a result, in
volatile markets, a Series may not be able to close out a transaction
without incurring losses substantially greater than the initial deposit.
Although the contemplated use of these contracts should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in the value of such position. The ability of the Short or
Intermediate Series to hedge successfully will depend on the Adviser's
ability to forecast pertinent market movements, which cannot be assured.
5
In order to achieve its investment objective, the a Series may sell interest
rate futures in a different dollar amount than the dollar amount of
securities being hedged depending on the expected relationship between
the volatility of the prices of such securities and the volatility of the
futures contracts, based on duration calculations by the Adviser. If the
actual price movements of the securities and futures are inconsistent with
their durations as so calculated, the hedge may not be fully effective.
The Short and Intermediate Series will not maintain open short
positions in interest rate futures contracts if, in the aggregate, the value of
the open positions (marked to market) exceeds the current market value of
its securities portfolio plus or minus the unrealized gain or loss on those
open positions, adjusted for the expected volatility relationship between the
Series and the futures contracts based on duration calculations. If this
limitation should be exceeded at any time, the Short or Intermediate
Series will take prompt action to close out the appropriate number of open
contracts to bring its open futures position into compliance with this
limitation.
Finally, the daily deposit requirements in futures contracts
create an ongoing greater potential financial risk than do options
transactions, where the exposure is limited to the cost of the initial
premium. Losses due to hedging transactions may reduce net asset value.
Income earned by the Short or Intermediate Series from its hedging
activities generally will be treated as capital gains.
INVESTMENT RESTRICTIONS
The following restrictions (except as noted) have been adopted
as fundamental policies for both the Short and Intermediate Series, which
means that they may not be changed without the approval of a majority of
the outstanding shares of each of the Series , as the case may be (as
defined in the Investment Company Act). A Series may not (except that
none of the following investment restrictions shall prevent a Series from
investing all of its assets (other than assets which are not "investment
securities" as defined in the Investment Company Act) in an open-end
investment company with substantially the same investment
objectives):
1. Issue senior securities, borrow money or pledge its assets,
except that the Short or Intermediate Series may borrow from banks or
through reverse repurchase agreements or dollar rolls up to 33 1/3% of the
value of its respective total assets (calculated when the loan is made) for
temporary, extraordinary or emergency purposes and to take advantage of
investment opportunities and may pledge up to 33 1/3% of the value of its
total assets to secure such borrowings. For purposes of this restriction, the
purchase or sale of securities on a "when-issued" or delayed delivery basis,
the purchase and sale of futures contracts, the entry into reverse repurchase
agreements and dollar roll transactions, short sales, interest rate swaps,
mortgage swaps, over-the-counter options, and collateral arrangements with
respect thereto are not deemed to be a pledge of assets and none of such
transactions or arrangements nor obligations of a Series to Trustees
pursuant to deferred compensation arrangements are deemed to be the
issuance of a senior security.
6
2. Act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.
3. Purchase any security (other than obligations of the U.S.
Government, its agencies and instrumentalities) if as a result: (i) with
respect to 75% of its total assets, more than 5% of the Short or
Intermediate Series' total assets (determined at the time of investment)
would then be invested in securities of a single issuer, or (ii) 25% or more
of a Series' total assets (determined at the time of investment) would be
invested in one or more issuers having their principal business activities in
the same industry.
4. Purchase the securities of any issuer which would result in
owning more than 10% of any class of the outstanding voting securities of
such issuer.
5. Purchase any security, other than Mortgage-Backed
Securities, or obligations of the U.S. Government, its agencies or
instrumentalities, if as a result the Short or Intermediate Series would have
invested more than 5% of its respective total assets in securities of issuers
(including predecessors) having a record of less than three years of
continuous operation; except for investments in regulated investment
companies with the same objective.
6. Acquire, lease or hold real estate. (Does not preclude
investments in securities collateralized by real estate or interests therein.)
7. Purchase or sell commodities or commodity contracts except for
hedging purposes.
8. Invest in interests in oil, gas or other mineral exploration or
development program.
9. Invest in companies for the purpose of exercising control or
management.
10. Purchase securities of other investment companies, except to
the extent permitted by the Investment Company Act.
11. Make loans of money or property to any person, except
through loans of portfolio securities to Qualified Institutions, the purchase
of debt obligations in which the Short or Intermediate Series may invest
consistently with its investment objectives and policies and investment
limitations or the investment in repurchase agreements with Qualified
Institutions. The Short or Intermediate Series will not lend portfolio
securities if, as a result, the aggregate of such loans exceeds 33 1/3% of the
value of a Series' respective total assets (including such loans).
12. Purchase securities on margin (but the Short or Intermediate
Series may obtain such short-term credits as may be necessary for the
clearance of transactions); provided that the deposit or payment by a
Series of initial or variation margin in connection with options or futures
contracts is not considered the purchase of a security on margin.
7
13. Make short sales of securities or maintain a short position if,
when added together, more than 25% of the value of the Short or
Intermediate Series' net assets would be (i) deposited as collateral for the
obligation to replace securities borrowed to effect short sales, and (ii)
allocated to segregated accounts in connection with short sales. Short sales
"against-the box" are not subject to this limitation.
Whenever any fundamental investment policy or investment
restriction states a maximum percentage of assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will
not be considered a violation of such policy. However, in the event that
the asset coverage for borrowings falls below 300%, the Short and
Intermediate Series will take prompt action to reduce its borrowings as
required by applicable laws.
In order to change any of the foregoing restrictions which are
fundamental policies, approval must be obtained by shareholders of the
Short or Intermediate Series, as the case may be. Such approval requires
the affirmative vote of the lesser of (i) 67% or more of the voting securities
present at a meeting if the holders of more than 50% of voting securities
are represented at that meeting or (ii) more than 50% of the outstanding
voting securities of either the Short or Intermediate Series.
In addition, as non-fundamental policies, the Short and
Intermediate Series each may not:
(a) sell over-the-counter options which it does not own;
(b) sell options on futures contracts which options it does not own;
or
(c) invest in residual interests in a REMIC or a CMO.
Other Policies
There are no restrictions or limitations on investments in
obligations of the United States, or of corporations chartered by Congress
as federal government instrumentalities. The underlying assets of the
Short or Intermediate Series may be retained in cash, including cash
equivalents which are Treasury bills, and short-term bank obligations such
as certificates of deposit, bankers' acceptances and repurchase agreements.
However, it is intended that only so much of the underlying assets of the
the Short or Intermediate Series be retained in cash as is deemed desirable
or expedient under then-existing market conditions. As noted in the
Prospectus, a Series may invest up to 15% of its respective total net assets
in illiquid securities.
8
In order to comply with certain "blue sky" restrictions, a Short
and Intermediate Series will not as a matter of operating policy, invest in
securities of any issuer if, to the knowledge of a Series, any officer or
Trustee of the Fund or the Adviser owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and Trustees who
own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
The Short and Intermediate Series may make commitments
more restrictive than the restrictions listed above so as to permit the sale of
shares of a Series in certain states. Should the Fund determine that a
commitment is no longer in the best interest of the Fund and its
shareholders, the Short or Intermediate Series will revoke the commitment
by terminating the sale of shares of the Series in the state involved.
TRUSTEES AND OFFICERS
The Board of Trustees has the responsibility for the overall
management of the Fund and each of the Short and Intermediate Series,
including general supervision and review of its investment activities. The
Trustees, in turn, elect the officers of the Fund who are responsible for
administering the day-to-day operations of the Fund. Trustees and officers
of the Fund are identified in the Prospectus.
Trustees not affiliated with the Adviser will be each be paid
approximately $26,000 by the Short Series and $3,500 by the Intermediate
Series and will reimbursed for expenses incurred in connection with their
overall management of the two Series, including those expenses incurred in
attending quarterly meetings. No officers or Trustees will receive any other
compensation directly from the Fund. For the fiscal year ended March 31,
1995, the Trustees not affiliated with the Adviser were paid in total
$43,414 by the Short Series and $4,700 by the Intermediate Series. The
Fund estimates an aggregate of $78,000 and $10,500 will be paid by the
Short and Intermediate Series, respectively, in total to the three Trustees
not affiliated with the Adviser during the Series' current fiscal year.
The Fund's Declaration of Trust provides that it will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Fund, unless it is determined that they had acted with
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices or had not acted in good faith in the
reasonable belief that their actions were in the best interests of the
Fund.
9
INVESTMENT ADVISORY AND OTHER SERVICES
The investment manager of each Series is Smith Breeden
Associates, Inc. (the "Adviser"). The table in the Prospectus indicates
which officers and Trustees are affiliated persons of the Adviser.
Pursuant to an Investment Advisory Agreement with each
Series (the "Advisory Agreement"), the Adviser provides investment
research and portfolio management services, including the selection of
securities to purchase, hold or sell, and the selection of brokers and
dealers through whom portfolio transactions are executed. The Adviser's
activities are subject to the review and supervision of the Board of
Trustees to whom the Adviser renders periodic reports of the two Series'
investment activities. The Adviser, at its own expense, furnishes the Short
and Intermediate Series with office space and office furnishings, facilities
and equipment required for managing the business affairs of the Series;
maintains all internal bookkeeping, clerical, secretarial and administrative
personnel and services; carries fidelity insurance on its own officers and
directors for the protection of the Series; and provides certain telephone
and other mechanical services. Except for the expense limitation in place
through March 31, 1995, each Series bears all expenses related to its
operation not borne by the Adviser, as discussed in the Prospectus.
The Advisory Agreement is in effect until July 20, 1996.
Thereafter, it may continue in effect for successive periods not exceeding
one year, providing such continuance is specifically approved at least
annually by a vote of the Fund's Board of Trustees or by a vote of the
holders of a majority of each of the Series' outstanding voting securities,
and in either event by a majority of the Fund's' Trustees who are not
parties to the Agreement or interested persons of any such party (other
than as Trustees of the Fund), cast in person at a meeting called for that
purpose. Each Advisory Agreement may be terminated without penalty at
any time by the Fund, on behalf of each Series, or by the Adviser on sixty
days' written notice and will automatically terminate in the event of its
assignment as defined in the Investment Company Act. The Advisory
Agreement provides that the Adviser will not be liable for any error of
judgment or for any loss suffered by either Series in connection with
matters to which the Advisory Agreement relates, except a loss resulting
from willful misfeasance, bad faith gross negligence or reckless disregard of
duty.
As compensation for the services rendered to each Series by
the Adviser pursuant to the Advisory Agreement, and the assumption by
the Adviser of the related expenses, the Short and Intermediate Series
each pays the Adviser a fee, computed daily and payable monthly, at an
annual rate equal to 0.70% of the respective Series' average daily net asset
value.
Under the terms of its Advisory agreement with each Series,
the Adviser also performs the following administrative services:
Fund/Plan Services, Inc. is the shareholder servicing, accounting,
transfer and dividend paying-agent. Each Series' pays its own expenses,
including, but not limited to auditing, legal, tax preparation and consulting,
insurance, custodial, accounting, shareholder servicing and shareholder
report expenses. Fees paid to Fund/Plan Services are determined by
contract as approved by the Trustees.
Bank of New York, 48 Wall Street, New York, NY, 10286 acts
as custodian of the securities and other assets of the Portfolio. The
custodian does not participate in decisions relating to the purchase and sale
of portfolio securities.
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540,
are the Fund's independent auditors, and Ropes & Gray, One International
Place, Boston, Massachusetts 02110-2624, are legal counsel to the Fund.
10<PAGE>
Listed below are the names and addresses of those shareholders
who, as of March 31, 1995, owned 5% or more of the shares of the Short
Duration Series.
Shareholder Percentage Owned
Carver Federal Savings Bank 29.62%
2815 Atlantic Avenue
Brooklyn, NY 11207
Humana, Inc.
500 W. Main Street
Louisville, KY 40202 9.06%
Hemet Federal Savings & Loan
445 E. Florida Ave.
Hemet, CA 92543 7.10%
Watsonville Federal Savings & Loan 6.84%
35 East Lake Avenue
Watsonville, CA 95076
Dell USA LP
2112 Kramer Ln. Bldg. BR-1
Austin, TX 5.97%
The Officers and Trustees of the Fund together as a group owned less than
1.00% of the shares of the Short Duration Series as of March 31, 1995.
Listed below are the names and addresses of those shareholders, who as of
March 31, 1995, owned 5% or more of shares of the Intermediate Series.
Roosevelt Bank
900 Roosevelt Pkwy
Chesterfield, MO 73.62%
Public School Retirement System
1 Mercantile Ctr.
St. Louis, MO 17.89%
The Officers and Trustees of the Fund together as a group owned less than
1.00% of the shares of the Intermediate Duration Series as of March 31,
1995.
11
Potential Conflicts of Interest
Principals of the Adviser as individuals own 99% of the
common stock of Financial Research Corporation, the holding company for
Harrington Bank, FSB (the "Association"). As of March 31, 1995, the
Association had total assets of $263 million.
Douglas T. Breeden, in combination with immediate family
members, controls over 75% of the common stock of Community First
Financial Group, Inc., the holding company for English State Bank of
English, Indiana (the "Bank"). As of March 31, 1995, the Bank had total
assets of $76 million. The Adviser furnishes certain Investment Advisory
Services to the Bank and Association. The Fund will transact no business
directly or indirectly with either the Bank or the Association. The Bank
and Association invest in assets of the same types as those to be held by
the Portfolio.
The Adviser may also manage advisory accounts with investment
objectives similar to or the same as those of the Short or Intermediate
Series, or different from the two Series, but trading in the same type of
securities and instruments .. Portfolio decisions and results of the two
Series' investments may differ from those of such accounts managed by the
Adviser. When two or more accounts managed by the Adviser seek to
purchase or sell the same assets, the assets actually purchased or sold may
be allocated among the accounts on a basis determined by the Adviser in
its good faith discretion to be equitable. In some cases, this system may
adversely affect the size or the price of the position obtainable for the
Short or Intermediate Series.
POLICIES REGARDING BROKERS
USED IN PORTFOLIO TRANSACTIONS
Under the Advisory Agreement, the selection of brokers and
dealers to execute transactions on behalf of the Portfolio is made by the
Adviser in accordance with criteria set forth in the Advisory Agreement and
any directions which the Board of Trustees may give. However, the Short
and Intermediate Series do not anticipate that it will incur a significant
amount of brokerage expense because brokerage commissions are not
normally incurred on investments in Mortgage Securities, which are
generally traded on a "net" basis, that is, in principal amounts without the
addition or deduction of brokerage commissions. The Short and
Intermediate Series paid $80,496 and $3,147, respectively, in brokerage
commissions on futures and options for the year end March 31,
1995.
When placing a portfolio transaction, the Adviser attempts to
obtain the best net price and execution of the transaction. On portfolio
transactions which are done on a securities exchange, the amount of
commission paid by the Short or Intermediate Series is negotiated between
the Adviser and the broker executing the transaction. The Adviser seeks to
obtain the lowest commission rate available from brokers which are felt to
be capable of efficient execution of the transactions. The determination
and evaluation of the reasonableness of the brokerage commissions paid in
connection with portfolio transactions are based to a large degree on the
professional opinions of the persons responsible for the placement and
review of such transactions.
12
These opinions are formed on the basis of,
among other things, the experience of these individuals in the securities
industry and information available to them concerning the level of
commissions being paid by other institutional investors of comparable
size.
Securities may be purchased directly from issuers or from
underwriters. Where possible, purchase and sale transactions will be
effected through dealers (including banks) which specialize in the types of
securities which the Portfolio will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principal for
their own account. Purchases from underwriters will include a concession
paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. No broker or
dealer affiliated with the Portfolio or with the Adviser may purchase
securities from, or sell securities to, the Portfolio.
When it is felt that several brokers or dealers are equally able
to provide the best net price and execution, the Adviser may decide to
execute transactions through brokers or dealers who provide quotations and
other services to the Short or Intermediate Series, specifically including the
quotations necessary to determine each of the Series' net assets, in such
amount of total brokerage as may reasonably be required in light of such
services, and through brokers and dealers who supply statistical and other
data to the two Series in such amount of total brokerage as may
reasonably be required.
The Adviser conducts extensive proprietary fixed income research
with emphasis on mortgage-backed securities. The Adviser is not
dependent on any broker for such research and analysis and, thus is able to
transact business with brokers regardless of the brokers' research
capabilities or provision of such research to brokerage customers. The
Adviser uses multiple electronic quotation services for trading and pricing
purposes. The Adviser pays for these services directly out of its advisory
fees. The Adviser is not involved in any soft dollar arrangements. The
Adviser does utilize broker pricing guidance for certain assets not
consistently available through electronic quotation services.
ADDITIONAL INFORMATION REGARDING
PURCHASES AND REDEMPTIONS OF FUND SHARES
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of either Series must be denominated in
U.S. Dollars. The Fund reserves the right, in its sole discretion, to either
(a) reject any order for the purchase or sale of shares denominated in any
other currency, or (b) to honor the transaction or make adjustments to
shareholder's account for the transaction as of a date and with a foreign
currency exchange factor determined by the drawee bank.
Dividend checks which are returned to the Fund marked
"unable to forward" by the postal service will be deemed to be a request to
change the dividend option and the proceeds will be reinvested in
additional shares at the current net asset value until new instructions are
received.
13
Redemptions in Kind
The Short and Intermediate Series have committed themselves
to pay in cash all requests for redemption by any shareholder of record,
limited in amount, however, during any 90-day period to the lesser of
$250,000 or 1% of the value of the either Series' net assets at the beginning
of such period. Such commitment is irrevocable without the prior approval
of the Securities and Exchange Commission. In the case of requests for
redemption in excess of such amounts, the Trustees reserve the right to
make payments in whole or in part in securities or other assets of either
Series in case of an emergency, or if the payment of such redemption in
cash would be detrimental to the existing shareholders of either Series. In
such circumstances, the securities distributed would be valued at the price
used to compute the Short or Intermediate Series' net assets. Should the
Short or Intermediate Series do so, a shareholder may incur brokerage fees
or other transaction costs in converting the securities to cash.
Principal Underwriter
Fund/Plan Broker Services, Inc. (the "Principal Underwriter"), #2
West Elm Street, P. O. Box 874, Conshohocken, Pennsylvania 19428-0874,
is the principal underwriter for the Fund. The Principal Underwriter is
registered as a broker-dealer under the Securities Exchange Act of 1934
and is a member of the National Association of Securities Dealers, Inc.
The offering of the Fund's shares is continuous.
The Fund's underwriting agreement with the Principal Underwriter
provides that the Fund will pay all fees and expenses in connection with:
registering and qualifying its shares under the various state "blue sky" laws;
preparing, setting in type, printing, and mailing its prospectuses and reports
to shareholders; and issuing its shares, including expenses of confirming
purchase orders. See the description of the Distribution Plan in the
Prospectus.
The Principal Underwriter acts as the agent of both the Short
and Intermediate Series in connection with the sale of their shares in all
states in which the shares are qualified and in which the Principal
Underwriter is qualified as a broker-dealer. Under the underwriting
agreement, the Principal Underwriter may accept orders for either Series
shares at the offering price. The Principal Underwriter may enter into
agreements with other broker-dealers for the sale of Short or Intermediate
Series shares by them.
The Principal Underwriter is paid $5,000 by the Adviser for its
services. In addition, for the year ended March 31, 1995, the Principal
Underwriter received no sales charges or commissions.
Calculation of Net Asset Value
As noted in the Prospectus, the Short and Intermediate Series
will generally calculate their net asset value as of the close of trading each
Monday through Friday that the Adviser and Transfer Agent are open for
business and sufficient trading takes place to impact the value of the Short
or Intermediate Series assets. As of the date of this Statement, current
14
holiday schedules indicate that the net asset value will not be calculated on:
New Year's Day, Presidents' Day, Martin Luther King Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's
Day, Thanksgiving Day, the day following Thanksgiving, Christmas Eve,
and Christmas Day.
Reinvestment Date
The dividend reinvestment date is the date on which the additional
shares are purchased for the investor who has his dividends reinvested.
This date will vary from month to month and is not necessarily the same
date as the record date or the payable date for cash dividends.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or
authority to control a shareholder's account, the Fund has the right (but
has no obligation) to (a) require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
prior to executing instructions regarding the account; (b) interplead
disputed funds or account with a court of competent jurisdiction or (c)
surrender ownership of all or a portion of the account to the Internal
Revenue Service in response to a Notice of Levy.
ADDITIONAL INFORMATION REGARDING TAXATION
Taxation of the Series
For federal income tax purposes, each Series will be treated as
a separate corporation. Each of the Short and Intermediate Series intend
to qualify each year and elect to be treated as regulated investment
companies ("RICs") for federal income tax purposes. To so qualify, the
Short and Intermediate Series must, among other things: (i) derive at least
90% of their gross income for each taxable year from dividends, interest,
payments with respect to loans of securities and gains from the sale or
other disposition of securities or certain other related income; (ii) generally
derive less than 30% of their gross income for each taxable year from gains
from the sale or other disposition of securities and certain other
investments held for less than three months; and (iii) diversify their
holdings so that at the end of each quarter of the taxable year (A) at least
50% of the value of each of the Short and Intermediate Series' assets
would be represented by cash, U.S. Government securities, securities of
other RICs, and other securities which, with respect to any one issuer, do
not represent more than 5% of the value of each of the Series' assets nor
more than 10% of the voting securities of such issuer and (B) not more
than 25% of the value of each of the Series' assets are invested in the
securities of any one issuer (other than U.S. Government securities or the
securities of other RICs).
The requirement that each Series derive less than 30% of its
gross income from gains from the sale or other disposition of securities and
certain other investments held for less than three months (the "Short-Short
Rule") may cause the Short or Intermediate Series to (i) hold certain
15
investments that it otherwise would have sold or (ii) sell certain investments
that it otherwise would have held. In addition, if the Short or Intermediate
Series were to experience a large quantity of share redemptions during a
taxable year, either Series may have difficulty satisfying the Short-Short
Rule during that year. If the Short or Intermediate Series fails to satisfy
the Short-Short Rule in a taxable year, it would lose its RIC status for that
year. Each Series, however, will endeavor to select investments for sale
during a taxable year in such a way that they will satisfy the Short-Short
Rule.
If the Short and Intermediate Series qualify as a RICs and
distribute to their shareholders at least 90% of its net investment income
(including tax-exempt interest and net short-term capital gain but not net
capital gain, which is the excess of net long-term capital gains over net
short-term capital losses), then the Short and Intermediate Series will not
be subject to federal income tax on the income so distributed. However,
the Short and Intermediate Series will be subject to corporate income tax
on any undistributed income. In addition, either Series would be subject
to a nondeductible 4% excise tax on the amount by which the income it
distributed in any calendar year would be less than a minimum distribution
amount. The minimum distribution amount required to avoid the excise
tax for a calendar year equals the sum of (i) 98% of a Series' ordinary
income (excluding tax-exempt interest income) for such calendar year; (ii)
98% of the excess of capital gains over capital losses for the one-year
period ending on October 31 (or another date if elected by a Series) of
each year; and (iii) 100% of the undistributed ordinary income and gains
from prior years. For purposes of the excise tax, any income or capital
gains retained by, and taxed in the hands of, either Series will be treated
as having been distributed.
Both the Short and Intermediate Series intend to distribute
sufficient income so as to avoid both corporate income tax and excise tax.
The Short Series may be subject to a 4% excise tax to the extent that the
amount of ordinary income distributed during the calendar year is less than
98% of the ordinary income (excluding tax-exempt interest income) for the
year. The Short Series will endeavor to pay dividends in such a manner
that an excise tax will not be incurred. The Series also may elect to retain
all or a portion of their net capital gain, as described under "Taxation of
Shareholders Distributions" below.
Any capital losses resulting from the disposition of securities can
be used only to offset capital gains and cannot be used to reduce a Series'
ordinary income. Such capital losses may be carried forward for eight
years. If any capital losses have not been utilized at the time a Series
terminates, such capital losses will become unusable.
16
Taxation of Shareholders
Distributions. In general, all distributions to shareholders
attributable to the Short or Intermediate Series' net investment income
(including any tax-exempt interest income distributed) will be taxable as
ordinary dividend income whether paid in cash or in additional
shares.
To the extent either the Short or Intermediate Series does
realize net capital gains, it intends to distribute such gains at least annually
and designate them as capital gain dividends. Capital gain dividends are
taxable as capital gains, whether paid in cash or in additional shares,
regardless of how long the shares have been held. The Short or
Intermediate Series may elect to retain net capital gains and pay corporate
income tax thereon. In such event, the Short or Intermediate Series would
most likely make an election that would require each shareholder of record
on the last day of the Series' taxable year to include in income for tax
purposes his proportionate share of the Series' undistributed net capital
gain. If such an election is made, each shareholder would be entitled to
credit his proportionate share of the tax paid by the Series against his
federal income tax liabilities and to claim refunds to the extent that the
credit exceeds such liabilities. In addition, the shareholder would be
entitled to increase the basis of his shares for federal tax purposes by an
amount equal to 66% of his proportionate share of the undistributed net
capital gain.
Shareholders receiving distributions in the form of additional shares
will be treated for federal income tax purposes as receiving an equivalent
amount of cash. In general, the basis of such shares will equal the amount
of cash that the shareholder would have received if he had elected to
receive distributions in cash.
Liquidating distributions which in the aggregate exceed a
shareholder's basis in shares will be treated as gain from the sale of shares.
If a shareholder receives, in the aggregate, liquidating distributions which
are less than such basis, such shareholder will recognize a loss to that
extent. Dividends and other distributions by either the Short or
Intermediate Series are generally taxable to the shareholders at the time
the dividend or distribution is made.
If a shareholder purchases shares at a cost that reflects an anticipated
dividend, such dividend will be taxable even though it represents
economically a return of part of the purchase price. Investors should
consider the tax implications of buying shares shortly prior to a distribution.
Sales of Shares. In general, if a share is sold, the seller will
recognize gain or loss equal to the difference between the amount realized
on the sale and the seller's adjusted basis in the share. However, any loss
recognized by a shareholder within six months of purchasing the shares will
be treated as a long-term loss to the extent of any long-term capital gain
distributions received by the shareholder and the shareholder's share of
undistributed long-term capital gains. In addition, any loss realized on a
sale of shares will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before the disposition
of the shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any gain or loss realized upon a
sale of shares by a shareholder who is not a dealer in securities will be
treated as capital gain or loss.
If a shareholder exchanges shares of one fund in the Smith Breeden
Family of Funds for shares of another fund, the shareholder generally will
recognize gain or loss as if the shares had been redeemed.
17
Tax-Exempt Investors. If a shareholder that is a benefit plan
investor (e.g., an individual retirement account, pension plan 401(k) plan,
or Keogh plan) or charitable organization (a "Tax-Exempt Investor") incurs
debt to finance the acquisition of its shares, a portion of the income
received by the Tax-Exempt Investor with respect to its shares would
constitute unrelated business taxable income ("UBTI"). In that case, the
UBTI portion of the Tax-Exempt Investor's income from its investment in
the Short or Intermediate Series for the year would equal the total income
recognized by the Tax-Exempt Investor in that year multiplied by the ratio
of the Tax-Exempt Investor's average acquisition debt balance to the
average tax basis of its shares for the year. A Tax-Exempt Investor
generally is subject to federal income tax to the extent that its UBTI for a
taxable year exceeds its annual $1,000 exclusion.
Consequences of Certain Fund Investments
Hedging Transactions. Each Series intends to engage in
various hedging transactions. Under various provisions of the Code, the
result of such investments and transactions may be to change the character
of recognized gains and losses, accelerate the recognition of certain gains
and losses, and defer the recognition of certain losses. For example, the
tax treatment of futures contracts entered into by a Series as well as listed
non-equity options written or purchased by a Series on U.S. exchanges
(including options on debt securities and options on futures contracts) will
be governed by section 1256 of the Code. Absent a tax election for "mixed
straddles" (described below), each such position held by a Series on the
last business day of each taxable year of the Series will be marked to
market (i.e., treated as if it were closed out), and all resulting gain or loss
will be treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, with subsequent adjustments made to any gain or loss
realized upon an actual disposition of such positions. When a Series holds
an option or contract governed by section 1256 which substantially
diminishes the Series' risk of loss with respect to another position of the
Portfolio not governed by section 1256 (as might occur in some hedging
transactions), that combination of positions generally will be a "mixed
straddle" that is subject to the straddles rules of section 1092 of the Code.
The application of Section 1092 might result in deferral of losses,
adjustments in the holding periods of the Series' securities and conversion
of short-term capital losses into long-term capital losses. Either Series may
make certain tax elections for its "mixed straddles" that could alter certain
effects of section 1256 or section 1092. The extent to which a Series is
able to use such hedging techniques may be limited by the Short-Short
Rule, which is discussed above. In determining compliance with the Short-
Short Rule, however, gains from certain types of hedging positions that are
part of designated hedges and are held by a Series for less than three
months will be netted against losses (whether recognized or unrecognized)
incurred with respect to the offsetting position in the designated hedge.
That special netting provision, if employed by a Series, could reduce the
risk that active hedging techniques will run afoul of the Short-Short
Rule.
18
The character of the Short or Intermediate Series' taxable
income will in most cases be determined on the basis of reports made to
the Series by the issuers of the securities in which they invest. The tax
treatment of certain securities in which a Series may invest is not free from
doubt and it is possible that an IRS examination of the issuers of such
securities could result in adjustments to the income of a Series.
The foregoing discussion is a general summary of certain of the
current federal income tax laws regarding the both Sereies and investors in
the shares. The discussion does not purport to deal with all of the federal
income tax consequences applicable to the Series or to all categories of
investors, some of which maybe subject to special rules. Investors should
consult their own tax advisers regarding the tax consequences to them of
investments in shares.
STANDARD PERFORMANCE MEASURES
Performance
As noted in the Prospectus, the Fund may from time to time
quote various performance figures to illustrate the past performance of
either Series. It may occasionally cite statistics to reflect its volatility or
risk.
Performance quotations by investment companies are subject to rules
adopted by the Securities and Exchange Commission ("SEC"). These rules
require the use of standardized performance quotations or alternatively,
that every non-standardized performance quotation furnished by the Fund
be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual
compounded total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC.
An explanation of those and other methods used by the Fund to compute
or express performance follows.
19
Total Return
The average annual total return is determined by finding the average
annual compounded rates of return over one, five, and ten year periods
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes no sales charge is deducted
from the initial $1,000 purchase order, capital gains and all income
dividends are reinvested at net asset value on the reinvestment dates during
the period. The quotation assumes the account was completely redeemed
at the end of each one, five and ten year period and the deduction of all
applicable charges and fees.
The Series' average annual compounded rate of return is determined
by reference to a hypothetical $1,000 investment, according to the following
formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10
year periods at the end of said 1, 5, or 10 year
periods (or fractional portion thereof).
As discussed in the Prospectus, the Fund may quote total rates of
return in addition to its average annual total return. Such quotations are
computed in the same manner as the Fund's average annual compounded
rate, except that such quotations will be based on the Fund's actual
aggregate return for a specified period as opposed to its average return
over one, five, and ten year periods.
Yield
Current yield reflects the income per share earned by the Fund's
portfolio investments. Current yield is determined by dividing the net
investment income per share earned during a 30-day base period by the
offering price or net asset value per share, as the case may be, on the last
day of the period and analyzing the result, according to the following
formula:
Yield = 2 [(a-b + 1)6 -1]
cd
where:
a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price or net asset
value per share, as the case may be, on
the last day of the period.
20
The following table shows the average annual total return for
the periods stated, and yield for the Short and Intermediate Series for the
30 day period ended March 31, 1995.
AVERAGE ANNUAL
TOTAL RETURN
SINCE
ONE YEAR INCEPTION YIELD
SHORT SERIES 6.58% 5.30% 6.34%
INTERMEDIATE
SERIES 6.10% 8.28% 6.90%
The investment results of the Short and Intermediate Series,
like all others, fluctuate over time. Thus, performance figures should not
be considered to represent what an investment may earn in the future or
what the Short or Intermediate Series' yield or total return may be for any
future period.
Current Distribution Rate
Yield which is calculated according to a formula prescribed by
the SEC is not indicative of the amounts which will be paid to the Series'
shareholders. Amounts paid to shareholders are reflected in the quoted
"current distribution rate." The current distribution rate is computed by
dividing the total amount of dividends, excluding long-term capital gains,
per share paid by a Series during the past twelve months by a current net
asset value. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
over the period such policies were in effect, rather than using the dividends
during the past twelve months. The current distribution rate differs from
the current yield computation because it may include distributions to
shareholders from sources other than dividends and interest, such as short-
term capital gains and net equalization credits and is calculated over a
different period of time.
Volatility
Occasionally statistics may be used to specify a Series volatility
or risk. Measures of volatility or risk are generally used to compare fund
net asset value or performance relative to a market index. One measure of
volatility is beta. The ratio of the expected excess return on a Series to
the expected excess return on the market index is called beta. Equity funds
commonly use the S&P 500 as their market index. A beta of more than
1.00 indicates volatility greater than the market, and a beta of less that 1.00
indicates volatility less than the market. Another measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability
of net asset value or total return around an average, over a specified period
of time. The premise is that greater volatility connotes greater risk
undertaken in achieving performance.
A statistic often used by sophisticated institutional investors
when comparing the relative performance of portfolios is the Sharpe Ratio.
This statistic is a Series' excess return (relative to T-Bills) divided by the
standard deviation of its returns.
21
Comparisons and Advertisements
To help investors better evaluate how an investment in a Series
might satisfy their objective, advertisements regarding either Series may
discuss various measures of a Series' performance as reported by various
financial publications. Advertisements may also compare performance (as
calculated above) to performance as reported by other investments, indices,
and averages. The following publications, indices, and averages may be
used:
a) Lipper - Mutual Fund Performance Analysis, Lipper-Fixed
Income Analysis, and Lipper Mutual Fund Indices - measures total return
and average current yield for the mutual fund industry and ranks individual
mutual fund performance over specified time periods assuming
reinvestment of all distributions, exclusive of sales charges.
b) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total return, and
average rate of return (average annual compounded growth rate) over
specified time periods for the mutual fund industry.
c) Mutual Fund Source book, published by Morningstar, Inc. -
analyzes price, yield, risk, and total return for equity and fixed income
funds.
d) Financial publications: Barron's, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - rate fund
performance over specified time periods.
e) Consumer Price Index (or Cost Of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure of change, over
time, in the price of goods and services, in major expenditure groups.
f) Stocks, Bonds, Bills, and Inflation, published by Ibbotson
Associates -historical measure of yield, price, and total return for common
and small company stock, long-term government bonds, treasury bills, and
inflation.
g) Savings and Loan Historical Interest Rates - as published in the
U.S. Savings & Loan League Fact Book.
h) Salomon Brothers Broad Bond Index - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds. All issues mature in one year or more and have at least
$50 million outstanding, with the exception of mortgages. The entry criteria
for mortgage issues is $200 million for each coupon.
i) Salomon Brothers Mortgage Index - The Salomon Brothers
Mortgage Index measures only the mortgage component of the Salomon
Brothers Broad Bond Index.
j) Salomon Brothers Composite High Yield Index or its
component indices -The High Yield Index measures yield, price and total
return for Long-Term High-Yield Index, Intermediate-Term High-Yield
Index and Long-Term Utility High-Yield Index.
22
k) Lehman Brothers Aggregate Bond Index or its component
indices - The Aggregate Bond Index measures yield, price and total return
for Treasury, Agency, Corporate, Mortgage, and Yankee bonds.
l) Lehman Brothers Government/Corporate Bond Index.
m) Standard & Poor's Bond Indices - measure yield and price of
Corporate, Municipal, and Government bonds.
n) Other taxable investments including certificates of deposit
(CD's), money market deposit accounts (MMDA's), checking accounts,
savings accounts, money market mutual funds, repurchase agreements, and
government securities.
o) Historical data supplied by the research departments of
Lehman Brothers, First Boston Corporation, Morgan Stanley, Salomon
Brothers, Merrill Lynch, Goldman Sachs, Prudential Securities and
Donaldson Lufkin and Jenrette.
p) Donoghues's Money Fund Report - industry averages for 7-day
annualized and compounded yields of taxable, tax-free and government
money funds.
q) Total returns and yields for Treasury Securities and fixed
income indices as published by Ryan Laboratories or other suppliers.
In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments in the
reported indices and averages is not identical, and in some cases is very
different, to a Series' portfolio, that the averages are generally unmanaged
and that the items included in the calculations of such averages may not be
identical to the formula used by a Series to calculate its figures. In
addition there can be no assurance that a Series will continue its
performance as compared to such other averages.
Shareholders should note that the investment results of the
Short or Intermediate Series will fluctuate over time, and any presentation
of a Series' current yield or total return for any period should not be
considered as a representation of what an investment may earn or what a
shareholder's yield or total return may be in any future period.
Shareholders should also note that although the Series believe that there
are substantial benefits to be realized by investing in its shares, such
investments also involve certain risks. (See "Investment Objectives and
Policies of the Fund - Risks of Mortgage Securities" in the Fund's
Prospectus.)
ADDITIONAL INFORMATION FOR INSTITUTIONAL INVESTORS
As the investments permitted to the Series are primarily in
mortgage securities issued or guaranteed by the U.S. Government or its
agencies and instrumentalities, the shares of either the Short or
Intermediate Series may be eligible for investment by federally chartered
credit unions, federally chartered thrifts, and national banks. Either Series
may be a permissible investment for certain state chartered institutions as
well, including state and local government authorities and agencies. Any
financial institution or agency considering an investment in either Series
should refer to the applicable laws and regulations governing its operations
in order to determine if a Series is a permissible investment.
23
EXPERTS
The financial statements of both the Short and Intermediate
Series and related notes thereto included in this Statement of Additional
Information have been so included in reliance upon the input of Deloitte &
Touche LLP, independent auditors, given in authority of said firm as
experts in auditing and accounting.
FINANCIAL STATEMENTS
The financial statements of the Fund are attached and follow the Appendix.<PAGE>
24
APPENDIX
Description of Moody's Investors Service, Inc.'s corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have predominantly
speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in this
class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and interest for
bonds in this capacity than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on
balance, predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
25<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION SERIES ANNUAL REPORT
PERFORMANCE REVIEW
The Smith Breeden Intermediate Duration U.S. Government Series
("Series") provided a total return of 6.10% for the year ended
March 31, 1995. The Series' return was in excess of that of its
benchmark, the Salomon Brothers Mortgage Index (the "SBMI"), by .09%.
Since the Series' inception, its return has exceeded that of its benchmark
by 3.19%, and on an annualized basis by .91%. The graph below plots the
Series' return versus its benchmark, which as noted in the title of the
graph, changed effective January 1, 1994.
The year ended March 31, 1995, was a tumultuous one for the fixed income
markets. The Federal Reserve Board raised the discount rate, the rate at
which banks borrow from the Federal Reserve to meet reserve requirements
and temporary liquidity needs, four times. The rate on March 31, 1994
was 3%, but rose to 5.25% by March 1995. These increases, and the market's
anticipation of the Federal Reserve's actions over the course of the year,
boosted short and intermediate-term yields and increased interest rate
volatility. From March 31, 1994 to March 31, 1995, short-term U.S. Treasury
yields rose over 200 basis points (100 basis points equals one percent),
intermediate-term U.S. Treasury yields rose 85 to 160 basis points, and
long-term yields rose less than 50 basis points. Over the course of the
fiscal year, intermediate and long-term interest rates had actually peaked
at much higher levels: for example, in early January 1995, the five year
U.S. Treasury Note yield was 80 basis points over its closing yield
on March 31, 1995.
IN ACCORDANCE WITH REG. 232.304 OF REGULATION S-T, THE FOLLOWING IS
A DESCRIPTION OF THE GRAPH PRESENTED HERE IN THE TEXT IN COMPLIANCE WITH
ITEM 5a. OF FORM N-1A:
The graph presented compares the change for the period from March 31, 1992
through March 31, 1995 of a $10,000 investment in the Series versus its
benchmark. For the period from the Series' inception, March 31, 1992,
through March 31, 1995, the Series' benchmark was the Five Year US Treasury, as
tracked by Salomon Brothers, Inc. After December 31, 1993, upon approval of a
majority of the shareholders, the Series' benchmark was changed to the Salomon
Brothers Mortgage Index. The Series average annual return for the one year
period was 6.10% and 8.28% for the three year period. The dollar value of a
$10,000 invested in the Series and benchmark, at the end of the three year
period, were $12,699 and $12,380, respectively.
Rising interest rates, volatility and extending durations hurt mortgage
security returns during the first part of the Series' fiscal year. In its
first three quarters, the Intermediate Series returned only .38%.
Performance turned around in the last quarter, however, primarily due to
two reasons. Intermediate-term rates declined in January of 1995
(five-year U.S. Treasury Note yields fell 0.32%), and the Intermediate
Series returned 2.51%, .27% in excess of its benchmark, the SBMI. The
January SBMI return was the best single monthly return for this index since
May of 1990. In February, the Intermediate Series continued to benefit from
declining rates, and returned 2.5%. In March, the Series returned only .38%,
reflecting the stability of market rates and mortgage yield spreads.
The fine performance of the Intermediate Series and SBMI in the first
quarter of 1995 reflects the fact that not only did rates decline, but
mortgages also performed extremely well versus U.S. Treasury securities. In
the first quarter, the five-year U.S. Treasury returned only 4.95% versus
5.39% for the Series. Adjustable-rate mortgages ("ARMS") underperformed
generic fixed-rate mortgages during most of 1994, so the Series took
advantage of the opportunity by increasing its position in ARMS issued by
GNMA. In the first quarter of 1995, investors realized that ARMS had been
considerably undervalued and bid up prices of ARMS relative to the mortgage
securities market in general. During this time, fixed-rate mortgages also
performed well.
The Series' approach to investment in the mortgage markets is to hold
relatively liquid, easy to price, government mortgage securities in a portfolio
with minimal interest-rate risk relative to its benchmark. With only small
exposures to credit and liquidity risk, the Intermediate Series seeks
actively to take advantage of changes in relative value among liquid
mortgage securities markets. This portfolio management style is reflected
in the Series' 557% portfolio turnover rate for the year ended
March 31, 1995. The markets in which the Series executes most of its
transactions are so liquid that transaction costs are relatively small,
especially in relation to the return advantage gained from these transactions.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
SCHEDULE OF INVESTMENTS MARCH 31, 1995
Market
Face Amount Security Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 99.86%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.47% *
FHLMC:
$2,955,733 8.00%, due 08/01/09-09/01/24....................... $2,945,358
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $2,917,339)................................... 2,945,358
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 45.44% *
FNMA:
3,673,326 7.00%, due 08/01/23-06/01/24........................ 3,461,890
9,950,191 8.50%, due 09/14/24-02/01/25........................ 10,052,158
2,000,000 9.50%, due (a)...................................... 2,083,750
FNMA ARM:
211,869 6.92%, due 06/01/20................................. 215,907
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $15,455,743).................................. 15,813,705
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 45.78% *
GNMA:
7,813,813 7.00%, due 12/15/23-03/15/24........................ 7,315,089
1,944,841 8.00%, due 11/15/06-04/15/09........................ 1,962,845
GNMA ARM:
939,767 5.50%, due 05/20/23................................. 913,115
1,972,848 6.00%, due 08/20/22................................. 1,948,582
2,625,493 6.125%, due 11/20/22................................ 2,584,272
1,200,000 7.00%, due (a)...................................... 1,208,250
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $15,823,677).................................. 15,932,153
UNITED STATES TREASURY BILLS - 0.17% **
50,000 5.66% due 06/29/95.................................. 49,301
10,000 5.69% due 06/29/95.................................. 9,859
TOTAL UNITED STATES TREASURY BILLS (Cost $59,160)... 59,160
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $34,255,920).................................. 34,750,376
TOTAL INVESTMENTS (Cost $34,255,920) - 99.86%....... 34,750,376
CASH AND OTHER ASSETS LESS LIABILITIES - 0.14%...... 47,120
NET ASSETS - 100.00%................................$34,797,496
* Mortgage-backed obligations are subject to principal paydowns as a result
of prepayments or refinancings of the underlying securities instruments. As a
result, the average life may be substantially less than the original maturity.
The interest rate shown is the rate in effect at March 31, 1995. ARM's have
coupon rates which adjust periodically. The adjusted rate is determined by
adding a spread to a specified index.
** The interest rate shown is the discount rate paid at the time of purchase
by the Fund.
(a) To be announced
Portfolio Abbreviations:
ARM - Adjustable-Rate Mortgage
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1995
ASSETS:
Investments at market value
(identified cost $34,255,920)(Note 1)............... $34,750,376
Cash and cash equivalents.............................. 3,197,511
Interest receivable.................................... 213,911
Prepaid expenses....................................... 21,528
Deferred organization expenses (Note 1)................ 19,587
Due from adviser (Note 3).............................. 17,137
TOTAL ASSETS...................................... 38,220,050
LIABILITIES:
Variation margin on futures contracts.................. 3,625
Accrued expenses....................................... 41,821
Securities purchased payable........................... 3,229,302
Distributions payable.................................. 147,806
TOTAL LIABILITIES................................. 3,422,554
NET ASSETS:
(Applicable to outstanding shares of 3,538,283;
unlimited number of shares of beneficial
interest authorized; no stated par)................. $34,797,496
Net asset value, offering price and redemption
price per share ($34,797,496 / 3,538,283)........... $ 9.83
SOURCE OF NET ASSETS:
Paid in capital........................................ $35,250,723
Overdistributed net investment income.................. (109,925)
Accumulated net realized loss on investments........... (831,188)
Net unrealized appreciation (depreciation) of investments
and futures contract............................... 487,886
NET ASSETS............................................. $34,797,496
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1995
INVESTMENT INCOME:
Interest and discount earned, net of premium
amortization....................................... $1,516,801
EXPENSES:
Advisory fees (Note 3)................................ 132,174
Accounting and pricing services fees.................. 26,079
Distribution fees (Note 3)............................ 7,074
Custodian fees....................................... 16,614
Audit & tax preparation fees......................... 18,395
Legal fees........................................... 20,663
Amortization of organization expenses (Note 1)....... 9,248
Transfer agent fees.................................. 30,431
Registration fees.................................... 20,558
Trustees fees........................................ 4,701
Insurance............................................ 3,459
Other................................................ 3,956
TOTAL EXPENSES BEFORE REIMBURSEMENT.............. 293,352
Expenses reimbursed by Adviser (Note 3).......... (123,390)
NET EXPENSES..................................... 169,962
NET INVESTMENT INCOME ........................... 1,346,839
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments..................... (248,302)
Change in unrealized appreciation (depreciation) of
investments and futures contracts................. 778,903
Net realized and unrealized gain on inestments....... 530,601
Net increase in net assets resulting from operations. $1,877,440
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
OPERATIONS: March 31, 1995 March 31, 1994
Net investment income......................... $1,346,839 $598,297
Net realized gain (loss) on investments....... (248,302) 37,266
Change in unrealized appreciation (depreciation)
of investments and futures contracts........ 778,903 (361,010)
Net increase in net assets resulting from
operations.................................. 1,877,440 274,553
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income.......... (1,346,839) (594,276)
Dividends in excess of net investment income.. (140,634) -
Distributions from net realized capital gains. - (5,416)
Distributions in excess of net realized capital
gains....................................... (28,444) -
Total distributions........................... (1,515,917) (599,692)
CAPITAL SHARE TRANSACTIONS:
Shares sold.................................. 31,506,439 9,608,109
Shares issued on reinvestment of
distributions............................. 669,611 569,108
Shares redeemed.............................. (4,519,742) (5,996,326)
Increase in net assets resulting from capital
share transactions (a).................... 27,656,308 4,180,891
TOTAL INCREASE IN NET ASSETS.............. 28,017,831 3,855,752
NET ASSETS:
Beginning of period ......................... 6,779,665 2,923,913
End of period................................ $34,797,496 $6,779,665
(a) Transactions in capital shares were as follows:
Shares sold.............................. 3,257,497 902,154
Shares issued on reinvestment of
distributions......................... 68,948 53,947
Shares redeemed.......................... (465,316) (554,342)
Net increase............................. 2,861,129 401,759
Beginning balance ....................... 677,154 275,395
Ending balance........................... 3,538,283 677,154
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental information
have been derived from information provided in the financial statements.
Year Ended Year Ended Period Ended
March 31, 1995 March 31, 1994 March 31, 1993 (3)
Net Asset Value, Beginning
of Period......... $10.01 $10.62 $10.00
Income From Investment
Operations
Net investment
income.......... 0.664 1.050 0.826
Net loss on securities
(both realized and
unrealized)...... (0.049) (0.601) 0.621
Total from investment
operations....... 0.615 0.449 1.447
Less Distributions
Dividends from net
investment
income.......... (0.664) (1.044) (0.826)
Dividends in excess of
net investment
income........... (0.108) - -
Distributions from net
realized gains on
investments...... - (0.015) -
Distributions in excess of
net realized gains on
investments...... (0.022) - -
Total distributions.. (0.794) (1.059) (0.826)
Net Asset Value,
End of Period...... $9.83 $10.01 $10.62
Total Return......... 6.10% 4.11% 14.93%
Ratios/Supplemental Data
Net assets, end of
period........... $34,797,496 6,779,666 $2,923,913
Ratio of expenses to
average net assets (1). 0.78% 0.00% 0.31%
Ratio of net investment
income to average
net assets (2)... 6.20% 7.74% 8.18%
Portfolio turnover
rate............. 557% 84% 42%
______________________
1 The annualized ratio of expenses to average net assets prior to
reimbursement of expenses by the Advisor was 1.35%, 1.30% and 14.80%
for the years ended March 31, 1995 and March 31, 1994 and for the
period ended March 31, 1993, respectively.
2 The annualized ratio of net investment income to average net assets
prior to reimbursement of expenses by the Adviser was 5.64%, 6.43%
and (6.31)% for the years ended March 31, 1995 and March 31, 1994 and
for the period ended March 31, 1993, respectively.
3 The Intermediate Duration U.S. Government Series commenced operations
on March 31, 1992.
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Breeden Series Fund (the "Fund") is an open-end, diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund offers shares in two series: Smith Breeden Short Duration
U.S. Government Series and the Smith Breeden Intermediate Duration U.S.
Government Series ("Intermediate Series" or "Series"). The following is a
summary of significant accounting policies consistently followed by the
Intermediate Series.
A. Security Valuation: Portfolio securities are valued at current market
value provided by a pricing service or by a bank or broker/dealer experienced
in such matters, when over-the-counter market quotations are readily available.
Securities and other assets for which market prices are not readily available
are valued at fair market value as determined in accordance with procedures
approved by the Board of Trustees. All money market instruments and debt
securities originally purchased with remaining maturities of 60 days or less
shall be valued at their amortized cost.
B. Distributions and Taxes: The Intermediate Series intends to continue to
qualify for and elect the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code, thereby relieving
the Series of Federal income taxes. To so qualify, the Series intends to
distribute substantially all of its net investment income and net realized
capital gains, if any, less any available capital loss carry forward. As of
March 31, 1995, the Series had a capital loss carry forward of $659,858 of
which $484,264 expires March 31, 2002, and $175,594 expires March 31, 2003.
C. Repurchase Agreements: The Intermediate Series may enter into
repurchase agreements with member banks of the Federal Reserve System having
total assets in excess of $500 million and securities dealers, provided that
such banks or dealers meet the credit guidelines of the Series' Board of
Trustees. In a repurchase agreement, the Series acquires securities from a
third party with the commitment that they will be repurchased by the seller
at a fixed price on an agreed upon date. The Intermediate Series' custodian
maintains control or custody of these securities collateralizing the
repurchase agreements until maturity of the repurchase agreements. The
value of the collateral is monitored daily, and if necessary, additional
collateral is received to ensure that the market value of the underlying
assets remains sufficient to protect the Series in the event of the seller's
default. However, in the event of default or bankruptcy of the seller,
the Series' right to the collateral may be subject to legal proceedings.
D. Reverse Repurchase Agreements: A reverse repurchase agreement involves
the sale by the Intermediate Series of portfolio assets concurrently with an
agreement by the Series to repurchase the same assets at a later date at a
fixed price. The Series will maintain a segregated account with its
custodian, which will be marked to market daily, consisting of cash, U.S.
Government securities or other liquid high-grade debt obligations equal in
value to its obligations under reverse repurchase agreements. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Series' use of the proceeds of the
agreement may be restricted pending a determination by the other party,
or its trustee or receiver whether to enforce the Series' obligation to
repurchase the securities.
E. Dollar Roll Agreements: The Intermediate Series may enter into dollar
rolls in which the Series sells securities for delivery in the current month
and simultaneously contracts to repurchase substantially similar (same type
and coupon) securities on a specified future date. During the roll period,
the Series foregoes principal and interest paid on these securities. The
Series is compensated by the difference between the current sales price and
the forward price for the future purchase (often referred to as the "drop")
as well as by the interest earned on the cash proceeds of the initial sale.
F. Determination Of Gains Or Losses On Sales Of Securities: Gains or
losses on the sale of securities are calculated for accounting and tax
purposes on the identified cost basis.
G. Deferred Organizational Expenses: Deferred organizational expenses are
being amortized on a straight-line basis over five years.
H. Securities Transactions and Investment Income: Interest income is
accrued daily on both long-term bonds and short-term investments. Interest
income also includes net amortization from the purchase of fixed-income
securities. Transactions are recorded on the first business day following
the trade date. Realized gains and losses from security transactions
are determined and accounted for on the basis of identified cost.
2. FINANCIAL INSTRUMENTS
A. Derivative Financial Instruments Held or Issued for Purposes other
than Trading: The Intermediate Series uses interest rate futures contracts
for risk management purposes in order to reduce fluctuation of the Series'
net asset value relative to its targeted option-adjusted duration.
Upon entering into a futures contract, the Series is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin)
are made or received by the Series each day. The variation margin
payments are equal to the daily changes in the contract value and are
recorded as unrealized gains or losses. The Series recognizes a realized
gain or loss when the contract is closed or expires 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.
The Intermediate Series had the following open futures contracts as of
March 31, 1995:
Principal Expiration Unrealized
Type Amount Position Month Gain/(Loss)
10 year $2,000,000 Long June 1995 $80,535
Treasury
3 month
Eurodollar $22,000,000 Short March 1998 (36,856)
3 month
Eurodollar $6,000,000 Short March 1999 (13,377)
3 month
Eurodollar $16,000,000 Short March 2000 (36,872)
($ 6,570)
Futures transactions involve costs and may result in losses. The effective
use of futures strategies depends on the Series' ability to terminate futures
positions at times when the Series' investment adviser deems it desirable to
do so. The use of futures also involves the risk of imperfect correlation
among movements in the values of the securities underlying the futures
purchased and sold by the Series, of the futures contract itself, and of the
securities which are the subject of a hedge.
The aggregate market value of investments pledged to cover margin requirements
for the open positions at March 31, 1995 was $59,175.
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Smith Breeden Associates, Inc. (the "Adviser"), a registered investment
adviser, provides the Series with investment management services. As
compensation for these services, the Intermediate Series pays the Adviser
a fee computed daily and payable monthly, at an annual rate equal to 0.70%
of the Series' average daily net asset value.
The Adviser has voluntarily agreed to reduce or otherwise limit other
expenses of the Intermediate Series (excluding advisory fees and litigation,
indemnification and other extraordinary expenses) to 0.90% of the Series'
average daily net assets. This voluntary agreement may be terminated or
modified at any time by the Adviser in its sole discretion. The Adviser has
agreed to reduce the fees payable (to the extent of such fees) by the amount
the Series' expenses would, absent the fee reduction, exceed the applicable
expense limitations imposed by state securities administrators. For the
year ended March 31, 1995, the Adviser received fees of $132,174 and
reimbursed the Series $123,391.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940, the
Intermediate Series adopted a distribution plan pursuant to which Fund/Plan
Broker Services, Inc., the Series' principal underwriter (the "Principal
Underwriter") received a fee, accrued daily and paid monthly, at an annual
rate of 0.25% of the Series' average daily net assets, regardless of the
amount of expenses incurred by the Principal Underwriter, to compensate the
Principal Underwriter for services provided in connection with sales of
shares of the Series, including bearing the cost of printing of prospectuses
used for sales, advertising expenses, and marketing allowances, promotional
incentives and other compensation paid to its employees or other dealers
that sell shares of the Series. For the four months ended July 31, 1994,
the Series paid the Principal Underwriter $7,074 for such fees. This plan
terminated August 1, 1994, at which point the Series adopted a different
distribution and services plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act.
The purpose of the Plan is to permit the Adviser to compensate investment
dealers and other persons involved in servicing shareholder accounts for
services provided and expenses incurred in promoting the sale of shares of
the Series, reducing redemptions, or otherwise maintaining or improving
services provided to shareholders by such dealers or other persons.
The Plan provides for payments by the Adviser, out of its advisory fee, to
dealers and other persons at the annual rate of up to 0.25% of the
Intermediate Series' average net assets subject to the authority of the
Trustees of the Series to reduce the amount of payments permitted under the
Plan or to suspend the Plan for such periods as they may determine. Subject
to these limitations, the amount of such payments and the purposes for which
they are made shall be determined by the Adviser.
Certain officers and trustees of the Series are also officers and directors
of the Adviser.
4. INVESTMENT TRANSACTIONS
During the year ended March 31, 1995, purchases and proceeds from sales of
securities, other than short-term investments, aggregated $158,263,181 and
$131,617,023, respectively. The purchases and proceeds shown above do not
include dollar roll agreements which are considered borrowings by the
Intermediate Series. The cost of securities for federal income tax purposes
is $34,255,920. Net unrealized appreciation of investments and futures
contracts consists of:
Gross unrealized appreciation...... $700,358
Gross unrealized depreciation...... (212,472)
Net unrealized appreciation........ $487,886
5. LIQUIDATION OF THE INSTITUTIONAL INTERMEDIATE FUND
Pursuant to a plan of liquidation adopted by the Trustees of the Smith Breeden
Institutional Intermediate U.S. Government Fund (the "Institutional Fund"),
on August 1, 1994, the Intermediate Series redeemed in-kind its shares in the
Smith Breeden Institutional Fund. The value of the securities and cash
received by the Intermediate Series totalled $8,563,933.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Smith Breeden Intermediate Duration U.S. Government Series
of the Smith Breeden Series Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Breeden Intermediate
Duration U.S. Government Series of the Smith Breeden Series Fund as of
March 31, 1995, and the related statements of operations for the year
ended and changes in net assets for each of the years in the two-year
period then ended and financial highlights for each of the years in the
two-year period then ended and the period March 31, 1992 (commencement
of operations) to March 31, 1993. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at March 31, 1995 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Smith
Breeden Intermediate Duration U.S. Government Series of the Smith Breeden
Series Fund as of March 31, 1995, the results of its operations, the
changes in net assets, and financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 12, 1995
ANNUAL REPORT SMITH BREEDEN SHORT DURATION U.S GOVERNMENT SERIES
PERFORMANCE REVIEW
The Smith Breeden Short Duration U.S. Government Series (the "Series")
provided a total return of 6.58% for the year ended March 31, 1995. The
Series' return exceeded its benchmark, the six-month U.S. Treasury Bill,
by a significant margin, 1.16%. Since the Series' inception, its return
has exceeded that of its benchmark by 3.60%, and on an annualized basis
by 1.09%. The graph below plots the Series' return versus its benchmark.
The Series had invested all of its assets in the Short Duration U.S.
Government Fund (the "Portfolio") through March 31, 1995. At the close
of business on March 31, 1995, the Portfolio liquidated its assets by a
distribution in kind to its shareholders. The Series received mortgage
securities and other assets with a market value of $218,431,665.
The year ended March 31, 1995, was a tumultuous one for the fixed
income markets. The Federal Reserve Board raised the discount rate, the
rate at which banks borrow from the Federal Reserve to meet reserve
requirements and temporary liquidity needs, four times. The rate on
March 31, 1994 was 3%, but rose to 5.25% by March 1995. These increases,
and the market's anticipation of the Federal Reserve's actions over the
course of the year, boosted short-term and intermediate-term yields and
increased interest-rate volatility. From March 31, 1994 to March 31, 1995,
short-term U.S. Treasury yields rose over 200 basis points (100 basis
points equals one percent), intermediate-term U.S. Treasury yields rose
85 to 160 basis points, and long-term yields rose less than 50 basis
points. Over the course of the fiscal year, intermediate and long-term
interest rates had actually peaked at much higher levels: for example,
in early January 1995, the five-year U.S. Treasury Note yield was 80
basis points over its closing yield on March 31,1995.
THE LINE GRAPH DETAILING PERFORMANCE VERSUS THE SERIES' INDEX
ACCORDING TO ITEM 5a. OF FORM N1-A IS LOCATED HERE IN THE TEXT AND IS
DESCRIBED BELOW IN ACCORDANCE WITH REG. 232.304 OF REGULATION S-T:
THE GRAPH DEPICTS THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
SHORT SERIES VERSUS THAT OF ITS BENCHMARK, THE SIX MONTH US TREASURY
BILL. FROM INCEPTION OF MARCH 31, 1992 THROUGH MARCH 31, 1995, AN
INVESTMENT OF $10,000 IN THE SERIES WOULD HAVE GROWN TO $11,676, VERSUS
$11,317, IF INVESTED IN THE SIX MONTH US TREASURY BILL. THE RETURN IN
THE SERIES IS NET OF FEES AND SALES CHARGES; THE RETURN OF THE
SIX MONTH US TREASURY DOES NOT REFLECT FEES OR TRANSACTION COSTS.
THE ANNUALIZED ONE YEAR RETURN FOR THE SERIES IS 6.58%, AND 5.30%
ANNUALIZED SINCE INCEPTION.
As interest rates rose, the effective maturities (durations) of
mortgage securities lengthened. This happened for two predictable
reasons. First, homeowners were less likely to prepay their mortgages
(primarily due to refinancing or moving). This lengthened the expected
time to receipt of a mortgage investor's principal payments and made a
mortgage security investment longer-term in nature. Second, as
variable-rate mortgage coupons began to reset upward (indexed, as they
are, to short-term rates), they began to be subject to caps on their
periodic adjustments, and their rates moved closer to their contractual
lifetime maximum rates. This made adjustable-rate mortgages (ARMs) more
fixed-rate and less adjustable-rate in nature, extending their durations
and making them more sensitive to subsequent changes in interest rates.
Although the "extension" of mortgage securities in 1994's rising rate
environment was predictable (and well prepared for by the Series, by virtue
of its investment in the Portfolio), investors in general appeared to be
surprised, or at least disappointed, as many left the market. ARM mutual
funds shrank dramatically during the year as many funds failed to deliver
on promises or expectations of price stability. Government mortgage mutual
funds also experienced very substantial outflows during the year; and banks
curtailed their purchases of ARMs as the market depreciation of their
existing holdings was deducted from their reported capital.
Rising volatility and extending durations hurt mortgage security returns
during the first part of the Series' fiscal year. Through November 1994,
the Series had outperformed its benchmark by only 17 basis points.
Adjustable-rate mortgages underperformed generic fixed-rate mortgages during
most of 1994, so the Portfolio, and the Series, by virtue of its investment
in the Portfolio, took advantage of the opportunity by increasing its position
in ARMs issued by GNMA. In December 1994 and January 1995, investors realized
that ARMs had become considerably undervalued and bid up the prices of ARMs
relative to the mortgage securities market in general. During this time,
fixed-rate mortgages also performed well. In these two months, the Series
earned 110 basis points over its six-month U.S. Treasury Bill benchmark.
In February and March 1995 the mortgage markets were "treading water" as
rates declined and spreads held relatively firm. The Portfolio took advantage
of the strength of the earlier mortgage performance to reduce ARM holdings
in the first months of 1995 and to increase the its cash position for future
opportunities.
The Series' and Portfolio's approach to investment in the mortgage
markets is to hold relatively liquid, easy to price, government mortgage
securities in a portfolio with minimal interest rate risk relative to its
benchmark. With only small exposures to credit risk, interest-rate risk
and liquidity risk, the Series seeks actively to take advantage of changes
in relative value among liquid mortgage securities markets. This portfolio
management style is reflected in the Portfolio's 438% portfolio turnover
for the year ended March 31, 1995. The markets in which the Series executes
most of its transactions are so liquid that transactions costs are
relatively small, especially in relation to the return advantage gained
from these transactions.
The Series' and Portfolio's strong risk management discipline stood it
in good stead during the fiscal year. Because the Series' risk is always
targeted to a six-month duration, we proactively prepare for the change in
the portfolio's effective maturity that we expect will occur should interest
rates either rise or fall. We therefore had in place hedge instruments
which counteracted the effects of rising interest rates during the fiscal
year. Gains on the Portfolio's hedge instruments significantly offset
depreciation of the core investments, enabling the Series and Portfolio to
deliver the low risk profile specified in the Prospectus and to outperform
the benchmark at the same time.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
SCHEDULE OF INVESTMENTS March 31, 1995
Market
Face amount Security Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 102.55%
FEDERAL HOME LOAN MORTGAGE CORP. - 33.11% *
FHLMC GOLD:
$24,933,273 7.50%, due 06/01/24-07/01/24............... $24,143,753
20,989,707 8.00%, due 09/01/24 to (a)................. 20,786,732
20,000,000 8.50%, due (a)............................. 20,218,750
FHLMC FLOATING-RATE REMIC:
7,308,287 6.83%, due 03/15/24 (b).................... 7,158,124
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(Cost $72,466,365) 72,307,359
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 16.62% *
FNMA:
20,383,132 8.50%, due 01/01/25 ....................... 20,592,011
FNMA ARM & FLOATING-RATE REMIC:
11,962,925 6.78%, due 02/25/24 (b)................. 11,710,114
468,440 6.89%, due 12/01/15........................ 471,392
847,476 6.99%, due 06/01/20........................ 863,629
239,776 7.08%, due 12/01/26 ....................... 246,864
1,065,438 7.45%, due 01/01/16 ....................... 1,100,566
555,568 7.50%, due 01/01/18 ....................... 565,379
FNMA INTEREST ONLY **:
2,338,485 9.00%, due 07/25/21........................ 752,693
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $35,548,396 36,302,648
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 52.55% *
GNMA:
28,722,855 7.00%, due 11/15/22-03/15/24............... 26,889,586
2,059,451 9.50%, due 07/15/09 to 09/15/21............ 2,165,604
GNMA ARM:
3,052,322 6.13%, due 11/20/22......................... 2,997,014
82,150,000 7.00%, due (a).............................. 82,714,781
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 114,766,985
UNITED STATES TREASURY BILLS - 0.27%
UNITED STATES TREASURY BILL ***
20,000 5.71%, due 06/29/95 ........................ 19,725
50,000 5.69%, due 06/29/95 ........................ 49,312
20,000 5.68%, due 06/29/95 ........................ 19,725
500,000 5.65%, due 06/29/95 ....................... 493,125
TOTAL UNITED STATES TREASURY BILLS
(Cost $581,743) 581,887
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $223,617,515) 223,958,879
Notional Amount INTEREST RATE SWAP CONTRACTS - 1.88%
$20,000,000 Contract dated 06/22/93 with Prudential Global Funding,
Expires 06/22/98.................................. 938,753
20,000,000 Contract dated 08/31/93 with Salomon Swapco,
Expires 08/31/00.................................1,740,853
20,000,000 Contract dated 12/02/93 with Morgan Guaranty,
Expires 12/02/00.................................1,432,554
TOTAL INTEREST RATE SWAP CONTRACTS............ 4,112,160
Market
Notional amount Security Value
THREE MONTH LIBOR INTEREST RATE CAP CONTRACTS - 3.84
$50,000,000 Contract with Credit Suisse Financial Products, expi
Strike rate 7.00%................................$1,685,000
75,000,000 Contract with Credit Suisse Financial Products, expi
Strike rate 9.00%...................................997,500
40,000,000 Contract with Morgan Guaranty, expires 10/15/98,
Strike rate 5.00%.................................2,655,600
40,000,000 Contract with Salomon SwapCo, expires 11/01/96,
Strike rate 5.00%.................................1,098,360
40,000,000 Contract with Salomon SwapCo, expires 11/15/97,
Strike rate 5.00%.................................1,960,240
TOTAL THREE-MO. LIBOR INTEREST RATE CAP CONTRACTS
(Cost $5,328,180) 8,396,700
Contracts TEN YEAR NOTE PUT OPTION CONTRACTS - 0.02%
50 Expires 6/95, Strike Price $98....................... 1,563
50 Expires 6/95, Strike Price $103......................32,813
TOTAL TEN YEAR NOTE PUT OPTION CONTRACTS
(Cost $75,450 34,376
TOTAL INVESTMENTS (Cost $229,021,146).......... 236,502,115
Face Amount REPURCHASE AGREEMENTS- 48.03%
$59,000,000 Morgan Stanley, 6.10%, due 04/04/95 dated 03/28/95
Collateralized by $60,189,173 FNMA ARM, 6.25%,
5.56%, 5.37% due 12/01/18-05/01/19 with
a market value of $60,179,105 59,000,000
45,900,000 Nomura, 6.15%, due 04/07/95 dated 03/31/95
Collateralized by $47,492,878 FNMA FRM, 6.0%, 8.0%,
due 06/01/08-11/01/21 with a market value of
$46,997,288 45,900,000
TOTAL REPURCHASE AGREEMENTS (Cost $104,900,000)..104,900,000
TOTAL INVESTMENTS AND REPURCHASE AGREEMENTS
(Cost $333,921,146) - 156.32%................341,402,115
OTHER LIABILITIES LESS CASH AND OTHER ASSETS
-(56.32%) (122,970,450)
NET ASSETS - 100.00% $218,431,665
* Mortgage-backed obligations are subject to principal paydowns as a result
of prepayments or refinancings of the underlying mortgage instruments. As a
result,the average life may be substantially less than the original maturity.
The interest rate shown is the rate in effect at March 31, 1995.
ARM's have coupon rates which adjust periodically.
The adjusted rate is determined by adding a spread to a specified index.
** Represents an interest only stripped mortgage-backed security.
*** The interest rate shown is the discount rate paid at the time of purchase
by the Fund.
(a) To be announced.
(b) Real Estate Mortgage Investment Conduit
Portfolio Abbreviations
ARM- Adjustable-rate mortgage
FHLMC- Federal Home Loan Mortgage Corporation
FNMA- Federal National Mortgage Association
GNMA- Government National Mortgage Association
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1995
ASSETS:
Investments at market value
(identified cost $229,021,146)(Note 1)............ $236,502,115
Repurchase agreements (cost $104,900,000)(Note 1).. 104,900,000
Cash .............................................. 72,897
Receivables:
Interest........................................ 1,364,434
Miscellaneous................................... 15,028
Securities sold................................. 219,933
Prepaid expenses................................... 45,539
Deferred organization expenses..................... 19,177
TOTAL ASSETS.................................. 343,139,123
LIABILITIES:
Variation margin on futures contracts (Note 1)..... 21,998
Accrued expenses................................... 100,968
Payables:
Securities purchased............................. 121,598,606
Payable for shares redeemed..................... 2,910,348
Due to adviser (Note 3)......................... 75,538
TOTAL LIABILITIES............................. 124,707,458
NET ASSETS:
(Applicable to outstanding shares of 22,050,739
unlimited number of shares of beneficial
interest authorized; no stated par)............. $218,431,665
Net asset value, offering price and redemption
price per share ($218,431,665 / 22,050,739)..... $9.90
SOURCE OF NET ASSETS:
Paid in capital.................................... $222,111,273
Accumulated net realized loss on investments....... (10,954,167)
Net unrealized appreciation(depreciation) of
investments, interest rate swap and
futures contracts.................................. 7,274,559
NET ASSETS.................................... $218,431,665
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1995
INVESTMENT INCOME:
Dividends...................................... $13,729,868
EXPENSES:
Distribution fees (Note 3)..................... 188,180
Registration fees.............................. 20,118
Transfer agent fees............................ 28,093
Custodian fees................................. 4,712
Legal fees..................................... 31,305
Accounting and pricing......................... 26,336
Amortization of organization expenses (Note 1). 9,603
Trustees fees and expenses..................... 43,414
Insurance...................................... 15,191
Other.......................................... 4,904
TOTAL EXPENSES BEFORE REIMBURSEMENT........ 371,856
Expenses reimbursed by Adviser (Note 3).... (146,256)
NET EXPENSES............................... 225,600
NET INVESTMENT INCOME ..................... 13,504,268
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments............... (1,414,168)
Change in unrealized appreciation(depreciation)
of investments............................... 1,365,349
Net realized and unrealized loss on
investments.................................. (48,819)
Net increase in net assets resulting from
operations................................... $13,455,449
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
March 31, 1995 March 31, 1994
OPERATIONS:
Net investment income.............. $13,504,268 $4,653,713
Net realized loss on investments... (1,414,168) (382,998)
Change in unrealized appreciation
(depreciation) of investments... 1,365,349 (1,572,884)
Net increase in net assets
resulting from operations...... 13,455,449 2,697,831
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment
income......................... (13,504,268) (4,702,281)
Dividends in excess of net
investment income.............. (90) -
Total distributions................ (13,504,358) (4,702,281)
CAPITAL SHARE TRANSACTIONS:
Shares sold........................ 94,549,923 292,685,905
Shares issued on reinvestment of
distributions................... 4,346,125 2,411,081
Shares redeemed.................... (98,582,965) (123,456,251)
Increase in net assets resulting
from capital share
transactions (a)................ 313,083 171,640,735
TOTAL INCREASE IN NET ASSETS... 264,174 169,636,285
NET ASSETS:
Beginning of period ............... 218,167,491 48,531,206
End of period...................... $218,431,665 $218,167,491
(a) Transactions in capital shares
were as follows:
Shares sold................... 9,582,171 29,296,974
Shares issued on reinvestment
of distributions............ 441,809 241,234
Shares redeemed............... (10,018,137) (12,346,115)
Net increase.................. 5,843 17,192,093
Beginning balance ............ 2,044,896 4,852,803
Ending balance................ 22,050,739 22,044,896
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental
information have been derived from information
provided in the financial statements.
Year Year For the Period
Ended Ended March 31, 1992 to
March 31, 1995 March 31, 1994 March 31, 1993(1)
Net Asset Value,
Beginning of Period....... $9.90 $10.00 $10.00
Income From Investment Operations
Net investment income..... 0.628 0.432 0.552
Net realized and unrealized
gain (loss)
on investments.......... - (0.070) 0.002
Total from investment
operations............ 0.628 0.362 0.554
Less Distributions
Dividends from net investment
income.................. (0.628) (0.462) (0.554)
Total distributions... (0.628) (0.462) (0.554)
Net Asset Value,
End of Period............... $9.90 $9.90 $10.00
Total Return ............... 6.58% 3.67% 5.67%
Ratios/Supplemental Data
Net assets, end of period. $218,431,665 $218,167,491 $48,531,206
Ratio of expenses to
average net assets (2).. 0.11% 0.29% 0.27%
Ratio of net investment
income to average
net assets (3)........... 6.33% 4.17% 4.53%
Portfolio turnover rate.... 47% 112% 3%
______________________
(1) Commencement of operations.
(2) The annualized operating expense ratios prior to reimbursment of
expenses by the Adviser were 0.17%, 0.45% and 1.63% for the Short
Duration U.S. Government Series for the years ended
March 31, 1995, March 31, 1994, and period ended March 31, 1993,
respectively.
(3) The annualized net investment income ratios prior to reimbursment
of expenses by the Adviser were 6.26%, 3.72%, and 3.17% for the
Short Duration U.S. Government Series for the years ended
March 31, 1995, March 31, 1994, and period ended March 31, 1993,
respectively.
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Breeden Series Fund (the "Fund") is an open-end, diversified
management investment company registered under the Investment Company
Act of 1940, as amended. The Fund offers shares in two series:
Smith Breeden Short Duration U.S. Government Series (the "Short Series"
or "Series") and Smith Breeden Intermediate Duration U.S. Government
Series ("Intermediate Duration Series"). For the year ended March 31,
1995, the Short Series sought to achieve its investment objective by
investing all of its assets in Smith Breeden Short Duration U.S.
Government Fund (the "Short Fund"), an open-end, diversified management
investment company having the same investment objective as the Series.
However, at the close of business on March 31, 1995, pursuant to a plan
of liquidation adopted March 1, 1995 by the Board of Trustees of the
Short Fund, and approved by the Board of Trustees of the Short Series,
the Short Series redeemed in-kind its shares of the Short Fund. The
assets of the Short Fund were transferred in proportion to the Short
Series' ownership of the Short Fund in cancellation of its shares.
Accordingly, the Schedule of Investments for the Short Series, which is
included in this report, reflects the transfer of the assets from the
Short Fund to the Short Series at the close of business on March 31, 1995
and the cancellation of the Short Series' shares. The following is a
summary of significant accounting policies consistently followed by
either the Short Fund or Short Series (the "Funds").
A. Security Valuation: Securities are valued at current market value
provided by a pricing service or by a bank or broker/dealer experienced
in such matters, when over-the-counter market quotations are readily
available. Securities and other assets for which market prices are not
readily available are valued at fair market value as determined in
accordance with the procedures approved by the Board of Trustees. All
money market instruments and debt securities originally purchased with
remaining maturities of 60 days or less shall be valued at their amortized
cost.
B. Repurchase Agreements: Repurchase agreements may be entered into
with member banks of the Federal Reserve System having total assets in
excess of $500 million and securities dealers, provided that such banks
or dealers meet the credit guidelines of the Funds' Board of Trustees. In
a repurchase agreement, securities are acquired from a third party with the
commitment that they will be repurchased by the seller at a fixed price on
an agreed upon date. The custodian maintains control or custody of
securities collateralizing repurchase agreements until maturity of the
repurchase agreements. The value of the collateral will be monitored
daily, and if necessary, additional collateral is received to ensure that
the market value of the underlying assets remains sufficient to protect the
Series in the event of the seller's default. However, in the event of
default or bankruptcy of the seller, the right to the collateral may be
subject to legal proceedings.
C. Reverse Repurchase Agreements: A reverse repurchase agreement involves
the sale of portfolio assets concurrently with an agreement to repurchase
the same assets at a later date at a fixed price. Assets will be
maintained in a segregated account with the custodian, which will be
marked to market daily, consisting of cash, U.S. Government securities or
other liquid high-grade debt obligations equal in value to the obligations
under the reverse repurchase agreements. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the use of the proceeds under the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver whether to enforce the obligation to repurchase the securities.
D. Dollar Roll Agreements: A dollar roll is an agreement to sell
securities for delivery in the current month and simultaneously contract
to repurchase substantially similar (same type and coupon) securities on
a specified future date. During the roll period, principal and interest
paid on these securities are not received. Compensation under the dollar
roll agreement is represented by the difference between the current sales
price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
E. Investment Income: The Short Series earned income, net of expenses,
on its investment in the Short Fund.
F. Distributions and Taxes: The Short Series intends to continue to
qualify for and elect the special tax treatment afforded regulated
investment companies under Subchapter M of the Internal Revenue Code,
thereby relieving the Series of Federal income taxes. To so qualify,
the Series intends to distribute substantially all of its net investment
income and net realized capital gains, if any, less any available
capital loss carry forward. As of March 31, 1995, the Series had a
net capital loss carry forward of $981,362 with $589 expiring
on March 31, 2001 and $75,461 expiring on March 31, 2002 and $905,312
expiring on March 31, 2003.
G. Determination of Gains or Losses on Sales of Securities: Gains or
losses on the sale of securities are calculated for accounting and tax
purposes on the identified cost basis.
H. Deferred Organization Expenses: Deferred organization expenses are
being amortized on a straight-line basis over five years.
I. Securities Transactions and Investment Income: Interest income is
accrued daily on both long-term bonds and short-term investments.
Interest income also includes net amortization from the purchase of
fixed-income securities. Transactions are recorded on the first business
day following the trade date. Realized gains and losses from security
transactions are determined and accounted for on the basis of identified
cost.
2. FINANCIAL INSTRUMENTS
Derivative Financial Instruments Held or Issued for Purposes other than
Trading: Interest rate futures, swaps, caps and options contracts are
used for risk management purposes in order to reduce fluctuations in
net asset value relative to the targeted option-adjusted duration.
A. Futures Contracts: Upon entering into a futures contract, either
cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value is required to be deposited in a
segregated account. Subsequent payments (variation margin) are made
or received each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized
gains or losses. A realized gain or loss is recognized when the
contract is closed or expires 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.
The following open futures contracts had been assigned by the Short Fund
to the Short Series as of the close of business on March 31, 1995:
Principal Expiration Unrealized
Type Amount Position Month Gain/(Loss)
5 year Treasury $ 29,900,000 Long June, 1995 $ ( 44,455)
10 year Treasury $ 8,500,000 Short June, 1995 1,071
6 month Treasury $ 100,000,000 Long June, 1995 3,301
3 month Eurodollar $ 350,000,000 Long March, 1995 255,964
3 month Eurodollar $ 47,000,000 Short March, 1996 9,088
3 month Eurodollar $ 47,000,000 Short March, 1997 17,588
3 month Eurodollar $ 107,000,000 Short March, 1998 3,618
3 month Eurodollar $ 161,000,000 Short March, 1999 ( 41,819)
3 month Eurodollar $ 182,000,000 Short March, 2000 ( 66,370)
3 month Eurodollar $ 208,000,000 Short March, 2001 (109,456)
3 month Eurodollar $ 65,000,000 Short March, 2002 ( 46,990)
3 month Eurodollar $100,000,000 Short March, 2003 (187,950)
$ (206,410)
Futures transactions involve costs and may result in losses. The effective
use of futures strategies depends on the Series' ability to terminate
futures positions at times when the Series' investment adviser deems it
desirable to do so. The use of futures also involves the risk of imperfect
correlation among movements in the values of the securities underlying the
futures purchased and sold by the Series, of the futures contract itself,
and of the securities which are the subject of a hedge.
The aggregate market value of instruments pledged to cover margin
requirements for the open position at March 31, 1995 was $581,452.
B. Interest Rate Swap Contracts: Interest rate swaps involve the exchange
by one party with another party of their respective commitments to pay or
receive interest. The interest rate swap contracts assigned by the Short
Fund to the Short Series had been entered into on a net basis, i.e., the
two payment streams are netted out, with the Short Series receiving or
paying, as the case may be, only the net amount of the two payments. As
of March 31, 1995, the Short Series had been assigned by the Short Fund
three interest rate swap contracts. In each of the contracts, the Short
Fund had agreed to pay a fixed rate and receive a floating rate. The
floating rate on the three contracts resets quarterly and is the three
month London Interbank Offered Rate ("LIBOR"). Interest rate swap
contracts will not be entered into unless the unsecured commercial paper,
unsecured senior debt or the claims-paying ability of the other party
thereto is rated either AA or A-1 or better by Standard & Poor's
Corporation or Aa or P-1 or better by Moody's Investors Service, Inc.
(or is otherwise acceptable to either agency) at the time of entering into
such transaction. If there is a default by the other party to the swap
transaction, the Short Series will be limited to contractual remedies
pursuant to the agreements related to the transaction. There is no
assurance that interest rate swap contract counterparties will be able to
meet their obligations pursuant to the swap contracts or that, in the
event of default, the Short Series will succeed in pursuing contractual
remedies. The Short Series thus assumes the risk that it may be delayed
in, or prevented from, obtaining payments owed to it pursuant to the swap
contracts.
The Short Series' interest receivable on the interest rate swap contracts
was $27,967. No collateral is required to be maintained on these contracts.
C. Interest Rate Cap Contracts: The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate caps. The Short
Series' interest receivable on the interest rate cap contracts at
March 31, 1995 was $254,445.
3. TRANSACTIONS WITH AFFILIATES
The Short Fund and the Series each paid their respective expenses in the year
ended March 31, 1995 and the Series will continue to do so. Smith Breeden
Associates, Inc. (the "Adviser"), a registered investment adviser, provided
the Short Fund with investment management services. As all of the Fund's
assets were invested in the Short Fund for the year ended March 31, 1995, the
Series did not directly pay advisory fees. Fees of the Adviser were paid by
the Short Fund. However, as of the close of business on March 31, 1995, the
Adviser will provide investment management services to the Short Series, and
the Series will the pay the Adviser directly.
The Adviser voluntarily agreed to reimburse normal business expenses of the
Short Series through March 31, 1995 so that total direct and indirect operating
expenses would not exceed 0.78% of its average net assets. This voluntary
agreement may be terminated at any time by the Adviser in its sole discretion
after March 31, 1995. The Adviser has also agreed to reduce its fees payable
(to the extent of such fees) by the amount the Series' direct and indirect
expenses would, absent the fee reduction, exceed the applicable expenses
limitations imposed by state securities administrators. For the year ended
March 31, 1995, the Adviser received no fees and reimbursed the Short Series
$146,256.
Certain officers and trustees of the Fund are also officers and directors of
the Adviser.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act"),
the Series adopted a distribution plan pursuant to which Fund/Plan Broker
Services, Inc., the Series' principal underwriter (the "Principal
Underwriter") would receive a fee, accrued daily and paid monthly, at an
annual rate of 0.25% of the Short Series' average daily net assets, regardless
of the amount of expenses incurred by the Principal Underwriter, to
compensate the Principal Underwriter for services provided in connection with
sales of shares of the Series, including bearing the cost of printing of
prospectuses used for sales, advertising expenses, and marketing allowances,
promotional incentives and other compensation paid to its employees or other
dealers that sell shares of the Series. For the four months ended
July 31, 1994, the Series paid the Principal Underwriter $188,180 for such
fees.
This plan terminated August 1, 1994, at which point the Series adopted a
different Distribution and Services Plan ( the "Plan") pursuant to Rule 12b-1
under the 1940 Act. The Short Fund had also adopted an identical Plan.
The purpose of the Plan is to permit the Adviser to compensate investment
dealers and other persons involved in servicing shareholder accounts for
services provided and expenses incurred in promoting the sale of shares of
the Short Fund or Series, as the case may be, reducing redemptions, or
otherwise maintaining or improving services provided to shareholders by
such dealers or other persons. The Plan provides for payments by the
Adviser, out of the advisory fee paid to it by the Short Fund or Series,
as the case may be, to dealers and other persons at the annual rate of up
to 0.25% of the Short Fund's or Series' average net assets, as the case
may be, subject to the authority the Trustees of the Short Fund or Series,
as the case may be, to reduce the amount of payments permitted under the
Plan or to suspend the Plan for such periods as they may determine.
Subject to these limitations, the amount of such payments and the purposes
for which they are made shall be determined by the Adviser.
4. INVESTMENT TRANSACTIONS
During the year ended March 31, 1995, purchases and proceeds from sales of
securities, other than short-term investments, aggregated $99,328,403 and
$100,371,923 respectively for the Series. The cost of securities assigned
by the Short Fund to the Short Series for federal income tax purposes at
March 31, 1995, is $333,921,145. Net unrealized appreciation consists of:
Gross unrealized appreciation $ 9,448,111
Gross unrealized depreciation (2,173,552)
Net unrealized appreciation . $ 7,274,559
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Smith Breeden Short Duration U.S. Government Series
of the Smith Breeden Series Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Breeden Short Duration
U.S. Government Series of the Smith Breeden Series Fund as of March 31, 1995,
and the related statements of operations for the year ended and changes in
net assets for each of the years in the two- year period then ended and
financial highlights for each of the years in the two-year period then ended
and the period March 31, 1992 (commencement of operations) to March 31, 1993.
These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at March 31, 1995 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Smith
Breeden Short Duration U.S. Government Series of the Smith Breeden Series
Fund as of March 31, 1995, the results of its operations, the changes
in net assets, and financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 12, 1995
SMITH BREEDEN SERIES FUND
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statement filed with Part B
(b) Exhibits:
(1) Declaration of Trust
(2) By-Laws
(3) Voting Trust Agreement--Not Applicable
(4) Specimen Share Certificate--Incorporated by
Reference
(5)(a) Form of Investment Advisory Agreement
for Smith Breeden Intermediate Duration
Series
(5)(b) Form of Investment Advisory Agreement
for Smith Breeden Short Duration Series
(6) Form of Underwriting or Distribution
Agreement
(7) Bonus, Profit Sharing, Pension and Other
Similar Arrangements -- Not Applicable
(8) Custodian Agreement
(9)(a) Shareholder Services Agreement
(9)(b) Accounting Services Agreement
(9)(c) Sub-Administration Agreement- Not Applicable
(10) Opinion and Consent of Counsel
(a) Incorporated by reference to Post-Effective
Amendment No. 10 filed on May 24, 1995.
(b) Incorporated by reference to Post-Effective
Amendment No. 7 filed on March 31, 1994.
(11) Independent Auditors' Consent
(12) Financial Statements Omitted from Item 23 --
Not Applicable
(13) Letter of Understanding relating to
initial capital--Incorporated by Reference
(14) Model Retirement Plan -- Not Applicable
(15)(a) Form of Rule 12b-1 Plan for Smith
Breeden Intermediate Duration Series
(15)(b) Form of Rule 12b-1 Plan for Smith
Breeden Short Duration Series
(16) Performance Calculation --
Not Applicable
(17) Powers of Attorney--Incorporated by Reference
Item 25. Persons Controlled by or under Common Control with
Registrant.
Carver Federal Savings Bank may be deemed to control the Smith
Breeden Short Duration Series by virtue of it owning 29.6% of the
outstanding shares of this series on March 31, 1995.
Roosevelt Bank FSB may be deemed to control the Smith Breeden
Intermediate Duration U.S. Government Series by virtue of it
owning 73.62% of the outstanding shares of the fund on March 31,
1995.
Item 26. Number of Holders of Securities.
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF MARCH 31, 1995
Smith Breeden Short Duration
U.S. Government Series 131
Shares of Beneficial Interest
Smith Breeden Intermediate
Duration U.S. Government Series 68
Shares of Beneficial Interest
Item 27. Indemnification.
Reference is made to Article IV, Sections 4.2 and 4.3 of
Registrant's Declaration of Trust (Exhibit 1(a)) with respect to
indemnification of the Trustees and officers of Registrant
against liabilities which may be incurred by them in such
capacities.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted
to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the
Securities and Exchange Commission ("SEC"), such indemnification
is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee, an
officer or a controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted
by such trustee, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Each disinterested Trustee has entered into an indemnity
agreement with the Adviser whereby the Adviser indemnifies each
disinterested Trustee against defense costs in connection with a
civil claim which involves the Trustee by virtue of his position
with the Fund.
Item 28. Business and Other Connections of Adviser.
Smith Breeden Associates, Inc. (the "Adviser") acts as investment
adviser to financial institution, insurance, pension, charitable foundation
clients and other registered investment companies. For a description of
the officers and directors of the Adviser and their business affiliations,
see "Management of the Fund" in the Prospectus contained within this
Registration Statement.
Item 29. Principal Underwriters
Fund/Plan Broker Services, Inc., located at #2 West Elm Street, P.O. Box
874, Conshohocken, Pennsylvania 19428-0874, is the principal underwriter.
Fund/Plan Broker Services also serves as the Principal Underwriter for The
Brinson Funds, Inc., CT&T Funds, Dreman Mutual Fund Group, First Mutual
Fund, Inc., Focus Trust, Inc., The HomeState PA Growth Fund, IAA Trust
Mutual Funds, Matthews International Funds, MCM Funds, Smith Breeden Series
Fund, Smith Breeden Trust, The Stratton Funds, Inc. Stratton Growth Fund,
Inc., Stratton Monthly Dividend Shares, Inc. and The Timothy Plan.
(b) The table below sets forth certain information as to the
Underwriter's Directors, Officers and Control Persons:
NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND
BUSINESS ADDRESS WITH UNDERWRITER OFFICES WITH
REGISTRANT
Kenneth J. Kempf Director, President and None
#2 West Elm Street Principal
Conshohocken, PA 19428-0874
Rocco C. Cavalieri Director and Vice President None
#2 West Elm Street
Conshohocken, PA 19428-0874
Gerald J. Holland Director and Vice President None
#2 West Elm Street
Conshohocken, PA 19428-0874
Joseph M. O'Donnell Director and Vice President None
#2 West Elm Street
Conshohocken, PA 19428-0874
Sandra L. Adams Assistant Vice President None
#2 West Elm Street and Principal
Conshohocken, PA 19428-0874
John H. Leven Treasurer None
#2 West Elm Street
Conshohocken, PA 19428-0874
Mary P. Efstration Secretary None
#2 West Elm Street
Conshohocken, PA 19428-0874
James W. Stratton may be considered a control person of the Underwriter due
to his direct or indirect ownership of Fund/Plan Services, Inc., the parent
of the Underwriter.
(c) Not Applicable.
Item 30. Locations of Accounts and Records.
The accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder will be kept by the Registrant at the following offices.
(1) Fund/Plan Services, Inc., #2 West Elm Street, P. O. Box 874,
Conshohocken, Pennsylvania 19428-0874
(2) Smith Breeden Associates, Inc., 100 Europa Drive, Suite 200,
Chapel Hill, NC 27514
Item 31. Management Services.
There are no management-related service contracts not discussed in
Part A or Part B.
Item 32. Undertakings.
(a) The Registrant previously has undertaken to file a post-effective
amendment within four to six months from the effective date of Registrant's
Registration Statement under the Securities Act of 1933, containing
reasonably current financial statements, which need not be certified. The
Registration Statement filed on August 24, 1992 was for the purpose of
complying with such undertaking.
(b) The Registrant previously has undertaken to promptly call a
meeting of shareholders for the purpose of voting upon the question of
removal of any trustee or trustees when requested in writing to do so by
the record holders of not less than 10 percent of the Registrant's
outstanding shares and to assist its shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications.
(c) The registrant hereby undertakes to furnish to each person to
whom a prospectus is delivered a copy of the Registrant's latest annual
report to shareholders upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant
has duly caused this Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Chapel Hill, the State of North Carolina, on the 31st day of May, 1995.
SMITH BREEDEN SERIES FUND
By
Michael J. Giarla
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statment has been signed below by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Michael J. Giarla President, Principal May 31,1995
Executive Officer, and Trustee
Douglas T. Breeden* Trustee May 31, 1995
Stephen M. Schaefer* Trustee May 31, 1995
Myron S. Scholes* Trustee May 31, 1995
William F. Sharpe* Trustee May 31, 1995
Marianthe S. Mewkill Principal Financial and May 31, 1995
Accounting Officer
* By
Marianthe S. Mewkill
*Attorney-in-Fact pursuant to power-of-attorney filed previously.
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
SMITH BREEDEN SERIES FUND
727 Eastowne Drive, Suite 300D
Chapel Hill, North Carolina 27514
Dated June 1, 1992
TABLE OF CONTENTS
Page
ARTICLE I - NAME AND DEFINITIONS . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Name . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Definitions. . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. General Powers . . . . . . . . . . . . . . . . . . 3
Section 2.2 Investments. . . . . . . . . . . . . . . . . . . . 4
Section 2.3. Legal Title. . . . . . . . . . . . . . . . . . . . 6
Section 2.4. Issuance and Repurchase of Shares. . . . . . . . . 7
Section 2.5. Delegation; Committees . . . . . . . . . . . . . . 7
Section 2.6. Collection and Payment . . . . . . . . . . . . . . 7
Section 2.7. Expenses . . . . . . . . . . . . . . . . . . . . . 7
Section 2.8. Manner of Acting; By-laws. . . . . . . . . . . . . 7
Section 2.9. Miscellaneous Powers . . . . . . . . . . . . . . . 8
Section 2.10. Principal Transactions . . . . . . . . . . . . . . 8
Section 2.11. Litigation . . . . . . . . . . . . . . . . . . . . 9
Section 2.12. Initial Trustee. . . . . . . . . . . . . . . . . . 9
Section 2.13. Number of Trustees . . . . . . . . . . . . . . . . 9
Section 2.14. Election and Term. . . . . . . . . . . . . . . . . 9
Section 2.15. Resignation and Removal. . . . . . . . . . . . . . 10
Section 2.16. Vacancies. . . . . . . . . . . . . . . . . . . . . 10
Section 2.17. Delegation of Power to Other Trustees. . . . . . . 11
ARTICLE III - CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.1. Distribution Contract. . . . . . . . . . . . . . . 11
Section 3.2. Advisory or Management Contract. . . . . . . . . . 11
Section 3.3. Administration Agreement . . . . . . . . . . . . . 12
Section 3.4. Transfer Agent . . . . . . . . . . . . . . . . . . 12
Section 3.5. Custodian. . . . . . . . . . . . . . . . . . . . . 12
Section 3.6. Affiliations of Trustees or Officers,
Etc. . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.7. Compliance with 1940 Act . . . . . . . . . . . . . 13
ARTICLE IV - LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS . . . . . . . . . . . . . . . . . . . 13
Section 4.1. No Personal Liability of Shareholders,
Trustees, Etc. . . . . . . . . . . . . . . . . . . 13
Section 4.2. Non-Liability of Trustees, Etc.. . . . . . . . . . 14
Section 4.3. Mandatory Indemnification. . . . . . . . . . . . . 14
Section 4.4. No Bond Required of Trustees . . . . . . . . . . . 16
Section 4.5. No Duty of Investigation; Notice in
Trust Instruments, Etc. . . . . . . . . . . . . . 17
Section 4.6. Reliance on Experts, Etc.. . . . . . . . . . . . . 17
ARTICLE V - SHARES OF BENEFICIAL INTEREST . . . . . . . . . . . . . . 18
Section 5.1. Beneficial Interest. . . . . . . . . . . . . . . . 18
Section 5.2. Rights of Shareholders . . . . . . . . . . . . . . 18
Section 5.3. Trust Only . . . . . . . . . . . . . . . . . . . . 18
Section 5.4. Issuance of Shares . . . . . . . . . . . . . . . 19
Section 5.5. Register of Shares . . . . . . . . . . . . . . . . 19
Section 5.6. Transfer of Shares . . . . . . . . . . . . . . . . 19
Section 5.7. Notices. . . . . . . . . . . . . . . . . . . . . . 20
Section 5.8. Treasury Shares. . . . . . . . . . . . . . . . . . 20
Section 5.9. Voting Powers. . . . . . . . . . . . . . . . . . . 20
Section 5.10. Meetings of Shareholders . . . . . . . . . . . . . 21
Section 5.11. Series or Class Designation. . . . . . . . . . . . 21
Section 5.12. Assent to Declaration of Trust . . . . . . . . . . 25
ARTICLE VI - REDEMPTION AND REPURCHASE OF SHARES . . . . . . . . . . . 25
Section 6.1. Redemption of Shares . . . . . . . . . . . . . . . 25
Section 6.2. Price. . . . . . . . . . . . . . . . . . . . . . . 26
Section 6.3. Payment. . . . . . . . . . . . . . . . . . . . . . 26
Section 6.4. Effect of Suspension of Determination
of Net Asset Value . . . . . . . . . . . . . . . . 26
Section 6.5. Repurchase by Agreement. . . . . . . . . . . . . . 27
Section 6.6. Redemption of Shareholder's Interest . . . . . . . 27
Section 6.7. Redemption of Shares in Order to
Quality as Regulated Investment
Company; Disclosure of Holding . . . . . . . . . . 27
Section 6.8. Reductions in Number of Outstanding
Shares Pursuant to Net Asset Value
Formula . . . . . . . . . . . . . . . . . . . . . 28
Section 6.9. Suspension of Right of Redemption. . . . . . . . . 28
ARTICLE VII - DETERMINATION OF NET ASSET VALUE, NET INCOME
AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . 28
Section 7.1. Net Asset Value. . . . . . . . . . . . . . . . . . 28
Section 7.2. Distributions to Shareholders. . . . . . . . . . . 29
Section 7.3. Determination of Net Income. . . . . . . . . . . . 30
Section 7.4. Power to Modify Foregoing Procedures . . . . . . . 31
ARTICLE VIII - DURATION; TERMINATION OF TRUST OR A SERIES;
AMENDMENT; MERGERS, ETC. . . . . . . . . . . . . . . . 31
Section 8.1. Duration . . . . . . . . . . . . . . . . . . . . . 31
Section 8.2. Termination of the Trust or a Series or
a Class . . . . . . . . . . . . . . . . . . . . . 31
Section 8.3. Amendment Procedure. . . . . . . . . . . . . . . . 33
Section 8.4. Merger, Consolidation and Sale of
Assets . . . . . . . . . . . . . . . . . . . . . . 33
Section 8.5. Incorporation. . . . . . . . . . . . . . . . . . . 34
ARTICLE IX - REPORTS TO SHAREHOLDERS . . . . . . . . . . . . . . . . . 34
ARTICLE X - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 35
Section 10.1 Execution and Filing . . . . . . . . . . . . . . . 35
Section 10.2 Governing Law. . . . . . . . . . . . . . . . . . . 35
Section 10.3. Counterparts . . . . . . . . . . . . . . . . . . . 35
Section 10.4. Reliance by Third Parties. . . . . . . . . . . . . 35
Section 10.5. Provisions in Conflict with Law or
Regulations . . . . . . . . . . . . . . . . . . . 36
<PAGE>
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
SMITH BREEDEN SERIES FUND
Dated June 1, 1992
This AMENDED AND RESTATED DECLARATION OF TRUST, made
by a majority of the trustees in accordance with Section 10.1 herewith,
amends and restates the Declaration of Trust dated October 3, 1991 and
amended by Amendment No. 1 to the Declaration of Trust, Amendment
No. 2 to the Declaration of Trust and Amendment No. 3 to the Declaration
of Trust dated December 17, 1991, January 12, 1992 and February 18,
1992, respectively;
WHEREAS, the Trustees desire to form a trust with transferrable
shares under the laws of the Commonwealth of Massachusetts for the
investment and reinvestment of funds contributed thereto; and
WHEREAS, it is proposed that the beneficial interest in the trust
assets be divided into transferable shares of beneficial interest which, in
the discretion of the Trustees, may be divided into separate Series as
hereinafter provided; and
WHEREAS, the Trustees hereby declare that all money and property
contributed to the trust established hereunder shall be held and managed
in trust for the benefit of the holders, from time to time, of the shares of
beneficial interest issued hereunder and subject to the provisions hereof.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby is
"Smith Breeden Series Fund" (the "Trust").
Section 1.2. Definitions. Wherever they are used herein,
the following terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the
contract described in Section 3.3 hereof.
(b) "By-laws" means the By-laws referred to in Section 2.8 hereof,
as from time to time amended.
(c) "Class" means any division of shares within a Series, which
Class is or has been established within such Series in accordance with
the provisions of Article V.
(d) The terms "Commission" and "Interested Person" have the
meanings given them in the 1940 Act. Except as otherwise defined by the
Trustees in conjunction with the establishment of any Series of Shares,
the term "vote of a majority of the Shares outstanding and entitled to
vote" shall have the same meaning as is assigned to the term "vote of a
majority of the outstanding voting securities" in the 1940 Act.
(e) "Custodian" means any Person other than the Trust who has
custody of any Trust Property as required by Section 17(f) of the 1940
Act, but does not include a system for the central handling of securities
described in said Section 17(f).
(f) "Declaration" means this Declaration of Trust as amended from
time to time. Reference in this Declaration of Trust to "Declaration,"
"hereof," "herein," and "hereunder" shall be deemed to refer to this
Declaration rather than exclusively to the article or section in which such
words appear.
(g) "Distributor" means the party, other than the Trust, to the
contract described in Section 3.1 hereof.
(h) "Fund" or "Funds" individually or collectively means the
separate Series of Shares of the Trust, together with the assets and
liabilities assigned thereto.
(i) "Fundamental Policies" means the investment policies and
restrictions set forth in the Prospectus and Statement of Additional
Information and designated as fundamental policies therein.
(j) "His" shall include the feminine and neuter, as well as the
masculine, genders.
(k) "Investment Adviser" means the party, other than the Trust, to
the contract described in Section 3.2 hereof.
(l) The "1940 Act" means the Investment Company Act of 1940,
as amended from time to time.
(m) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political
subdivisions thereof.
(n) "Prospectus" means the Prospectus and Statement of
Additional Information included in the Registration Statement of the Trust
under the Securities Act of 1933 as such Prospectus and Statement of
Additional Information may be amended or supplemented and filed with
the Commission from time to time.
(o) "Series" individually or collectively means the separately
managed components of the Trust as may be established and designated
from time to time by the Trustees pursuant to Section 5.11 hereof.
(p) "Shareholder" means a record owner of Outstanding Shares.
(q) "Shares" means the equal proportionate units of interest into
which the beneficial interest in the Trust shall be divided from time to time,
including the Shares of any and all Series or of any Class within any
Series (as the context may require) which may be established by the
Trustees, and includes fractions of Shares as well as whole Shares.
"Outstanding" Shares means those Shares shown from time to time on the
books of the Trust or its Transfer Agent as then issued and outstanding,
but shall not include Shares which have been redeemed or repurchased
by the Trust and which are at the time held in the treasury of the Trust.
(r) "Transfer Agent" means any Person other than the Trust who
maintains the Shareholder records of the Trust, such as the list of
Shareholders, the number of Shares credited to each account, and the
like.
(s) "Trust" means Smith Breeden U.S. Government Series Fund.
(t) The "Trustees" means the person who has signed this
Declaration, so long as he shall continue in office in accordance with the
terms hereof, and all other persons who may from time to time be duly
elected, qualified and serving as Trustees in accordance with the
provisions of Article II hereof, and reference herein to a Trustee or the
Trustees shall refer to such person or persons in this capacity or their
capacities as trustees hereunder.
(u) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees, including any and all assets of or allocated to any
Series or Class, as the context may require.
ARTICLE II
TRUSTEES
Section 2.1. General Powers. The Trustees shall have exclusive
and absolute control over the Trust Property and over the business of the
Trust to the same extent as if the Trustees were the sole owners of the
Trust Property and business in their own right, but with such powers of
delegation as may be permitted by this Declaration. The Trustees shall
have power to conduct the business of the Trust and carry on its
operations in any and all of its branches and maintain offices both within
and without the Commonwealth of Massachusetts, in any and all states of
the United States of America, in the District of Columbia, and in any and
all commonwealths, territories, dependencies, colonies, possessions,
agencies or instrumentalities of the United States of America and of
foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to
promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of
the Trust made by the Trustees in good faith shall be conclusive. In
construing the provisions of this Declaration, the presumption shall be in
favor of a grant of power to the Trustees.
The enumeration of any specific power herein shall not be construed
as limiting the aforesaid powers. Such powers of the Trustees may be
exercised without order of or resort to any court.
Section 2.2. Investments. The Trustees shall have the power:
(a) To operate as and carry on the business of an investment
company, and exercise all the powers necessary and appropriate to the
conduct of such operations.
(b) To subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or
otherwise deal in or dispose of United States and foreign currencies and
related instruments including options and futures contracts, forward
foreign currency exchange contracts, mortgage swaps, interest rate
swaps, caps and floors; securities, including common, preferred and
preference stocks, warrants, subscription rights, profit-sharing interests or
participations and all other contracts for or evidence of equity interests;
interests of any sort in another investment company; bonds, debentures,
time notes and all other evidences of indebtedness; negotiable or non-
negotiable instruments, obligations, certificates of deposit or
indebtedness, finance paper, bankers' acceptances, commercial paper,
repurchase agreements, reverse repurchase agreements, convertible
securities, forward contracts, options, futures contracts, options on futures
contracts; and other securities, including, without limitation, those issued,
guaranteed or sponsored by any state, territory or possession of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, or by the United States Government, any
foreign government, or any agency, instrumentality or political subdivision
of the United States Government or any foreign government, or
international instrumentalities, or by any bank, savings institution,
corporation, trust, partnership or other entity organized under the laws of
any State or of the United States or under foreign laws; and the Trustees
shall be deemed to have the foregoing powers with respect to any
additional securities in which the Trust may invest should the Fundamental
Policies be amended.
(c) To acquire (by purchase, subscription or otherwise), hold,
trade in and deal in, acquire any rights or options to purchase or sell, sell
or otherwise dispose of, any such securities; to exchange, lend, pledge,
mortgage, hypothecate and lease any or all assets of the Trust; to enter
into repurchase agreements, reverse repurchase agreements, firm
commitment agreements, and forward foreign currency exchange
contracts; to purchase and sell options on securities, indices, currency or
other financial assets, futures contracts and options on futures contracts of
all descriptions; to engage in, and to pledge collateral with respect to, all
types of hedging and risk management transactions, including but not
limited to mortgage swaps, interest rate swaps, caps and floors.
(d) To exercise all rights, powers and privileges of ownership or
interest in all securities and repurchase agreements included in the Trust
Property, including the right to vote thereon and otherwise act with
respect thereto and to do all acts for the preservation, protection,
improvement and enhancement in value of all such securities and
repurchase agreements.
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property, real
or personal, including cash or foreign currency, and any interest therein.
(f) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging
or otherwise subjecting as security the Trust Property; and to endorse,
guarantee, or undertake the performance of any obligation or engagement
of any other Person and to lend Trust Property.
(g) To aid by further investment any corporation, company, trust,
partnership, association or firm, any obligation of or interest in which is
included in the Trust Property or in the affairs of which the Trustees have
any direct or indirect interest; to do all acts and things designed to
protect, preserve, improve or enhance the value of such obligation or
interest; and to guarantee or become surety on any or all of the contracts,
stocks, bonds, notes, debentures and other obligations of any such
corporation, company, trust, partnership, association or firm.
(h) To enter into a plan of distribution and any related agreements
whereby the Trust may finance directly or indirectly any activity which is
primarily intended to result in sale of Shares.
(i) To adopt on behalf of the Trust or any Series thereof any plan
providing for the issuance of multiple Classes of Shares (as authorized
herein at Section 5.11).
(j) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the
attainment of any object or the furtherance of any power hereinbefore set
forth, either alone or in association with others, and to do every other act
or thing incidental or appurtenant to or arising out of or connected with
the aforesaid business or purposes, objects or powers.
The foregoing clauses shall be construed both as objects and
powers, and the foregoing enumeration of specific powers shall not be
held to limit or restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be
limited by any law limiting the investments which may be made by
fiduciaries.
Section 2.3. Legal Title. Legal title to all the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall
have power to cause legal title to any Trust Property to be held by or in
the name of one or more of the Trustees, or in the name of the Trust or
any Series of the Trust, or in the name of any other Person as nominee,
on such terms as the Trustees may determine, provided that the interest
of the Trust therein is deemed appropriately protected. The right, title and
interest of the Trustees in the Trust Property and the Property of each
Series of the Trust shall vest automatically in each Person who may
hereafter become a Trustee. Upon the termination of the term of office,
resignation, removal or death of a Trustee he shall automatically cease to
have any right, title or interest in any of the Trust Property, and the right,
title and interest of such Trustee in the Trust Property shall vest
automatically in the remaining Trustees. Such vesting and cessation of
title shall be effective whether or not conveyancing documents have been
executed and delivered.
Section 2.4. Issuance and Repurchase of Shares. The Trustees
shall have the power to issue, sell, repurchase, redeem, retire, cancel,
acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in
Shares and, subject to the provisions set forth in Articles VI and VII and
Section 5.11 hereof, to apply to any such repurchase, redemption,
retirement, cancellation or acquisition of Shares any funds or property of
the Trust, whether capital or surplus or otherwise, to the full extent now or
hereafter permitted by the laws of the Commonwealth of Massachusetts
governing business corporations.
Section 2.5. Delegation; Committees. The Trustees shall have
power, consistent with their continuing exclusive authority over the
management of the Trust and the Trust Property, to delegate from time to
time to such of their number or to officers, employees or agents of the
Trust the doing of such things and the execution of such instruments
either in the name of the Trust or any Series of the Trust or the names of
the Trustees or otherwise as the Trustees may deem expedient, to the
same extent as such delegation is permitted by the 1940 Act.
Section 2.6. Collection and Payment. Subject to Section 5.11
hereof, the Trustees shall have power to collect all property due to the
Trust; to pay all claims, including taxes, against the Trust Property; to
prosecute, defend, compromise or abandon any claims relating to the
Trust Property; to foreclose any security interest securing any obligations,
by virtue of which any property is owed to the Trust; and to enter into
releases, agreements and other instruments.
Section 2.7. Expenses. Subject to Section 5.11 hereof, the
Trustees shall have the power to incur and pay any expenses which in the
opinion of the Trustees are necessary or incidental to carry out any of the
purposes of this Declaration, and to pay reasonable compensation from
the funds of the Trust to themselves as Trustees. The Trustees shall fix
the compensation of all officers, employees and Trustees.
Section 2.8. Manner of Acting; By-laws. Except as otherwise
provided herein or in the By-laws, any action to be taken by the Trustees
may be taken by a majority of the Trustees present at a meeting of
Trustees (a quorum being present), including any meeting held by means
of a conference telephone circuit or similar communications equipment by
means of which all persons participating in the meeting can hear each
other, or by written consents of the entire number of Trustees then in
office. The Trustees may adopt By-laws not inconsistent with this
Declaration to provide for the conduct of the business of the Trust and
may amend or repeal such By-laws to the extent such power is not
reserved to the Shareholders.
Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of
the By-laws, a majority of the Trustees may by resolution appoint a
committee consisting of less than the whole number of Trustees then in
office, which committee may be empowered to act for and bind the
Trustees and the Trust, as if the acts of such committee were the acts of
all the Trustees then in office, with respect to the institution, prosecution,
dismissal, settlement, review or investigation of any action, suit or
proceeding which shall be pending or threatened to be brought before
any court, administrative agency or other adjudicatory body.
Section 2.9. Miscellaneous Powers. Subject to Section 5.11
hereof, the Trustees shall have the power to: (a) employ or contract with
such Persons as the Trustees may deem desirable for the transaction of
the business of the Trust or any Series thereof; (b) enter into joint
ventures, partnerships and any other combinations or associations; (c)
remove Trustees or fill vacancies in or add to their number, elect and
remove such officers and appoint and terminate such agents or
employees as they consider appropriate, and appoint from their own
number, and terminate, any one or more committees which may exercise
some or all of the power and authority of the Trustees as the Trustees
may determine; (d) purchase, and pay for out of Trust Property or the
Property of the appropriate Series of the Trust, insurance policies insuring
the Shareholders, Trustees, officers, employees, agents, investment
advisers, administrators, distributors, selected dealers or independent
contractors of the Trust against all claims arising by reason of holding any
such position or by reason of any action taken or omitted by any such
Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person
against such liability; (e) establish pension, profit-sharing, share purchase,
and other retirement, incentive and benefit plans for any Trustees, officers,
employees and agents of the Trust; (f) to the extent permitted by law,
indemnify any person with whom the Trust or any Series thereof has
dealings, including the Investment Adviser, Administrator, Distributor,
Transfer Agent and selected dealers, to such extent as the Trustees shall
determine; (g) guarantee indebtedness or contractual obligations of
others; (h) determine and change the fiscal year of the Trust or any Series
thereof and the method by which its accounts shall be kept; and (i) adopt
a seal for the Trust, but the absence of such seal shall not impair the
validity of any instrument executed on behalf of the Trust.
Section 2.10. Principal Transactions. Except in transactions not
permitted by the 1940 Act or rules and regulations adopted by the
Commission, the Trustees may, on behalf of the Trust, buy any securities
from or sell any securities to, or lend any assets of the Trust or any Series
thereof, to any Trustee or officer of the Trust or any firm of which any such
Trustee or officer is a member acting as principal, or have any such
dealings with the Investment Adviser, Distributor or Transfer Agent or with
any Interested Person of such Person; and the Trust or a Series thereof
may employ any such Person, or firm or company in which such Person
is an Interested Person, as broker, legal counsel, registrar, transfer agent,
dividend disbursing agent or custodian upon customary terms.
Section 2.11. Litigation. The Trustees shall have the power to
engage in and to prosecute, defend, compromise, abandon, or adjust by
arbitration, or otherwise, any actions, suits, proceedings, disputes, claims,
and demands relating to the Trust, and out of the assets of the Trust or
any Series thereof to pay or to satisfy any debts, claims or expenses
incurred in connection therewith, including those of litigation, and such
power shall include without limitation the power of the Trustees or any
appropriate committee thereof, in the exercise of their or its good faith
business judgment, to dismiss any action, suit, proceeding, dispute, claim,
or demand, derivative or otherwise, brought by any person, including
a Shareholder in its own name or the name of the Trust, whether or not
the Trust or any of the Trustees may be named individually therein or the
subject matter arises by reason of business for or on behalf of the Trust.
Section 2.12. Initial Trustee. Upon his execution of this
Declaration or a counterpart hereof, Gerald J. Madigan shall become a
Trustee hereunder.
Section 2.13. Number of Trustees. The number of Trustees shall
initially be one (1), and thereafter shall be such number as shall be fixed
from time to time by a written instrument signed by a majority of the
Trustees, provided, however, that the subsequent number of Trustees
shall not be less than three (3) nor more than fifteen (15).
Section 2.14. Election and Term. Except for the Trustees named
herein or appointed to fill vacancies pursuant to Section 2.16 hereof, the
Trustees may succeed themselves and shall be elected by the
Shareholders owning of record a plurality of the Shares voting at a
meeting of Shareholders on a date fixed by the Trustees. Except in the
event of resignation or removals pursuant to Section 2.15 hereof, each
Trustee shall hold office until such time as less than a majority of the
Trustees holding office have been elected by Shareholders. In such event
the Trustees then in office will call a Shareholders' meeting for the election
of Trustees. Except for the foregoing circumstances, the Trustees shall
continue to hold office and may appoint successor Trustees.
Section 2.15. Resignation and Removal. Any Trustee may resign
his trust (without the need for any prior or subsequent accounting) by an
instrument in writing signed by him and delivered to the other Trustees
and such resignation shall be effective upon such delivery, or at a later
date according to the terms of the instrument. Any of the Trustees may
be removed (provided the aggregate number of Trustees after such
removal shall not be less than three) with cause, by the action of
two-thirds of the remaining Trustees or by action of two-thirds of the
outstanding Shares of the Trust (for purposes of determining the
circumstances and procedures under which any such removal by the
Shareholders may take place, the provisions of Section 16(a) of the 1940
Act shall be applicable to the same extent as if the Trust were subject to
the provisions of that Section). Upon the resignation or removal of a
Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the
purpose of conveying to the Trust or the remaining Trustees any Trust
Property held in the name of the resigning or removed Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall execute
and deliver on his behalf such documents as the remaining Trustees shall
require as provided in the preceding sentence.
Section 2.16. Vacancies. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of his death, retirement,
resignation, removal, bankruptcy, adjudicated incompetence or other
incapacity to perform the duties of the office of a Trustee. No such
vacancy shall operate to annul the Declaration or to revoke any existing
agency created pursuant to the terms of the Declaration. In the case of
an existing vacancy, including a vacancy existing by reason of an increase
in the number of Trustees, subject to the provisions of Section 16(a) of the
1940 Act, the remaining Trustees shall fill such vacancy by the
appointment of such other person as they in their discretion shall see fit,
made by a written instrument signed by a majority of the Trustees then in
office. Any such appointment shall not become effective, however, until
the person named in the written instrument of appointment shall have
accepted in writing such appointment and agreed in writing to be bound
by the terms of the Declaration. An appointment of a Trustee may be
made in anticipation of a vacancy to occur at a later date by reason of
retirement, resignation or increase in the number of Trustees, provided
that such appointment shall not become effective prior to such retirement,
resignation or increase in the number of Trustees. Whenever a vacancy in
the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.16, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by the Declaration. A
written instrument certifying the existence of such vacancy signed by a
majority of the Trustees in office shall be conclusive evidence of the
existence of such vacancy.
Section 2.17. Delegation of Power to Other Trustees. Any
Trustee may, by power of attorney, delegate his power for a period not
exceeding six (6) months at any one time to any other Trustee or
Trustees; provided that in no case shall fewer than two (2) Trustees
personally exercise the powers granted to the Trustees under this
Declaration except as herein otherwise expressly provided.
ARTICLE III
CONTRACTS
Section 3.1. Distribution Contract. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
distribution contract or contracts providing for the sale of the Shares to net
the Trust or the applicable Series of the Trust not less than the amount
provided for in Section 7.1 of Article VII hereof, whereby the Trustees may
either agree to sell the Shares to the other party to the contract or appoint
such other party as their sales agent for the Shares, and in either case on
such terms and conditions, if any, as may be prescribed in the By-laws,
and such further terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article III
or of the By-laws; and such contract may also provide for the repurchase
of the Shares by such other party as agent of the Trustees.
Section 3.2. Advisory or Management Contract. Subject to
approval by a vote of a majority of the Shares outstanding and entitled to
vote, the Trustees may in their discretion from time to time enter into one
or more investment advisory or management contracts or, if the Trustees
establish multiple Series, separate investment advisory or management
contracts with respect to one or more Series whereby the other party or
parties to any such contracts shall undertake to furnish the Trust or such
Series management, investment advisory, administration, accounting,
legal, statistical and research facilities and services, promotional or
marketing activities, and such other facilities and services, if any, as the
Trustees shall from time to time consider desirable and all upon such
terms and conditions as the Trustees may in their discretion determine.
Notwithstanding any provisions of the Declaration, the Trustees may
authorize the Investment Advisers, or any of them, under any such
contracts (subject to such general or specific instructions as the Trustees
may from time to time adopt) to effect purchases, sales, loans or
exchanges of portfolio securities and other investments of the Trust on
behalf of the Trustees or may authorize any officer, employee or Trustee
to effect such purchases, sales, loans or exchanges pursuant to
recommendations of such Investment Advisers, or any of them (and all
without further action by the Trustees). Any such purchases, sales, loans
and exchanges shall be deemed to have been authorized by all of the
Trustees. The Trustees may, in their sole discretion, call a meeting of
Shareholders in order to submit to a vote of Shareholders at such meeting
the approval or continuance of any such investment advisory or
management contract. If the Shareholders of any one or more of the
Series of the Trust should fail to approve any such investment advisory or
management contract, the Investment Adviser may nonetheless serve as
Investment Adviser with respect to any Series whose Shareholders
approve such contract.
Section 3.3. Administration Agreement. The Trustees may in
their discretion from time to time enter into an administration agreement
or, if the Trustees establish multiple Series or Classes separate
administration agreements with respect to each Series or Class, whereby
the other party to such agreement shall undertake to manage the
business affairs of the Trust or of a Series or Class of the Trust and furnish
the Trust or a Series or a Class thereof with office facilities, and shall be
responsible for the ordinary clerical, bookkeeping and recordkeeping
services at such office facilities, and other facilities and services, if any,
and all upon such terms and conditions as the Trustees may in their
discretion determine.
Section 3.4. Transfer Agent. The Trustees may in their
discretion from time to time enter into a transfer agency and shareholder
service contract whereby the other party to such contract shall undertake
to furnish transfer agency and shareholder services to the Trust. The
contract shall have such terms and conditions as the Trustees may In their
discretion determine not inconsistent with the Declaration. Such services
may be provided by one or more Persons.
Section 3.5. Custodian. The Trustees may appoint or otherwise
engage one or more banks or trust companies, each having an aggregate
capital, surplus and undivided profits (as shown in its last published
report) of not less than two million dollars ($2,000,000) to serve as
Custodian with authority as its agent, but subject to such restrictions,
limitations and other requirements, if any, as may be contained in the By-
Laws of the Trust. The Trustees may also authorize the Custodian to
employ one or more sub-custodians, including such foreign banks and
securities depositories as meet the requirements of applicable provisions
of the 1940 Act, and upon such terms and conditions as may be agreed
upon between the Custodian and such sub-custodian, to hold securities
and other assets of the Trust and to perform the acts and services of the
Custodian, subject to applicable provisions of law and resolutions adopted
by the Trustees.
Section 3.6. Affiliations of Trustees or Officers, Etc.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust
or any Series thereof is a shareholder, director, officer, partner,
trustee, employee, manager, adviser or distributor of or for any
partnership, corporation, trust, association or other organization or of
or for any parent or affiliate of any organization, with which a
contract of the character described in Sections 3.1, 3.2 or 3.3 above
or for services as Custodian, Transfer Agent or disbursing agent or
for related services may have been or may hereafter be made, or
that any such organization, or any parent or affiliate thereof, is a
Shareholder of or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in
Sections 3.1, 3.2 or 3.3 above or for services as Custodian, Transfer
Agent or disbursing agent or for related services may have been or
may hereafter be made also has any one or more of such contracts
with one or more other partnerships, corporations, trusts,
associations or other organizations, or has other business or
interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing
the same or create any liability or accountability to the Trust or its
Shareholders.
Section 3.7. Compliance with 1940 Act. Any contract entered
into pursuant to Sections 3.1 or 3.2 shall be consistent with and subject to
the requirements of Section 15 of the 1940 Act (including any amendment
thereof or other applicable Act of Congress hereafter enacted), as
modified by any applicable order or orders of the Commission, with
respect to its continuance in effect, its termination and the method of
authorization and approval of such contract or renewal thereof.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc.
No Shareholder shall be subject to any personal liability whatsoever to
any Person in connection with Trust Property or the acts, obligations or
affairs of the Trust or any Series thereof. No Trustee, officer, employee or
agent of the Trust or any Series thereof shall be subject to any personal
liability whatsoever to any Person, other than to the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties with respect to such Person; and all
such Persons shall look solely to the Trust Property, or to the Property of
one or more specific Series of the Trust if the claim arises from the
conduct of such Trustee, officer, employee or agent with respect to only
such Series, for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee, officer,
employee, or agent, as such, of the Trust or any Series thereof, is made a
party to any suit or proceeding to enforce any such liability of the Trust or
any Series thereof, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims and liabilities, to which such
Shareholder may become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder or former Shareholder
(or his or her heirs, executors, administrators or other legal representatives
or in the case of a corporation or other entity, its corporate or other
general successor) out of the Trust Property for all legal and other
expenses reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required by the
preceding sentence shall be made only out of assets of the one or more
Series whose Shares were held by said Shareholder at the time the act or
event occurred which gave rise to the claim against or liability of said
Shareholder. The rights accruing to a Shareholder under this Section 4.1
shall not impair any other right to which such Shareholder may be lawfully
entitled, nor shall anything herein contained restrict the right of the Trust
or any Series thereof to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust or any Series thereof shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee, officer, employee,
or agent thereof for any action or failure to act (including without
limitation the failure to compel in any way any former or acting Trustee to
redress any breach of trust) except for his own bad faith, willful
misfeasance, gross negligence or reckless disregard of the duties involved in
the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to
the exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee, officer,
employee or agent of the Trust (including any individual who serves
at its request as director, officer, partner, trustee or the like of
another organization in which it has any interest as a shareholder,
creditor or otherwise) shall be indemnified by the Trust, or by one or
more Series thereof if the claim arises from his or her conduct with
respect to only such Series, to the fullest extent permitted by law
against all liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding
in which he becomes involved as a party or otherwise by virtue of
his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal, or
other, including appeals), actual or threatened; and the words
"liability" and expenses shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust, a Series thereof or the
Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall have
been finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interest of the Trust
or a Series thereof;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(ii)
resulting in a payment by a Trustee or officer, unless there has been
a determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office:
(A) by the court or other body approving the settlement
or other disposition;
(B) based upon a review of readily available facts (as
opposed to a full trial-type inquiry) by (x) vote of a majority of
the Non-interested Trustees acting on the matter (provided that
a majority of the Non-interested Trustees then in office act on
the matter) or (y) written opinion of independent legal counsel;
or
(C) a Majority Shareholder Vote (excluding Shares
owned of record or beneficially by such individual).
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or
hereafter be entitled, shall continue as to a person who has ceased to be
such Trustee or officer and shall inure to the benefit of the heirs,
executors, administrators and assigns of such a person. Nothing
contained herein shall affect any rights to indemnification to which
personnel of the Trust or any Series thereof other than Trustees and
officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in paragraph
(a) of this Section 4.3 may be advanced by the Trust or a Series thereof
prior to final disposition thereof upon receipt of an undertaking by or on
behalf of the recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification under this Section 4.3, provided
that either:
(i) such undertaking is secured by a surety bond
or some other appropriate security provided by the recipient, or the
Trust or Series thereof shall be insured against losses arising out of
any such advances; or
(ii) a majority of the Non-interested Trustees acting on the
matter (provided that a majority of the Non-interested Trustees act
on the matter) or an independent legal counsel in a written opinion
shall determine, based upon a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to believe
that the recipient ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who (i)
is not an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or
order of the Commission); and (ii) is not involved in the claim, action, suit
or proceeding.
Section 4.4. No Bond Required of Trustees. No Trustee
shall be obligated to give any bond or other security for the performance
of any of his duties hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust
Instruments, Etc. No purchaser, lender, transfer agent or other Person
dealing with the Trustees or any officer, employee or agent of the Trust or
a Series thereof shall be bound to make any inquiry concerning the
validity of any transaction purporting to be made by the Trustees or by
said officer, employee or agent or be liable for the application of money or
property paid, loaned, or delivered to or on the order of the Trustees or of
said officer, employee or agent. Every obligation, contract, instrument,
certificate, Share, other security of the Trust or a Series thereof or
undertaking, and every other act or thing whatsoever executed in
connection with the Trust shall be conclusively presumed to have been
executed or done by the executors thereof only in their capacity as
Trustees under this Declaration or in their capacity as officers, employees
or agents of the Trust or a Series thereof. Every written obligation,
contract, instrument, certificate, Share, other security of the Trust or a
Series thereof or undertaking made or issued by the Trustees may recite
that the same is executed or made by them not individually, but as
Trustees under the Declaration, and that the obligations of the Trust or a
Series thereof under any such instrument are not binding upon any of the
Trustees or Shareholders individually, but bind only the Trust Property or
the Trust Property of the applicable Series, and may contain any further
recital which they may deem appropriate, but the omission of such recital
shall not operate to bind the Trustees individually. The Trustees shall at
all times maintain insurance for the protection of the Trust Property or the
Trust Property of the applicable Series, its Shareholders, Trustees,
officers, employees and agents in such amount as the Trustees shall
deem adequate to cover possible tort liability, and such other insurance
as the Trustees in their sole judgment shall deem advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee, officer or
employee of the Trust or a Series thereof shall, in the performance of his
duties, be fully and completely justified and protected with regard to any
act or any failure to act resulting from reliance in good faith upon the
books of account or other records of the Trust or a Series thereof, upon
an opinion of counsel, or upon reports made to the Trust or a Series
thereof by any of its officers or employees or by the Investment Adviser,
the Administrator, the Distributor, Transfer Agent, selected dealers,
accountants, appraisers or other experts or consultants selected with
reasonable care by the Trustees, officers or employees of the Trust,
regardless of whether such counsel or expert may also be a Trustee.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of beneficial interest
without par value. The number of such Shares of beneficial interest
authorized hereunder is unlimited. The Trustees shall have the authority
to establish and designate one or more Series of shares and one or more
Classes thereof. Each Share of any Series shall represent an equal
proportionate Share in the assets of that Series with each other Share in
that Series. The Trustees may divide or combine the Shares of any Series
into a greater or lesser number of Shares in that Series without thereby
changing the proportionate interests in the assets of that Series. Subject
to the provisions of Section 5.11 hereof, the Trustees may also authorize
the creation of additional Series of Shares (the proceeds of which may be
invested in separate, independently managed portfolios) and additional
Classes of Shares within any Series. All Shares issued hereunder
including, without limitation, Shares issued in connection with a dividend
in Shares or a split in Shares, shall be fully paid and nonassessable.
Section 5.2. Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any business
hereinbefore described are vested exclusively in the Trustees, and the
Shareholders shall have no interest therein other than the beneficial
interest conferred by their Shares, and they shall have no right to call for
any partition or division of any property, profits, rights or interests of the
Trust nor can they be called upon to share or assume any losses of the
Trust or suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the rights
specifically set forth in this Declaration. The Shares shall not entitle the
holder to preference, preemptive, appraisal, conversion or exchange
rights, except as the Trustees may determine with respect to any Series or
Class of Shares.
Section 5.3. Trust Only. It is the intention of the Trustees to
create only the relationship of Trustee and beneficiary between the
Trustees and each Shareholder from time to time. It is not the intention of
the Trustees to create a general partnership, limited partnership, joint
stock association, corporation, bailment or any form of legal relationship
other than a trust. Nothing in this Declaration of Trust shall be construed
to make the Shareholders, either by themselves or with the Trustees,
partners or members of a joint stock association.
Section 5.4. Issuance of Shares. The Trustees in their
discretion may, from time to time without vote of the Shareholders, issue
Shares, in addition to the then issued and outstanding Shares and Shares
held in the treasury, to such party or parties and for such amount and
type of consideration, including cash or property, at such time or times
and on such terms as the Trustees may deem best, except that only
Shares previously contracted to be sold may be issued during any period
when the right of redemption is suspended pursuant to Section 6.9
hereof, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption of,
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares and Shares held in the treasury. The
Trustees may from time to time divide or combine the Shares of the Trust
or, if the Shares be divided into Series or Classes, of any Series or any
Class thereof of the Trust, into a greater or lesser number without thereby
changing the proportionate beneficial interests in the Trust or in the Trust
Property allocated or belonging to such Series or Class. Contributions to
the Trust or Series thereof may be accepted for, and Shares shall be
redeemed as, whole Shares and/or 1/1,000ths of a Share or integral
multiples thereof.
Section 5.5. Register of Shares. A register shall be kept at the
principal office of the Trust or an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of
Shares held by them respectively and a record of all transfers thereof.
Such register shall be conclusive as to who are the holders of the Shares
and who shall be entitled to receive dividends or distributions or otherwise
to exercise or enjoy the rights of Shareholders. No Shareholder shall be
entitled to receive payment of any dividend or distribution, nor to have
notice given to him as provided herein or in the By-laws, until he has
given his address to the Transfer Agent or such other officer or agent of
the Trustees as shall keep the said register for entry thereon. It is not
contemplated that certificates will be issued for the Shares; however, the
Trustees, in their discretion, may authorize the issuance of share
certificates and promulgate appropriate rules and regulations as to their
use.
Section 5.6. Transfer of Shares. Shares shall be transferable on
the records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing, upon delivery to the Trustees or the
Transfer Agent of a duly executed instrument of transfer, together with
such evidence of the genuineness of each such execution and
authorization and of other matters as may reasonably be required. Upon
such delivery the transfer shall be recorded on the register of the Trust.
Until such record is made, the Shareholder of record shall be deemed to
be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any transfer agent or registrar nor any officer, employee or
agent of the Trust shall be affected by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the
death, bankruptcy, or incompetence of any Shareholder, or otherwise by
operation of law, shall be recorded on the register of Shares as the holder
of such Shares upon production of the proper evidence thereof to the
Trustees or the Transfer Agent, but until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares
for all purposes hereunder and neither the Trustees nor any Transfer
Agent or registrar nor any officer or agent of the Trust shall be affected by
any notice of such death, bankruptcy or incompetence, or other operation
of law.
Section 5.7. Notices. Any and all notices to which any
Shareholder may be entitled and any and all communications shall be
deemed duly served or given if mailed, postage pre-paid, addressed to
any Shareholder of record at his last known address as recorded on the
register of the Trust.
Section 5.8. Treasury Shares. Shares held in the treasury shall,
until resold pursuant to Section 5.4, not confer any voting rights on the
Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.
Section 5.9. Voting Powers. The Shareholders shall have power
to vote only (i) for the election of Trustees as provided in Section 2.14;
(ii) with respect to any investment advisory contract entered into pursuant to
Section 3.2; (iii) with respect to termination of the Trust or a Series
thereof as provided in Section 8.2; (iv) with respect to any amendment of this
Declaration to the extent and as provided in Section 8.3; (v) with respect
to any merger, consolidation or sale of assets as provided in Section 8.4;
(vi) with respect to incorporation of the Trust to the extent and as provided
in Section 8.5; (vii) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or a Series thereof
or the Shareholders of either; (viii) with respect to any plan adopted
pursuant to Rule 12b-1 (or any successor rule) under the 1940 Act, and
related matters; and (ix) with respect to such additional matters relating to
the Trust as may be required by this Declaration, the By-laws or any
registration of the Trust as an investment company under the 1940 Act
with the Commission (or any successor agency) or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to
one vote as to any matter on which it is entitled to vote and each
fractional Share shall be entitled to a proportionate fractional vote. On any
matter submitted to a vote of Shareholders, all Shares shall be voted by
individual Series except (1) when required by the 1940 Act, Shares shall
be voted in the aggregate and not by individual Series; and (2) when the
Trustees have determined that the matter affects only the interests of one
or more Series or Class thereof, then only the Shareholders of such
Series or Class thereof shall be entitled to vote thereon. The Trustees
may, in conjunction with the establishment of any further Series or any
Classes of Shares, establish conditions under which the several Series or
Classes of Shares shall have separate voting rights or no voting rights.
There shall be no cumulative voting in the election of Trustees. Until
Shares are issued, the Trustees may exercise all rights of Shareholders
and may take any action required by law, this Declaration or the By-laws
to be taken by Shareholders. The By-laws may include further provisions
for Shareholders' votes and meetings and related matters.
Section 5.10. Meetings of Shareholders. Meetings of the
Shareholders of the Trust may be called at any time by the Chairman of
the Board, President, or any Vice-President of the Trust, and shall be
called by the President or the Secretary at the request, in writing or by
resolution, of a majority of the Trustees, or at the written request of the
holder or holders of ten percent (10%) or more of the total number of
Shares then issued and outstanding of the Trust entitled to vote at such
meeting. Meetings of the Shareholders of any Series of the Trust shall be
called by the President or the Secretary at the written request of the
holder or holders of ten percent (10%) or more of the total number of
Shares then issued and outstanding of such Series of the Trust entitled to
vote at such meeting. Any such request shall state the purpose of the
proposed meeting.
Section 5.11. Series or Class Designation. (a) Without limiting
the authority of the Trustees set forth in Section 5.1 to establish and
designate any further Series, it is hereby confirmed that the Trust consists
of one Class of the Shares of the Trust designated as shares of the
following five Series: Smith Breeden Short Duration U.S. Government
Series I, Smith Breeden Short Duration U.S. Government Series II, Smith
Breeden Intermediate Duration U.S. Government Series, Smith Breeden
Market Tracking Series and Smith Breeden Market Tracking Series II.
(b) Without limiting the authority of the Trustees set forth in Section
5.1 to establish and designate any further Classes, it is hereby confirmed
that the Trust presently consists of one Class of Shares. Each
Outstanding Share of any Series shall be of the existing Class unless the
Trustees, with the consent of the holder of the Share (which consent shall
be evidenced by the holder's subscription of Shares of a specified Class
or by any other action prescribed by the Trustees), determines that such
Share is or shall be of some other Class.
(c) The Shares of the existing Series and the Class thereof herein
established and designated and any Shares of any further Series and
Classes thereof that may from time to time be established and designated
by the Trustees shall be established and designated, and the variations in
the relative rights and preferences as between the different Series shall be
fixed and determined, by the Trustees (unless the Trustees otherwise
determine with respect to further Series or Classes at the time of
establishing and designating the same); provided, that all Shares shall be
identical except that there may be variations so fixed and determined
between different Series or Classes thereof as to investment objective,
policies and restrictions, purchase price, payment obligations, distribution
expenses, right of redemption, special and relative rights as to dividends
and on liquidation, conversion rights, exchange rights, and conditions
under which the several Series shall have separate voting rights, all of
which are subject to the limitations set forth below. All references to
Shares in this Declaration shall be deemed to be Shares of any or all
Series or Classes as the context may require.
(d) As to any existing Series and Classes, both heretofore and
herein established and designated, and any further division of Shares of
the Trust into additional Series or Classes, the following provisions shall
be applicable:
(i) The number of authorized Shares and the number of
Shares of each Series or Class thereof that may be issued shall be
unlimited. The Trustees may classify or reclassify any unissued
Shares or any Shares previously issued and reacquired of any
Series or Class into one or more Series or one or more Classes that
may be established and designated from time to time. The Trustees
may hold as treasury shares (of the same or some other Series or
Class), reissue for such consideration and on such terms as they
may determine, or cancel any Shares of any Series or Class
reacquired by the Trust at their discretion from time to time.
(ii) All consideration received by the Trust for the issue or
sale of Shares of a particular Series or Class, together with all assets
in which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and
any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall irrevocably
belong to that Series or Class for all purposes, subject only to the
rights of creditors of such Series or Class and except as may
otherwise be required by applicable tax laws, and shall be so
recorded upon the books of account of the Trust. In the event that
there are any assets, income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily identifiable as
belonging to any particular Series or Class, the Trustees shall
allocate them among any one or more of the Series or Classes
established and designated from time to time in such manner and
on such basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Series or Classes for all
purposes. No holder of Shares of any Series shall have any claim
on or right to any assets allocated or belonging to any other Series.
(iii) The assets belonging to each particular Series shall be
charged with the liabilities of the Trust in respect of that Series or
the appropriate Class or Classes thereof and all expenses, costs,
charges and reserves attributable to that Series or Class or Classes
thereof, and any general liabilities, expenses, costs, charges or
reserves of the Trust which are not readily identifiable as belonging
to any particular Series or Class or Classes thereof shall be
allocated and charged by the Trustees to and among any one or
more of the Series or Class or Classes thereof established and
designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. Each
allocation of liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the Shareholders of
all Series and Classes for all purposes. The Trustees shall have full
discretion, to the extent not inconsistent with the 1940 Act, to
determine which items are capital; and each such determination and
allocation shall be conclusive and binding upon the Shareholders.
The assets of a particular Series or Class of the Trust shall, under no
circumstances, be charged with liabilities attributable to any other
Series or Class of the Trust. All persons extending credit to, or
contracting with or having any claim against a particular Series or
Class of the Trust shall look only to the assets of that particular
Series or Class for payment of such credit, contract or claim.
(iv) The power of the Trustees to pay dividends and make
distributions shall be governed by Section 7.2 of this Declaration
with respect to any one or more Series or Classes which represents
the interests in the assets of the Trust immediately prior to the
establishment of two or more Series or Classes. With respect to any
other Series or Class, dividends and distributions on Shares of a
particular Series or Class may be paid with such frequency as the
Trustees may determine, which may be daily or otherwise, pursuant
to a standing resolution or resolutions adopted only once or with
such frequency as the Trustees may determine, to the holders of
Shares of that Series or Class, from such of the income and capital
gains, accrued or realized, from the assets belonging to that Series
or Class, as the Trustees may determine, after providing for actual
and accrued liabilities belonging to that Series or Class. All
dividends and distributions on Shares of a particular Series or Class
shall be distributed pro rata to the Shareholders of that Series or
Class in proportion to the number of Shares of that Series or Class
held by such Shareholders at the time of record established for the
payment of such dividends or distribution.
(v) Each Share of a Series of the Trust shall represent a
beneficial interest in the net assets of such Series. Each holder of
Shares of a Series or Class thereof shall be entitled to receive his
pro rata share of distributions of income and capital gains made with
respect to such Series or Class. Upon redemption of his Shares or
indemnification for liabilities incurred by reason of his being or
having been a Shareholder of a Series or Class, such Shareholder
shall be paid solely out of the funds and property of such Series or
Class of the Trust. Upon liquidation or termination of a Series or
Class of the Trust, Shareholders of such Series or Class shall be
entitled to receive a pro rata share of the net assets of such Series
or Class. A Shareholder of a particular Series of the Trust shall not
be entitled to participate in a derivative or class action on behalf of
any other Series or the Shareholders of any other Series of the
Trust.
(vi) On each matter submitted to a vote of Shareholders, all
Shares of all Series and Classes shall vote as a single class;
provided, however, that (1) as to any matter with respect to which a
separate vote of any Series or Class is required by the 1940 Act or
is required by attributes applicable to any Class, such requirements
as to a separate vote by that Series or Class shall apply; (2) to the
extent that a matter referred to in (1) above, affects more than one
Class or Series and the interests of each such Class or Series in the
matter are identical, then, subject to (3) below, the Shares of all
such affected Classes or Series shall vote as a single Class; (3) as
to any matter which does not affect the interests of a particular
Series or Class, only the holders of Shares of the one or more
affected Series or Classes shall be entitled to vote; and (4) the
provisions of the following sentence shall apply. On any matter that
pertains to a Rule 12b-1 distribution plan, which matter is submitted
to a vote of Shareholders, Shareholders of a Class of a Series shall
have exclusive voting rights with respect to the Rule 12b-1
distribution plan applicable to their respective Classes of Shares and
to the extent that such matter does not affect Shares of a particular
Class of such Series, said Shares shall not be entitled to vote
(except where otherwise required by law or permitted by the Board
of Trustees acting in its sole discretion) even though the matter is
submitted to a vote of the Shareholders of any other Class or Series.
(vii) Except as otherwise provided in this Article V, the
Trustees shall have the power to determine the designations,
preferences, privileges, payment obligations, limitations and rights,
including voting and dividend rights, of each Class and Series of
Shares. Subject to compliance with the requirement of the 1940
Act, the Trustees shall have the authority to provide that the holders
of Shares of any Series or Class shall have the right to convert or
exchange said Shares into Shares of one or more Series or Classes
of Shares in accordance with such requirements and procedures as
may be established by the Trustees; provided however, that any
conversion of Shares is subject to the continuing availability of an
opinion of counsel or an Internal Revenue Service Ruling that such
conversion is a non-taxable event.
(viii) The establishment and designation of any Series or
Classes of Shares shall be effective upon the execution by a
majority of the then Trustees of an instrument setting forth such
establishment and designation and the relative rights and
preferences of such Series or Classes, or as otherwise provided in
such instrument. At any time that there are no shares outstanding of
any particular Series or Class previously established and designated,
the Trustees may by an instrument executed by a majority of their
number abolish that Series or Class and the establishment and
designation thereof. Each instrument referred to in this section shall
have the status of an amendment to this Declaration.
Section 5.12. Assent to Declaration of Trust. Every Shareholder,
by virtue of having become a Shareholder, shall be held to have expressly
assented and agreed to the terms hereof and to have become a party
hereto.
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
Section 6.1. Redemption of Shares. (a) All Shares of the Trust
shall be redeemable, at the redemption price determined in the manner
set out in this Declaration. Redeemed or repurchased Shares may be
resold by the Trust. The Trust may require any Shareholder to pay a
sales charge to the Trust, the underwriter, or any other person designated
by the Trustees upon redemption or repurchase of Shares in such amount
and upon such conditions as shall be determined from time to time by the
Trustees.
(b) The Trust shall redeem the Shares of the Trust or any Series
or Class thereof at the price determined as hereinafter set forth, upon the
appropriately verified written application of the record holder thereof (or
upon such other form of request as the Trustees may determine) at such
office or agency as may be designated from time to time for that purpose
by the Trustees. The Trustees may from time to time specify additional
conditions, not inconsistent with the 1940 Act, regarding the redemption
of Shares in the Trust's then effective Prospectus.
Section 6.2. Price. Shares shall be redeemed at a price based
on their net asset value determined as set forth in Section 7.1 hereof as of
such time as the Trustees shall have theretofore prescribed by resolution.
In the absence of such resolution, the redemption price of Shares
deposited shall be based on the net asset value of such Shares next
determined as set forth in Section 7.1 hereof after receipt of such
application. The amount of any contingent deferred sales charge or
redemption fee payable upon redemption of Shares may be deducted
from the proceeds of such redemption.
Section 6.3. Payment. Payment of the redemption price of
Shares of the Trust or any Series or Class thereof shall be made in cash
or in property to the Shareholder at such time and in the manner, not
inconsistent with the 1940 Act or other applicable laws, as may be
specified from time to time in the Trust's then effective Prospectus, subject
to the provisions of Section 6.4 hereof.
Section 6.4. Effect of Suspension of Determination of Net Asset
Value. If, pursuant to Section 6.9 hereof, the Trustees shall declare a
suspension of the determination of net asset value with respect to Shares
of the Trust or of any Series or Class thereof, the rights of Shareholders
(including those who shall have applied for redemption pursuant to
Section 6.1 hereof but who shall not yet have received payment) to have
Shares redeemed and paid for by the Trust or a Series or Class thereof
shall be suspended until the termination of such suspension is declared.
Any record holder who shall have his redemption right so suspended
may, during the period of such suspension, by appropriate written notice
of revocation at the office or agency where application was made, revoke
any application for redemption not honored and withdraw any Share
certificates on deposit. The redemption price of Shares for which
redemption applications have not been revoked shall be based on the net
asset value of such Shares next determined as set forth in Section 7.1
after the termination of such suspension, and payment shall be made
within seven (7) days after the date upon which the application was made
plus the period after such application during which the determination of
net asset value was suspended.
Section 6.5. Repurchase by Agreement. The Trust may
repurchase Shares directly, or through the Distributor or another agent
designated for the purpose, by agreement with the owner thereof at a
price not exceeding the net asset value per share determined as of the
time when the purchase or contract of purchase is made or the net asset
value as of any time which may be later determined pursuant to Section
7.1 hereof, provided payment is not made for the Shares prior to the time
as of which such net asset value is determined.
Section 6.6. Redemption of Shareholder's Interest. The
Trustees, in their sole discretion, may cause the Trust to redeem all of the
Shares of one or more Series or Class thereof held by any Shareholder if
the value of such Shares held by such Shareholder is less than the
minimum amount established from time to time by the Trustees.
Section 6.7. Redemption of Shares in Order to Qualify as
Regulated Investment Company; Disclosure of Holding. (a) If the
Trustees shall, at any time and in good faith, be of the opinion that direct
or indirect ownership of Shares or other securities of the Trust has or may
become concentrated in any Person to an extent which would disqualify
the Trust or any Series of the Trust as a regulated investment company
under the Internal Revenue Code, then the Trustees shall have the power
by lot or other means deemed equitable by them (i) to call for redemption
by any such Person a number, or principal amount, of Shares or other
securities of the Trust or any Series of the Trust sufficient to maintain or
bring the direct or indirect ownership of Shares or other securities of the
Trust or any Series of the Trust into conformity with the requirements for
such qualification; and (ii) to refuse to transfer or issue Shares or other
securities of the Trust or any Series of the Trust to any Person whose
acquisition of the Shares or other securities of the Trust or any Series of
the Trust in question would result in such disqualification. The redemption
shall be effected at the redemption price and in the manner provided in
Section 6.1.
(b) The holders of Shares or other securities of the Trust shall
upon demand disclose to the Trustees in writing such information with
respect to direct and indirect ownership of Shares or other securities of
the Trust as the Trustees deem necessary to comply with the provisions of
the Internal Revenue Code, or to comply with the requirements of any
other taxing authority.
Section 6.8. Reductions in Number of Outstanding Shares
Pursuant to Net Asset Value Formula. The Trust may also reduce the
number of outstanding Shares of the Trust or of any Series of the Trust
pursuant to the provisions of Section 7.3.
Section 6.9. Suspension of Right of Redemption. The Trust
may declare a suspension of the right of redemption or postpone the date
of payment or redemption for the whole or any part of any period (i)
during which the New York Stock Exchange is closed other than
customary weekend and holiday closings; (ii) during which trading on the
New York Stock Exchange is restricted; (iii) during which an emergency
exists as a result of which disposal by the Trust or a Series thereof of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Trust or a Series thereof fairly to determine the value of
its net assets; or (iv) during any other period when the Commission may
for the protection of Shareholders of the Trust by order permit suspension
of the right of redemption or postponement of the date of payment or
redemption; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (ii),
(iii), or (iv) exist. Such suspension shall take effect at such time as the
Trust shall specify but not later than the close of business on the business
day next following the declaration of suspension, and thereafter there shall
be no right of redemption or payment on redemption until the Trust shall
declare the suspension at an end, except that the suspension shall
terminate in any event on the first day on which said stock exchange shall
have reopened or the period specified in (ii) or (iii) shall have expired (as
to which in the absence of an official ruling by the Commission, the
determination of the Trust shall be conclusive). In the case of a
suspension of the right of redemption, a Shareholder may either withdraw
his request for redemption or receive payment based on the net asset
value existing after the termination of the suspension.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 7.1. Net Asset Value. The net asset value of each
outstanding Share of each Series or Class thereof of the Trust shall be
determined on such days and at such time or times as the Trustees may
determine. The value of the assets of the Trust may be determined (i) by
a pricing service which utilizes electronic pricing techniques based on
general institutional trading; (ii) by appraisal of the securities owned by
the Trust or any Series of the Trust; (iii) in certain cases, at amortized
cost; or (iv) by such other method as shall be deemed to reflect the fair
value thereof, determined in good faith by or under the direction of the
Trustees. From the total value of said assets, there shall be deducted all
indebtedness, interest, taxes, payable or accrued, including estimated
taxes on unrealized book profits, expenses and management charges
accrued to the appraisal date, net income determined and declared as a
distribution and all other items in the nature of liabilities which shall be
deemed appropriate, as incurred by or allocated to any Series or Class of
the Trust. The resulting amount which shall represent the total net assets
of the Trust or Series or Class thereof shall be divided by the number of
Shares of the Trust or Series or Class thereof outstanding at the time and
the quotient so obtained shall be deemed to be the net asset value of the
Shares of the Trust or Series or Class thereof. The net asset value of the
Shares shall be determined at least once on each business day, as of the
close of trading on the New York Stock Exchange or as of such other time
or times as the Trustees shall determine. The power and duty to make
the daily calculations may be delegated by the Trustees to the Investment
Adviser, the Administrator, the Custodian, the Transfer Agent or such
other Person as the Trustees by resolution may determine. The Trustees
may suspend the daily determination of net asset value to the extent
permitted by the 1940 Act. It shall not be a violation of any provision of
this Declaration of Trust if Shares are sold, redeemed or repurchased by
the Trust at a price other than one based on net asset value if the net
asset value is affected by one or more errors inadvertently made in the
pricing of portfolio securities or in accruing income, expenses or liabilities.
Section 7.2. Distributions to Shareholders. (a) The Trustees
shall from time to time distribute ratably among the Shareholders of the
Trust or of a Series or Class thereof such proportion of the net profits,
surplus (including paid-in surplus), capital, or assets of the Trust or such
Series or Class held by the Trustees as they may deem proper. Such
distributions may be made in cash or property (including without limitation
any type of obligations of the Trust or Series or Class or any assets
thereof), and the Trustees may distribute ratably among the Shareholders
of the Trust or Series or Class thereof additional Shares of the Trust or
Series or Class thereof issuable hereunder in such manner, at such times,
and on such terms as the Trustees may deem proper. Such distributions
may be among the Shareholders of the Trust or Series or Class thereof at
the time of declaring a distribution or among the Shareholders of the Trust
or Series or Class thereof at such other date or time or dates or times as
the Trustees shall determine. The Trustees may in their discretion
determine that, solely for the purposes of such distributions, Outstanding
Shares shall exclude Shares for which orders have been placed
subsequent to a specified time on the date the distribution is declared or
on the next preceding day if the distribution is declared as of a day on
which Boston banks are not open for business, all as described in the
then effective prospectus under the Securities Act of 1933. The Trustees
may always retain from the net profits such amount as they may deem
necessary to pay the debts or expenses of the Trust or a Series or Class
thereof or to meet obligations of the Trust or a Series or Class thereof, or
as they may deem desirable to use in the conduct of its affairs or to retain
for future requirements or extensions of the business. The Trustees may
adopt and offer to Shareholders such dividend reinvestment plans, cash
dividend payout plans or related plans as the Trustees shall deem
appropriate. The Trustees may in their discretion determine that an
account administration fee or other similar charge may be deducted
directly from the income and other distributions paid on Shares to a
Shareholders account in each Series or Class.
(b) Inasmuch as the computation of net income and gains for
Federal income tax purposes may vary from the computation thereof on
the books, the above provisions shall be interpreted to give the Trustees
the power in their discretion to distribute for any fiscal year as ordinary
dividends and as capital gains distributions, respectively, additional
amounts sufficient to enable the Trust or a Series or Class thereof to avoid
or reduce liability for taxes.
Section 7.3. Determination of Net Income. Subject to Section
5.11 hereof, the net income of the Series and Classes of the Trust shall be
determined in such manner as the Trustees shall provide by resolution.
Expenses of the Trust or of a Series or Class thereof, including the
advisory or management fee, shall be accrued each day. Each Class
shall bear only expenses relating to its Shares and an allocable share of
Series expenses in accordance with such policies as may be established
by the Trustees from time to time and as are not inconsistent with the
provisions of this Declaration of Trust or of any applicable document filed
by the Trust with the Commission or of the Internal Revenue Code of
1986, as amended. Such net income may be determined by or under the
direction of the Trustees as of the close of trading on the New York Stock
Exchange on each day on which such market is open or as of such other
time or times as the Trustees shall determine, and, except as provided
herein, all the net income of any Series or Class of the Trust, as so
determined, may be declared as a dividend on the Outstanding Shares of
such Series. The Trustees shall have full discretion to determine whether
any cash or property received shall be treated as income or as principal
and whether any item of expense shall be charged to the income or the
principal account, and their determination made in good faith shall be
conclusive upon the Shareholders. In the case of stock dividends
received, the Trustees shall have full discretion to determine, in the light
of the particular circumstances, how much if any of the value thereof shall be
treated as income, the balance, if any, to be treated as principal.
Section 7.4. Power to Modify Foregoing Procedures.
Notwithstanding any of the foregoing provisions of this Article II, but
subject to Section 5.11 hereof, the Trustees may prescribe, in their
absolute discretion, such other bases and times for determining the per
Share net asset value of the Shares of the Trust or a Series or Class
thereof or net income of the Trust or a Series or Class thereof, or the
declaration and payment of dividends and distributions as they may deem
necessary or desirable. Without limiting the generality of the foregoing,
the Trustees may establish several Series or Classes of Shares in
accordance with Section 5.11, and declare dividends thereon in
accordance with Section 5.11(d)(iv).
ARTICLE VIII
DURATION; TERMINATION OF TRUST OR A SERIES;
AMENDMENT; MERGERS, ETC.
Section 8.1. Duration. The Trust shall continue without
limitation of time but subject to the provisions of this Article VIII.
Section 8.2. Termination of the Trust or a Series or a Class.
The Trust or any Series or Class thereof may be terminated by (i) the
affirmative vote of the holders of not less than two-thirds of the Shares
outstanding and entitled to vote at any meeting of Shareholders of the
Trust or the appropriate Series or Class thereof; (ii) by an instrument or
instruments in writing without a meeting, consented to by the holders of
two-thirds of the Shares of the Trust or a Series or Class thereof;
provided, however, that, if such termination is recommended by the
Trustees, the vote or written consent of the holders of a majority of the
Shares of the Trust or a Series or Class thereof outstanding and entitled
to vote shall be sufficient authorization; or (iii) notice to Shareholders by
means of an instrument in writing signed by a majority of the Trustees,
stating that a majority of the Trustees has determined that the continuation
of the Trust or a Series or a Class thereof is not in the best interest of
such Series or a Class, the Trust or their respective shareholders as a
result of such factors or events adversely affecting the ability of such
Series or a Class or the Trust to conduct its business and operations in an
economically viable manner. Such factors and events may include the
inability of a Series or Class or the Trust to maintain its assets at an
appropriate size, changes in laws or regulations governing the Series or
Class or the Trust or affecting assets of the type in which such Series or
Class or the Trust invests or economic developments or trends having a
significant adverse impact on the business or operations of such Series or
Class or the Trust. Upon the termination of the Trust or the Series or
Class,
(i) The Trust, Series or Class shall carry on no business
except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust, Series or Class and all of the powers of the Trustees under
this Declaration shall continue until the affairs of the Trust shall have
been wound up, including the power to fulfill or discharge the
contracts of the Trust, Series or Class, collect its assets, sell,
convey, assign, exchange, transfer or otherwise dispose of all or any
part of the remaining Trust Property or Trust Property allocated or
belonging to such Series or Class to one or more persons at public
or private sale for consideration which may consist in whole or in
part of cash, securities or other property of any kind, discharge or
pay its liabilities, and do all other acts appropriate to liquidate its
business; provided that any sale, conveyance, assignment,
exchange, transfer or other disposition of all or substantially all the
Trust Property or Trust Property allocated or belonging to such
Series or Class that requires Shareholder approval in accordance
with Section 8.4 hereof shall receive the approval so required.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection,
the Trustees may distribute the remaining Trust Property or the
remaining property of the terminated Series or Class, in cash or in
kind or partly each, among the Shareholders of the Trust or the
Series or Class according to their respective rights.
(b) After termination of the Trust, Series or Class and distribution
to the Shareholders as herein provided, a majority of the Trustees shall
execute and lodge among the records of the Trust and file with the Office
of the Secretary of the Commonwealth of Massachusetts an instrument in
writing setting forth the fact of such termination, and the Trustees shall
thereupon be discharged from all further liabilities and duties with respect
to the Trust or the terminated Series or Class, and the rights and interests
of all Shareholders of the Trust or the terminated Series or Class shall
thereupon cease.
Section 8.3. Amendment Procedure. (a) This Declaration may
be amended by a vote of the holders of a majority of the Shares
outstanding and entitled to vote or by any instrument in writing, without a
meeting, signed by a majority of the Trustees and consented to by the
holders of a majority of the Shares outstanding and entitled to vote. The
Trustees may amend this Declaration without the vote or consent of
Shareholders if they deem it necessary to conform this Declaration to the
requirements of applicable federal or state laws or regulations or the
requirements of the regulated investment company provisions of the
Internal Revenue Code, but the Trustees shall not be liable for failing so to
do. The Trustees may also amend this Declaration without the vote or
consent of Shareholders if they deem it necessary or desirable to change
the name of the Trust or to make any other changes in the Declaration
which do not adversely affect the rights of Shareholders hereunder.
(b) No amendment may be made under this Section 8.3 which
would change any rights with respect to any Shares of the Trust or Series
or Class thereof by reducing the amount payable thereon upon liquidation
of the Trust or Series or Class thereof or by diminishing or eliminating any
voting rights pertaining thereto, except with the vote or consent of the
holders of two-thirds of the Shares of the Trust or such Series or Class
outstanding and entitled to vote. Nothing contained in this Declaration
shall permit the amendment of this Declaration to impair the exemption
from personal liability of the Shareholders, Trustees, officers, employees
and agents of the Trust or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees setting forth
an amendment and reciting that it was duly adopted by the Shareholders
or by the Trustees as aforesaid or a copy of the Declaration, as amended,
and executed by a majority of the Trustees, shall be conclusive evidence
of such amendment when lodged among the records of the Trust.
Section 8.4. Merger, Consolidation and Sale of Assets. The
Trust or any Series thereof may merge or consolidate with any other
corporation, association, trust or other organization or may sell, lease or
exchange all or substantially all of the Trust Property or Trust Property
allocated or belonging to such Series, including its good will, upon such
terms and conditions and for such consideration when and as authorized
at any meeting of Shareholders called for the purpose by the affirmative
vote of the holders of two-thirds of the Shares of the Trust or such Series
outstanding and entitled to vote, or by an instrument or instruments in
writing without a meeting, consented to by the holders of two-thirds of the
Shares of the Trust or such Series; provided, however, that, if such
merger, consolidation, sale, lease or exchange is recommended by the
Trustees, the vote or written consent of the holders of a majority of the
Shares of the Trust or such Series outstanding and entitled to vote shall
be sufficient authorization; and any such merger, consolidation, sale, lease
or exchange shall be deemed for all purposes to have been accomplished
under and pursuant to Massachusetts law.
Section 8.5. Incorporation. With the approval of the holders of a
majority of the Shares of the Trust or a Series thereof outstanding and
entitled to vote, the Trustees may cause to be organized or assist in
organizing a corporation or corporations under the laws of any jurisdiction
or any other trust, partnership, association or other organization to take
over all of the Trust Property or the Trust Property allocated or belonging
to such Series or to carry on any business in which the Trust shall directly
or indirectly have any interest, and to sell, convey and transfer the Trust
Property or the Trust Property allocated or belonging to such Series to
any such corporation, trust, association or organization in exchange for
the shares or securities thereof or otherwise, and to lend money to,
subscribe for the shares or securities of, and enter into any contracts with
any such corporation, trust, partnership, association or organization, or
any corporation, partnership, trust, association or organization in which
the Trust or such Series holds or is about to acquire shares or any other
interest. The Trustees may also cause a merger or consolidation between
the Trust or any successor thereto and any such corporation, trust,
partnership, association or other organization if and to the extent
permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders
for the Trustees to organize or assist in organizing one or more
corporations, trusts, partnerships, associations or other organizations and
selling, conveying or transferring a portion of the Trust Property to such
organization or entities.
ARTICLE IX
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders
of each Series a written financial report of the transactions of the Trust,
including financial statements which shall at least annually be certified by
independent public accountants.
ARTICLE X
MISCELLANEOUS
Section 10.1. Execution and Filing. This Declaration and any
amendment hereto shall be filed in the office of the Secretary of The
Commonwealth of Massachusetts and in such other places as may be
required under the laws of Massachusetts and may also be filed or
recorded in such other places as the Trustees deem appropriate. Each
amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee stating that such action was duly taken in a
manner provided herein, and unless such amendment or such certificate
sets forth some later time for the effectiveness of such amendment, such
amendment shall be effective upon its execution. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time
by a majority of the Trustees and filed with the Secretary of the
Commonwealth of Massachusetts. A restated Declaration shall, upon
execution, be conclusive evidence of all amendments contained therein
and may hereafter be referred to in lieu of the original Declaration and the
various amendments thereto.
Section 10.2. Governing Law. This Declaration is executed by
the Trustees and delivered in The Commonwealth of Massachusetts and
with reference to the laws thereof, and the rights of all parties and the
validity and construction of every provision hereof shall be subject to and
construed according to the laws of said Commonwealth.
Section 10.3. Counterparts. This Declaration may be
simultaneously executed in several counterparts, each of which shall be
deemed to be an original, and such counterparts, together, shall
constitute one and the same instrument, which shall be sufficiently
evidenced by any such original counterpart.
Section 10.4. Reliance by Third Parties. Any certificate executed
by an individual who, according to the records of the Trust appears to be
a Trustee hereunder, certifying (a) the number or identity of Trustees or
Shareholders; (b) the due authorization of the execution of any instrument
or writing; (c) the form of any vote passed at a meeting of Trustees or
Shareholders; (d) the fact that the number of Trustees or Shareholders
present at any meeting or executing any written instrument satisfies the
requirements of this Declaration; (e) the form of any By-laws adopted by
or the identity of any officers elected by the Trustees; or (f) the existence
of any fact or facts which in any manner relate to the affairs of the Trust,
shall be conclusive evidence as to the matters so certified in favor of any
Person dealing with the Trustees and their successors.
Section 10.5. Provisions in Conflict with Law or Regulations. (a)
The provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of
the Internal Revenue Code or with other applicable laws and regulations,
the conflicting provision shall be deemed never to have constituted a part
of this Declaration; provided, however, that such determination shall not
affect any of the remaining provisions of this Declaration or render invalid
or improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any
manner affect such provisions in any other jurisdiction or any other
provision of this Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned trustees have executed
this Amended and Restated Declaration of Trust this 1st day of June,
1992.
___________________________
Douglas J. Breeden
___________________________
Gerald J. Madigan
___________________________
Stephen M. Schaefer
___________________________
Myron S. Scholes
___________________________
William F. Sharpe
BY-LAWS
OF
SMITH BREEDEN SERIES FUND
Dated October 3, 1991
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS 1
ARTICLE II - OFFICES 1
Section 1. Principal Office 1
Section 2. Other Offices 1
ARTICLE III - SHAREHOLDERS 1
Section 1. Meetings 1
Section 2. Notice of Meetings 1
Section 3. Record Date for Meetings
and Other Purposes 2
Section 4. Proxies 2
Section 5. Inspection of Record 3
Section 6. Action without Meeting 3
ARTICLE IV - TRUSTEES 3
Section 1. Meetings of the Trustees 3
Section 2. Quorum and Manner of Acting 4
ARTICLE V - COMMITTEES 4
Section 1. Executive and Other Committees 4
Section 2. Meetings, Quorum and Manner of Acting 4
ARTICLE VI - OFFICERS 5
Section 1. General Provisions 5
Section 2. Term of Office and Qualifications 5
Section 3. Removal 5
Section 4. Powers and Duties of the Chairman 5
Section 5. Powers and Duties of the President 6
Section 6. Powers and Duties of Vice Presidents 6
Section 7. Powers and Duties of the Treasurer 6
Section 8. Powers and Duties of the Secretary 6
Section 9. Powers and Duties of Assistant
Officers 7
Section 10. Powers and Duties of Assistant
Secretaries 7
Section 11. Compensation of Officers and Trustees
and Members of Advisory Board 7
ARTICLE VII - FISCAL YEAR 7
ARTICLE VIII - SEAL 8
ARTICLE IX - SUFFICIENCY AND WAIVERS OF NOTICE 8
ARTICLE X - CUSTODY OF SECURITIES 8
Section 1. Employment of a Custodian 8
Section 2. Action Upon Termination of Custodian
Agreement 8
Section 3. Provisions of Custodian Contract 9
Section 4. Central Certificate System 9
Section 5. Acceptance of Receipts in Lieu of
Certificate 9
ARTICLE XI - AMENDMENTS 10
ARTICLE XII - MISCELLANEOUS 10
BY-LAWS
OF
SMITH BREEDEN SERIES FUND
ARTICLE I
DEFINITIONS
The terms "Administrator," "By-laws," "Class," "Commission,"
"Custodian," "Declaration," "Distributor," "Fund" or "Funds," "Fundamental
Policies," "His," "Interested Person," "Investment Adviser," "1940 Act,"
"Person," "Prospectus," "Series," "Shareholder," "Shares," "Transfer Agent,"
"Trust," "Trustees," "Trust Property," and "vote of a majority of the Shares
outstanding and entitled to vote," have the respective meanings given
them in the Declaration of Trust of Smith Breeden Series Fund dated
October 3, 1991, as amended from time to time.
ARTICLE II
OFFICES
Section 1. Principal Office. Until changed by the Trustees, the
principal office of the Trust shall be in Chapel Hill, North Carolina.
Section 2. Other Offices. The Trust may have offices in such other
places without as well as within the State of North Carolina as the
Trustees may from time to time determine.
ARTICLE III
SHAREHOLDERS
Section 1. Meetings. An annual meeting of the Shareholders of the
Trust shall be held as provided in the Declaration at such place within or
without the State of North Carolina as the Trustees shall designate.
Special meetings of the Shareholders of the Trust or a Series of the Trust
shall be called at the request, in writing or by resolution, by a majority of
the Trustees, or at the written request of the holder or holders of ten
percent (10%) or more of the outstanding Shares of the Trust, having
voting rights, such request specifying the purpose or purposes for which
such meeting is to be called. The holders of a majority of outstanding
Shares of the Trust or a Series of the Trust or a Class thereof present in
person or by proxy shall constitute a quorum at any meeting of the
Shareholders of the Trust or a Series of the Trust or a Class thereof. In
the absence of a quorum, a majority of outstanding Shares entitled to vote
present in person or by proxy may adjourn the meeting from time to time
until a quorum shall be present.
Section 2. Notice of Meetings. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall
be given by the Trustees by mail to each Shareholder at his address as
recorded on the register of the Trust mailed at least (10) days and not
more than sixty (60) days before the meeting[, provided, however, that
notice of a meeting need not be given to a shareholder to whom such
notice need not be given under the proxy rules of the Commission under
the 1940 Act and the Securities Exchange Act of 1934, as amended].
Only the business stated in the notice of the meeting shall be considered
at such meeting. Any adjourned meeting may be held as adjourned
without further notice. No notice need be given to any Shareholder who
shall have failed to inform the Trust of his current address or if a written
waiver of notice, executed before or after the meeting by the Shareholder
or his attorney thereunto authorized, is filed with the records of the
meeting.
Section 3. Record Date for Meetings and Other Purposes. For the
purpose of determining the Shareholders who are entitled to notice of and
to vote at any meeting, or to participate in any distribution, or for the
purpose of any other action, the Trustees may from time to time close the
transfer books for such period, not exceeding thirty (30) days, as the
Trustees may determine; or without closing the transfer books the
Trustees may fix a date not more than sixty (60) days prior to the date of
any meeting of Shareholders or distribution or other action as a record
date for the determination of the persons to be treated as Shareholders of
record for such purposes, except for dividend payments which shall be
governed by the Declaration.
Section 4. Proxies. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by proxy, provided that no proxy
shall be voted at any meeting unless it shall have been placed on file with
the Secretary, or with such other officer or agent of the Trust as the
Secretary may direct, for verification prior to the time at which such vote
shall be taken. Proxies may be solicited in the name of one or more
Trustees or one or more of the officers of the Trust. Only Shareholders of
record shall be entitled to vote. Each [whole/full] share shall be entitled
to one vote as to any matter on which it is entitled by the Declaration to
vote, and each fractional Share shall be entitled to a proportionate
fractional vote. When any Share is held jointly by several persons, any one
of them may vote at any meeting in person or by proxy in respect of such
Share, but if more than one of them shall be present at such meeting in person
or by proxy, and such joint owners or their proxies so present disagree as
to any vote to be cast, such vote shall not be received in respect of such
Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving invalidity shall rest on the challenger.
If the holder of any such share is a minor or a person of unsound mind,
and subject to guardianship or the legal control of any other person as
regards the charge or management of such Share, he may vote by his
guardian or such other person appointed or having such control, and
such vote may be given in person or by proxy.
Section 5. Inspection of Records. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
Section 6. Action without Meeting. Any action which may be taken
by Shareholders may be taken without a meeting if a majority of
Shareholders entitled to vote on the matter (or such larger proportion
thereof as shall be required by law, the Declaration or these By-laws for
approval of such matter) consent to the action in writing and the written
consents are filed with the records of the meetings of Shareholders. Such
consents shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
ARTICLE IV
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice
of regular or stated meetings need not be given. Meetings of the Trustees
other than regular or stated meetings shall be held whenever called by the
[Chairman/President], or by any one of the Trustees, at the time being in
office. Notice of the time and place of each meeting other than regular or
stated meetings shall be given by the Secretary or an Assistant Secretary
or by the officer or Trustee calling the meeting and shall be mailed to
each Trustee at least two days before the meeting, or shall be
telegraphed, cabled, or wirelessed to each Trustee at his business
address, or personally delivered to him at least one day before the
meeting. Such notice may, however, be waived by any Trustee. Notice
of a meeting need not be given to any Trustee if a written waiver of notice,
executed by him before or after the meeting, is filed with the records of
the meeting, or to any Trustee who attends the meeting without protesting
prior thereto or at its commencement the lack of notice to him. A notice
or waiver of notice need not specify the purpose of any meeting. The
Trustees may meet by means of a telephone conference circuit or similar
communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by
such means shall be deemed to have been held at a place designated by
the Trustees at the meeting. Participation in a telephone conference
meeting shall constitute presence in person at such meeting. Any action
required or permitted to be taken at any meeting of the Trustees may be
taken by the Trustees without a meeting if all the Trustees consent to the
action in writing and the written consents are filed with the records of the
Trustees' meetings. Such consents shall be treated as a vote for all
purposes.
Section 2. Quorum and Manner of Acting. A majority of the
Trustees shall be present in person at any regular or special meeting of
the Trustees in order to constitute a quorum for the transaction of
business at such meeting and (except as otherwise required by law, the
Declaration or these By-laws) the act of a majority of the Trustees present
at any such meeting, at which a quorum is present, shall be the act of the
Trustees. In the absence of a quorum, a majority of the Trustees present
may adjourn the meeting from time to time until a quorum shall be
present. Notice of an adjourned meeting need not be given.
ARTICLE V
COMMITTEES
Section 1. Executive and Other Committees. The Trustees by vote
of a majority of all the Trustees may elect from their own number an
Executive Committee to consist of not less than [three (3)/two (2)]
members to hold office at the pleasure of the Trustees, which shall have
the power to conduct the current and ordinary business of the Trust while
the Trustees are not in session, including the purchase and sale of
securities and the designation of securities to be delivered upon
redemption of Shares of the Trust or a Series thereof, and such other
powers of the Trustees as the Trustees may, from time to time, delegate
to them except those powers which by law, the Declaration or these By-
laws they are prohibited from delegating. The Trustees may also elect
from their own number other Committees from time to time, the number
composing such Committees, the powers conferred upon the same
(subject to the same limitations as with respect to the Executive
Committee) and the term of membership on such Committees to be
determined by the Trustees. The Trustees may designate a chairman of
any such Committee. In the absence of such designation the Committee
may elect its own Chairman.
Section 2. Meetings, Quorum and Manner of Acting. The Trustees
may (1) provide for stated meetings of any Committee, (2) specify the
manner of calling and notice required for special meetings of any
Committee, (3) specify the number of members of a Committee required
to constitute a quorum and the number of members of a Committee
required to exercise specified powers delegated to such Committee, (4)
authorize the making of decisions to exercise specified powers by written
assent of the requisite number of members of a Committee without a
meeting, and (5) authorize the members of a Committee to meet by
means of a telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings
and records of decisions taken without a meeting and cause them to be
recorded in a book designated for that purpose and kept in the office of
the Trust.
ARTICLE VI
OFFICERS
Section 1. General Provisions. The officers of the Trust shall be a
[Chairman,] President, a Treasurer and a Secretary, who shall be elected
by the Trustees. The Trustees may elect or appoint such other officers or
agents as the business of the Trust may require, including one or more
Vice Presidents, one or more Assistant Secretaries, and one or more
Assistant Treasurers. The Trustees may delegate to any officer or
committee the power to appoint any subordinate officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise
provided by law, the Declaration or these By-laws, the President, the
Treasurer and the Secretary shall each hold office until his successor shall
have been duly elected and qualified, and all other officers shall hold
office at the pleasure of the Trustees. The Secretary and the Treasurer
may be the same person. A Vice President and the Treasurer or a Vice
President and the Secretary may be the same person, but the offices of
Vice President, Secretary and Treasurer shall not be held by the same
person. The President shall hold no other office. Except as above
provided, any two offices may be held by the same person. Any officer
may be but none need be a Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special
meeting of the Trustees, may remove any officer with or without cause by
a vote of a majority of the Trustees [then in office]. Any officer or agent
appointed by any officer or committee may be removed with or without
cause by such appointing officer or committee.
Section 4. Powers and Duties of the Chairman. [The Trustees may,
but need not, appoint from among their number a Chairman.] When
present he shall preside at the meetings of the shareholders and of the
Trustees. He may call meetings of the Trustees and of any committee
thereof whenever he deems it necessary. He shall be an executive officer
of the Trust and shall have, with the President, general supervision over
the business and policies of the Trust, subject to the limitations imposed
upon the President as provided in Section 5 of this Article VI.
Section 5. Powers and Duties of the President. In the absence or
disability of the Chairman, the President may call meetings of the Trustees
and of any Committee thereof when he deems it necessary and shall
preside at all meetings of the Shareholders. Subject to the control of the
Trustees and to the control of any Committees of the Trustees, within their
respective spheres, as provided by the Trustees, he shall at all times
exercise a general supervision and direction over the affairs of the Trust.
He shall have the power to employ attorneys and counsel for the Trust or
any Series or Class thereof and to employ such subordinate officers,
agents, clerks and employees as he may find necessary to transact the
business of the Trust or any Series or Class thereof. He shall also have
the power to grant, issue, execute or sign such powers of attorney,
proxies or other documents as may be deemed advisable or necessary in
furtherance of the interests of the Trust or any Series or Class thereof.
The President shall have such other powers and duties, as from time to
time may be conferred upon or assigned to him by the Trustees.
Section 6. Powers and Duties of Vice Presidents. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall
perform all the duties and may exercise any of the powers of the
President, subject to the control of the Trustees. Each Vice President
shall perform such other duties as may be assigned to him from time to
time by the Trustees and the President.
Section 7. Powers and Duties of the Treasurer. The Treasurer shall
be the principal financial and accounting officer of the Trust. He shall
deliver all funds of the Trust or any Series or Class thereof which may
come into his hands to such Custodian as the Trustees may employ
pursuant to Article X of these By-laws. He shall render a statement of
condition of the finances of the Trust or any Series thereof to the Trustees
as often as they shall require the same and he shall in general perform all
the duties incident to the office of a Treasurer and such other duties as
from time to time may be assigned to him by the Trustees. The Treasurer
shall give a bond for the faithful discharge of his duties, if required so to
do by the Trustees, in such sum and with such surety or sureties as the
Trustees shall require.
Section 8. Powers and Duties of the Secretary. The Secretary shall
keep the minutes of all meetings of the Trustees and of the Shareholders
in proper books provided for that purpose; he shall have custody of the
seal of the Trust; he shall have charge of the Share transfer books, lists
and records unless the same are in the charge of the Transfer Agent. He
shall attend to the giving and serving of all notices by the Trust in
accordance with the provisions of these By-laws and as required by law;
and subject to these By-laws, he shall in general perform all duties
incident to the office of Secretary and such other duties as from time to
time may be assigned to him by the Trustees.
Section 9. Powers and Duties of Assistant Officers. In the absence
or disability of the Treasurer, any officer designated by the Trustees shall
perform all the duties, and may exercise any of the powers, of the
Treasurer. Each officer shall perform such other duties as from time to
time may be assigned to him by the Trustees. Each officer performing the
duties and exercising the powers of the Treasurer, if any, and any
Assistant Treasurer, shall give a bond for the faithful discharge of his
duties, if required to do so by the Trustees, in such sum and with such
surety or sureties as, the Trustees shall require.
Section 10. Powers and Duties of Assistant Secretaries. In the
absence or disability of the Secretary, any Assistant Secretary designated
by the Trustees shall perform all the duties, and may exercise any of the
powers, of the Secretary. Each Assistant Secretary shall perform such
other duties as from time to time may be assigned to him by the Trustees.
Section 11. Compensation of Officers and Trustees and Members of
the Advisory Board. Subject to any applicable provisions of the
Declaration, the compensation of the officers and Trustees and members
of the Advisory Board shall be fixed from time to time by the Trustees or,
in the case of officers, by any Committee or officer upon whom such
power may be conferred by the Trustees. No officer shall be prevented
from receiving such compensation as such officer by reason of the fact
that he is also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of November
in each year and shall end on the last day of October in each year,
provided, however, that the Trustees may from time to time change the
fiscal year. The fiscal year of the Trust shall be the taxable year of each
Series of the Trust.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and
shall have such inscription thereon as the Trustees may from time to time
prescribe.
ARTICLE IX
SUFFICIENCY AND WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration or these By-laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. A notice shall be
deemed to have been telegraphed, cabled or wirelessed for the purposes
of these By-laws when it has been delivered to a representative of any
telegraph, cable or wireless company with instructions that it be
telegraphed, cabled or wirelessed. [Any notice shall be deemed to be
given at the time when the same shall be mailed, telegraphed, cabled or
wirelessed.]
ARTICLE X
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Trust shall place and
at all times maintain in the custody of one or more Custodians (including
any sub-custodian for the Custodian) all funds, securities and similar
investments included in the Trust Property or the Trust Property allocated
or belonging to a Series thereof. The Custodian (and any sub-custodian)
shall be a bank or trust company having not less than $2,000,000
aggregate capital, surplus and undivided profits and shall be appointed
from time to time by the Trustees, who shall fix its remuneration.
Section 2. Action Upon Termination of Custodian Agreement. Upon
termination of a Custodian Agreement or inability of the Custodian to
continue to serve, the Trustees shall promptly appoint a successor
custodian, but in the event that no successor custodian can be found who
has the required qualifications and is willing to serve, the Trustees shall
call as promptly as possible a special meeting of the Shareholders of the
Trust or a Series thereof to determine whether the Trust or Series thereof
shall function without a custodian or shall be liquidated. If so directed by
vote of the holders of a majority of the outstanding voting securities, the
Custodian shall deliver and pay over all Trust Property or the Trust
Property allocated or belonging to a Series thereof held by it as specified
in such vote.
Section 3. Provisions of Custodian Contract. The following
provisions shall apply to the employment of a Custodian [pursuant to this
Article X] and to any contract entered into with the Custodian so
employed:
(a) The Trustees shall cause to be delivered to the Custodian all
securities included in the Trust Property or the Trust Property
allocated or belonging to a Series thereof or to which the Trust or
such Series may become entitled, and shall order the same to be
delivered by the Custodian only upon completion of a sale,
exchange, transfer, pledge, loan of securities to another person, or
other disposition thereof, all as the Trustees may generally or from
time to time require or approve, or to a successor custodian; and
the Trustees shall cause all funds included in the Trust Property or
the Trust Property allocated or belonging to a Series thereof or to
which it may become entitled to be paid to the Custodian, and shall
order the same disbursed only for investment against delivery of the
securities acquired, or the return of cash held as collateral for loans
of fund securities, or in payment of expenses, including
management compensation, and liabilities of the Trust or Series
thereof, including distributions to shareholders, or for other proper
Trust purposes, or to a successor Custodian.
Section 4. Central Certificate System. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may
direct the Custodian to deposit all or any part of the securities owned by
the Trust or Series thereof in a system for the central handling of
securities established by a national securities exchange or a national
securities association registered with the Commission under the Securities
Exchange Act of 1934, or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act, pursuant to
which system all securities of any particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of
such securities, provided that all such deposits shall be subject to
withdrawal only upon the order of the Trust or Series thereof [or its
custodian].
Section 5. Acceptance of Receipts in Lieu of Certificates. Subject to
such rules, regulations and orders as the Commission may adopt, the
Trustees may direct the Custodian to accept written receipts or other
written evidences indicating purchases of securities held in book-entry
form in the Federal Reserve System in accordance with regulations
promulgated by the Board of Governors of the Federal Reserve System
and the local Federal Reserve Banks in lieu of receipt of certificates
representing such securities.
ARTICLE XI
AMENDMENTS
These By-laws, or any of them, may be altered, amended or
repealed, or new By-laws may be adopted by (a) vote of a majority of the
Shares outstanding and entitled to vote or (b) by the Trustees, provided,
however, that no By-law may be altered, amended, adopted or repealed
by the Trustees if such alteration, amendment, adoption or repeal
requires, pursuant to law, the Declaration or these By-laws, a vote of the
Shareholders.
ARTICLE XII
MISCELLANEOUS
(A) Except as hereinafter provided, no officer or Trustee of the
Trust and no partner, officer, director or shareholder of the Investment
Adviser of the Trust (as that term is defined in the Investment Company
Act of 1940) or of the underwriter of the Trust, and no Investment Adviser
or underwriter of the Trust, shall take long or short positions in the
securities issued by the Trust or any Series thereof.
(1) The foregoing provisions shall not prevent the
underwriter from purchasing Shares from the Trust or any Series or
Class thereof if such purchases are limited (except for reasonable
allowances for clerical errors, delays and errors of transmission and
cancellation of orders) to purchase for the purpose of filling orders
for such Shares received by the underwriter, and provided that
orders to purchase from the Trust or any Series thereof are entered
with the Trust or any Series thereof or the Custodian promptly upon
receipt by the underwriter of purchase orders for such Shares,
unless the underwriter is otherwise instructed by its customer.
(2) The foregoing provision shall not prevent the underwriter
from purchasing Shares of the Trust or any Series or Class thereof
as agent for the account of the Trust or any Series thereof.
(3) The foregoing provisions shall not prevent the purchase
from the Trust or any Series thereof or from the underwriter of
Shares issued by the Trust or any Series. thereof, by any officer, or
Trustee of the Trust or any Series thereof or by any partner, officer,
director or shareholder of the Investment Adviser of the Trust or any
Series thereof or of the underwriter of the Trust at the price available
to the public generally at the moment of such purchase, or as
described in the then currently effective Prospectus of the Trust.
(4) The foregoing shall not prevent the Investment Adviser,
or any affiliate thereof, of the Trust or any Series thereof from
purchasing Shares prior to the effectiveness of the first registration
statement relating to the Shares under the Securities Act of 1933.
(B) Neither the Trust nor any Series thereof shall lend assets of the
Trust or of such Series to any officer or Trustee of the Trust or Series, or
to any partner, officer, director or shareholder of, or person financially
interested in, the Investment Adviser of the Trust or Series or the
underwriter of the Trust.
(C) The Trust shall not impose any restrictions upon the transfer of
the Shares of the Trust or any Series or Class thereof except as provided
in the Declaration or as may be required to comply with federal or state
securities laws, but this requirement shall not prevent the charging of
customary transfer agent fees.
(D) The Trust shall not permit any officer or Trustee of the Trust, or
any partner, officer or director of the Investment Adviser or Administrator
of the Trust or any Series thereof or underwriter of the Trust to deal for or
on behalf of the Trust or a Series thereof with himself as principal or
agent, or with any partnership, association or corporation in which he has
a financial interest; provided that the foregoing provisions shall not prevent
(a) officers and Trustees of the Trust or partners, officers or directors of
the Investment Adviser or Administrator of the Trust or any Series thereof
or underwriter of the Trust from buying, holding or selling shares in the
Trust or a Series or Class thereof, or from being partners, officers or
directors or otherwise financially interested in the Investment Adviser or
Administrator of the Trust or any Series thereof or any underwriter of the
Trust; (b) purchases or sales of securities or other property by the Trust or
a Series thereof from or to an affiliated person or to the Investment
Adviser or Administrator of the Trust or any Series thereof or underwriter
of the Trust if such transaction is not prohibited by or is exempt from the
applicable provisions of the 1940 Act; (c) purchases of investments by the
Series of the Trust or sales of investments owned by the Trust or a Series
thereof through a security dealer who is, or one or more of whose
partners, shareholders, officers or directors is, an officer or Trustee of the
Trust, or a partner, officer or director of the Investment Adviser or
Administrator of the Trust or any Series thereof or underwriter of the Trust,
if such transactions are handled in the capacity of broker only and
commissions charged do not exceed customary brokerage charges for
such services; (d) employment of legal counsel, registrar, Transfer Agent,
dividend disbursing agent or Custodian who is, or has a partner,
shareholder, officer, or director who is, an officer or Trustee of the Trust,
or a partner, officer or director of the Investment Adviser or Administrator
of the Trust or any Series thereof or underwriter of the Trust, if only
customary fees are charged for services to the Trust or Series or Class
thereof; (e) sharing statistical research, legal and management expenses
and office hire and expenses with any other investment company in which
an officer or Trustee of the Trust, or a partner, officer or director of the
Investment Adviser or Administrator of the Trust or a Series thereof or
underwriter of the Trust, is an officer or director or otherwise financially
interested.
October 3, 1991
END OF BY-LAWS
<PAGE>
RI-BBRE
t:\smithbre\sbfund\bylaws.ser
12/23/91 - 3:57 p.m.
INVESTMENT ADVISORY AGREEMENT
Between
SMITH BREEDEN SERIES FUND
and
SMITH BREEDEN ASSOCIATES, INC.
INVESTMENT ADVISORY AGREEMENT dated August 1, 1994
between SMITH BREEDEN SERIES FUND, a Massachusetts trust ("the
Trust"), on behalf of its Smith Breeden Intermediate Duration U.S.
Government Series (the "Portfolio"), and SMITH BREEDEN ASSOCIATES,
INC., a corporation organized and existing under the laws of the State of
Kansas (hereinafter called the "Manager").
W I T N E S S E T H:
Whereas, the Portfolio is engaged in business as an open-end
management investment company and has registered as such under the
federal Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Manager is engaged principally in the business of
rendering investment management and administrative services and is
registered as an investment adviser under the federal investment Advisers
Act of 1940, as amended: and
WHEREAS, the Portfolio wishes to engage the Manager to provide
certain investment management and administrative services, and the
Manager is willing to provide such services, all on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. Duties and Responsibilities of Manager.
A. Investment Advisory Services. The Manager shall act
as investment adviser to and shall supervise and direct the investments of
the Portfolio in accordance with the Portfolio's investment objectives,
program and restrictions as provided in the Portfolio's then current
Registration Statement under the Act, and such other directions or
limitations as the Portfolio may impose by notice in writing to the
Manager. The Manager shall obtain and evaluate such information
relating to the economy, industries, businesses, securities markets and
securities as it may deem necessary or useful in the discharge of its
obligations hereunder and shall formulate and implement a continuing
program for the management of the assets and resources of the Portfolio
in a manner consistent with its investment objective. The Manager shall
for all purposes be deemed to be an independent contractor and shall,
except as expressly provided or authorized (whether herein or otherwise),
have no authority to act for or represent the Portfolio in any way or
otherwise be deemed an agent of the Portfolio.
In furtherance of its duties hereunder, the Manager is authorized, in
its discretion and without prior consultation with the Portfolio, to:
(i) buy, sell, exchange, convert, lend, and otherwise
trade in any stocks, bonds, and other securities, financial futures, swap
contracts or other assets; and
(ii) directly place orders and negotiate the
commissions (if any) for the execution of transactions in securities,
financial futures, swap contracts or other assets with or through such
brokers, dealers, underwriters or issuers as the Manager may select.
B. Administrative Services. Subject to the overall authority
of the Board of Trustees of the Portfolio, the Manager shall provide
general administrative services and oversee the operation of the Portfolio
("Administrative Services"). Such Administrative Services shall not include
investment advisory, custodial, underwriting and distribution, transfer
agency, shareholder or accounting services, or the preparation and filing
of the Portfolio's tax returns, but shall include, without limitation:
(i) the provision of office space and equipment
necessary in connection with the maintenance of the headquarters of the
Portfolio;
(ii) the maintenance of the books and records of the
Portfolio, and making arrangements for the meetings of the Trustees of
the Portfolio including the preparation of agendas and supporting
materials therefor;
(iii) the preparation of communications and reports to
investors in the Portfolio and making arrangements for meetings of such
investors;
(iv) the preparation and filing of all required reports and
all updating and other amendments to the Portfolio's registration
statement under the Act and the rules and regulations thereunder;
(v) the periodic computation and, as necessary,
reporting to the Trustees of the Portfolio of the Portfolio's compliance with
its investment objective and policies with the Portfolio diversification and
other Portfolio requirements of the Act and, to the extent required, the
Internal Revenue Code; and
(vi) the negotiation of agreements or other arrangements
with, and general oversight and coordination of the activities of, agents
and others retained by the Portfolio to provide custodial, net asset value
computation, Portfolio accounting, legal, tax and accounting services.
It is understood that the Manager may, in its discretion and at its
expense, delegate some or all of its administrative duties and
responsibilities under this paragraph 1.B to any person provided that the
Manager gives prior notice to the Portfolio.
C. Reports to Portfolio. The Manager shall furnish to or
place at the disposal of the Portfolio such information, reports,
evaluations, analyses and opinions relating to the Manager and its
investment management of the Portfolio's portfolio securities as the
Portfolio may, at any time or from time to time, reasonably request or as
the Manager may deem helpful.
D. Reports and Other Communications to Investors. The
Manager shall assist the Portfolio in providing communications to
investors as may reasonably be necessary.
E. Portfolio Personnel. the Manager will permit individuals
who are officers or employees of the Manager to serve (if duly elected or
appointed) as officers, trustees, members of any committee of trustees,
members of any advisory board, or members of any other committee of
the Portfolio, without remuneration or other cost to the Portfolio.
F. Personnel, Office Space, and Facilities of Manager.
The Manager at its own expense shall furnish or provide and pay the cost
of such office space, office equipment, office personnel, and office
services as the Manager requires in the performance of its investment
advisory, administrative and other obligations under this Agreement.
2. Allocation of Expenses.
A. Expenses Paid by Manager.
(i) Expenses Paid by Manager. The Manager shall
pay all salaries, expenses, and fees of the officers and trustees of the
Portfolio who are employees of the Manager. The Manager is not
obligated to bear any other expenses incidental to the operations and
business of the Portfolio.
(ii) Assumption of Expenses by Manager. The
payment or assumption by the Manager of any expense of the Portfolio
that the Manager is not required by this Agreement to pay or assume shall
not obligate the Manager to pay or assume the same or any similar
expense on any subsequent occasion.
B. Expenses Paid by Portfolio. The Portfolio shall bear all
expenses of its organization, operations, and business not specifically
assumed or agreed to be paid by the Manager as provided in this
Agreement. In particular, but without limiting the generality of the
foregoing, the Portfolio shall pay:
(i) Management Fees. the fees of the Manager as
provided in paragraph 3 below;
(ii) Custody and Accounting Services. All expenses
of the transfer, receipt, safekeeping, servicing and accounting for the
cash, securities, and other property of the Portfolio, including all charges
of depositories, custodians, and other agents, if any;
(iii) Investor Servicing. All expenses of establishing,
maintaining and servicing investor accounts, including all charges of
agents for account transfers, account record keeping, and account
distribution or disbursement;
(iv) Distribution and Service Fees. The fees, if any,
payable pursuant to any plan heretofore or hereafter adopted by the
Portfolio pursuant to Rule 12b-1 under the Act.
(v) Investor Meetings. All expenses incidental to
holding meetings of the Portfolio's investors;
(vi) Pricing. All expenses of computing the Portfolio's
net asset value, including the cost of any equipment or services used for
obtaining price quotations and the fees of any independent pricing service
authorized by the Trustees of the Portfolio;
(vii) Communication Equipment. All charges for
equipment or services used for communication between the Manager or
the Portfolio and the custodian, transfer agent or any other agent selected
by the Portfolio;
(viii) Legal and Accounting Fees and Expenses. All
charges for services and expenses of the Portfolio's legal counsel and
independent auditors;
(ix) Trustees' Fees and Expenses. All compensation of
Trustees of the Portfolio, other than those who are interested persons of
the Portfolio, and all expenses (including fees and disbursements of their
legal counsel) incurred in connection with their service;
(x) Federal Registration Fees. All fees and expenses
of registering and maintaining the registration of the Portfolio under the
Act, including all fees and expenses incurred in connection with the
preparation and filing of any registration statement under the Act, and any
amendments or supplements that may be made from time to time;
(xi) Bonding and Insurance. All expenses of bond,
liability, and other insurance coverage required by law or deemed
advisable by the Trustees of the Portfolio;
(xii) Brokerage Commissions. All brokers'
commissions and other charges incident to the purchase, sale, or lending
of the Portfolio's portfolio securities.
(xiii) Interest and Taxes. Interest on borrowed money
and all taxes or governmental fees payable by or with respect to the
Portfolio to federal, state, or other governmental agencies, domestic or
foreign, including stamp or other transfer taxes;
(xiv) Trade Association Fees. All fees, dues, and other
expenses incurred in connection with the membership of the Portfolio in
the Investment Company Institute or any other trade association or other
investment organization; and
(xv) Nonrecurring and Extraordinary Expenses. Such
nonrecurring expenses as may arise, including the costs of actions, suits,
or proceedings to which the Portfolio is a party and the expenses that the
Portfolio may incur as a result of its legal obligation to provide
indemnification to its officers, trustees, employees and agents.
3. Management Fees. The Portfolio shall pay the Manager a fee
at an annual rate computed as follows based on the value of the net
assets of the Portfolio.
A. Method of Computation. The fee shall be accrued for
each calendar day and the sum of the daily fee accruals shall be paid
monthly to the Manager on the first business day of the next succeeding
calendar month. The daily fee accruals will be computed by multiplying
the fraction of one over the number of calendar days in the year by
0.70%, and multiplying the resulting product by the net assets of the
Portfolio as determined in accordance with the Portfolio's Registration
Statement under the Act as of the close of business on the previous
business day on which the Portfolio was open for business.
B. Proration of Fee. If this Agreement becomes effective
or terminates before the end of any calendar month, the fee for the period
from the effective date to the end of such calendar month or from the
beginning of such calendar month to the date of termination, as the case
may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
4. Limitation of Portfolio's Normal Business Expenses. In the
event that expenses of the Portfolio for any fiscal year (not including any
distribution expenses paid by the Portfolio pursuant to any distribution
plan) should exceed the expense limitation on investment company
expenses enforced by any statute or regulatory authority of any
jurisdiction in which shares of the Trust are qualified for offer and sale,
the compensation due the Manager for such fiscal year shall be reduced by
the amount of such excess by a reduction or refund thereof. In the event
that the expenses of the Portfolio exceed any expense limitation which the
Manager may, by written notice to the Trust, voluntarily declare to be
effective with respect to the Portfolio, subject to such terms and conditions
as the Manager may prescribe in such notice, the compensation due the
Manager shall be reduced, and, if necessary, the Manager shall bear the
Portfolio's expenses to the extent required by such expense limitation.
5. Brokerage. In the selection of brokers or dealers and the
placing of orders for the purchase and sale of portfolio investments for the
Portfolio , the Manager shall seek to obtain the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described
below. In using its best efforts to obtain for the Portfolio the most
favorable price and execution available, the Manager, bearing in mind the
Portfolio 's best interests at all times, shall consider all factors it deems
relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices
and trends, the reputation, experience and financial stability of the broker
or dealer involved and the quality of service rendered by the broker or
dealer in other transactions. Subject to such policies as the Trustees may
determine, the Manager shall not be deemed to have acted unlawfully or
to have breached any duty created by this Contract or otherwise solely by
reason of its having caused the Trust to pay, on behalf of the Portfolio , a
broker or dealer that provides brokerage and research services to the
Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Manager
determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided
by such broker or dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Portfolio and to other clients of the Manager as to which the Manager
exercises investment discretion. The Trust hereby agrees with the
Manager that any entity or person associated with the Manager which is a
member of a national securities exchange is authorized to effect any
transaction on such exchange for the account of the Portfolio which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 and
Rule 11a-2-2(T) thereunder, and the Trust hereby consents to the retention
of compensation for such transactions in accordance with Rule 11a2-
2(T)(2)(iv).
6. Manager's Use of the Services of Others. The Manager may
(at its cost except as contemplated by Paragraph 5 of this Agreement)
employ, retain or otherwise avail itself of the services or facilities of
other persons or organizations for the purpose of providing the Manager or
the Portfolio with such statistical and other factual information, such
advice regarding economic factors and trends, such advice as to occasional
transactions in specific securities or such other information, advise or
assistance as the Manager may deem necessary, appropriate or
convenient for the discharge of its obligations hereunder or otherwise
helpful to the Portfolio or in the discharge of the Manager's overall
responsibility with respect to other accounts which it serves as investment
adviser or manager.
7. Ownership of Records. All records required to be maintained
and preserved by the Portfolio pursuant to the rules or regulations of the
Securities and Exchange Commission under Section 31(a) of the Act and
maintained and preserved by the manager on behalf of the Portfolio are
the property of the Portfolio and will be surrendered by the Manager
promptly on request by the Portfolio. The Manager may retain, for itself,
copies of all such records.
8. Reports to Manager. The Portfolio shall furnish or otherwise
make available to the Manager such prospectuses, financial statements,
proxy statements, reports, and other information relating to the business
and affairs of the Portfolio as the Manager may, at any time or from time
to time, reasonably require in order to discharge its obligations under this
Agreement.
9. Other Agreements, Etc. It is understood that any of the
shareholders, Trustees, officers and employees of the Trust may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the Manager, and in any person controlled by or under common control
with the Manager, and that the Manager and any person controlled by or
under common control with the Manager may have an interest in the
Trust. It is also understood that the Manager and persons controlled by
or under common control with the Manager have and may have advisory,
management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
10. Limitation of Liability of Manager. Neither the Manager nor
any of its officers, directors, stockholders (or partners of stockholders),
agents or employees, nor any person performing executive,
administrative, trading, or other functions for the Portfolio (at the
direction or request of the manager) or the Manager in connection with the
Manager's discharge of its obligation undertaken or reasonably assumed
with respect to this Agreement, shall be liable for any error of judgment or
mistake of law or for any loss suffered by the Portfolio in connection with
the matters to which this Agreement relates, except for loss resulting from
willful misfeasance, bad faith, or gross negligence in the performance of
its or his duties on behalf of the Portfolio or from reckless disregard by the
Manager or any such person of the duties of the Manager under this
Agreement.
11. Limitation of Liability of Portfolio. The term "Smith Breeden
Trust" means and refers to the trustees from time to time serving under
the Declaration of Trust of the Trust dated December 18, 1991, as the
same may subsequently thereto have been, or subsequently hereto be,
amended (the "Declaration of Trust"). It is expressly agreed that the
obligations of the Portfolio hereunder shall not be binding upon any of the
trustees, shareholders, nominees, officers, agents or employees of the
Portfolio personally, but shall bind only the trust property of the Portfolio,
as provided in the Declaration of Trust of the Portfolio. The execution and
delivery of this Agreement have been authorized by the trustees and
shareholders of the Portfolio and this Agreement has been signed by an
authorized officer of the Portfolio, acting as such, and neither such
authorization by such trustees and shareholders nor such execution and
delivery by such officer shall be deemed to have been made by any of
them but shall bind only the trust property of the Portfolio as provided in
its Declaration of Trust.
12. Use of Name. The Manager owns the name "Smith Breeden,"
which may be used by the Trust only with the consent of the Manager.
The Manager consents to the use by the Trust of the name "Smith
Breeden Funds" or any other name embodying the name "Smith
Breeden," but only on the condition and so long as (i) this Agreement
shall remain in full force, (ii) the Trust shall fully perform, fulfill and
comply with all provisions of this Agreement expressed herein to be performed,
fulfilled or complied with by it, and (iii) Smith Breeden Associates, Inc. is
the Manager of the Trust. No such name shall be used by the Trust at
any time or in any place or for any purposes or under any conditions
except as in this section provided. The foregoing authorization by the
Manager to the Trust to use the name "Smith Breeden" as a part of a
business or name is not exclusive of the right of the Manager itself to use,
or to authorize others to use, the same; the Trust acknowledges and
agrees that as between the Manager and the Trust, the Manager has the
exclusive right so to use, or authorize others to use, said name, and the
Trust agrees to take such action as may reasonably be requested by the
Manager to give full effect to the provisions of this section (including,
without limitation, consenting to such use of said name). Without limiting
the generality of the foregoing, the Trust agrees that, upon (i) any
termination of this Agreement by either party, (ii) the violation of any of
its provisions by the Trust or (iii) termination of this Investment Advisory
Agreement between Smith Breeden Associates, Inc. and the Trust, the
Trust will, at the request of the Manager made within six months after
such termination or violation, use its best efforts to change the name of
the Trust so as to eliminate all reference, if any, to the name "Smith
Breeden" and will not thereafter transact any business in a name
containing the name "Smith Breeden" in any form or combination
whatsoever, or designate itself as the same entity as or successor to an
entity of such name, or otherwise use the name "Smith Breeden" or any
other reference to the Manager. Such covenants on the part of the Trust
shall be binding upon it, its Trustees, officers, stockholders, creditors and
all other persons claiming under or through it.
13. Term of Agreement. The term of this Agreement shall begin
on the date first above written, and unless sooner terminated as
hereinafter provided, this Agreement shall remain in effect through the
second anniversary of its execution. Thereafter, this Agreement shall
continue in effect from year to year, subject to the termination provisions
and all other terms and conditions hereof, so long as such continuation
shall be specifically approved at least annually (a) by either the Board of
Trustees of the Portfolio, or by vote of a majority of the outstanding voting
securities of the Portfolio, and (b) in either event by the vote, cast in
person at a meeting called for the purpose of voting on such approval, of
a majority of the Trustees of the Portfolio who are not interested persons
of the Trust or the Manager; provided, however, that if the continuance of
this Agreement is submitted to the shareholders of the Portfolio for their
approval and such shareholders fail to approve such continuance of this
Contract as provided herein, the Manager may continue to serve
hereunder in a manner consistent with the Investment Company Act of
1940 and the rules and regulations thereunder. The Manager shall furnish
to the Portfolio, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement or any
extension, renewal or amendment hereof.
14. Amendment and Assignment of Agreement. This Agreement
may not be amended in any material respect or assigned without the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio, and this Agreement shall automatically and immediately
terminate in the event of its assignment.
15. Termination of Agreement. This Agreement may be
terminated by either party hereto, without the payment of any penalty,
upon 60 days' prior notice in writing to the other party; provided, that in
the case of termination by the Portfolio, such action shall have been
authorized by resolution of a majority of the Trustees of the Portfolio who
are not parties to this Agreement or interested persons of any such party,
or by vote of a majority of the outstanding voting securities of the
Portfolio.
16. Miscellaneous.
A. Captions. The captions in this Agreement are included
for convenience of reference only and in no way define or delineate any of
the provisions hereof or otherwise affect their construction or effect.
B. Interpretation. Nothing herein contained shall be
deemed to require the Portfolio to take any action contrary to its
Declaration of Trust or By-Laws, or any applicable statutory or regulatory
requirement to which it is subject or by which it is bound, or to relieve or
deprive the Board of Trustees of the Portfolio of its responsibility for and
control of the conduct of the affairs of the Portfolio. This Agreement shall
be construed and enforced in accordance with and governed by the laws
of The Commonwealth of Massachusetts.
C. Definitions. For the purposes of this Agreement, the
"affirmative vote of a majority of the outstanding shares" of the Portfolio
means the affirmative vote, at a duly called and held meeting of
shareholders, (a) of the holders of 67% or more of the shares of the
Portfolio present (in person or by proxy) and entitled to vote as such
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio entitled to vote at such meeting are present in person or by
proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person,"
"interested person" and "assignment" shall have their respective meanings
defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the
term "specifically approve at least annually" shall be construed in a
manner consistent with the Investment Company Act of 1940 and the
rules and regulations thereunder; and the term "brokerage and research
services" shall have the meaning given in the Securities Exchange Act of
1934 and the rules and regulations thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers thereunto duly
authorized and their respective corporate seals to be hereunto affixed, as
of the date and year first above written.
SMITH BREEDEN SERIES FUND
(on behalf of Smith Breeden
Intermediate Duration U.S. Government
Series)
Attest: Marianthe S. Mewkill By:Michael J. Giarla, President
SMITH BREEDEN ASSOCIATES, INC.
Attest: Marianthe S. Mewkill By:Michael J. Giarla, Chief Operating Officer
INVESTMENT ADVISORY AGREEMENT
Between
SMITH BREEDEN SERIES FUND
and
SMITH BREEDEN ASSOCIATES, INC.
INVESTMENT ADVISORY AGREEMENT dated August 1, 1994
between SMITH BREEDEN SERIES FUND, a Massachusetts trust ("the
Trust"), on behalf of its Smith Breeden Short Duration U.S. Government
Series (the "Portfolio"), and SMITH BREEDEN ASSOCIATES, INC., a
corporation organized and existing under the laws of the State of Kansas
(hereinafter called the "Manager").
W I T N E S S E T H:
Whereas, the Portfolio is engaged in business as an open-end
management investment company and has registered as such under the
federal Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Manager is engaged principally in the business of
rendering investment management and administrative services and is
registered as an investment adviser under the federal investment Advisers
Act of 1940, as amended: and
WHEREAS, the Portfolio wishes to engage the Manager to provide
certain investment management and administrative services, and the
Manager is willing to provide such services, all on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. Duties and Responsibilities of Manager.
A. Investment Advisory Services. The Manager shall act
as investment adviser to and shall supervise and direct the investments of
the Portfolio in accordance with the Portfolio's investment objectives,
program and restrictions as provided in the Portfolio's then current
Registration Statement under the Act, and such other directions or
limitations as the Portfolio may impose by notice in writing to the
Manager. The Manager shall obtain and evaluate such information
relating to the economy, industries, businesses, securities markets and
securities as it may deem necessary or useful in the discharge of its
obligations hereunder and shall formulate and implement a continuing
program for the management of the assets and resources of the Portfolio
in a manner consistent with its investment objective. The Manager shall
for all purposes be deemed to be an independent contractor and shall,
except as expressly provided or authorized (whether herein or otherwise),
have no authority to act for or represent the Portfolio in any way or
otherwise be deemed an agent of the Portfolio.
In furtherance of its duties hereunder, the Manager is authorized, in
its discretion and without prior consultation with the Portfolio, to:
(i) buy, sell, exchange, convert, lend, and otherwise
trade in any stocks, bonds, and other securities, financial futures, swap
contracts or other assets; and
(ii) directly place orders and negotiate the
commissions (if any) for the execution of transactions in securities,
financial futures, swap contracts or other assets with or through such
brokers, dealers, underwriters or issuers as the Manager may select.
B. Administrative Services. Subject to the overall
authority of the Board of Trustees of the Portfolio, the Manager shall
provide general administrative services and oversee the operation of the
Portfolio ("Administrative Services"). Such Administrative Services shall
not include investment advisory, custodial, underwriting and distribution,
transfer agency, shareholder or accounting services, or the preparation
and filing of the Portfolio's tax returns, but shall include, without
limitation:
(i) the provision of office space and equipment
necessary in connection with the maintenance of the headquarters of the
Portfolio;
(ii) the maintenance of the books and records of the
Portfolio, and making arrangements for the meetings of the Trustees of
the Portfolio including the preparation of agendas and supporting
materials therefor;
(iii) the preparation of communications and reports to
investors in the Portfolio and making arrangements for meetings of such
investors;
(iv) the preparation and filing of all required reports
and all updating and other amendments to the Portfolio's registration
statement under the Act and the rules and regulations thereunder;
(v) the periodic computation and, as necessary,
reporting to the Trustees of the Portfolio of the Portfolio's compliance with
its investment objective and policies with the Portfolio diversification and
other Portfolio requirements of the Act and, to the extent required, the
Internal Revenue Code; and
(vi) the negotiation of agreements or other arrangements
with, and general oversight and coordination of the activities of, agents
and others retained by the Portfolio to provide custodial, net asset value
computation, Portfolio accounting, legal, tax and accounting services.
It is understood that the Manager may, in its discretion and at its
expense, delegate some or all of its administrative duties and
responsibilities under this paragraph 1.B to any person provided that the
Manager gives prior notice to the Portfolio.
C. Reports to Portfolio. The Manager shall furnish to or
place at the disposal of the Portfolio such information, reports,
evaluations, analyses and opinions relating to the Manager and its
investment management of the Portfolio's portfolio securities as the
Portfolio may, at any time or from time to time, reasonably request or as
the Manager may deem helpful.
D. Reports and Other Communications to Investors.
The Manager shall assist the Portfolio in providing communications to
investors as may reasonably be necessary.
E. Portfolio Personnel. the Manager will permit
individuals who are officers or employees of the Manager to serve (if duly
elected or appointed) as officers, trustees, members of any committee of
trustees, members of any advisory board, or members of any other
committee of the Portfolio, without remuneration or other cost to the
Portfolio.
F. Personnel, Office Space, and Facilities of Manager.
The Manager at its own expense shall furnish or provide and pay the cost
of such office space, office equipment, office personnel, and office
services as the Manager requires in the performance of its investment
advisory, administrative and other obligations under this Agreement.
2. Allocation of Expenses.
A. Expenses Paid by Manager.
(i) Expenses Paid by Manager. The Manager shall
pay all salaries, expenses, and fees of the officers and trustees of the
Portfolio who are employees of the Manager. The Manager is not
obligated to bear any other expenses incidental to the operations and
business of the Portfolio.
(ii) Assumption of Expenses by Manager. The
payment or assumption by the Manager of any expense of the Portfolio
that the Manager is not required by this Agreement to pay or assume
shall not obligate the Manager to pay or assume the same or any similar
expense on any subsequent occasion.
B. Expenses Paid by Portfolio. The Portfolio shall bear all
expenses of its organization, operations, and business not specifically
assumed or agreed to be paid by the Manager as provided in this
Agreement. In particular, but without limiting the generality of the
foregoing, the Portfolio shall pay:
(i) Management Fees. the fees of the Manager as
provided in paragraph 3 below;
(ii) Custody and Accounting Services. All expenses
of the transfer, receipt, safekeeping, servicing and accounting for the
cash, securities, and other property of the Portfolio, including all charges
of depositories, custodians, and other agents, if any;
(iii) Investor Servicing. All expenses of establishing,
maintaining and servicing investor accounts, including all charges of
agents for account transfers, account record keeping, and account
distribution or disbursement;
(iv) Distribution and Service Fees. The fees, if any,
payable pursuant to any plan heretofore or hereafter adopted by the
Portfolio pursuant to Rule 12b-1 under the Act.
(v) Investor Meetings. All expenses incidental to
holding meetings of the Portfolio's investors;
(vi) Pricing. All expenses of computing the Portfolio's
net asset value, including the cost of any equipment or services used for
obtaining price quotations and the fees of any independent pricing
service authorized by the Trustees of the Portfolio;
(vii) Communication Equipment. All charges for
equipment or services used for communication between the Manager or
the Portfolio and the custodian, transfer agent or any other agent
selected by the Portfolio;
(viii) Legal and Accounting Fees and Expenses. All
charges for services and expenses of the Portfolio's legal counsel and
independent auditors;
(ix) Trustees' Fees and Expenses. All compensation of
Trustees of the Portfolio, other than those who are interested persons of
the Portfolio, and all expenses (including fees and disbursements of their
legal counsel) incurred in connection with their service;
(x) Federal Registration Fees. All fees and expenses
of registering and maintaining the registration of the Portfolio under the
Act, including all fees and expenses incurred in connection with the
preparation and filing of any registration statement under the Act, and any
amendments or supplements that may be made from time to time;
(xi) Bonding and Insurance. All expenses of bond,
liability, and other insurance coverage required by law or deemed
advisable by the Trustees of the Portfolio;
(xii) Brokerage Commissions. All brokers'
commissions and other charges incident to the purchase, sale, or lending
of the Portfolio's portfolio securities.
(xiii) Interest and Taxes. Interest on borrowed money
and all taxes or governmental fees payable by or with respect to the
Portfolio to federal, state, or other governmental agencies, domestic or
foreign, including stamp or other transfer taxes;
(xiv) Trade Association Fees. All fees, dues, and other
expenses incurred in connection with the membership of the Portfolio in
the Investment Company Institute or any other trade association or other
investment organization; and
(xv) Nonrecurring and Extraordinary Expenses. Such
nonrecurring expenses as may arise, including the costs of actions, suits,
or proceedings to which the Portfolio is a party and the expenses that the
Portfolio may incur as a result of its legal obligation to provide
indemnification to its officers, trustees, employees and agents.
3. Management Fees. The Portfolio shall pay the Manager a
fee at an annual rate computed as follows based on the value of the net
assets of the Portfolio.
A. Method of Computation. The fee shall be accrued for
each calendar day and the sum of the daily fee accruals shall be paid
monthly to the Manager on the first business day of the next succeeding
calendar month. The daily fee accruals will be computed by multiplying
the fraction of one over the number of calendar days in the year by
0.70%, and multiplying the resulting product by the net assets of the
Portfolio as determined in accordance with the Portfolio's Registration
Statement under the Act as of the close of business on the previous
business day on which the Portfolio was open for business.
B. Proration of Fee. If this Agreement becomes effective
or terminates before the end of any calendar month, the fee for the
period from the effective date to the end of such calendar month or from
the beginning of such calendar month to the date of termination, as the
case may be, shall be prorated according to the proportion which such
period bears to the full month in which such effectiveness or termination
occurs.
4. Limitation of Portfolio's Normal Business Expenses. In the
event that expenses of the Portfolio for any fiscal year (not including any
distribution expenses paid by the Portfolio pursuant to any distribution
plan) should exceed the expense limitation on investment company
expenses enforced by any statute or regulatory authority of any
jurisdiction in which shares of the Trust are qualified for offer and sale,
the compensation due the Manager for such fiscal year shall be reduced
by the amount of such excess by a reduction or refund thereof. In the
event that the expenses of the Portfolio exceed any expense limitation
which the Manager may, by written notice to the Trust, voluntarily declare
to be effective with respect to the Portfolio, subject to such terms and
conditions as the Manager may prescribe in such notice, the
compensation due the Manager shall be reduced, and, if necessary, the
Manager shall bear the Portfolio's expenses to the extent required by
such expense limitation.
5. Brokerage. In the selection of brokers or dealers and the
placing of orders for the purchase and sale of portfolio investments for
the Portfolio , the Manager shall seek to obtain the most favorable price
and execution available, except to the extent it may be permitted to pay
higher brokerage commissions for brokerage and research services as
described below. In using its best efforts to obtain for the Portfolio the
most favorable price and execution available, the Manager, bearing in
mind the Portfolio 's best interests at all times, shall consider all factors
it deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market
prices and trends, the reputation, experience and financial stability of the
broker or dealer involved and the quality of service rendered by the
broker or dealer in other transactions. Subject to such policies as the
Trustees may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Contract or
otherwise solely by reason of its having caused the Trust to pay, on
behalf of the Portfolio , a broker or dealer that provides brokerage and
research services to the Manager an amount of commission for effecting
a portfolio investment transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that
transaction, if the Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Portfolio and to other clients of the Manager as to
which the Manager exercises investment discretion. The Trust hereby
agrees with the Manager that any entity or person associated with the
Manager which is a member of a national securities exchange is
authorized to effect any transaction on such exchange for the account of
the Portfolio which is permitted by Section 11(a) of the Securities
Exchange Act of 1934 and Rule 11a-2-2(T) thereunder, and the Trust
hereby consents to the retention of compensation for such transactions in
accordance with Rule 11a2-2(T)(2)(iv).
6. Manager's Use of the Services of Others. The Manager
may (at its cost except as contemplated by Paragraph 5 of this
Agreement) employ, retain or otherwise avail itself of the services or
facilities of other persons or organizations for the purpose of providing
the Manager or the Portfolio with such statistical and other factual
information, such advice regarding economic factors and trends, such
advice as to occasional transactions in specific securities or such other
information, advise or assistance as the Manager may deem necessary,
appropriate or convenient for the discharge of its obligations hereunder
or otherwise helpful to the Portfolio or in the discharge of the Manager's
overall responsibility with respect to other accounts which it serves as
investment adviser or manager.
7. Ownership of Records. All records required to be
maintained and preserved by the Portfolio pursuant to the rules or
regulations of the Securities and Exchange Commission under Section
31(a) of the Act and maintained and preserved by the manager on behalf
of the Portfolio are the property of the Portfolio and will be surrendered
by the Manager promptly on request by the Portfolio. The Manager may
retain, for itself, copies of all such records.
8. Reports to Manager. The Portfolio shall furnish or otherwise
make available to the Manager such prospectuses, financial statements,
proxy statements, reports, and other information relating to the business
and affairs of the Portfolio as the Manager may, at any time or from time
to time, reasonably require in order to discharge its obligations under this
Agreement.
9. Other Agreements, Etc. It is understood that any of the
shareholders, Trustees, officers and employees of the Trust may be a
shareholder, director, officer or employee of, or be otherwise interested
in, the Manager, and in any person controlled by or under common
control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an
interest in the Trust. It is also understood that the Manager and persons
controlled by or under common control with the Manager have and may
have advisory, management service, distribution or other contracts with
other organizations and persons, and may have other interests and
businesses.
10. Limitation of Liability of Manager. Neither the Manager nor
any of its officers, directors, stockholders (or partners of stockholders),
agents or employees, nor any person performing executive,
administrative, trading, or other functions for the Portfolio (at the
direction or request of the manager) or the Manager in connection with the
Manager's discharge of its obligation undertaken or reasonably assumed
with respect to this Agreement, shall be liable for any error of judgment
or mistake of law or for any loss suffered by the Portfolio in connection
with the matters to which this Agreement relates, except for loss resulting
from willful misfeasance, bad faith, or gross negligence in the
performance of its or his duties on behalf of the Portfolio or from reckless
disregard by the Manager or any such person of the duties of the
Manager under this Agreement.
11. Limitation of Liability of Portfolio. The term "Smith Breeden
Trust" means and refers to the trustees from time to time serving under
the Declaration of Trust of the Trust dated December 18, 1991, as the
same may subsequently thereto have been, or subsequently hereto be,
amended (the "Declaration of Trust"). It is expressly agreed that the
obligations of the Portfolio hereunder shall not be binding upon any of
the trustees, shareholders, nominees, officers, agents or employees of
the Portfolio personally, but shall bind only the trust property of the
Portfolio, as provided in the Declaration of Trust of the Portfolio. The
execution and delivery of this Agreement have been authorized by the
trustees and shareholders of the Portfolio and this Agreement has been
signed by an authorized officer of the Portfolio, acting as such, and
neither such authorization by such trustees and shareholders nor such
execution and delivery by such officer shall be deemed to have been
made by any of them but shall bind only the trust property of the Portfolio
as provided in its Declaration of Trust.
12. Use of Name. The Manager owns the name "Smith Breeden,"
which may be used by the Trust only with the consent of the Manager.
The Manager consents to the use by the Trust of the name "Smith
Breeden Funds" or any other name embodying the name "Smith
Breeden," but only on the condition and so long as (i) this Agreement
shall remain in full force, (ii) the Trust shall fully perform, fulfill and
comply with all provisions of this Agreement expressed herein to be performed,
fulfilled or complied with by it, and (iii) Smith Breeden Associates, Inc. is
the Manager of the Trust. No such name shall be used by the Trust at
any time or in any place or for any purposes or under any conditions
except as in this section provided. The foregoing authorization by the
Manager to the Trust to use the name "Smith Breeden" as a part of a
business or name is not exclusive of the right of the Manager itself to
use, or to authorize others to use, the same; the Trust acknowledges and
agrees that as between the Manager and the Trust, the Manager has the
exclusive right so to use, or authorize others to use, said name, and the
Trust agrees to take such action as may reasonably be requested by the
Manager to give full effect to the provisions of this section (including,
without limitation, consenting to such use of said name). Without limiting
the generality of the foregoing, the Trust agrees that, upon (i) any
termination of this Agreement by either party, (ii) the violation of any of
its provisions by the Trust or (iii) termination of this Investment Advisory
Agreement between Smith Breeden Associates, Inc. and the Trust, the
Trust will, at the request of the Manager made within six months after
such termination or violation, use its best efforts to change the name of
the Trust so as to eliminate all reference, if any, to the name "Smith
Breeden" and will not thereafter transact any business in a name
containing the name "Smith Breeden" in any form or combination
whatsoever, or designate itself as the same entity as or successor to an
entity of such name, or otherwise use the name "Smith Breeden" or any
other reference to the Manager. Such covenants on the part of the Trust
shall be binding upon it, its Trustees, officers, stockholders, creditors and
all other persons claiming under or through it.
13. Term of Agreement. The term of this Agreement shall begin
on the date first above written, and unless sooner terminated as
hereinafter provided, this Agreement shall remain in effect through the
second anniversary of its execution. Thereafter, this Agreement shall
continue in effect from year to year, subject to the termination provisions
and all other terms and conditions hereof, so long as such continuation
shall be specifically approved at least annually (a) by either the Board of
Trustees of the Portfolio, or by vote of a majority of the outstanding voting
securities of the Portfolio, and (b) in either event by the vote, cast in
person at a meeting called for the purpose of voting on such approval, of
a majority of the Trustees of the Portfolio who are not interested persons
of the Trust or the Manager; provided, however, that if the continuance of
this Agreement is submitted to the shareholders of the Portfolio for their
approval and such shareholders fail to approve such continuance of this
Contract as provided herein, the Manager may continue to serve
hereunder in a manner consistent with the Investment Company Act of
1940 and the rules and regulations thereunder. The Manager shall
furnish to the Portfolio, promptly upon its request, such information as
may reasonably be necessary to evaluate the terms of this Agreement or
any extension, renewal or amendment hereof.
14. Amendment and Assignment of Agreement. This
Agreement may not be amended in any material respect or assigned
without the affirmative vote of a majority of the outstanding voting
securities of the Portfolio, and this Agreement shall automatically and
immediately terminate in the event of its assignment.
15. Termination of Agreement. This Agreement may be
terminated by either party hereto, without the payment of any penalty,
upon 60 days' prior notice in writing to the other party; provided, that in
the case of termination by the Portfolio, such action shall have been
authorized by resolution of a majority of the Trustees of the Portfolio who
are not parties to this Agreement or interested persons of any such party,
or by vote of a majority of the outstanding voting securities of the
Portfolio.
16. Miscellaneous.
A. Captions. The captions in this Agreement are included
for convenience of reference only and in no way define or delineate any
of the provisions hereof or otherwise affect their construction or effect.
B. Interpretation. Nothing herein contained shall be
deemed to require the Portfolio to take any action contrary to its
Declaration of Trust or By-Laws, or any applicable statutory or regulatory
requirement to which it is subject or by which it is bound, or to relieve or
deprive the Board of Trustees of the Portfolio of its responsibility for and
control of the conduct of the affairs of the Portfolio. This Agreement shall
be construed and enforced in accordance with and governed by the laws
of The Commonwealth of Massachusetts.
C. Definitions. For the purposes of this Agreement, the
"affirmative vote of a majority of the outstanding shares" of the Portfolio
means the affirmative vote, at a duly called and held meeting of
shareholders, (a) of the holders of 67% or more of the shares of the
Portfolio present (in person or by proxy) and entitled to vote as such
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio entitled to vote at such meeting are present in person or by
proxy, or (b) of the holders of more than 50% of the outstanding shares
of the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person,"
"interested person" and "assignment" shall have their respective meanings
defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the
term "specifically approve at least annually" shall be construed in a
manner consistent with the Investment Company Act of 1940 and the
rules and regulations thereunder; and the term "brokerage and research
services" shall have the meaning given in the Securities Exchange Act of
1934 and the rules and regulations thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers thereunto duly
authorized and their respective corporate seals to be hereunto affixed, as
of the date and year first above written.
SMITH BREEDEN SERIES FUND
(on behalf of Smith Breeden Short
Duration U.S. Government Series)
Attest: Marianthe S. Mewkill By: Michael J. Giarla, President
SMITH BREEDEN ASSOCIATES, INC.
Attest: Marianthe S. Mewkill By: Michael J. Giarla, Chief Operating Officer
UNDERWRITING AGREEMENT
This Agreement, dated as of the 20th day of July, 1994, made by
and between Smith Breeden Series Fund, a Massachusetts business trust
(the "Trust") operating as a registered investment company under the
Investment Company Act of 1940, as amended (the "Act"), Smith Breeden
Associates, Inc., (the "Advisor"), a registered investment adviser existing
as a corporation duly organized and existing under the laws of the State
of Kansas; and Fund/Plan Broker Services, Inc. ("Fund/Plan"), a
corporation duly organized and existing under the laws of the State of
Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is authorized by its Agreement and Declaration
of Trust, as amended (the "Declaration of Trust"), to issue separate series
of shares representing interests in separate investment portfolios (the
"Series"), which Series are identified on Schedule "C" attached hereto, and
which Schedule "C" may be amended from time to time by mutual agreement
among the Parties; and
WHEREAS, the Advisor has been appointed investment adviser to
the Trust; and
WHEREAS, Fund/Plan is a broker-dealer registered with the U.S.
Securities and Exchange Commission and a member in good standing of
the National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Parties are desirous of entering into an agreement
providing for the distribution by Fund/Plan of shares of beneficial interest
of the Series of the Trust (the "Shares"), and that Fund/Plan be
compensated by the Advisor for providing such services.
NOW, THEREFORE, in consideration of the premises and mutual
promises of the Parties contained herein, the Parties agree as follows:
1. Appointment.
The Trust hereby appoints Fund/Plan as its agent for the
underwriting and distribution of the Shares, and Fund/Plan hereby
accepts such appointment under the terms of this Agreement.
Notwithstanding any other provision hereof, the Trust may terminate,
suspend, or withdraw the offering of the Shares whenever, in its sole
discretion, it deems such action to be desirable.
2. Sale and Repurchase of Shares.
(a) Subject to applicable federal and state law and the Declaration
of Trust, By-laws and current Prospectus and Statement of
Additional Information of the Trust, Fund/Plan is hereby
granted the right as agent for the Trust, to sell Shares to the
public against orders therefor at the public offering price (as
defined in sub-paragraph 2.(c) hereof).
(b) Subject to applicable federal and state law and the Declaration
of Trust, By- laws and current Prospectus and Statement of
Additional Information of the Trust, Fund/Plan will also have the
right to take, as agent for the Trust, all actions which, in
Fund/Plan's judgment, are necessary to carry into effect the
distribution of the Shares.
(c) The public offering price shall be the net asset
value of the Shares then in effect.
(d) The net asset value of the Shares shall be
determined in the manner provided in the then
current prospectus, and statement of additional
information relating to the Shares and when
determined shall be applicable to all transactions
as provided in the prospectus. The net asset value
of the Shares shall be calculated by the Trust or by
another entity on behalf of the Trust. Fund/Plan
shall have no duty to inquire into or liability for the
accuracy of the net asset value per Share as
calculated.
(e) On every sale, the Trust shall receive the applicable
net asset value of the Shares promptly.
(f) Upon receipt of purchase instructions, Fund/Plan
will transmit such instructions to the Trust or its
transfer agent for registration of the Shares
purchased.
(g) Nothing in this Agreement shall prevent Fund/Plan
or any affiliated person (as defined in the Act) of
Fund/Plan from acting as underwriter or distributor
for any other person, firm or corporation (including
other investment companies) or in any way limit or
restrict Fund/Plan or such affiliated person from
buying, selling or trading any securities for its or
their own account or for the accounts of others for
whom it or they may be acting; provided, that
Fund/Plan expressly agrees that it will not for its
own account purchase any shares of the Trust
except for investment purposes and that it will not
for its own account sell any such shares except by
redemption of such shares by the Trust, and that it
will not undertake in any activities which, in its
judgment, will adversely affect the performance of
its obligations to the Trust under this Agreement.
(h) Fund/Plan may repurchase Shares at such prices
and upon such terms and conditions as shall be
specified in the then current Prospectus.
3. Rules of Sale of Shares.
Fund/Plan does not agree to sell any specific number of Shares.
Fund/Plan, as Underwriter for the Trust, undertakes to sell Shares on
a best efforts basis and only against orders received therefor.
The Trust reserves the right to refuse at any time or times to sell any
of its Shares for any reason deemed adequate by it.
4. Rules of NASD.
(a) Fund/Plan will conform to the Rules of Fair Practice
of the NASD and the securities laws of any
jurisdiction in which it directly or indirectly sells any
Shares.
(b) Fund/Plan will require each dealer with whom
Fund/Plan has a selling agreement to conform to
the applicable provisions of the Prospectus with
respect to the public offering price of the Shares,
and Fund/Plan shall not cause the Trust to withhold
the placing of purchase orders so as to make a
profit thereby.
(c) The Trust agrees to furnish to Fund/Plan sufficient
copies of any agreements, plans, communications
with the public or other materials it intends to use
in connection with any sales of Shares in adequate
time for Fund/Plan to file and clear such materials
with the proper authorities before they are put in
use. In addition, the Trust agrees not to use any
such materials until so filed and cleared for use by
appropriate authorities and Fund/Plan.
(d) Fund/Plan, at its own expense, will qualify as a
dealer or broker, or otherwise, under all applicable
state or federal laws as required in order that the
Shares may be sold in such states as may be
mutually agreed upon by the Parties.
(e) Fund/Plan shall not, in connection with any sale or
solicitation of a sale of the Shares, make or
authorize any representative, Service Organization,
broker or dealer to make, any representations
concerning the Shares except those contained in
the then current Prospectus covering the Shares
and in communications with the public or sales
materials approved by Fund/Plan and the Trust as
information supplemental to such Prospectus.
Copies of the Prospectus will be supplied by the
Trust to Fund/Plan in reasonable quantities upon
request.
5. Records to be Supplied by the Trust.
The Trust shall furnish to Fund/Plan copies of all information,
financial statements and other papers which Fund/Plan may
reasonably request for use in connection with the distribution of the
Shares including, but not be limited to, one certified copy of all
financial statements prepared for the Trust by its independent public
accountants.
6. Expenses.
(a) The Trust will bear the following expenses:
(i) preparation, setting in type, and printing of sufficient
copies of the prospectuses and statements of additional
information for distribution to shareholders, and the
distribution of same to the shareholders;
(ii) preparation, printing and distribution of reports and
other communications to shareholders;
(iii)registration of the Shares under the federal securities
laws;
(iv) qualification of the Shares for sale in the jurisdictions
mutually agreed upon by the Trust and Fund/Plan;
(v) maintaining facilities for the issue and transfer of the
Shares;
(vi) supplying information, prices and other data to be
furnished by the Trust under this Agreement; and
(vii)any original issue taxes or transfer taxes applicable to
the sale or delivery of the Shares or certificates
therefor.
(b) the Advisor will pay all other expenses incident to the sale and
distribution of the Shares sold hereunder.
7. Term and Compensation.
(a) The term of this Agreement shall commence on the date
hereinabove first written (the "Effective Date").
(b) This Agreement shall remain in effect for two (2) years from the
Effective Date. The Agreement shall continue thereafter for
periods not exceeding one (1) year if approved at least
annually (i) by a vote of a majority of the outstanding voting
securities of each Series or by a vote of the Trustees of the
Trust, and (ii) by a vote of a majority of the trustees of the
Trust who are not interested persons of the Trust or parties to
this Agreement (other than as Trustees of the Trust), cast in
parson at a meeting called for the purpose of voting on such
approval such person.
(c) Fees payable to Fund/Plan shall be paid by the Advisor as set
forth in Schedule "B" attached and shall be fixed for the two (2)
years period commencing on the Effective Date of this
Agreement. Thereafter, the fee schedule will be subject to
annual review and adjustment.
(d) This Agreement (i) may at any time be terminated without the
payment of any penalty, either by a vote of the Trustees of the
Trust or by a vote of a majority of the outstanding voting
securities of each Series with respect to such Series, on sixty
(60) days' written notice to Fund/Plan; and (ii) may be
terminated by Fund/Plan on sixty (60) days' written notice to
the Trust with respect to any Series.
(e) This Agreement shall automatically terminate in the event of its
assignment.
8. Indemnification of Fund/Plan by Advisor.
The Advisor will indemnify and hold Fund/Plan harmless for the
actions of the Advisor's employees registered with the NASD as
Fund/Plan representatives and the Advisor will undertake to maintain
compliance with all rules and regulations concerning any and all
sales presentations made by such employees.
9. Liability and Indemnification of Fund/Plan and the Trust.
(a) Fund/Plan, its directors, officers, employees, shareholders and
agents shall not be liable for any loss suffered by the Trust in
connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence on the
part of Fund/Plan in the performance of its obligations and
duties or by reason of its reckless disregard of its obligations
and duties under this Agreement.
(b) The Trust agrees to indemnify and hold harmless Fund/Plan,
and each, who controls Fund/Plan within the meaning of
Section 15 of the Securities Act of 1933, as amended (the
"Securities Act"), or Section 20 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), against any and all
losses, claims, damages and liabilities, joint or several
(including any reasonable investigative, legal and other
expenses incurred in connection therewith) to which they, or
any of them, may become subject under the Act, the Securities
Act, the Exchange Act or other federal or state law or
regulation, at common law or otherwise insofar as such losses,
claims, damages or liabilities (or actions, suits or proceedings
in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact
contained in a prospectus, statement of additional information,
supplement thereto, sales literature or other written information
prepared by the Trust and furnished by the Trust to Fund/Plan
for Fund/Plan's use hereunder, disseminated by the Trust or
arise out of or are based upon any omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading.
Such indemnity shall not, however, inure to the benefit of
Fund/Plan (or any person controlling Fund/Plan) on account of
any losses, claims, damages or liabilities (or actions, suits or
proceedings in respect thereof) arising from the sale of the
shares of the Trust to any person by Fund/Plan (i) if such
untrue statement or omission or alleged untrue statement or
omission was made in the prospectus, statement of additional
information, sales or other literature, in reliance upon and in
conformity with information furnished in writing to the Trust by
Fund/Plan specifically for use therein, (ii) if such losses,
claims, damages or liabilities arise out of or are based upon an
untrue statement or omission or alleged untrue statement or omission
found in any prospectus, statement of additional information,
supplement, sales or other literature, although subsequently
corrected, but, negligently distributed by Fund/Plan and a copy
of the corrected document was not delivered to such person at
or before the confirmation of the sale to such person, or (iii) if
such losses, claims, damages or liabilities result from
Fund/Plan's willful misfeasance, bad faith, or gross negligence
in the performance of its obligations and duties or by reason of
its reckless disregard of its obligations and duties hereunder.
(c) Fund/Plan agrees to indemnify and hold harmless the Trust, its
several trustees and officers and each person who controls the
Trust within the meaning of Section 15 of the Securities Act, or
Section 20 of the Exchange Act, against any and all losses,
claims, damages and liabilities, joint or several (including any
reasonable investigative, legal and other expenses incurred in
connection therewith) to which they, or any of them, may become
subject to the Securities Act, the Exchange Act or other federal or
state law or regulation, at common law or otherwise insofar
as such losses, claims, damages or liabilities (or actions, suits
or proceedings, in respect thereof) arise out (or actions, suits or
proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement of material fact or omission of material
act contained in information furnished in writing to the Trust by
Fund/Plan for use in the prospectus, statement of additional
information, or sales or other literature, (ii) the negligent
distribution of any document relating to the sale of Shares
containing an untrue statement of material fact or omitting to
state a material fact which error is later corrected by the Fund
but where such corrected document is not delivered at or before the
confirmation of any related sale of Shares, or (iii) Fund/Plan's
willful misfeasance, bad faith, or gross negligence in the
performance of its obligations and duties or by reason of its
reckless disregard of its obligations and duties hereunder.
10. Amendments.
No provision of this Agreement may be amended or modified, in any
manner whatsoever except by a written agreement properly
authorized and executed by the Parties.
11. Section Headings.
Section and Paragraph headings are for convenience only and shall
not be construed as part of this Agreement.
12. Reports.
Fund/Plan shall prepare reports for the Board of Trustees of the
Trust on a quarterly basis showing such information as from time to
time shall be reasonably requested by such Board.
13. Severability.
If any part, term or provision of this Agreement is held by any court
to be illegal, in conflict with any law or otherwise invalid, the
remaining portion or portions shall be considered severable and not
affected, and the rights and obligations of the parties shall be
construed and enforced as if the Agreement did not contain the
particular part, term or provision held to be illegal or invalid
provided that the basic agreement is not thereby substantially impaired.
14. Certain Definitions
As used in this Agreement, the terms "prospectus" and "statement of
additional information" shall mean the form of prospectus and
statement of additional information filed by the Trust on behalf of the
Series as part of the Registration Statement most recently filed by
the Trust on behalf of the Series with the Securities and Exchange
Commission and effective under the 1933 Act, as such Registration
Statement is amended by any amendments thereto at the time in
effect, as such form of prospectus and statement of additional
information may be amended or supplemented from time to time.
As used in this Agreement, the term "net asset value" shall have the
meaning ascribed to it in the Trust's Declaration of Trust; and the
term "assignment," "interested person," and "majority of the
outstanding voting securities" shall have the meanings given to them
by section 2(a) of the 1940 Act, subject to such exemptions as may
be granted by the Securities and Exchange Commission by any
rule, regulation or order.
15. Limitation of Liability of Trust.
It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the trustees, shareholders,
nominees, officers, agents or employees of the Trust personally, but
shall bind only the trust property of the Trust, as provided in the
Declaration of Trust of the Trust. The execution and delivery of this
Agreement have been authorized by the trustees of the Trust and
this Agreement has been signed by an authorized officer of the
Trust, acting as such, and neither such authorization by such
trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them but shall bind only the
trust property of the Trust as provided in its Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
consisting of nine type written pages, together with Schedules "A", "B" and
"C", to be signed by their duly authorized officers, as of the day and year
first above written.
By:
Smith Breeden Series Fund
Michael J. Giarla, President
By:
Smith Breeden Associates, Inc.
Michael J. Giarla, Chief Operating Officer
By:
Fund/Plan Broker Services, Inc.
Nancy E. Kuhn, President
Schedule "A"
UNDERWRITER/DISTRIBUTION SERVICES
FOR
SMITH BREEDEN SERIES FUND
A) Compliance and maintenance of Trust share registration limits
B) Preparation and execution of Underwriter and 12b-1 Plan
Agreements
Monitoring accruals
Monitoring expenses
Disbursements for expenses and trail commissions
C) Quarterly Reports to Board of Trustees
D) Literature review, recommendations and submission to the NASD
E) All NASD required files and bookkeeping
F) Initial NASD Licensing and Transfers of Registered Representatives
G) Written supervisory procedures and manuals for Registered
Representatives
H) Annual on-site compliance review for Representatives regarding:
disbursement of Trust literature, written correspondence and
communications with the public.
Schedule "B"
Combined Underwriter and Distribution Fee Schedule
for
Smith Breeden Series Fund
Smith Breeden Short Duration U.S. Government Fund, and
Smith Breeden Trust
I. UNDERWRITER/SPONSOR SERVICES
A) The annual fee payable to Fund/Plan Broker Services, Inc. for
services rendered under the Agreements as primary
Underwriter/Distributor of the Funds and primary
licensing/regulatory agent for Smith Breeden Associates, Inc.
personnel is $15,000.00 payable on the Effective Date and
each anniversary thereof.
B) Fees payable to Fund/Plan Broker Services, Inc. for
maintaining annual NASD and state license renewals and for
the required monitoring of representative activities are as
follows:
Up to 2 States - $1,000 per Representative
per Year
3 to 30 States - $2,500 per Representative
per Year
31 to 50 States - $3,500 per Representative
per Year
II. OUT-OF-POCKET EXPENSES
Smith Breeden Associates, Inc. will reimburse Fund/Plan Services
monthly for all out-of-pocket expenses, including postage,
telecommunications (telephone and fax), special reports, record
retention, special transportation costs as incurred and any individual
state tax or assessment over and above annual registration fees.
Schedule "C"
Identification of Series
Below are listed the "Series" to which services under this Agreement are
to be performed as of the execution date of this Agreement:
Smith Breeden Series Fund
Smith Breeden Short Duration U.S. Government Series
Smith Breeden Intermediate Duration U.S. Government Series
This Schedule "C" may be amended from time to time by agreement of
the Parties.
CUSTODY AGREEMENT
Agreement made as of this 16th day of December,
1994, between Smith Breeden Series Fund, a Massachusetts busi-
ness trust organized and existing under the laws of the Com-
monwealth of Massachusetts, having its principal office and
place of business at 100 Europa Drive, Chapel Hill, NC 27514
(hereinafter called the "Fund"), and THE BANK OF NEW YORK, a
New York corporation authorized to do a banking business, hav-
ing its principal office and place of business at 48 Wall
Street, New York, New York 10286 (hereinafter called the "Cus-
todian").
W I T N E S S E T H :
WHEREAS, the Fund represents that pursuant to the Custody
Administration and Agency Agreement between Fund/Plan Ser-
vices, Inc. ("Fund/Plan") and the Fund, Fund/Plan (a) has
agreed to perform certain administrative functions which may
include the functions of administrator, transfer agent and
accounting services agent and (b) has been appointed by the
Fund to act as its agent in respect of certain transactions
contemplated in this Agreement; and
WHEREAS, the Fund represents that (a) Fund/Plan has
agreed to act as Fund's agent in respect of certain transac-
tions contemplated in this Agreement and (b) the Bank is au-
thorized and directed to rely upon and follow Certificates and
instructions given by Fund/Plan, the Fund's agent, in respect
of transactions contemplated in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
hereinafter set forth, the Fund and the Custodian agree as
follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:<PAGE>
1. "Administrator" shall mean Fund/Plan Services, Inc.
and such successors or permitted assigns as may succeed and
perform its duties under the Administration Agreement.
2. "Administration Agreement" shall mean that certain
separate agreement entitled "Custody Administration and Agency
Agreement" dated as of December 20, 1994 between the Fund
and the Fund/Plan Services, Inc.
3. "Book-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for United States and fed-
eral agency securities, its successor or successors and its
nominee or nominees.
4. "Call Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and payment of the exercise
price, as specified therein, to purchase from the writer
thereof the specified underlying Securities.
5. "Certificate" shall mean any notice, instruction, or
other instrument in writing, authorized or required by this
Agreement to be given to the Custodian which is actually re-
ceived by the Custodian and signed on behalf of the Fund by
any two Officers, and the term Certificate shall also include
instructions communicated to the Custodian by the Administra-
tor by Terminal Link.
6. "Clearing Member" shall mean a registered
broker-dealer which is a clearing member under the rules of
O.C.C. and a member of a national securities exchange quali-
fied to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such
a clearing member.
7. "Collateral Account" shall mean a segregated account
so denominated which is specifically allocated to a Series and
pledged to the Custodian as security for, and in consideration
of, the Custodian's issuance of (a) any Put Option guarantee
letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII
herein.
8. "Covered Call Option" shall mean an exchange traded
option entitling the holder, upon timely exercise and payment
of the exercise price, as specified therein, to purchase from
the writer thereof the specified underlying Securities (ex-
cluding Futures Contracts) which are owned by the writer
thereof and subject to appropriate restrictions.
9. "Depository" shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and
- 2 -<PAGE>
Exchange Commission, its successor or successors and its nomi-
nee or nominees. The term "Depository" shall further mean and
include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, specifically identi-
fied in a certified copy of a resolution of the Fund's Board
of Trustees specifically approving deposits therein by the
Custodian.
10. "Financial Futures Contract" shall mean the firm
commitment to buy or sell fixed income securities including,
without limitation, U.S. Treasury Bills, U.S. Treasury Notes,
U.S. Treasury Bonds, domestic bank certificates of deposit,
and Eurodollar certificates of deposit, during a specified
month at an agreed upon price.
11. "Futures Contract" shall mean a Financial Futures
Contract and/or Stock Index Futures Contracts.
12. "Futures Contract Option" shall mean an option with
respect to a Futures Contract.
13. "Margin Account" shall mean a segregated account in
the name of a broker, dealer, futures commission merchant, or
a Clearing Member, or in the name of the Fund for the benefit
of a broker, dealer, futures commission merchant, or Clearing
Member, or otherwise, in accordance with an agreement between
the Fund, the Custodian and a broker, dealer, futures commis-
sion merchant or a Clearing Member (a "Margin Account Agree-
ment"), separate and distinct from the custody account, in
which certain Securities and/or money of the Fund shall be
deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time deter-
mine. Securities held in the Book-Entry System or the Deposi-
tory shall be deemed to have been deposited in, or withdrawn
from, a Margin Account upon the Custodian's effecting an ap-
propriate entry in its books and records.
14. "Money Market Security" shall be deemed to include,
without limitation, certain Reverse Repurchase Agreements,
debt obligations issued or guaranteed as to interest and prin-
cipal by the government of the United States or agencies or
instrumentalities thereof, any tax, bond or revenue anticipa-
tion note issued by any state or municipal government or pub-
lic authority, commercial paper, certificates of deposit and
bankers' acceptances, repurchase agreements with respect to
the same and bank time deposits, where the purchase and sale
of such securities normally requires settlement in federal
funds on the same day as such purchase or sale.
15. "O.C.C." shall mean the Options Clearing Corpora-
tion, a clearing agency registered under Section 17A of the
Securities Exchange Act of 1934, its successor or successors,
and its nominee or nominees.
- 3 -<PAGE>
16. "Officers" shall be deemed to include the President,
any Vice President, the Secretary, the Clerk, the Treasurer,
the Controller, any Assistant Secretary, any Assistant Clerk,
any Assistant Treasurer, and any other person or persons, in-
cluding officers or employees of the Administrator, whether or
not any such other person is an officer of the Fund, duly au-
thorized by the Board of Trustees of the Fund to execute any
Certificate, instruction, notice or other instrument on behalf
of the Fund and listed in the Certificate annexed hereto as
Appendix A or such other Certificate as may be received by the
Custodian from time to time.
17. "Option" shall mean a Call Option, Covered Call Op-
tion, Stock Index Option and/or a Put Option.
18. "Oral Instructions" shall mean verbal instructions
actually received by the Custodian from an Officer or from a
person reasonably believed by the Custodian to be an Officer.
19. "Put Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and tender of the specified un-
derlying Securities, to sell such Securities to the writer
thereof for the exercise price.
20. "Reverse Repurchase Agreement" shall mean an agree-
ment pursuant to which the Fund sells Securities and agrees to
repurchase such Securities at a described or specified date
and price.
21. "Security" shall be deemed to include, without limi-
tation, Money Market Securities, Call Options, Put Options,
Stock Index Options, Stock Index Futures Contracts, Stock In-
dex Futures Contract Options, Financial Futures Contracts,
Financial Futures Contract Options, Reverse Repurchase Agree-
ments, common stocks and other securities having characteris-
tics similar to common stocks, preferred stocks, debt obliga-
tions issued by state or municipal governments and by public
authorities, (including, without limitation, general obliga-
tion bonds, revenue bonds, industrial bonds and industrial
development bonds), bonds, debentures, notes, mortgages or
other obligations, and any certificates, receipts, warrants or
other instruments representing rights to receive, purchase,
sell or subscribe for the same, or evidencing or representing
any other rights or interest therein, or any property or as-
sets.
22. "Senior Security Account" shall mean an account
maintained and specifically allocated to a Series under the
terms of this Agreement as a segregated account, by recorda-
tion or otherwise, within the custody account in which certain
- 4 -<PAGE>
Securities and/or other assets of the Fund specifically al-
located to such Series shall be deposited and withdrawn from
time to time in accordance with Certificates received by the
Custodian in connection with such transactions as the Fund may
from time to time determine.
23. "Series" shall mean the various portfolios, if any,
of the Fund as described from time to time in the current and
effective prospectus for the Fund and listed on Appendix B
hereto as amended from time to time.
24. "Shares" shall mean the shares of beneficial inter-
est of the Fund, each of which is, in the case of a Fund hav-
ing Series, allocated to a particular Series.
25. "Stock Index Futures Contract" shall mean a bilat-
eral agreement pursuant to which the parties agree to take or
make delivery of an amount of cash equal to a specified dollar
amount times the difference between the value of a particular
stock index at the close of the last business day of the con-
tract and the price at which the futures contract is origi-
nally struck.
26. "Stock Index Option" shall mean an exchange traded
option entitling the holder, upon timely exercise, to receive
an amount of cash determined by reference to the difference
between the exercise price and the value of the index on the
date of exercise.
26. "Terminal Link" shall mean an electronic data trans-
mission link between the Administrator on behalf of the Fund
and the Custodian requiring in connection with each use of the
Terminal Link by or on behalf of the Administrator on behalf
of the Fund use of an authorization code provided by the Cus-
todian and at least two access codes established by the Admin-
istrator on behalf of the Fund.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custo-
dian as custodian of the Securities and moneys at any time
owned by the Fund during the period of this Agreement.
2. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as herein-
after set forth.
- 5 -<PAGE>
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this
Article and in Article VIII, the Fund will deliver or cause to
be delivered to the Custodian all Securities and all moneys
owned by it, at any time during the period of this Agreement,
and shall specify with respect to such Securities and money
the Series to which the same are specifically allocated. The
Custodian shall segregate, keep and maintain the assets of the
Series separate and apart. The Custodian will not be respon-
sible for any Securities and moneys not actually received by
it. The Custodian will be entitled to reverse any credits
made on the Fund's behalf where such credits have been previ-
ously made and moneys are not finally collected. The Fund
shall deliver to the Custodian a certified resolution of the
Board of Trustees of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the
Custodian on a continuous and on-going basis to deposit in the
Book-Entry System all Securities eligible for deposit therein,
regardless of the Series to which the same are specifically
allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, includ-
ing, without limitation, in connection with settlements of
purchases and sales of Securities, loans of Securities and
deliveries and returns of Securities collateral. Prior to a
deposit of Securities specifically allocated to a Series in
the Depository, the Fund shall deliver to the Custodian a cer-
tified resolution of the Board of Trustees of the Fund, sub-
stantially in the form of Exhibit B hereto, approving, autho-
rizing and instructing the Custodian on a continuous and ongo-
ing basis until instructed to the contrary by a Certificate
actually received by the Custodian to deposit in the Deposi-
tory all Securities specifically allocated to such Series eli-
gible for deposit therein, and to utilize the Depository to
the extent possible with respect to such Securities in connec-
tion with its performance hereunder, including, without limi-
tation, in connection with settlements of purchases and sales
of Securities, loans of Securities, and deliveries and returns
of Securities collateral. Securities and moneys deposited in
either the Book-Entry System or the Depository will be repre-
sented in accounts which include only assets held by the Cus-
todian for customers, including, but not limited to, accounts
in which the Custodian acts in a fiduciary or representative
capacity and will be specifically allocated on the Custodian's
books to the separate account for the applicable Series.
Prior to the Custodian's accepting, utilizing and acting with
respect to Clearing Member confirmations for Options and
transactions in Options for a Series as provided in this
Agreement, the Custodian shall have received a certified reso-
lution of the Fund's Board of Trustees, substantially in the
- 6 -<PAGE>
form of Exhibit C hereto, approving, authorizing and instruct-
ing the Custodian on a continuous and on-going basis, until
instructed to the contrary by a Certificate actually received
by the Custodian, to accept, utilize and act in accordance
with such confirmations as provided in this Agreement with
respect to such Series.
2. The Custodian shall establish and maintain separate
accounts, in the name of each Series, and shall credit to the
separate account for each Series all moneys received by it for
the account of the Fund with respect to such Series. Money
credited to a separate account for a Series shall be disbursed
by the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name
and address of the person to whom the payment is to be made,
the Series account from which payment is to be made and the
purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of
the expenses and liabilities of the Custodian attributable to
such Series.
3. Promptly after the close of business on each day,
the Custodian shall furnish the Administrator with confirma-
tions and a summary, on a per Series basis, of all transfers
to or from the account of the Fund for a Series, either here-
under or with any co-custodian or sub-custodian appointed in
accordance with this Agreement during said day. Where Securi-
ties are transferred to the account of the Fund for a Series,
the Custodian shall also by book-entry or otherwise identify
as belonging to such Series a quantity of Securities in a fun-
gible bulk of Securities registered in the name of the Custo-
dian (or its nominee) or shown on the Custodian's account on
the books of the Book-Entry System or the Depository. At
least monthly and from time to time, the Custodian shall fur-
nish the Administrator with a detailed statement, on a per
Series basis, of the Securities and moneys held by the Custo-
dian for the Fund.
4. Except as otherwise provided in paragraph 7 of this
Article and in Article VIII, all Securities held by the Custo-
dian hereunder, which are issued or issuable only in bearer
form, except such Securities as are held in the Book-Entry
System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the
Fund, in the name of any duly appointed registered nominee of
the Custodian as the Custodian may from time to time deter-
mine, or in the name of the Book-Entry System or the Deposi-
tory or their successor or successors, or their nominee or
nominees. The Fund agrees to furnish or cause to be furnished
- 7 -<PAGE>
to the Custodian appropriate instruments to enable the Custo-
dian to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee or in the name
of the Book-Entry System or the Depository any Securities
which it may hold hereunder and which may from time to time be
registered in the name of the Fund. The Custodian shall hold
all such Securities specifically allocated to a Series which
are not held in the Book-Entry System or in the Depository in
a separate account in the name of such Series physically seg-
regated at all times from those of any other person or per-
sons.
5. Except as otherwise provided in this Agreement and
unless otherwise instructed to the contrary by a Certificate,
the Custodian by itself, or through the use of the Book-Entry
System or the Depository with respect to Securities held here-
under and therein deposited, shall with respect to all Securi-
ties held for the Fund hereunder in accordance with preceding
paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount pay-
able upon such Securities which are called, but only if either
(i) the Custodian receives a written notice of such call, or
(ii) notice of such call appears in one or more of the publi-
cations listed in Appendix C annexed hereto, which may be
amended at any time by the Custodian without the prior notifi-
cation or consent of the Fund;
(c) Present for payment and collect the amount pay-
able upon all Securities which mature;
(d) Surrender Securities in temporary form for de-
finitive Securities;
(e) Execute, as custodian, any necessary declara-
tions or certificates of ownership under the Federal Income
Tax Laws or the laws or regulations of any other taxing au-
thority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System
or the Depository with respect to Securities therein depos-
ited, for the account of a Series, all rights and similar se-
curities issued with respect to any Securities held by the
Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the
Custodian, directly or through the use of the Book-Entry Sys-
tem or the Depository, shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authoriza-
tions, and any other instruments whereby the authority of the
- 8 -<PAGE>
Fund as owner of any Securities held by the Custodian hereun-
der for the Series specified in such Certificate may be exer-
cised;
(b) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate in ex-
change for other Securities or cash issued or paid in con-
nection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation,
or the exercise of any conversion privilege and receive and
hold hereunder specifically allocated to such Series any cash
or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate to any
protective committee, reorganization committee or other person
in connection with the reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets of any cor-
poration, and receive and hold hereunder specifically al-
located to such Series such certificates of deposit, interim
receipts or other instruments or documents as may be issued to
it to evidence such delivery;
(d) Make such transfers or exchanges of the assets
of the Series specified in such Certificate, and take such
other steps as shall be stated in such Certificate to be for
the purpose of effectuating any duly authorized plan of liqui-
dation, reorganization, merger, consolidation or recapitaliza-
tion of the Fund; and
(e) Present for payment and collect the amount pay-
able upon Securities not described in preceding paragraph 5(b)
of this Article which may be called as specified in the Cer-
tificate.
7. Notwithstanding any provision elsewhere contained
herein, the Custodian shall not be required to obtain posses-
sion of any instrument or certificate representing any Futures
Contract, any Option, or any Futures Contract Option until
after it shall have determined, or shall have received a Cer-
tificate from the Fund stating, that any such instruments or
certificates are available. The Fund shall deliver to the
Custodian such a Certificate no later than the business day
preceding the availability of any such instrument or certifi-
cate. Prior to such availability, the Custodian shall comply
with Section 17(f) of the Investment Company Act of 1940, as
amended, in connection with the purchase, sale, settlement,
closing out or writing of Futures Contracts, Options, or Fu-
tures Contract Options by making payments or deliveries speci-
fied in Certificates received by the Custodian in connection
with any such purchase, sale, writing, settlement or closing
out upon its receipt from a broker, dealer, or futures commis-
sion merchant of a statement or confirmation reasonably be-
lieved by the Custodian to be in the form customarily used by
- 9 -<PAGE>
brokers, dealers, or future commission merchants with respect
to such Futures Contracts, Options, or Futures Contract Op-
tions, as the case may be, confirming that such Security is
held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or
any nominee of the Custodian) as custodian for the Fund, pro-
vided, however, that notwithstanding the foregoing, payments
to or deliveries from the Margin Account and payments with
respect to Securities to which a Margin Account relates, shall
be made in accordance with the terms and conditions of the
Margin Account Agreement. Whenever any such instruments or
certificates are available, the Custodian shall, notwithstand-
ing any provision in this Agreement to the contrary, make pay-
ment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are
available only against the delivery to the Custodian of such
instrument or such certificate, and deliver any Futures Con-
tract, Option or Futures Contract Option for which such in-
struments or such certificates are available only against re-
ceipt by the Custodian of payment therefor. Any such instru-
ment or certificate delivered to the Custodian shall be held
by the Custodian hereunder in accordance with, and subject to,
the provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the
Fund, other than a purchase of an Option, a Futures Contract,
or a Futures Contract Option, the Fund shall deliver or cause
the Administrator to deliver to the Custodian (i) with respect
to each purchase of Securities which are not Money Market Se-
curities, a Certificate, and (ii) with respect to each pur-
chase of Money Market Securities, a Certificate or Oral In-
structions, specifying with respect to each such purchase: (a)
the Series to which such Securities are to be specifically
allocated; (b) the name of the issuer and the title of the
Securities; (c) the number of shares or the principal amount
purchased and accrued interest, if any; (d) the date of pur-
chase and settlement; (e) the purchase price per unit; (f) the
total amount payable upon such purchase; (g) the name of the
person from whom or the broker through whom the purchase was
made, and the name of the clearing broker, if any; and (h) the
name of the broker to whom payment is to be made. The Custo-
dian shall, upon receipt of Securities purchased by or for the
Fund, pay to the broker specified in the Certificate out of
the moneys held for the account of such Series the total
- 10 -<PAGE>
amount payable upon such purchase, provided that the same con-
forms to the total amount payable as set forth in such Cer-
tificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund,
other than a sale of any Option, Futures Contract, Futures
Contract Option, or any Reverse Repurchase Agreement, the Fund
shall deliver or cause the Administrator to deliver to the
Custodian (i) with respect to each sale of Securities which
are not Money Market Securities, a Certificate, and (ii) with
respect to each sale of Money Market Securities, a Certificate
or Oral Instructions, specifying with respect to each such
sale: (a) the Series to which such Securities were specifi-
cally allocated; (b) the name of the issuer and the title of
the Security; (c) the number of shares or principal amount
sold, and accrued interest, if any; (d) the date of sale; (e)
the sale price per unit; (f) the total amount payable to the
Fund upon such sale; (g) the name of the broker through whom
or the person to whom the sale was made, and the name of the
clearing broker, if any; and (h) the name of the broker to
whom the Securities are to be delivered. The Custodian shall
deliver the Securities specifically allocated to such Series
to the broker specified in the Certificate against payment
upon receipt of the total amount payable to the Fund upon such
sale, provided that the same conforms to the total amount pay-
able as set forth in such Certificate or Oral Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the
Fund, the Fund shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to each Option purchased: (a) the Series to which such Option
is specifically allocated; (b) the type of Option (put or
call); (c) the name of the issuer and the title and number of
shares subject to such Option or, in the case of a Stock Index
Option, the stock index to which such Option relates and the
number of Stock Index Options purchased; (d) the expiration
date; (e) the exercise price; (f) the dates of purchase and
settlement; (g) the total amount payable by the Fund in con-
nection with such purchase; (h) the name of the Clearing Mem-
ber through whom such Option was purchased; and (i) the name
of the broker to whom payment is to be made. The Custodian
shall pay, upon receipt of a Clearing Member's statement con-
firming the purchase of such Option held by such Clearing Mem-
ber for the account of the Custodian (or any duly appointed
and registered nominee of the Custodian) as custodian for the
Fund, out of moneys held for the account of the Series to
which such Option is to be specifically allocated, the total
amount payable upon such purchase to the Clearing Member
- 11 -<PAGE>
through whom the purchase was made, provided that the same
conforms to the total amount payable as set forth in such Cer-
tificate.
2. Promptly after the sale of any Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall de-
liver or cause the Administrator to deliver to the Custodian a
Certificate specifying with respect to each such sale: (a) the
Series to which such Option was specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer
and the title and number of shares subject to such Option or,
in the case of a Stock Index Option, the stock index to which
such Option relates and the number of Stock Index Options
sold; (d) the date of sale; (e) the sale price; (f) the date
of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the Clearing Member through
whom the sale was made. The Custodian shall consent to the
delivery of the Option sold by the Clearing Member which pre-
viously supplied the confirmation described in preceding para-
graph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the
Fund, provided that the same conforms to the total amount pay-
able as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call
Option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying with respect to such
Call Option: (a) the Series to which such Call Option was spe-
cifically allocated; (b) the name of the issuer and the title
and number of shares subject to the Call Option; (c) the expi-
ration date; (d) the date of exercise and settlement; (e) the
exercise price per share; (f) the total amount to be paid by
the Fund upon such exercise; and (g) the name of the Clearing
Member through whom such Call Option was exercised. The Cus-
todian shall, upon receipt of the Securities underlying the
Call Option which was exercised, pay out of the moneys held
for the account of the Series to which such Call Option was
specifically allocated the total amount payable to the Clear-
ing Member through whom the Call Option was exercised, pro-
vided that the same conforms to the total amount payable as
set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put
Option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying with respect to such
Put Option: (a) the Series to which such Put Option was spe-
cifically allocated; (b) the name of the issuer and the title
and number of shares subject to the Put Option; (c) the expi-
ration date; (d) the date of exercise and settlement; (e) the
exercise price per share; (f) the total amount to be paid to
the Fund upon such exercise; and (g) the name of the Clearing
- 12 -<PAGE>
Member through whom such Put Option was exercised. The Custo-
dian shall, upon receipt of the amount payable upon the exer-
cise of the Put Option, deliver or direct the Depository to
deliver the Securities specifically allocated to such Series,
provided the same conforms to the amount payable to the Fund
as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock
Index Option purchased by the Fund pursuant to paragraph 1
hereof, the Fund shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to such Stock Index Option: (a) the Series to which such Stock
Index Option was specifically allocated; (b) the type of Stock
Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates;
(e) the expiration date; (f) the exercise price; (g) the total
amount to be received by the Fund in connection with such ex-
ercise; and (h) the Clearing Member from whom such payment is
to be received.
6. Whenever the Fund writes a Covered Call Option, the
Fund shall deliver or cause the Administrator to deliver to
the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered
Call Option was written; (b) the name of the issuer and the
title and number of shares for which the Covered Call Option
was written and which underlie the same; (c) the expiration
date; (d) the exercise price; (e) the premium to be received
by the Fund; (f) the date such Covered Call Option was writ-
ten; and (g) the name of the Clearing Member through whom the
premium is to be received. The Custodian shall deliver or
cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call
Option, such receipts as are required in accordance with the
customs prevailing among Clearing Members dealing in Covered
Call Options and shall impose, or direct the Depository to
impose, upon the underlying Securities specified in the Cer-
tificate specifically allocated to such Series such restric-
tions as may be required by such receipts. Notwithstanding
the foregoing, the Custodian has the right, upon prior written
notification to the Fund, at any time to refuse to issue any
receipts for Securities in the possession of the Custodian and
not deposited with the Depository underlying a Covered Call
Option.
7. Whenever a Covered Call Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall deliver or cause the Administrator
to deliver to the Custodian a Certificate instructing the Cus-
todian to deliver, or to direct the Depository to deliver, the
Securities subject to such Covered Call Option and specifying:
(a) the Series for which such Covered Call Option was written;
(b) the name of the issuer and the title and number of shares
subject to the Covered Call Option; (c) the Clearing Member to
- 13 -<PAGE>
whom the underlying Securities are to be delivered; and (d)
the total amount payable to the Fund upon such delivery. Upon
the return and/or cancellation of any receipts delivered pur-
suant to paragraph 6 of this Article, the Custodian shall de-
liver, or direct the Depository to deliver, the underlying
Securities as specified in the Certificate against payment of
the amount to be received as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund
shall deliver or cause the Administrator to deliver to the
Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written;
(b) the name of the issuer and the title and number of shares
for which the Put Option is written and which underlie the
same; (c) the expiration date; (d) the exercise price; (e) the
premium to be received by the Fund; (f) the date such Put Op-
tion is written; (g) the name of the Clearing Member through
whom the premium is to be received and to whom a Put Option
guarantee letter is to be delivered; (h) the amount of cash,
and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Secu-
rity Account for such Series; and (i) the amount of cash
and/or the amount and kind of Securities specifically al-
located to such Series to be deposited into the Collateral
Account for such Series. The Custodian shall, after making
the deposits into the Collateral Account specified in the Cer-
tificate, issue a Put Option guarantee letter substantially in
the form utilized by the Custodian on the date hereof, and
deliver the same to the Clearing Member specified in the Cer-
tificate against receipt of the premium specified in said Cer-
tificate. Notwithstanding the foregoing, the Custodian shall
be under no obligation to issue any Put Option guarantee let-
ter or similar document if it is unable to make any of the
representations contained therein.
9. Whenever a Put Option written by the Fund and de-
scribed in the preceding paragraph is exercised, the Fund
shall deliver or cause the Administrator to deliver to the
Custodian a Certificate specifying: (a) the Series to which
such Put Option was written; (b) the name of the issuer and
title and number of shares subject to the Put Option; (c) the
Clearing Member from whom the underlying Securities are to be
received; (d) the total amount payable by the Fund upon such
delivery; (e) the amount of cash and/or the amount and kind of
Securities specifically allocated to such Series to be with-
drawn from the Collateral Account for such Series and (f) the
amount of cash and/or the amount and kind of Securities, spe-
cifically allocated to such Series, if any, to be withdrawn
from the Senior Security Account. Upon the return and/or
cancellation of any Put Option guarantee letter or similar
document issued by the Custodian in connection with such Put
Option, the Custodian shall pay out of the moneys held for the
- 14 -<PAGE>
account of the Series to which such Put Option was specifi-
cally allocated the total amount payable to the Clearing Mem-
ber specified in the Certificate as set forth in such Certifi-
cate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the
Fund shall deliver or cause the Administrator to deliver to
the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index
Option was written; (b) whether such Stock Index Option is a
put or a call; (c) the number of options written; (d) the
stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the Clearing Member through
whom such Option was written; (h) the premium to be received
by the Fund; (i) the amount of cash and/or the amount and kind
of Securities, if any, specifically allocated to such Series
to be deposited in the Senior Security Account for such Se-
ries; (j) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to
be deposited in the Collateral Account for such Series; and
(k) the amount of cash and/or the amount and kind of Securi-
ties, if any, specifically allocated to such Series to be de-
posited in a Margin Account, and the name in which such ac-
count is to be or has been established. The Custodian shall,
upon receipt of the premium specified in the Certificate, make
the deposits, if any, into the Senior Security Account speci-
fied in the Certificate, and either (1) deliver such receipts,
if any, which the Custodian has specifically agreed to issue,
which are in accordance with the customs prevailing among
Clearing Members in Stock Index Options and make the deposits
into the Collateral Account specified in the Certificate, or
(2) make the deposits into the Margin Account specified in the
Certificate.
11. Whenever a Stock Index Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall deliver or cause the Administrator
to deliver to the Custodian a Certificate specifying with re-
spect to such Stock Index Option: (a) the Series for which
such Stock Index Option was written; (b) such information as
may be necessary to identify the Stock Index Option being ex-
ercised; (c) the Clearing Member through whom such Stock Index
Option is being exercised; (d) the total amount payable upon
such exercise, and whether such amount is to be paid by or to
the Fund; (e) the amount of cash and/or amount and kind of
Securities, if any, to be withdrawn from the Margin Account;
and (f) the amount of cash and/or amount and kind of Securi-
ties, if any, to be withdrawn from the Senior Security Account
for such Series; and the amount of cash and/or the amount and
kind of Securities, if any, to be withdrawn from the Col-
lateral Account for such Series. Upon the return and/or can-
cellation of the receipt, if any, delivered pursuant to the
preceding paragraph of this Article, the Custodian shall pay
- 15 -<PAGE>
out of the moneys held for the account of the Series to which
such Stock Index Option was specifically allocated to the
Clearing Member specified in the Certificate the total amount
payable, if any, as specified therein.
12. Whenever the Fund purchases any Option identical to
a previously written Option described in paragraphs, 6, 8 or
10 of this Article in a transaction expressly designated as a
"Closing Purchase Transaction" in order to liquidate its posi-
tion as a writer of an Option, the Fund shall deliver or cause
the Administrator to deliver to the Custodian a Certificate
specifying with respect to the Option being purchased: (a)
that the transaction is a Closing Purchase Transaction; (b)
the Series for which the Option was written; (c) the name of
the issuer and the title and number of shares subject to the
Option, or, in the case of a Stock Index Option, the stock
index to which such Option relates and the number of Options
held; (d) the exercise price; (e) the premium to be paid by
the Fund; (f) the expiration date; (g) the type of Option (put
or call); (h) the date of such purchase; (i) the name of the
Clearing Member to whom the premium is to be paid; and (j) the
amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified
Margin Account, or the Senior Security Account for such Se-
ries. Upon the Custodian's payment of the premium and the
return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Op-
tion being liquidated through the Closing Purchase Transac-
tion, the Custodian shall remove, or direct the Depository to
remove, the previously imposed restrictions on the Securities
underlying the Call Option.
13. Upon the expiration, exercise or consummation of a
Closing Purchase Transaction with respect to any Option pur-
chased or written by the Fund and described in this Article,
the Custodian shall delete such Option from the statements
delivered to the Fund pursuant to paragraph 3 Article III
herein, and upon the return and/or cancellation of any re-
ceipts issued by the Custodian, shall make such withdrawals
from the Collateral Account, and the Margin Account and/or the
Senior Security Account as may be specified in a Certificate
received in connection with such expiration, exercise, or con-
summation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Con-
tract, the Fund shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to such Futures Contract, (or with respect to any number of
- 16 -<PAGE>
identical Futures Contract(s)): (a) the Series for which the
Futures Contract is being entered; (b) the category of Futures
Contract (the name of the underlying stock index or financial
instrument); (c) the number of identical Futures Contracts
entered into; (d) the delivery or settlement date of the Fu-
tures Contract(s); (e) the date the Futures Contract(s) was
(were) entered into and the maturity date; (f) whether the
Fund is buying (going long) or selling (going short) on such
Futures Contract(s); (g) the amount of cash and/or the amount
and kind of Securities, if any, to be deposited in the Senior
Security Account for such Series; (h) the name of the broker,
dealer, or futures commission merchant through whom the Fu-
tures Contract was entered into; and (i) the amount of fee or
commission, if any, to be paid and the name of the broker,
dealer, or futures commission merchant to whom such amount is
to be paid. The Custodian shall make the deposits, if any, to
the Margin Account in accordance with the terms and conditions
of the Margin Account Agreement. The Custodian shall make
payment out of the moneys specifically allocated to such Se-
ries of the fee or commission, if any, specified in the Cer-
tificate and deposit in the Senior Security Account for such
Series the amount of cash and/or the amount and kind of Secu-
rities specified in said Certificate.
2. (a) Any variation margin payment or similar payment
required to be made by the Fund to a broker, dealer, or fu-
tures commission merchant with respect to an outstanding Fu-
tures Contract, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment
from a broker, dealer, or futures commission merchant to the
Fund with respect to an outstanding Futures Contract, shall be
received and dealt with by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian
hereunder is retained by the Fund until delivery or settlement
is made on such Futures Contract, the Fund shall deliver or
cause the Administrator to deliver to the Custodian a Certifi-
cate specifying: (a) the Futures Contract and the Series to
which the same relates; (b) with respect to a Stock Index Fu-
tures Contract, the total cash settlement amount to be paid or
received, and with respect to a Financial Futures Contract,
the Securities and/or amount of cash to be delivered or re-
ceived; (c) the broker, dealer, or futures commission merchant
to or from whom payment or delivery is to be made or received;
and (d) the amount of cash and/or Securities to be withdrawn
from the Senior Security Account for such Series. The Custo-
dian shall make the payment or delivery specified in the Cer-
tificate, and delete such Futures Contract from the statements
delivered to the Fund pursuant to paragraph 3 of Article III
herein.
- 17 -<PAGE>
4. Whenever the Fund shall enter into a Futures Con-
tract to offset a Futures Contract held by the Custodian here-
under, the Fund shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying: (a) the
items of information required in a Certificate described in
paragraph 1 of this Article, and (b) the Futures Contract be-
ing offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commis-
sion, if any, specified in the Certificate and delete the Fu-
tures Contract being offset from the statements delivered to
the Fund pursuant to paragraph 3 of Article III herein, and
make such withdrawals from the Senior Security Account for
such Series as may be specified in such Certificate. The
withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and con-
ditions of the Margin Account Agreement.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract
Option by the Fund, the Fund shall deliver or cause the Admin-
istrator to deliver to the Custodian a Certificate specifying
with respect to such Futures Contract Option: (a) the Series
to which such Option is specifically allocated; (b) the type
of Futures Contract Option (put or call); (c) the type of Fu-
tures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Con-
tract Option purchased; (d) the expiration date; (e) the exer-
cise price; (f) the dates of purchase and settlement; (g) the
amount of premium to be paid by the Fund upon such purchase;
(h) the name of the broker or futures commission merchant
through whom such option was purchased; and (i) the name of
the broker, or futures commission merchant, to whom payment is
to be made. The Custodian shall pay out of the moneys spe-
cifically allocated to such Series, the total amount to be
paid upon such purchase to the broker or futures commissions
merchant through whom the purchase was made, provided that the
same conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Op-
tion purchased by the Fund pursuant to paragraph 1 hereof, the
Fund shall deliver or cause the Administrator to deliver to
the Custodian a Certificate specifying with respect to each
such sale: (a) Series to which such Futures Contract Option
was specifically allocated; (b) the type of Future Contract
Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d)
the date of sale; (e) the sale price; (f) the date of settle-
ment; (g) the total amount payable to the Fund upon such sale;
- 18 -<PAGE>
and (h) the name of the broker of futures commission merchant
through whom the sale was made. The Custodian shall consent
to the cancellation of the Futures Contract Option being
closed against payment to the Custodian of the total amount
payable to the Fund, provided the same conforms to the total
amount payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the
Fund pursuant to paragraph 1 is exercised by the Fund, the
Fund shall deliver or cause the Administrator to deliver to
the Custodian a Certificate specifying: (a) the Series to
which such Futures Contract Option was specifically allocated;
(b) the particular Futures Contract Option (put or call) being
exercised; (c) the type of Futures Contract underlying the
Futures Contract Option; (d) the date of exercise; (e) the
name of the broker or futures commission merchant through whom
the Futures Contract Option is exercised; (f) the net total
amount, if any, payable by the Fund; (g) the amount, if any,
to be received by the Fund; and (h) the amount of cash and/or
the amount and kind of Securities to be deposited in the Se-
nior Security Account for such Series. The Custodian shall
make, out of the moneys and Securities specifically allocated
to such Series, the payments, if any, and the deposits, if
any, into the Senior Security Account as specified in the Cer-
tificate. The deposits, if any, to be made to the Margin Ac-
count shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option,
the Fund shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures
Contract Option was written; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d)
the expiration date; (e) the exercise price; (f) the premium
to be received by the Fund; (g) the name of the broker or fu-
tures commission merchant through whom the premium is to be
received; and (h) the amount of cash and/or the amount and
kind of Securities, if any, to be deposited in the Senior Se-
curity Account for such Series. The Custodian shall, upon
receipt of the premium specified in the Certificate, make out
of the moneys and Securities specifically allocated to such
Series the deposits into the Senior Security Account, if any,
as specified in the Certificate. The deposits, if any, to be
made to the Margin Account shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account
Agreement.
5. Whenever a Futures Contract Option written by the
Fund which is a call is exercised, the Fund shall deliver or
cause the Administrator to deliver to the Custodian a Certifi-
cate specifying: (a) the Series to which such Futures Contract
- 19 -<PAGE>
Option was specifically allocated; (b) the particular Futures
Contract Option exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Fu-
tures Contract Option was exercised; (e) the net total amount,
if any, payable to the Fund upon such exercise; (f) the net
total amount, if any, payable by the Fund upon such exercise;
and (g) the amount of cash and/or the amount and kind of Secu-
rities to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon its receipt of the net to-
tal amount payable to the Fund, if any, specified in such Cer-
tificate make the payments, if any, and the deposits, if any,
into the Senior Security Account as specified in the Certifi-
cate. The deposits, if any, to be made to the Margin Account
shall be made by the Custodian in accordance with the terms
and conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written
by the Fund and which is a put is exercised, the Fund shall
deliver or cause the Administrator to deliver to the Custodian
a Certificate specifying: (a) the Series to which such Option
was specifically allocated; (b) the particular Futures Con-
tract Option exercised; (c) the type of Futures Contract un-
derlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Fu-
tures Contract Option is exercised; (e) the net total amount,
if any, payable to the Fund upon such exercise; (f) the net
total amount, if any, payable by the Fund upon such exercise;
and (g) the amount and kind of Securities and/or cash to be
withdrawn from or deposited in, the Senior Security Account
for such Series, if any. The Custodian shall, upon its re-
ceipt of the net total amount payable to the Fund, if any,
specified in the Certificate, make out of the moneys and Secu-
rities specifically allocated to such Series, the payments, if
any, and the deposits, if any, into the Senior Security Ac-
count as specified in the Certificate. The deposits to and/or
withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract
Option identical to a previously written Futures Contract Op-
tion described in this Article in order to liquidate its posi-
tion as a writer of such Futures Contract Option, the Fund
shall deliver or cause the Administrator to deliver to the
Custodian a Certificate specifying with respect to the Futures
Contract Option being purchased: (a) the Series to which such
Option is specifically allocated; (b) that the transaction is
a closing transaction; (c) the type of Future Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Option Contract; (d)
the exercise price; (e) the premium to be paid by the Fund;
(f) the expiration date; (g) the name of the broker or futures
commission merchant to whom the premium is to be paid; and (h)
- 20 -<PAGE>
the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for
such Series. The Custodian shall effect the withdrawals from
the Senior Security Account specified in the Certificate. The
withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and con-
ditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a
closing transaction with respect to, any Futures Contract Op-
tion written or purchased by the Fund and described in this
Article, the Custodian shall (a) delete such Futures Contract
Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdraw-
als from and/or in the case of an exercise such deposits into
the Senior Security Account as may be specified in a Certifi-
cate. The deposits to and/or withdrawals from the Margin Ac-
count, if any, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the
exercise of a Futures Contract Option described in this Ar-
ticle shall be subject to Article VI hereof.
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of the
Fund, the Fund shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying: (a) the
Series for which such short sale was made; (b) the name of the
issuer and the title of the Security; (c) the number of shares
or principal amount sold, and accrued interest or dividends,
if any; (d) the dates of the sale and settlement; (e) the sale
price per unit; (f) the total amount credited to the Fund upon
such sale, if any, (g) the amount of cash and/or the amount
and kind of Securities, if any, which are to be deposited in a
Margin Account and the name in which such Margin Account has
been or is to be established; (h) the amount of cash and/or
the amount and kind of Securities, if any, to be deposited in
a Senior Security Account, and (i) the name of the broker
through whom such short sale was made. The Custodian shall
upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund upon
such sale, if any, as specified in the Certificate is held by
such broker for the account of the Custodian (or any nominee
of the Custodian) as custodian of the Fund, issue a receipt or
make the deposits into the Margin Account and the Senior Secu-
rity Account specified in the Certificate.
- 21 -<PAGE>
2. In connection with the closing-out of any short
sale, the Fund shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to each such closing out: (a) the Series for which such
transaction is being made; (b) the name of the issuer and the
title of the Security; (c) the number of shares or the princi-
pal amount, and accrued interest or dividends, if any, re-
quired to effect such closing-out to be delivered to the bro-
ker; (d) the dates of closing-out and settlement; (e) the pur-
chase price per unit; (f) the net total amount payable to the
Fund upon such closing-out; (g) the net total amount payable
to the broker upon such closing-out; (h) the amount of cash
and the amount and kind of Securities to be withdrawn, if any,
from the Margin Account; (i) the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from
the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Cus-
todian shall, upon receipt of the net total amount payable to
the Fund upon such closing-out, and the return and/ or cancel-
lation of the receipts, if any, issued by the Custodian with
respect to the short sale being closed-out, pay out of the
moneys held for the account of the Fund to the broker the net
total amount payable to the broker, and make the withdrawals
from the Margin Account and the Senior Security Account, as
the same are specified in the Certificate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase
Agreement with respect to Securities and money held by the
Custodian hereunder, the Fund shall deliver or cause the Ad-
ministrator to deliver to the Custodian a Certificate, or in
the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions specifying: (a)
the Series for which the Reverse Repurchase Agreement is en-
tered; (b) the total amount payable to the Fund in connection
with such Reverse Repurchase Agreement and specifically al-
located to such Series; (c) the broker or dealer through or
with whom the Reverse Repurchase Agreement is entered; (d) the
amount and kind of Securities to be delivered by the Fund to
such broker or dealer; (e) the date of such Reverse Repurchase
Agreement; and (f) the amount of cash and/or the amount and
kind of Securities, if any, specifically allocated to such
Series to be deposited in a Senior Security Account for such
Series in connection with such Reverse Repurchase Agreement.
The Custodian shall, upon receipt of the total amount payable
to the Fund specified in the Certificate or Oral Instructions
make the delivery to the broker or dealer, and the deposits,
if any, to the Senior Security Account, specified in such Cer-
tificate or Oral Instructions.
- 22 -<PAGE>
2. Upon the termination of a Reverse Repurchase Agree-
ment described in preceding paragraph 1 of this Article, the
Fund shall deliver or cause the Administrator to deliver a
Certificate or, in the event such Reverse Repurchase Agreement
is a Money Market Security, a Certificate or Oral Instructions
to the Custodian specifying: (a) the Reverse Repurchase Agree-
ment being terminated and the Series for which same was en-
tered; (b) the total amount payable by the Fund in connection
with such termination; (c) the amount and kind of Securities
to be received by the Fund and specifically allocated to such
Series in connection with such termination; (d) the date of
termination; (e) the name of the broker or dealer with or
through whom the Reverse Repurchase Agreement is to be termi-
nated; and (f) the amount of cash and/or the amount and kind
of Securities to be withdrawn from the Senior Securities Ac-
count for such Series. The Custodian shall, upon receipt of
the amount and kind of Securities to be received by the Fund
specified in the Certificate or Oral Instructions, make the
payment to the broker or dealer, and the withdrawals, if any,
from the Senior Security Account, specified in such Certifi-
cate or Oral Instructions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities
specifically allocated to a Series held by the Custodian here-
under, the Fund shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to each such loan: (a) the Series to which the loaned Securi-
ties are specifically allocated; (b) the name of the issuer
and the title of the Securities, (c) the number of shares or
the principal amount loaned, (d) the date of loan and deliv-
ery, (e) the total amount to be delivered to the Custodian
against the loan of the Securities, including the amount of
cash collateral and the premium, if any, separately identi-
fied, and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall
deliver the Securities thus designated to the broker, dealer
or financial institution to which the loan was made upon re-
ceipt of the total amount designated as to be delivered
against the loan of Securities. The Custodian may accept pay-
ment in connection with a delivery otherwise than through the
Book-Entry System or Depository only in the form of a certi-
fied or bank cashier's check payable to the order of the Fund
or the Custodian drawn on New York Clearing House funds and
may deliver Securities in accordance with the customs prevail-
ing among dealers in securities.
- 23 -<PAGE>
2. Promptly after each termination of the loan of Secu-
rities by the Fund, the Fund shall deliver or cause the Admin-
istrator to deliver to the Custodian a Certificate specifying
with respect to each such loan termination and return of Secu-
rities: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the
title of the Securities to be returned, (c) the number of
shares or the principal amount to be returned, (d) the date of
termination, (e) the total amount to be delivered by the Cus-
todian (including the cash collateral for such Securities mi-
nus any offsetting credits as described in said Certificate),
and (f) the name of the broker, dealer, or financial institu-
tion from which the Securities will be returned. The Custo-
dian shall receive all Securities returned from the broker,
dealer, or financial institution to which such Securities were
loaned and upon receipt thereof shall pay, out of the moneys
held for the account of the Fund, the total amount payable
upon such return of Securities as set forth in the Certifi-
cate.
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such
deposits to, or withdrawals from, a Senior Security Account as
specified in a Certificate received by the Custodian. Such
Certificate shall specify the Series for which such deposit or
withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such
Series to be deposited in, or withdrawn from, such Senior Se-
curity Account for such Series. In the event the Certificate
fails to specify the Series, the name of the issuer, the title
and the number of shares or the principal amount of any par-
ticular Securities to be deposited by the Custodian into, or
withdrawn from, a Senior Securities Account, the Custodian
shall be under no obligation to make any such deposit or with-
drawal and shall so notify the Administrator.
2. The Custodian shall make deliveries or payments from
a Margin Account to the broker, dealer, futures commission
merchant or Clearing Member in whose name, or for whose ben-
efit, the account was established as specified in the Margin
Account Agreement.
3. Amounts received by the Custodian as payments or
distributions with respect to Securities deposited in any Mar-
gin Account shall be dealt with in accordance with the terms
and conditions of the Margin Account Agreement.
- 24 -<PAGE>
4. The Custodian shall have a continuing lien and secu-
rity interest in and to any property at any time held by the
Custodian in any Collateral Account described herein. In ac-
cordance with applicable law the Custodian may enforce its
lien and realize on any such property whenever the Custodian
has made payment or delivery pursuant to any Put Option guar-
antee letter or similar document or any receipt issued hereun-
der by the Custodian. In the event the Custodian should real-
ize on any such property net proceeds which are less than the
Custodian's obligations under any Put Option guarantee letter
or similar document or any receipt, such deficiency shall be a
debt owed the Custodian by the Fund within the scope of Ar-
ticle XIV herein.
5. On each business day the Custodian shall furnish the
Fund with a statement with respect to each Margin Account in
which money or Securities are held specifying as of the close
of business on the previous business day: (a) the name of the
Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custo-
dian shall make available upon request to any broker, dealer,
or futures commission merchant specified in the name of a Mar-
gin Account a copy of the statement furnished the Fund with
respect to such Margin Account.
6. Promptly after the close of business on each busi-
ness day in which cash and/or Securities are maintained in a
Collateral Account for any Series, the Custodian shall furnish
the Administrator with a statement with respect to such Col-
lateral Account specifying the amount of cash and/or the
amount and kind of Securities held therein. No later than the
close of business next succeeding the delivery to the Fund of
such statement, the Fund shall deliver or cause the Adminis-
trator to deliver to the Custodian a Certificate specifying
the then market value of the Securities described in such
statement. In the event such then market value is indicated
to be less than the Custodian's obligation with respect to any
outstanding Put Option guarantee letter or similar document,
the Fund shall promptly specify or cause the Administrator to
promptly specify in a Certificate the additional cash and/or
Securities to be deposited in such Collateral Account to
eliminate such deficiency.
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall deliver or cause the Administrator to
deliver to the Custodian a copy of the resolution of the Board
of Trustees of the Fund, certified by the Secretary, the
Clerk, any Assistant Secretary or any Assistant Clerk, either
(i) setting forth with respect to the Series specified therein
- 25 -<PAGE>
the date of the declaration of a dividend or distribution, the
date of payment thereof, the record date as of which share-
holders entitled to payment shall be determined, the amount
payable per Share of such Series to the shareholders of record
as of that date and the total amount payable to the Dividend
Agent and any sub-dividend agent or co-dividend agent of the
Fund on the payment date, or (ii) authorizing with respect to
the Series specified therein the declaration of dividends and
distributions on a daily basis and authorizing the Custodian
to rely on Oral Instructions or a Certificate setting forth
the date of the declaration of such dividend or distribution,
the date of payment thereof, the record date as of which
shareholders entitled to payment shall be determined, the
amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the
Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution,
Oral Instructions or Certificate, as the case may be, the Cus-
todian shall pay out of the moneys held for the account of
each Series the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund with
respect to such Series.
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall
deliver or cause the Administrator to deliver to the Custodian
a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade
date, and price; and
(b) The amount of money to be received by the Cus-
todian for the sale of such Shares and specifically allocated
to the separate account in the name of such Series.
2. Upon receipt of such money from the Transfer Agent,
the Custodian shall credit such money to the separate account
in the name of the Series for which such money was received.
3. Upon issuance of any Shares of any Series described
in the foregoing provisions of this Article, the Custodian
shall pay, out of the money held for the account of such Se-
ries, all original issue or other taxes required to be paid by
the Fund in connection with such issuance upon the receipt of
a Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund
desires the Custodian to make payment out of the money held by
- 26 -<PAGE>
the Custodian hereunder in connection with a redemption of any
Shares, it shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying:
(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice
setting forth the Series and number of Shares received by the
Transfer Agent for redemption and that such Shares are in good
form for redemption, the Custodian shall make payment to the
Transfer Agent out of the moneys held in the separate account
in the name of the Series the total amount specified in the
Certificate delivered pursuant to the foregoing paragraph 4 of
this Article.
6. Notwithstanding the above provisions regarding the
redemption of any Shares, whenever any Shares are redeemed
pursuant to any check redemption privilege which may from time
to time be offered by the Fund, the Custodian, unless other-
wise instructed by a Certificate, shall, upon receipt of an
advice from the Fund or its agent setting forth that the re-
demption is in good form for redemption in accordance with the
check redemption procedure, honor the check presented as part
of such check redemption privilege out of the moneys held in
the separate account of the Series of the Shares being re-
deemed.
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion ad-
vance funds on behalf of any Series which results in an over-
draft because the moneys held by the Custodian in the separate
account for such Series shall be insufficient to pay the total
amount payable upon a purchase of Securities specifically al-
located to such Series, as set forth in a Certificate or Oral
Instructions, or which results in an overdraft in the separate
account of such Series for some other reason, or if the Fund
is for any other reason indebted to the Custodian with respect
to a Series, including any indebtedness to The Bank of New
York under the Fund's Cash Management and Related Services
Agreement, (except a borrowing for investment or for temporary
or emergency purposes using Securities as collateral pursuant
to a separate agreement and subject to the provisions of para-
graph 2 of this Article), such overdraft or indebtedness shall
be deemed to be a loan made by the Custodian to the Fund for
such Series payable on demand and shall bear interest from the
date incurred at a rate per annum (based on a 360-day year for
the actual number of days involved) equal to 1/2% over
- 27 -<PAGE>
Custodian's prime commercial lending rate in effect from time
to time, such rate to be adjusted on the effective date of any
change in such prime commercial lending rate but in no event
to be less than 6% per annum. In addition, the Fund hereby
agrees that the Custodian shall have a continuing lien and
security interest in and to any property specifically al-
located to such Series at any time held by it for the benefit
of such Series or in which the Fund may have an interest which
is then in the Custodian's possession or control or in posses-
sion or control of any third party acting in the Custodian's
behalf. The Fund authorizes the Custodian, in its sole dis-
cretion, at any time to charge any such overdraft or indebted-
ness together with interest due thereon against any balance of
account standing to such Series' credit on the Custodian's
books. In addition, the Fund hereby covenants that on each
Business Day on which either it intends to enter a Reverse
Repurchase Agreement and/or otherwise borrow from a third
party, or which next succeeds a Business Day on which at the
close of business the Fund had outstanding a Reverse Repur-
chase Agreement or such a borrowing, it shall prior to 9 a.m.,
New York City time, advise the Custodian, in writing, of each
such borrowing, shall specify the Series to which the same
relates, and shall not incur any indebtedness not so specified
other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian
by any bank (including, if the borrowing is pursuant to a
separate agreement, the Custodian) from which it borrows money
for investment or for temporary or emergency purposes using
Securities held by the Custodian hereunder as collateral for
such borrowings, a notice or undertaking in the form currently
employed by any such bank setting forth the amount which such
bank will loan to the Fund against delivery of a stated amount
of collateral. The Fund shall promptly deliver to the Custo-
dian a Certificate specifying with respect to each such bor-
rowing: (a) the Series to which such borrowing relates; (b)
the name of the bank, (c) the amount and terms of the borrow-
ing, which may be set forth by incorporating by reference an
attached promissory note, duly endorsed by the Fund, or other
loan agreement, (d) the time and date, if known, on which the
loan is to be entered into, (e) the date on which the loan
becomes due and payable, (f) the total amount payable to the
Fund on the borrowing date, (g) the market value of Securities
to be delivered as collateral for such loan, including the
name of the issuer, the title and the number of shares or the
principal amount of any particular Securities, and (h) a
statement specifying whether such loan is for investment pur-
poses or for temporary or emergency purposes and that such
loan is in conformance with the Investment Company Act of 1940
and the Fund's prospectus. The Custodian shall deliver on the
borrowing date specified in a Certificate the specified col-
lateral and the executed promissory note, if any, against de-
livery by the lending bank of the total amount of the loan
payable, provided that the same conforms to the total amount
- 28 -<PAGE>
payable as set forth in the Certificate. The Custodian may,
at the option of the lending bank, keep such collateral in its
possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such Se-
curities as additional collateral as may be specified in a
Certificate to collateralize further any transaction described
in this paragraph. The Fund shall cause all Securities re-
leased from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time
such return of collateral as may be tendered to it. In the
event that the Fund fails to specify in a Certificate the Se-
ries, the name of the issuer, the title and number of shares
or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall
not be under any obligation to deliver any Securities.
ARTICLE XV
TERMINAL LINK
1. At no time and under no circumstances shall the Ad-
ministrator on behalf of the Fund be obligated to have or uti-
lize the Terminal Link, and the provisions of this Article
shall apply if, but only if, the Fund in its sole and absolute
discretion directs the Administrator to utilize the Terminal
Link to transmit Certificates to the Custodian.
2. The Terminal Link shall be utilized by the Adminis-
trator on behalf of the Fund only for the purpose of providing
Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be ap-
plied to the payment of dividends, distributions or redemp-
tions of Fund Shares, and shall be utilized by the Custodian
only for the purpose of providing notices to the Administra-
tor. Such use shall commence only after the Fund shall have
delivered or caused the Administrator to have delivered to the
Custodian a Certificate substantially in the form of Exhibit D
and shall have established access codes. Each use of the Ter-
minal Link by the Administrator shall constitute a representa-
tion and warranty that the Terminal Link is being used only
for the purposes permitted hereby, that at least two Officers
have each utilized an access code, that such safekeeping pro-
cedures have been established, and that such use does not con-
travene the Investment Company Act of 1940, as amended, or the
rules or regulations thereunder.
3. The Administrator shall obtain and maintain at its
own cost and expense all equipment and services, including,
but not limited to communications services, necessary for it
to utilize the Terminal Link, and the Custodian shall not be
responsible for the reliability or availability of any such
equipment or services.
- 29 -<PAGE>
4. The Fund and the Administrator each acknowledge that
any data bases made available as part of, or through the Ter-
minal Link and any proprietary data, software, processes,
information and documentation (other than any such which are
or become part of the public domain or are legally required to
be made available to the public) (collectively, the "Informa-
tion"), are the exclusive and confidential property of the
Custodian. The Fund and the Administrator shall, and shall
cause others to which either discloses the Information, to
keep the Information confidential by using the same care and
discretion it uses with respect to its own confidential prop-
erty and trade secrets, and shall neither make nor permit any
disclosure without the express prior written consent of the
Custodian.
5. Upon termination of this Agreement for any reason,
the Fund and the Administrator shall return to the Custodian
any and all copies of the Information which are in its respec-
tive possession or under its respective control, or which ei-
ther distributed to third parties. The provisions of this
Article shall not affect the copyright status of any of the
Information which may be copyrighted and shall apply to all
Information whether or not copyrighted.
6. The Custodian reserves the right to modify the Ter-
minal Link from time to time without notice to the Fund or the
Administrator except that the Custodian shall give the Admin-
istrator notice not less than 75 days in advance of any modi-
fication which would materially adversely affect the
Administrator's operation, and the Administrator agrees that
the it shall not modify or attempt to modify the Terminal Link
without the Custodian's prior written consent. The Fund ac-
knowledges that any software or procedures provided the Fund
as part of the Terminal Link are the property of the Custodian
and, accordingly, the Administrator agrees that any modifica-
tions to the Terminal Link, whether by the Administrator, or
by the Custodian and whether with or without the Custodian's
consent, shall become the property of the Custodian.
7. Neither the Custodian nor any manufacturers and sup-
pliers it utilizes or the Fund utilizes in connection with the
Terminal Link makes any warranties or representations, express
or implied, in fact or in law, including but not limited to
warranties of merchantability and fitness for a particular
purpose.
8. The Administrator will cause its officers and
employees to treat the authorization codes and the access
codes applicable to Terminal Link with extreme care, and the
Fund and the Administrator irrevocably authorizes the Custo-
dian to act in accordance with and rely on Certificates re-
ceived by it through the Terminal Link. The Fund acknowledges
that it is the Administrator's responsibility to assure that
- 30 -<PAGE>
only Officers use the Terminal Link, and that Custodian shall
not be responsible nor liable for use of the Terminal Link by
persons other than such persons or Officers, or by only a
single Officer, nor for any alteration, omission, or failure
to promptly forward.
9(a). Except as otherwise specifically provided in
Section 9(b) of this Article, the Custodian shall have no li-
ability for any losses, damages, injuries, claims, costs or
expenses arising out of or in connection with any failure,
malfunction or other problem relating to the Terminal Link
except for money damages suffered as the direct result of the
negligence of the Custodian in an amount not exceeding for any
incident $100,000 provided, however, that the Custodian shall
have no liability under this Section 9 if the Administrator
fails to comply with the provisions of Section 11.
9(b). The Custodian's liability for its negligence in
executing or failing to execute in accordance with a Certifi-
cate received through Terminal Link shall be only with respect
to a transfer of funds which is not made in accordance with
such Certificate after such Certificate shall have been duly
acknowledged by the Custodian, and shall be contingent upon
the Administrator complying with the provisions of Section 12
of this Article, and shall be limited to (i) restoration of
the principal amount mistransferred, if and to the extent that
the Custodian would be required to make such restoration under
applicable law, and (ii) the lesser of (A) the Fund's actual
pecuniary loss incurred by reason of its loss of use of the
mistransferred funds or the funds which were not transferred,
as the case may be, or (B) compensation for the loss of the
use of the mistransferred funds or the funds which were not
transferred, as the case may be, at a rate per annum equal to
the average federal funds rate as computed from the Federal
Reserve Bank of New York's daily determination of the effec-
tive rate for federal funds, for the period during which a
Fund has lost use of such funds. In no event shall the Custo-
dian have any liability for failing to execute in accordance
with a Certificate a transfer of funds where the Certificate
is received by the Custodian through Terminal Link other than
through the applicable transfer module for the particular in-
structions contained in such Certificate.
10. Without limiting the generality of the foregoing, in
no event shall the Custodian or any manufacturer or supplier
of its computer equipment, software or services relating to
the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which the Fund or the Ad-
ministrator may incur or experience by reason of its use of
the Terminal Link even if the Custodian or any manufacturer or
supplier has been advised of the possibility of such damages,
nor with respect to the use of the Terminal Link shall the
Custodian or any such manufacturer or supplier be liable for
acts of God, or with respect to the following to the extent
- 31 -<PAGE>
beyond such person's reasonable control: machine or computer
breakdown or malfunction, interruption or malfunction of com-
munication facilities, labor difficulties or any other similar
or dissimilar cause.
11. The Fund shall cause the Administrator to notify the
Custodian of any errors, omissions or interruptions in, or
delay or unavailability of, the Terminal Link as promptly as
practicable, and in any event within 24 hours after the earli-
est of (i) discovery thereof, (ii) the Business Day on which
discovery should have occurred through the exercise of reason-
able care and (iii) in the case of any error, the date of ac-
tual receipt of the earliest notice which reflects such error,
it being agreed that discovery and receipt of notice may only
occur on a business day. The Custodian shall promptly advise
the Fund whenever the Custodian learns of any errors, omis-
sions or interruption in, or delay or unavailability of, the
Terminal Link.
12. The Custodian shall verify to the Administrator, by
use of the Terminal Link, receipt of each Certificate the Cus-
todian receives through the Terminal Link, and in the absence
of such verification the Custodian shall not be liable for any
failure to act in accordance with such Certificate and neither
the Fund nor the Administrator may claim that such Certificate
was received by the Custodian. Such verification, which may
occur after the Custodian has acted upon such Certificate,
shall be accomplished on the same day on which such Certifi-
cate is received.
ARTICLE XVI
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to
employ, as sub-custodian for each Series' Foreign Securities
(as such term is defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, as amended) and
other assets, the foreign banking institutions and foreign
securities depositories and clearing agencies designated on
Schedule I hereto ("Foreign Sub-Custodians") to carry out
their respective responsibilities in accordance with the terms
of the sub-custodian agreement between each such Foreign Sub-
Custodian and the Custodian, copies of which have been previ-
ously delivered to the Fund and receipt of which is hereby
acknowledged (each such agreement, a "Foreign Sub-Custodian
Agreement"). The Custodian shall be liable for the acts and
- 32 -<PAGE>
omissions of each Foreign Sub-Custodian constituting negli-
gence or willful misconduct in the conduct of its responsi-
bilities under the terms of the Foreign Sub-Custodian Agree-
ment. Upon receipt of a Certificate, together with a certi-
fied resolution substantially in the form attached as Exhibit
E of the Fund's Board of Trustees, the Fund may designate any
additional foreign sub-custodian with which the Custodian has
an agreement for such entity to act as the Custodian's agent,
as its sub-custodian and any such additional foreign sub-
custodian shall be deemed added to Schedule I. Upon receipt
of a Certificate, the Custodian shall cease the employment of
any one or more Foreign Sub-Custodians for maintaining custody
of the Fund's assets and such Foreign Sub-Custodian shall be
deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be
substantially in the form previously delivered to the Fund and
will not be amended in a way that materially adversely affects
the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as
belonging to each Series of the Fund the Foreign Securities of
such Series held by each Foreign Sub-Custodian. At the elec-
tion of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims by the Fund
or any Series against a Foreign Sub-Custodian as a consequence
of any loss, damage, cost, expense, liability or claim sus-
tained or incurred by the Fund or any Series if and to the
extent that the Fund or such Series has not been made whole
for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will,
consistent with the terms of the applicable Foreign Sub-
Custodian Agreement, use reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as
such books and records relate to the performance of such For-
eign Sub-Custodian under its agreement with the Custodian on
behalf of the Fund.
5. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of each Series held by Foreign
Sub-Custodians, including but not limited to, an identifica-
tion of entities having possession of each Series' Foreign
Securities and other assets, and advices or notifications of
any transfers of Foreign Securities to or from each custodial
account maintained by a Foreign Sub-Custodian for the Custo-
dian on behalf of the Series.
6. The Custodian shall furnish annually to the
Fund, as mutually agreed upon, information concerning the For-
eign Sub-Custodians employed by the Custodian. Such informa-
tion shall be similar in kind and scope to that furnished to
- 33 -<PAGE>
the Fund in connection with the Fund's initial approval of
such Foreign Sub-Custodians and, in any event, shall include
information pertaining to (i) the Foreign Custodians' finan-
cial strength, general reputation and standing in the coun-
tries in which they are located and their ability to provide
the custodial services required, and (ii) whether the Foreign
Sub-Custodians would provide a level of safeguards for safe-
keeping and custody of securities not materially different
form those prevailing in the United States. The Custodian
shall monitor the general operating performance of each For-
eign Sub-Custodian, and at least annually obtain and review
the annual financial report published by such Foreign Sub-
Custodian to determine that it meets the financial criteria of
an "Eligible Foreign Custodian" under Rule 17f-5(c)(2)(i) or
(ii). The Custodian will promptly inform the Fund in the
event that the Custodian learns that a Foreign Sub-Custodian
no longer satisfies the financial criteria of an "Eligible
Foreign Custodian" under such Rule. The Custodian agrees that
it will use reasonable care in monitoring compliance by each
Foreign Sub-Custodian with the terms of the relevant Foreign
Sub-Custodian Agreement and that if it learns of any breach of
such Foreign Sub-Custodian Agreement believed by the Custodian
to have a material adverse effect on the Fund or any Series it
will promptly notify the Fund of such breach. The Custodian
also agrees to use reasonable and diligent efforts to enforce
its rights under the relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the
Fund all notices, reports or other written information re-
ceived pertaining to the Fund's Foreign Securities, including
without limitation, notices of corporate action, proxies and
proxy solicitation materials.
8. Notwithstanding any provision of this Agreement
to the contrary, settlement and payment for securities re-
ceived for the account of any Series and delivery of securi-
ties maintained for the account of such Series may be effected
in accordance with the customary or established securities
trading or securities processing practices and procedures in
the jurisdiction or market in which the transaction occurs,
including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expecta-
tion of receiving later payment for such securities from such
purchaser or dealer.
ARTICLE XVII
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in
Article XVI neither the Custodian nor its nominee shall be
- 34 -<PAGE>
liable for any loss or damage, including counsel fees, result-
ing from its action or omission to act or otherwise, either
hereunder or under any Margin Account Agreement, except for
any such loss or damage arising out of its own negligence or
willful misconduct. The Custodian agrees to indemnify and
hold harmless the Trust and Trust's Trustees and officers to
the extent described above (including reasonable counsel fees)
incurred or assessed against any of them as a result of any
breach or violation of this Agreement by the Custodian or its
officers, employees and agents or its nominees, resulting from
their negligence or willful misconduct. The Custodian may,
with respect to questions of law arising hereunder or under
any Margin Account Agreement, apply for and obtain the advice
and opinion of counsel to the Fund or of its own counsel, at
the expense of the Fund, and shall be fully protected with
respect to anything done or omitted by it in good faith in
conformity with such advice or opinion. The Custodian shall
be liable to the Fund for any loss or damage resulting from
the use of the Book-Entry System or any Depository arising by
reason of any negligence or willful misconduct on the part of
the Custodian or any of its employees or agents.
Notwithstanding the foregoing, or any other provision
contained in this Agreement, in no event shall the Custodian
be liable to the Trust, its Trustees or officers, or any third
party, for special, indirect or consequential damages, or lost
profits or loss of business, arising under or in connection
with this Agreement, even if previously informed of the
possibility of such damages and regardless of the form of
action.
2. Without limiting the generality of the foregoing,
the Custodian shall be under no obligation to inquire into,
and shall not be liable for:
(a) The validity of the issue of any Securities
purchased, sold, or written by or for the Fund, the legality
of the purchase, sale or writing thereof, or the propriety of
the amount paid or received therefor;
(b) The legality of the sale or redemption of any
Shares, or the propriety of the amount to be received or paid
therefor;
(c) The legality of the declaration or payment of
any dividend by the Fund;
(d) The legality of any borrowing by the Fund using
Securities as collateral;
(e) The legality of any loan of portfolio Securi-
ties, nor shall the Custodian be under any duty or obligation
to see to it that any cash collateral delivered to it by a
broker, dealer, or financial institution or held by it at any
- 35 -<PAGE>
time as a result of such loan of portfolio Securities of the
Fund is adequate collateral for the Fund against any loss it
might sustain as a result of such loan. The Custodian spe-
cifically, but not by way of limitation, shall not be under
any duty or obligation periodically to check or notify the
Fund that the amount of such cash collateral held by it for
the Fund is sufficient collateral for the Fund, but such duty
or obligation shall be the sole responsibility of the Fund.
In addition, the Custodian shall be under no duty or obliga-
tion to see that any broker, dealer or financial institution
to which portfolio Securities of the Fund are lent pursuant to
Article XIV of this Agreement makes payment to it of any divi-
dends or interest which are payable to or for the account of
the Fund during the period of such loan or at the termination
of such loan, provided, however, that the Custodian shall
promptly notify the Fund in the event that such dividends or
interest are not paid and received when due; or
(f) The sufficiency or value of any amounts of
money and/or Securities held in any Margin Account, Senior
Security Account or Collateral Account in connection with
transactions by the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer,
futures commission merchant or Clearing Member makes payment
to the Fund of any variation margin payment or similar payment
which the Fund may be entitled to receive from such broker,
dealer, futures commission merchant or Clearing Member, to see
that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the
amount the Fund is entitled to receive, or to notify the Fund
of the Custodian's receipt or non-receipt of any such pay-
ment.
3. The Custodian shall not be liable for, or considered
to be the Custodian of, any money, whether or not represented
by any check, draft, or other instrument for the payment of
money, received by it on behalf of the Fund until the Custo-
dian actually receives and collects such money directly or by
the final crediting of the account representing the Fund's
interest at the Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall
not be liable for ascertaining or acting upon any calls, con-
versions, exchange offers, tenders, interest rate changes or
similar matters relating to Securities held in the Depository,
unless the Custodian shall have actually received timely no-
tice from the Depository. In no event shall the Custodian
have any responsibility or liability for the failure of the
Depository to collect, or for the late collection or late
crediting by the Depository of any amount payable upon Securi-
ties deposited in the Depository which may mature or be re-
deemed, retired, called or otherwise become payable. However,
upon receipt of a Certificate from the Fund of an overdue
amount on Securities held in the Depository the Custodian
- 36 -<PAGE>
shall make a claim against the Depository on behalf of the
Fund, except that the Custodian shall not be under any obliga-
tion to appear in, prosecute or defend any action suit or pro-
ceeding in respect to any Securities held by the Depository
which in its opinion may involve it in expense or liability,
unless indemnity satisfactory to it against all expense and
liability be furnished as often as may be required.
5. The Custodian shall not be under any duty or obliga-
tion to take action to effect collection of any amount due to
the Fund from the Transfer Agent of the Fund nor to take any
action to effect payment or distribution by the Transfer Agent
of the Fund of any amount paid by the Custodian to the Trans-
fer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obliga-
tion to take action to effect collection of any amount if the
Securities upon which such amount is payable are in default,
or if payment is refused after due demand or presentation,
unless and until (i) it shall be directed to take such action
by a Certificate and (ii) it shall be assured to its satisfac-
tion of reimbursement of its costs and expenses in connection
with any such action.
7. The Custodian may in addition to the employment of
Foreign Sub-Custodians pursuant to Article XVI appoint one or
more banking institutions as Depository or Depositories, as
Sub-Custodian or Sub-Custodians, or as Co-Custodian or
Co-Custodians including, but not limited to, banking institu-
tions located in foreign countries, of Securities and moneys
at any time owned by the Fund, upon such terms and conditions
as may be approved in a Certificate or contained in an agree-
ment executed by the Custodian, the Fund and the appointed
institution.
8. The Custodian shall not be under any duty or obliga-
tion (a) to ascertain whether any Securities at any time de-
livered to, or held by it or by any Foreign Sub-Custodian, for
the account of the Fund and specifically allocated to a Series
are such as properly may be held by the Fund or such Series
under the provisions of its then current prospectus, or (b) to
ascertain whether any transactions by the Fund, whether or not
involving the Custodian, are such transactions as may properly
be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the
Fund agrees to pay to the Custodian all out-of-pocket expenses
and such compensation as may be agreed upon from time to time
between the Custodian and the Fund. The Fund represents that
the Administrator has agreed to pay such compensation and ex-
penses promptly upon receipt of statements therefor, and
hereby directs the Custodian to (i) send all statements for
compensation to its attention care of Fund/Plan at the follow-
ing address: Fund/Plan Services, Inc., 2 W. Elm Street,
- 37 -<PAGE>
Conshohocken, PA 19428, Attention: Mr. Elmer Gardner, Senior
Vice President, and (ii) accept all payments made by Fund/Plan
in the Fund's name as if such payments were made directly by
the Fund. The Fund shall pay to Fund/Plan fees for services
(including custodian services provided by the Custodian) in
accordance with the Administration Agreement. The Custodian's
compensation for services rendered hereunder is set forth in a
separate agreement between the Custodian and Fund/Plan.
Should Fund/Plan fail to pay or remit such compensation to the
Custodian within 20 days of the date the same is due and pay-
able, Custodian shall notify the Fund. If such payment or
remittance is not received from Fund/Plan within 15 days of
such notice, then the Custodian will be entitled to debit the
Custody Account directly for such compensation. The Custodian
may charge compensation with respect to which it has properly
sent a notice to the Fund, as provided in the preceding sen-
tence, and any expenses with respect to a Series incurred by
the Custodian in the performance of its duties pursuant to
such agreement against any money specifically allocated to
such Series. Unless and until the Fund or the Administrator
instructs the Custodian by a Certificate to apportion any
loss, damage, liability or expense among the Series in a
specified manner, the Custodian shall also be entitled to
charge against any money held by it for the account of a Se-
ries such Series' pro rata share (based on such Series net
asset value at the time of the charge to the aggregate net
asset value of all Series at that time) of the amount of any
loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the pro-
visions of this Agreement. The expenses for which the Custo-
dian shall be entitled to reimbursement hereunder shall in-
clude, but are not limited to, the expenses of sub-custodians
and foreign branches of the Custodian incurred in settling
outside of New York City transactions involving the purchase
and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received by
the Custodian and reasonably believed by the Custodian to be a
Certificate. The Custodian shall be entitled to rely upon any
Oral Instructions actually received by the Custodian. The
Fund agrees to forward or cause the Administrator to forward
to the Custodian a Certificate or facsimile thereof confirming
such Oral Instructions in such manner so that such Certificate
or facsimile thereof is received by the Custodian, whether by
hand delivery, telecopier or other similar device, or other-
wise, by the close of business of the same day that such Oral
Instructions are given to the Custodian. The Fund agrees that
the fact that such confirming instructions are not received by
the Custodian shall in no way affect the validity of the
transactions or enforceability of the transactions hereby au-
thorized by the Fund. The Fund agrees that the Custodian
- 38 -<PAGE>
shall incur no liability to the Fund in acting upon Oral In-
structions given to the Custodian hereunder concerning such
transactions provided such instructions reasonably appear to
have been received from an Officer.
11. The Custodian shall be entitled to rely upon any
instrument, instruction or notice received by the Custodian
and reasonably believed by the Custodian to be given in ac-
cordance with the terms and conditions of any Margin Account
Agreement. Without limiting the generality of the foregoing,
the Custodian shall be under no duty to inquire into, and
shall not be liable for, the accuracy of any statements or
representations contained in any such instrument or other no-
tice including, without limitation, any specification of any
amount to be paid to a broker, dealer, futures commission mer-
chant or Clearing Member.
12. The books and records pertaining to the Fund which
are in the possession of the Custodian shall be the property
of the Fund. Such books and records shall be prepared and
maintained as required by the Investment Company Act of 1940,
as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representa-
tives, shall have access to such books and records during the
Custodian's normal business hours. Upon the reasonable re-
quest of the Fund, copies of any such books and records shall
be provided by the Custodian to the Fund or the Fund's autho-
rized representative, and the Fund shall reimburse the Custo-
dian its expenses of providing such copies. Upon reasonable
request of the Fund, the Custodian shall provide in hard copy
or on micro-film, whichever the Custodian elects, any records
included in any such delivery which are maintained by the Cus-
todian on a computer disc, or are similarly maintained, and
the Fund shall reimburse the Custodian for its expenses of
providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report
obtained by the Custodian on the system of internal accounting
control of the Book-Entry System, the Depository or O.C.C.,
and with such reports on its own systems of internal account-
ing control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against
and save the Custodian harmless from all liability, claims,
losses and demands whatsoever, including attorney's fees, how-
soever arising or incurred because of or in connection with
this Agreement, including the Custodian's payment or
non-payment of checks pursuant to paragraph 6 of Article XIII
as part of any check redemption privilege program of the Fund,
except for any such liability, claim, loss and demand arising
out of the Custodian's own negligence or willful misconduct.
For any legal proceeding giving rise to the indemnification
set forth above in this paragraph, the Fund shall be entitled
- 39 -<PAGE>
to defend or prosecute any claim in the name of the Custodian
at its own expense and through counsel of its own choosing
reasonably acceptable to the Custodian if it gives written
notice to the Custodian within ten (10) Business days of re-
ceiving notice of such claim. Notwithstanding the foregoing,
the Custodian may participate in the litigation at its own
expense and with counsel of its own choosing.
15. Subject to the foregoing provisions of this Agree-
ment, including, without limitation, those contained in Ar-
ticle XVI the Custodian may deliver and receive Securities,
and receipts with respect to such Securities, and arrange for
payments to be made and received by the Custodian in ac-
cordance with the customs prevailing from time to time among
brokers or dealers in such Securities. When the Custodian is
instructed to deliver Securities against payment, delivery of
such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility
and liability for all credit risks involved in connection with
the Custodian's delivery of Securities pursuant to Certifi-
cates or instructions of the Fund or the Administrator which
responsibility and liability shall continue until final pay-
ment in full has been received by the Custodian.
16. In the event the Custodian is advised by the Fund
that the Fund is no longer utilizing the services of the Ad-
ministrator, then the Custodian shall furnish or give to the
Fund the statements or notices described above as to be fur-
nished or given to the Administrator.
17. The Custodian shall have no duties or responsibili-
ties whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement, and no covenant or
obligation shall be implied in this Agreement against the Cus-
todian. Without limiting the generality of the foregoing, the
Custodian shall have no duties or responsibilities by reason
of any terms or provisions in the Administration Agreement,
and if such Administration Agreement shall cease to be in ef-
fect the Custodian shall have no additional duties hereunder.
ARTICLE XVIII
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
less than ninety (90) days after the date of giving of such
notice, provided, however, that if such notice is sent by the
Fund and recites that it is being given contemporaneously with
- 40 -<PAGE>
a termination of the Custody Administration any Agency Agree-
ment with Fund/Plan, such notice may specify any date of ter-
mination selected by the Fund. In the event such notice is
given by the Fund, it shall be accompanied by a copy of a
resolution of the Board of Trustees of the Fund, certified by
the Secretary, the Clerk, any Assistant Secretary or any As-
sistant Clerk, electing to terminate this Agreement and desig-
nating a successor custodian or custodians, each of which
shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided profits.
In the event such notice is given by the Custodian, the Fund
shall, on or before the termination date, deliver to the Cus-
todian a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary, the Clerk, any Assistant
Secretary or any Assistant Clerk, designating a successor cus-
todian or custodians. In the absence of such designation by
the Fund, the Custodian may designate a successor custodian
which shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided profits.
Upon the date set forth in such notice this Agreement shall
terminate, and the Custodian shall upon receipt of a notice of
acceptance by the successor custodian on that date deliver
directly to the successor custodian all Securities and moneys
then owned by the Fund and held by it as Custodian, after de-
ducting all fees, expenses and other amounts for the payment
or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the
Fund or the Custodian in accordance with the preceding para-
graph, the Fund shall upon the date specified in the notice of
termination of this Agreement and upon the delivery by the
Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and
moneys then owned by the Fund be deemed to be its own custo-
dian and the Custodian shall thereby be relieved of all duties
and responsibilities pursuant to this Agreement, other than
the duty with respect to Securities held in the Book Entry
System which cannot be delivered to the Fund to hold such Se-
curities hereunder in accordance with this Agreement.
ARTICLE XIX
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed
by two of the present Officers of the Fund under its seal,
setting forth the names and the signatures of the present Of-
ficers. The Fund agrees to furnish to the Custodian a new
Certificate in similar form in the event that any such present
Officer ceases to be an Officer or in the event that other or
additional Officers are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully
- 41 -<PAGE>
protected in acting under the provisions of this Agreement
upon Oral Instructions or signatures of the present Officers
as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, autho-
rized or required by this Agreement to be given to the Custo-
dian, shall be sufficiently given if addressed to the Custo-
dian and mailed or delivered to it at its offices at 90 Wash-
ington Street, New York, New York 10286, or at such other
place as the Custodian may from time to time designate in
writing.
3. Any notice or other instrument in writing, autho-
rized or required by this Agreement to be given to the Fund
shall be sufficiently given if addressed to the Fund and
mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund
may from time to time designate in writing, and any notice or
other instrument in writing authorized or required to be given
to the Administrator shall be sufficiently given if addressed
to the Administrator at such address as the Administrator may
from time to time designate in writing.
4. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties
with the same formality as this Agreement and approved by a
resolution of the Board of Trustees of the Fund.
5. This Agreement shall extend to and shall be binding
upon the parties hereto, and their respective successors and
assigns; provided, however, that this Agreement shall not be
assignable by the Fund without the written consent of the Cus-
todian, or by the Custodian without the written consent of the
Fund, authorized or approved by a resolution of the Fund's
Board of Trustees.
6. This Agreement shall be construed in accordance with
the laws of the State of New York without giving effect to
conflict of laws principles thereof. Each party hereby con-
sents to the jurisdiction of a state or federal court situated
in New York City, New York in connection with any dispute
arising hereunder and hereby waives its right to trial by
jury.
7. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but such counterparts shall, together, constitute only one
instrument.
8. A copy of the Declaration of Trust of the Fund is on
file with the Secretary of The Commonwealth of Massachusetts,
and notice is hereby given that this instrument is executed on
behalf of the Board of Trustees of the Fund as Trustees and
not individually and that the obligations of this instrument
- 42 -<PAGE>
are not binding upon any of the Trustees or shareholders indi-
vidually but are binding only upon the assets and property of
the Fund; provided, however, that the Declaration of Trust of
the Fund provides that the assets of a particular Series of
the Fund shall under no circumstances be charged with li-
abilities attributable to any other Series of the Fund and
that all persons extending credit to, or contracting with or
having any claim against a particular Series of the Fund shall
look only to the assets of that particular Series for payment
of such credit, contract or claim.
- 43 -<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agree-
ment to be executed by their respective Officers, thereunto
duly authorized and their respective seals to be hereunto af-
fixed, as of the day and year first above written.
SMITH BREEDEN SERIES FUND
[SEAL] By:Michael J. Giarla
Attest:
Marianthe S. Mewkill
THE BANK OF NEW YORK
[SEAL] By:Masao Yamaguchi
Attest:
Vincent M. Blazewicz
- 44 -<PAGE>
APPENDIX A
I,Michael J. Giarla, President and Trustee, of the Smith
Breeden Series Fund, a Massachusetts business trust (the
"Fund"), do hereby certify that:
The following individuals including officers and employ-
ees of the Administrator have been duly authorized by the
Board of Trustees of the Fund in conformity with the Fund's
Declaration of Trust and By-Laws to give Certificates or Oral
Instructions on behalf of the Fund, and the signatures set
forth opposite their respective names are their true and cor-
rect signatures:
Name Signature
St. John Kelliher St. John Kelliher
Arthur Coyne Arthur Coyne
Denise Tawwab Denise Tawwab
Elizabeth Holder Elizabeth Holder
Cindi Hooks Cindi Hooks
Lezlie Butts Lezlie Butts
William Drourr William Drourr
Elmer Gardner Elmer Gardner
Kathy Nace Kathy Nace
Gus Pittaoulis Gus Pittaoulis
Joseph Gessner Joseph Gessner
APPENDIX B
SERIES
Smith Breeden Short Duration U.S. Government Series
Smith Breeden Intermediate Duration U.S. Government Series<PAGE>
APPENDIX C
I, Vincent Blazewicz, a Vice President with THE BANK OF
NEW YORK do hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned,Marianthe S. Mewkill, hereby certifies
that he or she is the duly elected and acting
Treasurer of Smith Breeden Series Fund, a Massachusetts
business trust (the "Fund"), and further certifies that the
following resolution was adopted by the Board of Trustees of
the Fund at a meeting duly held on October 18, 1994,
at which a quorum was at all times present and that such reso-
lution has not been modified or rescinded and is in full force
and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Fund dated as of December 16, 1994,
(the "Custody Agreement") is authorized and instructed on
a continuous and ongoing basis to deposit in the Book-
Entry System, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of
the Series to which the same are specifically allocated,
and to utilize the Book-Entry System to the extent pos-
sible in connection with its performance thereunder, in-
cluding, without limitation, in connection with settle-
ments of purchases and sales of securities, loans of se-
curities, and deliveries and returns of securities col-
lateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Series Fund, as of the 16 day of
December , 1994.
[SEAL]<PAGE>
EXHIBIT B
CERTIFICATION
The undersignd, Marianthe S. Mewkill, hereby certifies
that he or she is the duly elected and acting
Treasurer of Smith Breeden Series Fund, a Mas-
sachusetts business trust (the "Fund"), and further certifies
that the following resolution was adopted by the Board of
Trustees of the Fund at a meeting duly held on
October 18, 1994, at which a quorum was at all times
present and that such resolution has not been modified or re-
scinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Fund dated as of December 18, 1994,
(the "Custody Agreement") is authorized and instructed on
a continuous and ongoing basis until such time as it re-
ceives a Certificate, as defined in the Custody Agree-
ment, to the contrary to deposit in the Depository, as
defined in the Custody Agreement, all securities eligible
for deposit therein, regardless of the Series to which
the same are specifically allocated, and to utilize the
Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in
connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and re-
turns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Series Fund, as of the 16th day of
December, 1994.
[SEAL]<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned,Marianthe S. Mewkill, hereby certifies
that he or she is the duly elected and acting
Treasurer of Smith Breeden Series Fund, a Mas-
sachusetts business trust (the "Fund"), and further certifies
that the following resolution was adopted by the Board of
Trustees of the Fund at a meeting duly held on
October 18, 1994, at which a quorum was at all times
present and that such resolution has not been modified or re-
scinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Fund dated as of December 16, 1994,
(the "Custody Agreement") is authorized and instructed on
a continuous and ongoing basis until such time as it re-
ceives a Certificate, as defined in the Custody Agree-
ment, to the contrary to deposit in the Participants
Trust Company as Depository, as defined in the Custody
Agreement, all securities eligible for deposit therein,
regardless of the Series to which the same are specifi-
cally allocated, and to utilize the Participants Trust
Company to the extent possible in connection with its
performance thereunder, including, without limitation, in
connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and re-
turns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Series Fund, as of the 16th day of
December, 1994.
[SEAL]<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, Marianthe S. Mewkill, hereby
certifies that he or she is the duly elected and acting
Treasurer of Smith Breeden Series Fund, a Mas-
sachusetts business trust (the "Fund"), and further certifies
that the following resolution was adopted by the Board of
Trustees of the Fund at a meeting duly held on
October 18, 1994, at which a quorum was at all
times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Fund dated as of December 16, 1994,
(the "Custody Agreement") is authorized and instructed on
a continuous and ongoing basis until such time as it re-
ceives a Certificate, as defined in the Custody Agree-
ment, to the contrary, to accept, utilize and act with
respect to Clearing Member confirmations for Options and
transaction in Options, regardless of the Series to which
the same are specifically allocated, as such terms are
defined in the Custody Agreement, as provided in the Cus-
tody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Series Fund, as of the 16 day of
December , 1994.
[SEAL]<PAGE>
EXHIBIT D
The undersigned, Marianthe S. Mewkill, hereby cer-
tifies that he or she is the duly elected and acting
Treasurer of Smith Breeden Series Fund, a Mas-
sachusetts business trust (the "Fund"), further certifies that
the following resolutions were adopted by the Board of Trust-
ees of the Fund at a meeting duly held on October 18,
1994, at which a quorum was at all times present and that such
resolutions have not been modified or rescinded and are in
full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursu-
ant to the Custody Agreement between The Bank of New York and
the Fund dated as of December 16, 1994 (the "Custody Agree-
ment") is authorized and instructed on a continuous and ongo-
ing basis to act in accordance with, and to rely on Certifi-
cates (as defined in the Custody Agreement) given by to the
Custodian by a Terminal Link (as defined in the Custody Agree-
ment).
RESOLVED, that the Fund shall establish access codes and
grant us of such access codes only to Officers of the fund as
defined in the Custody Agreement, shall establish internal
safekeeping procedures to safeguard and protect the confiden-
tiality and availability of such access codes, shall limit its
use of the Terminal Link to those purposes permitted by the
Custody Agreement, shall require at least two such Officers to
utilize their respective access codes in connection with each
such Certificate, and shall use the Terminal Link only in a
manner that does not contravene the Investment Company Act of
1940, as amended, or the rules and regulations thereunder.
RESOLVED, that Officers of the Fund shall, following the
establishment of such access codes and such internal safekeep-
ing procedures, advise the Custodian that the same have been
established by delivering a Certificate, as defined in the
Custody Agreement, and the Custodian shall be entitled to rely
upon such advice.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Series Fund, as of the 16th day of
December , 1994.
[SEAL]<PAGE>
SHAREHOLDER SERVICES AGREEMENT
This Agreement, dated as of the 20th day of February, 1994, made by
and between Smith Breeden Series Fund (the "Trust"), a business trust
operating as an open-end management investment company, duly organized
and existing under the laws of the Commonwealth of Massachusetts and
Fund/Plan Services, Inc. (the "Company"), a corporation duly organized and
existing under the laws of the State of Delaware (collectively the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is a registered open-end investment company
under the Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Trust desires to appoint the Company as its Transfer,
Redemption and Dividend Disbursing Agent as set forth in this Agreement
and to perform certain other functions as set forth in the attached Schedule
"A"; and
WHEREAS, the Trust is authorized by its Trust Instrument to issue
separate series of shares representing interests in separate investment
portfolios (the "Series"), which Series are identified on Schedule "C"
attached hereto, and which Schedule "C" may be amended from time to time by
mutual agreement of the Trust and Fund/Plan; and
WHEREAS, the Company is willing to perform such functions upon the
terms and conditions set forth below; and
WHEREAS, the Trust will cause to be provided certain information to the
Company as set forth below.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, the parties hereto, intending to be legally
bound, do hereby agree as follows:
Section 1. The terms as defined in this Section wherever used in this
Agreement, or in any amendment or supplement hereto, shall have the
meanings herein specified unless the context otherwise requires.
The Series: The term Series shall mean any series issued by the
authority of the Board of Trustees.
Share Certificates: The term Share Certificates shall mean the share
certificates for the Shares of the Series.
Shareholders: The term Shareholders shall mean the registered owners
from time to time of the Shares of the Series in accordance with the share
registry records of the Series.
Shares: The term Shares shall mean the issued and outstanding
shares of the Series.
Oral Instruction: The term Oral Instruction shall mean an
authorization, instruction, approval, item or set of data, or information of
any kind transmitted to the Company in person or by telephone, telegram,
telecopy or other mechanical or documentary means lacking a signature, by a
person or persons believed in good faith by the Company to be a person or
persons authorized by a resolution of the Board of Trustees of the Trust, to
give Oral Instructions on behalf of the Series.
Written Instruction: The term Written Instruction shall mean an
authorization, instruction, approval, item or set of data or information of
any kind transmitted to the Company in original writing containing original
signatures or a copy of such document transmitted by telecopy including
transmission of such signature believed in good faith by the Company to be
the signature of a person authorized by a resolution of the Board of Trustees
of the Trust to give Written Instructions on behalf of the Series.
TRANSFER AGENCY
Section 2. The Series shall furnish to Company as Transfer Agent a
sufficient supply of blank Share Certificates and from time to time will renew
such supply upon the request of Company. Such blank Share Certificates
shall be signed manually or by facsimile signatures of officers of the Series
authorized by law or the by-laws of the Trust to sign Share Certificates and,
if required, shall bear the corporate seal or a facsimile thereof.
Section 3. Company as Transfer Agent, shall make original issues of
Shares in accordance with Section 14 and 15 below and with the Series'
Prospectus and Statement of Additional Information upon the written request
of the Series and upon being furnished with (i) a certified copy of a
resolution or resolutions of the Board of Trustees of the Trust authorizing
such issue; (ii) an opinion of counsel as to the validity of such additional
Shares; and (iii) necessary funds for the payment of any original issue tax
applicable to such additional Shares.
Section 4. Transfers of Shares shall be registered and new Share
Certificates issued by Company upon surrender of outstanding Share
Certificates, (i) in form deemed by Company to be properly endorsed for
transfer, (ii) with all necessary endorser's signatures guaranteed by a
member firm of a national securities exchange or a commercial bank, or
savings institution, and (iii) satisfactory evidence of compliance with all
applicable laws relating to the payment or collection of taxes.
Section 5. When mail is used for delivery of Share Certificates,
Company shall forward Share Certificates in "non-negotiable" form by first-
class mail, and Share Certificates in "negotiable" form by registered mail,
all mail deliveries to be covered while in transit to the addressee by
insurance arranged for by Company.
Section 6. In registering transfers, Company, as Transfer Agent, may
rely upon the Uniform Commercial Code or any other statutes which, in the
opinion of counsel, protect Company and the Series in not requiring
complete documentation, in registering transfers without inquiry into adverse
claims, in delaying registration for purposes of such inquiry, or in refusing
registration where in its judgment an adverse claim requires such refusal.
Section 7. Company as Transfer Agent may issue new Share
Certificates in place of Share Certificates represented to have been lost,
destroyed or stolen, upon receiving indemnity satisfactory to Company and
may issue new Share Certificates in exchange for and upon surrender of
mutilated Share Certificates.
Section 8. In case any officer of the Series who shall have signed
manually or whose facsimile signature shall have been affixed to blank Share
Certificates shall die, resign or be removed prior to the issuance of such
Share Certificates, Company as Transfer Agent may issue or register such
Share Certificates as the Share Certificates of the Series notwithstanding
such death, resignation or removal; and the Series shall file promptly with
Company such approval, adoption or ratification as may be required by law.
Section 9. With respect to confirmed trades received by the Company
as Transfer Agent for the Series, the Company shall periodically notify the
Series of the current status of outstanding confirmed trades. The Company
is authorized to cancel confirmed trades which have been outstanding for
thirty (30) days. Upon such cancellation, the Transfer Agent shall instruct
the Series Accounting Agent to adjust the books of the Series accordingly.
Section 10. Company will maintain stock registry records in the usual
form in which it will note the issuance, transfer and redemption of Shares
and the issuance and transfer of Share Certificates, and is also authorized
to maintain an account entitled Unissued Certificate Account in which it will
record the Shares and fractions issued and outstanding from time to time for
which issuance of Share Certificates is deferred. The Series is responsible
to provide Company reports of Series Share purchases, redemptions, and
total Shares outstanding on the next business day after each net asset
valuation. Company is authorized to keep records, which will be part of the
stock transfer records, in which it will note the names and registered address
of Shareholders and the number of Shares and fractions from time to time
owned by them for which no Share Certificates are outstanding. Each
Shareholder will be assigned a single account number even though Shares
for which Certificates have been issued will be accounted for separately.
Section 11. Company will issue Share Certificates for Shares of the
Series, only upon receipt of a written request from a Shareholder. In all
other cases, the Series authorizes Company to dispense with the issuance
and countersignature of Share Certificates whenever Shares are purchased.
In such case Company as Transfer Agent, shall merely note on its stock
registry records the issuance of the Shares and fractions (if any), shall
credit the Unissued Certificate Account with the Shares and fractions issued
and shall credit the proper number of Shares and fractions to the respective
Shareholders. Likewise, whenever Company has occasion to surrender for
redemption Shares and fractions owned by Shareholders, it shall be
unnecessary to issue Share Certificates for redemption purposes. The Series
authorizes Company in such cases to process the transactions by
appropriate entries in its Share transfer records, and debiting of the
Unissued Certificate Account and the record of issued Shares outstanding.
Section 12. Company in its capacity as Transfer Agent will, in
addition to the duties and functions above-mentioned, perform the usual duties
and functions of a Stock Transfer Agent for a corporation. It will
countersign for issuance or reissuance Share Certificates representing
original issue or reissued Shares as directed by the Written Instructions of
the Series and will transfer Share Certificates registered in the name of
Shareholders from one Shareholder to another in the usual manner. Company
may rely conclusively and act without further investigation upon any list,
instruction, certification, authorization, Share Certificate or other
instrument or paper believed by it in good faith to be genuine and unaltered,
and to have been signed, countersigned, or executed by duly authorized person
or persons, or upon the instructions of any officer of the Series, or upon the
advice of counsel for the Trust or for Company. Company may record any
transfer of Share Certificates which is believed by it in good faith to have
been duly authorized or may refuse to record any transfer of Share
Certificates if in good faith Company in its capacity as Transfer Agent deems
such refusal necessary in order to avoid any liability either to the Series,
the Trust, or to Company. The Trust agrees to indemnify and hold harmless
Company from and against any and all losses, costs, claims, and liability
which it may suffer or incur by reason of so relying or acting or refusing to
act.
Section 13. In case of any request or demand for the inspection of the
Share records of the Series, Company as Transfer Agent, shall endeavor to
notify the Trust and to secure instructions as to permitting or refusing such
inspection. However, Company may exhibit such records to any person in
any case where it is advised by its counsel that it may be held liable for
failure to do so.
ISSUANCE OF SHARES
Section 14. Prior to the daily determination of net asset value in
accordance with the Series' Prospectus, Company shall process all purchase
orders received since the last determination of the Series' net asset value.
Company shall calculate daily the amount available for investment in
Shares at the net asset value determined by the Company as pricing agent
(see Accounting Services Agreement) as of the close of trading on the New
York Stock Exchange, the number of Shares and fractional Shares to be
purchased and the net asset value to be deposited with the Custodian.
Company, as agent for the Shareholders, shall place a purchase order daily
with the Series for the proper number of Shares and fractional Shares to be
purchased and confirm such number to the Series in writing.
Section 15. Company having made the calculations provided for in
Section 14, shall thereupon pay over the net asset value of Shares
purchased to the Custodian. The proper number of Shares and fractional
Shares shall then be issued daily and credited by Company to the Unissued
Certificate Account. The Shares and fractional Shares purchased for each
Shareholder will be credited by Company to his separate account. Company
shall mail to each Shareholder a confirmation of each purchase, with copies
to the Series if requested. Such confirmations will show the prior Share
balance, the new Share balance, the Shares for which Stock Certificates are
outstanding (if any), the amount invested and the price paid for the newly
purchased Shares. Under normal circumstances, such confirmation shall be
mailed within three days of purchase.
REDEMPTIONS
Section 16. Company shall, prior to the daily determination of net
asset value in accordance with the Series' Prospectus and Statement of
Additional Information, process all requests from Shareholders to redeem
Shares and determine the number of Shares required to be redeemed to make
monthly payments, automatic payments or the like. Thereupon, Company shall
advise the Series of the total number of Shares available for redemption and
the number of Shares and fractional Shares requested to be redeemed. The
Company as Pricing Agent shall then determine the applicable net asset
value, whereupon Company shall furnish the Series with an appropriate
confirmation of the redemption and process the redemption by filing with the
Custodian an appropriate statement and making the proper distribution and
application of the redemption proceeds in accordance with the Series'
Prospectus and Statement of Additional Information. The stock registry
books recording outstanding Shares, the Unissued Certificate Account and
the individual account of the Shareholder shall be properly debited.
Section 17. The proceeds of redemption shall be remitted by Company
in accordance with the Series' Prospectus by check mailed to the
Shareholder at his registered address. If Share Certificates have been issued
for Shares being redeemed, then such Share Certificates and a stock power
with a signature guarantee of a commercial bank, trust company, savings
bank, savings and loan association, or a member firm of a national securities
exchange shall accompany the redemption request. If Share Certificates
have not been issued to the redeeming Shareholder, the signature of the
Shareholder on the redemption request must be similarly guaranteed. The
Series may authorize Company to waive the signature guarantee in certain
cases by Written Instructions.
For the purposes of redemption of Shares which have been purchased
within 15 days of a redemption request, the Series shall provide Company,
from time to time, with Written Instructions concerning the time within which
such requests may be honored.
DIVIDENDS
Section 18. Upon the declaration of each dividend and each capital
gains distribution by the Board of Trustees of the Series, the Series shall
notify Company of the date of such declaration, the amount payable per
share, the record date for determining the shareholders entitled to payment,
the payment, and the reinvestment date price.
Section 19. On or before each payment date the Series will transfer,
or cause the Custodian to transfer, to Company in its capacity as Dividend
Disbursing Agent, the total amount of the dividend or distribution currently
payable to those shareholders who have elected to receive dividends or
distributions in cash. Company will, on the designated payment date, mail
distribution checks to the Shareholders for the proper amounts payable to
them.
GENERAL PROVISIONS
Section 20. Company shall maintain records (which may be part of the
stock transfer records) in connection with the issuance and redemption of
Shares, and the disbursement of dividends and dividend reinvestments, in
which will be noted the transactions effected for each Shareholder and the
number of Shares and fractional Shares owned by each for which no Share
Certificates are outstanding. Company agrees to make available upon
request and to preserve for the periods prescribed in Rule 31a-2 under the
Investment Company Act of 1940 any records relating to services provided
under this Agreement which are required to be maintained by Rule 31a-1
under the Act. Company acknowledges that the records created or
maintained by the Company on behalf of the Trust are the property of the
Trust and will be surrendered promptly as required under Rule 31a-3 under
the Investment Company Act of 1940, as amended.
Section 21. In addition to the services as Transfer Agent and Dividend
Disbursing Agent as above set forth, Company will perform other services for
the Series as agreed from time to time, including but not limited to,
preparation of and mailing Federal Tax Information Forms, mailing annual
and semi-annual reports of the Series, preparation of one annual list of
Shareholders, and mailing notices of Shareholders' meetings, proxies and
proxy statements.
Section 22. Nothing contained in this Agreement is intended to or
shall require Company in any capacity hereunder, to perform any functions or
duties on any holiday recognized by the Trust, as set forth in its current
Prospectus, day of special observance or any other day on which the
Custodian or the New York Stock Exchange are closed. Functions or duties
normally scheduled to be performed on such days shall be performed on,
and as of, the next business day on which both the New York Stock
Exchange and the Custodian are open.
Section 23. The Trust agrees to pay Company compensation for its
services and to reimburse it for expenses, as set forth in Schedule "B"
attached hereto, or as shall be set forth in amendments to such Schedule.
The Trust agrees to make payment to the Company for the services
performed for the applicable function within 30 days following receipt by the
Trust of an invoice detailing such services.
Section 24. (a) The Company, its directors, officers, employees,
shareholders and agents shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with the
performance of this Agreement, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard on the part
of the Company in the performance of its obligations and duties under this
Agreement.
(b) Any person, even though also a director, officer,
employee, shareholder or agent of the Company, who may be or become
an officer, trustee, employee, or agent of the Series, shall be deemed, when
rendering services to the Series or acting on any business of the Series
(other than services or business in connection with the Company's duties
hereunder), to be rendering such services to or acting solely for the Series
and not as a trustee, officer, employee, shareholder or agent of, or one
under the control or direction of the Company even though paid by it.
(c) Notwithstanding any other provision of this Agreement,
the Trust shall indemnify and hold harmless the Company, its directors,
officers, employees, shareholders and agents from and against any and all
claims, demands, expenses and liabilities (whether with or without basis in
fact or law) of any and every nature which the Company may sustain or incur
or which may be asserted against the Company by any person by reason of,
or as a result of: (i) any action taken or omitted to be taken by the Company
in good faith hereunder; (ii) in reliance upon any certificate, instrument,
order, or stock certificate or other document reasonably believed by it to be
genuine and to be signed, countersigned or executed by any duly authorized
person, upon the Oral Instructions or Written Instructions of an authorized
person of the Series or upon the opinion of legal counsel for the Trust or its
own counsel; or (iii) any action taken or omitted to be taken by the Company
in connection with its appointment as Shareholder Services Agent in good
faith in reliance upon any law, act, regulation or interpretation of the same
even though the same may thereafter have been altered, changed,
amended, or repealed. However, indemnification under this subparagraph
shall not apply to actions or omissions of the Company or its directors,
officers, employees, shareholders, or agents in cases of its or their own
negligence, willful misconduct, bad faith, or reckless disregard of its or
their own duties hereunder.
(d) The Company shall give written notice to the Trust
within ten (10) business days of receipt by the Company of a written
assertion or claim of any threatened or pending legal proceeding which may
be subject to this indemnification. However, the failure to notify the Trust
of such written assertion or claim shall not operate in any manner whatsoever
to relieve the Trust of any liability arising from this Section or otherwise.
(e) For any legal proceeding giving rise to this
indemnification, the Trust shall be entitled to defend or prosecute any claim
in the name of the Company at its own expense and through counsel of its
own choosing if it gives written notice to the Company within ten (10)
business days of receiving notice of such claim. Notwithstanding the
foregoing, the Company may participate in the litigation at its own expense
through counsel of its own choosing. If the Trust does choose to defend or
prosecute such claim, then the parties shall cooperate in the defense or
prosecution thereof and shall furnish such records and other information as
are reasonably necessary.
(f) The Trust shall not settle any claim subject to the
indemnification provisions of paragraph 24(c) above without the Company's
express written consent which shall not be unreasonably withheld; provided,
however, in the event the Company withholds such consent the Trust may,
at its option, elect to deliver to the Company an amount of money equal to
the proposed settlement amount for such claim along with a written copy of
the proposed settlement as agreed to by the claimant and the Company
shall thereafter be responsible for the defense of any such claim and any and
all costs associated therewith.
Section 25. Company is authorized, upon receipt of Written
Instructions from the Trust, to make payment upon redemption of Shares without
a signature guarantee. The Trust hereby agrees to indemnify and hold
Company, its successors and assigns, harmless of and from any and all
expenses, damages, claims, suits, liabilities, actions, demands, losses
whatsoever arising out of or in connection with a payment by Company upon
redemption of Shares without a signature guarantee, if such redemption has
been authorized by the Trust in Written Instructions to the Company, and
upon the request of Company the Trust shall assume the entire defense of
any action, suit or claim subject to the foregoing indemnity. Company shall
notify the Trust of any such action, suit or claim within ten (10) days after
receipt by Company of notice thereof.
Section 26. (a) The term of this Agreement shall be one year,
commencing on the date hereof and shall continue in force from year to year
thereafter upon review and agreement of the Parties.
(b) Either Party may give written notice to the other of the
termination of this Agreement, such termination to take effect at the time
specified in the notice, not less than ninety (90) days after the giving of
the notice. Upon the effective termination date, the Trust shall pay to the
Company such compensation as may be due as of the date of termination
and shall likewise reimburse the Company for any out-of-pocket expenses
and disbursements reasonably incurred by the Company to such date.
(c) In the event that in connection with termination of this
Agreement a successor to any of the Company's duties or responsibilities
under this Agreement is designated by the Trust by written notice to the
Company, the Company shall, promptly upon such termination and at the
expense of the Trust, transfer all Required Records to such person as the
Trust may designate and shall cooperate in the transfer of such duties and
responsibilities.
Section 27. The Trust shall file with Company a certified copy of each
resolution of its Board of Trustees authorizing the execution of Written
Instructions or the transmittal of Oral Instructions, as provided in Section 1
of this Agreement.
Section 28. This Agreement may be amended from time to time by a
supplemental agreement executed by the Trust and the Company.
Section 29. Any notice or other communication required by or
permitted to be given in connection with this Agreement shall be in writing,
and shall be delivered in person or sent by first class mail, postage prepaid,
to the respective parties as follows:
If to the Trust:
Smith Breeden Series Fund
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
Attention: Gerald J. Madigan, President
If to the Company:
Fund/Plan Services, Inc.
P.O. Box 874
Conshohocken, PA 19428
Attention: Kenneth J. Kempf, President
Section 30. (a) The Trust represents and warrants to Company that
the execution and delivery of this Shareholder Services Agreement by the
undersigned officers of the Trust has been duly and validly authorized by
resolution of the Board of Trustees of the Trust.
(b) The Company represents and warrants to the Trust
that the execution and delivery of this Shareholder's Services Agreement by
the undersigned officers of the Company has been duly and validly
authorized by resolution of the Board of Directors of the Company.
Section 31. This Agreement may be executed in two or more
counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the
same instrument.
Section 32. This Agreement shall extend to and shall be binding upon
the parties hereto and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Trust without the
written consent of Company or by Company without the written consent of
the Trust, authorized or approved by a resolution of its Board of Trustees.
Section 33. The Company acknowledges that it has received
notice of and accepts the limitations of the Trust's liability as set forth in
its Declaration of Trust and this Agreement. The Company agrees that the
Trust's obligations under this Agreement with respect to a particular Series
and any other specific Series shall be limited to such Series and to its
assets, and that the Company shall not seek satisfaction of any such
obligation from the Shareholders of the Series nor from any trustee, officer,
employee or agent of the Trust or the Series, nor from the assets of
Shareholders of any other Series.
Section 34. This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania.
Section 35. The Company agrees that, except as otherwise
required by law as set forth in an opinion of Company's counsel, the
Company will use its best efforts to keep confidential all records and
information in its possession relating to the Trust or Shareholder accounts,
and will not disclose the same to any person except at the request of or with
the consent of the Trust or, with respect to Shareholder accounts, at the
request of with the consent of the holder of the account.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement, together with Schedules "A", "B" and "C", to be signed by their
duly authorized officers and their corporate seals hereunto duly affixed and
attested, as of the day and year first above written.
SMITH BREEDEN SERIES FUND
Attest: Marianthe S. Mewkill By:
________________________________
Gerald J. Madigan
President
FUND/PLAN SERVICES, INC.
Attest: Mary P. Efstration By:
_____________________________
Kenneth J. Kempf
President<PAGE>
Schedule A
TRANSFER AGENT UNIT
TRANSFER AGENT SERVICES FOR
SMITH BREEDEN SERIES FUND
The following is a list of Transfer Agency Services to be provided:
Opening new accounts and entering demographic data into
shareholder base.
Real-time Customer Information File (CIF) to link accounts within the
Fund and across Funds. Facilitates account maintenance, lead
tracking, quality control, household mailings and combined statements.
100% Quality Control of new accounts opened on a same-day basis
performed by the New Accounts Processing Unit. All of the above
information is checked by a separate unit.
Account Maintenance with quality control.
Processing all investments to include:
- initial investments
- subsequent investments through lock box computer interface
- pre-authorized investments through ACH
- government allotments through ACH
- wire and Fund/SERV trades.
Establishing and maintaining Rights of Accumulation and Letters of
Intent with escrow handling as needed.
Processing tax ID certifications and NRA processing and handling
back-up withholding.
Processing regular and legal transfers of accounts.
Exchange processing via automated exchange system. Calls will be
automatically recorded.
Responding to shareholder calls and written inquires. Fund/Plan shall
assign a specific dedicated institutional representative.
Processing reinvested dividends of one fund into another fund.
Processing sweep purchases and redemptions for brokerage, bank, or
other accounts via tape or transmission.*
Generating account statements with copies to appropriate interested
parties.
Generating trade confirmations with copies to dealers, representatives
and fund.
Redemption processing to include:
- complete and partial redemptions
- selected group redemptions
- wire trade redemptions
- accommodate special liquidation processing
Interface to Fund/SERV System.*
Maintain dealer file by fund group to include dealer, branch,
representative number and name.
Commission processing with up to four commission tables.
Issuing and canceling of certificates (if applicable).
Replacement of certificates through surety bonds (if applicable).
Processing dividends from annual to daily dividend with monthly
payments.
Maintain Blue Sky reporting and produce daily and monthly reports.
Daily reports reflect a "warning system" that informs the funds'
administrator when it is within a certain percentage of shares registered
in a state, or within a certain time period for permit renewal.
Producing daily, monthly or periodic reports of shareholder activity.
Producing shareholder lists, labels, Ad Hoc reports to management,
etc.*
Addressing, mailing, and tabulation of annual proxy cards, as
necessary.
Preparation of federal tax information forms to include 1099-DIV's,
1099-B's, 1042S's, etc. to shareholders with tape to IRS.
Microfilming and indexing in PC system of all application, check
certification, correspondence and other pertinent shareholder
documents to provide automated location of these records.
System access by PC dial-up or by dedicated line (if applicable).*
Retirement Plan processing.*
Purchases or Sales by investors in the Series Funds will be mirrored
by the related purchase or sale in the Institutional Funds on the same
day.
Procedures will be instituted to ensure that purchases or sales by
investors in the
Market Tracking Fund will be mirrored by a sale or purchase by Smith
Breeden on the same day.
*Separate fees will apply for these services
Schedule B
SHAREHOLDER SERVICES AND TRANSFER AGENT FEE SCHEDULE
I. The following is our schedule for Shareholder and Transfer Agent
Services:
A) Institutional Portfolios
1) Short Duration US Government Fund
2) Intermediate Duration US Government Fund
3) Market Tracking Fund
$12.00 per Account per Year
B) Retail Portfolios
1) Short Duration US Government Fund
$15.60 per Account per Year
2) Intermediate Duration US Government Fund
$19.80 per Account per Year
3) Market Tracking Fund
$13.20 per Account per Year
C) Monthly Minimums Per Portfolio
1) Short Duration Portfolios
1 - Institutional Short Duration Portfolio $1,800
1 - Retail Short Duration Portfolio $1,200
$3,000
2) Intermediate Duration Portfolios
1 - Institutional Intermediate Duration Portfolio
$1,800
1 - Retail Intermediate Duration Portfolio
$1,200
$3,000
3) Market Tracking Portfolios
1 - Institutional Market Tracking Portfolio
$2,000
1 - Retail Market Tracking Portfolio $1,350
$3,350
II. Retirement Plans: (if applicable)
$12.00 per Account - Annual Maintenance Fee
(charged to shareholder account)
III. Fund/SERV: (Retail Only)
$50.00 Connection Fee per Portfolio per Month
$5,000 One-Time Set Up Charge (applicable across all Retail Funds)
OUT-OF-POCKET EXPENSES
The Funds will reimburse Fund/Plan Services monthly for all out-of-pocket
expenses, including telephone, postage, telecommunications, special reports,
record retention.
ADDITIONAL SERVICES
Additional/enhanced services or reports will be quoted upon request. To the
extent the Funds should decide to issue separate classes of shares,
additional fees will apply. Fees for activities of a non-recurring nature
such as fund consolidations, mergers or reorganizations will be subject to
negotiation.
Schedule C
As of the date of this Agreement, the Trust has authorized the issuance of
the following separate series of shares:
Smith Breeden Short Duration U.S. Government Series
Smith Breeden Market Tracking Series
Smith Breeden Intermediate Duration U.S. Government Series
ACCOUNTING SERVICES AGREEEMENT
THIS AGREEMENT, dated as of the 20th day of February, 1994
made by and between Smith Breeden Series Fund (the "Trust") a business
trust operating as an open-end management investment company, duly
organized and existing under the laws of the Commonwealth of
Massachusetts, and Fund/Plan Services, Inc. (the "Company") a
corporation duly organized and existing under the laws of the State of
Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is a registered open-end, management
investment company under the Investment Company Act of 1940, as
amended (the "Act"); and
WHEREAS, the Trust desires to appoint the Company as its
Accounting Services Agent to maintain and keep current the books,
accounts, records, journals or other records of original entry relating to
the business of the Trust as set forth in Schedule "A" of this Agreement (the
"Accounts and Records") and to perform certain other functions in
connection with such accounts and records; and
WHEREAS, the Trust is authorized by its Trust Instrument to issue
separate series of shares representing interests in separate investment
portfolios (the "Series"), which Series are identified on Schedule "C"
attached hereto, and which Schedule "C" may be amended from time to
time by mutual agreement of the Parties; and
WHEREAS, the Company is willing to perform such functions upon
the terms and conditions set forth below; and
WHEREAS, the Trust will cause to be provided certain information to
the Company as set forth below; and
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereto, intending to be legally
bound, do hereby agree as follows:
Section 1. For purposes of this Agreement, the terms Oral
Instructions and Written Instructions shall mean:
Oral Instructions: The term Oral Instruction shall mean
an authorization, instruction, approval, item or set of data, or information
of any kind transmitted to the Company in person or by telephone,
telegram, telecopy, or other mechanical or documentary means lacking a
signature, by a person or persons believed in good faith by the Company
to be a person or persons authorized by a resolution of the Board of
Trustees of the Trust, to give Oral Instructions on behalf of the Trust.
Written Instructions: The term Written Instruction shall
mean an authorization, instruction, approval, item or set of data or
information of any kind transmitted to the Company in original writing
containing original signatures or a copy of such document transmitted by
telecopy including transmission of such signature believed in good faith
by the Company to be the signature of a person authorized by a
resolution of the Board of Trustees of the Trust to give Written Instructions
on behalf of the Trust.
The Trust shall file with the Company a certified
copy of each resolution of its Board of Trustees authorizing execution of
Written Instructions or the transmittal of Oral Instructions as provided
above.
Section 2. To the extent it receives the necessary information
from the Trust or its agents by Written or Oral Instructions, the Company
shall maintain and keep current the following Accounts and Records
relating to the business of the Trust, in such form as may be mutually
agreed to between the Trust and the Company:
(a) Cash Receipts Journal
(b) Cash Disbursements Journal
(c) Dividends Paid and Payable Schedule
(d) Purchase and Sales Journals - Portfolio Securities
(e) Subscription and Redemption Journals
(f) Security Ledgers - Transaction Report and Tax Lot
Holdings Report
(g) Broker Ledger - Commission Report
(h) Daily Expense Accruals
(i) Daily Interest Accruals
(j) Daily Trial Balance
(k) Portfolio Interest Receivable and Income Journal
(l) Portfolio Dividend Receivable and Income Register
(m) Listing of Portfolio Holdings - showing cost, market
value and percentage of portfolio comprised of
each security.
The necessary information to perform the above
functions and the calculation of the Trust's net asset value as provided
below, is to be furnished by Written or Oral Instructions to the Company
daily (in accordance with the time frame identified in Section 7) prior to
the close of trading on the New York Stock Exchange.
Section 3. The Company shall perform the ministerial
calculations necessary to calculate the Trust's net asset value daily, in
accordance with the Trust's current Prospectus and utilizing the
information described in this Section. Portfolio items for which market
quotations are available by the Company's use of an automated financial
information service ("Service") shall be based on the closing prices of
such Service except where the Trust has given or caused to be given
specific Written or Oral Instructions to Utilize a different value. All of
the portfolio securities shall be given such values as the Trust provides by
Written or Oral Instructions including all restricted securities and other
securities requiring valuation not readily ascertainable solely by such
Service. The Company shall have no responsibility or liability for the
accuracy of prices quoted by such Service; for the accuracy of the
information supplied by the Trust; or for any loss, liability, damage, or cost
arising out of any inaccuracy of such data. The Company shall have no
responsibility or duty to include information or valuations to be provided
by the Trust in any computation unless and until it is timely supplied to
the Company in usable form.
Section 4. For all purposes under this Agreement, the
Company is authorized to act upon receipt of the first of any Written or
Oral Instruction it receives from the Trust or its agents on behalf of the
Trust. In cases where the first instruction is an Oral Instruction that is
not in the form of a document or written record, a confirmatory Written
Instruction or Oral Instruction in the form of a document or written record
shall be delivered, and in cases where the Company receives an
Instruction, whether Written or Oral, to enter a portfolio transaction on the
records, the Trust shall cause the broker/dealer to send a written
confirmation to the Company. The Company shall be entitled to rely on
the first Instruction received, and for any act or omission undertaken in
compliance therewith shall be free of liability and fully indemnified and
held harmless by the Trust, provided however, that in the event a Written
or Oral Instruction received by the Company is countermanded by a
timely later Written or Oral Instruction received by the Company prior to
acting upon such countermanded Instruction, the Company shall act upon
such later Written or Oral Instruction. The sole obligation of the company
with respect to any follow-up or confirmatory Written Instruction, Oral
Instruction in documentary or written form, or broker/dealer written
confirmation shall be to make reasonable efforts to detect any such
discrepancy between the original Instruction and such confirmation and to
report such discrepancy to the Trust. The Trust shall be responsible, at
the Trust's expense, for taking any action, including any reprocessing,
necessary to correct any discrepancy or error, and to the extent such
action requires the Company to act the Trust shall give the Company
specific Written Instruction as to the action required.
Section 5. The Trust shall cause the Trust's Custodian to
forward to the Company a daily statement of cash and portfolio
transactions and, at the end of each month, the Trust shall cause the
Trust's Custodian to forward to the Company a monthly statement of
portfolio transactions, which will be reconciled with the Company's
Accounts and Records maintained for the Trust. The Company will report
any discrepancies to the Custodian, and report any unreconciled items to
the Trust.
Section 6. The Company shall promptly supply daily and
periodic reports of the Trust as requested by the Trust and agreed upon
by the Company.
Section 7. The Trust shall provide and shall require each of its
agents (including without limitation its Transfer Agent and its Custodian) to
provide the Company as of the close of each business day, or on such
other schedule as the Trust determines is necessary, with Written or Oral
Instructions (to be delivered to the company by 11:00 AM Eastern Time
the next following business day) containing all data and information
necessary for the Company to maintain the Trust's Accounts and Records
and the Company may conclusively assume that the information it
receives by Written or Oral Instructions is complete and accurate. The
Trust is responsible to provide or cause to be provided to the Company
reports of share purchases, redemptions, and total shares outstanding on
the next business day after each net asset valuation.
Section 8. The Accounts and Records, in the agreed upon
format, maintained by the Company shall be the property of the Trust, and
shall be made available to the Trust promptly upon request and shall be
maintained for the periods prescribed in Rule 31a-2 under the Investment
Company Act of 1940, as amended. The Company shall assist the Trust's
independent auditors, or upon approval of the Trust, or upon demand,
any regulatory body, in any requested review of the Trust's Accounts and
Records but shall be reimbursed for all expenses and employee time
invested in any such review of the Trust's Accounts and Records outside
of routine and normal periodic review and audits. Upon receipt from the
Trust of the necessary information, the Company shall supply the
necessary data for the Trust or accountant's completion of any necessary
tax returns, questionnaires, periodic reports to Shareholders and such
other reports and information requests as the Trust and the Company
shall agree upon from time to time. Company acknowledges that the
records created or maintained by the Company on behalf of the Trust are
the property of the Trust and will be surrendered promptly as required
under Rule 31a-3 under the Investment Company Act of 1940, as
amended.
Section 9. In case of any request or demand for the
inspection of the Share records of the Trust, Company, as Accounting
Services Agent, shall endeavor to notify the Trust and to secure
instructions as to permitting or refusing such inspection. However,
Company may exhibit such records to any person in any case where it is
advised by its counsel that it may be held liable for failure to do so.
Section 10. The Company and the Trust may from time to time
adopt such procedures as they agree upon in writing, and the Company
may conclusively assume that any procedure approved by the Trust or
directed by the Trust, does not conflict with or violate any requirements of
its Prospectus, Articles of Incorporation, By-Laws, or any rule or regulation
of any regulatory body or governmental agency. The Trust shall be
responsible for notifying the Company of any changes in regulations or
rules which might necessitate changes in the Company's procedures, and
for working out with the Company such changes.
Section 11. (a) The Company, its directors, officers,
employees, shareholders, and agents shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of this Agreement, except losses
resulting from willful misfeasance, bad faith or gross negligence on the
part of the Company in the performance of its obligations and duties
under this Agreement.
(b) Any person, even though also a director, officer,
employee, shareholder or agent of the Company, who may be or become
an officer, trustee, employee or agent of the Trust, shall be deemed, when
rendering services to the Trust or acting on any business of the Trust
(other than services or business in connection with the Company's duties
hereunder), to be rendering such services to or acting solely for the Trust
and not as a director, officer, employee, shareholder or agent of, or one
under the control or direction of the Company even though paid by it.
(c) Notwithstanding any other provision of this
Agreement, the Trust shall indemnify and hold harmless the Company, its
directors, officers, employees, shareholders and agents from and against
any and all claims, demands, expenses and liabilities (whether with or
without basis in fact or law) of any and every nature which the Company
may sustain or incur or which may be asserted against the Company by
any person by reason of, or as a result of: (i) any action taken or omitted
to be taken by the Company in good faith hereunder; (ii) in reliance upon
any certificate, instrument, order or stock certificate or other document
reasonably believed by it to be genuine and to be signed, countersigned
or executed by any duly authorized person, upon the Oral Instructions or
Written Instructions of an authorized person of the Trust or upon the
opinion of legal counsel for the Trust or its own counsel; or (iii) any action
taken or omitted to be taken by the Company in connection with its
appointment in good faith in reliance upon any law, act, regulation or
interpretation of the same even though the same may thereafter have
been altered, changed, amended, or repealed. However, indemnification
under this subparagraph shall not apply to actions or omissions of the
Company or its directors, officers, employees, shareholders, or agents in
cases of its or their own negligence, willful misconduct, bad faith, or
reckless disregard of its or their own duties hereunder.
(d) The Company shall give written notice to the Trust
within ten (10) business days of receipt by the Company of a written
assertion or claim of any threatened or pending legal proceeding which
may be subject to this indemnification. However, the failure to notify the
Trust of such written assertion or claim shall not operate in any manner
whatsoever to relieve the Trust of any liability arising from this Section or
otherwise.
(e) For any legal proceeding giving rise to this
indemnification, the Trust shall be entitled to defend or prosecute any
claim in the name of the Company at its own expense and through
counsel of its own choosing if it gives written notice to the Company
within ten (10) business days of receiving notice of such claim.
Notwithstanding the foregoing, the Company may participate in the
litigation at its own expense through counsel of its own choosing. If the
Trust does choose to defend or prosecute such claim, then the parties
shall cooperate in the defense or prosecution thereof and shall furnish
such records and other information as are reasonably necessary.
(f) The Trust shall not settle any claim without the
Company's express written consent which shall not be unreasonably
withheld. The Company shall not settle any claim without the Trust's
express written consent which shall not be unreasonably withheld.
Section 12. All financial data provided to, processed by, and
reported by the Company under this Agreement shall be stated in United
States dollars. The Company shall have no obligation to convert to,
equate, or deal in foreign currencies or values, and expressly assumes no
liability for any currency conversion or equation computations relating to
the affairs of the Trust.
Section 13. The Trust agrees to pay Fund/Plan compensation
for its services and to reimburse it for expenses, at the rates and amounts
as set forth in Schedule "B" attached hereto, and as shall be set forth in
any amendments to such Schedule "B" approved by the Trust and
Fund/Plan.
Section 14. Nothing contained in this Agreement is intended to
or shall require the Company, in any capacity hereunder, to perform any
functions or duties on any holiday, day of special observance or any other
day on which the New York Stock Exchange is closed. Functions or
duties normally scheduled to be performed on such days shall be
performed on, and as of, the next succeeding business day on which the
New York Stock Exchange is open. Not withstanding the foregoing, the
Company shall compute the net asset value of the Trust on each day
required pursuant to Rule 22c-1 promulgated under the Investment Act of
1940, as amended.
Section 15. (a) The term of this Agreement shall be one year,
commencing on the date hereof and shall continue in force from year to
year thereafter upon review and agreement of the Parties.
(b) Either Party may give written notice to the other of
the termination of this Agreement, such termination to take effect at the
time specified in the notice, not less than ninety (90) days after the giving
of the notice. Upon the effective termination date, the Trust shall pay to
the Company such compensation as may be due as of the date of
termination and shall likewise reimburse the Company for any out-of-
pocket expenses and disbursements reasonably incurred by the Company
to such date.
(c) In the event that in connection with termination of
this Agreement a successor to any of the Company's duties or
responsibilities under this Agreement is designated by the Trust by written
notice to the Company, the Company shall, promptly upon such
termination and at the expense of the Trust, transfer all Required Records
and shall cooperate in the transfer of such duties and responsibilities.
Section 16. Any notice or other communication required by or
permitted to be given in connection with this Agreement shall be in
writing, and shall be delivered in person or sent by first class mail,
postage prepaid to the respective parties as follows:
If to the Trust:
Smith Breeden Series Fund
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
Attention: Gerald J. Madigan, President
If to the Company:
Fund/Plan Services, Inc.
P.O. Box 874
Conshohocken, PA 19428
Attention: Kenneth J. Kempf, President
Section 17. The Trust represents and warrants to Company that
the execution and delivery of this Accounting Services Agreement by the
undersigned officers of the Trust has been duly and validly authorized by
resolution of the Board of Trustees of the Trust.
Section 18. This Agreement may be amended from time to time
by supplemental agreement executed by the Trust and the Company and
the compensation stated in Schedule "B" attached hereto may be adjusted
accordingly as mutually agreed upon.
Section 19. This Agreement shall extend to and shall be
binding upon the parties hereto and their respective successors and
assigns; provided, however, that this Agreement shall not be assignable
by the Trust without written consent of Company or by Company without
the written consent of the Trust, authorized by a resolution of its Board of
Trustees.
Section 20. This Agreement shall be governed by the laws of
the Commonwealth of Pennsylvania.
Section 21. The Company acknowledges that it has received
notice of and accepts the limitations of the Trust's liability as set forth in
its Agreement and Declaration of Trust. The Company agrees that the
Trust's obligations under this Agreement with respect to the Trust and any
other specific Trust shall be limited to such Trust and to its assets, and
that the Company shall not seek satisfaction of any such obligation from
the Shareholders of the Trust nor from any trustee, officer, employee or
agent of the Trust or the Series, nor from the assets of Shareholders of
any other Funds.
Section 22. This Agreement sets forth the entire understanding
of the parties with respect to the provisions contemplated hereby, and
supersedes any and all prior agreements, arrangements and
understandings relating to such services.
Section 23. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original agreement
but such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement, together with Schedules "A", "B" and "C", to be signed by their
duly authorized officers and their corporate seals hereunto duly affixed
and attested, as of the day and year first above written.
SMITH BREEDEN SERIES FUND
Attest: Marianthe S. Mewkill By:
________________________________
Gerald J. Madigan
President
FUND/PLAN SERVICES, INC.
Attest: Mary P. Efstration By:
_____________________________
Kenneth J. Kempf,President<PAGE>
Schedule A
ACCOUNTING SERVICES UNIT
ACCOUNTING & PORTFOLIO VALUATION SERVICES FOR
THE SMITH BREEDEN SERIES FUND
Daily Accounting Services
1) Calculate Net Asset Value (and Offering Price) Per Share:
- Update the daily market value of securities held by the Funds
using Smith Breeden supplied prices. Prices will be
transmitted electronically from Smith Breeden to Fund/Plan
and then uploaded directly into the Accounting System.
- If necessary, enter manual prices supplied by client and/or
broker.
- Prepare NAV proof sheet. Review components of change in
NAV for reasonableness.
- Review variance reporting on-line and in hard copy for price
changes in individual securities using variance levels
established by client. Verify US dollar security prices
exceeding variance levels by notifying client and pricing
sources of noted variance.
- Review for ex-dividend items indicated by pricing sources;
trace to general ledger for agreement.
- Communicate required pricing information (NAV/POP) to client,
Transfer Agent and, electronically, to NASDAQ.
2) Complete Daily Dividend Fund Requirements - Intermediate Funds:
- Calculate net investment income available for distribution daily.
- Calculate daily dividend rate, and 1, 7, 30-day yields.
- Supply Transfer Agent with distribution rates.
- Verify system calculated dollar weighted average maturity.
3) Determine and Report Cash Availability to Fund by approximately
10:00 AM Eastern Time:
- Receive daily cash and transaction statements from the
custodian by 8:30 AM Eastern time.
- Fax hard copy calculations with all details to client.
- Supply client with 5-day cash projection report, upon request.
- Prepare and complete daily bank cash reconciliations
including documentation of any reconciling items and notify
the custodian/client.
- The Funds' Transfer Agent will also support the client in receipt
of timely cash information.
4) Reconcile and Record All Daily Expense Accruals:
- Accrue expenses based on F/PS Administration supplied
budget either as percentage of Fund's net assets or specific
dollar amounts.
- If applicable, monitor expense limitations established by client.
- If applicable, accrue daily amortization of organization
expense.
- If applicable, complete daily accrual of 12(b)1 expenses.
5) Verify and Record All Daily Income Accruals for Debt Issues:
- Review and verify all system generated Interest and
Amortization reports.
- Establish unique security codes for bond issues to permit
segregated Trial Balance income reporting.
6) Monitor Domestic Securities Held for Cash Dividends, corporate
actions and capital changes such as splits, mergers, spinoffs, etc.
and process appropriately.
- Monitor electronically received information from Muller Data
Corporation for all domestic securities.
- Review current daily security trades for dividend activity.
- Interface with custodian for timely collection and postings of
corporate actions, dividends and interest/pre-payments.
7) Enter All Security Trades on Investment Accounting System (IAS)
based on written instructions from the client or custodian.
- Review system verification of trade and interest calculations.
- Verify settlement through the custodian statements.
- Maintain security ledger transaction reporting.
- Maintain tax lot holdings.
- Determine realized gains or losses on security trades.
- Provide complete broker commission reporting.
8) Enter All Fund Share Transactions on IAS:
- Process activity identified on the Transfer Agent reports.
- Verify settlement through the custodian statements.
- Reconcile to the Fund/Plan Services' Transfer Agent report
balances.
- Account for mirror trades between the Institutional and Retail
Funds, as required.
9) Prepare and Reconcile/Prove Accuracy of the Daily Trial Balance
(listing all asset, liability, equity, income and expense accounts)
- Post manual entries to the general ledger.
- Post custodian bank activity.
- Post shareholder and security transactions.
- Post and verify system generated activity, i.e., income and
expense accruals.
- Prepare general ledger net cash proof used in NAV calculation.
10) Review and Reconcile With Custodian Statements:
- Verify all posted interest, dividends, expenses, and shareholder
and security payments/receipts, etc. (discrepancies will be
reported to and resolved by the custodian).
- Post all cash settlement activity to the Trial Balance.
- Reconcile to ending cash balance accounts.
- Clear IAS subsidiary reports with settled amounts.
- Track status of past due items and failed trades with the
custodian.<PAGE>
11) Submission of Daily Accounting Reports to Client:
- Trial Balance
- Portfolio Valuation (listing inclusive of holdings, cost, market
value, unrealized appreciation/depreciation and percentage of
portfolio comprised of each security).
- NAV Calculation Report (with Daily Distribution Rate, if
applicable).
- Cash Availability
- 5-day Cash Projection Report, if requested.
- Additional reports readily available.
Monthly Accounting Services
1) Full Financial Statement preparation (automated Statements of
Assets and Liabilities, of Operations and of Changes in Net Assets)
and submission to Smith Breeden by 10th business day.
2) Submission of Monthly Automated IAS Reports to Fund/Client:
- Security Purchase/Sales Journal
- Interest and Maturity Report
- Brokers Ledger (Commission Report)
- Security Ledger Transaction Report with Realized
Gains/Losses
- Security Ledger Tax Lot Holdings Report
- Additional reports available upon request.
3) Reconcile Accounting Asset Listing to Custodian Asset Listing and
provide to Smith Breeden:
- Report any security balance discrepancies to the
custodian/client.
4) Provide Monthly Analysis and Reconciliation of Additional Trial
Balance Accounts to Smith Breeden, inclusive of:
- Cash reconciliation
- Share reconciliation
- Subscription/Liquidation Schedule
- I.O. Schedule
- Interest/dividend receivable and income
- Payable/receivable for securities purchased and sold
- Payable/receivable for Fund shares; issued and redeemed
- Upon request, security cost and realized gains/losses schedule
(presently available semi-annually)
5) If Appropriate, Prepare and Submit to Client:
- SEC yield reporting (non-money market funds with domestic
and ADR securities only).
- Income by state reporting
- Standard Industry Code Valuation Report
- Alternative Minimum Tax Income segregation schedule<PAGE>
Annual (and Semi-Annual) Accounting Services
1) Assist and supply Deloitte & Touche with schedules supporting
securities and shareholder transactions, income and expense
accruals, etc. during the year in accordance with standard audit
assistance requirements.
2) Provide NSAR Reporting (Accounting Questions):
If applicable, answer the following items:
2, 12B, 20, 21, 22, 23, 28, 30A, 31, 32, 35, 36, 37, 43, 53, 55, 62,
63, 64B, 71, 72, 73, 74, 75, 76
BASIC ASSUMPTIONS
The Fee Schedule in Schedule "B" for The Smith Breeden Funds is based
upon review of the Funds' most recent N1A and other information
provided to us by Gerald J. Madigan. To the extent our understanding of
your current requirements and procedures should be incorrect, please
advise us.
Basic Assumptions:
1. It is our understanding that the Institutional Funds will hold an
average 50-100 issues with approximately 50-100 trades per year
per fund. The US Government Series Fund will invest all of its
assets in the appropriate Institutional Fund. To the extent
incremental increases in number of issues and trading activity levels
correspond to portfolio/Fund asset level increases, no additional
fees are anticipated.
2. The portfolios'/Funds' tax year-end coincides with its fiscal year-end.
No additional accounting requirements are expected to identify or
maintain book-tax differences.
To the extent tax accounting for certain securities differs from the
book accounting, it will be done by the Funds' administrator or the
Funds' independent accountants. We would recommend book/tax
differences be minimized. Wherever possible ASU will include on
the books of the Fund necessary tax adjustments and proper
security cost basis. ASU will assist the client and the Administrator
in this process by supplying segregated Trial Balance reporting and
supplemental reports as necessary.
3. Smith Breeden will supply Fund/Plan Services with prices on
Mortgage/Asset-Backed Securities and hedges within their portfolios.
Initially, Fund/Plan would receive all prices via fax, with follow-up via
telephone. (It is our understanding these prices would be available
and supplied to the Accounting Services Unit (ASU) no later than
4:30 PM Eastern time.) As of date of this contract, Smith Breeden
and Fund/Plan Services have built an interface into the Investment
Accounting System to download prices systematically. Mutually
agreed upon costs for improvements to this interface will be borne
by Smith Breeden. Smith Breeden and ASU will continue to
enlarge the daily price file and minimize the number of manually
priced securities such as TBA/non-standard cusips.
4. To the extent the portfolios should ever purchase/hold open-end
investment companies (RIC's), procedural discussions should take
place between Fund/Plan Services and Fund management clarifying
the appropriate pricing and dividend rate sources.
5. The Accounting Services Unit will supply daily Portfolio Valuation
Reports (via fax or remote printing) to Smith Breeden identifying
current security positions, original/ amortized cost, security market
values and changes in unrealized appreciation/ depreciation.
Smith Breeden will review these reports and promptly notify the
Accounting Unit of any possible problems, trade discrepancies,
incorrect security prices or capital change information that could
result in a misstated portfolio/Fund NAV or daily distribution rate.
6. It is assumed for all debt and hedge issues that the advisor will
supply the Accounting Unit with critical income information such as
accrual methods, principal and interest payment frequency details,
coupon payment dates, floating/adjustable rate changes, and
complete security descriptions with issue types and cusip numbers.
If applicable for proper income accrual accounting, Accounting
Services Unit will look to Fund Management to supply PSA and
related cash flow models for the mortgage/asset backed securities
and IO/PO positions held in the Funds.
7. Fund/Plan Services as Custody Administrator will provide the
Accounting Unit with daily custodian statements (through on-line
access to the custody system) reflecting all prior-day cash activity on
behalf of each portfolio by 8:30 AM Eastern time. Complete and
clear descriptions of any postings, inclusive of cusip numbers,
interest and principal payment dates, capital stock details, expense
authorizations, beginning/ending balances, etc. will be provided by
the custodian's reports or system.
8. It is assumed that the custodian (supported by Fund/Plan Services'
Custody Administration) will monitor and report on all failed trades,
trade/income discrepancies, and unsettled dividends/interest/paydowns
and capital changes. Additionally, the custodian will process all
applicable capital change paperwork based upon advice from the client
and Fund/Plan. Fund/Plan Services will supply segregated Trial Balance
reporting and supplemental reports to assist in this process.
9. Specific deadlines and complete advisor supplied information will be
identified for all security trades in order to minimize any settlement
problems, NAV miscalculations or income accrual/daily distribution
rate adjustments.
Trade Authorization Forms, with the appropriate officer signature,
should be supplied to Fund/Plan on all security trades placed by the
Fund no later than settlement date by 12:30 PM Eastern time for
money market (same day) issues, and trade date plus one, by 11:00
AM Eastern time for non-money market securities. Receipt of trade
information within these identified deadlines may be via telex, fax, or
on-line system access. To the extent applicable, the investment
advisor will also communicate all required trade information directly
to Fund/Plan Services' Custody Administration who in turn will
supply Accounting Services Unit with the details in accordance with
the above stated deadlines.
10. To the extent the Funds/portfolios should establish a Line of Credit
with the custodian for temporary administrative purposes and/or
leveraging the portfolio, the administrator will complete the
appropriate paperwork/monitoring the segregation of assets and
adequacy of collateral. Accounting will reflect appropriate interest
expense accrual charges on the daily Trial Balance and adjust as
necessary at month-end.
11. The Funds do not currently expect to participate in Short Sales (not
against the box) or Security Lending of their portfolio securities,
other than Dollar Rolls. To the extent they do so in the future,
additional fees will apply after the appropriate discussions have
taken place with Fund management.
12. The Funds do not expect to invest in foreign (non-US dollar
denominated) securities, futures or options on foreign securities,
currencies, or related indices. To the extent these investment
strategies should change, additional fees will apply after the
appropriate procedural discussions have taken place between
Accounting Services Unit and Fund management. (Advance notice
is requested should the Funds/portfolios commence trading in these
investments.)
13. To the extent that the Funds/portfolios will hold any issues with
Original Issue Discount (OID), it is our understanding that OID is a
tax requirement and, as such, not necessarily reflected on the books
of the Fund. ASU's current clients have not required any OID
support. To the extent the Funds/portfolios should, in the future,
own securities with OID, it is expected that the Funds' auditors will
complete the necessary OID adjustments for financial statements
and/or tax reporting.
14. With respect to Mortgage/Asset-Backed securities such as GNMA's,
FHLMC's, FNMA's, CMO's, ARM's, etc. the custodian or the client
will provide ASU with current principal repayment factors on a timely
basis in accordance with the appropriate securities' schedule.
Income accrual adjustments (to the extent necessary) based upon
initial estimates will be completed by ASU when actual
principal/income payments are collected by the custodian.
Schedule B
FUND ACCOUNTING AND PORTFOLIO VALUATION SERVICES:
(Investments in Domestic and ADR Securities Only)
All Accounting Services fees are quoted with the assumption that Fund
Administration, Transfer Agent Services, and Custody Administration will
be provided by Fund/Plan Services, Inc.
I. Annual Fee Schedule Per Portfolio: (1/12th payable monthly)
A) Short Duration Series
$6,000 On the First $ 10 Million of Average Net Assets
.0001 Over $ 10 Million of Average Net Assets
B) Intermediate Duration Series
$7,000 On the First $ 10 Million of Average Net Assets
.0001 Over $ 10 Million of Average Net Assets
C) Market Tracking Fund
$6,000 On the First $ 10 Million of Average Net Assets
.0001 Over $ 10 Million of Average Net Assets
(The minimum annual fees for the listed Portfolios are allocated as
follows)
D) Institutional Short Duration Series
$27,350 On the First $ 10 Million of Average Net Assets
.0004 On the Next $ 40 Million of Average Net Assets
.0003 On the Next $ 50 Million of Average Net Assets
.0001 Over $100 Million of Average Net Assets
E) Institutional Intermediate Duration Series
$27,350 On the First $ 10 Million of Average Net Assets
.0004 On the Next $ 40 Million of Average Net Assets
.0003 On the Next $ 50 Million of Average Net Assets
.0001 Over $100 Million of Average Net Assets
F) Institutional Market Tracking Fund
$27,350 On the First $ 10 Million of Average Net Assets
.0004 On the Next $ 40 Million of Average Net Assets
.0003 On the Next $ 50 Million of Average Net Assets
.0001 Over $100 Million of Average Net Assets
(The above fee schedule is only for this group of six portfolios.
If the status of any of these Portfolios changes, it will be
necessary to review the fee schedule.)<PAGE>
II. Pricing Service Quotation Fee:
(Based on individual cusip or security identification numbers.)
A) Muller Data Corporation *(if applicable)
*Based on current vendor costs, subject to change.
GNMA Quotes $ .25 per Quote per Bond
Government/Corporate
Short & Long Term Quotes $ .50 per Quote per Bond
Tax-Exempt Short & Long Term Quotes $ .55 per Quote per Bond
Tax-Exempt Variable Rate Change $ .55 per Rate Change per Issue
Information
Minimum Weekly File Transmission is Assumed
There is currently no charge for the domestic dividend and
capital change information transmitted daily to Fund/Plan
Services from Muller Data Corporation.
B) Telerate Systems, Inc. *(if applicable)
*Based on current vendor costs, subject to change.
Specific costs will be identified based upon options selected
by the client and will be billed monthly.
C) Quotron Systems, Inc. (if applicable)
There is currently no charge for the domestic security prices
supplied by Quotron Systems, Inc.
III. Yield Calculation: (if applicable)
Provide up to 12 reports per year to reflect the yield calculations for
non-money market funds required by the SEC. $1,000 per year per
fund (domestic and ADR securities only).
OUT-OF-POCKET EXPENSES
The Funds will reimburse Fund/Plan Services monthly for all out-of-pocket
expenses, including telephone, postage, telecommunications, special
reports, record retention, and the cost of copying and sending materials
to auditors for off-site audits will be an additional expense.<PAGE>
ADDITIONAL SERVICES
To the extent the Funds commence using investment techniques such as
Security Lending, Precious Metals, and/or Foreign Trading, additional fees
will apply. Additional/enhanced services or reports will be quoted upon
request. To the extent the Funds should decide to issue separate classes
of shares, additional fees will apply. Fees for activities of a non-recurring
nature such as fund consolidations, mergers or reorganizations will be
subject to negotiation.<PAGE>
Schedule C
As of the date of this Agreement, the Trust has authorized the issuance of
the following separate series of shares:
Smith Breeden Short Duration U.S. Government Series
Smith Breeden Intermediate Duration U.S. Government Series
Smith Breeden Market Tracking Series
INDEPENDENT AUDITORS' CONSENT
Smith Breeden Series Fund:
We consent to use in Post-Effective Amendment No. 11 to Registration
Statement No. 33-43089 of our reports dated May 12, 1995 appearing in
the Statement of Additional Information, which is a part of such
Registration Statement, and to the reference to us under the captions
"Financial Highlights" appearing in the Prospectus, which also is a
part of such Registration Statement and "Experts" appearing in the
Statement of Additional Information.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
May 31, 1995
DISTRIBUTION AND SERVICES PLAN
This Plan (the "Plan") constitutes the Distribution and Services Plan
of Smith Breeden Short Duration U.S. Government Series (the "Fund"), a
separate series of Smith Breeden Series Fund, a Massachusetts business
trust (the "Trust"), adopted pursuant to the provisions of Rule 12b-1 under
the Investment Company Act of 1940 (the "Act"). During the effective term
of this Plan, Smith Breeden Associates, Inc. ("Smith Breeden"), the
investment advisor to Smith Breeden Short Duration U.S. Government
Fund (the "Portfolio"), in which the Fund invests all of its assets, may
make payments out of the investment advisory fee to be received by
Smith Breeden from the Portfolio to investment dealers and other persons
providing services to the Fund upon the terms and conditions hereinafter
set forth. No payments by the Fund shall be made directly by the Fund
under this Plan for the purposes set forth in Section 1.
Section 1. Smith Breeden may make payments to investment dealers
or the other persons providing services to the Fund, in the form of fees or
reimbursements, as compensation for services provided and expenses
incurred for purposes of promoting the sale of shares of the Fund,
reducing redemptions of shares, or maintaining or improving services
provided to shareholders by investment dealers and other persons. The
amount of such payments and the purposes for which they are made
shall be determined by Smith Breeden. Smith Breeden's payments
covered by this Plan shall not exceed in any fiscal year the annual rate of
0.25% of the average net asset value of the Fund, as determined at the
close of each business day during the year. A majority of the Qualified
Trustees (as defined below) may, at any time and from time to time, may
reduce the amount of such payments covered by this Plan, or may
suspend the operation of the Plan for such period or periods of time as
they may determine.
Section 2. This Plan shall not take effect until:
(a) it has been approved by a vote of a majority of the
outstanding voting securities of the Fund; and
(b) it has been approved, together with any related
agreements, by votes, of the majority (or whatever greater
percentage may, from time to time, be required by Section
12(b) of the Act or the rules and regulations thereunder) of
both (i) the Trustees of the Trust, and (ii) the Qualified Trustee
of the Trust, cast in person at a meeting called for the purpose
of voting on this Plan or such agreement.
Section 3. This Plan shall continue in effect for a period of more
than one year after it takes effect only so long as such continuance is
specifically approved at least annually in the manner provided for approval
of this Plan in Section 2(b).
Section 4. Smith Breeden shall provide to the Trustees of the Trust,
and the Trustees shall review, at least quarterly, a written report of the
amounts covered by this Plan and the purposes for which such
expenditures were made.
Section 5. This Plan may be terminated at any time by vote of a
majority of the Qualified Trustees, or by vote of a majority of the Fund's
outstanding voting securities.
Section 6. All agreements with any person relating to
implementation of this Plan shall be in writing, and any agreement related
to this Plan shall provide:
(a) that such agreement may be terminated at any
time, without payment of any penalty, by vote of a majority of
the Qualified Trustees or by vote of a majority of the Fund's
outstanding voting securities, on not more than 60 days'
written notice to any other party to the agreement; and
(b) that such agreement shall terminate automatically
in the event of its assignment.
Section 7. This Plan may not be amended to increase materially the
amount of distribution expenses permitted pursuant to Section 1 hereof
without the approval of a majority of the outstanding voting securities of
the Fund, and all material amendments to this Plan shall be approved in
the manner provided for approval of this Plan in Section 2(b).
Section 8. As used in this Plan, (a) the term "Qualified Trustees"
shall mean those Trustees of the Trust who are not interested persons of
the Trust, and have no direct or indirect financial interest in the operation
of this Plan or any agreements related to it, and (b) the terms
"assignment", "interested person" and "vote of a majority of the
outstanding voting securities" shall have the respective meaning specified
in the Act and the rules and regulations thereunder, subject to such
exemptions as may be granted by the Securities and Exchange
Commission.
Section 9. A copy of the Amended and Restated Declaration of
Trust of the Trust is on file with the Secretary of The Commonwealth of
Massachusetts and notice is hereby given that this instrument is executed
on behalf of the Trustees of the Trust as Trustees and not individually, and
that the obligations of or arising out of this instrument are not binding
upon any of the Trustees, officers or shareholders individually but are
binding only upon the assets and property of the Trust.
Adopted as of August 1, 1994.
DISTRIBUTION AND SERVICES PLAN
This Plan (the "Plan") constitutes the Distribution and Services Plan
of Smith Breeden Intermediate Duration U.S. Government Series (the
"Fund"), a separate series of Smith Breeden Series, a Massachusetts
business trust (the "Trust"), adopted pursuant to the provisions of Rule
12b-1 under the Investment Company Act of 1940 (the "Act"). During the
effective term of this Plan, Smith Breeden Associates, Inc., the Fund's
investment advisor ("Smith Breeden") may make payments out of the
investment advisory to be received by Smith Breeden from the Fund to
investment dealers and other persons providing services the Fund upon
the terms and conditions hereinafter set forth. No payments by the Fund
shall be made directly by the Fund under this plan for the purposes set
forth in Section 1.
Section 1. Smith Breeden may make payments to investment dealers or
the other persons providing services to the Fund, in the form of fees or
reimbursements, as compensation for services provided and expenses
incurred for purposes of promoting the sale of shares of the Fund,
reducing redemptions of shares, or maintaining or improving services
provided to shareholders by investment dealers and other persons. The
amount of such payments and the purposes for which they are made
shall be determined by Smith Breeden. Smith Breeden's payments
covered by this Plan shall not exceed in any fiscal year the annual rate of
0.25% of the average net asset value of the Fund, as determined at the
close of each business day during the year. A majority of the Qualified
Trustees (as defined below) may, at any time and from time to time, may
reduce the amount of such payments covered by this Plan, or may
suspend the operation of the Plan for such period or periods of time as
they may determine.
Section 2. This Plan shall not take effect until:
(a) it has been approved by a vote of a majority of the
outstanding voting securities of the Fund; and
(b) it has been approved, together with any related
agreements, by votes, of the majority (or whatever greater
percentage may, from time to time, be required by Section
12(b) of the Act or the rules and regulations thereunder) of
both (i) the Trustees of the Trust, and (ii) the Qualified Trustee
of the Trust, cast in person at a meeting called for the purpose
of voting on this Plan or such agreement.
Section 3. This Plan shall continue in effect for a period of more
than one year after it takes effect only so long as such continuance is
specifically approved at least annually in the manner provided for approval
of this Plan in Section 2(b).
Section 4. Smith Breeden shall provide to the Trustees of the Trust,
and the Trustees shall review, at least quarterly, a written report of the
amounts covered by this Plan and the purposes for which such
expenditures were made.
Section 5. This Plan may be terminated at any time by vote of a
majority of the Qualified Trustees, or by vote of a majority of the Fund's
outstanding voting securities.
Section 6. All agreements with any person relating to
implementation of this Plan shall be in writing, and any agreement related
to this Plan shall provide:
(a) that such agreement may be terminated at any
time, without payment of any penalty, by vote of a majority of
the Qualified Trustees or by vote of a majority of the Fund's
outstanding voting securities, on not more than 60 days'
written notice to any other party to the agreement; and
(b) that such agreement shall terminate automatically
in the event of its assignment.
Section 7. This Plan may not be amended to increase materially the
amount of distribution expenses permitted pursuant to Section 1 hereof
without the approval of a majority of the outstanding voting securities of
the Fund, and all material amendments to this Plan shall be approved in
the manner provided for approval of this Plan in Section 2(b).
Section 8. As used in this Plan, (a) the term "Qualified Trustees"
shall mean those Trustees of the Trust who are not interested persons of
the Trust, and have no direct or indirect financial interest in the operation
of this Plan or any agreements related to it, and (b) the terms
"assignment", "interested person" and "vote of a majority of the
outstanding voting securities" shall have the respective meaning specified
in the Act and the rules and regulations thereunder, subject to such
exemptions as may be granted by the Securities and Exchange
Commission.
Section 9. A copy of the Amended and Restated Declaration of
Trust of the Trust is on file with the Secretary of The Commonwealth of
Massachusetts and notice is hereby given that this instrument is executed
on behalf of the Trustees of the Trust as Trustees and not individually, and
that the obligations of or arising out of this instrument are not binding
upon any of the Trustees, officers or shareholders individually but are
binding only upon the assets and property of the Trust.
Adopted as of August 1, 1994.
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<ARTICLE> 6
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<NUMBER> 001
<NAME> SMITH BREEDEN SHORT DURATION US GOV'T SERIES
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<PERIOD-END> MAR-31-1995
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<DISTRIBUTIONS-OF-INCOME> 13504268
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<NUMBER-OF-SHARES-REDEEMED> 10018137
<SHARES-REINVESTED> 441809
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<ACCUMULATED-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 9.90
<PER-SHARE-NII> 0.628
<PER-SHARE-GAIN-APPREC> 0.000
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<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> SMITH BREEDEN INTERMEDIATE DURATION US GOV'T SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 34255920
<INVESTMENTS-AT-VALUE> 34750376
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<PAYABLE-FOR-SECURITIES> 3229302
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<ACCUMULATED-NII-PRIOR> 3937
<ACCUMULATED-GAINS-PRIOR> 28445
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</TABLE>
