[SMITH BREEDEN MUTUAL FUNDS LOGO APPEARS HERE]
SEMI-ANNUAL REPORTS
SMITH BREEDEN SHORT DURATION
U.S. GOVERNMENT FUND
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT FUND
SMITH BREEDEN U.S. EQUITY MARKET PLUS(R) FUND
SEPTEMBER 30, 1999
<PAGE>
[SMITH BREEDEN MUTUAL FUNDS LOGO APPEARS HERE]
Dear Shareholder:
The third quarter of 1999 ended on a positive note following three volatile
months in the financial markets. Many equity investors experienced losses
during the quarter as concerns over rising interest rates, weaker corporate
earnings and Y2K drove down stock prices. The average diversified U.S. stock
fund posted a loss of 5.39% according to Lipper Analytical. The S&P 500 stock
index fell 6.56% while the Dow Jones Industrials fell 5.78%. Only the
technology heavy Nasdaq Composite rose in value, up 2.24%
The Smith Breeden Equity Market Plus(R) Fund lost 6.38% during the quarter,
just slightly behind the S&P 500 stock index. However, the Fund's year-to-date
performance through 9/30/99 was a positive 4.94% and its 12-month total return
was 27.05%. The Equity Market Plus Fund remains fully invested relative to the
S&P 500 Index. In the Fund's fixed-income component, the yield spread between
Agency mortgage-backed securities and Treasury securities of comparable
interest rate risk widened. As a result, mortgage-backed securities (as well as
corporate bonds) lagged Treasurys and Agencys for the quarter. We believe the
volatility and widening of these yield spreads present attractive opportunities
to investors as yield spreads should revert back to more normal levels.
Bond investors experienced an interest-rate hike during the quarter and many
expressed concerns about additional rate increases in the future. This caused
the average taxable-bond fund's return to fall 0.16% for the quarter. Bond
funds with shorter durations performed best during the quarter with the average
short duration bond fund gaining 0.63%. Ultrashort bond funds (those with a
portfolio duration of 12 months or less) rose 0.81%. The Smith Breeden
Intermediate and Short Duration U.S. Government funds performed a bit better,
gaining 0.68% and 0.83% respectively.
Smith Breeden is committed to using prudent investment strategies with which
you can build a diversified mutual fund portfolio and pursue your most
important financial goals. Consistent with this tradition, each Smith Breeden
fund seeks not only to earn returns in excess of its respective benchmark, but
to do so without straying substantially from that benchmark's risk.
For more information about Smith Breeden Mutual Funds please call us at
(800) 221-3138 or visit Smith Breeden's internet site at www.smithbreeden.com.
Thank you for your continued trust and investment in the Smith Breeden Mutual
Funds.
Sincerely,
/s/ DOUGLAS T. BREEDEN /s/ MICHAEL J. GIARLA
Douglas T. Breeden Michael J. Giarla
Chairman President
- --------------------------------------------------------------------------------
Past performance does not guarantee future results. Share prices will vary, and
you may have a gain or loss when you redeem your shares. Average annual total
returns through September 30, 1999 for the funds are as follows: Smith Breeden
Short Duration U.S. Government Fund: 1-year 3.41%, 5-years 5.53%, since
inception 3/31/92 5.25%. Smith Breeden Intermediate Duration U.S. Government
Fund: 1-year 2.09%, 5-years 7.52%, since inception 3/31/92 7.51%. Smith Breeden
U.S. Equity Market Plus(R) Fund: 1-year 27.05%, 5-years 27.83%, since inception
6/30/92 20.22%.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- --------------- --------------------------------------------------------------------------- -------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 116.1%
FREDDIE MAC -- 17.7%
Fixed-rate (1)
$10,000,000 6.50% 30 Year, due date to be announced ................................... $9,593,750
2,459,209 8.50%, due 5/1/25 to 12/1/25 .............................................. 2,555,463
Discount Notes ............................................................
50,000 5.09%, due 6/2/00 (2), (3) ................................................ 48,149
----------
12,197,362
----------
FANNIE MAE -- 37.3%
Interest-only strip (1)
745,710 9.00%, due 12/15/16 ....................................................... 193,012
Fixed-rate (1)
2,412,801 6.00%, due 11/1/13 ........................................................ 2,323,961
4,972,595 6.50%, due 6/1/29 ......................................................... 4,776,276
5,000,000 6.50%, due 4/29/99, callable 4/2/02 ....................................... 4,787,399
5,000,000 7.50% 30 Year, due date to be announced ................................... 5,017,159
Delegated Underwriting Servicing (DUS) (1)
4,831,940 6.01%, due 12/1/08 ........................................................ 4,569,860
1,352,638 6.04%, due 10/1/08 ........................................................ 1,275,977
853,054 7.024%, due 6/1/07 ........................................................ 864,821
1,324,614 7.041%, due 12/1/06 ....................................................... 1,336,321
Discount Notes
40,000 4.70%, due 3/22/00 (2), (3) ............................................... 38,954
130,000 4.83%, due 5/1/00 (2), (3) ................................................ 125,816
25,000 5.09%, due 5/26/00 (2), (3) ............................................... 24,101
100,000 5.21%, due 6/15/00 (2), (3) ............................................... 96,101
125,000 5.33%, due 7/21/00 (2), (3) ............................................... 119,447
100,000 5.49%, due 8/28/00 (2), (3) ............................................... 94,960
50,000 5.41%, due 9/15/00 (2), (3) ............................................... 47,340
----------
25,691,505
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 61.1%
Adjustable-rate (1)
719,710 6.375%, due 3/20/21 to 4/20/24 ............................................ 731,977
2,676,884 6.625%, due 7/20/17 to 9/20/22 ............................................ 2,724,519
Fixed-rate (1)
6,983,177 6.50%, due 6/15/29 to 7/15/29 ............................................. 6,685,623
17,615,237 7.00%, due 3/15/27 to 3/15/29 ............................................. 17,321,583
14,000,000 7.50% 30 Year, due date to be announced ................................... 14,048,045
579,549 9.50%, due 7/15/09 to 9/15/21 ............................................. 623,065
----------
42,134,812
----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $81,207,169)......................................................... 80,023,679
----------
NOTIONAL
AMOUNT
-----------
THREE MONTH LIBOR INTEREST RATE SWAP CONTRACTS -- 0.1%
$20,000,000 Contract dated 8/31/93 with Salomon Swapco,
Expires 8/31/00, pay rate 5.34% ........................................... 100,730
----------
TOTAL THREE MONTH LIBOR INTEREST RATE SWAP CONTRACTS ...................... 100,730
----------
THREE MONTH LIBOR INTEREST RATE CAP CONTRACTS -- 0.6%
50,000,000 Contract with Salomon Swapco, expires 4/23/03, Strike rate 7.50% .......... 392,000
----------
TOTAL THREE MONTH LIBOR INTEREST RATE CAP CONTRACTS
(COST $1,218,268).......................................................... 392,000
----------
</TABLE>
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- --------------- ----------------------------------------------------------------------- ----------------
<S> <C> <C>
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 4.2% (1)
$3,000,000 GMAC Commercial Mortgage Securities 6.42%, due 8/15/08 ................ $ 2,871,945
-------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $2,839,509)...................................................... 2,871,945
-------------
TOTAL INVESTMENTS -- 121.0% (COST $85,264,946)......................... 83,388,354
-------------
REPURCHASE AGREEMENTS -- 19.1%
4,000,000 Morgan Stanley Dean Witter, 5.33%, due 10/5/99 dated 9/29/99 .......... 4,000,000
9,200,000 Morgan Stanley Dean Witter, 5.30%, due 10/7/99 dated 9/30/99 .......... 9,200,000
-------------
13,200,000
-------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (40.1%) ..................... (27,627,820)
-------------
NET ASSETS -- 100.0% .................................................. $ 68,960,534
=============
</TABLE>
- ---------
(1) 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. Adjustable-rate mortgages have coupon rates that adjust
periodically. The interest rate shown is the rate in effect at September 30,
1999. The adjusted rate is determined by adding a spread to a specified
index.
(2) The interest rate shown for discount notes is the discount rate paid at the
time of purchase by the fund.
(3) Security is held as collateral by Carr Futures, Inc.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS
Investments at market value (identified cost $85,264,946) (Note 1)....................... $ 83,388,354
Repurchase Agreement (Cost $13,200,000) (Note 1)......................................... 13,200,000
Cash .................................................................................... 507,591
Receivables:
Subscriptions ......................................................................... 363,824
Interest .............................................................................. 536,390
Securities sold ....................................................................... 19,048,958
Other assets ............................................................................ 48,243
-------------
TOTAL ASSETS ......................................................................... 117,093,360
-------------
LIABILITIES
Payables:
Variation margin on futures contracts (Note 2) ........................................ 218,253
Redemptions ........................................................................... 74,422
Securities purchased .................................................................. 47,797,635
Due to Advisor (Note 3) ................................................................. 24,544
Accrued expenses ........................................................................ 17,972
-------------
TOTAL LIABILITIES .................................................................... 48,132,826
-------------
NET ASSETS
(Applicable to outstanding shares of 7,033,701 unlimited number of shares of beneficial
interest authorized; no stated par) ................................................... $ 68,960,534
=============
Net asset value, offering price and redemption price per share ($68,960,534 / 7,033,701). $ 9.80
=============
SOURCE OF NET ASSETS
Paid in capital ......................................................................... $ 74,084,407
Overdistributed net investment income ................................................... (326,789)
Accumulated net realized loss on investments and futures contracts ...................... (2,972,019)
Net unrealized depreciation of investments, interest rate swaps, interest rate caps and
forward sales ......................................................................... (1,876,592)
Net unrealized appreciation of futures contracts ........................................ 51,527
-------------
NET ASSETS ........................................................................... $ 68,960,534
=============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest and discount earned, net of premium amortization and interest expense
($113,570) (Note 1) ................................................................... $ 1,641,504
EXPENSES
Advisory fees (Note 3) ................................................................. 190,589
Accounting and pricing services fees ................................................... 21,946
Custodian fees ......................................................................... 16,370
Audit and tax preparation fees ......................................................... 4,405
Legal fees ............................................................................. 3,609
Transfer agent fees .................................................................... 11,917
Registration fees ...................................................................... 12,500
Trustees fees and expenses ............................................................. 23,448
Other .................................................................................. 2,456
------------
TOTAL EXPENSES BEFORE REIMBURSEMENT ................................................... 287,240
Expenses reimbursed by Advisor (Note 3) ............................................... (74,868)
------------
NET EXPENSES .......................................................................... 212,372
------------
NET INVESTMENT INCOME ................................................................. 1,429,132
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments and futures contracts ................................. (1,343,468)
Change in unrealized depreciation of investments, interest rate swaps, interest rate
caps, and futures contracts ............................................................ 606,664
------------
Net realized and unrealized loss on investments and futures contracts .................. (736,804)
------------
Net increase in net assets resulting from operations ................................... $ 692,328
============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, 1999 YEAR ENDED
(UNAUDITED) MARCH 31, 1999
-------------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income ....................................................... $ 1,429,132 $ 3,470,553
Net realized gain (loss) on investments ..................................... (1,343,468) 1,074,357
Change in unrealized appreciation (depreciation) of investments, interest
rate swaps, interest rate caps and futures contracts ....................... 606,664 (1,229,582)
------------- -------------
Net increase in net assets resulting from operations ........................ 692,328 3,315,328
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ........................................ (1,292,636) (3,302,565)
------------- -------------
Total distributions ......................................................... (1,292,636) (3,302,565)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Shares sold ................................................................. 36,161,945 45,691,681
Shares issued on reinvestment of distributions .............................. 1,171,575 1,845,880
Shares redeemed ............................................................. (28,580,127) (65,170,730)
------------- -------------
Increase (Decrease) in net assets resulting from capital share
transactions (a) ........................................................... 8,753,393 (17,633,169)
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS .................................... 8,153,085 (17,620,406)
NET ASSETS
Beginning of period ......................................................... 60,807,449 78,427,855
------------- -------------
End of period ............................................................... $ 68,960,534 $ 60,807,449
============= =============
(a) Transactions in capital shares were as follows:
Shares sold ................................................................. 3,687,643 4,622,012
Shares issued on reinvestment of distributions .............................. 119,616 186,844
Shares redeemed ............................................................. (2,893,584) (6,593,289)
------------- -------------
Net decrease ................................................................ 913,675 (1,784,433)
Beginning balance ........................................................... 6,120,026 7,904,459
------------- -------------
Ending balance .............................................................. 7,033,701 6,120,026
============= =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental information
have been derived from information provided in the financial statements.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
SEPTEMBER 30,1999 ENDED
(UNAUDITED) MARCH 31,1999
------------------- ---------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD .............................. $ 9.94 $ 9.92
--------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............... 0.265 0.451
Net realized and unrealized
gain (loss) on investments ......... (0.170) 0.016
---------- -----------
Total from investment
operations ......................... 0.095 0.467
---------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.235) (0.447)
Dividends in excess of
investment income .................. -- --
---------- -----------
Total distributions ................ (0.235) (0.447)
---------- -----------
NET ASSET VALUE, END OF
PERIOD .............................. $ 9.80 $ 9.94
---------- -----------
TOTAL RETURN ......................... 0.98% 4.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ........... $68,960,534 $60,807,449
Ratio of net expenses to
average net assets (2) ............. 0.78%* 0.78%
Ratio of net investment
income to average net
assets ............................. 5.33%* 4.78%
Portfolio turnover rate ............. 150% 298%
Ratio of net expenses to
average net assets before
reimbursement of expenses
by the Advisor (2) ................. 1.06%* 1.00%
Ratio of net investment
income to average net
assets before
reimbursement of expenses
by the Advisor ..................... 5.05%* 4.56%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31,1998 MARCH 31,1997 MARCH 31,1996 MARCH 31,1995(1)
--------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD .............................. $ 9.83 $ 9.74 $ 9.90 $ 9.90
----------- ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............... 0.484 0.476 0.621 0.628
Net realized and unrealized
gain (loss) on investments ......... 0.114 0.146 (0.148) --
----------- ------------ ------------ ------------
Total from investment
operations ......................... 0.598 0.622 0.473 0.628
----------- ------------ ------------ ------------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.508) (0.476) (0.621) (0.628)
Dividends in excess of
investment income .................. -- (0.056) (0.012) --
----------- ------------ ------------ ------------
Total distributions ................ (0.508) (0.532) (0.633) (0.628)
----------- ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD .............................. $ 9.92 $ 9.83 $ 9.74 $ 9.90
----------- ------------ ------------ ------------
TOTAL RETURN ......................... 6.24% 6.57% 4.95% 6.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ........... $78,427,855 $118,988,609 $221,825,136 $218,431,665
Ratio of net expenses to
average net assets (2) ............. 0.78% 0.78% 0.78% 0.78%
Ratio of net investment
income to average net
assets ............................. 5.28% 5.04% 6.29% 6.33%
Portfolio turnover rate ............. 626% 556% 225% 47%
Ratio of net expenses to
average net assets before
reimbursement of expenses
by the Advisor (2) ................. 1.00% 0.93% 0.93% 0.92%
Ratio of net investment
income to average net
assets before
reimbursement of expenses
by the Advisor ..................... 5.06% 4.90% 6.13% 6.18%
</TABLE>
- ---------
(1) Through March 31, 1995, expense ratios include both the direct expenses of
the Smith Breeden Short Duration U.S. Government Fund, and the indirect
expenses incurred through the Fund's investment in the Smith Breeden
Institutional Short Duration U.S. Government Fund.
*Annualized
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- ------------- ------------------------------------------------------------------------ ----------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 124.5%
FREDDIE MAC -- 30.3% (1)
Fixed-rate
$4,899,357 6.00%, due 1/1/29 ...................................................... $ 4,579,282
10,000,000 6.50% 30 Year, due date to be announced ................................ 9,599,949
1,800,000 7.50% 30 Year, due date to be announced ................................ 1,806,750
Discount Notes
50,000 5.15%, due 6/2/00 (2), (3) ............................................. 48,149
-------------
16,034,130
-------------
FANNIE MAE -- 35.4% (1)
Fixed-rate
3,796,391 6.00%, due 1/1/14 to 7/1/14 ............................................ 3,656,028
2,600,000 6.00% 15 Year, due date to be announced ................................ 2,500,862
2,863,978 6.50%, due 11/1/28 ..................................................... 2,751,709
4,200,000 6.50% 15 Year, due date to be announced ................................ 4,121,229
5,000,000 6.50% 30 Year, due date to be announced ................................ 4,796,850
Delegated Underwriting Servicing (DUS)
702,097 6.981%, due 6/1/07 ..................................................... 710,554
Discount Notes
100,000 5.21%, due 6/15/00 (2), (3) ............................................ 96,101
140,000 5.33%, due 7/21/00 (2), (3) ............................................ 133,780
-------------
18,767,113
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 58.8% (1)
Fixed-rate
11,973,481 6.50%, due 5/15/29 to 7/15/29 .......................................... 11,463,290
11,451,191 7.00%, due 3/15/26 to 8/15/29 .......................................... 11,259,543
3,960,715 7.50%, due 9/15/28 ..................................................... 3,980,438
Adjustable-rate
2,150,000 5.50% 30 Year, due date to be announced ................................ 2,125,141
365,985 6.125%, due 11/20/17 to 12/20/17 ....................................... 372,425
1,008,053 6.375%, due 3/20/16 to 5/20/21 ......................................... 1,025,501
885,126 6.625%, due 8/20/17 to 8/20/18 ......................................... 900,800
-------------
31,127,138
-------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (COST $67,459,773)........... 65,928,381
-------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 16.4% (1)
2,000,000 First Union-Lehman Brothers-Bank of America Commercial Mortage Trust
6.56%, due 11/18/08 .................................................... 1,935,370
2,000,000 GMAC Commercial Mortgage Securities 6.42%, due 8/15/08 ................. 1,914,630
5,000,000 Nomura Asset Securities Corporation Commercial Mortgage Trust 6.59%, due
3/17/28 ................................................................ 4,815,025
-------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $9,143,513)....................................................... 8,665,025
-------------
TOTAL INVESTMENTS (COST $76,603,286)--140.9%............................ 74,593,406
-------------
REPURCHASE AGREEMENTS -- 1.1%
600,000 Morgan Stanley Dean Witter, 5.30%, due 10/4/99 dated 9/27/99 ........... 600,000
-------------
600,000
-------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (42.0%) ...................... (22,244,502)
-------------
NET ASSETS -- 100.0% ................................................... $ 52,948,904
=============
</TABLE>
- ---------
(1) 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. Adjustable-rate mortgages have coupon rates that adjust
periodically. The interest rate shown is the rate in effect at September 30,
1999. The adjusted rate is determined by adding a spread to a specified
index.
(2) The interest rate shown for discount notes is the discount rate
paid at the time of purchase by the fund.
(3) Security is held as collateral by Carr Futures, Inc.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS
Investments at market value (identified cost $76,603,286) (Note 1)...................... $ 74,593,406
Repurchase Agreements (Cost $600,000) (Note 1).......................................... 600,000
Cash ................................................................................... 454,700
Receivables:
Subscriptions ........................................................................ 5,402
Interest ............................................................................. 343,829
Securities sold ...................................................................... 3,855,583
Prepaid expenses ..................................................................... 34,734
-------------
TOTAL ASSETS ........................................................................ 79,887,654
-------------
LIABILITIES
Payables:
Variation margin on futures contracts (Note 2) ....................................... 105,266
Securities purchased ................................................................. 26,664,010
Redemptions .......................................................................... 121,013
Distributions ........................................................................ 8,678
Due to Advisor (Note 3) ................................................................ 24,671
Accrued expenses ....................................................................... 15,112
-------------
TOTAL LIABILITIES ................................................................... 26,938,750
-------------
NET ASSETS
(Applicable to outstanding shares of 5,502,144; unlimited number of shares of beneficial
interest authorized; no stated par) .................................................. $ 52,948,904
=============
Net asset value, offering price and redemption price per share ($55,948,904 / 5,502,144) $ 9.62
=============
SOURCE OF NET ASSETS
Paid in capital ........................................................................ $ 55,045,006
Overdistribution of net investment income .............................................. (134,448)
Accumulated net realized gain on investments and futures contracts ..................... 168,399
Net unrealized depreciation of investments and forward sales ........................... (2,009,880)
Net unrealized depreciation of futures contracts ....................................... (120,173)
-------------
NET ASSETS .......................................................................... $ 52,948,904
=============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest and discount earned, net of premium amortization (Note 1) ......... $ 1,719,022
EXPENSES
Advisory fees (Note 3) ..................................................... 188,854
Accounting and pricing services fees ....................................... 21,943
Custodian fees ............................................................. 6,369
Audit & tax preparation fees ............................................... 5,171
Legal fees ................................................................. 6,290
Transfer agent fees ........................................................ 11,751
Registration fees .......................................................... 11,866
Trustees fees and expenses ................................................. 23,360
Other ...................................................................... 2,470
------------
TOTAL EXPENSES BEFORE REIMBURSEMENT ...................................... 278,074
Expenses reimbursed by Advisor (Note 3) .................................. (40,659)
------------
NET EXPENSES ............................................................. 237,415
------------
NET INVESTMENT INCOME .................................................... 1,481,607
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments and futures contracts ..................... 374,348
Change in unrealized depreciation of investments and futures contracts ..... (1,983,058)
------------
Net realized and unrealized gain on investments and futures contracts ...... (1,608,710)
------------
Net increase in net assets resulting from operations ....................... $ (127,103)
============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, 1999 YEAR ENDED
(UNAUDITED) MARCH 31, 1999
-------------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income ............................................... $ 1,481,607 $ 2,630,169
Net realized gain on investments .................................... 374,348 247,095
Change in unrealized depreciation of investments .................... (1,983,058) (209,534)
------------ -------------
Net increase in net assets resulting from operations ................ (127,103) 2,667,730
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ................................ (1,481,607) (2,630,169)
Distributions from net realized gains on investments ................ -- (576,411)
------------ -------------
Total distributions ................................................. (1,481,607) (3,206,580)
------------ -------------
CAPITAL SHARE TRANSACTIONS
Shares sold ......................................................... 7,466,766 45,066,774
Shares issued on reinvestment of distributions ...................... 1,424,947 3,096,717
Shares redeemed ..................................................... (9,459,896) (31,140,723)
------------ -------------
Increase in net assets resulting from capital share transactions (a) (568,183) 17,022,768
------------ -------------
TOTAL INCREASE IN NET ASSETS ...................................... (2,176,893) 16,483,918
NET ASSETS
Beginning of period ................................................. 55,125,797 38,641,879
------------ -------------
End of period ....................................................... $ 52,948,904 $ 55,125,797
============ =============
(a) Transactions in capital shares were as follows:
Shares sold ......................................................... 769,951 4,529,253
Shares issued on reinvestment of distributions ...................... 147,745 311,881
Shares redeemed ..................................................... (975,417) (3,146,761)
------------ -------------
Net increase (decrease) ............................................. (57,721) 1,694,373
Beginning balance ................................................... 5,559,865 3,865,492
------------ -------------
Ending balance ...................................................... 5,502,144 5,559,865
============ =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental information
have been derived from information provided in the financial statements.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
SEPTEMBER 30, 1999 ENDED
(UNAUDITED) MARCH 31, 1999
-------------------- ----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ........................... $ 9.91 $ 10.00
--------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............ 0.267 0.525
Net realized and unrealized
(loss) gain on investments ...... (0.290) 0.030
---------- -----------
Total from investment
operations .................... (0.023) 0.555
---------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income .......................... (0.267) ( 0.515)
Dividends in excess of net
investment income ............... -- --
Distributions from net realized
gains on investments ............ -- ( 0.130)
Distributions in excess of net
realized gains on
investments ..................... -- --
---------- -----------
Total distributions ............. (0.267) ( 0.645)
---------- -----------
NET ASSET VALUE, END OF PERIOD..... $ 9.62 $ 9.91
---------- -----------
TOTAL RETURN ...................... (0.21%) 5.73%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ........ $52,948,904 $71,930,177
Ratio of net expenses to
average net assets (2) .......... 0.88%* 0.88%
Ratio of net investment income
to average net assets ........... 5.58%* 5.25%
Portfolio turnover rate .......... 179% 423%
Ratio of expenses to average
net assets before
reimbursement of expenses
by the Advisor .................. 1.04%* 1.06%
Ratio of net investment income
to average net assets before
reimbursement of expenses
by the Advisor .................. 5.43%* 5.08%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ........................... $ 9.73 $ 10.01 $ 9.83 $ 10.01
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............ 0.590 0.599 0.660 0.664
Net realized and unrealized
(loss) gain on investments ...... 0.419 ( 0.024) 0.277 ( 0.049)
----------- ----------- ----------- -----------
Total from investment
operations .................... 1.009 0.575 0.937 0.615
----------- ----------- ----------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income .......................... (0.561) (0.604) (0.656) (0.664)
Dividends in excess of net
investment income ............... -- -- -- (0.108)
Distributions from net realized
gains on investments ............ (0.178) (0.251) (0.101) --
Distributions in excess of net
realized gains on
investments ..................... -- -- -- (0.022)
----------- ----------- ----------- -----------
Total distributions ............. (0.739) (0.855) (0.757) (0.794)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD..... $ 10.00 $ 9.73 $ 10.01 $ 9.83
----------- ----------- ----------- -----------
TOTAL RETURN ...................... 10.65% 5.92% 9.69% 6.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ........ $38,641,879 $37,735,525 $36,446,940 $34,797,496
Ratio of net expenses to
average net assets (2) .......... 0.88% 0.88% 0.90% 0.90%
Ratio of net investment income
to average net assets ........... 5.61% 6.19% 6.49% 6.20%
Portfolio turnover rate .......... 583% 409% 193% 557%
Ratio of expenses to average
net assets before
reimbursement of expenses
by the Advisor .................. 1.13% 1.16% 1.14% 2.33%
Ratio of net investment income
to average net assets before
reimbursement of expenses
by the Advisor .................. 5.36% 5.92% 6.26% 4.77%
</TABLE>
- ---------
* Annualized
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Breeden Series Fund and the Smith Breeden Trust (the "Trusts") are
open-end, diversified management investment companies registered under the
Investment Company Act of 1940, as amended. The Smith Breeden Series Fund
offers shares in two series: the Smith Breeden Short Duration U.S. Government
Fund (the "Short Duration Fund") and the Smith Breeden Intermediate Duration
U.S. Government Fund (the "Intermediate Duration Fund"). The Smith Breeden
Trust offers shares in the Smith Breeden U.S. Equity Market Plus(R) Fund (the
"U.S. Equity Market Plus(R) Fund"). The following is a summary of accounting
policies consistently followed by the Short Duration Fund, the Intermediate
Duration Fund, and the U.S. Equity Market Plus(R) Fund (collectively, the
"Funds").
A. SECURITY VALUATION: Portfolio securities are valued at the 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.
B. REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
member banks of the Federal Reserve System with 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, a
Fund 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
Funds' custodian maintains control or custody of the securities collateralizing
the repurchase agreement until maturity. The value of the collateral is
monitored daily, and, if necessary, additional collateral is received to ensure
that the market value of the collateral remains sufficient to protect the Fund
in the event of the seller's default. However, in the event of default or
bankruptcy of the seller, the Fund's right to the collateral may be subject to
legal proceedings.
C. REVERSE REPURCHASE AGREEMENTS: A reverse repurchase agreement involves the
sale of portfolio assets together with an agreement to repurchase the same
assets later at a fixed price. Additional assets are maintained in a segregated
account with the custodian, and are marked to market daily. The segregated
assets may consist of cash, U.S. Government securities, or other liquid
high-grade debt obligations at least 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, a
Fund's 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 AND REVERSE DOLLAR ROLL AGREEMENTS: A dollar roll is an
agreement to sell securities for delivery in the current month and 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. When a Fund invests in a dollar roll, it 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
earnings on the cash proceeds of the initial sale.
A reverse dollar roll is agreement to buy securities for delivery in the
current month and to sell substantially similar (same type and coupon)
securities on a specified future date, typically at a lower price. During the
roll period, the fund receives the principal and interest on the securities
purchased in compensation for the cash invested in the transaction.
E. DISTRIBUTIONS AND TAXES: Dividends to shareholders are recorded on the
ex-dividend date. Each Fund intends to continue to qualify for and elect the
special tax treatment afforded to regulated investment companies under
Subchapter M of the Internal Revenue Code, thereby relieving the Funds of
Federal income taxes. To so qualify, the Funds intend to distribute
substantially all net investment income and net realized capital gains, if any,
less any available capital loss carryforward. The following table summarized
the available capital loss carryforwards for each Fund.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
<TABLE>
<CAPTION>
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
CARRYFORWARD CARRYFORWARD CARRYFORWARD
FUND EXPIRES 3/31/2004 EXPIRES 3/31/2005 EXPIRES 3/31/2007
- --------------------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Short Duration Fund ............. $658,505 $829,556 $ 0
Intermediate Duration Fund ...... 0 0 126,641
U.S. Equity Market Plus(R) Fund . 0 0 0
</TABLE>
F. SECURITIES TRANSACTIONS, INVESTMENT INCOME AND OPERATING EXPENSES:
Securities transactions are recorded on the trade date. Interest income is
accrued daily, and includes net amortization from the purchase of fixed-income
securities. Discounts and premiums on fixed-income securities purchased are
amortized over the life of the respective securities. Dividend income is
recorded on the ex-dividend date. Gains or losses on the sale of securities are
calculated for accounting and tax purposes on the identified cost basis.
Expenses are accrued daily. Common expenses incurred by the Trusts are
generally allocated among the funds comprising the Trusts based on the ratio of
net assets of each Fund to the combined net assets of each Trust. Other
expenses are charged to each Fund on a specific identification basis.
G. ACCOUNTING ESTIMATES: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.
2. FINANCIAL INSTRUMENTS
A. FUTURES CONTRACTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING: The Funds
use interest-rate futures contracts for risk management purposes in order to
reduce fluctuations in the Funds' net asset values relative to the Funds'
targeted option-adjusted durations.
On entering into a futures contract, either cash or securities in an amount
equal to a certain percentage of the contract value (initial margin) must be
deposited with the futures broker. Subsequent payments (variation margin) are
made or received each day. The variation margin payments equal the daily
changes in the contract value and are recorded as unrealized gains or losses.
The Funds recognize 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.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
The Short Duration Fund had the following open futures contracts as of
September 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
- ---------------------------- ----------- ---------- ----------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 194 Short December, 1999 $ (110,935)
10 Year Treasury ........... 156 Short December, 1999 (49,866)
30 Year Treasury ........... 50 Short December, 1999 33,564
3 Month Eurodollar ......... 2 Short December, 1999 441
3 Month Eurodollar ......... 37 Short March, 2000 29,471
3 Month Eurodollar ......... 7 Short June, 2000 (344)
3 Month Eurodollar ......... 7 Short September, 2000 (369)
3 Month Eurodollar ......... 7 Short December, 2000 (131)
3 Month Eurodollar ......... 7 Short March, 2001 681
3 Month Eurodollar ......... 5 Short June, 2001 1,228
3 Month Eurodollar ......... 45 Long September, 2001 (64,515)
3 Month Eurodollar ......... 5 Short December, 2001 1,540
3 Month Eurodollar ......... 5 Short March, 2002 1,540
3 Month Eurodollar ......... 25 Short June, 2002 30,187
3 Month Eurodollar ......... 5 Short September, 2002 1,602
3 Month Eurodollar ......... 5 Short December, 2002 1,665
3 Month Eurodollar ......... 5 Short March, 2003 1,665
3 Month Eurodollar ......... 25 Short June, 2003 31,887
3 Month Eurodollar ......... 5 Short September, 2003 1,603
3 Month Eurodollar ......... 5 Short December, 2003 1,665
3 Month Eurodollar ......... 5 Short March, 2004 1,603
3 Month Eurodollar ......... 25 Short June, 2004 34,788
3 Month Eurodollar ......... 10 Short September, 2004 3,918
3 Month Eurodollar ......... 4 Short December, 2004 2,157
3 Month Eurodollar ......... 4 Short March, 2005 2,094
3 Month Eurodollar ......... 13 Short June, 2005 20,642
3 Month Eurodollar ......... 8 Short September, 2005 8,576
3 Month Eurodollar ......... 16 Short December, 2005 29,915
3 Month Eurodollar ......... 18 Short March, 2006 34,719
3 Month Eurodollar ......... 3 Short June, 2006 536
----------
Total $ 51,527
==========
</TABLE>
The Intermediate Duration Fund had the following open futures contracts as of
September 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
- -------------------------- ----------- ---------- ---------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury .......... 183 Short December, 1999 $ (157,730)
10 Year Treasury ......... 4 Long December, 1999 3,232
30 Year Treasury ......... 51 Short December, 1999 34,325
----------
Total $ (120,173)
==========
</TABLE>
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
The U.S. Equity Market Plus(R) Fund had the following open interest-rate
futures contracts as of September 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
- ---------------------------- ----------- ---------- ----------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 706 Short December, 1999 $ (476,950)
10 Year Treasury ........... 380 Short December, 1999 (133,038)
30 Year Treasury ........... 27 Short December, 1999 (1,872)
3 Month Eurodollar ......... 403 Short December, 1999 208,949
3 Month Eurodollar ......... 332 Long March, 2000 91,631
3 Month Eurodollar ......... 34 Short June, 2000 (18,978)
3 Month Eurodollar ......... 143 Short September, 2000 36,682
3 Month Eurodollar ......... 34 Short December, 2000 (26,728)
3 Month Eurodollar ......... 65 Short March, 2001 24,483
3 Month Eurodollar ......... 34 Short June, 2001 (18,465)
3 Month Eurodollar ......... 139 Short September, 2001 116,549
3 Month Eurodollar ......... 34 Short December, 2001 (13,866)
3 Month Eurodollar ......... 64 Short March, 2002 38,750
3 Month Eurodollar ......... 34 Short June, 2002 (12,503)
3 Month Eurodollar ......... 133 Short September, 2002 158,214
3 Month Eurodollar ......... 34 Short December, 2002 (11,290)
3 Month Eurodollar ......... 78 Short March, 2003 72,699
3 Month Eurodollar ......... 34 Short June, 2003 (10,315)
3 Month Eurodollar ......... 118 Short September, 2003 175,160
3 Month Eurodollar ......... 33 Short December, 2003 (8,798)
3 Month Eurodollar ......... 82 Short March, 2004 93,618
3 Month Eurodollar ......... 24 Short June, 2004 (8,533)
3 Month Eurodollar ......... 1 Long September, 2004 (130)
3 Month Eurodollar ......... 24 Short December, 2004 27,717
3 Month Eurodollar ......... 143 Short March, 2005 304,431
3 Month Eurodollar ......... 24 Short June, 2005 28,154
3 Month Eurodollar ......... 21 Short September, 2005 17,781
3 Month Eurodollar ......... 12 Short December, 2005 (592)
3 Month Eurodollar ......... 86 Short March, 2006 174,688
3 Month Eurodollar ......... 13 Short June, 2006 (871)
3 Month Eurodollar ......... 24 Short March, 2007 61,092
----------
Total $ 887,669
==========
</TABLE>
Futures transactions involve costs and may result in losses. The effective use
of futures depends on the Funds' ability to close futures positions at times
when the Funds' Advisor 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 Funds, of the
futures contract themselves, and of the securities that are the subject of a
hedge.
B. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES: The
U.S. Equity Market Plus(R) Fund invests in futures contracts on the S&P 500
Index whose returns are expected to track movements in the S&P 500 Index.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
The U.S. Equity Market Plus(R) Fund had the following open futures contracts on
the S&P 500 Index as of September 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
- ------------------- ----------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
S&P 500 ......... 482 Long December, 1999 $ (9,191,635)
S&P 500 ......... 135 Long March, 2000 (2,643,300)
S&P 500 ......... 49 Long June, 2000 (818,820)
-------------
Total $ (12,653,755)
=============
</TABLE>
C. ASSETS PLEDGED TO COVER MARGIN REQUIREMENTS FOR OPEN FUTURES POSITIONS: The
aggregate market value of assets pledged to cover margin requirements for the
open futures positions at September 30, 1999 was:
<TABLE>
<CAPTION>
FUND ASSETS PLEDGED
- --------------------------------------- ---------------
<S> <C>
Short Duration Fund ................. $ 594,868
Intermediate Duration Fund .......... 278,030
U.S. Equity Market Plus(R) Fund ..... 14,963,003
</TABLE>
D. INTEREST RATE SWAP OPTIONS AND CONTRACTS: The Funds may enter into
over-the-counter transactions swapping interest rates, or purchase options to
enter into such contracts in order to manage interest rate risk. Purchased
options on interest rate swap contracts ("swaptions") give the right, but not
the obligation, to enter into a swap contract with the counterparty which has
written the option on a date, at an interest rate, and with a notional amount
as specified in the swaption agreement. Interest rate swaps represent an
agreement between counterparties to exchange cash flows based on the difference
between two interest rates, applied to a notional principal amount for a
specified period. The most common type of interest rate swap involves the
exchange of fixed-rate cash flows for variable-rate cash flows. Interest rate
swaps do not involve the exchange of principal between the parties. The Funds
will not enter into interest rate swap or swaption contracts unless the
unsecured commercial paper, unsecured senior debt or the claims-paying ability
of the counterparty is rated either AA or A 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 a
transaction. If the counterparty to the swap transaction defaults, the Funds
will be limited to contractual remedies pursuant to the agreements governing
the transaction. There is no assurance that interest rate swap or swaption
contract counterparties will be able to meet their obligations under the
contracts or that, in the event of default, the Funds will succeed in pursuing
contractual remedies. The Funds may thus assume the risk that payments owed the
Funds under a swap or swaption contract will be delayed, or not received at
all. Should interest rates move unexpectedly, the Funds may not achieve the
anticipated benefits of the interest rate swaps or swaptions, and may realize a
loss. The Funds recognize gains and losses under interest rate swap or swaption
contracts as realized gains or losses on investments upon sale of the
contracts.
As of September 30, 1999, the Short Duration Fund had one open interest rate
swap contract. In the contract, the Short Fund has agreed to pay a fixed rate
and receive a floating rate. The Short Duration Fund's interest rate swap
contract has been entered into on a net basis, i.e., the two payment streams
are netted out, with the Short Fund receiving or paying, as the case may be,
only the net amount of the two payments. The floating rate on the contract
resets quarterly and is the three month London Inter-Bank Offered Rate
("LIBOR"). The Short Duration Fund's interest receivable on the interest rate
swap contract as of September 30, 1999 was $4,323. No collateral is required
under these contracts.
As of September 30, 1999, the U.S. Equity Market Plus(R) Fund had two open
swaptions. In each of the contracts, the Fund has paid a sum of money, called a
premium, to the counterparty, in return for the swaptions. These swaptions may
be exercised by entering into a swap contract with the counterparty only on the
date specified in each contract.
E. 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
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
amount from the party selling such interest rate caps. The Short Duration Fund
had one interest rate cap contract open at September 30, 1999.
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Smith Breeden Associates, Inc. (the "Advisor"), a registered Investment
Advisor, provides the Funds with investment management services. As
compensation for these services, the Funds pay the Advisor a fee computed daily
and payable monthly at a fixed annual rate based on the Funds' average daily
net assets.
The Advisor voluntarily agreed to reimburse normal business expenses of the
Funds during the six months ended September 30, 1999 so that total direct and
indirect operating expenses do not exceed the percentages listed below of each
fund's average net assets. This voluntary agreement may be terminated or
modified at any time by the Advisor in its sole discretion. The table below
lists the fees received by the Advisor and the expenses reimbursed by the
Advisor to each Fund during the six months ending September 30, 1999.
<TABLE>
<CAPTION>
NET EXPENSE FEES RECEIVED EXPENSES REIMBURSED
FUND RATIO BY ADVISOR BY ADVISOR
- --------------------------------------- ------------- --------------- --------------------
<S> <C> <C> <C>
Short Duration Fund ............. 0.78% $190,589 $ 74,868
Intermediate Duration Fund ...... 0.88% 188,854 40,659
U.S. Equity Market Plus(R) Fund . 0.88% 742,211 129,959
</TABLE>
The Funds have adopted a Distribution and Services Plan (the "Plan") under Rule
12b-1 under the Investment Company Act of 1940. The purpose of the Plan is to
permit the Advisor 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 Funds, reducing redemptions, or
otherwise maintaining or improving services provided to shareholders by such
dealers or other persons. The Plan provides for payments by the Advisor, which
may come out of the advisory fee, to dealers and other persons at the annual
rate of up to 0.25% of each Fund's average net assets, subject to the authority
of 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 Advisor shall determine the amount of such payments
and the purposes for which they are made.
Certain officers and trustees of the Fund are also officers and directors of
the Advisor.
4. INVESTMENT TRANSACTIONS
During the six months ended September 30, 1999 purchases and proceeds from
sales of securities, other than short-term investments, aggregated:
<TABLE>
<CAPTION>
PURCHASES OF PROCEEDS FROM
FUND SECURITIES SALES OF SECURITIES
- --------------------------------------- -------------- --------------------
<S> <C> <C>
Short Duration Fund ................. $112,527,315 $100,656,103
Intermediate Duration Fund .......... 122,966,773 146,500,119
U.S. Equity Market Plus(R) Fund ..... 353,918,712 280,988,364
</TABLE>
The cost of securities held for Federal tax purposes, and the net unrealized
appreciation (depreciation) of investments, short sales and futures contracts
is as follows:
<TABLE>
<CAPTION>
COST OF SECURITIES
FOR FEDERAL TAX GROSS UNREALIZED GROSS UNREALIZED NET UNREALIZED
FUND PURPOSES APPRECIATION DEPRECIATION DEPRECIATION
- ----------------------------------- ------------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
Short Duration Fund ............... $ 85,264,946 $ 618,869 ($ 2,443,934) ($ 1,825,065)
Intermediate Duration Fund ........ 76,603,286 54,355 (2,184,408) (2,130,053)
U.S. Equity Market Plus(R) Fund ... 272,697,180 2,719,772 (20,459,532) (17,739,760)
</TABLE>
<PAGE>
BOARD OF TRUSTEES
Douglas T. Breeden
Michael J. Giarla
Stephen M. Schaefer
Myron S. Scholes
William F. Sharpe
OFFICERS
CHAIRMAN
Douglas T. Breeden
PRESIDENT
Michael J. Giarla
VICE PRESIDENTS
Daniel C. Dektar (Smith Breeden Series Fund)
Timothy D. Rowe (Smith Breeden Series Fund)
John B. Sprow (Smith Breeden Trust)
TREASURER AND SECRETARY
Marianthe S. Mewkill
INVESTMENT ADVISOR
Smith Breeden Associates, Inc.
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
TRANSFER AND DIVIDEND PAYING AGENT
First Data Investor Services Group, Inc.
211 South Gulph Road
PO Box 61767
King of Prussia, PA 19406
DISTRIBUTOR
First Data Distributors, Inc.
4400 Computer Drive
Westborough, MA 01581
EFFECTIVE ON OR ABOUT DECEMBER 1, 1999
Provident Distributors, Inc.
Four Falls Corporate Center
West Conshohocken, PA 19406
CUSTODIAN
Bank of New York
48 Wall Street
New York, NY 10286
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, NJ 08540
For information about:
o Establishing an account
o Account procedures and status
o Exchanges
CALL 1-800-221-3137 (TRANSFER AGENT)
For all other information about the Funds:
CALL 1-800-221-3138 (INVESTMENT ADVISOR)
This report must be preceded or accompanied by a prospectus. Unlike U.S.
Treasury securities they may hold, no mutual fund is itself directly insured by
the U.S. Government and no fixed rate of return is guaranteed. Futures and
options contracts may involve special risks that may not be suitable for all
investors. DFU: 5/99
