[SMITH BREEDEN MUTUAL FUNDS LOGO APPEARS HERE]
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
MARCH 31, 2000
<PAGE>
[SMITH BREEDEN MUTUAL FUNDS LOGO APPEARS HERE]
Dear Fellow Shareholder:
We are pleased to present to you the attached annual report for the Smith
Breeden Funds for the year ending March 31, 2000, our eighth year of operation.
As the Smith Breeden Funds and our shareholder base have grown, we have
endeavored to provide shareholders with more and better products and services.
Consistent with this desire, and in order to better position the Smith Breeden
Funds for the future, we are entering into a relationship (subject to
shareholder approval) with The Managers Funds LLC ("Managers"). As part of this
proposed agreement, Managers would become manager to the three Smith Breeden
mutual funds and Smith Breeden Associates would be hired as the sub-advisor for
each. You will soon receive a proxy statement that explains the details of the
proposal.
Managers manages and distributes two mutual fund families, The Managers Funds
and Managers AMG Funds. Organized in 1983, The Managers Funds family is a $3.1
billion no-load mutual fund complex with ten funds and approximately 125,000
shareholders. Using a proprietary selection process, Managers searches for and
selects investment advisors to serve as sub-advisors of the funds it sponsors.
Once chosen, the sub-advisors are subject to ongoing monitoring by Managers'
research team. In addition, Managers manages and distributes Managers AMG Funds,
a $250 million fund family whose sub-advisors are affiliates of its parent
company, Affiliated Managers Group, Inc. ("AMG").
Both Managers and AMG are fine organizations which share our philosophy of
bringing institutional money management expertise to retail investors on a
no-load basis. The partnership is attractive to us because it will provide Smith
Breeden Funds' shareholders with a combination of high quality investment
management and client service. Smith Breeden will be able to focus on its
strength -- portfolio management. Fund shareholders will experience no change in
this area, as the same individuals at Smith Breeden will continue to manage the
investment portfolio of each of the three Smith Breeden funds. Managers, with
greater experience and resources devoted to the mutual fund business, is better
able to service your day-to-day operational account and investment needs. Smith
Breeden Funds' shareholders will benefit from access to more extensive products
and services, as well as the higher level of customer service and technology
offered by Managers. For example, Managers is developing products to assist
customers with asset allocation decisions and expects to make internet access
available to account holders by year-end. We encourage you to visit the
Managers' web site at www.managersfunds.com to learn more about the
organization.
Thank you for the trust you have placed in the Smith Breeden Funds. We look
forward to the continuing opportunity to provide for your investing needs. For
more information, please call us at (800) 221-3138 or visit Smith Breeden's web
site at www.smithbreeden.com.
Sincerely,
/s/ Douglas T. Breeden /s/ Michael J. Giarla
---------------------- ---------------------
Douglas T. Breeden Michael J. Giarla
Chairman President
Smith Breeden Mutual Funds Smith Breeden Mutual Funds
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
MARKET OVERVIEW
FIXED INCOME MARKETS
The Federal Reserve raised interest rates 0.75% during the twelve months
ended March 31, 2000. Since March 31, 2000, the Fed has raised rates another
1.00% in a continuing effort to slow economic growth and the risk of inflation.
At the outset of this year, Treasury yields were at their highest point of the
previous twelve months, with the 30-year bond yield as high as 6.75%, and the
two-year note approaching 6.40%. Since that time, the Treasury yield curve has
flattened substantially, and yield relationships at the long end of the curve
are inverted. At March 31, 2000, the yield on two-year Treasurys was 6.48%, the
five-year Treasury was at 6.32%, and the 30-year Treasury was 5.84%. Factors
contributing to this decline in long-term Treasury rates include: 1) reduced
demand for long-term credit, due to the expectation that the Federal Reserve's
campaign to slow economic growth will be successful, and 2) market fear of
declining supply of long-term Treasurys, as Federal surpluses mount and the
Treasury reduces the public debt.
The twelve months ended March 31, 2000 were a quite unusual period in the
annals of the government securities markets, in that the yield spreads of asset
classes with identical credit risk and similar trading liquidity widened quite
substantially. GNMA and FNMA mortgage security par yields increased by 1.1% to
1.3%, while the yield on ten-year Treasury securities increased only 0.8%. The
widening in this differential had less to do with the fundamental value of the
securities and more to do with the perceived possible shortage of Treasury
securities, as discussed above.
Mortgage securities performed well relative to other high-grade debt during
the year. Rising mortgage rates reduced refinancing opportunities, making
mortgage cashflows more stable. Mortgage rate volatility fell also, which helps
mortgage security returns.
EQUITY MARKETS
For the first time in history, the S&P 500 earned more than 20% for four
consecutive years with a return of 21.04% in 1999. While returns in excess of
20% are excellent, the technology heavy NASDAQ far surpassed that with an 86.13%
return. Clearly, technology dominated in 1999. In fact, the technology sector of
the S&P 500 returned 74%, and if that sector is excluded from the S&P 500, the
return drops to 8%. This points out a major factor about the equity markets in
1999 -- there was a great divergence in performance of stocks and sectors of
stocks. In general, prices soared for most technology-related stocks, but most
other issues had an undistinguished showing with almost 60% of the stocks on the
New York Stock Exchange falling in price in 1999.
Sector, group and stock selection mattered more in 1999 than perhaps at any
other time in the past 30 years. It is certainly evident why technology
dominated in 1998 and 1999. The new economy structured around the Internet is
powered by technology and, secondarily, technology provided the productivity
gains that have held inflation in check. Moreover, the under performance of the
broad market during the past two years can probably be attributed primarily to:
1) the predominantly disinflationary climate, where rising interest rates serve
to control inflation but restrain earnings growth, and (2) the momentum
generated by investors primarily motivated by the prospects for growth in
technology, especially Internet-related companies, but less interested in the
actual profits.
Indeed, during 1999 investors seemed to discard historical investment
concepts of earnings growth and price earnings multiples and focus instead on
sales growth. At the end of 1999, the resulting valuations had the top 20% of
the S&P 500 stocks priced at over 75 times earnings while the other 80% was
trading at around 14 times. This new market environment was also reflected by
the fact that during 1999, as reported by Morningstar, investors redeemed over
$50 billion in value fund assets and poured over $100 billion into tech-oriented
growth stock funds. As 1999 closed, there was general agreement that although
the technology sector might continue to boom for some time, the unprecedented
valuations had priced success into virtually every technology stock and could
not be sustained in the long run. It is interesting to note that the highly
touted Y2K concerns seemed to have had minimal effects on the market, if any.
<PAGE>
The two-tiered market continued into the first quarter of 2000 with the
NASDAQ up 12.41%, the S&P 500 up 2.29%, and the Dow Jones Industrial Average
down 4.65% at the end of March. In addition, the performance of the U.S. economy
continued to be exceptionally strong, fueled by consumer spending and
productivity gains. During this quarter, the general level of market interest
rates did not change significantly, but a shift in underlying factors resulted
in a flatter Treasury yield curve and substantially wider spreads on high
quality fixed-income securities. However, the Federal Reserve revealed its
intention to pursue a more aggressive policy to reign in growth, which
intensified market skittishness and clouded the outlook for some sectors, such
as new economy issues and interest-sensitive stocks.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
PERFORMANCE REVIEW
The Smith Breeden Short Duration U.S. Government Fund returned 2.75% in the
year ending March 31, 2000. The Fund's benchmark, the six-month U.S. Treasury
Bill, returned 4.97% over the same period as measured by Merrill Lynch. The
Graph below shows the Fund's return versus both its benchmark and the average
return of the mutual funds in Morningstar's Ultrashort Bond Fund category.
[BAR CHART APPEARS HERE]
(1) Fund returns are net of fees and sales charges. Index returns are market
returns without deduction of fees or rebalancing
Past performance is no guarantee of future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS
ENDING MARCH 31, 2000
------------------------------------- FINAL VALUE OF
SINCE INCEPTION $10,000 INVESTMENT
1 YEAR 5 YEARS (3/31/92) (SINCE INCEPTION)
---------- --------- ---------------- -------------------
<S> <C> <C> <C> <C>
Smith Breeden Short Duration U.S. Government
Fund ...................................... 2.75% 5.06% 5.15% $14,943
Six Month T-Bill ........................... 4.97% 5.44% 4.95% 14,717
Morningstar Avg. Ultrashort Bond Fund ...... 4.75% 5.66% 5.22% 15,021
</TABLE>
The Short Duration Fund earns incremental return mostly by purchasing
liquid, high credit-quality mortgage and U.S. Agency securities at higher yields
than Treasury securities and using Treasury securities as hedges to maintain the
low interest-rate risk of the Fund. The incremental return, in general, comes
from the higher yield of the mortgage and Agency securities, but it can be
higher or lower depending on how these securities' yields change relative to
Treasurys. If the market yields of mortgage-backed securities narrow relative to
Treasury yields, the Fund earns additional profit; if they widen, the Fund's
return is lower. During the past year, a 0.3% to 0.5% widening in yield spreads
was the primary factor in the Fund's return shortfall as compared to the
benchmark six-month Treasury bill.
GNMA securities performed better than FNMA and FHLMC securities for the
year, due to recent concerns about the status of FNMA's and FHLMC's relationship
with the Federal government. Through the Fund's substantial positions in GNMAs
we were able to take advantage of their recent strong relative performance.
<PAGE>
While the supply concerns about Treasurys have reduced the Fund's recent
returns, the current yield advantage of the mortgage and Agency markets would
appear to offer generous compensation for bearing the uncertainty of future
Treasury supply. The Fund is positioned to profit as the Treasury market returns
to equilibrium relative to allied markets, although the spread between the
Fund's holding and Treasury securities may widen if the yield curve inverts
further, if equity market volatility increases, or if general demand for
liquidity increases in the fixed income markets.
At times during the past, the Fund has used hedge instruments other than
Treasury securities (such as interest-rate swaps) that reduce the Fund's
exposure to mortgage/Treasury spread movements. As mortgage/ Treasury spreads
widened during the year, the Fund shifted the hedges to mostly Treasury
securities. If the recent volatility of mortgage/Treasury spreads continues, the
volatility of the Fund's returns relative to its benchmark may be greater than
it has been in the past.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS MARCH 31, 2000
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
------------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 141.2%
FREDDIE MAC -- 18.7%
Fixed-rate (1)
$ 967,214 Gold 6.50%, due 7/1/29 ............................................... $ 908,495
3,600,000 Gold 7.50%, 30 Year, due date to be announced ........................ 3,540,366
2,091,774 Gold 8.50%, due 5/1/25 to 12/1/25 .................................... 2,136,748
Discount Notes
50,000 5.09%, due 6/2/00 (2), (3) ........................................... 49,503
----------
6,635,112
----------
FANNIE MAE -- 65.3%
Interest-only strip (1)
667,521 9.00%, due 12/15/16 .................................................. 191,209
Fixed-rate (1)
1,500,000 6.50%, 30 Year, due date to be announced ............................. 1,406,245
5,000,000 6.50%, due 4/29/09, callable 4/2/02 .................................. 4,652,975
10,000,000 7.00%, 30 Year, due date to be announced ............................. 9,603,120
Delegated Underwriting Servicing (DUS) (1)
4,806,172 6.01%, due 12/1/08 ................................................... 4,431,359
1,341,548 6.04%, due 10/1/08 ................................................... 1,237,159
1,185,176 7.04%, due 12/1/06 ................................................... 1,166,836
Discount Notes
130,000 4.83%, due 5/1/00 (2) ................................................ 129,476
25,000 5.09%, due 5/26/00 (2), (3) .......................................... 24,806
100,000 5.21%, due 6/15/00 (2) ............................................... 98,789
125,000 5.33%, due 7/21/00 (2), (3) .......................................... 122,718
50,000 5.41%, due 9/15/00 (2), (3) .......................................... 48,595
100,000 5.49%, due 8/28/00 (2), (3) .......................................... 97,509
----------
23,210,796
----------
GINNIE MAE -- 57.2%
Adjustable-rate (1)
1,406,844 6.375%, due 3/20/21 to 4/20/24 ....................................... 1,417,956
3,919,216 6.75%, due 7/20/17 to 9/20/22 ........................................ 3,942,265
Fixed-rate (1)
12,052,348 7.00%, due 3/15/27 to 10/15/28 ....................................... 11,682,114
2,900,000 8.00%, 30 Year, due date to be announced ............................. 2,931,711
328,420 9.50%, due 7/15/09 to 12/15/17 ....................................... 345,296
----------
20,319,342
----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $51,418,180).................................................... 50,165,250
----------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 7.9%
3,000,000 GMAC Commercial Mortgage Securities, 6.42%, due 8/15/08 (1) .......... 2,794,808
----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $2,848,571)..................................................... 2,794,808
----------
SHARES
----------
PREFERRED STOCK -- 7.2%
3,300 Home Ownership Funding Corporation (6) 2,579,082
----------
TOTAL PREFERRED STOCK (COST $2,768,370)............................... 2,579,082
----------
</TABLE>
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2000
<TABLE>
<CAPTION>
MARKET
NOTIONAL AMOUNT SECURITY VALUE
----------------- ----------------------------------------------------------------- ---------------
<S> <C> <C>
THREE MONTH LIBOR INTEREST RATE SWAP CONTRACTS -- 0.2%
$ 20,000,000 Contract dated 8/31/93 with Salomon Swapco, .....................
Expires 8/31/00, pay fixed rate 5.34% ........................... $ 89,770
------------
TOTAL THREE MONTH LIBOR INTEREST RATE SWAP CONTRACTS
(COST $0)........................................................ 89,770
------------
THREE MONTH LIBOR INTEREST RATE CAP CONTRACTS -- 1.3%
50,000,000 Contract with Salomon Swapco, Expires 4/23/03,
Strike rate 7.50% ............................................... 450,500
------------
TOTAL THREE MONTH LIBOR INTEREST RATE CAP CONTRACTS
(COST $1,083,307)................................................ 450,500
------------
TOTAL INVESTMENTS -- 157.8% (COST $58,118,428)................... 56,079,410
------------
FACE AMOUNT REVERSE REPURCHASE AGREEMENTS -- (16.2%)
-------------
(1,000,000) Merrill Lynch 6.20%, due 4/5/00 dated 3/29/00 (4) ............... (1,000,000)
(4,755,000) Merrill Lynch 6.15%, due 4/5/00 dated 3/29/00 (4) ............... (4,755,000)
------------
TOTAL REVERSE REPURCHASE AGREEMENTS
(PROCEEDS $5,755,000)............................................ (5,755,000)
------------
FORWARD SALES -- (27.2%)
(10,000,000) Ginnie Mae 7.00% 30 Year, due date to be announced (5) .......... (9,668,750)
------------
TOTAL FORWARD SALES (PROCEEDS $9,657,812)........................ (9,668,750)
------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (14.4%) ............... (5,115,443)
------------
NET ASSETS -- 100.0% ............................................ $ 35,540,217
============
</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 March 31,
2000. The adjusted rate is determined by adding a spread to a specified
index.
(2) The interest rate shown for discount notes is the effective yield at the
time of purchase by the Fund.
(3) Security is held as collateral by Carr Futures, Inc.
(4) Reverse repurchase agreements are collateralized by $1,073,185 face of
Ginnie Mae 7% due 6/15/2028 and $5,000,000 face of Fannie Mae 6.50% due
4/29/2009. Market value is $1,030,928 and $4,652,975, respectively.
(5) The forward sale position represents the unsettled sale of securities held
by the Fund.
(6) Security is exempt from registration under Rule 144(a) of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Such securities
represented 7.2% of net assets as of March 31, 2000.
--------------------------------------------------------------------------------
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 MARCH 31, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at market value (identified cost $58,118,428) (Note 1)...................... $ 56,079,410
Cash ................................................................................... 993,217
Receivables:
Securities sold ....................................................................... 18,023,185
Interest .............................................................................. 342,121
Subscriptions ......................................................................... 129,505
Other assets ........................................................................... 27,825
-------------
TOTAL ASSETS .......................................................................... 75,595,263
-------------
LIABILITIES
Reverse repurchase agreement (proceeds $5,755,000) (Note 1)............................. 5,755,000
Forward sales at market value (proceeds $9,657,812) (Note 1)............................ 9,668,750
Payables:
Securities purchased .................................................................. 24,451,128
Redemptions ........................................................................... 89,873
Variation margin on futures contracts (Note 2) ........................................ 50,856
Due to Advisor, net (Note 3) ........................................................... 9,114
Accrued expenses ....................................................................... 30,325
-------------
TOTAL LIABILITIES ..................................................................... 40,055,046
-------------
NET ASSETS
(Applicable to outstanding shares of 3,688,017 unlimited number of shares of beneficial
interest authorized; no stated par) ................................................... $ 35,540,217
=============
Net asset value, offering price and redemption price per share ($35,540,217
(divided by) 3,688,017) $ 9.64
=============
SOURCE OF NET ASSETS
Paid in capital ........................................................................ $ 41,474,322
Overdistributed net investment income .................................................. (384,434)
Accumulated net realized loss on investments, forward sales, futures contracts and interest
rate swaps ............................................................................ (3,195,791)
Net unrealized depreciation of investments, forward sales, interest rate swaps and interest
rate caps ............................................................................. (2,049,956)
Net unrealized depreciation of futures contracts ....................................... (303,924)
-------------
NET ASSETS ............................................................................ $ 35,540,217
=============
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest income, net of amortization and accretion (net of interest expense $350,074) $ 3,393,525
(Note 1)
Dividend income ......................................................................... 219,962
------------
TOTAL INVESTMENT INCOME ............................................................... 3,613,487
EXPENSES
Advisory fees (Note 3) .................................................................. 374,112
Trustees fees and expenses .............................................................. 47,090
Accounting and pricing services fees .................................................... 44,949
Custodian fees .......................................................................... 29,252
Registration fees ....................................................................... 25,000
Transfer agent fees ..................................................................... 20,892
Audit and tax preparation fees .......................................................... 11,673
Legal fees .............................................................................. 10,022
Other ................................................................................... 9,545
------------
TOTAL EXPENSES BEFORE REIMBURSEMENT ................................................... 572,535
Expenses reimbursed by Advisor (Note 3) ............................................... (155,667)
------------
NET EXPENSES .......................................................................... 416,868
------------
NET INVESTMENT INCOME ................................................................. 3,196,619
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments and forward sales ...................................... (1,841,440)
Net realized gain on futures contracts .................................................. 1,602,725
Net realized loss on interest rate swaps ................................................ (1,328,525)
Change in unrealized depreciation of investments ........................................ (1,540,473)
Change in unrealized depreciation of futures contracts. ................................. (187,381)
Change in unrealized appreciation of interest rate swaps and caps ....................... 1,805,703
------------
Net realized and unrealized loss on investments and futures contracts ................... (1,489,391)
------------
Net increase in net assets resulting from operations .................................... $ 1,707,228
============
</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>
YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999
---------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income .......................................................... $ 3,196,619 $ 3,470,553
Net realized gain (loss) on investments, futures contracts and interest rate
swaps ......................................................................... (1,567,240) 1,074,357
Change in unrealized appreciation (depreciation) of investments, futures
contracts, interest rate swaps and caps. ...................................... 77,849 (1,229,582)
------------- -------------
Net increase in net assets resulting from operations ........................... 1,707,228 3,315,328
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ........................................... (3,117,768) (3,302,565)
------------- -------------
Total distributions ............................................................ (3,117,768) (3,302,565)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Shares sold .................................................................... 45,705,401 45,691,681
Shares issued on reinvestment of distributions ................................. 2,856,393 1,845,880
Shares redeemed ................................................................ (72,418,486) (65,170,730)
------------- -------------
Decrease in net assets resulting from capital share transactions (a) ........... (23,856,692) (17,633,169)
------------- -------------
TOTAL DECREASE IN NET ASSETS .................................................. (25,267,232) (17,620,406)
NET ASSETS
Beginning of period ............................................................ 60,807,449 78,427,855
------------- -------------
End of period .................................................................. $ 35,540,217 $ 60,807,449
============= =============
(a) Transactions in capital shares were as follows:
Shares sold .................................................................... 4,672,634 4,622,012
Shares issued on reinvestment of distributions ................................. 292,708 186,844
Shares redeemed ................................................................ (7,397,351) (6,593,289)
------------- -------------
Net decrease ................................................................... (2,432,009) (1,784,433)
Beginning balance .............................................................. 6,120,026 7,904,459
------------- -------------
Ending balance ................................................................. 3,688,017 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.
For a share outstanding throughout the periods.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ......................... $ 9.94 $ 9.92 $ 9.83 $ 9.74 $ 9.90
---------- ---------- ---------- ----------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income .......... 0.537 0.451 0.484 0.476 0.621
Net realized and unrealized
gain (loss) on investments .... (0.272) 0.016 0.114 0.146 (0.148)
----------- ----------- ----------- ------------ ------------
Total from investment
operations .................... 0.265 0.467 0.598 0.622 0.473
----------- ----------- ----------- ------------ ------------
LESS DISTRIBUTIONS
Dividends from net
investment income ............. (0.565) (0.447) (0.508) (0.476) (0.621)
Dividends in excess of
investment income ............. -- -- -- (0.056) (0.012)
----------- ----------- ----------- ------------ ------------
Total distributions ........... (0.565) (0.447) (0.508) (0.532) (0.633)
----------- ----------- ----------- ------------ ------------
NET ASSET VALUE, END OF
PERIOD ......................... $ 9.64 $ 9.94 $ 9.92 $ 9.83 $ 9.74
----------- ----------- ----------- ------------ ------------
TOTAL RETURN ..................... 2.75% 4.83% 6.24% 6.57% 4.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ...... $35,540,217 $60,807,449 $78,427,855 $118,988,609 $221,825,136
Ratio of net expenses to
average net assets ............ 0.78% 0.78% 0.78% 0.78% 0.78%
Ratio of net investment
income to average net
assets ........................ 6.01% 4.78% 5.28% 5.04% 6.29%
Portfolio turnover rate ........ 268% 298% 626% 556% 225%
Ratio of net expenses to
average net assets before
reimbursement of
expenses by the Advisor ....... 1.07% 1.00% 1.00% 0.93% 0.93%
Ratio of net investment
income to average net
assets before
reimbursement of
expenses by the Advisor ....... 5.72% 4.56% 5.06% 4.90% 6.13%
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
The Board of Trustees and Shareholders,
Smith Breeden Short Duration U.S. Government Fund 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 Fund of the Smith Breeden Series Fund (the "Fund"), as of March 31,
2000, and the related statements of operations, changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and the 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 auditing standards generally
accepted in the United States of America. 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, 2000, by correspondence with the custodian and
brokers; where replies were not received, we performed other auditing
procedures. 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 referred
to above present fairly, in all material respects, the financial position of the
Smith Breeden Short Duration U.S. Government Fund of the Smith Breeden Series
Fund as of March 31, 2000, the results of its operations, the changes in its net
assets, and the financial highlights for the periods presented in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
May 12, 2000
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
PERFORMANCE REVIEW
The Smith Breeden Intermediate Duration U.S. Government Fund returned 0.40%
in the year ending March 31, 2000. The Salomon-Smith Barney Mortgage Index, the
Fund's benchmark returned 2.29%. The average Government Mortgage Fund, as
tracked by Morningstar, returned 2.27% over the same period.
[BAR CHART APPEARS HERE]
(1) Fund returns are net of fees and sales charges. Index returns are market
returns without deduction of fees or rebalancing transaction costs.
(2) 5-Year Treasury Note to 12/31/93 and the Salomon Smith Barney Mortgage Index
("SBMI") to 3/31/00. The fund changed its investment objective 1/1/94.
Past performance is no guarantee of future results
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR
PERIODS ENDING MARCH 31, 2000
----------------------------------- FINAL VALUE OF
SINCE INCEPTION $10,000 INVESTMENT
1 YEAR 5 YEARS (3/31/92) (SINCE INCEPTION)
-------- --------- ---------------- -------------------
<S> <C> <C> <C> <C>
Smith Breeden Intermediate Duration U.S. Government
Fund ............................................... .40% 6.41% 7.11% $17,322
SBMI/5-Year U.S. Treasury (2) ....................... 2.29% 7.13% 7.22% 17,473
Morningstar Avg. Government Mortgage Fund ........... 2.27% 6.39% 6.52% 16,579
</TABLE>
The Intermediate Fund aims to match closely the interest rate risk of the
Salomon-Smith Barney Mortgage Index. This index is representative of the
universe of fixed-rate agency mortgage-backed securities and has a duration
ranging from about two to five years, depending on the overall level of interest
rates.
The Fund is actively managed to take advantage of changes in the difference
in yields between agency mortgage-backed securities and U.S. Treasury notes. For
most of the prior year, the fund was positioned to benefit from a tightening of
this yield differential. The Fund's return for the past twelve months lagged the
return on the Salomon-Smith Barney Mortgage Index due to a widening of this
differential, particularly in the first three months of this calendar year.
While the supply concerns about Treasurys have reduced the Fund's recent
returns, the current yield advantage of the mortgage and Agency markets would
appear to offer generous compensation for bearing the uncertainty of future
Treasury supply. The Fund is positioned to profit as the Treasury market returns
to equilibrium relative to allied markets, although the spread between the
Fund's holding and Treasury securities may widen if the yield curve inverts
further, if equity market volatility increases, or if general demand for
liquidity increases in the fixed income markets.
If the recent volatility of mortgage/Treasury spreads continues, the
volatility of the Fund's returns relative to its benchmark may be greater than
it has been in the past.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS MARCH 31, 2000
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
------------- ---------------------------------------------------------------------------- ----------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 129.9%
FREDDIE MAC -- 26.2%
Fixed-rate (1)
$4,763,430 Gold 6.00%, due 1/1/29 ..................................................... $ 4,342,544
4,000,000 6.50%, 30 Year, due date to be announced ................................... 3,753,740
Discount Notes
50,000 5.15%, due 6/2/00 (2),(3) .................................................. 49,503
-------------
8,145,787
FANNIE MAE -- 68.1%
Interest-only strip (1)
675,550 6.50%, due 10/15/23 ........................................................ 206,313
Fixed-rate (1)
1,713,213 6.00%, due 1/1/14 .......................................................... 1,612,401
2,666,868 6.50%, due 11/1/28 ......................................................... 2,503,830
16,500,000 6.50%, 30 Year, due date to be announced ................................... 15,468,699
1,200,000 7.50%, 30 Year, due date to be announced ................................... 1,179,372
Discount Notes
100,000 5.21%, due 6/15/00 (2),(3) ................................................. 98,789
140,000 5.33%, due 7/21/00 (2),(3) ................................................. 137,444
-------------
21,206,848
-------------
GINNIE MAE -- 35.6% (1)
Fixed-rate
5,436,436 7.00%, due 1/15/28 to 6/15/28 .............................................. 5,268,952
3,775,438 7.50%, due 9/15/28 ......................................................... 3,745,239
Adjustable-rate
906,013 6.375%, due 3/20/16 to 5/20/21 ............................................. 912,598
817,179 6.75%, due 8/20/17 to 8/20/18 .............................................. 821,904
338,604 7.125%, due 11/20/17 to 12/20/17 ........................................... 343,635
-------------
11,092,328
-------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (COST $41,558,130)............... 40,444,963
-------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 15.0%
2,000,000 GMAC Commercial Mortgage Securities, 6.42%, due 8/15/08 .................... 1,863,205
3,000,000 Nomura Asset Securities Corporation Commercial Mortgage Trust, 6.59%, due
3/17/28 .................................................................... 2,811,612
-------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $5,064,327)........................................................... 4,674,817
-------------
TOTAL INVESTMENTS (COST $46,622,457)--144.9%................................ 45,119,780
-------------
REPURCHASE AGREEMENTS -- 19.3%
6,000,000 Morgan Stanley Dean Witter, 6.10%, due 4/5/00 dated 3/29/00 (4) ............ 6,000,000
-------------
TOTAL REPURCHASE AGREEMENTS (COST $6,000,000)............................... 6,000,000
-------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (64.2%) .......................... (19,981,176)
-------------
NET ASSETS -- 100.0% ....................................................... $ 31,138,604
=============
</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 March 31,
2000. The adjusted rate is determined by adding a spread to a specified
index.
(2) The interest rate shown for discount notes is the effective yield at the
time of purchase by the Fund.
(3) Security is held as collateral by Carr Futures, Inc.
(4) Repurchase agreement is collateralized by $5,998,408 face of Fannie Mae
adjustable-rate 7.263% due 12/1/2022. Market value of the collateral is
$6,122,455.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at market value (identified cost $46,622,457) (Note 1)...................... $ 45,119,780
Repurchase Agreements (Cost $6,000,000) (Note 1)........................................ 6,000,000
Cash ................................................................................... 282,303
Receivables:
Securities sold ...................................................................... 19,878,034
Interest ............................................................................. 189,544
Subscriptions ........................................................................ 41,553
Prepaid expenses ....................................................................... 18,202
-------------
TOTAL ASSETS ........................................................................ 71,529,416
-------------
LIABILITIES
Payables:
Securities purchased ................................................................. 40,235,952
Redemptions .......................................................................... 60,440
Variation margin on futures contracts (Note 2) ....................................... 34,563
Distributions ........................................................................ 21,982
Due to Advisor, net (Note 3) ........................................................... 11,320
Accrued expenses ....................................................................... 26,555
-------------
TOTAL LIABILITIES ................................................................... 40,390,812
-------------
NET ASSETS
(Applicable to outstanding shares of 3,323,759 unlimited number of shares of beneficial
interest authorized; no stated par) .................................................. $ 31,138,604
=============
Net asset value, offering price and redemption price per share ($31,138,604 / 3,323,759) $ 9.37
=============
SOURCE OF NET ASSETS
Paid in capital ........................................................................ $ 34,430,881
Overdistribution of net investment income .............................................. (139,621)
Accumulated net realized loss on investments and futures contracts ..................... (1,364,281)
Net unrealized depreciation of investments ............................................. (1,502,677)
Net unrealized depreciation of futures contracts ....................................... (285,698)
-------------
NET ASSETS .......................................................................... $ 31,138,604
=============
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest income, net amortization and accretion (net of interest expense $47,575)
(Note 1) .............................................................................. $ 3,191,826
EXPENSES
Advisory fees (Note 3) .................................................................. 340,173
Accounting and pricing services fees .................................................... 43,377
Trustees fees and expenses .............................................................. 42,974
Registration fees ....................................................................... 24,366
Transfer agent fees ..................................................................... 20,777
Custodian fees .......................................................................... 13,170
Legal fees .............................................................................. 11,611
Audit & tax preparation fees ............................................................ 11,201
Other ................................................................................... 8,222
------------
TOTAL EXPENSES BEFORE REIMBURSEMENT ................................................... 515,871
Expenses reimbursed by Advisor (Note 3) ............................................... (88,225)
------------
NET EXPENSES .......................................................................... 427,646
------------
NET INVESTMENT INCOME ................................................................. 2,764,180
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss on investments ........................................................ (1,872,274)
Net realized gain on futures contracts .................................................. 819,648
Change in unrealized depreciation of investments ........................................ (1,278,328)
Change in unrealized depreciation of futures contracts .................................. (363,052)
------------
Net realized and unrealized loss on investments and futures contracts ................... (2,694,006)
------------
Net increase in net assets resulting from operations .................................... $ 70,174
============
</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>
YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999
---------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income ............................................ $ 2,764,180 $ 2,630,169
Net realized gain (loss) on investments .......................... (1,052,626) 247,095
Change in unrealized depreciation of investments ................. (1,641,380) (209,534)
------------- -------------
Net increase in net assets resulting from operations ............. 70,174 2,667,730
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ............................. (2,764,180) (2,630,169)
Distributions in excess of net investment income ................. (5,173) --
Distributions from net realized gains on investments ............. (105,706) (576,411)
------------- -------------
Total distributions .............................................. (2,875,059) (3,206,580)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Shares sold ...................................................... 12,864,608 45,066,774
Shares issued on reinvestment of distributions ................... 2,713,480 3,096,717
Shares redeemed .................................................. (36,760,396) (31,140,723)
------------- -------------
Increase (Decrease) in net assets resulting from capital share
transactions (a) ............................................... (21,182,308) 17,022,768
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................ (23,987,193) 16,483,918
NET ASSETS
Beginning of period .............................................. 55,125,797 38,641,879
------------- -------------
End of period .................................................... $ 31,138,604 $ 55,125,797
============= =============
(a) Transactions in capital shares were as follows:
Shares sold ...................................................... 1,338,329 4,529,253
Shares issued on reinvestment of distributions ................... 283,573 311,881
Shares redeemed .................................................. (3,858,008) (3,146,761)
------------- -------------
Net increase (decrease) .......................................... (2,236,106) 1,694,373
Beginning balance ................................................ 5,559,865 3,865,492
------------- -------------
Ending balance ................................................... 3,323,759 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.
For a share outstanding throughout the periods.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................ $ 9.91 $ 10.00 $ 9.73 $ 10.01 $ 9.83
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............. 0.534 0.525 0.590 0.599 0.660
Net realized and unrealized
(loss) gain on investments ...... (0.499) 0.030 0.419 ( 0.024) 0.277
----------- ----------- ----------- ----------- -----------
Total from investment
operations ...................... 0.035 0.555 1.009 0.575 0.937
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income .......................... (0.534) ( 0.515) ( 0.561) ( 0.604) ( 0.656)
Dividends in excess of net
investment income ............... (0.018) -- -- -- --
Distributions from net realized
gains on investments ............ (0.023) ( 0.130) ( 0.178) ( 0.251) ( 0.101)
----------- ----------- ----------- ----------- -----------
Total distributions ............. (0.575) ( 0.645) ( 0.739) ( 0.855) ( 0.757)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ..... $ 9.37 $ 9.91 $ 10.00 $ 9.73 $ 10.01
----------- ----------- ----------- ----------- -----------
TOTAL RETURN ....................... 0.40% 5.73% 10.65% 5.92% 9.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ......... $31,138,604 $55,125,797 $38,641,879 $37,735,525 $36,446,940
Ratio of net expenses to
average net assets .............. 0.88% 0.88% 0.88% 0.88% 0.90%
Ratio of net investment income
to average net assets ........... 5.72% 5.25% 5.61% 6.19% 6.49%
Portfolio turnover rate ........... 455% 423% 583% 409% 193%
Ratio of expenses to average
net assets before
reimbursement of expenses
by the Advisor .................. 1.06% 1.06% 1.13% 1.16% 1.14%
Ratio of net investment income
to average net assets before
reimbursement of expenses
by the Advisor .................. 5.54% 5.08% 5.36% 5.92% 6.26%
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
The Board of Trustees and Shareholders,
Smith Breeden Intermediate Duration U.S. Government Fund 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 Fund of the Smith Breeden Series Fund (the "Fund"), as
of March 31, 2000, and the related statements of operations, changes in net
assets and the financial highlights for each of the periods presented. These
financial statements and the 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 auditing standards generally
accepted in the United States of America. 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, 2000, by correspondence with the custodian and
brokers; where replies were not received, we performed other auditing
procedures. 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 referred
to above present fairly, in all material respects, the financial position of the
Smith Breeden Intermediate Duration U.S. Government Fund of the Smith Breeden
Series Fund as of March 31, 2000, the results of its operations, the changes in
its net assets, and the financial highlights for the periods presented in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche LLP
New York, New York
May 12, 2000
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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, including derivatives, 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 (including derivatives) 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.
Short-term securities which mature in 60 days or less are valued at amortized
cost. Short-term securities with a term to maturity greater than 60 days from
the date of purchase are valued at current market quotations until maturity.
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
lending of portfolio assets as collateral, together with an agreement to receive
the same assets at a fixed price on an agreed upon date. 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. Accordingly, there is no provision for income taxes in
the accompanying financial statements. To so qualify, the Funds intend
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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.
<TABLE>
<CAPTION>
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
CARRYFORWARD CARRYFORWARD CARRYFORWARD
FUND EXPIRES 3/31/2004 EXPIRES 3/31/2005 EXPIRES 3/31/2008
--------------------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Short Duration Fund ............. $658,505 $829,556 $760,963
Intermediate Duration Fund ...... 0 0 0
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 accretion of discount and amortization of premium from the purchase
of fixed-income securities. Discounts and premiums on fixed-income securities
purchased are amortized over the life of the respective securities using the
effective yield method. 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 Funds are generally
based on the ratio of net assets of each Fund to the combined net assets of all
Funds. 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.
Upon 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 (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
The Short Duration Fund had the following open futures contracts as of March 31,
2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
---- ----------- ---------- ---------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 129 Short June 2000 $ (172,015)
10 Year Treasury ........... 58 Short June 2000 (120,425)
30 Year Treasury ........... 14 Short June 2000 (50,516)
3 Month Eurodollar ......... 23 Short June 2000 6,721
3 Month Eurodollar ......... 21 Short September 2000 8,056
3 Month Eurodollar ......... 6 Short December 2000 3,673
3 Month Eurodollar ......... 11 Long March 2001 (1,575)
3 Month Eurodollar ......... 50 Long September 2001 (154,438)
3 Month Eurodollar ......... 20 Short June 2002 47,022
3 Month Eurodollar ......... 17 Short March 2003 (3,164)
3 Month Eurodollar ......... 20 Short June 2003 37,160
3 Month Eurodollar ......... 20 Short June 2004 31,310
3 Month Eurodollar ......... 5 Short September 2004 3,290
3 Month Eurodollar ......... 1 Long December 2004 833
3 Month Eurodollar ......... 1 Long March 2005 908
3 Month Eurodollar ......... 8 Short June 2005 9,814
3 Month Eurodollar ......... 3 Short September 2005 986
3 Month Eurodollar ......... 11 Short December 2005 17,463
3 Month Eurodollar ......... 13 Short March 2006 21,992
3 Month Eurodollar ......... 2 Long June 2006 2,191
3 Month Eurodollar ......... 5 Long September 2006 3,278
3 Month Eurodollar ......... 3 Long December 2006 3,512
----------
Total $ (303,924)
==========
</TABLE>
The Intermediate Duration Fund had the following open futures contracts as of
March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
-------------------------- ----------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury .......... 57 Short June 2000 $ (101,054)
10 Year Treasury ......... 19 Short June 2000 (36,687)
30 Year Treasury ......... 43 Short June 2000 (147,957)
----------
Total $ (285,698)
==========
</TABLE>
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
The U.S. Equity Market Plus(R) Fund had the following open interest-rate futures
contracts as of March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
---- ----------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 1,316 Short June 2000 $ (1,637,482)
10 Year Treasury ........... 605 Short June 2000 (1,103,731)
30 Year Treasury ........... 48 Short June 2000 (165,560)
3 Month Eurodollar ......... 149 Short June 2000 24,380
3 Month Eurodollar ......... 96 Short September 2000 19,918
3 Month Eurodollar ......... 157 Long December 2000 29,756
3 Month Eurodollar ......... 142 Long March 2001 (25,477)
3 Month Eurodollar ......... 19 Long June 2001 5,065
3 Month Eurodollar ......... 86 Short September 2001 203,200
3 Month Eurodollar ......... 19 Long December 2001 9,302
3 Month Eurodollar ......... 11 Short March 2002 4,063
3 Month Eurodollar ......... 19 Long June 2002 11,440
3 Month Eurodollar ......... 80 Short September 2002 139,565
3 Month Eurodollar ......... 19 Long December 2002 13,077
3 Month Eurodollar ......... 83 Short March 2003 (6,999)
3 Month Eurodollar ......... 19 Long June 2003 14,052
3 Month Eurodollar ......... 65 Short September 2003 52,570
3 Month Eurodollar ......... 20 Long December 2003 15,348
3 Month Eurodollar ......... 29 Short March 2004 (2,430)
3 Month Eurodollar ......... 29 Long June 2004 22,169
3 Month Eurodollar ......... 54 Long September 2004 22,044
3 Month Eurodollar ......... 26 Long December 2004 18,408
3 Month Eurodollar ......... 122 Short March 2005 279,663
3 Month Eurodollar ......... 3 Short June 2005 (401)
3 Month Eurodollar ......... 9 Long December 2005 (828)
3 Month Eurodollar ......... 65 Short March 2006 122,608
3 Month Eurodollar ......... 8 Long June 2006 (236)
3 Month Eurodollar ......... 21 Long September 2006 (95)
3 Month Eurodollar ......... 16 Long December 2006 928
3 Month Eurodollar ......... 24 Short March 2007 58,392
------------
Total $ (1,877,291)
============
</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. Should interest rates move unexpectedly, the Fund may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
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.
The U.S. Equity Market Plus(R) Fund had the following open futures contracts on
the S&P 500 Index as of March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
---- ----------- ---------- ---------------- --------------
<S> <C> <C> <C> <C>
S&P 500 ............ 372 Long June 2000 $12,279,315
S&P 500 ............ 58 Long September 2000 673,960
S&P 500 ............ 73 Long December 2000 816,323
-----------
Total $13,769,598
===========
</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 March 31, 2000 was:
<TABLE>
<CAPTION>
FUND ASSETS PLEDGED
---- ---------------
<S> <C>
Short Duration Fund ................. $ 343,131
Intermediate Duration Fund .......... 285,736
U.S. Equity Market Plus(R) Fund ..... 15,149,551
</TABLE>
D. INTEREST RATE SWAP CONTRACTS AND OPTIONS: 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. Interest rate
swaps represent an agreement between two parties 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. 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. The Funds will
not enter into interest rate swap agreements or swaptions 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 counterparties to interest rate swap agreements or
swaptions 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 to the Funds under an
interest rate swap agreement or swaption 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. During the term of the interest rate swap agreement or swaptions,
unrealized gains or losses are recorded as a result of "marking-to-market". When
the interest rate swap agreement or swaption is terminated, the Funds will
record a realized gain or loss equal to the difference between the proceeds from
(or cost of) the closing transaction and the Funds' basis in the contract, if
any.
As of March 31, 2000, 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 Duration Fund receiving or paying 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
net interest receivable on the interest rate swap agreement as of March 31, 2000
was $13,959. No collateral is required under these contracts.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
As of March 31, 2000, 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.
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 of 0.70% per annum, based on the
Funds' average net assets, computed daily rate and payable monthly.
The Advisor voluntarily agreed to reimburse normal business expenses of the
Funds during the year ended March 31, 2000 so that total direct and indirect
operating expenses do not exceed the percentages listed below of each Funds'
average net assets. The table below lists the fees received by the Advisor and
the expenses reimbursed by the Advisor to each Fund during the year ending March
31, 2000.
<TABLE>
<CAPTION>
NET EXPENSE FEES RECEIVED EXPENSES REIMBURSED
FUND RATIO BY ADVISOR BY ADVISOR
---- ------------ -------------- --------------------
<S> <C> <C> <C>
Short Duration Fund ............. 0.78% $ 374,112 $155,667
Intermediate Duration Fund ...... 0.88% 340,173 88,225
U.S. Equity Market Plus(R) Fund . 0.88% 1,465,858 269,913
</TABLE>
The Funds have adopted a Distribution and Services Plan (the "Plan") under Rule
12b-1 of 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 year ended March 31, 2000 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 ................. $ 174,957,932 $196,534,894
Intermediate Duration Fund .......... 292,984,465 294,024,494
U.S. Equity Market Plus(R) Fund ..... 1,052,303,795 974,674,170
</TABLE>
The cost of securities held for Federal tax purposes, and the net unrealized
appreciation (depreciation) of investments, forward sales and futures contracts
is as follows:
<TABLE>
<CAPTION>
COST OF SECURITIES NET UNREALIZED
FOR FEDERAL TAX GROSS UNREALIZED GROSS UNREALIZED APPRECIATION
FUND PURPOSES APPRECIATION DEPRECIATION (DEPRECIATION)
---- ------------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Short Duration Fund ............... $ 48,460,616(1) $ 557,956 $2,911,836 $ (2,353,880)
Intermediate Duration Fund ........ 46,622,457 44,528 1,832,903 (1,788,375)
U.S. Equity Market Plus(R) Fund ... 255,121,426 16,037,007 9,429,745 6,607,262
</TABLE>
---------
(1) Includes securities cost basis of $58,118,428 and forward sales proceeds of
$9,657,812.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
Subsequently, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," was
issued which deferred the effective date of SFAS No. 133 to all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Funds have elected to
adopt the provisions of SFAS No. 133 for the fiscal year ended March 31, 2000.
SFAS No. 133 supersedes SFAS No. 119 and No. 105, which required the disclosure
of average aggregate fair values and contract/notional values, respectively, of
derivative financial instruments for an entity that carries its assets at fair
value. The application of SFAS No. 133 does not have a material effect on the
Funds' financial statements.
6. SUBSEQUENT EVENTS
Smith Breeden Associates, Inc. (the "Advisor") has entered into an agreement
with the Managers Funds LLC ("Managers") whereby the Advisor would sell certain
of its assets related to its management of the Funds to Managers and Managers
would assume certain of the Advisor's contractual liabilities (the
"Transaction"). The Transaction shall only be consummated if certain approvals
are received from the Funds' shareholders at a special meeting to be held on
July 21, 2000. Such approvals include (1) the appointment of Managers as
investment advisor to each Fund; (2) the appointment of the Advisor as
sub-advisor to each Fund; and (3) the election of new Trustees to replace the
current Trustees of the Trusts.
In addition, upon completion of the Transaction, the Funds would be renamed as
follows: the Short Duration Fund would become the Managers Short Duration
Government Fund, the Intermediate Duration Fund would become the Managers
Intermediate Government Fund, and the U.S. Equity Market Plus(R) Fund would
become the Managers Equity 500 Plus Fund.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
IMPORTANT TAX INFORMATION
Dear Shareholder:
None of the ordinary income distributions paid by the Fund to shareholders
during the fiscal year ended March 31, 2000 qualify for the dividends received
deduction for corporations. Additionally, the Fund paid a long-term capital gain
distribution of $20,532 to shareholders during the fiscal year ended March 31,
2000.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
BOARD OF TRUSTEES INVESTMENT ADVISOR
Douglas T. Breeden Smith Breeden Associates, Inc.
Michael J. Giarla 100 Europa Drive, Suite 200
Stephen M. Schaefer Chapel Hill, NC 27514
Myron S. Scholes
William F. Sharpe
TRANSFER AND DIVIDEND PAYING AGENT
PFPC, Inc.
OFFICERS 211 South Gulph Road
PO Box 61767
King of Prussia, PA 19406
CHAIRMAN
Douglas T. Breeden
DISTRIBUTOR
Provident Distributors, Inc
PRESIDENT 3200 Horizon Drive
Michael J. Giarla King of Prussia, PA 19406
VICE PRESIDENTS CUSTODIAN
Daniel C. Dektar (Smith Breeden Series Fund) Bank of New York
Timothy D. Rowe (Smith Breeden Series Fund) 48 Wall Street
John B. Sprow (Smith Breeden Trust) New York, NY 10286
TREASURER AND SECRETARY INDEPENDENT AUDITORS
Marianthe S. Mewkill Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
</TABLE>
For information about:
o Establishing an account
o Account procedures and status
o Exchanges
o Prices
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