As filed with the Securities and Exchange Commission
on August 1, 1995
File No. 33-44909
File No. 811-6520
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M N-1A
Registration Statement Under the Securities Act of 1933
Post-Effective Amendment No. 7
and
Registration Statement Under the Investment Company Act of 1940
Amendment No. 9
____________________
SMITH BREEDEN TRUST
(Exact Name of Registrant as Specified in Charter)
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514
(Address of Principal Executive Office)
(919) 967-7221
(Registrant's Telephone Number, Including Area Code)
MICHAEL J. GIARLA
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514
(Name and Address of Agent for Service)
_______________
This filing shall become effective on August 1, 1995 pursuant to
paragraph (b) of Rule 485 under the Securities Act of 1933.
The Registrant has previously registered an indefinite number of
shares of beneficial interest pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. The Rule 24f-2 notice for
the Registrant's most recent fiscal year was filed on May 24, 1995.
_______________
Please Send Copy of Communications to:
MARIANTHE S. MEWKILL
Smith Breeden Associates, Inc.
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
(919)-967-7221 <PAGE>
SMITH BREEDEN TRUST
SMITH BREEDEN MARKET TRACKING FUND
(THE "MARKET TRACKING FUND")
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
N-1A
Item No. Item Location in the
Registration Statement
by Prospectus Heading
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial
Information Financial Highlights
4. General Description of
Registrant "Description of the Trust"
5. Management of the Fund "Management of the Fund"
5a. Management's Discussion
of Fund's Performance "Performance"
6. Capital Stock and Other
Securities "Distributions and Taxes";
"Description of the Trust"
7. Purchase of Securities
Being Offered "Purchase and Redemption
of Shares"; "Valuation of
Fund Shares"
8. Redemption or Repurchase "Purchase and Redemption
of Shares"
9. Pending Legal Proceedings Not Applicable
<PAGE>
SMITH BREEDEN TRUST
SMITH BREEDEN MARKET TRACKING FUND
PROSPECTUS
August 1, 1995
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514
(919) 967-7221
Smith Breeden Market Tracking Fund (the "Fund") is a series of
Smith Breeden Trust (the "Trust"), an open-end, diversified
management investment company managed by Smith Breeden
Associates, Inc. (the "Adviser"). The Fund's objective is to
provide a total return approximating the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"). To achieve
its objective, the Fund will invest in Equity Swap Contracts
(defined below) and S&P 500 and other stock index futures
contracts as well as fixed income securities which are issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities. The Fund also may invest a substantial
portion of its assets in fixed income securities that directly or
indirectly represent a participation in, or are collateralized by
and payable from, mortgage loans on real property. The Fund may
employ various hedging techniques in connection with its fixed
income investments. On occasion, the Fund may purchase
additional securities with borrowed funds which may result in a
leveraged capital structure. See "Investment Objective and
Policies -- Fixed Income Segment."
This Prospectus explains concisely what you should know before
investing in the Fund. Please read it carefully and keep it for
future reference. You can find more detailed information about
the Fund in the August 1, 1995 Statement of Additional
Information, as amended from time to time. For a free copy of
the Statement write to Fund/Plan Broker Services, Inc., #2 West
Elm Street, Post Office Box 874, Conshohocken, Pennsylvania
19428-0874, or call (800) 221-3138. The Statement has been filed
with the Securities and Exchange Commission and is incorporated
into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-1-
TABLE OF CONTENTS
Page
EXPENSE TABLE. . . . . . . . . . . . . . . . . . . 3
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . 4
INVESTMENT OBJECTIVE, POLICIES
AND RISK CONSIDERATIONS . . . . . . . . . . . . . 5
OTHER INVESTMENT PRACTICES AND
RISK CONSIDERATIONS . . . . . . . . . . . . . . . 10
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . 12
PURCHASE AND REDEMPTION OF
SHARES. . . . . . . . . . . . . . . . . . . . . . 17
DISTRIBUTIONS AND TAXES. . . . . . . . . . . . . . 21
VALUATION OF FUND SHARES . . . . . . . . . . . . . 22
PERFORMANCE. . . . . . . . . . . . . . . . . . . . 22
DESCRIPTION OF THE TRUST . . . . . . . . . . . . . 23
APPENDIX A . . . . . . . . . . . . . . . . . . . . 25
This Prospectus is not an offering of the securities described
herein in any state in which the offering is unauthorized. No
sales representative, dealer or other person is authorized to
give any information or make any representations other than those
contained in this Prospectus.
-2-
<PAGE>
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses, as a percentage of
net assets of the Fund, that a shareholder will bear in
connection with an investment in the Fund.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) NONE
Redemption Fees
(as a percentage of amount redeemed) NONE*
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees (a) 0.70%
Other Expenses
(after expense limitation) (a) 0.20%
Total Fund Operating Expenses -----
(after expense limitation) (a) 0.90%
___________________
* An additional service fee of $9 per transaction may be
imposed on redemptions executed by wire transfer.
(a) The Other Expenses and Total Fund operating expenses
shown in the table reflect an undertaking by the Adviser to bear
expenses of the Fund and/or waive its fees to the extent
necessary to limit Total Fund Operating Expenses to 0.90% through
March 31, 1996 and are estimates which are based upon Total Fund
Operating expenses for the fiscal year ended March 31, 1995.
Absent the expense limitation, estimated Management Fees, Other
Expenses and Total Fund Operating Expenses would be 0.70%, 7.05%
and 7.75%, respectively. For the year ending March 31, 1995,
actual Management Fees, Other Expenses and actual Total Fund
Operating Expenses were 0.70%, 0.20%, and 0.90% respectively,
reflecting the expense limitation.
(b) Pursuant to a distribution and services plan, the
Adviser may pay annual distribution and servicing fees of up to
0.25% of the Fund's net assets out of its management fee. See
"Purchase and Redemption of Shares -- Distribution and Services
Plan."
____________________
The following example illustrates the expenses that apply to a
$1,000 investment in the Fund over various time periods, assuming
(1) a 5% annual return and (2) redemption or no redemption at end
of each time period.
Year 1 Year 3 Year 5 Year 10
$ 9 $ 29 $ 50 $ 112
These examples are based on the annual operating expenses shown
in the table above and should not be considered a representation
of past or future expenses or performance.<PAGE>
-3-
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following selected per share data and ratios cover the period
from June 30, 1992, the date the Fund commenced operations,
through March 31, 1995 and are a part of the Fund's financial
statements which have been audited by Deloitte & Touche LLP,
independent auditors. The Fund's most recent annual audited
financial statements and the report of Deloitte & Touche LLP
thereon appear in the Fund's Statement of Additional Information.
This data should be read in conjunction with the financial
statements and notes thereto included in the Fund's Statement of
Additional Information.
FINANCIAL HIGHLIGHTS
Year Ended Year Ended Period Ended
March 31, 1995 March 31, 1994 March 31, 1993
Net Asset Value,
Beginning of Period $ 9.88 $10.85 $10.00
Income From
Investment
Operations
Net Investment
Income 0.568 0.476 0.355
Net Realized and
Unrealized Gain
(Loss) on
Investments, Equity
Swap and Futures
Contracts 1.081 (0.216) 1.281
Total From
Investment
Operations 1.649 0.260 1.636
Less Distributions
Dividends from net
investment
income (0.568) (0.472) (0.311)
Dividends in excess
of net investment
income (0.001) ---- ----
Distributions from
net realized
gains on
investments (0.047) (0.701) (0.420)
Distributions in
excess of net
realized gains
on investments (0.073) (0.057) (0.055)
Total
Distributions (0.689) (1.230) (0.786)
Net Asset Value,
End of Period $10.84 $9.88 $10.85
Total Return 17.18% 2.19% 22.59%*
_____________________________________
Ratios/Supplemental
Data
Net Assets,
End of Period $2,107,346 $1,760,519 $903,846
Ratio of Expenses
to Average
Net Assets
Before expense
reimbursement 7.75% 7.08% 28.48%*
After expense
reimbursement 0.90% 0.90% 0.57%*
Ratio of Net Income
to Average Net
Assets
Before expense
reimbursement 0.59% 1.84% (22.63%)*
After expense
reimbursement 7.44% 8.02% 5.28%*
Portfolio Turnover
Rate 120% 119% 271%
Additional performance information is presented in the Annual
Report for the Fund which will be made available without charge
upon request.
* Annualized<PAGE>
-4-
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund seeks to provide a total return approximating the
S&P 500 Index. Total return is a measure of investment
performance which includes all of the interest, dividends and
other income, net of expenses, paid on the Fund's investments, as
well as all realized and unrealized capital gains and losses.
For a description of how the total return of the Fund is
calculated, see "Performance". The S&P 500 Index is composed of
500 common stocks, most of which are listed on the New York Stock
Exchange. Standard & Poor's Corporation, which is not a sponsor
of or in any other way affiliated with the Fund, chooses the 500
stocks included in the S&P 500 Index on the basis of market value
and industry diversification. The S&P 500 Index assigns relative
values to the stocks included in the index, weighted according to
each stock's total market value relative to the total market
value of the other stocks included in the index.
The Fund seeks to achieve its objective by dividing its
portfolio into two separate segments. The Fund's first portfolio
segment, the "Equity Simulation Segment," will invest in a
combination of Equity Swap Contracts (described more fully
below), futures contracts on the S&P 500 stock index and on other
stock indices, including, but not limited to the New York Stock
Exchange ("S&P 500 and Other Stock Index Futures") and common
stocks whose return (before deducting allocated costs) is
expected to track movements in the S&P 500 Index. The Fund
expects its use of stock index futures other than S&P 500 Stock
Index Futures to be minimal. The Fund's second portfolio
segment, the "Fixed Income Segment," will seek a total return
greater than the aggregate costs of the Fund (including the costs
of the Equity Simulation Segment such as those relating to the
Equity Swap Contracts and S&P 500 and other Stock Index Futures)
by investing in fixed-income securities (and futures, options,
floors, caps and swaps related thereto). Hence, the Fixed Income
Segment will seek to generate income (consisting primarily of
interest income) and gains which exceed the expenses of operating
the entire Fund. As discussed more fully below, if the Equity
Simulation Segment produces capital appreciation or depreciation
for the Fund corresponding to movements of the S&P 500 Index in a
magnitude correlated to the Fund's total net assets, whether the
Fund outperforms or underperforms the S&P 500 Index will depend
on whether the total return on the Fixed Income Segment is
greater or is less than the Fund's expenses (including
transaction costs and the costs of the equity derivative
instruments held in the Equity Simulation Segment).
The investment objective of the Fund is not fundamental, and
may be changed without a vote of the majority of the shareholders
of the Fund. Shareholders will receive written notification at
least thirty days prior to any change in the Fund's investment
objective. If such a change in the investment objective of the
fund occurs, such changes may result in the Fund having
investment objectives different from the objectives which the
shareholders considered appropriate at the time of their
investment in the Fund.
Equity Simulation Segment
The Equity Simulation Segment will use equity swap contracts
whose return (before deducting the interest costs described
below) is expected to track closely the return of the S&P 500
Index ("Equity Swap Contracts"). The Equity Simulation Segment
may also invest in S&P 500 and Other Stock Index Futures and
common stocks whose returns are expected to have a high
correlation with the S&P 500 Index.
Equity Swap Contracts. The counterparty to an Equity Swap
Contract will typically be a bank, investment banking firm or
broker/dealer. The counterparty will generally agree to pay the
Fund the amount, if any, by which the notional amount of the
Equity Swap Contract would have increased in value had it been
invested in the stocks comprising the S&P 500 Index in proportion
to the composition of the Index, plus the dividends that would
have been received on those stocks. The Fund will agree to pay
to the counterparty a floating rate of interest (typically the
London Inter Bank Offered Rate) on the notional amount of the
Equity Swap Contract plus the amount, if any, by which that
notional amount would have decreased in value had it been
invested in such stocks. Therefore, the return to the Fund on
any Equity Swap Contract should be the gain or loss on the
notional amount plus dividends on the stocks comprising the S&P
500 Index (as if the Fund had invested the notional amount in
stocks comprising the S&P 500 Index) less the interest paid by
the Fund on the notional amount. The Fund will only enter into
Equity Swap Contracts on a net basis, i.e., the two parties'
obligations are netted out, with the Fund paying or
receiving, as the case may be, only the net
-5-
amount of any payments. Payments under the Equity Swap Contracts
may be made at the conclusion of the contract or periodically
during its term.
If there is a default by the counterparty to an Equity Swap
Contract, the Fund will be limited to contractual remedies
pursuant to the agreements related to the transaction. There is
no assurance that Equity Swap Contract counterparties will be
able to meet their obligations pursuant to Equity Swap Contracts
or that, in the event of default, the Fund will succeed in
pursuing contractual remedies. The Fund thus assumes the risk
that it may be delayed in or prevented from obtaining payments
owed to it pursuant to Equity Swap Contracts. The Fund will
closely monitor the credit of Equity Swap Contract counterparties
in order to minimize this risk.
The Fund may from time to time enter into the opposite side
of Equity Swap Contracts (i.e., where the Fund is obligated to
pay the increase (net of interest) or receive the decrease (plus
interest) on the S&P 500 Index) to reduce the amount of the
Fund's equity market exposure consistent with the Fund's
objective. These positions are sometimes referred to as "Reverse
Equity Swap Contracts".
S&P 500 Index Futures. The Equity Simulation Segment of the Fund
may also invest in S&P 500 and Other Stock Index Futures to the
extent necessary to cause the notional amount of its Equity Swap
Contracts (less the notional amount of Reverse Equity Swap
Contracts) plus the face amount of its S&P 500 and Other Stock
Index Futures plus the value of its common stocks to approximate
the Fund's total net assets.
S&P 500 and Other Stock Index Futures represent contracts to
buy an integral number of units of the S&P 500 Index or some
other stock index, including but not limited to the New York
Stock Exchange, at a specified future date at a price agreed upon
when the contract is made. Upon entering into a contract, the
Fund will be required to deposit with its custodian in a
segregated account in the name of the futures broker a specified
amount of cash or securities, generally not exceeding 5% of the
face amount of the contract. This amount is known as "initial
margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual
obligations have been satisfied. Subsequent payments, called
"variation margin" to and from the broker, will be made on a
daily basis as the price of the S&P 500 or Other Stock Index
fluctuates, making the position in the futures contract more or
less valuable, a process known as "marking to the market."
Positions in S&P 500 or Other Stock Index Futures may be
closed out only by entering into a futures contract sale on the
futures exchange on which the futures are traded. The liquidity
of the market in S&P 500 or Other Stock Index Futures could be
adversely affected by "daily price fluctuation limits"
established by the exchange which limit the amount of fluctuation
in the price of an S&P 500 or Other Stock Index Futures contract
during a single trading day. In such events, it may not be
possible for the Fund to close out its futures contract position,
and, in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation
margin.
Common Stocks. When S&P 500 or Other Stock Index Futures and/or
Equity Swap Contracts are overpriced relative to the common
stocks underlying the S&P 500 Index, the Fund may also invest
directly in the common stocks represented by the S&P 500 Index..
The Fund will generally not own all 500 issues, but will attempt
to purchase a basket of common stocks which, on average, are
expected to match movements in the S&P 500 Index. Subject to
limits on investment in other investment companies, the Fund may
also invest in these stocks indirectly by purchasing interests in
asset pools investing in such stocks. To the extent that the
Fund purchases interests in other investment companies,
shareholders of the Fund may be subject to a layering of expenses
because they may indirectly bear a proportionate share of the
expenses of such investment companies (including advisory fees)
in addition to bearing the direct expenses of the Fund.
Limitations on the Use of Equity Swap Contracts and S&P 500 Index
Futures. The Fund will invest in a combination of Equity Swap
Contracts, Reverse Equity Swap Contracts, S&P 500 or Other Stock
Index Futures and common stocks to achieve the same opportunity
and risk profile for the Equity Simulation Segment (disregarding
for this purpose the interest and other transaction costs
described above) as that of a
-6-
hypothetical portfolio, equal in size to the Fund, invested in the
common stocks comprising the S&P 500 Index in proportion to their
respective weight in the S&P 500 Index. The Fund will not use
Equity Swap Contracts or S&P 500 Index Futures to leverage the Fund.
The Fund will not enter into any Equity Swap Contract or
Reverse Equity Swap Contract unless, at the time of entering into
such transaction, the unsecured senior debt of the counterparty
is rated at least A by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). In
addition, the staff of the SEC considers Equity Swap Contracts
and Reverse Equity Swap Contracts to be illiquid securities.
Consequently, while the staff maintains this position, the Fund
will not invest in Equity Swap Contracts or Reverse Equity Swap
Contracts if, as a result of the investment, the total value of
such investments together with that of all other illiquid
securities which the Fund owns would exceed 15% of the Fund's
total assets.
The Adviser and the Fund do not believe that the Fund's
obligations under Equity Swap Contracts or Reverse Equity Swap
Contracts are senior securities, so long as a segregated account
is maintained, and, accordingly, the Fund will not treat them as
being subject to its borrowing restrictions. The net amount of
the excess, if any, of the Fund's obligations over its
entitlements with respect to each Equity Swap Contract and each
Reverse Equity Swap Contract will be accrued on a daily basis and
an amount of cash, U.S. Government Securities or other liquid
high quality debt securities having an aggregate market value at
least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian.
The Fund will not purchase S&P 500 or Other Stock Index
Futures, except for bona fide hedging purposes, if as a result
the Fund's aggregate initial margin deposits and premiums would
be greater than 5% of the Fund's total assets. In addition to
margin deposits, when the Fund purchases an S&P 500 or Other
Stock Index Futures Contract, it is required to maintain at all
times while the S&P 500 or Other Stock Index Future is held by
the Fund, cash, U.S. government securities or other liquid high
quality debt obligations in a segregated account with its
Custodian, in an amount which, together with the initial margin
deposit on the futures contract, is equal to the current delivery
or cash settlement value of the futures contract.
General. As indicated above, the Equity Simulation Segment of
the Fund's portfolio will seek to obtain the same opportunity and
risk profile (disregarding, for this purpose, the interest and
other transaction costs described above) as a hypothetical
portfolio, equal in size to the net asset value of the Fund,
invested in the stocks comprising the S&P 500 Index in proportion
to their respective weightings in the S&P 500 Index. This means,
for example, that if the Fund has total assets of $100 million,
the Equity Simulation Segment might: (1) enter into an Equity
Swap Contract with a notional amount of $50 million, (2) purchase
an S&P 500 Index Futures contract with a face amount of $45
million, and (3) purchase $5 million worth of common stocks
comprising the S&P 500 Index in proportion to their respective
weightings in the S&P 500 Index. The Fixed Income Segment would
invest $95 million in various fixed income assets with
appropriate hedging strategies. See "Fixed Income Segment." If,
during the course of the year, the stocks comprising the S&P 500
Index appreciate 10% on average and pay a 4% dividend, and if the
interest on the Equity Swap Contract's notional amount is 6%, at
the end of the year the counterparty to the equity swap contract
will be required to pay the Fund $4 million ($7 million
appreciation and dividends minus $3 million interest). The S&P
500 Index Futures contract should be closed out at a gain of $3.6
million (since the pricing of S&P 500 Futures carries an implicit
cost of carry) and the common stocks should now be worth $5.7
million. If, in addition, the Fund's total expenses (other than
brokerage expenses and the interest on the notional amount of the
Equity Swap contract as described above) is .90% of total net
assets (i.e., $0.9 million dollars), the Fund would achieve a
total return equal to the S&P 500 Index only if the Fixed Income
Segment has a total return equal to 6.9% per annum. If the Fixed
Income Segment achieves this result, then the Fund's total net
assets will be $114 million - an increase of 14% and a total
return equal to the S&P 500 Index. If the Fixed Income Segment's
total return is greater or less than 6.9% per annum, the Fund's
total return will be greater or less than the S&P 500 Index.
The Equity Simulation Segment's actual opportunities for
gain and risk of loss will tend to be greater than a
hypothetical portfolio invested in the stocks comprising the
S&P 500 Index if the aggregate of
-7-
the notional amount of the Equity Swap Contracts (less the
notional amount of any Reverse Equity Swap Contracts) plus the
face amount of the S&P 500 or Other Stock Index Futures plus the
common stocks owned by the Fund exceeds the Fund's total
net assets and will tend to be smaller if such aggregate is less
than the Fund's total net assets. Under normal conditions, the
Fund expects the Fund's total net assets generally to be up to 5%
more or less than this aggregate because purchases and
redemptions of Fund shares will change the Fund's total net
assets frequently and because S&P 500 Index Futures can only be
purchased in integral multiples of the S&P 500 Index. Also, the
ability of the Equity Simulation Segment of the Fund's portfolio
to replicate the opportunity and risk profile (disregarding, for
this purpose, the interest and other transactional costs
described above) of a hypothetical stock portfolio may be
diminished by imperfect correlations between price movements of
the S&P 500 Index itself with price movements of S&P 500 Index
and Other Stock Index Futures and/or common stocks purchased by
the Fund. In addition, the purchase and sale of common stocks
and S&P 500 and Other Stock Index Futures involve transaction
costs and Equity Swap Contracts require the Fund to pay interest
on the notional amount of the contract. Therefore, if the
aggregate face amount of the S&P 500 and Other Stock Index
Futures, the notional amount of the Equity Swap Contracts (less
the notional amount of any Reverse Equity Swap Contracts) and the
value of the Equity Simulation Segment's common stocks is
precisely equal to the Fund's total net assets, and if there is
exact price movement correlation between the Fund's common stocks
and/or S&P 500 Index and Other Stock Index Futures and the S&P
500 Index, the Fund will outperform the S&P 500 Index only if the
total net return on the Fixed Income Segment of the Fund's
portfolio exceeds the sum of (1) the Equity Simulation Segment's
transaction costs on S&P 500 and Other Stock Index Futures and
common stock, (2) the interest payments under Equity Swap
Contracts and (3) all the other Fund expenses (e.g., management,
custodial, transfer agency, accounting and legal fees) which are
described more fully under "Management of the Fund."
Fixed Income Segment
The Fixed Income Segment will invest primarily in U.S.
Government Securities and other fixed income securities. While
these securities generally have maturities of up to 30 years, the
Fixed Income Segment will engage in various hedging strategies so
that it is expected that the Fixed Income Segment will have a
volatility similar to that of a one year Treasury Bill.
"U.S. Government Securities" are securities issued or
guaranteed as to principal and interest by the U.S. Government,
its agencies, authorities or instrumentalities and include
securities supported by the full faith and credit of the United
States, as well as those supported by the discretionary authority
of the U.S. Government to purchase the issuer's obligations,
those supported by the right of the issuer to borrow from the
United States Treasury and those supported only by the credit of
the issuing agency, authority or instrumentality itself. U.S.
Government Securities include conventional bills, notes and
bonds, as well as collateralized mortgage obligations ("CMOs")
and other mortgage-backed securities, adjustable rate securities,
IO/PO strips (defined below) and zero coupon securities,
described more fully below. The Fixed Income Segment may invest
substantially in FNMA, FHLMC and GNMA mortgage-backed
certificates and other U.S. Government Securities representing
ownership interests in mortgage pools.
In addition to investing in U.S. Government Securities, the
Fixed Income Segment may invest a portion of its assets in bank
certificates of deposit, corporate debt obligations and mortgage-
backed and other asset-backed securities of non-governmental
issuers. These investments generally involve credit risk, as
well as the risk (present with all fixed-income securities) of
fluctuations in value as market rates of interest change. To
reduce credit risk, however, the Segment's investments in fixed-
income securities will all, at the time of purchase, be either of
investment grade (as rated by S&P or by Moody's), or unrated but
determined by the Manager to be of a quality comparable to
obligations that are so rated. The lowest quality investment
grade fixed income securities are rated BBB by Moody's or Baa by
S&P and have certain speculative characteristics and are more
susceptible to adverse changes in circumstances and economic
conditions than higher rated fixed income securities. The
Adviser will monitor the Fund's investments in fixed income
securities and will cause the Fund to dispose of any such
security the rating of which is reduced to below investment
grade.
-8-
Mortgage-Backed and Other Asset-Backed Securities. Interest and
principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the
holders of the mortgage-backed security. Prepayments occur when
the mortgagor on an individual mortgage prepays the remaining
principal before the mortgage's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the
underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated
maturity would indicate. Because the prepayment characteristics
of the underlying mortgages vary, it is not possible to predict
accurately the realized yield or average life of a particular
issue of pass-through certificates. Prepayments are important
because of their effect on the yield and price of the securities.
During periods of declining interest rates, such prepayments can
be expected to accelerate and the Fund would be required to
reinvest the proceeds at the lower interest rates then available.
In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses because the
premium may not have been fully amortized at the time the
obligation is prepaid. As a result of these principal payment
features, the values of mortgage-backed securities generally fall
when interest rates rise, but their potential for capital
appreciation in periods of falling interest rates is limited
because of the prepayment feature. In order to hedge against
possible prepayment the Fund may purchase certain options and
options on futures transactions as described more fully in
Appendix A. The mortgage-backed securities purchased by the Fund
may include adjustable rate instruments. See "Adjustable Rate
Securities" below.
The Fixed Income Segment may also invest in other mortgage-
backed and asset-backed securities, rated at least A by Moody's
or S&P such as securities backed by pools of automobile loans,
educational loans and credit card receivables. Asset-backed
securities of non-governmental issuers may involve prepayment
risks similar to those of U.S. Government guaranteed mortgage-
backed securities and also involve risk of loss of principal if
the obligers of the underlying obligations default in payment of
the obligations.
Collateralized Mortgage Obligations ("CMOs") A CMO is a security
backed by a portfolio of mortgages or mortgage-backed securities
held under an indenture. The issuer's obligation to make
interest and principal payments is secured by the underlying
portfolio of mortgages or mortgage-backed securities. CMOs are
issued with a number of classes or series which have different
maturities representing interests in some or all of the interest
or principal on the underlying collateral or a combination
thereof. CMOs of different classes are generally retired in
sequence as the underlying mortgage loans in the mortgage pool
are repaid. In the event of sufficient early prepayments on such
mortgages, the class or series of CMO first to mature generally
will be retired prior to its stated maturity. Thus, the early
retirement of a particular class or series of CMO held by the
Fixed Income Segment would have the same effect as the prepayment
of mortgages underlying a mortgage-backed pass-through security.
CMOs also include securities ("Residuals") representing the
interest in any excess cash flow and/or the value of any
collateral remaining after the issuer has applied cash flow from
the underlying mortgages or mortgage-backed securities to the
payment of principal of and interest on all other CMOs and the
administrative expenses of the issuer. Residuals have value only
to the extent income from such underlying mortgages or mortgage-
backed securities exceeds the amounts necessary to satisfy the
issuer's debt obligations represented by all other outstanding
CMOs.
Zero Coupon Securities, Strips and Residuals. The Fund may also
invest in "zero coupon" securities (which are issued at a
significant discount from face value and pay interest only at
maturity rather than at intervals during the life of the
security) or in certificates representing undivided interests in
payments of interest only or principal only ("IO/PO Strips") on
some other fixed income security (including asset-backed
securities). Zero coupon securities, IO/PO Strips and Residuals
tend to be more volatile than other types of securities. IO
Strips and Residuals also involve the additional risk of loss of
a substantial portion or the entire value of the investment if
the underlying securities are prepaid. In addition, if a CMO
bears interest at an adjustable rate, the cash flows on the
related Residual will also be extremely sensitive to the level of
the index upon which the rate adjustments are based.
The Fund is required to accrue and distribute income from
zero coupon securities on a current basis, even though the
Fund does not receive that income currently in cash.
Thus, the Fund may have to sell
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other investments to obtain cash needed to make income
distributions, which may reduce the Fund's assets and may
thereby increase its expense ratio and decrease its rate of
return. Certain Residuals may involve similar consequences for
the Fund.
Adjustable Rate Securities. Adjustable rate securities are
securities that have interest rates that are reset at periodic
intervals, usually by reference to some interest rate index or
market interest rate. They may be U.S. Government Securities or
securities of other issuers rated at least A by Moody's or S&P.
Some adjustable rate securities are backed by pools of mortgage
loans. Although the rate adjustment feature may act as a buffer
to reduce sharp changes in the value of adjustable rate
securities, these securities are still subject to changes in
value based on changes in market interest rates or changes in the
issuer's creditworthiness. Because the interest rate is reset
only periodically, changes in the interest rates on adjustable
rate securities may lag changes in prevailing market interest
rates. Also, some adjustable rate securities (or the underlying
mortgages) are subject to caps or floors that limit the maximum
change in interest rate during a specified period or over the
life of the security. Because of the resetting of interest
rates, adjustable rate securities are less likely than non-
adjustable rate securities of comparable quality and maturity to
increase significantly in value when market interest rates fall.
Other Portfolio Strategies. In order to hedge its fixed income
securities, the Fixed Income Segment may engage in portfolio
strategies involving financial futures contracts and options on
securities eligible for purchase by the Fund. In order to hedge
against prepayment of mortgage-backed and other asset-backed
securities, the Fixed Income Segment may also purchase options on
financial futures contracts and on securities eligible for
purchase by the Segment. The Fixed Income Segment may also seek
to hedge against interest rate fluctuations by making short sales
of securities and by purchasing interest rate caps or floors or
by entering into interest rate swaps. See Appendix A for a more
detailed description of these portfolio strategies and the
associated risks.
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The Fund's Fixed Income Segment may also engage in the
following investment practices, each of which may involve certain
special risks. The Statement of Additional Information contains
more detailed information about these practices, including
limitations designed to reduce these risks.
Securities Loans, Repurchase Agreements and Forward Commitments
The Fund may lend portfolio securities to broker-dealers and
may enter into repurchase agreements. These transactions must be
fully collateralized at all times but involve some risk to the
Fund if the other party should default on its obligations and the
Fund is delayed or prevented from recovering the collateral. The
Fund may also purchase securities for future delivery, which may
increase its overall investment exposure and involves a risk of
loss if the value of the securities declines prior to the
settlement date.
Reverse Repurchase Agreements, Dollar Roll Agreements and
Borrowing
In order to increase the income of the Fixed Income Segment,
the Fund may enter into reverse repurchase agreements and dollar
roll agreements with commercial banks and registered broker-
dealers. Appendix A contains a more detailed explanation of
these practices. Reverse repurchase agreements and dollar rolls
are considered borrowings by the Fund and require segregation of
assets with the Fund's custodian in an amount equal to the Fund's
obligations pending completion of such transactions. The Fund
may also use reverse repurchase agreements and dollar rolls and
borrow money from banks in an amount up to 33 1/3% of the Fund's
total assets to realize investment opportunities, for
extraordinary or emergency purposes, or for the clearance of
transactions. Borrowing from banks usually involves certain
transaction and ongoing costs and may require the Fund to
maintain minimum bank account balances. Use of these borrowing
techniques to purchase securities is a speculative practice known
as "leverage." Depending on whether the performance of the
investments purchased with borrowed funds is sufficient to meet
the costs of borrowing, the Fund's net asset value per share will
increase or decrease, as the case may be, more rapidly than if
the Fund did not employ leverage.
-10-
Short Sales
The Fund may make short sales of securities. A short sale
is a transaction in which the Fund sells a security it does not
own in anticipation that the market price of that security will
decline. The Fund expects to make short sales both as a form of
hedging to shorten the overall duration of the portfolio and in
order to maintain portfolio flexibility.
When the Fund makes a short sale, it must borrow the
security sold short and deliver it to the broker-dealer through
which it made the short sale as collateral for its obligation to
deliver the security upon completion of the transaction. The
Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such
borrowed securities.
Until the Fund replaces a borrowed security, it will
maintain daily a segregated account (not with the broker)
containing cash, U.S. Government securities, or other liquid
high-grade debt obligations, such that (i) the amount deposited
in the account plus any cash, U.S. Government securities or other
liquid high-grade debt obligations deposited with the broker as
collateral will equal the current value of the security sold
short and (ii) the amount deposited in the segregated account
plus the amount deposited with the broker as collateral will not
be less than the market value of the security at the time it was
sold short. Depending on arrangements made with the broker from
which it borrowed the security, the Fund may not receive any
payments (including interest) on collateral deposited with such
broker-dealer.
If the price of the security sold short increases between
the time of the short sale and the time the Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the
price declines, the Fund will realize a gain. Although the
Fund's gain is limited to the amount at which it sold the
security short, its potential loss is limited only by the maximum
attainable price of the security less the price at which the
security was sold. Unless market interest becomes negative, for
a fixed income security this maximum sales price is equal to the
undiscounted sum of the largest possible payments of principal
and interest.
The Fund will not make a short sale if, after giving effect
to such sale, the market value of all securities sold exceeds 25%
of the value of the Fund's total net assets. The Fund may also
effect sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the
sale, the Fund owns or has the immediate and unconditional right
to acquire at no additional cost the identical security.
Illiquid Securities
The Fund may invest up to 15% of its net assets in
securities for which there are legal or contractual restrictions
on resale or for which there is no readily available market or
other illiquid securities, including non-terminable repurchase
agreements having maturities of more than seven days. See
"Investment Restrictions" in the Statement of Additional
Information. The Adviser will monitor the Fund's investments in
illiquid securities under the supervision of the Trustees. The
determination of whether certain IO/PO Strips issued by the U.S.
Government and backed by fixed rate mortgages or any other
securities in which the Fund desires to invest are liquid shall
be made by the Trustees or the Adviser under guidelines
established by the Trustees in accordance with applicable
pronouncements of the SEC. At present, all other IO/PO Strips,
other residual interests of CMO's and OTC options are treated as
illiquid securities. The SEC staff also currently takes the
position that the interest rate swaps, caps and floors discussed
in Appendix A, as well as Equity Swap Contracts and Reverse
Equity Swap Contracts, are illiquid. The Fund intends to conduct
its investment operations accordingly.
Portfolio Turnover
The Adviser buys and sells securities for the Fund whenever
it believes it is appropriate to do so. Portfolio turnover
generally involves some expense to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestment in other securities. Such
transactions may result in realization of taxable capital gains.
The portfolio turnover rate for the last fiscal period is shown
in the Table under the heading "Financial Highlights".
-11-
While the Fund will pay commissions in connection with its
options and future transactions an possibly in relation to any
purchase of common stocks, most of the other securities in which
the Fund invests are generally traded on a "net" basis with
dealers acting as principals for their own account without a
stated commission. Nevertheless, high portfolio turnover may
involve correspondingly greater brokerage commissions and other
transaction costs which will be borne directly by the Fund.
Another potential consequence of high portfolio turnover is
that, if 30% or more of the Fund's gross income for a taxable
year were derived from gains from the sale or other disposition
of securities and certain other investments held for less than
three months, the Fund would not qualify as a regulated
investment company and, therefore, would be subject to corporate
income tax during that taxable year. The Adviser endeavors to
manage the investment composition of the Fund and to adjust the
portfolio turnover, if necessary, to ensure the Fund's treatment
as regulated investment company.
Fundamental Policies
Except for any policy explicitly identified as
"fundamental," the investment objective and policies of the Fund
described in this Prospectus may be changed without shareholder
approval. If there is a change in the Fund's investment
objective, shareholders should consider whether the Fund remains
an appropriate investment in light of their then current
financial position and needs.
The Fund is managed by Smith Breeden Associates, Inc., (the
"Adviser"), 7300 College Boulevard, Suite 430, Overland Park,
Kansas 66210, which provides investment advisory and portfolio
management services for the Trust pursuant to an Investment
Advisory Agreement. The Adviser also provides executive and
other personnel for management of the Fund. Pursuant to the
Trust's Agreement and Declaration of Trust, the Trustees
supervise the affairs of the Fund as conducted by the Adviser.
The Adviser also serves as the investment adviser and portfolio
manager to the other registered investment companies in the Smith
Breeden Family of Funds.
-12-
MANAGEMENT OF THE FUND
Trustees and Officers
The Trust's Trustees are responsible for deciding matters of
general policy and reviewing the actions of the Adviser,
distributor and transfer agent. The officers of the Trust are
elected by the Trustees and conduct and supervise the Fund's
daily
business operations. The Trust's trustees and officers are
identified below. The Trust's trustees also serve as trustees of
other mutual funds in the Smith Breeden Family of Funds.
BOARD OF TRUSTEES
AFFILIATED WITH
TRUSTEE ADVISER SINCE
Douglas T. Breeden* 1982
Dr. Breeden, the Chairman of the Board of Smith Breeden
Associates, co-founded the firm in 1982. Dr. Breeden has served on
business school faculties at Duke University, Stanford University and
the University of Chicago, and as a visiting professor at Yale
University and at the Massachusetts Institute of Technology. He
is the Editor of the Journal of Fixed Income. Dr. Breeden has
served as Associate Editor for five journals in financial economics,
and was elected to the Board of Directors of the American Finance
Association. He has published several well-cited articles in
finance and economics journals. He holds a Ph.D. in Finance from
the Stanford University Graduate School of Business, and a B.S.
in Management Science from the Massachusetts Institute of
Technology. Dr. Breeden taught in the Portfolio Management Program
at the Nomura School of Advanced Management in Tokyo from 1987
to 1992. He serves as Chairman of the Board for Roosevelt Bank of St.
Louis. He also serves as Chairman of Harrington Financial Group, the
holding company for Harrington Bank, F.S.B., of Richmond, Indiana.
Michael J. Giarla* 1985
Principal, Executive Vice President, Director and Chief Operating
Officer, Smith Breeden Associates, Inc., President, Smith Breeden
Family of Funds, Associate Editor, Journal of Fixed Income 1991-
1993. He has published several book chapters and articles regarding
mortgage-backed securities investments, risk management and
hedging. MBA with concentration in Finance, Arjay Miller Scholar,
Stanford University. BS in statistics, summa cum laude, Phi Beta
Kappa, Harvard Club of Boston Scholar, Harvard University.
Trustee, the Roxbury Latin School, Boston, MA.
Stephen M. Schaefer
Stephen M. Schaefer is Esmee Fairbairn Professor of Finance at
London Business School. Previously on the Faculty of the
Graduate School of Business of Stanford University, he has also
taught at the Universities of California (Berkeley), Chicago, British
Columbia and Venice. His research interests focus on capital
markets and financial regulation. He has served on the editorial
board of a number of professional journals including, currently,
the Journal of Fixed Income, the Review of Derivative Research
and Ricerche Economiche. He consults for a number of leading
financial institutions and is an Independent Board Member of
the Securities and Futures Authority of Great Britain.
Myron S. Scholes
Myron S. Scholes is the Frank E. Buck Professor of Finance at the
Graduate School of Business Stanford University (since 1983); a
Senior Research Fellow at the Hoover Institution (since 1987);
and is currently on leave as a Professor of Law, Stanford Law School.
He is a principal in the money management firm, Long-Term Capital
Management Co. (since 1993). He is a Research Associate of the
National Bureau of Economic Research and is a member of the
Econometric Society. Professor Scholes was also a managing director and co-
-13-
head of the fixed income derivatives group at Salomon Brothers
between 1991-1993. Prior to coming to Stanford University,
Professor Scholes was the Edward Eagle Brown Professor of Finance at
the Graduate School of Business, University of Chicago (1974-1983).
He served as the Director of the University of Chicago's Center for
Research in Security Prices from 1974-1980. Prior to coming to the
University of Chicago, Professor Scholes was first an Assistant
Professor then an Associate Professor at the Sloan School of
Management, at M.I.T. from 1968 to 1973. He received his PhD in
1969 from the Graduate School of Business, University of Chicago.
He has honorary Doctor of Law degrees from the University of Paris
and McMaster University. He is a past president of the American
Finance Association (1990).
Dr. Scholes has published numerous articles in academic journals
and in professional volumes. He is most noted as the
co-originator of the Black-Scholes Options Pricing Model as described
in a paper, "The Pricing of Options and Corporate Liabilities," published
in the Journal of Political Economy (May 1973) (with Fischer Black).
His other papers include such topics as risk-return relations, the
effects of dividend policy on stock prices, the effects of taxes
and tax policy on corporate decision making. His book with Mark
Wolfson (Stanford University) "Taxes and Business Strategy: A
Planning Approach" was published by Prentice Hall in 1991.
William F. Sharpe
William F. Sharpe is the STANCO 25 Professor of Finance at
Stanford University's Graduate School of Business. He is best known as
one of the developers of the Capital Asset Pricing Model, including
the beta and alpha concepts used in risk analysis and performance
measurement. He developed the widely-used binomial method for
the valuation of options and other contingent claims. He also
developed the computer algorithm used in many asset allocation
procedures. Dr. Sharpe has published articles in a number of
professional journals. He has also written six books, including
Portfolio Theory and Capital Markets, (McGraw-Hill, 1970), Asset
Allocation Tools, (Scientific Press, 1987), Fundamentals of
Investments (with Gordon J. Alexander and Jeffery Bailey,
Prentice-Hall, 1993) and Investments (with Gordon J. Alexander and
Jeffery Bailey, Prentice-Hall, 1995). Dr. Sharpe is a past President
of the American Finance Association. He has also served as
consultant to a number of corporations and investment organizations.
He is also a member of the Board of Trustees of Rosenberg Series
Trust, an investment company, and a director at CATS Software and
Stanford Management Company. He received the Nobel Prize in
Economic Sciences in 1990.
*Interested party
-14-
OFFICERS
Affiliated With
Officer Title Adviser Since
Douglas T. Breeden Chairman 1982
Michael J. Giarla President and Chief 1985
Executive Officer
John B. Sprow Vice President, 1987
Portfolio Manager
Portfolio Adviser for the Smith Breeden Market Tracking Fund,
Principal, Smith Breeden Associates, Inc. Mr. Sprow is the
trading co-ordinator for all client investments. He has been primarily
responsible for the day-to-day management of the Market Tracking
Fund since its inception in 1992. He currently advises three
mortgage securities portfolios. Previously was a research
assistant at Duke University and Cornell University. Earned an
MBA with a concentration in Finance, Duke University and a BS in
Materials Science and Engineering from Cornell University where
he was awarded the Carpenter Technology Scholarship for three
consecutive years.
Marianthe S. Mewkill Vice President, 1992
Secretary, Treasurer,
and Chief Accounting Officer
Principal, Smith Breeden Associates, Inc. She was previously
employed as a Controller for the Hunt Alternatives Fund and as an
Associate at Goldman Sachs & Co. and Senior Auditor at Arthur
Anderson & Co. She earned an M.B.A. with concentrations in
Finance and Accounting from New York University, and graduated
from Wellesley College, magna cum laude with a B.A. in History and
French, and a minor in Economics.
Investment Management
Smith Breeden Associates, Inc., Overland Park, Kansas 66210, a
registered investment adviser (the "Adviser"), acts as the
investment adviser to the Fund. The Adviser also serves as the
investment adviser to the other funds in the Smith Breeden Family
of Funds. Douglas T. Breeden, Chairman and President of the
Adviser, owns approximately 71% of the Adviser's voting stock, as
of March 31, 1995.
Under its Investment Advisory Agreement with the Fund, the
Adviser, subject to the general supervision of the Fund's Board of
Trustees, manages the Fund's portfolio and provides for the administration
of all of the Fund's other affairs. It is the responsibility of the
Adviser to place purchase and sale orders for the Fund's
portfolio transactions. John Sprow, a Principal of the Adviser, is the
portfolio manager for the Smith Breeden Market Tracking Fund, and
has been primarily responsible for the day-to-day investment
management of the Fund since its inception in 1992.
The Adviser has extensive experience providing investment advice
to financial institution, insurance, pension and charitable
foundation clients, particularly in the area of mortgage backed securities.
At March of 1995, the Adviser provided investment advice on a
discretionary and non-discretionary basis relating to over $10
billion in mortgage securities. The Adviser has provided such
services since 1982 with assets under management exceeding $1
billion since 1984.
A number of governmental agencies have engaged the Adviser to
provide risk analysis and portfolio management for mortgage
securities. The Federal Deposit Insurance Corporation, Federal
Savings and Loan Insurance Corporation, Resolution Trust
Corporation, Office of Thrift Supervision and various Federal
Home Loan Regional Banks have engaged the Adviser for various
securities-related projects. One of the most significant
governmental agency projects involved the disposition of CMO
residuals purchased by the former
-15-
Silverado Banking of Denver at an original cost exceeding $700 million.
The Adviser is currently advising the Federal Home Loan Bank of Boston
regarding a mortgage security portfolio exceeding $3 billion in assets.
None of the government project activity is included in the advisory assets
discussed above.
The Adviser was one of the first market participants to develop
effective option adjusted evaluation models. For over twelve
years, the Adviser has developed and traded on proprietary
mortgage prepayment projections. Such projections are available only to
advisory clients and, in contrast to prepayment projections
developed by securities firms, are not used for any broker
trading or arbitrage operations.
The principals and staff of the Adviser collectively have
accumulated over 100 years of experience analyzing and investing
in mortgage securities and controlling the related risks while in
the employ of the Adviser. Key employees of the Adviser who may
contribute investment ideas, research and analysis for the
benefit of the Fund and who are not officers or Trustees of the Fund
are:
Associated With
Adviser Since
Michael L. Bamburg 1986
Principal, Smith Breeden Associates, Inc. Mr. Bamburg assists
in analyzing, trading, designing, and hedging mortgage asset
portfolios for clients of Smith Breeden Associates. He
supervises client data for consistency and integrity. He also
supervises monthly analyses, including total rate of return,
mark-to-market net worth, spread income and hedge performance.
Mr. Bamburg is also involved in marketing Smith Breeden Associates'
mutual funds to institutional investors. Previously was a corporate
management associate with Volume Shoe Corporation, a division of
the May Company, and worked on a mortgage market study for
Citicorp. Earned an MBA and a BS with concentrations in Finance,
University of Kansas. Received the Ford Finance Scholarship for
graduate business studies at Kansas University.
Carl D. Bell 1991
Principal, Smith Breeden Associates, Inc. Mr. Bell develops
computer programs to value and hedge interest rate sensitive
securities and provides research support to the client service
and trading functions. Mr. Bell manages Smith Breeden's library of
analytical software and is active in the analysis and modeling of
mortgage prepayment behavior. Previously, Mr. Bell has been a
Staff Consultant at Andersen Consulting and a Research Assistant
with Putnam, Hayes & Bartlett. He received a Master of Business
Administration with a Concentration in Finance from the Fuqua
School of Business, Duke University, where he received the Hanes
Scholarship and was designated a Fuqua Scholar. Mr. Bell holds a
Bachelor of Science in Mathematics with a Minor in Industrial
Management from Carnegie Mellon University.
Craig J. Cerny 1985
Executive Vice President, Principal and Director of Smith
Breeden Associates, Inc. President of Harrington Financial Group,
the holding company for Harrington Bank, Richmond, Indiana.
He also serves as Chairman and CEO of Harrington Bank, FSB.
Mr. Cerny has made numerous presentations to financial institutions
and federal regulators regarding investments and risk management.
While with Smith Breeden, he has participated in trade and portfolio
analysis in support of the management of twenty-five mortgage
security portfolios. Previously was the Director of Financial
Planning/Analysis and Region Controller for field operations for
Pizza Hut, Inc., a division of Pepsico. Earned an MBA in Finance
with Distinction and BS in Finance, Honors Convocation from
Arizona State University.
-16-
Daniel C. Dektar 1986
Director of Trading, Executive Vice-President, Principal and
Director of Smith Breeden Associates, Inc. Mr. Dektar has been
primarily responsible for the day-to-day management of the Short
and Intermediate Series from their commencement of operations in
1992. Previously employed in investment banking capacities at
Morgan Stanley & Co. Earned an MBA with a concentration in
Finance, Arjay Miller Scholar, Stanford University, and a B.S. in
Business Administration, summa cum laude, Phi Beta Kappa, Phi Eta
Sigma, White Award as top student in finance and Regents Scholar
at the University of California at Berkeley.
Stephen A. Eason, C.F.A. 1988
Executive Vice President, Principal and Director of Smith Breeden
Associates, Inc. While with Smith Breeden, Mr. Eason has
participated in trade and portfolio decisions regarding the
management of twelve mortgage security portfolios. Previously,
Vice President-Institutional Sales, specializing in thrift mortgage
sales, at Salomon Brothers and Assistant Treasurer at Chase
Manhattan Bank., N.A. Earned an MBA with a concentration in
Finance, The Wharton School, a BS with highest honors in Business
Administration, University of Arkansas, and won the Wall Street
Journal Award as outstanding finance student.
Sharon E. Fankhauser 1986
Principal and Chief Financial Officer of Smith Breeden
Associates, Inc. Ms. Fankhauser handles financial reporting,
budgeting, tax research and planning for Smith Breeden Associates's
four offices. She ensures compliance with agency regulations and
administers the company's internal trading and other policies.
Previously was a Certified Public Accountant for Mayer Hoffman
McCann of Kansas City, Missouri. Earned an MBA with a
concentration in Accounting at California State University, and a BA
with honors in Sociology from Drake University. She was awarded
the Elijah Watts Sells Award for the top 100 candidates passing the
Certified Public Accountant Exam.
Lawrence E. Golaszewski 1987
Principal, Smith Breeden Associates, Inc. Mr. Golasweski
provides investment and risk management consulting services for
several institutional clients and mutual funds. He is actively involved
in the analysis, trading and hedging of complex mortgage securities.
His other special projects have included the analysis of a
proposed hedging program for two Southwest Plan thrifts, the analysis
and liquidation of a portfolio of complex mortgage securities, and
the comprehensive balance sheet analysis of a multi-billion dollar
savings bank for FDIC and OTS regional offices. Earned an MBA
with a concentration in Finance, University of Chicago and a BS in
Finance and Accounting, summa cum laude, New York State Regents
Scholar, State University of New York at Buffalo.
Gerald J. Madigan 1984
Executive Vice President, Principal and Director of Smith
Breeden Associates, Inc. President, Smith Breeden Mutual Funds 1992
to 1994. Chairman, Peoples Federal Savings Association, Richmond,
Indiana 1989 to 1992. Mr. Madigan has provided portfolio advice
to ten of Smith Breeden's financial institution clients. He oversaw
the disposition of the complex mortgage securities portfolio of
Silverado Banking. Previously employed by Touche Ross & Co. as
Senior Management Consultant, Hallmark Cards Incorporated, Arthur
Andersen & Co., Indiana University as an instructor, and Federal
Deposit Insurance Corporation. MBA, concentration in Finance,
with distinction from the Honors Program, Indiana University. BS in
Accounting with High Distinction, Indiana University. Phi Eta
Sigma, Beta Alpha Psi and Beta Gamma Sigma, Indiana University.
-17-
William F. Quinn 1986
Principal, Director of Client Services, Smith Breeden Associates,
Inc. Mr. Quinn provides investment and risk management advice to
a number of institutional clients. He specializes in the
analytical, trading, tax and accounting aspects of complex
mortgage securities and hedging instruments. He is actively involved in
the formulation and implementation of investment and risk management
policies and procedures as well as clients' strategic plans and
business plans. Earned an MS with concentrations in Finance, MIS
and System Dynamics, Sloan School of Management, M.I.T, and a BS
in Management Science from M.I.T.
Timothy D. Rowe 1988
Principal, Smith Breeden Associates. Mr. Rowe has expertise in
mortgage portfolio management, portfolio restructuring, financial
institution loan and deposit pricing, and the profitability of
branch operations. He currently advises three mortgage
securities portfolios and has advised three other mortgage security
portfolios. Previously was an Assistant Economist at the Federal
Reserve Bank of Richmond, Virginia. Earned an MBA with a
concentration in Finance, University of Chicago, a BA in
Economics and History, magna cum laude, Class Honors and National
Merit Scholar, Duke University.
For investment advisor, management and administration
services provided to the Fund, the Adviser receives a fee, computed daily
and payable quarterly, at the annual rate of 0.70% of the Fund's
average daily net assets. In addition to the advisory fee, the
Fund pays all expenses associated with its operations, including,
without limitation, fees and expenses paid to the Fund's
Independent Trustees, taxes, brokerage commissions, expenses of
issue or redemption of shares, fees and expenses of registering
and qualifying the Fund and its shares for distribution under federal
and state laws and regulations, charges of custodians, auditing,
tax preparation, tax consulting, and legal expenses, expenses of
determining net asset value of the Fund's shares, reports to
shareholders, expenses of meetings of shareholders, expenses of
printing and mailing prospectuses, proxy statements and proxies
to existing shareholders, and its insurance premiums. However,
until March 31, 1996, the Adviser has voluntarily agreed to reduce its
compensation and, to the extent necessary, absorb other expenses
of the Fund in order that expenses of the Fund (exclusive of
ordinary brokerage commissions, taxes and extraordinary expenses)
do not exceed 0.90% of the Fund's average net assets.
The Adviser places all orders for purchases and sales of the
Fund's securities. Subject to seeking the most favorable price
and execution available, the Adviser may consider sales of shares of
the Fund (and, if permitted by law, of other funds managed by the
Adviser) as a factor in the selection of broker-dealers.
Transfer Agent, Principal Underwriter and Custodian
Fund/Plan Services, Inc. ("Fund/Plan Services" or the
"Transfer Agent") serves as the Fund's transfer and dividend
disbursing agent and performs certain shareholder servicing
functions. In addition, Fund/Plan Services maintains certain
records of the Fund pursuant to an Accounting Services Agreement.
Fund Plan Broker Services, Inc., an affiliate of the Transfer
Agent, is the Fund's principal underwriter (the "Principal
Underwriter") for which it receives a fee of $5,000 per annum
paid by the Adviser under the Fund's Distribution and Services Plan
discussed below.
The Bank of New York acts as the custodian of the Fund's
assets. The Bank of New York's office is at 48 Wall Street, New
York, New York 10286.
-18-
PURCHASE AND REDEMPTION OF SHARES
Purchase of Fund Shares
Shares of the Fund may be purchased at their net asset value
(with no sales charge) on a continuous basis from the Fund. As
each payment is received, full and fractional shares of the Fund
will be purchased at the net asset value next computed and proper
entry will be made on the books of the Fund. The minimum initial
investment is $1,000 with a $50 minimum on subsequent
investments. Investments may be made by mail or wire.
Shares of the Fund may be purchased by mail by check or by
federal funds wire. Direct purchase orders received by the
Transfer Agent by 4:00 p.m., Eastern time, and accompanied by
check or wire are confirmed at that day's public offering price.
Direct purchase orders accompanied by check or wire transfer
received by the Transfer Agent after 4:00 p.m., Eastern time, are
confirmed at the public offering price next determined on the
following business day.
Shareholders should send federal funds wires to United
Missouri Bank, KC, N.A., ABA #10-10-00695, for credit to
Fund/Plan Services, Inc. A/C 98-7037-071-9, for further credit to:
Smith Breeden Market Tracking Fund (include shareholder name,
and shareholder account number). To obtain a new account number,
an investor should call the Transfer Agent at (800) 221-3137 by
12:00 noon, Eastern time.
Shares may be purchased through investment dealers who, as
part of the services they provide, must transmit orders promptly.
They may charge for these services. Wire orders for shares of
the Fund received by dealers prior to 4:00 p.m., Eastern time, and
received by the Transfer Agent before 7:00 p.m., Eastern time, on
the same day are confirmed at that day's net asset value. Orders
received by dealers after 4:00 p.m., Eastern time, are confirmed
at the net asset value on the following business day. It is the
dealer's obligation to place the order with the Transfer Agent
before 7:00 p.m., Eastern time.
The Fund and the Principal Underwriter reserve the right to
reject any order for the purchase of shares or to waive the
minimum
investment requirements. Subject to its stated investment
objective and policies, the Fund also reserves the right to issue
its shares in exchange for mortgage securities or other
securities
meeting its investment policies. The number of Fund shares to be
issued will equal the then current market value of the securities
acquired, divided by the Fund's next determined net asset value
per
share.
Shareholders will receive confirmation statements each time
there is a transaction which affects an account.
Share certificates will only be issued upon receipt of a
written request.
Telephone Transactions
The privilege to initiate telephone transactions by telephone
will be made available automatically to shareholders unless they
indicate they do not want the privilege by checking the
appropriate box on the Shareholder Account Application. The Fund
will employ reasonable procedures to ensure that instructions
communicated by telephone are genuine. These procedures include,
but are not limited to, recording telephone instructions and requesting
verification of account number, registration, and tax
identification number. In the event of a fraudulent telephone
transaction, the Fund will not be liable unless the Fund did not
employ reasonable procedures to ensure that the instructions were
genuine.
Automatic Investment Plan
The Plan provides a convenient method by which an investor
may have amounts deducted directly from his or her checking account
for investment in the Fund. The minimum initial and subsequent
investment pursuant to this plan is $50 per month.
-19-
Purchasing Shares of the Fund in Connection with Retirement Plans
Shares of the Fund may be used in a Fund-sponsored individual
retirement account ("IRA") providing for tax-deferred investments
for individuals. Shareholders wishing to establish an IRA
account should consult their tax advisor regarding 1) their individual
qualifying status, and 2) any current changes to the tax
regulations governing these accounts. A shareholder may hold
shares of the Fund in an IRA sponsored by the Fund for a $12.00
annual custodial fee. The Fund also may be used as an investment
for a variety of other retirement programs.
Purchases Through Securities Dealers
Shareholders can make a purchase through securities dealers
who, as part of the services they provide, must transmit orders
promptly. They may charge for these services.
Securities dealers and other firms provide varying
arrangements for their clients to purchase and redeem Fund
shares. Some may establish higher minimum investment
requirements than set forth above. Firms may arrange with their
clients for other investment or administrative services. Such firms
may independently establish and charge additional amounts to their
clients for such services, which charges would reduce the
clients' return. Firms also may hold Fund shares in nominee or
street name as agent for and on behalf of their customers. In such
instances, the Fund's transfer agent will have no information with
respect to or control over accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information
about their accounts only from their brokerage firm. Certain of
these firms may receive compensation from the Fund's shareholder
service agent for recordkeeping and other expenses relating to
these nominee accounts. In addition, certain privileges with
respect to the purchase and redemption of shares or the
reinvestment of dividends may not be available through such
firms. Some firms may participate in a program allowing them access
to their clients' accounts for servicing including, without
limitation, transfers of registration and dividend payee changes,
and may perform functions such as generation of confirmation
statements and disbursement of cash dividends. This Prospectus
should be read in connection with such firms' material regarding
their fees and services.
Share Certificates
Shares for an initial investment as well as subsequent
investments, including the reinvestment of dividends and capital
gains distributions, are generally credited to an account in the
name of an investor on the books of the Series, without the
issuance of a share certificate. Maintaining shares in this
manner (also known as "plan balance") minimizes the risk of loss
or theft of a share certificate. A certificate will be issued if
requested in writing by the shareholder or by his broker.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan
and receive regular periodic payments from the account. An initial
balance of $10,000 is required to establish an account under this
plan. There are no service charges for establishing or
maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw periodically is $100. Capital
gain distributions and income dividends to the shareholder's account
are received in additional shares at net asset value. Payments are
then made from the liquidation of shares at net asset value to
meet the specified withdrawals. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to the
extent withdrawals exceed shares earned through dividends and
distributions, particularly in the event of a market decline. No
payment pursuant to a Systematic Withdrawal Plan will be made if
there are insufficient shares on deposit on the date of the
scheduled distribution. A subsequent deposit of shares will not
result in a payment under the Systematic Withdrawal Plan
retroactive to the distribution date. As with other redemptions,
a liquidation to make a withdrawal payment is a sale for federal
income tax purposes. The entire Systematic Withdrawal Plan
payment cannot be considered as actual yield or income since part
of such a Systematic Withdrawal Plan payment may be a return of
capital.
A Systematic Withdrawal Plan may be terminated on written
notice by the shareholder or the Fund, and it will terminate
automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death
or incapacity of the shareholder. Shareholders may change the
amount (but not below the specified minimums) and schedule of
withdrawal payments or suspend such payments by giving written
notice to the Transfer Agent at least seven business days
prior to the end of the month preceding a
-20-
scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
Exchange Privilege
Shares of the Fund may be exchanged for shares of any other
fund in the Smith Breeden Family of Funds which is eligible for
sale in the shareholder's state of residence. Because the
exchange is considered a redemption and purchase of shares, the
shareholder may recognize gain or loss for federal income tax
purposes. Backup withholding and information reporting may
also apply. Additional information regarding the possible tax
consequences of such an exchange is included under the caption
"Additional Information on Distributions and Taxation" in the
Statement of Additional Information.
There are differences among the funds in the Smith Breeden
Family of Funds. Before making an exchange, a shareholder should
obtain and review a current prospectus of the fund into which the
shareholder wishes to transfer. When exchanging shares,
shareholders should be aware that the funds may have different
dividend payment dates. The dividend payment schedules should be
checked before exchanging shares. The amount of any accumulated,
but unpaid dividend is included in the net asset value per share.
Exchanges will be effected upon receipt of written instructions
signed by all account owners and accompanied by any outstanding
share certificates properly endorsed. Exchanges out of any single
fund will be limited to four per calendar year. This limit does
not include reinvestment of dividends in a different fund.
Shareholders can elect to adopt the privilege to initiate
telephone exchanges from a fund into an identically registered
account in another fund. The Telephone Exchange Privilege is
available only for uncertificated shares. During periods of
drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In
this event, shareholders should follow the other exchange
procedures discussed in this section, including the procedures
for processing exchanges through broker/dealers. The Telephone
Exchange Privilege may be modified or discontinued by the Fund at
any time upon 60 days' notice to shareholders.
Exchanges Through Securities Dealers. As is the case with
all purchases and redemptions of the Fund's shares, the Fund will
accept exchange orders by telephone or other means of electronic
transmission from securities dealers who execute a dealer
agreement with the Principal Underwriter. Such a dealer-ordered
exchange will be effective only for uncertificated shares on deposit
in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for
handling an exchange. The use of the exchange program may be
discontinued or modified by the Fund at any time upon 60 days' notice
to shareholders.
Distribution and Services Plan
The Trust has adopted a Distribution and Services Plan for
the Fund pursuant to Rule 12b-1 under the 1940 Act. The purpose of
the Plan is to permit the Adviser to compensate investment dealers
and other persons involved in servicing shareholder accounts for
services provided and expenses incurred in promoting the sale of
shares of the Fund, reducing redemptions, or otherwise maintaining
or improving services provided to shareholders by such dealers or
other persons. The Plan provides for payments by the Adviser out of
its advisory fee to dealers and other persons at the annual rate of up
to 0.25% of the Fund's average net assets, subject to the authority of
the Trustees to reduce the amount of payments permitted under the
Plan or to suspend the Plan for such periods as they may determine.
Subject to these limitations, the amount of such payments and the
purposes for which they are made shall be determined by the
Adviser. (Pursuant to the terms of the Plan the Adviser
currently pays the Principal Underwriter $5,000 per annum as
compensation for its distribution and servicing activities.)
Any distribution and servicing related payments made by the
Adviser to investment dealers or other persons are subject to the
continuation of the Plan, the terms of any related service
agreements, and any applicable limits imposed by the National
Association of Securities Dealers, Inc.
-21-
Redemption
1. By Telephone with Payment to a Pre-authorized Bank Account:
A shareholder may redeem shares by telephone to the Transfer
Agent. Redemption instructions telephoned to the Transfer Agent
must include the shareholder's name and account number.
Redemption proceeds will be mailed to the registered address;
payment may also be made by wire directly to any commercial bank
previously designated by the shareholder in a shareholder account
application. The Transfer Agent may accept telephone redemption
instructions from any person who has properly identified himself as
the owner of an account or the owner's broker where the owner has
not declined in writing to utilize this service. The Fund will employ
reasonable procedures to ensure that instructions communicated by
telephone are genuine. These procedures include, but are not
limited to, recording telephone instructions and written
confirmation of requests. The Fund may be liable for any losses
due to fraudulent or unauthorized instructions.
During periods of unusual economic or market changes, the
telephone redemption privilege may be difficult to implement.
Under such circumstances, shareholders should employ the
alternative redemption methods discussed in this section.
Redemptions by telephone are not available with respect to
shares for which certificates are outstanding.
2. By Mail:
A shareholder may redeem shares by sending a letter
requesting redemption to Fund/Plan Services, Inc., Post Office Box
874, Conshohocken, Pennsylvania 19428.
Redemption proceeds will be mailed to the shareholder's
registered address, or mailed or wired to a pre-authorized bank
account as requested. Proceeds of redemption may also be sent to
some other party or account as requested, however in such cases
the signature(s) on the redemption request must be guaranteed.
To be considered in proper form, the signature(s) of all
registered owners or previously designated signers must be
guaranteed if the redemption request involves any of the
following:
(1) the proceeds of the redemption are over $25,000;
(2) the proceeds (in any amount) are to be paid to someone
other than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any
address other than the address of record, pre-authorized
bank account or brokerage firm account; or
(4) share certificates, if the redemption proceeds are in
excess of $25,000.
Signatures must be guaranteed by an "eligible guarantor
institution" as defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934. Eligible guarantor institutions include
banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies
and savings associations. A broker-dealer guaranteeing
signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must
be authorized to issue signature guarantees. Signature guarantees
will be accepted from any eligible guarantor institution which
participates in a signature guarantee program. A notarized
signature will not be sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by
the share certificate and a share assignment form signed by the
registered shareholders exactly as the account is registered,
with the signature(s) guarantee as referenced above. Shareholders
are advised, for their own protection, to send the share certificate
and assignment form in separate envelopes if they are being
mailed in for redemption.
-22-
Liquidation requests of corporate, partnership, trust,
custodianship accounts and accounts under court jurisdiction and
retirement plan accounts may require additional documentation to
be in proper form.
Please call Fund/Plan Services, Inc. at 1-800-221-3137 with
any questions about a proposed liquidation. Payment for redeemed
shares will be sent within seven days after receipt of a request
in proper form, except that the Fund may delay the mailing of the
redemption check, or a portion thereof, until the Fund's
depository banks has made fully available for withdrawal the check
used to purchase Fund shares, which may take up to 15 days or more.
Although the use of a certified or cashier's check will generally
reduce this delay, shares purchased with these checks will also
be held pending clearance. Shares purchased by federal funds wire
are available for immediate redemption (i.e., payments will be
transmitted by wire on the business day following receipt of a
request received prior to 4 p.m. Eastern time). In addition, the
right of a redemption may be suspended or the date of payment
postponed if the New York Stock Exchange is closed (other than
customary closing) or upon the determination of the SEC that
trading on the New York Stock Exchange is restricted or an
emergency exists, or if the SEC permits it by order for the
protection of shareholders. Of course, the amount you receive
may be more or less than your investment, depending on fluctuations
in the market value of securities owned by the Fund. Shareholders
will be charged a fee of $10 for redemptions by wire.
Selling Shares Through Securities Dealers
Shares of the Fund may also be sold by contacting your
securities dealer or investment firm (by telephone or in
writing). Securities dealers and investment firms that have entered
into a selling group agreement with the Fund's Principal Underwriter
can effect redemptions on the shareholder's behalf by telephone or
other expedited means at the net asset value next calculated
after receiving the shareholder's request in proper form. The
securities dealer or investment firm is responsible for prompt
transmission of redemption requests to the Series' Transfer Agent,
and may charge a fee for handling such requests.
Shareholder Inquiries
Any questions or communications regarding a shareholder's
account should be directed to Fund/Plan Services, Inc. at 1-800-
221-3137, Monday through Friday, from 9 a.m. to 7 p.m Eastern
time.
DISTRIBUTIONS AND TAXES
Distributions
The Fund pays out as dividends substantially all of its net
investment income (which comes from dividends and interest it
receives from its investments) and net realized capital gains.
All dividends and/or distributions will be paid in shares of
the Fund, at net asset value, unless the shareholder elects to
receive cash. The Fund declares and pays dividends out of
investment income quarterly, and distributes net realized capital
gains at least once annually. Dividends and capital gains
distributions may be declared more or less frequently at the
discretion of the Trustees.
Federal Income Taxes
The Fund intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other
requirements that are necessary for it to be relieved of federal
income taxes on income and gains it distributes to shareholders.
The Fund will distribute annually substantially all of its
ordinary income and net capital gains on a current basis.
All Fund distributions will be taxable to you as ordinary
income, except that any distributions of net long-term capital
gains will be taxed as such, regardless of how long you have held
Fund shares. Distributions will be taxable as described above
whether received in cash or in shares through the reinvestment of
distributions.
Early in each year the Fund will notify you of the amount and
tax status of distributions paid to you by the Fund for the
preceding year.
-23-
The foregoing is a summary of certain federal income tax
consequences of investing in the Fund. You should consult your
tax adviser to determine the precise effect of an investment in the
Fund on your particular tax situation.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of
the close of trading (currently 4:00 p.m. Eastern time) each day
that the Adviser and Transfer Agent are open for business and on
which there is a sufficient degree of trading in the Fund's
portfolio securities that the net asset value of the Fund's
shares might be affected. As of the date of this Prospectus, current
holiday schedules indicate net asset value will not be calculated
on the day after New Year's Day, Presidents' Day, Martin Luther
King Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veteran's Day, Thanksgiving Day, the day
following Thanksgiving, Christmas Eve and Christmas Day.
The net asset value per share of the Fund is determined in
the following manner: the aggregate of all liabilities, including
accrued expenses and taxes and any necessary reserves, are
deducted from the aggregate gross value of all assets, and the
difference is divided by the number of shares of the Fund
outstanding at the time. For the purposes of determining the
aggregate net assets of the Fund, cash and receivables will be valued
at their realizable amounts. Portfolio securities for which market
quotations are readily available are stated at market value. Interest
will be recorded as accrued. Under procedures approved by the
Board of Trustees, the securities in the Fund's portfolio are valued
at current market value provided by a pricing service, bank or
broker/dealer experienced in such matters, when over-the-counter
market quotations are readily available. Securities and other
assets for which market prices are not readily available are
valued at fair market value as determined following procedures
approved by the Board of Trustees.
PERFORMANCE
Total return data may from time to time be included in
advertisements about the Fund. "Total return" since inception
through the most recent calendar quarter represents the average
annual compounded rate of return on an investment in the Fund of
$1,000 at the net asset value at the beginning of the period.
Total return may also be presented for other periods. Quotations
of total return for any period when an expense limitation is in
effect will be greater than if the limitation had not been in
effect. The Fund's performance may be compared to the S&P 500
Index and other indices. See the Statement of Additional
Information.
All data is based on the Fund's past investment results and
does not predict future performance. Investment performance,
which will vary, is based on many factors, including market
conditions, the composition of the Fund's portfolio, and the Fund's
operating expenses. Investment performance also often reflects the
risks associated with the Fund's investment objective and policies.
These factors should be considered when comparing the Fund's
investment results to those of other mutual funds and other
investment vehicles.
DESCRIPTION OF THE TRUST
Smith Breeden Trust is a Massachusetts business trust
organized under an Agreement and Declaration of Trust, dated
December 18, 1991. A copy of the Trust's Agreement and
Declaration of Trust, which is governed by Massachusetts law, is
on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Trust has authorized a single series with an unlimited
number of authorized shares representing beneficial interest in
the Fund. The Trust may create additional series of shares, each
of which will represent beneficial interest in a mutual fund other
than the Smith Breeden Market Tracking Fund. Each such series
of shares may also be further subdivided into classes. Each share
has one vote, with fractional shares voting proportionally. Shares
are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Fund were liquidated, would receive the net
assets of the Fund. Although the Trust is not required to hold
annual meetings of its shareholders, shareholders have the right
to call a meeting to elect or remove trustees, or to take other
actions as provided in the Declaration of Trust. Upon written
request by the holders of at least
-24-
1% of the outstanding shares stating that such shareholders wish
to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to
consider removal of a trustee, the Trust has undertaken to
provide a list of shareholders or to disseminate appropriate
materials (at the expense of the requesting shareholders).
-25-
<PAGE>
FUND INFORMATION
SMITH BREEDEN TRUST,
SMITH BREEDEN MARKET TRACKING FUND
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
INVESTMENT ADVISER
Smith Breeden Associates, Inc.
7300 College Blvd., Suite 430
Overland Park, KS 66210
INVESTOR SERVICING,
DIVIDEND DISBURSING,
AND TRANSFER AGENT
Fund/Plan Services, Inc.
P.O. Box 8701
Conshohocken, PA 19428
CUSTODIAN
Bank of New York
48 Wall Street
New York, NY 10286
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, NJ 08540
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
PRINCIPAL UNDERWRITER
Fund Plan Broker Services, Inc.
#2 West Elm Street
P.O. Box 874
Conshohocken, PA 19428-0874<PAGE>
-26-
APPENDIX A
OTHER PORTFOLIO STRATEGIES (FIXED INCOME SEGMENT)
Options on Securities; Financial Futures and Options
In order to hedge against the possible prepayment of
securities underlying mortgage-backed and other asset-backed
securities, the Fund may purchase call options on those
securities in which the Fixed Income Segment may invest, including
options that are traded on securities exchanges and in the
over-the-counter market ("OTC Options"). The Fund will engage in
OTC Options transactions only with primary United States government
securities dealers recognized by the Federal Reserve Bank of New
York. The premiums paid on call options purchased and any related
transaction costs will increase the cost of securities acquired upon
exercise of the option, and, unless the price of the underlying security
rises sufficiently, the options may expire worthless to the Fund.
The Fund may also purchase options on financial futures contracts
for similar hedging purposes. In addition, the Fund may hedge
against changes in the values of Fixed Income Segment portfolio
securities by selling financial futures contracts.
In general, investment in futures contracts requires the Fund
to deposit with the applicable exchange or other specified
financial intermediary as security for its obligations an amount
of cash or other specified debt securities which initially is 1% to
5% of the face amount of the contract and which thereafter
fluctuates on a periodic basis as the value of the contract fluctuates.
Investment in options involves payment of a premium for the
option without any further obligation on the part of the Fund.
There is no overall limitation on the percentage of the
Fund's assets which may be subject to a hedge position.
Options and futures transactions involve certain special
risks, and may result in losses. The losses from investing in
futures are potentially unlimited. The effective use of options
and futures depends on the Fund's ability to terminate options
and futures positions at times when the Adviser deems it desirable to
do so. Although the Fund will take an option or futures contract
position only if the Adviser believes there is a liquid secondary
market for the option or futures contract, there is no assurance
that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price.
The Fund's ability to hedge effectively all or a portion of
the Fixed Income Segment's securities through options and futures
transactions depends on the degree to which movements in the
prices of the security underlying the hedging instrument correlate with
movements in the prices of the hedging instrument or of the
portion of the Fixed Income Segment's securities being hedged. The
Fund therefore bears the risk that prices of hedged securities will
not move to the same degree as the hedging instrument or that price
movements in the hedging instrument will not accurately reflect
price movements in the security underlying the hedging
instrument. It is also possible that there may be a negative correlation
between the securities underlying the hedging instrument and the
hedged securities, which would result in a loss on both the
hedged securities and the hedging instrument.
At times, the Fund may sell interest rate futures in a
different dollar amount than the dollar amount of securities
being hedged depending on the expected relationship between the
volatility of the prices of such securities and the volatility of
the futures contracts, based on duration calculations by the
Adviser. If the actual price movements of the securities and
futures are inconsistent with their durations as so calculated,
the hedge may not be fully effective.
The Fund will not maintain open short positions in interest
rate futures contracts if, in the aggregate, the value of the
open positions (marked to market) exceeds the current market value
of its securities portfolio plus or minus the unrealized gain or
loss on those open positions, adjusted for the expected volatility
relationship between the portfolio and the futures contracts
based on duration calculations. If this limitation should be exceeded
at any time, the Fund will take prompt action to close out the
appropriate number of open contracts to bring its open futures
position into compliance with this limitation.
-27-
Interest Rate Caps, Floors and Swaps
The Fund may use interest rate caps and floors to hedge
against changes in the values of fixed income securities held by
the Fixed Income Segment. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specific index
exceeds a specified interest rate, to receive payments of interest on a
notional principal amount from the party selling the interest
rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a
specified interest rate, to receive payments of interest on a
notional principal amount from the party selling the interest
rate floor. Interest rate caps and floors involve the risk that the
other party will be unable to meet its payment obligations to the
Fund. The Fund will maintain in a segregated account with its
custodian cash or high-grade liquid assets in an amount at least
equal to its obligations, if any, under interest rate cap and
floor arrangements.
Interest rate swaps involve the exchange of the two parties'
respective commitments to pay or receive interest (e.g., an
exchange of floating rate payments for fixed rate payments). The
Fund may enter into interest rate swaps, on either an asset-based
or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Fund receiving or paying, as the case may be,
only the net amount of the two payments. Inasmuch as these
hedging transactions are entered into for good faith hedging
purposes, the Adviser and the Fund believe such obligations do not
constitute senior securities and, accordingly, will not treat them as
being subject to its borrowing restrictions. The net amount of the
excess, if any, of the Fund's obligations over its entitlement
with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or liquid high-grade debt securities
having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian
that satisfies the requirements of the Investment Company Act. To
the extent that the Fund enters into interest rate swaps on other
than a net basis, the amount maintained in a segregated account
will be the full amount of the Fund's obligations, if any, with respect
to such interest rate swaps, accrued on a daily basis. The Fund
will not enter into any interest rate swap, cap or floor transaction,
unless the unsecured senior debt or the claims-paying ability of
the other party thereto is rated at least A by Moody's or S&P at
the time of entering into such transaction. If there is a default
by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreement related to the
transaction. There is no assurance that interest rate swap, cap
or floor counterparties will be able to meet their obligations
pursuant to interest rate swap contracts, or that, in the event
of default, the Fund will succeed in pursuing contractual remedies.
The Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to interest
rate swaps, caps or floors. The Fund and Adviser will closely
monitor, subject to the oversight of the Portfolio's Board of
Trustees, the creditworthiness of the interest rate swap contract
counterparties in order to minimize risk.
The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both
as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively
liquid, although the Fund still treats swaps as illiquid investments
subject to the limitation on such investments described in the
Prospectus at "Other Investment Practices - Illiquid Securities."
Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, as a result, are
less liquid than swaps. Caps and floors are accordingly also
considered to be illiquid investments subject to the same limitation.
Reverse Repurchase Agreements and Dollar Roll Agreements
The Fixed Income Segment may enter into reverse repurchase
agreements and dollar roll agreements with commercial banks and
registered broker-dealers to seek to enhance returns.
Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to
repurchase the same assets at a later date at a fixed price.
During the reverse repurchase agreement period, the Fund continues
to receive principal and interest payments on these securities and
also has the opportunity to earn a return on the collateral
furnished by the counterparty to secure its obligation to
redeliver the securities.
-28-
Dollar rolls are transactions in which the Fund sells
securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type and
coupon) securities on a specified future date. During the roll
period, the Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the
current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale.
The Fund will establish a segregated account with its
custodian in which it will maintain cash, U.S. Government
securities or other liquid high grade debt obligations equal in
value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and
dollar rolls involve the risk that the market value of the
securities retained by the Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase under
the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party or its
trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements and
dollar rolls are considered borrowings by the Fund.
OTHER PORTFOLIO STRATEGIES
(EQUITY SIMULATION SEGMENT)
Any investment in warrants, valued at the lower of cost of
market, may not exceed 5.0% of the value of the Fund's net assets.
Included within that amount, but not to exceed 2.0% of the value of
the Fund's net assets, may be warrants which are not listed on the
New York or American Stock Exchange. Warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
-29-
Part B: Information Required in
Statement of Additional Information
N-1A
Item No. Item Location in the
Registration Statement
by Prospectus Heading
10. Cover Page Cover Page
11. Table of Contents "Table of Contents"
12. General Information
and History See Part A Item 4.
13. Investment Objective
and Policies "Miscellaneous
Investment
Practices and Risk
Considerations"
14. Management of the
Registrant "Management of the Fund
15. Control Persons and
Principal Holders of
Securities "Principal Holders of Securities
and Controlling Persons"
16. Investment Advisory
and Other Services "The Investment Advisory
Agreement and Other Services"
17. Brokerage Allocation "The Investment Advisory
Agreement and Other
Services"
18. Capital Stock and
Other Securities "Additional Information
Regarding Purchases and
Redemptions of Fund Shares"
19. Purchase, Redemption
and Pricing of
Securities Being
Offered "Additional Information
Regarding Purchases and
Redemptions of Fund
Shares"
20. Tax Status "Taxes"
21. Underwriters "Additional Information
Regarding Purchases and
Redemptions of Fund
Shares"
22. Calculation of
Performance Data "Standard Performance
Measures"
23. Financial Statements "Report of Independent
Auditors and Financial
Statements"
<PAGE>
SMITH BREEDEN TRUST
SMITH BREEDEN MARKET TRACKING FUND
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1995
This statement of Additional Information contains information
which may be useful to investors and is not included in the
Prospectus of Smith Breeden Market Tracking Fund. This Statement
is not a Prospectus and is only authorized for distribution when
accompanied or preceded by the Prospectus of the Fund dated
August 1, 1995, as may be amended from time to time. The
Statement should be read together with the Prospectus.
TABLE OF CONTENTS
Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT RESTRICTIONS OF THE FUND. . . . . . . . . . . . . . 2
MISCELLANEOUS INVESTMENT PRACTICES AND
RISK CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . 5
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FUND CHARGES AND EXPENSES. . . . . . . . . . . . . . . . . . . 8
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . 9
THE INVESTMENT ADVISORY AGREEMENT AND OTHER SERVICES . . . . . 10
PRINCIPAL HOLDERS OF SECURITIES AND CONTROLLING PERSONS. . . . 13
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . 14
ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES . . . . . . . . . . . . . 15
SHAREHOLDER INFORMATION. . . . . . . . . . . . . . . . . . . . 16
SUSPENSION OF REDEMPTIONS. . . . . . . . . . . . . . . . . . . 16
SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . 16
STANDARD PERFORMANCE MEASURES. . . . . . . . . . . . . . . . . 17
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . 19
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS. . . . 19
-1-
<PAGE>
SMITH BREEDEN TRUST,
SMITH BREEDEN MARKET TRACKING FUND
Statement of Additional Information
DEFINITIONS
The "Trust" -- Smith Breeden Trust
The "Fund" -- Smith Breeden Market Tracking Fund, a series
of the Trust offering its shares to the
public.
The "Adviser" -- Smith Breeden Associates, Inc., the Fund's
investment adviser.
The "Custodian"-- The Bank of New York, the Fund's
custodian.
"Fund/Plan
Services" -- Fund/Plan Services, Inc., the Fund's investor
servicing agent.
INVESTMENT RESTRICTIONS OF THE FUND
Subject to the Fund's ability to invest all or substantially all
of its assets in another investment company with substantially
the same investment objective, as fundamental investment
restrictions, which may not be changed without a vote of a
majority of the outstanding voting securities, the Fund may not
and will not:
1. Issue senior securities, borrow money or pledge its assets,
except that the Fund may borrow from banks or through reverse
repurchase agreements or dollar rolls up to 33 1/3% of the value
of its respective total assets (calculated when the loan is made)
for temporary, extraordinary or emergency purposes and to take
advantage of investment opportunities and may pledge up to 33
1/3% of the value of its total assets to secure such borrowings.
For purposes of this restriction, the purchase or sale of
securities on a "when-issued" or delayed delivery basis, the
purchase and sale of futures contracts, the entry into forward
contracts, reverse repurchase agreements and dollar roll
transactions, short sales, interest rate caps, floors and swaps,
mortgage swaps, and collateral arrangements with respect thereto
and such other practices as may be determined by counsel to the
Fund (consistent with pronouncements of the Securities and
Exchange Commission) are not deemed to be a pledge of assets and
-2-
none of such transactions or arrangements nor obligations of the
Fund to Trustees pursuant to deferred compensation arrangements
are deemed to be the issuance of a senior security.
2. Act as underwriter except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to
be an underwriter under certain federal securities laws.
3. Purchase any security (other than obligations of the U.S.
Government, its agencies and instrumentalities) if as a result
25% or more of the Fund's total assets (determined at the time of
investment) would be invested in one or more issuers having their
principal business activities in the same industry.
4. Purchase any security, other than mortgage-backed securities,
obligations of the U.S. Government, its agencies or
instrumentalities or collateralized mortgage obligations, if as a
result the Fund would have invested more than 5% of its
respective total assets in securities of issuers (including
predecessors) having a record of less than three years of
continuous operation.
5. Acquire, sell, lease or hold real estate or real estate
limited partnerships, except that it may invest in securities of
companies which deal in real estate and in securities
collateralized by real estate or interests therein and it may
acquire, sell, lease or hold real estate in connection with
protecting its rights as a creditor.
6. Purchase or sell commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts
and options thereon. (Does not include caps, floors, collars or
swaps.)
7. Invest in interests in oil, gas, mineral leases or other
mineral exploration or development program.
8. Invest in companies for the purpose of exercising control or
management.
9. Purchase securities of other investment companies, except to
the extent permitted by the Investment Company Act.
10. Make loans of money or property to any person, except
through loans of portfolio securities to qualified institutions,
the purchase of debt obligations in which the Fund may invest
consistently with its investment objectives and policies and
investment limitations or the investment in repurchase agreements
with qualified institutions. The Fund will not lend portfolio
securities if, as a result, the aggregate of such loans exceeds
33 1/3% of the value of the Fund's total assets (including such
loans).
-3-
11. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions); provided that the deposit or payment by the Fund
of initial or variation margin in connection with options or
futures contracts is not considered the purchase of a security on
margin.
12. Make short sales of securities or maintain a short position
if, when added together, more than 25% of the value of the Fund's
net assets would be (i) deposited as collateral for the
obligation to replace securities borrowed to effect short sales,
and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to
this limitation.
It is contrary to the Fund's present policy, which may be changed
without shareholder approval, to:
(a) sell over-the-counter options which it does not own;
(b) sell options on futures contracts which options it does not
own; or
As noted in the Prospectus, the Fund may invest up to 15% of its
total net assets in illiquid securities.
In order to comply with certain "blue sky" restrictions, the Fund
will not, as a matter of operating policy, invest in securities
of any issuer if, to the knowledge of the Fund, any officer or
Trustee of the Fund or the Fund's Adviser owns more than one half of 1%
of the outstanding securities of such issuer, and such officers
and Trustees who own more than one half of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer.
All percentage limitations on investments will apply at the
time of the making of an investment and shall not be considered
violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
The Investment Company Act of 1940 provides that a "vote of
a majority of the outstanding voting securities" of the Fund
means the affirmative of the lesser of (1) more than 50% of the
outstanding shares of the Fund, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy.
-4-
MISCELLANEOUS INVESTMENT PRACTICES AND RISK
CONSIDERATIONS
The Fund's Prospectus states that the Fund may engage in
each of the following investment practices. However, the fact
that the Fund may engage in a particular practice does not
necessarily mean that it will actually do so.
Repurchase Agreements
The Fixed Income Segment may invest in repurchase
agreements. A repurchase agreement is a contract under which the
Fund acquires a security for a relatively short period (usually
not more than one week) subject to the obligation of the seller
to repurchase and the Fund to resell such security at a fixed
time and price (representing the Fund's cost plus interest). It
is the Fund's present intention to enter into repurchase
agreements only with commercial banks and registered broker-
dealers and only with respect to obligations of the U.S.
government or its agencies or instrumentalities. Repurchase
agreements may also be viewed as loans made by the Fund which are
collateralized by the securities subject to repurchase. The
Adviser will monitor such transactions to determine that the
value of the underlying securities is at least equal at all times
to the total amount of the repurchase obligation, including the
interest factor. If the seller defaults, the Fund could realize
a loss on the sale of the underlying security to the extent that
the proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or
insolvency proceedings, the Fund may incur delay and costs in
selling the underlying security or may suffer a loss of principal
and interest if the Fund is treated as an unsecured creditor and
required to return the underlying collateral to the seller's
estate.
Forward Commitments
The Fixed Income Segment may enter into contracts to
purchase securities for a fixed price at a future date beyond
customary settlement time ("forward commitments" and "when
issued" and "delayed delivery" securities) if the Fund holds
until the settlement date, in a segregated account, cash or high-
grade debt obligations in an amount sufficient to meet the
purchase price, or if the Fund enters into offsetting contracts
for the forward sale of other securities it owns. Forward
commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Where such
purchases are made through dealers, the Fund relies on the dealer
to consummate the sale. The dealer's failure to do so may result
in the loss to the Fund of an advantageous return or price.
Although the Fund will generally enter into forward commitments
with the intention of acquiring securities for its portfolio or
for delivery pursuant to options contracts it has entered into,
the Fund may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. The Fund may realize
short-term profits or losses upon the sale of forward
commitments.
-5-
Securities Loans
The Fund may make secured loans of Fixed Income Segment
securities amounting to not more than 33 1/3% of the Fund's total
assets thereby realizing additional income. The risks in lending
portfolio securities, as with other extensions of credit, consist
of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially.
As a matter of policy, securities loans are made to broker-
dealers pursuant to agreement requiring that loans be
continuously secured by collateral in cash or short-term debt
obligations at least equal at all times to the value of the
securities on loan. The borrower pays to the Fund an amount
equal to any dividends or interest received on securities lent.
The Fund retains all or a portion of the interest received on
investment of the cash collateral or receives a fee from the
borrower. Although voting rights, or rights to consent, with
respect to the loaned securities pass to the borrower, the Fund
retains the right to call the loans at any time on reasonable
notice, and it will do so in order that the securities may be
voted by the Fund if the holders of such securities are asked to
vote upon or consent to matters materially affecting the
investment. The Fund may also call such loans in order to sell
the securities involved.
Borrowing
The Fixed Income Segment may borrow from banks and enter
into reverse repurchase agreements or dollar rolls (as described
in Appendix A of the Prospectus) up to 33 1/3% of the value of
the Fund's total assets (computed at the time the loan is made)
to take advantage of investment opportunities and for
extraordinary or emergency purposes, or for the clearance of
transactions. The Fund may pledge up to 33 1/3% of its total
assets to secure these borrowings. If the Fund's asset coverage
for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings even though it may be disadvantageous at
that time from an investment point of view. The Fund will incur
borrowing costs when it leverages, including payment of interest
and any fee necessary to maintain a line of credit, and may be
required to maintain a minimum average balance. If the income and
appreciation on assets acquired with borrowed funds exceed their
borrowing cost, the Fund's investment performance will increase,
whereas if the income and appreciation on assets acquired with
borrowed funds are less than their borrowing costs, investment
performance will decrease. In addition, if the Fund borrows to
invest in securities, any investment gains made on the securities
in excess of the costs of the borrowing, and any gain or loss on
hedging, will cause the net asset value of the shares to rise
faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased
fails to cover their cost (including any interest paid on the
money borrowed) to the Fund, the net asset value of the Fund's
shares will decrease faster than would otherwise be the case.
This speculative characteristic is known as "leverage."
-6-
TAXES
Taxation of the Fund
The Fund intends to qualify each year as a regulated
investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). In order so to qualify
and to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, the Fund must, among
other things:
(a) Derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and
gains from the sale of stock, securities and foreign currencies,
or other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its
business of investing in such stock, securities, or currencies;
(b) derive less than 30% of its gross income from gains from the
sale or other disposition of certain assets (including
securities) held for less than three months;
(c) distribute with respect to each taxable year at least 90% of
its taxable and tax-exempt income for such year; and
(d) diversify its holdings so that, at the end of each fiscal
quarter (i) at least 50% of the market value of the Fund's assets
is represented by cash and cash items, U.S. Government
securities, securities of other regulated investment companies,
and other securities limited in respect of any one issuer to a
value not greater than 5% of the value of the Fund's total assets
and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its assets is invested in
the securities (other than those of the U.S. Government or other
regulated investment companies) of any one issuer or of two or
more issuers which the Fund controls and which are engaged in the
same, similar, or related trades or businesses.
Qualification as a regulated investment company exempts the
Fund from federal income tax on income paid to its shareholders
in the form of dividends (including capital gain dividends). A
dividend paid to shareholders by the Fund in January of a year
generally is deemed to have been paid by the Fund on December 31
of the preceding year, if the dividend was declared and payable
to shareholders of record on a date in October, November or
December of that preceding year.
If the Fund failed to qualify as a regulated investment
company accorded special tax treatment in any taxable year, the
Fund would be subject to tax on its taxable income at corporate
rates, and could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is
accorded special tax treatment.
-7-
If the Fund fails to distribute in a calendar year
substantially all of its ordinary income for such year and
substantially all of its net capital gain for the year ending
October 31 (or later if the Fund is permitted so to elect and so
elects), plus any retained amount from the prior year, the Fund
will be subject to a 4% excise tax on the undistributed amounts.
The Fund intends generally to make distributions sufficient to
avoid imposition of the 4% excise tax. In calculating its
income, the Fund must include dividends in income not when
received but on the date when the stock in question is acquired
or becomes ex-dividend, whichever is later. Also, a portion of
the yield on certain high yield securities (including certain
payment-in-kind bonds) issued after July 10, 1989 may be treated
as dividends.
Return of capital distributions
If the Fund makes a distribution to you in excess of its
current and accumulated "earnings and profits" in any taxable
year, the excess distribution will be treated as a return of
capital to the extent of your tax basis in your shares, and
thereafter as capital gain. A return of capital is not taxable,
but it reduces your tax basis in your shares.
FUND CHARGES AND EXPENSES
Management Fees
The Fund pays a monthly fee to the Adviser based on the
average net assets of the Fund, as determined at the close of
each business day during the month, at an annual rate of 0.70%.
Advisory fees paid for the fiscal year ended March 31, 1995 were
$11,056. Advisory fees paid from inception, June 30, 1992
through March 31, 1995 were $18,372. The amounts paid in prior
fiscal years reflect the previous advisory contract rate of 0.35%
of average net assets. During the three-year period ended March
31, 1995, the Adviser reimbursed the Fund in aggregate $345,325
under expense limitation provisions.
Other Expenses
The Fund pays its own expenses, including, but not limited
to auditing, legal, tax preparation and consulting, insurance,
custodial, accounting, shareholder servicing and shareholder
report expenses. Fees paid to Fund/Plan Services which serves as
the Fund's shareholder servicing and accounting agent are
determined by contract as approved by the Board of Trustees.
-8-
MANAGEMENT OF THE FUND
The Board of Trustees has the responsibility for the overall
management of the Fund, including general supervision and review
of its investment activities. The Trustees, in turn, elect the
officers of the Fund who are responsible for administering the
day-to-day operations of the Fund. Trustees and officers of the
Fund are identified in the Prospectus.
All of the Trustees are Trustees of all the other funds
managed by the Adviser and each independent trustee receives fees
for his or her services. For details of trustees' fees paid by
the Fund, see "Fund Charges and Expenses" in this Statement.
The Agreement and Declaration of Trust of the Fund provides
that the Fund will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the
Fund, except if it is determined in the manner specified in the
Agreement and Declaration of Trust that they have not acted in
good faith in the reasonable belief that their actions were in
the best interests of the Fund or that such indemnification would
relieve any officer or Trustee of any liability to the Fund or
its shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of his or her duties.
Trustees and officers of the Fund who are also officers or
shareholders of the Adviser will benefit from the advisory fees
paid by the Fund.
Potential Conflicts of Interest
Principals of the Adviser as individuals own 99% of the
common stock of Harrington Financial Group, the holding company
for Harrington Bank, FSB of Richmond, Indiana (the
"Association"). As of March 31, 1995, the Association had total
assets of $263 million.
Douglas T. Breeden, in combination with immediate family
members, controls over 75% of the common stock of Community First
Financial Group, Inc. , the holding company for English State
Bank of English, Indiana (the "Bank"). As of March 31, 1995, the
Bank had total assets of $76 million. The Adviser furnishes
certain Investment Advisory services to the Bank and Association.
The Fund will transact no business directly or indirectly with
either the Bank or the Association. The Bank and Association
invest in assets of the same types as those to be held by the
Fund.
The Adviser may also manage advisory accounts with
investment objectives similar to or the same as those of the
Fund, or different from the Fund but trading in the same type of
securities and instruments as the Fund. Portfolio decisions and
results of the Fund's investments may differ from those of such
accounts managed by the Adviser. When two or more accounts
managed by the Adviser seek to purchase or sell the same assets,
the assets actually purchased or sold may be allocated among the
accounts on a basis determined by the Adviser in its good faith
discretion to be equitable. In some cases, this system may
adversely affect the size or the price of the position obtainable
for the Fund.
-9-
THE INVESTMENT ADVISORY AGREEMENT AND OTHER SERVICES
The investment manager of the Fund is Smith Breeden
Associates, Inc. (the "Adviser"). The table in the Prospectus
indicates which officers and trustees are affiliated persons of
the Adviser.
Under the Investment Advisory Agreement between the Fund and
the Adviser, subject to such policies as the Trustees may
determine, the Adviser, at its expense, furnishes continuously an
investment program for the Fund and makes investment decisions on
behalf of the Fund. Subject to the control of the Trustees, the
Adviser also manages, supervises and conducts the other affairs
and business of the Fund, furnishes office space and equipment,
provides bookkeeping and clerical services (including
determination of the Fund's net asset value, but excluding
shareholder accounting services) and places all orders for the
purchase and sale of the Fund's portfolio securities.
For details of the Adviser's compensation under the
Investment Advisory Agreement, see "Fund Charges and Expenses" in
this Statement. The Adviser's compensation under the Investment
Advisory Agreement may be reduced in any year if the Fund's
expenses exceed the limits on investment company expenses imposed
by any statute or regulatory authority of any jurisdiction in
which shares of the Fund are qualified for offer or sale. The
term "expenses" is defined in the statutes or regulations of such
jurisdictions, and, generally speaking, excludes brokerage
commissions, taxes, interest and extraordinary expenses. The
only such limitation as of the date of this Statement (imposed by
the State of California) was 2.5% of the first $30 million of
average net assets, 2% of the next $70 million and 1.5% of any
excess over $100 million.
Under the Investment Advisory Agreement, the Adviser may
reduce its compensation to the extent that the Fund's expenses
exceed such lower expense limitation as the Adviser may, by
notice to the Fund, voluntarily declare to be effective. The
expenses subject to this limitation are exclusive of brokerage
commissions, interest, taxes, and extraordinary expenses. The
terms of the expense limitation currently in effect are described
in the Prospectus and on the following page. The Fund pays all
expenses not assumed by the Adviser including, without
limitation, auditing, legal, tax preparation and consulting,
custodial, investor servicing and shareholder reporting expenses.
The Investment Advisory Agreement provides that the Adviser
shall not be subject to any liability to the Fund or to any
shareholder of the Fund for any act or omission in the course of
or connected with rendering services to the Fund in the absence
of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties on the part of the Adviser.
The Investment Advisory Agreement may be terminated without
penalty by vote of the Trustees or the shareholders of the Fund,
or by the Adviser, on 60 days written notice. It may be amended
only by a vote of the shareholders of the Fund. The Investment
-10-
Advisory Agreement also terminates without payment of any penalty
in the event of its assignment as defined in the Investment
Company Act. The Investment Advisory Agreement provides that it
will continue in effect after its initial term of two years only
so long as such continuance is approved at least annually by vote
of either the Trustees or the shareholders, and, in either case,
by a majority of the Trustees who are not "interested persons" of
the Adviser or the Fund. In each of the foregoing cases, the
vote of the shareholders is the affirmative vote of a "majority
of the outstanding voting securities".
Under the terms of the Investment Advisory Agreement, the
Adviser performs certain administrative services as follows: (1)
coordinates with the Fund's custodian and Transfer Agent and
monitors the services they provide to the Fund; (2) coordinates
with and monitors other third parties furnishing services to the
Fund; (3) provides the Fund with necessary office space,
telephones and other communications facilities and personnel
competent to perform administrative and clerical functions for
the Fund; (4) supervises the preparation by third parties of all
Federal, state and local tax returns and reports of the Fund
required by applicable law; (5) prepares and, after approval by
the Fund, files and arranges for the distribution of proxy
materials and periodic reports to shareholders of the Fund as
required by applicable law; (6) prepares and, after approval by
the Fund, arranges for the filing of such registration statements
and other documents with the Securities and Exchange Commission
and other Federal and state regulatory authorities as may be
required by applicable law; (7) reviews and submits to the
officers of the Fund for their approval invoices or other
requests for payment of Fund expenses; and (8) takes such other
actions with respect to the Fund as may be necessary in the
opinion of the Administrator to perform its duties under the
agreement.
The Adviser has voluntarily agreed to bear normal operating
expenses (excluding litigation, indemnification and other
extraordinary expenses) of the Fund, and, if necessary, to waive
its advisory fee, for the period ending March 31, 1996 such that
total operating expenses would not exceed 0.90% of the average
net assets of the Fund. Such expense limitations, if any, are
calculated daily based on average net assets and may be continued
or modified by the Adviser at any time in its sole discretion.
Portfolio Transactions
Investment decisions
Investment decisions for the Fund and for the other
investment advisory clients of the Adviser are made with a view
to achieving their respective investment objectives. Investment
decisions are the product of many factors in addition to basic
suitability for the particular client involved. Thus, a
particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients
at the same time. Likewise, a particular security may be bought
for one or more clients when one or more other clients are
selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens
that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in
-11-
such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the Adviser's
opinion is equitable to each and in accordance with the amount being
purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
Brokerage and research services
Transactions on U.S. stock exchanges, commodities markets
and futures markets and other agency transactions involve the
payment by the Fund of negotiated brokerage commissions. Such
commissions vary among different brokers. In addition, a
particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction.
There is generally no stated commission in the case of securities
traded in the over-the-counter markets, but the price paid by the
Fund usually includes an undisclosed dealer commission or mark-
up. In underwritten offerings, the price paid by the Fund
includes a disclosed, fixed commission or discount retained by
the underwriter or dealer. The Fund paid approximately $1000 in
brokerage commissions on futures and options transactions for the
fiscal year ended March 31, 1995.
The Adviser places all orders for the purchase and sale of
portfolio investments for the Fund and may buy and sell
investments for the Fund through a substantial number of brokers
and dealers. In so doing, the Adviser uses its best efforts to
obtain for the Fund the most favorable price and execution
available. In seeking the most favorable price and execution,
the Adviser, having in mind the Fund's best interests, considers
all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for
the security or other investment, the amount of the commission,
the timing of the transaction taking into account market prices
and trends, the reputation, experience and financial stability of
the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.
When it is determined that several brokers or dealers are
equally able to provide the best net price and execution, the
Adviser may execute transactions through brokers or dealers who
provide quotations and other services to its advisory clients,
including the quotations necessary to determine these clients'
net assets, in such amount of total brokerage as may reasonably
be required in light of such services, and through brokers and
dealers who supply statistical and other data to the Adviser and
its clients in such amount of total brokerage as may reasonably
be required.
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to seeking
the most favorable price and execution available and such other
policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund (and, if permitted by law, of the
other funds managed by the Adviser) as a factor in the selection
of broker-dealers to execute portfolio transactions for the Fund.
-12-
The Adviser conducts extensive proprietary fixed income
research with emphasis on mortgage-backed securities. The
Adviser is not dependent on any broker for such research and
analysis and, thus is able to transact business with brokers
regardless of the brokers' research capabilities or provision of
such research to brokerage customers. The Adviser uses multiple
electronic quotation services for trading and pricing purposes.
The Adviser pays for these services directly out of its advisory
fees. The Adviser is not involved in any soft dollar
arrangements. The Adviser does utilize broker pricing guidance
for certain assets not consistently available through electronic
quotation services.
Investor Servicing Agent and Underwriter
Fund/Plan Services is the Fund's investor servicing agent
(transfer, plan and dividend disbursing agent), for which it
receives fees which are paid monthly by the Fund as an expense of
all its shareholders. See "Fund Charges and Expenses" in this
Statement for information on fees and reimbursements received by
Fund/Plan Services. Fund/Plan Services is also investor
servicing agent for the other funds managed by the Adviser and
receives fees from each of those funds for its services.
Custodian
The Bank of New York ("Custodian") acts as custodian of the
Fund's assets. In carrying out its duties under its custodian
contract, the Custodian may employ one or more subcustodians
whose responsibilities will include safeguarding and controlling
the Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund's
investments. The Fund pays the Custodian an annual fee based on
the assets of the Fund and the Fund's securities transactions.
The Fund also pays the Custodian an annual fee based on the
Fund's securities holdings for the year and reimburses the
Custodian for certain out-of-pocket expenses incurred by it or
any subcustodian employed by it in performing custodial services.
The Custodian pays the fees and other charges of any subcustodian
employed by it.
PRINCIPAL HOLDERS OF SECURITIES AND CONTROLLING PERSONS
Listed below are the names and addresses of those
shareholders who, as of June 30, 1995, owned 5% or more of the
shares of the Fund.
Shareholder Percentage Owned
Sammie C. Bledsoe 22.58%
Sammie C. Bledsoe Trust
1737 East 30th Place
Tulsa, OK 74114
Shepard Barbash and Vicki Ragan 17.14%
1732 Meadowdale Avenue
Atlanta, GA 30306-3114
-13-
Michael J. Giarla 6.72%
Trust Smith Breeden Assoc., Inc. PSP
FBO Timothy D. Rowe
7300 College Boulevard, Suite 430
Overland Park, KS 66210-1879
A Fund Trustee owns less than 1% of the shares of the Fund as
of June 30, 1995.
DETERMINATION OF NET ASSET VALUE
The Fund determines net asset value as of the close of regular
trading on the New York Stock Exchange at 4 p.m..
If any securities held by the Fund are restricted as to
resale, the Adviser determines their fair value following
procedures approved by the Trustees. The Trustees periodically
review such valuation procedures. The fair value of such
securities is generally determined as the amount which the Fund
could reasonably expect to realize from an orderly disposition of
such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from
case to case. However, consideration is generally given to the
financial position of the issuer and other fundamental analytical
data relating to the investment and to the nature of the
restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection
with such disposition). In addition, specific factors are also
generally considered, such as the cost of the investment, the
market value of any unrestricted securities of the same class (both
at the time of purchase and at the time of valuation), the size of
the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports
regarding the issuer.
Generally, trading in certain securities is substantially
completed each day at various times prior to the close of regular
trading on the Exchange. The values of these securities used in
determining the net asset value of the Fund's shares are computed
as of such times. Also, because of the amount of time required to
collect and process trading information as to large numbers of
securities issues, the values of certain securities (such as
convertible bonds and U.S. Government securities) are determined
based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the Exchange.
Occasionally, events affecting the value of such securities may
occur between such times and the close of the Exchange which will
not be reflected in the computation of the Fund's net asset value.
If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their
fair market value following procedures approved by the Trustees.
-14-
ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of the Fund must be denominated in
U.S. Dollars. The Fund reserves the right, in its sole discretion,
to either (a) reject any order for the purchase or sale of shares
denominated in any other currency, or (b) to honor the transaction
or make adjustments to shareholder's account for the transaction as
of a date and with a foreign currency exchange factor determined by
the drawee bank.
Dividend checks which are returned to the Fund marked "unable
to forward" by the postal service will be deemed to be a request to
change the dividend option and the proceeds will be reinvested in
additional shares at the current net asset value until new
instructions are received.
Redemptions in Kind
The Fund has committed itself to pay in cash all requests for
redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1%
of the value of the Fund's net assets at the beginning of such
period. Such commitment is irrevocable without the prior approval
of the Securities and Exchange Commission. In the case of requests
for redemption in excess of such amounts, the Trustees reserve the
right to make payments in whole or in part in securities or other
assets of the Fund in case of any emergency, or if the payment of
such redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities
distributed would be valued at the price used to compute the Fund's
net assets. Should the Fund do so, a shareholder may incur
brokerage fees or other transaction costs in converting the
securities to cash.
Principal Underwriter
Fund/Plan Broker Services, Inc. (the "Principal Underwriter"),
#2 West Elm Street, P.O. Box 874, Conshohocken, Pennsylvania
19428-0874, is the principal underwriter for the Fund. The
Principal Underwriter is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. The offering of the Fund's
shares is continuous.
The Fund's underwriting agreement with the Principal
Underwriter provides that the Fund will pay all fees and expenses
in connection with: registering and qualifying its shares under the
various state "blue sky" laws; preparing, setting in type,
printing, and mailing its prospectuses and reports to shareholders;
and issuing its shares, including expenses of confirming purchase
orders.
The Principal Underwriter acts as the agent of the Fund in
connection with the sale of its shares in all states in which the
shares are qualified and in which the Principal Underwriter is
qualified as a broker-dealer. Under the underwriting agreement,the
-15-
Principal Underwriter may accept orders for Fund shares at the
offering price. For these services, the Adviser pays the Principal
Underwriter $5000. The Principal Underwriter may enter into
agreements with other broker-dealers for the sale of Fund shares by
them.
Reinvestment Date
The dividend reinvestment date is the date on which the
additional shares are purchased for the investor who has its
dividends reinvested. This date will vary and is not necessarily
the same date as the record date or the payable date for cash
dividends.
Special Services
The Fund may pay certain financial institutions which maintain
omnibus accounts with the Fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such
beneficial owners. Such financial institutions may also charge a
fee for their services directly to their clients.
SHAREHOLDER INFORMATION
Each time shareholders buy, redeem or exchange shares or
receive a distribution, they will receive a statement confirming
the transaction and listing their current share balance. The Fund
also sends annual and semiannual reports that keep shareholders
informed about its portfolio and performance, and year-end tax
information to simplify their recordkeeping. Shareholders may call
Fund/Plan Services toll-free at 1-800-221-3137 between 9:00 a.m.
and 7:00 p.m. (Eastern Time) for more information, including
account balances.
SUSPENSION OF REDEMPTIONS
The Fund may not suspend shareholders' right of redemption, or
postpone payment for more than seven days, unless the New York
Stock Exchange (the "Exchange") is closed for other than customary
weekends or holidays, or if permitted by the rules of the
Securities and Exchange Commission during periods when trading on
the Exchange is restricted or during any emergency which makes it
impracticable for the Fund to dispose of its securities or to
determine fairly the value of its net assets, or during any other
period permitted by order of the Commission for protection of
investors.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Fund. However, the Agreement and Declaration of Trust disclaims
shareholder liability for acts or obligations of the Fund and
requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the Fund or
the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of
any shareholder held personally liable for the obligations of
the Fund. Thus, the risk of a shareholder incurring
-16-
financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its
obligations. The likelihood of such circumstances is remote.
STANDARD PERFORMANCE MEASURES
Total return data for the Fund may from time to time be
presented in this Statement and in advertisements. Total return
for the life of the Fund is determined by calculating the actual
dollar amount of investment return on a $1,000 investment in the
Fund made at the net asset value at the beginning of the period,
and then calculating the annual compounded rate of return which
would produce that amount. Total return for a period of one year
is equal to the actual return of the Fund during that period.
Total return calculations assume reinvestment of all Fund
distributions at net asset value on their respective reinvestment
dates. As of March 31, 1995, the average annual total return for
the Fund since inception is 12.87%. The average annual total
return for the one year period ended March 31, 1995 is 17.18%.
At times, the Adviser may reduce its compensation or assume
expenses of the Fund in order to reduce the Fund's expenses. The
per share amount of any such fee reduction or assumption of
expenses for the life of the Fund, will be reflected in the
Prospectus as updated. Any such fee reduction or assumption of
expenses would increase the Fund's total return during the period
of the fee reduction or assumption of expenses.
Independent statistical agencies measure the Fund's investment
performance and publish comparative information showing how the
Fund, and similar investment companies, performed in specified time
periods. Two agencies whose reports are commonly used for such
comparisons are Lipper Analytical Services and Wiesenberger
Investment Companies Service. From time to time, the Fund may
distribute these comparisons to its shareholders or to potential
investors.
The Fund's performance may also from time to time be compared
to Standard & Poor's 500 Composite Stock Price Index (the "S&P 500
Index"). The S&P 500 Index is an unmanaged list of common stocks
frequently used as a general measure of stock market performance.
Standard & Poor's performance figures reflect changes of market
prices and reinvestment of all regular cash dividends and are not
adjusted for commissions or other costs. Because the Fund is a
managed portfolio investing in a variety of securities and
derivative instruments, the securities it owns will not match those
in the Index.
Other publications, indices, and averages which may be used
are as follows:
a) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return and average rate of return (average annual compounded growth
rate) over specified time periods for the mutual fund industry.
-17-
b) Mutual Fund Source book, published by Morningstar, Inc. -
analyzes price, yield, risk and total return for equity and fixed
income funds.
c) Financial publications: Barron's, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - rate
fund performance over specified time periods.
d) Consumer Price Index (or Cost of Living Index), published
by the U.S. Bureau of Labor Statistics - a statistical measure of
change, over time, in the price of goods and services in major
expenditure groups.
e) Stocks, Bonds, Bills, and Inflation, published by Ibbotson
Associates - historical measure of yield, price and total return
for common and small company stock, long-term government bonds,
treasury bills, and inflation.
f) Savings and Loan Historical Interest Rates - as published
in the U.S. Savings & Loan League Fact Book.
g) Salomon Brothers Broad Bond Index or its component indices
- The Broad Index measures yield, price and total return for
Treasury, Agency, Corporate, and Mortgage bonds.
h) Salomon Brothers Composite High Yield Index or its
component indices - The High Yield Index measures yield, price and
total return for Long-Term High-Yield Index, Intermediate-Term
High-Yield Index and Long-Term Utility High-Yield Index.
i) Lehman Brothers Aggregate Bond Index or its component
indices - The Aggregate Bond Index measures yield, price and total
return for Treasury, Agency, Corporate, Mortgage, and Yankee bonds.
j) Lehman Brothers Government/Corporate Bond Index.
k) Other taxable investments including certificates of
deposit (CD's), money market deposit accounts (MMDA's), checking
accounts, savings accounts, money market mutual funds, repurchase
agreements, and government securities.
l) Historical data supplied by the research departments of
Lehman Brothers, First Boston Corporation, Morgan Stanley, Salomon
Brothers, Merrill Lynch, Goldman Sachs, Prudential Securities and
Donaldson Lufkin and Jenrette.
m) Donoghues's Money Fund Report - industry averages for
seven-day annualized and compounded yields of taxable, tax-free and
government money funds.
n) Total returns and yields for Treasury Securities and fixed
income indices as published by Ryan Laboratories or other
suppliers.
-18-
Volatility
Occasionally statistics may be used to specify Fund volatility
or risk. Measures of volatility or risk are generally used to
compare fund net asset value or performance relative to a market
index. One measure of volatility is beta. The ratio of the
expected excess return on the portfolio to the expected excess
return on the market index is called beta. Equity funds commonly
use the S&P 500 as their market index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or
total return around an average, over a specified period of time.
the premise is that greater volatility connotes greater risk
undertaken in achieving performance.
A statistic often used by sophisticated institutional
investors when comparing the relative performance of portfolios is
the Sharpe Ratio. This statistic is the portfolio's excess return
(relative to T-Bills) divided by the standard deviation of its
returns.
All data are based on past performance and do not predict
future results.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey
08540, are the Fund's independent auditors, providing audit
services, tax return review and preparation services and assistance
and consultation in connection with the review of various
Securities and Exchange Commission filings.
EXPERTS
The financial statements of the Fund and related notes thereto
included in this Statement of Additional Information have been so
included in reliance upon the report of Deloitte & Touche LLP,
independent auditors, given on the authority of said firm as
experts in auditing and accounting.
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
See attached report.
-19-
<PAGE>
ANNUAL REPORT
PERFORMANCE REVIEW
In the year ended March 31, 1995, the total return for the Smith
Breeden Market Tracking Fund ( the "Fund") was 17.18%, 1.60% more than
its benchmark, the S&P 500, which returned 15.58%. Since the Fund's
inception, it has achieved a total return of 39.53%, as compared to the
S&P 500 index return of 32.58%, representing an advantage of 6.95%.
The Fund also performed much better than the average S&P 500 index
fund for this period. The average total return of S&P 500 index funds as
tracked by Lipper Analytical, Inc. was only 15.09% for the year ended
March 31, 19951, or 49 basis points lower than the index. The return was
lower than the actual index due to the funds' expenses. As will be
discussed in more detail later, the Market Tracking Fund's enhanced index
strategy enables it to seek a return on its invested cash in excess of its
expenses and indexing costs.
It is noteworthy that in 1994 the S&P 500 index outperformed 78% of
stock funds. One reason the 1994 stock market favored S&P 500 stocks,
and the index, is that the weakness of the U.S. dollar benefited exporter
firms and those companies with significant operations overseas. Corporate
earnings in foreign currencies become more valuable as the dollar weakens
since the conversion ratio of dollars to foreign currency becomes greater.
This effect has particularly benefited the large corporations that
comprise the S&P 500 index. Additionally, foreign firms face greater
difficulty in competing with U.S. corporations as the dollar becomes cheaper.
A cheaper dollar lowers the price of American goods and services in
international markets, and enhances the earnings prospects of U.S. exporters.
THE LINE GRAPH DETAILING PERFORMANCE IN ACCORDANCE WITH ITEM 5a. OF FORM
N1-A IS LOCATED HERE IN THE TEXT AND IS DESCRIBED BELOW IN ACCORDANCE
WITH REG 232.304 OF REGULATION S-T.
THE GRAPH DEPICTS THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
MARKET TRACKING FUND VERSUS THAT OF ITS BENCHMARK, THE S&P 500 INDEX.
FROM THE FUND'S INCEPTION OF JUNE 30, 1992 THROUGH MARCH 31, 1995, AN
INVESTMENT OF $10,000 WOULD HAVE GROWN TO $13,953 IF INVESTED IN THE
FUND AND $13,258 IF INVESTED IN THE INDEX. THE RETURN IN THE FUND IS
NET OF FEES AND SALES CHARGES; THE RETURN OF THE S&P 500 INDEX DOES NOT
REFLECT FEES OR TRANSACTION COSTS. THE ANNUALIZED ONE YEAR RETURN
FOR THE FUND IS 17.18% AND SINCE INCEPTION, THE FUND'S ANNUALIZED
RETURN IS 12.87%.
The performance of the S&P 500 and the stock market in general has also
been buoyed by investors' perception that the Federal Reserve has successfully
controlled the economy's growth without increasing the risk of recession.
The effect of an increase in interest rates usually takes at least a year to
have an impact on the economy. The Federal Reserve's first increase in the
discount rate was in February, 1994. The measure of the Gross Domestic
Product (GDP) in the first quarter of 1995 supported the impact of this rate
increase a year prior, since the annualized rate of increase in the GDP was
the lowest of any in the last five quarters. The continuing stock market
rally suggests that investors are confident that the risk of recession or of
further interest rate hikes has receded.
As mentioned earlier, the Fund's strategy of investing its cash in fixed
income securities with the aim of producing a total return greater than the
Fund's expenses met with great success in the year ended March 31, 1995. The
Fund beat the S&P 500 index return by 1.57% over the period. During 1994
and the first quarter of 1995, the Market Tracking Fund's fixed income
segment was invested mainly in premium fixed-rate mortgage-backed securities
("MBS") and in GNMA adjustable-rate mortgages ("ARMS"). Holders of premium
MBS, which have a higher coupon than currently issued mortgages, benefit
when prepayments are slow. In the rising interest rate environment of 1994,
with fewer homeowners refinancing their mortgages, hedged premium MBS
produced superior returns. This was especially the case during the last four
months of the 1994 calendar year, during which time, the Fund beat the
S&P 500 index by 2.23%. When rates started to decline in the first quarter
of 1995, the excellent performance of the Fund's holdings of GNMA ARMs
helped offset the weak performance in fixed-rate premiums as investors'
prepayment concerns regarding these securities increased. The Fund had built
up a position in GNMA ARMs in previous months while they were undervalued
relative to other sectors of the mortgage market.
The Market Tracking Fund will continue to search for relative value in
the mortgage market to provide you with an incremental return after expenses
over the S&P 500. At March 31, 1995, the Fund's cash holdings represented
about 5 % of net assets in anticipation of developing opportunities.
1 Source: Barron's, April 10, 1995.
SMITH BREEDEN MARKET TRACKING FUND
SCHEDULE OF INVESTMENTS MARCH 31, 1995
Market
Face Amount Security Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 91.57%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 12.83% *
FHLMC:
$192,252 9.50%, due 07/01/02.................................$198,020
65,987 12.50%, due 02/01/14................................ 72,423
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $275,001)......................................270,443
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 28.34% *
FNMA:
170,739 12.50%, due 09/01/12................................ 189,297
305,431 13.50%, due 11/01/14-02/01/15....................... 340,345
FNMA ARM:
65,569 7.08%, due 12/01/26................................. 67,507
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $605,103)..................................... 597,149
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 48.06% *
GNMA ARM:
684,966 5.50%, due 02/20/22-03/20/22........................ 677,808
335,322 6.0%, due 05/20/21.................................. 334,930
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $981,636) 1,012,738
U.S. GOVERNMENT OBLIGATIONS - 2.34%
U.S. TREASURY BILL **
50,000 5.66%, due 06/29/95................................. 49,312
TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $49,301).... 49,312
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $1,911,041)..................................1,929,642
EURODOLLAR PUT OPTIONS - 0.35%
Contracts
5 Expires 6/95, Strike Price $93.25................... 875
5 Expires 12/95, Strike Price $92.25.................. 2,875
5 Expires 12/95, Strike Price $92.50.................. 3,500
TOTAL EURODOLLAR PUT OPTIONS (Cost $14,707)......... 7,250
EQUITY SWAP CONTRACTS - 3.22%
Notional Amount
S&P 500 Index Equity Swap Contract
dated 1/11/95 with Morgan Stanley Capital Markets
$923,340 Expires 7/11/95..................................... 67,981
TOTAL EQUITY SWAP CONTRACTS.............................. 67,981
TOTAL INVESTMENTS (Cost $1,925,748) - 95.14%...... 2,004,873
CASH AND OTHER ASSETS LESS LIABILITIES - 4.86%...... 102,473
NET ASSETS - 100.00%............................. $2,107,346
* Mortgage backed obligations are subject to principal paydowns as a
result of prepayments or refinancings of the underlying mortgage
loans. As a result, the average life may be substantially less than
the original maturity. The interest rate shown is the rate in effect at
March 31, 1995. ARMs have coupon rates which adjust periodically. The
adjusted rate is determined by adding a spread to a
specified index.
** The interest rate shown is the discount rate paid at the time of
purchase by the Fund.
Portfolio Abbreviations:
ARM - Adjustable Rate Mortgage
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN MARKET TRACKING FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1995
ASSETS:
Investments at market value
(identified cost $1,925,748)(Note 1)..................$2,004,873
Cash......................................................81,060
Receivables:
Interest...............................................14,859
Variation margin on futures contracts (Note 2)............625
Securities sold.........................................3,656
Prepaid expenses...........................................2,820
Deferred organization expenses (Note 1)...................62,530
TOTAL ASSETS......................................2,170,423
LIABILITIES:
Accrued expenses..........................................10,483
Distributions payable......................................1,200
Due to adviser (Note 3)...................................51,394
TOTAL LIABILITIES....................................63,077
NET ASSETS:
(Applicable to outstanding shares of 194,482;
unlimited number of share of beneficial
interest authorized; no stated par)................$2,107,346
Net asset value, offering price and redemption
price per share ($2,107,346 / 194,482).................$10.84
SOURCE OF NET ASSETS:
Paid in capital.......................................$2,040,914
Accumulated net realized loss on investments.............(38,496)
Net unrealized appreciation(depreciation) of
investments, equity swap and futures contracts...........104,928
NET ASSETS.......................................$2,107,346
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN MARKET TRACKING FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1995
INVESTMENT INCOME:
Interest and discount earned, net of amortization.....$156,990
EXPENSES:
Accounting and pricing services fees.................. 27,350
Amortization of organization expenses (Note 1)........ 27,791
Transfer agent fees................................... 29,919
Legal fees............................................ 12,472
Registration fees..................................... 19,652
Custodian fees........................................ 7,251
Advisory fees (Note 3)................................ 11,056
Trustees fees and expenses............................ 4,274
Insurance expense..................................... 1,900
Other................................................. 4,169
TOTAL EXPENSES BEFORE REIMBURSEMENT............... 145,834
Expenses reimbursed by Adviser (Note 3)...........(128,959)
NET EXPENSES...................................... 16,875
NET INVESTMENT INCOME ............................ 140,115
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments...................... (64,050)
Change in unrealized appreciation(depreciation)
of investments, equity swap and futures contracts.... 229,458
Net realized and unrealized gain on investments,
equity swap and futures contracts.................... 165,408
Net increase in net assets resulting from operations..$305,523
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN MARKET TRACKING FUND
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
March 31, 1995 March 31, 1994
OPERATIONS:
Net investment income............................ $140,115 $135,900
Net realized gain (loss) on investments. (64,050) 57,426
Change in unrealized appreciation
(depreciation) of investments,
equity swap and futures contracts..... 229,458 (155,969)
Net increase in net assets resulting
from operations....................... 305,523 37,357
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income.... (104,085) (77,182)
Dividends in excess of net investment
income................................ (251) -
Distributions from net realized gains on
investments........................... (9,133) (115,776)
Distributions in excess of net realized
gains on investments.................. (13,962) (9,611)
Total distributions..................... (127,431) (202,569)
CAPITAL SHARE TRANSACTIONS:
Shares sold............................. 200,709 2,077,867
Shares issued on reinvestment of
distributions......................... 120,434 9,822
Shares redeemed......................... (152,408) (1,065,804)
Increase in net assets resulting from
capital share transactions (a)........ 168,735 1,021,885
TOTAL INCREASE IN NET ASSETS........ 346,827 856,673
NET ASSETS:
Beginning of period..................... 1,760,519 903,846
End of period...........................$2,107,346 $1,760,519
(a) Transactions in capital shares were as follows:
Shares sold........................ 19,300 191,195
Shares issued on reinvestment of
distributions..................... 11,593 931
Shares redeemed.................... (14,689) (97,117)
Net increase....................... 16,204 95,009
Beginning balance ................. 178,278 83,269
Ending balance..................... 194,482 178,278
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN MARKET TRACKING FUND
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental
information has been derived from information provided in the
financial statements.
Year Year Period
Ended Ended Ended
March 31, 1995 March 31, 1994 March 31, 1993*
Net Asset Value
Beginning of Period..... $9.88 $10.85 $10.00
Income From Investment Operations
Net investment income..... 0.568 0.476 0.355
Net realized and
unrealized gain (loss)
equity swaps and
futures contracts...... 1.081 (0.216) 1.281
Total from investment
operations......... 1.649 0.260 1.636
Less Distributions
Dividends from net
investment income..... (0.568) (0.472) (0.311)
Dividends in excess of
net investment income. (0.001) - -
Distributions from
net realized gains
on investments........ (0.047) (0.701) (0.420)
Distributions in excess
of net realized gains
on investments........ (0.073) (0.057) (0.055)
Total distributions. (0.689) (1.230) (0.786)
Net Asset Value,
End of Period........... $10.84 $9.88 10.85
Total Return.............. 17.18% 2.19% 22.59%
Ratios/Supplemental Data
Net assets, end of
period.................. $2,107,346 $1,760,519 $903,846
Ratio of expenses
to average
net assets (1)........ 0.90% 0.90% 0.57%
Ratio of net investment
income to average
net assets (2)........ 7.44% 8.02% 5.28%
Portfolio turnover rate. 120% 119% 271%
______________________
(1) The annualized ratio of expenses to average net assets prior
to reimbursement by the Adviser was 7.75%, 7.08%, and 28.48%
for the years ended March 31, 1995, March 31, 1994, and the
period ended March 31, 1993, respectively.
(2) The annualized ratio of net investment income to average net
assets prior to reimbursement of expenses by the Adviser was
0.59%, 1.84%, and (22.63%) for the years ended March 31, 1995,
March 31, 1994, and the period ended March 31, 1993,
respectively.
* The Smith Breeden Market Tracking Fund commenced operations
June 30, 1992.
** Annualized
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Breeden Market Tracking Fund (the "Fund") is a series of the
Smith Breeden Trust (the "Trust"), an open-end, diversified management
investment company registered under the Investment Company Act of 1940,
as amended. The following is a summary of significant accounting
policies consistently followed by the Fund.
A. Security Valuation: Portfolio securities are valued at current market
value provided by a pricing service or by a bank or broker/dealer experienced
in such matters, when over-the-counter market quotations are readily
available. Securities and other assets for which market prices are not readily
available are valued at fair market value as determined in accordance with
procedures approved by the Board of Trustees. All money market instruments
and debt securities originally purchased with remaining maturities of 60 days
or less shall be valued at their amortized cost.
B. Distributions and Taxes: The Fund intends to continue to qualify for
and elect the special tax treatment afforded regulated investment companies
under Subchapter M of the Internal Revenue Code, thereby relieving the Fund
of federal income taxes. To so qualify, the Fund intends to distribute
substantially all of its net investment income and net realized capital
gains, if any, less any available capital loss carry forward. As of
March 31, 1995, the Fund had no net capital loss carry forward.
C. Repurchase Agreements: The Fund may enter into repurchase agreements
with member banks of the Federal Reserve System having total assets in excess
of $500 million and securities dealers, provided that such banks or dealers
meet the credit guidelines of the Fund's Board of Trustees. In a repurchase
agreement, the 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 Fund's custodian maintains control or custody of these
securities which collateralize the repurchase agreements until maturity of
the repurchase agreements. The value of the collateral is monitored daily,
and if necessary, additional collateral is received to ensure that the market
value of the underlying assets remains sufficient to protect the 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.
D. Reverse Repurchase Agreements: A reverse repurchase agreement involves
the sale by the Fund of portfolio assets concurrently with an agreement by the
Fund to repurchase the same assets at a later date at a fixed price. The Fund
will maintain a segregated account with its custodian, which will be marked to
market daily, consisting of cash, U.S. Government securities or other liquid
high-grade debt obligations equal in value to its obligations under reverse
repurchase agreements. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the agreement may be restricted pending a determination by
the other party, or its trustee or receiver whether to enforce the Fund's
obligation to repurchase the securities.
E. Determination Of Gains Or Losses On Sales Of Securities: Gains or losses
on the sale of securities are calculated for accounting and tax purposes on
the identified cost basis.
F. Deferred Organization Expenses: Deferred organization expenses are being
amortized on a straight-line basis over five years.
G. Securities Transactions and Investment Income: Interest income is accrued
daily on both long-term bonds and short-term investments. Interest income also
includes net amortization from the purchase of fixed-income securities.
Transactions are recorded on the first business day following the trade
date. Realized gains and losses from security transactions are
determined and accounted for on the basis of identified cost.
2. FINANCIAL INSTRUMENTS
A. Derivative Financial Instruments Held or Issued for Purposes other than
Trading: The Fund uses interest rate futures contracts for risk management
purposes in order to reduce fluctuation of the Fund's net asset value
relative to its targeted option-adjusted duration. Upon entering into a
futures contract, the Fund is required to deposit either cash or securities
in an amount (initial margin) equal to a certain percentage of the contract
value. Subsequent payments (variation margin) are made or received by the
Fund each day. The variation margin payments are equal to the daily changes in
the contract value and are recorded as unrealized gains or losses. The Fund
recognizes a realized gain or loss when the contract is closed or expires
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
Futures contracts involve costs and may result in losses. The effective use
of futures strategies depends on the Fund's ability to terminate futures
positions at times when the Fund's investment adviser deems it desirable to
do so. The use of futures also involves the risk of imperfect correlation
among movements in the values of the securities underlying the futures
purchased and sold by the Fund, of the futures contract itself, and of the
securities which are the subject of a hedge.
The Fund had the following open futures contracts as of March 31, 1995:
Principal Expiration Unrealized
Type Amount Position Month Gain/Loss
Eurodollar $1,000,000 Long September, 1995 $ 3,596
Eurodollar $2,000,000 Short September, 1996 (4,257)
Eurodollar $3,000,000 Short September, 1997 (2,814)
Eurodollar $3,000,000 Short September, 1998 (3,090)
Eurodollar $1,000,000 Short September, 1999 96
$ (6,469)
The aggregate market value of investments pledged to cover margin
requirements for the open positions at March 31, 1995 was $49,312.
B. Derivative Financial Instruments Held or Issued for Trading Purposes:
The Fund invests in a combination of Equity Swap Contracts and Futures
Contracts on the S&P 500 Index whose return is expected to track movements
in the S&P 500 Index.
The counterparty to an Equity Swap Contract will typically be a bank,
investment banking firm or broker/dealer. The counterparty will
generally agree to pay the Fund the amount, if any, by which the notional
amount of the Equity Swap Contract would have increased in value had it been
invested in the stocks comprising the S&P 500 Index in proportion to the
composition of the Index, plus the dividends that would have been received
on those stocks. The Fund will agree to pay to the counterparty a floating
rate of interest (typically the London Interbank Offered Rate plus a spread)
on the notional amount of the Equity Swap Contract plus the amount, if any,
by which that notional amount would have decreased in value had it been
invested in such stocks. Payments under the Equity Swap Contracts may be made
at the conclusion of the contract or periodically during its term. If there
is a default by the counterparty to an Equity Swap Contract, the Fund will
be limited to contractual remedies pursuant to agreements related to the
transaction. There is no assurance that Equity Swap Contract counterparties
will be able to meet their obligations pursuant to Equity Swap Contracts
or that, in the event of default, the Fund will succeed in pursuing
contractual remedies. The Fund thus assumes the risk that it may be delayed
in, or prevented from, obtaining payments owed to it pursuant to Equity Swap
Contracts. The Fund will closely monitor the credit quality of Equity Swap
Contract counterparties in order to minimize this risk.
The Fund had four open futures contracts on the S&P 500 Index as of March 31,
1995:
Principal Expiration Unrealized
Type Amount Position Month Gain
S&P 500 $1,010,740 Long June, 1995 $32,272
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Smith Breeden Associates, Inc. (the "Adviser"), a registered investment
adviser, provides the Fund with investment management services. As
compensation for these services, the Fund pays the Adviser a fee computed
daily and payable monthly, at an annual rate equal to 0.70% of the Fund's
average daily net asset value. The Adviser has voluntarily agreed to limit
the expenses of the Fund to 0.90% of the Fund's average daily net assets.
This voluntary agreement may be terminated or modified at any time by the
Adviser in its sole discretion, except that the Adviser has agreed to
limit expenses of the Fund to 0.90% through March 31, 1995. For the year
ended March 31, 1995, the Adviser received fees of $11,056 and reimbursed
the Fund $128,959.
Effective August 1, 1994, the Fund adopted a Distribution and Services
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The purpose of the Plan is to permit the Adviser to compensate
investment dealers and other persons involved in servicing shareholder
accounts for services provided and expenses incurred in promoting the sale
of shares of the Fund, reducing redemptions, or otherwise maintaining or
improving services provided to shareholders by such dealers or other
persons. The Plan provides for payments by the Adviser, out of its advisory
fee paid to it by the Fund, to dealers and other persons at the annual rate
of up to 0.25% of the Fund's average net assets subject to the authority
the Trustees of the Fund to reduce the amount of payments permitted under
the Plan or to suspend the Plan for such periods as they may determine.
Subject to these limitations, the amount of such payments and the purposes
for which they are made shall be determined by the Adviser.
Certain officers and trustees of the Fund are also officers and directors
of the Adviser.
4. INVESTMENT TRANSACTIONS
During the year ended March 31, 1995, purchases and proceeds from sales
of securities, other than short-term investments, aggregated $2,494,150
and $1,983,398, respectively. The cost of securities for federal income
tax purposes is $1,925,748. Net unrealized appreciation of investments,
equity swaps and futures contracts consists of:
Gross unrealized appreciation.......$140,750
Gross unrealized depreciation.......(35,822)
Net unrealized appreciation.........$104,928
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Smith Breeden Market Tracking Fund of the Smith Breeden Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Breeden Market
Tracking Fund of the Smith Breeden Trust as of March 31, 1995, and
the related statements of operations and changes in net assets for
each of the years in the two-year period then ended and financial
highlights for each of the years in the two-year period then ended
and the period June 30, 1992 (commencement of operations)
to March 31, 1993. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1995 by correspondence
with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
the Smith Breeden Market Tracking Fund of the Smith Breeden Trust as
of March 31, 1995, the results of its operations, the changes in net
assets, and financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 12, 1995
SMITH BREEDEN TRUST
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statement filed with Part B
(b) Exhibits:
(1) Declaration of Trust
(2) By-Laws
(3) Voting Trust Agreement--Not Applicable
(4) Specimen Share Certificate--Incorporated by Reference
(5) Form of Investment Advisory Agreement
for Smith Breeden Trust
(6) Form of Underwriting or Distribution
Agreement
(7) Bonus, Profit Sharing, Pension and Other
Similar Arrangements -- Not Applicable
(8) Custodian Agreement
(9)(a) Shareholder Services Agreement
(9)(b) Accounting Services Agreement
(9)(c) Sub-Administration Agreement- Not Applicable
(10) Opinion and Consent of Counsel
(a) Incorporated by reference to Post-Effective Amendment No. 6
of the Securities Act of 1933 filed on May 24, 1995.
(b) Incorporated by reference to Post-Effective Amendment No. 3
of the Securities Act of 1933 filed on March 31, 1994.
(11) Independent Auditors' Consent
(12) Financial Statements Omitted from Item 23 --
Not Applicable
(13) Letter of Understanding relating to
initial capital--Incorporated by Reference
(14) Model Retirement Plan -- Not Applicable
(15) Form of Rule 12b-1 Plan for Smith
Breeden Trust
(16) Performance Calculation --
Not Applicable
(17) Powers of Attorney--Incorporated by Reference
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant.
There were no persons directly or indirectly controlled by or under common
control with the Registrant as of June 30, 1995.
Item 26. Number of Holders of Securities.
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF JUNE 30, 1995
Smith Breeden Market Tracking Fund
80
Shares of Beneficial Interest
Item 27. Indemnification.
Reference is made to Article IV,Sections 4.2 and 4.3 of Registrant's
Declaration of Trust (Exhibit 1(a)) with respect to indemnification of
the Trustees and officers of Registrant against liabilities which may be
incurred by them in such capacities.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission ("SEC"), such indemnification is against
public policy as expressed in the Act, and is therefore, unenforceable.
In the event that a claim for indeminfication against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by
a trustee, an officer or a controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such
issue.
Each disinterested Trustee has entered into an indemnity agreement with
the Adviser whereby the Adviser indemnifies each disinterested Trustee
against defense costs in connection with a civil claim which involves
the Trustee by virtue of his position with the Fund.
Item 28. Business and Other Connections of Adviser.
Smith Breeden Associates, Inc. (the "Adviser") acts as
investment adviser to financial institution, insurance, pension,
charitable foundation clients and other registered investment
companies. For a description of the officers and directors of
the Adviser and their business affiliations, see "Management of
the Fund" in the Prospectus contained within this Registration
Statement.
Item 29. Principal Underwriters
Fund/Plan Broker Services, Inc., located at #2 West Elm
Street, P.O. Box 874, Conshohocken, Pennsylvania 19428-0874, is
the principal underwriter. Fund/Plan Broker Services also serves
as the Principal Underwriter for The Brinson Funds, Inc., CT&T
Funds, Dreman Mutual Fund Group, First Mutual Fund, Inc., Focus
Trust, Inc., The HomeState PA Growth Fund, IAA Trust Mutual
Funds, Matthews International Funds, MCM Funds, Smith Breeden
Series Fund, Smith Breeden Trust, The Stratton Funds, Inc.
Stratton Growth Fund, Inc., Stratton Monthly Dividend Shares,
Inc., The Timothy Plan, Farrell Alpha Strategies and SwissKey
Funds.
(b) The table below sets forth certain information as to
the Underwriter's Directors, Officers and Control Persons:
NAME AND PRINCIPAL POSITION AND OFFICES POSITION
BUSINESS ADDRESS WITH UNDERWRITER AND OFFICES
WITH
REGISTRANT
Kenneth J. Kempf Director, President and None
#2 West Elm Street Principal
Conshohocken, PA
19428-0874
Rocco C. Cavalieri Director and Vice President None
#2 West Elm Street
Conshohocken, PA
19428-0874
Gerald J. Holland Director and Vice President None
#2 West Elm Street
Conshohocken, PA
19428-0874
Joseph M. O'Donnell Director and Vice President None
#2 West Elm Street
Conshohocken, PA
19428-0874
Sandra L. Adams Assistant Vice President None
#2 West Elm Street and Principal
Conshohocken, PA
19428-0874
John H. Leven Treasurer None
#2 West Elm Street
Conshohocken, PA
19428-0874
Mary P. Efstration Secretary None
#2 West Elm Street
Conshohocken, PA
19428-0874
James W. Stratton may be considered a control person of the
Underwriter due to his direct or indirect ownership of Fund/Plan
Services, Inc., the parent of the Underwriter.
(c) Not Applicable.
Item 30. Locations of Accounts and Records.
The accounts, books or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940
and the Rules thereunder will be kept by the Registrant at the
following offices:
(1) Fund/Plan Services, Inc., #2 West Elm Street, P. O. Box
874, Conshohocken, Pennsylvania 19428-0874
(2) Smith Breeden Associates, Inc., 100 Europa Drive,
Suite 200, Chapel Hill, NC 27514
Item 31. Management Services.
There are no management-related service contracts not
discussed in Part A or Part B.
Item 32. Undertakings.
(a) The Registrant previously has undertaken to file a
post-effective amendment within four to six months from the
effective date of Registrant's Registration Statement under the
Securities Act of 1933, containing reasonably current financial
statements, which need not be certified. The Registration
Statement filed on October 20, 1992 was for the purpose of
complying with such undertaking.
(b) The Registrant previously has undertaken to promptly
call a meeting of shareholders for the purpose of voting upon the
question of removal of any trustee or trustees when requested in
writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its
shareholders in accordance with the requirements of Section 16(c)
of the Investment Company Act of 1940 relating to shareholder
communications.
(c) The registrant hereby undertakes to furnish to each
person to whom a prospectus is delivered a copy of the
Registrant's latest annual report to shareholders upon request
and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended,
the Registrant has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chapel Hill, the State
of North Carolina, on the 1st day of August, 1995.
SMITH BREEDEN TRUST
By
Michael J. Giarla
President
<PAGE>
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
Michael J. Giarla President, Principal August 1,1995
Executive Officer, and
Trustee
Douglas T. Breeden* Trustee August 1, 1995
Stephen M. Schaefer* Trustee August 1, 1995
Myron S. Scholes* Trustee August 1, 1995
William F. Sharpe* Trustee August 1, 1995
Marianthe S. Mewkill Principal Financial August 1, 1995
and Accounting Officer
* By:
Marianthe S. Mewkill
*Attorney-in-Fact pursuant to power-of-attorney filed
previously.
AGREEMENT AND DECLARATION OF TRUST
OF
SMITH BREEDEN TRUST
THIS AGREEMENT AND DECLARATION OF TRUST made by the Trustees
hereunder and the holders of shares of beneficial interest issued
hereunder and to be issued hereunder as hereinafter provided:
WITNESSETH that
WHEREAS the Trustees have agreed to manage all property
coming into their hands as trustees of a Massachusetts business
trust in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby direct that this
Agreement and Declaration of Trust be filled with the Secretary of
State of The Commonwealth of Massachusetts and with the Clerk of
every city or town where such association or trust has a usual
place of business, and do hereby declare that they will hold all
cash, securities and other assets, which they may from time to
time acquire in any manner as Trustees hereunder IN TRUST to
manage and dispose of the same upon the following terms and
conditions for the pro rata benefit of the holders from time to
time of Shares in this trust as hereinafter set forth.
ARTICLE I
Name and Definitions
Section 1. This Trust shall be known as Smith Breeden Trust,
and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time
determine.
Section 2. Definitions. Whenever used herein, unless
otherwise required by the context or specifically provided
(a) "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as amended
from time to time;
(b) "Trustees" refers to the Trustees of the Trust named in
Article IV hereof or elected in accordance with such Article;
(c) "Shares" means the equal proportionate units or interest
into which the beneficial interest in the Trust or in the Trust
property belonging to any Series of the Trust (or in the property
belonging to any Series allocable to any Class of that Series) (as
the context may require) shall be divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) "1940 Act" refers to the Investment Company Act of 1940
and the Rules and Regulations thereunder, all as amended from time
to time;
(f) The terms "Commission" and "principal underwriter" shall
have the meanings given them in the 1940 Act;
(g) "Declaration of Trust" and "this Declaration" shall mean
this Agreement and Declaration of Trust, as amended or restated
from time to time;
(h) "Bylaws" shall mean the Bylaws of the Trust as amended
from time to time;
(i) "Series Company" refers to the form of registered open-
end investment company described in Section 18(f)(2) of the 1940
Act or in any successor statutory provision;
(j) "Series" refers to Series of Shares established and
designated under or in accordance with the provisions of Article
III; and
(k) "Class" refers to any Class of Shares of a Series
established and designated under or in accordance with the
provisions of Article III. The Shares of a Class shall represent
a subset of Shares of a Series and the Shares of each Class,
together with the Shares of all other Classes of the same Series,
shall constitute all Shares of that Series.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed
investment primarily in securities (including options), debt
instruments, money market instruments, commodities, commodity
contracts and options thereon.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall at all times be divided into an
unlimited number of Shares, without par value. Subject to the
provisions of Section 6 of this Article III, each Share shall have
the voting rights as provided in Article V hereof, and holders of
the Shares of any Series or Class shall be entitled to receive
dividends, when and as declared with respect thereto in the manner
provided in Article
VI, Section 1 hereof. No Share shall have any priority or
preference over any other Share of the same Series and Class with
respect to dividends or distributions upon termination of the
Trust or of such Series or Class made pursuant to Article IX,
Section 4 hereof. Unless the Trustees have authorized the
issuance of Shares of a Series in two or more Classes, all
dividends and distributions shall be made ratably among all
Shareholders of a particular Series from the assets belonging to
such Series according to the number of Shares of such Series held
of record by such Shareholders on the record date for any dividend
or on the date of termination, as the case may be. The Trustees
may from time to time divide or combine the Shares of any
particular Series or Class into a greater or lesser number of
Shares of that Series or Class without thereby changing the
proportionate beneficial interest of the Shares of that Series or
Class in the assets belonging to that Series (or allocable to the
Shares of that Class) or in any way affecting the rights of Shares
of any other Series or Class.
Section 2. Ownership of Shares. The ownership of Shares
shall be recorded on the books of the Trust or a transfer or
similar agent for the Trust, which books shall be maintained
separately for the Shares of each Series. No certificates
certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees
may make such rules as they consider appropriate for the transfer
of Shares of each Series and Class and similar matters. The
record books of the Trust as kept by the Trust or any transfer or
similar agent, as the case may be, shall be conclusive as to who
are the Shareholders of each Series and Class and as to the number
of Shares of each Series and Class held from time to time by each.
Section 3. Investments in the Trust. The Trustees shall
accept investments in the Trust from such persons and on such
terms and for such consideration as they from time to time
authorize.
Section 4. Status of Shares and Limitation of Personal
Liability. Shares shall be deemed to be personal property giving
only the rights provided in this instrument. Every Shareholder by
virtue of having become a Shareholder shall be held to have
expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the
continuance of the Trust shall not operate to terminate the same
nor entitle the representative of any deceased Shareholder to an
accounting or to take any action in court or elsewhere against the
Trust or the Trustees, but entitles such representative only to
the rights of said deceased Shareholder under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title
in or to the whole or any part of the Trust property or right to
call for a partition or division of the same or for an accounting,
nor shall the ownership of Shares constitute the Shareholders
partners of each other. Neither the Trust nor the Trustees, nor
any officer,
employee or agent of the Trust shall have any power to bind
personally any Shareholders, nor except as specifically provided
herein to call upon any Shareholder for the payment of any sum of
money or assessment whatsoever other than such as the Shareholder
may at any time personally agree to pay.
Section 5. Power of Trustees to Change Provisions Relating
to Shares. Notwithstanding any other provisions of this
Declaration of Trust and without limiting the power of the
Trustees to amend the Declaration of Trust as provided elsewhere
herein, the Trustees shall have the power to amend this
Declaration of Trust, at any time and from time to time, in such
manner as the Trustees may determine in their sole discretion,
without the need for Shareholder action, so as to add to, delete,
replace or otherwise modify any provisions relating to the Shares
contained in this Declaration of Trust for the purpose of (i)
responding to or complying with any regulations, orders, rulings
or interpretations of any governmental agency or any laws, now or
hereafter applicable to the Trust, or (ii) designating and
establishing Series or Classes in addition to the Series or
Classes established in Section 6 of this Article III; provided
that before adopting any such amendment in clause (i) without
Shareholder approval the Trustees shall determine that it is
consistent with the fair and equitable treatment of all
Shareholders. The establishment and designation of any Series or
Class of Shares in addition to the Series or Classes established
and designated in Section 6 of this Article III shall be effective
upon the execution by a majority of the then Trustees of an
amendment to this Declaration of Trust, taking the form of a
complete restatement or otherwise, setting forth such
establishment and designation and the relative rights and
preferences of such Series or Class, or as otherwise provided in
such instrument.
Without limiting the generality of the foregoing, the
Trustees may, for the above-stated purposes, amend the Declaration
of Trust to:
(a) create one or more Series or Classes of Shares (with respect
to or in addition to any Series or Classes already existing or
otherwise) with such rights and preferences and such eligibility
requirements for investment therein as the Trustees shall
determine, and reclassify any or all outstanding Shares as shares
of particular Series or Classes in accordance with such
eligibility requirements;
(b) amend any of the provisions set forth in paragraphs (a)
through (j) of Section 6 of this Article III;
(c) combine one or more Series or Classes of Shares into a
single Series or Class on such terms and conditions as the
Trustees shall determine;
(d) change or eliminate any eligibility requirements for
investment in Shares of any Series or Class, including without
limitation the power to provide for the issue of Shares of any
Series or Class in connection with any merger or consolidation of
the Trust with another trust or company or any acquisition by the
Trust of part or all of the assets of another trust or company;
(e) change the designation of any Series or Class of Shares;
(f) change the method of allocating dividends among the various
Series and Classes of Shares;
(g) allocate any specific assets or liabilities of the Trust or
any specific items of income or expense of the Trust to one or
more Series or Classes of Shares;
(h) specifically allocate assets to any or all Series or Classes
of Shares or create one or more additional Series or Classes of
Shares which are preferred over all other Series or Classes of
Shares in respect of assets specifically allocated thereto or any
dividends paid by the Trust with respect to any net income,
however determined, earned from the investment and reinvestment of
any assets so allocated or otherwise and provide for any special
voting or other rights with respect to such Series or Classes; or
(i) divide one or more Series of Shares into one or more Classes
on such terms and conditions as the Trustees may determine.
Section 6. Establishment and Designation of Series. Without
limiting the authority of the Trustees set forth in Section 5,
inter alia, to establish and designate any further Series or
Classes or to modify the rights and preferences of any Series or
Classes, the "Smith Breeden Index Fund" shall be, and is hereby,
established and designated.
Shares of each Series established in this Section 6 shall have
the following relative rights and preferences:
(a) Assets Belonging to Series. All consideration received by
the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested
or reinvested, all income, earnings, profits, and proceeds thereof
from whatever source derived, including, without limitation, any
proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of
such proceeds in whatever form the same may be, shall irrevocably
belong to that Series for all purposes, subject only to the rights
of creditors, and shall be so recorded upon the books of account
of the Trust. Such consideration, assets, income, earnings,
profits and proceeds thereof, from whatever source derived,
including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds, in whatever form
the same may be, are herein referred to as "assets belonging to"
that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which
are not readily identifiable as belonging to any particular Series
(collectively "General Assets"), the Trustees shall allocate such
General Assets to, between or among any one or more of the Series
established and designated from time to time in such manner and on
such basis as they, in their sole discretion, deem fair and
equitable, and any General Asset so allocated to a particular
Series shall belong to that Series. Each such allocation by the
Trustees shall be conclusive and binding upon the Shareholders of
all Series for all purposes.
(b) Liabilities Belonging to Series. The assets belonging to
each particular Series shall be charged solely with the
liabilities of the Trust in respect to that Series, expenses,
costs, charges and reserves attributable to that Series, and any
general liabilities of the Trust which are not readily
identifiable as belonging to any particular Series but which are
allocated and charged by the Trustees to and among any one or more
of the Series established and designated from time to time in a
manner and on such basis as the Trustees in their sole discretion
deem fair and equitable. The liabilities, expenses, costs,
charges, and reserves so charged to a Series are herein referred
to as "liabilities belonging to" that Series. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the holders of all Series for
all purposes.
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration,
including, without limitation, Article VI, no dividend or
distribution (including, without limitation, any distribution paid
upon termination of the Trust or of any Series) with respect to,
nor any redemption or repurchase of, the Shares of any Series
shall be effected by the Trust other than from the assets
belonging to such Series, nor shall any Shareholder of any
particular Series otherwise have any right or claim against the
assets belonging to any other Series except to the extent that
such Shareholder has such a right or claim hereunder as a
Shareholder of such other Series.
(d) Voting. Notwithstanding any of the other provisions of this
Declaration, including, without limitation, Section 1 of Article
V, the Shareholders of any particular Series or Class shall not be
entitled to vote on any matters as to which such Series or Class
is not affected. On any matter submitted to a vote of
Shareholders, all Shares of the Trust then entitled to vote shall
be voted by individual Series, unless otherwise required by the
1940 Act or other applicable law or as specifically required under
this Declaration or the Bylaws or as otherwise determined by the
Trustees.
(e) Equality. All the Shares of each particular Class of a
Series shall represent an equal proportionate interest in the
assets and liabilities belonging to that Series allocable to that
Class and all Shares of each particular Series shall represent an
equal proportionate interest in the assets belonging to that
Series (subject to the liabilities belonging to that Series), and
each Share of any particular Series shall be equal to each other
Share of that Series.
(f) Fractions. Any fractional Share of a Series or Class shall
carry proportionately all the rights and obligations of a whole
share of that Series or Class, including rights with respect to
voting, receipt of dividends and distributions, redemption of
Shares and termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the authority
to provide that the holders of Shares of any Series shall have the
right to exchange said Shares for Shares of one or more other
Series of Shares in accordance with such requirements and
procedures as may be established by the Trustees.
(h) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series
or Class unless otherwise required by applicable law, to combine
the assets and liabilities belonging to any two or more Series or
Classes into assets and liabilities belonging to a single Series
or Class.
(i) Elimination of Series. At any time that there are no Shares
outstanding of any particular Series previously established and
designated, the Trustees may amend this Declaration of Trust to
abolish that Series and to rescind the establishment and
designation thereof, such amendment to be effected in the manner
provided in Section 5 of this Article III.
(j) Assets and Liabilities Allocable to a Class. The assets and
liabilities belonging to a Series shall be fully allocated among
all the Classes of that Series. For purposes of determining the
assets and liabilities belonging to a Series which are allocable
to a Class of that Series, subject to the provisions of paragraph
(f) of Section 5 of this Article III, the provisions of paragraphs
(a) and (b) of this Section 6 shall apply, mutatis mutandis, as if
each Class were a Series.
Section 7. Indemnification of Shareholders. In case any
Shareholder or former Shareholder shall be held to be personally
liable solely by reason of his or her being or having been a
Shareholder of the Trust or of a particular Series and not because
of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets of the Series of
which he is a Shareholder or former Shareholder to be held
harmless from and indemnified against all loss and expense arising
from such liability.
Section 8. No Preemptive Rights. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares or
other securities issued by the Trust.
Section 9. Derivative Claims. No Shareholder shall have the
right to bring or maintain any court action, proceeding or claim
on behalf of this Trust or any Series without first making demand
on the Trustees requesting the Trustees to bring or maintain such
action, proceeding or claim. Such demand shall be excused only
when the plaintiff makes a specific showing that irreparable
injury to the Trust or Series would otherwise result. Such demand
shall be mailed to the Clerk of the Trust at the Trust's principal
office and shall set forth in reasonable detail the nature of the
proposed court action, proceeding or claim and the essential facts
relied upon by the Shareholder to support the allegations made in
the demand. The Trustees shall consider such demand within 45
days of its receipt by the Trust. In their sole discretion, the
Trustees may submit the matter to a vote of Shareholders of the
Trust or Series, as appropriate. Any decision by the Trustees to
bring, maintain or settle (or not to bring, maintain or settle)
such court action, proceeding or claim, or to submit the matter to
a vote of Shareholders shall be made by the Trustees in their
business judgment and shall be binding upon the Shareholders. Any
decision by the Trustees to bring or maintain a court action,
proceeding or suit on behalf of the Trust or a Series shall be
subject to the right of the Shareholders under Article V, Section
1 hereof to vote on whether or not such court action, proceeding
or suit should or should not be brought or maintained.
ARTICLE IV
The Trustees
Section 1. Election and Tenure. The initial Trustees shall be
Gerald J. Madigan and Mark P. Goshko. Trustees may fix the number
of Trustees, fill vacancies in the Trustees, including vacancies
arising from an increase in the number of Trustees, or remove
Trustees with or without cause. Each Trustee shall serve during
the continued lifetime of the Trust until he dies, resigns or is
removed, or, if sooner, until the next meeting of Shareholders
called for the purpose of electing Trustees and until the election
and qualification of his successor. Any Trustee may resign at any
time by written instrument signed by him and delivered to any
officer of the Trust or to a meeting of the Trustees. Such
resignation shall be effective upon receipt unless specified to be
effective at some other time. Except to the extent expressly
provided in a written agreement with the Trust, no Trustee
resigning and no Trustee removed shall have any right to any
compensation for any period following his resignation or removal,
or any right to damages on account of such removal. The
Shareholders may fix the number of Trustees and elect Trustees at
any meeting of Shareholders called by the Trustees for that
purpose.
Section 2. Effect of Death, Resignation, Etc. of a Trustee. The
death, declination, resignation, retirement, removal or incapacity
of the Trustees, or any of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust.
Section 3. Powers. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed
by the Trustees, and they shall have all powers necessary or
convenient to carry out that responsibility including the power to
engage in securities transactions of all kinds on behalf of the
Trust. Without limiting the foregoing, the Trustees may adopt
Bylaws not inconsistent with this Declaration of Trust providing
for the regulation and management of the affairs of the Trust and
may amend and repeal them to the extent that such Bylaws do not
reserve that right to the Shareholders; they may fill vacancies in
or remove from their number (including any vacancies created by an
increase in the number of Trustees); they may remove from their
number with or without cause; they may elect and remove such
officers and appoint and terminate such agents as they consider
appropriate; they may appoint from their own number and terminate
one or more committees consisting of two or more Trustees which
may exercise the powers and authority of the Trustees to the
extent that the Trustees determine; they may employ one or more
custodians of the assets of the Trust and may authorize such
custodians to employ subcustodians and to deposit all or any part
of such assets in a system or systems for the central handling of
securities or with a Federal Reserve Bank; they may retain a
transfer agent or a shareholder servicing agent, or both; they may
provide for the distribution of Shares by the Trust, through one
or more principal underwriters or otherwise; they may set record
dates for the determination of Shareholders with respect to
various matters; and in general they may delegate such authority
as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the
Trust or to any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options with respect to or otherwise deal in any
property rights relating to any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property; and to
execute and deliver proxies or powers of attorney to such person
or persons as the Trustees shall deem proper, granting to such
person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;
(d) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable
form, or in its own name or in the name of a custodian or
subcustodian or a nominee or nominees or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or
issuer of any security which is held in the Trust; to consent to
any contract, lease, mortgage, purchase or sale of property by
such corporation or issuer; and to pay calls or subscriptions with
respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that
connection to deposit any security with, or transfer any security
to, any such committee, depositary or trustee, and to delegate to
them such power and authority with relation to any security
(whether or not so deposited or transferred) as the Trustees shall
deem proper, and to agree to pay, and to pay, such portion of the
expenses and compensation of such committee, depositary or trustee
as the Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor
of or against the Trust or any matter in controversy, including
but not limited to claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property;
(k) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or
suretyship, or otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust property such
insurance as they may deem necessary or appropriate for the
conduct of the business, including without limitation, insurance
policies insuring the assets of the Trust and payment of
distributions and principal on its portfolio investments, and
insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust individually against all
claims and liabilities of every nature arising by reason of
holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any
such person as Trustee, officer, employee, agent, investment
adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to
constitute negligence, whether or not the Trust would have the
power to indemnify such person against liability; and
(m) To pay pensions as deemed appropriate by the Trustees and to
adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement,
incentive and benefit plans, trusts and provisions, including the
purchasing of life insurance and annuity contracts as a means of
providing such retirement and other benefits, for any or all of
the Trustees, officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any
present or future law or custom in regard to investments by
Trustees. The Trustees shall not be required to obtain any court
order to deal with any assets of the Trust or take any other
action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or
income of the Trust, or partly out of principal and partly out of
income, as they deem fair, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the Trust, or
in connection with the management thereof, including but not
limited to, the Trustee's compensation and such expenses and
charges for the services of the Trust's officers, employees,
investment adviser or manager, principal underwriter, auditor,
counsel, custodian, transfer agent, shareholder servicing agent,
and such other agents or independent contractors and such other
expenses and charges as the Trustees may deem necessary or proper
to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees
shall have the power, as frequently as they may determine, to
cause each Shareholder, or each Shareholder of any particular
Series, to pay directly, in advance or arrears, for charges of the
Trust's custodian or transfer, shareholder servicing or similar
agent, an amount fixed from time to time by the Trustees, by
setting off such charges due from such Shareholder from declared
but unpaid dividends owed such Shareholder and/or by reducing the
number of Shares in the account of such Shareholder by that number
of full and/or fractional Shares which represents the outstanding
amount of such charges due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of
the assets of the Trust shall at all times be considered as vested
in the Trustees.
Section 7. Advisory, Management and Distribution Contracts.
Subject to such requirements and restrictions as may be set forth
in the Bylaws, the Trustees may, at any time and from time to
time, contract for exclusive or nonexclusive advisory and/or
management services for the Trust or for any Series with
Caterpillar Investment Management Ltd. or any other partnership,
corporation, trust, association or other organization (the
"Manager"); and any such contract may contain such other terms as
the Trustees may determine, including without limitation,
authority for a Manager to determine from time to time without
prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of
the assets of the Trust shall be held uninvested and to make
changes in the Trust's investments. The Trustees may also, at any
time and from time to time, contract with the Manager or any other
partnership, corporation, trust, association or other
organization, appointing it exclusive or nonexclusive distributor
or principal underwriter for the Shares, every such contract to
comply with such requirements and restrictions as may be set forth
in the Bylaws; and any such contract may contain such other terms
as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the
Trust is a shareholder, director, officer, partner, trustee,
employee, manager, adviser, principal underwriter, distributor or
affiliate or agent of or for any partnership, corporation, trust,
association, or other organization, or of or for any parent or
affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other agency
contract may have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a
Shareholder or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or
other organization with which an advisory or management contract
or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract may have
been or may hereafter be made also has an advisory or management
contract, or principal underwriter's or distributor's contract,
or transfer, shareholder servicing or other agency contract with
one or more other corporations, trusts, associations, or other
organizations, or has other business or interests, shall not
affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or
executing the same or create any liability or accountability to
the Trust or its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. The Shareholders shall have power to
vote only (i) for the election of Trustees as provided in Article
IV, Section 1, (ii) with respect to any amendment of this
Declaration of Trust to the extent and as provided in Article IX,
Section 8, (iii) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court
action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the
Trust or the Shareholders, (iv) with respect to the termination of
the Trust or any Series to the extent and as provided in Article
IX, Section 4, and (v) with respect to such additional matters
relating to the Trust as may be required by this Declaration of
Trust, the Bylaws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. Each whole Share
shall be entitled to one vote as to any matter on which it is
entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person
or by proxy. A proxy with respect to Shares held in the name of
two or more persons shall be valid if executed by any one of them
unless at or prior to exercise of the proxy the Trust receives a
specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its
exercise and the burden of proving invalidity shall rest on the
challenger. At any time when no Shares of a Series or Class are
outstanding the Trustees may exercise all rights of Shareholders
of that Series or Class with respect to matters affecting that
Series or Class and may with respect to that Series or Class take
any action required by law, this Declaration of Trust or the
Bylaws to be taken by the Shareholders.
Section 2. Voting Power and Meetings. Meetings of the
Shareholders may be called by the Trustees for the purpose of
electing Trustees as provided in Article IV, Section 1 and for
such other purposes as may be prescribed by law, by this
Declaration of Trust or by the Bylaws. Meetings of the
Shareholders may also be called by the Trustees from time to time
for the purpose of taking action upon any other matter deemed by
the Trustees to be necessary or desirable. A meeting of
Shareholders may be held at any place designated by the Trustees.
Written notice of any meeting of Shareholders shall be given or
caused to be given by the Trustees by mailing such notice at least
seven days before such meeting, postage prepaid, stating the time
and place of the meeting, to each Shareholder at the Shareholder's
address as it appears on the records of the Trust. Whenever
notice of a meeting is required to be given to a Shareholder under
this Declaration of Trust or the Bylaws, a written waiver thereof,
executed before or after the meeting by such Shareholder or his
attorney thereunto authorized and filed with the records of the
meeting, shall be deemed equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger
quorum is required by law, by the Bylaws or by this Declaration of
Trust, 10% of the Shares entitled to vote shall constitute a
quorum at a Shareholders' meeting. When any one or more Series or
Class is to vote as a single class separate from any other Shares
which are to vote on the same matters as a separate class or
classes, 10% of the Shares of each such class entitled to vote
shall constitute a quorum at a Shareholder's meeting of that
class. Any meeting of Shareholders may be adjourned from time to
time by a majority of the votes properly cast upon the question,
whether or not a quorum is present, and the meeting may be held as
adjourned within a reasonable time after the date set for the
original meeting without further notice. When a quorum is present
at any meeting, a majority of the Shares voted shall decide any
questions and a plurality shall elect a Trustee, except when a
larger vote is required by any provision of this Declaration of
Trust or the Bylaws or by law. If any question on which the
Shareholders are entitled to vote would adversely affect the
rights of any Series or Class of Shares, the vote of a majority
(or such larger vote as is required as aforesaid) of the Shares of
such Series or class which are entitled to vote, voting
separately, shall be required to decide such question.
Section 4. Action by Written Consent. Any action taken by
Shareholders may be taken without a meeting if Shareholders
holding a majority of the Shares entitled to vote on the matter
(or such larger proportion thereof as shall be required by any
express provision of this Declaration of Trust or by the Bylaws)
and/or holding a majority (or such larger proportion as aforesaid)
of the Shares of any Series or Class entitled to vote separately
on the matter consent to the action in writing and such written
consents are filed with the records of the meetings of
Shareholders. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the
Shareholders of any Series or Class who are entitled to vote or
act at any meeting or any adjournment thereof, the Trustees may
from time to time fix a time as the record date for determining
the Shareholders of such Series or Class having the right to
notice of and to vote at such a meeting and any adjournment
thereof, and in such case only Shareholders of record on such
record date shall have such right, notwithstanding any transfer of
Shares on the books of the Trust after the record date. For the
purpose of determining the Shareholders of any Series or Class who
are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a date, which
shall be before the date for the payment of such dividend or such
other payment, as the record date for determining the Shareholders
of such Series or Class having the right to receive such dividend
or distribution. Without fixing a record date the Trustees may
for voting and/or distribution purposes close the register or
transfer books for one or more Series or Class for all or any part
of the period between a record date and a meeting of shareholders
or the payment of a distribution. Nothing in this section shall
be construed as precluding the Trustees from setting different
record dates for different Series or Classes.
Section 6. Additional Provisions. The Bylaws may include
further provisions for Shareholders' votes and meetings and
related matters.
ARTICLE VI
Net Income, Distributions, and Redemptions and Repurchases
Section 1. Distributions of Net Income. The Trustees shall each
year, or more frequently if they so determine in their sole
discretion, distribute to the Shareholders of each Series or
Class, in shares of that Series or Class, cash or otherwise, an
amount approximately equal to the net income attributable to the
assets belonging to such Series or Class and may from time to time
distribute to the Shareholders of each Series or Class, in shares
of that Series or Class, cash or otherwise, such additional
amounts, but only from the assets belonging to such Series (or
allocable to such Class), as they may authorize. All dividends
and distributions on Shares of a particular Series or Class shall
be distributed pro rata to the holders of that Series or Class in
proportion to the number of Shares of that Series or Class held by
such holders and recorded on the books of the Trust at the date
and time of record established for that payment of such dividend
or distributions.
The manner of determining net income, income, asset values,
capital gains, expenses, liabilities and reserves of any Series or
Class may from time to time be altered as necessary or desirable
in the judgment of the Trustees to conform such manner of
determination to any other method prescribed or permitted by
applicable law. Net income shall be determined by the Trustees or
by such person as they may authorize at the times and in the
manner provided in the Bylaws. Determinations of net income of
any Series or Class and determination of income, asset values,
capital gains, expenses, and liabilities made by the Trustees, or
by such person as they may authorize, in good faith, shall be
binding on all parties concerned. The foregoing sentence shall
not be construed to protect any Trustee, officer or agent of the
Trust against any liability to the Trust or its security holders
to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office.
If, for any reason, the net income of any Series or Class
determined at any time is a negative amount, in the discretion of
the Trustees the pro rata share of such negative amount allocable
to each Shareholder of such Series or Class may constitute a
liability of such Shareholder to that Series or Class which shall
be paid out of such Shareholder's account at such times and in
such manner as the Trustees may from time to time determine (x)
out of the accrued dividend account of such Shareholder, (y) by
reducing the number of Shares of that Series or Class in the
account of such Shareholder, or (z) otherwise.
Section 2. Redemptions and Repurchases. The Trust shall
purchase such Shares as offered by any Shareholder for redemption,
upon the presentation of a proper instrument of transfer together
with a request directed to the Trust or a person designated by the
Trust that the Trust purchase such Shares or in accordance with
such other procedures for redemption as the Trustees may from time
to time authorize; and the Trust will pay therefor the net asset
value thereof, as determined in accordance with the Bylaws, the
1940 Act and the rules of the Commission. Payment for said Shares
shall be made by the Trust to the Shareholder within seven days
after the date on which the request is made or in accordance with
such other procedures, consistent with the 1940 Act and the rules
of the Commission, as the Trustees may from time to time
authorize. The obligation set forth in this Section 2 is subject
to the provision that in the event that at any time the New York
Stock Exchange (the "Exchange") is closed for other than weekends
or holidays, or if permitted by the rules of the Commission during
periods when trading on the Exchange is restricted or during any
emergency which makes it impracticable for the Trust to dispose of
the investments of the applicable Series or to determine fairly
the value of the net assets belonging to such Series or during any
other period permitted by order of the Commission for the
protection of investors, such obligations may be suspended or
postponed by the Trustees. The Trust may also purchase or
repurchase Shares at a price not exceeding the net asset value of
such Shares in effect when the purchase or repurchase or any
contract to purchase or repurchase is made.
The redemption price may in any case or cases be paid wholly or
partly in kind if the Trustees determine that such payment is
advisable in the interests of the remaining Shareholders of the
Series or Class the Shares of which are being redeemed. In making
any such payment wholly or partly in kind, the Trust shall, so far
as may be practicable, deliver assets which approximate the
diversification of all of the assets belonging at the time to the
Series or Class the Shares of which are being redeemed. Subject
to the foregoing, the fair value, selection and quantity of
securities or other property so paid or delivered as all or part
of the redemption price may be determined by or under authority of
the Trustees. In no case shall the Trust be liable for any delay
of any corporation or other person in transferring securities
selected for delivery as all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust
shall have the right at its option and at any time to redeem
Shares of any Shareholder at the net asset value thereof as
described in Section 1 of this Article VI: (i) if at such time
such Shareholder owns Shares of any Series or Class having an
aggregate net asset value of less than an amount determined from
time to time by the Trustees; or (ii) to the extent that such
Shareholder owns Shares equal to or in excess of a percentage
determined from time to time by the Trustees of the outstanding
Shares of the Trust or of any Series or Class.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled
to reasonable compensation from the Trust; they may fix the amount
of their compensation. Nothing herein shall in any way prevent
the employment of any Trustee for advisory, management, legal,
accounting, investment banking or other services and payment of
the same by the Trust.
Section 2. Limitation of Liability. The Trustees shall not be
responsible or liable in any event for any neglect or wrong-doing
of any officer, agent, employee, Manager or principal underwriter
of the Trust, nor shall any Trustee be responsible for the act or
omission of any other Trustee, but nothing herein contained shall
protect any Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his office.
Every note, bond, contract, instrument, certificate or
undertaking and every other act or thing whatsoever issued,
executed or done by or on behalf of the Trust or the Trustees or
any of them in connection with the Trust shall be conclusively
deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
ARTICLE VIII
Indemnification
Section 1. Trustees, Officers, Etc. The Trust shall indemnify
each of its Trustees and officers (including persons who serve at
the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder,
creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees reasonably
incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil
or criminal, before any court or administrative or legislative
body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such Covered Person
may be or may have been threatened, while in office or thereafter,
by reason of being or having been such a Covered Person except
with respect to any matter as to which such Covered Person shall
have been finally adjudicated in any such action, suit or other
proceeding to be liable to the Trust or its Shareholders by reason
of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered
Person's office. Expenses, including counsel fees so incurred by
any such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by Trust in advance of
the final disposition of any such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such Covered Person
to repay amounts so paid to the Trust if it is ultimately
determined that indemnification of such expenses is not authorized
under this Article, provided, however, that either (a) such
Covered Person shall have provided appropriate security for such
undertaking, (b) the Trust shall be insured against losses arising
from any such advance payments or (c) either a majority of the
disinterested Trustees acting on the matter (provided that a
majority of the disinterested Trustees then in office act on the
matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts
(as opposed to a full trial type inquiry) that there is reason to
believe that such Covered Person will be found entitled to
indemnification under this Article.
Section 2. Compromise Payment. As to any matter disposed of
(whether by a compromise payment, pursuant to a consent decree or
otherwise) without an adjudication by a court, or by any other
body before which the proceeding was brought, that such Covered
Person is liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her
office, indemnification shall be provided if (a) approved, after
notice that it involves such indemnification, by at least a
majority of the disinterested Trustees acting on the matter
(provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a
review of readily available facts (as opposed to a full trial type
inquiry) that such Covered Person is not liable to the Trust or
its Shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his or her office, or (b) there has been obtained
an opinion in writing of independent legal counsel, based upon a
review of readily available facts (as opposed to a full trial type
inquiry) to the effect that such indemnification would not protect
such Person against any liability to the Trust to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his or her office. Any approval pursuant to this
Section shall not prevent the recovery from any Covered Person of
any amount paid to such Covered Person in accordance with this
Section as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction to have been
liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such Covered Person's
office.
Section 3. Indemnification Not Exclusive. The right of
indemnification hereby provided shall not be exclusive of or
affect any other rights to which such Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person"
shall include such person's heirs, executors and administrators
and a "disinterested Trustee" is a Trustee who is not an
"interested person" of the Trust as defined in Section 2(a)(19) of
the 1940 Act (or who has been exempted from being an "interested
person" by any rule, regulation or order of the Commission), and
against whom none of such actions, suits or other proceedings or
another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this
Article shall affect any rights to indemnification to which
personnel of the Trust, other than Trustees or officers, and other
persons may be entitled by contract or otherwise under law, nor
the power of the Trust to purchase and maintain liability
insurance on behalf of any such person; provided, however, that
the Trust shall not purchase or maintain any such liability
insurance in contravention of applicable law, including without
limitation the 1940 Act.
Section 4. Shareholders. In case any Shareholder or former
Shareholder shall be held to be personally liable solely by reason
of his or her being or having been a Shareholder and not because
of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and
indemnified against all loss and expense arising from such
liability, but only out of the assets of the particular Series of
Shares of which he or she is or was a Shareholder.
ARTICLE IX
Miscellaneous
Section 1. Trustees, Shareholders, Etc. Not Personally Liable;
Notice. All persons extending credit to, contracting with or
having any claim against the Trust or any Series shall look only
to the assets of the Trust or to the assets of that particular
Series for payment under such credit, contract or claim; and
neither Shareholders nor the Trustees, nor any of the Trust's
officers, employees or agents, whether past, present or future,
shall be personally liable therefor. Nothing in this Declaration
of Trust shall protect any Trustee against any liability to which
such Trustee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or
undertaking made or issued on behalf of the Trust by the Trustees,
by any officers or officer or otherwise shall give notice that
this Declaration of Trust is on file with the Secretary of State
of The Commonwealth of Massachusetts and shall recite that the
same was executed or made by or on behalf of the Trust or by them
as Trustee or Trustees or as officer or officers or otherwise and
not individually and that the obligations of such instrument are
not binding upon any of them or the shareholders individually but
are binding only upon the assets and property of the Trust or upon
the assets belonging to the Series for the benefit of which the
Trustees have caused the note, bond, contract, instrument,
certificate or undertaking to be made or issued, and may contain
such further recital as he or they may deem appropriate, but the
omission of any such recital shall not operate to bind any Trustee
or Trustees or officer or officers or Shareholders or any other
person individually.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond
or Surety. The exercise by the Trustees of their powers and
discretions hereunder shall be binding upon everyone interested.
A Trustee shall be liable for his or her own willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and for nothing
else, and shall not be liable for errors of judgment or mistakes
of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this
Declaration of Trust, and shall be under no liability for any act
or omission in accordance with such advice or for failing to
follow such advice. The Trustees shall not be required to give
any bond as such, nor any surety if a bond is required.
Section 3. Liability of Third Persons Dealing with Trustees. No
person dealing with the Trustees shall be bound to make any
inquiry concerning the validity of any transaction made or to be
made by the Trustees or to see to the application of any payments
made or property transferred to the Trust or upon its order.
Section 4. Termination of Trust or Series. Unless terminated as
provided herein, the Trust shall continue without limitation of
time. The Trust may be terminated at any time by vote of at least
66-2/3% of the Shares of each Series entitled to vote and voting
separately by Series or by the Trustees by written notice to the
Shareholders. Any Series may be terminated at any time by vote of
at least 66-2/3% of the Shares of that Series or by the Trustees
by written notice to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may
be), after paying or otherwise providing for all charges, taxes,
expenses and liabilities belonging, severally, to each Series (or
the applicable Series, as the case may be), whether due or accrued
or anticipated as may be determined by the Trustees, the Trust
shall in accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets belonging, severally, to
each Series (or the applicable Series, as the case may be), to
distributable form in cash or shares or other securities, or any
combination thereof, and distribute the proceeds belonging to each
Series (or the applicable Series, as the case may be), to the
Shareholders of that Series, as a Series, ratably according to the
number of Shares of that Series held by the several Shareholders
on the date of termination.
Section 5. Merger and Consolidation. The Trustees may cause the
Trust to be merged into or consolidated with another trust or
company or its shares exchanged under or pursuant to any state or
federal statute, if any, or otherwise to the extent permitted by
law, if such merger or consolidation or share exchange has been
authorized by vote of a majority of the outstanding Shares, as
such phrase is defined in the 1940 Act; provided that in all
respects not governed by statute or applicable law, the Trustees
shall have power to prescribe the procedure necessary or
appropriate to accomplish a sale of assets, merger or
consolidation.
Section 6. Filing of Copies, References, Headings. The original
or a copy of this instrument and of each amendment hereto shall be
kept at the office of the Trust where it may be inspected by any
Shareholder. A copy of this instrument and of each amendment
hereto shall be filed by the Trust with the Secretary of State of
The Commonwealth of Massachusetts and with any other governmental
office where such filing may from time to time be required.
Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such amendments have
been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original,
may rely on a copy certified by an officer of the Trust to be a
copy of this instrument or of any such amendments. In this
instrument and in any such amendment, references to this
instrument, and all expressions like "herein," "hereof" and
"hereunder" shall be deemed to refer to this instrument as amended
or affected by any such amendments. Headings are placed herein
for convenience of reference only and shall not be taken as a part
hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be
executed in any number of counterparts each of which shall be
deemed an original.
Section 7. Applicable Law. This Declaration of Trust is made in
The Commonwealth of Massachusetts, and it is created under and is
to be governed by and construed and administered according to the
laws of said Commonwealth. The Trust shall be of the type
commonly called a Massachusetts business trust, and without
limiting the provisions hereof, the Trust may exercise all powers
which are ordinarily exercised by such a trust.
Section 8. Amendments. This Declaration of Trust may be amended
at any time by an instrument in writing signed by a majority of
the then Trustees when authorized so to do by vote of a majority
of the Shares entitled to vote, except that amendments described
in Article III, Section 5 hereof or having the purpose of changing
the name of the Trust or of supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or
inconsistent provision contained herein shall not require
authorization by Shareholder vote.
IN WITNESS WHEREOF, the initial Trustees as aforesaid does hereto
set their hands as of the dates indicated below.
Mark P. Goshko, Initial Trustee
Gerald J. Madigan, Initial Trustee
Registered Agent -
CT Corporation System
2 Oliver St.
Boston MA 02109
STATE OF NORTH CAROLINA )
: ss.
COUNTY OF ORANGE )
Then personally appeared before me Gerald J. Madigan, who
acknowledged the foregoing Agreement and Declaration of Trust to
be his free act and deed.
Witness my hand and notarial seal.
Dated: December 17, 1991 Sherri C. Welch
Notary Public
My commission expires:
October 16, 1994
<PAGE>
COMMONWEALTH OF MASSACHUSETTS )
) SS.
COUNTY OF SUFFOLK )
Then personally appeared before me Mark P. Goshko the last person
to execute this Agreement and Declaration of Trust who
acknowledged the foregoing instrument to be his free act and deed.
Witness by hand and notarial seal.
Dated: December 18, 1991 Diane Rotundi
Notary Public
My commission expires:
October 16, 1992
BYLAWS
OF
SMITH BREEDEN TRUST
ARTICLE 1
Agreement and Declaration of Trust and
Principal Office
1.1. Agreement and Declaration of Trust. These Bylaws
shall be subject to the Agreement and Declaration of Trust, as
from time to time in effect (the "Declaration of Trust"), of
Caterpillar Investment Trust, the Massachusetts business trust
established by the Declaration of Trust (the "Trust").
1.2. Principal Office of the Trust. The initial principal
office of the Trust shall be located in Chapel Hill, North
Carolina. The Trust may have such other offices within or
without Massachusetts as the Trustee may determine or as they may
authorize.
ARTICLE 2
Meetings of Trustees
2.1. Regular Meetings. Regular meetings of the Trustees
may be held without call or notice at such places and at such
times as the Trustees may from time to time determine, provided
that notice of the first regular meeting following any such
determination shall be given to absent Trustees.
2.2. Special Meetings. Special meetings of the Trustees
may be held at any time and at any place designated in the call
of the meeting when called by the Chairman of the Trustees, the
President or the Treasurer or by two or more Trustees, sufficient
notice thereof being given to each Trustee by the Clerk or an
Assistant Clerk or by the officer or the Trustees calling the
meeting.
2.3. Notice. It shall be sufficient notice to a Trustee of
a special meeting to send notice by mail at least forty-eight
hours or by telegram, telex or telecopy or other electronic
facsimile transmission method at least twenty-four hours before
the meeting addressed to the Trustee at his or her usual or last
known business or residence address or to give notice to him or
her in person or by telephone at least twenty-four hours before
the meeting. Notice of a meeting need not be given to any
Trustee if a written waiver of notice, executed by him or her
before the meeting, is filed with the records of the meeting, or
to any Trustee who attends the meeting without protesting prior
thereto or at its commencement the lack of notice to him or her.
Neither notice of a meeting nor a waiver of a notice need specify
the purposes of the meeting.
2.4. Quorum. At any meeting of the Trustees a majority of
the Trustees then in office shall constitute a quorum. Any
meeting may be adjourned from time to time by a majority of the
votes cast upon the question, whether or not a quorum is present,
and the meeting may be held as adjourned without further notice.
2.5. Action by Vote. When a quorum is present at any
meeting, a majority of Trustees present may take any action,
except when a larger vote is expressly required by law, by the
Declaration of Trust or by these Bylaws.
2.6. Action by Writing. Except as required by law, any
action required or permitted to be taken at any meeting of the
Trustees may be taken without a meeting if a majority of the
Trustees (or such larger proportion thereof as shall be required
by any express provision of the Declaration of Trust or these
Bylaws) consent to the action in writing and such written
consents are filed with the records of the meetings of Trustees.
Such consent shall be treated for all purposes as a vote taken at
a meeting of Trustees.
2.7. Presence through Communications Equipment. Except as
required by law, the Trustees may participate in a meeting of
Trustees by means of a conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other at the same time
and participation by such means shall constitute presence in
person at a meeting.
ARTICLE 3
Officers
3.1. Enumeration; Qualification. The officers of the Trust
shall be a President, a Treasurer, a Clerk, and such other
officers, including a Chairman of the Trustees and a Controller,
if any, as the Trustees from time to time may in their discretion
elect. The Trust may also have such agents as the Trustees from
time to time may in their discretion appoint. The Chairman of
the Trustees, if one is elected, shall be a Trustee and may but
need not be a Shareholder; and any other officer may but need not
be a Trustee or a Shareholder. Any two or more offices may be
held by the same person.
3.2. Election. The President, the Treasurer, and the Clerk
shall be elected annually by the Trustees. Other officers, if
any, may be elected or appointed by the Trustees at such or any
other time. Vacancies in any office may be filled at any time.
3.3. Tenure. The Chairman of the Trustees, if one is
elected, the President, the Treasurer and the Clerk shall hold
office until their respective successors are chosen and
qualified, or in each case until he or she sooner dies, resigns,
is removed or becomes disqualified. Each other officer shall
hold office and each agent shall retain authority at the pleasure
of the Trustees.
3.4. Powers. Subject to the provisions of these Bylaws,
each officer shall have, in addition to the duties and powers
herein and in the Declaration of Trust set forth, such duties and
powers as are commonly incident to the office occupied by him or
her as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may
from time to time designate.
3.5. Chairman; President. Unless the Trustees otherwise
provide, the Chairman of the Trustees or, if there is none or in
the absence of the Chairman, the President shall preside at all
meetings of the Shareholders and of the Trustees. The President
shall be the chief executive officer.
3.6. Treasurer and Controller. The Treasurer shall be the
chief financial officer and, if no Controller is elected, chief
accounting officer of the Trust, and shall, subject to the
provisions of the Declaration of Trust and to any arrangement
made by the Trustees with a custodian, investment adviser or
manager, or transfer, shareholder servicing or similar agent, be
in charge of the valuable papers and, if no Controller is
elected, the books of account and accounting records of the
Trust, and shall have such other duties and powers as may be
designated from time to time by the Trustees or by the President.
The Controller, if any, shall be the chief accounting
officer of the Trust and shall be in charge of its books of
account and accounting records. The Controller shall be
responsible for preparation of financial statements of the Trust
and shall have such other duties and powers as may be designated
from time to time by the Trustees or the President.
3.7. Clerk. The Clerk shall record all proceedings of the
Shareholders and the Trustees in books to be kept therefor, which
books or a copy thereof shall be kept at the principal office of
the Trust. In the absence of the Clerk from any meeting of the
Shareholders or Trustees, an assistant clerk or, if there be none
or if he or she is absent, a temporary clerk chosen at such
meeting shall record the proceedings thereof in the aforesaid
books.
3.8. Resignations. Any officer may resign at any time by
written instrument signed by him or her and delivered to the
Chairman, the President or the Clerk or to a meeting of the
Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to
the extent expressly provided in a written agreement with the
Trust, no officer resigning and no officer removed shall have any
right to any compensation for any period following his or her
resignation or removal, or any right to damages on account of
such removal.
ARTICLE 4
Committees
4.1. Quorum; Voting. A majority of the members of any
Committee of the Trustees shall constitute a quorum for the
transaction of business, and any action of such a Committee may
be taken at a meeting by a vote of a majority of the members
present (a quorum being present) or evidenced by one or more
writings signed by such a majority. Members of a Committee may
participate in a meeting of such Committee by means of a
conference telephone or other communications equipment by means
of which all persons participating in the meeting can hear each
other at the same time and participation by such means shall
constitute presence in person at a meeting.
ARTICLE 5
Reports
5.1. General. The Trustees and officers shall render
reports at the time and in the manner required by the Declaration
of Trust or any applicable law. Officers and Committees shall
render such additional reports as they may deem desirable or as
may from time to time be required by the Trustees.
ARTICLE 6
Fiscal Year
6.1. General. Except as from time to time otherwise
provided by the Trustees, the initial fiscal year of the Trust
shall end on such date as is determined in advance or in arrears
by the Treasurer, and subsequent fiscal years shall end on such
date in subsequent years.
ARTICLE 7
Seal
7.1. General. The Trust shall have no seal.
ARTICLE 8
Execution of Papers
8.1. General. Except as the Trustees may generally or in
particular cases authorize the execution thereof in some other
manner, all deeds, leases, contracts, notes and other obligations
made by the Trustees shall be signed by the President or by the
Treasurer.
ARTICLE 9
Share Certificates
9.1. Share Certificates. No certificates certifying the
ownership of Shares shall be issued except as the Trustee may
otherwise authorize. In the event that the Trustees authorize
the issuance of Share certificates, subject to the provisions of
Section 9.3, each Shareholder shall be entitled to a certificate
stating the number of Shares and the series or class owned by him
or her, in such form as shall be prescribed from time to time by
the Trustees. Such certificates shall be signed by the President
or any Vice-President and by the Treasurer or any Assistant
Treasurer. Such signatures may be facsimiles if the certificate
is signed by a transfer agent, or by a registrar, other than a
Trustee, officer or employee of the Trust. In case any officer
who has signed or whose facsimile signature has been placed on
such certificate shall cease to be such officer before such
certificate is issued, it may be issued by the Trust with the
same effect as if he or she were such officer at the time of its
issue.
In lieu of issuing certificates for Shares, the Trustees or
the transfer agent may either issue receipts therefor or may keep
accounts upon the books of the Trust for the record holders of
such Shares, who shall in either case be deemed, for all purposes
hereunder, to be the holders of certificates for such Shares as
if they had accepted such certificates and shall be held to have
expressly assented and agreed to the terms hereof.
9.2. Loss of Certificates. In case of the alleged loss or
destruction or the mutilation of a Share certificate, a duplicate
certificate may be issued in place thereof, upon such terms as
the Trustees may prescribe.
9.3. Discontinuance of Issuance of Certificates. The
Trustees may at any time discontinue the issuance of Share
certificates and may, by written notice to each Shareholder,
require the surrender of Share certificates to the Trust for
cancellation. Such surrender and cancellation shall not affect
the ownership of Shares in the Trust.
ARTICLE 10
Provisions Relating to the Conduct of the Trust's Business
10.1. Determination of Net Asset Value Per Share. Net
asset value per Share of each series or class of Shares of the
Trust shall mean: (i) the value of all the assets of such series
or class of Shares; (ii) less total liabilities of such series or
class of Shares; (iii) divided by the number of Shares of such
series or class of Shares outstanding, in each case at the time
of each determination. The net asset value per Share of each
series or class of Shares shall be determined as of the primary
close of trading on the New York Stock Exchange on each day on
which such Exchange is open. As of any time other than the
primary close of trading on such Exchange, the Trustees may cause
the net asset value per Share last determined to be determined
again in a similar manner or adjusted to reflect changes in
market values of securities in the portfolio, such adjustment to
be made on the basis of changes in selected securities prices
determined by the Trustees to be relevant to the portfolio of
such series or class of Shares or in averages or in other
standard and readily ascertainable market data, and the Trustees
may fix the time when such redetermination or adjusted net asset
value per Share of each series or class of Shares shall become
effective.
In valuing the portfolio investments of any series or class
of Shares for determination of net asset value per Share of such
series, securities for which market quotations are readily
available shall be valued at prices which, in the opinion of the
Trustees or the person designated by the Trustees to make the
determination, most nearly represent the market value of such
securities, and other securities and asset shall be valued at
their fair value as determined by or pursuant to the direction of
the Trustees, which in the case of short-term debt obligations,
commercial paper and repurchase agreements may, but need not, be
on the basis of quoted yields for securities of comparable
maturity, quality and type, or on the basis of amortized cost.
Expenses and liabilities of the Trust shall be accrued each day.
Liabilities may include such reserves for taxes, estimated
accrued expenses and contingencies as the Trustees or their
designates may in their sole discretion deem fair and reasonable
under the circumstances. No accruals shall be made in respect of
taxes on unrealized appreciation of securities owned unless the
Trustees shall otherwise determine. Dividends payable by the
Trust shall be deducted as at the time of but immediately prior
to the determination of net asset value per Share on the record
date thereof.
10.2. Derivative Claims. No Shareholder shall have the
right to bring or maintain any court action, proceeding or claim
on behalf of this Trust or any series without first making demand
on the Trustees requesting the Trustees to bring or maintain such
action, proceeding or claim. Such demand shall be excused only
when the plaintiff makes a specific showing that irreparable
injury to the Trust or Series would otherwise result. Such
demand shall be mailed to the Clerk of the Trust at the Trust's
principal office and shall set forth in reasonable detail the
nature of the proposed court action, proceeding or claim and the
essential facts relied upon by the Shareholder to support the
allegations made in the demand. The Trustees shall consider such
demand within 45 days of its receipt by the Trust. In their sole
discretion, the Trustees may submit the matter to a vote of
Shareholders of the Trust or series, as appropriate. Any
decision by the Trustees to bring, maintain or settle (or not to
bring, maintain or settle) such court action, proceeding or
claim, or to submit the matter to a vote of Shareholders shall be
made by the Trustees in their business judgment and shall be
binding upon the Shareholders. Any decision by the Trustees to
bring or maintain a court action, proceeding or suit on behalf of
the Trust or a series shall be subject to the right of the
Shareholders under Article V, Section 1 of the Declaration of
Trust to vote on whether or not such court action, proceeding or
suit should or should not be brought or maintained.
10.3. Securities and Cash of the Trust to be held by
Custodian Subject to Certain Terms and Conditions.
(a) All securities and cash owned by this Trust shall be
held by or deposited with one or more banks or trust
companies having (according to its last published
report) not less than $5,000,000 aggregate capital,
surplus and undivided profits (any such bank or trust
company being hereby designated as "Custodian"),
provided such a Custodian can be found ready and
willing to act; subject to such rules, regulations and
orders, if any, as the Securities and Exchange
Commission may adopt, this Trust may, or may permit any
Custodian to, deposit all or any part of the securities
owned by this Trust in a system for the central
handling of securities pursuant to which all securities
of any particular class or series of any issue
deposited within the system may be transferred or
pledged by bookkeeping entry, without physical
delivery. The Custodian may appoint, subject to the
approval of the Trustees, one or more subcustodians.
(b) The Trust shall enter into a written contract with each
Custodian regarding the powers, duties and compensation
of such Custodian with respect to the cash and
securities of the Trust held by such Custodian. Such
contract and all amendments thereto shall be approved
by the Trustees.
(c) The Trust shall upon the resignation or inability to
serve of any Custodian or upon change of any Custodian:
(i) in case of such resignation or inability to serve,
use its best efforts to obtain a successor
Custodian;
(ii) require that the cash and securities owned by the
Trust be delivered directly to the successor
Custodian; and
(iii) in the event that no successor Custodian
can be found, submit to the
Shareholders, before permitting delivery
of the cash and securities owned by the
Trust to a successor Custodian, the
question whether the Trust shall be
liquidated or shall function without a
Custodian.
ARTICLE 11
Shareholders' Voting Powers and Meetings
11.1. Voting Powers. The Shareholders shall have power to
vote only (i) for the election of Trustees as provided in Article
IV, Section 1 of the Declaration of Trust, provided, however,
that no meeting of Shareholders is required to be called for the
purpose of electing Trustees unless and until such time as less
than a majority of the Trustees have been elected by the
Shareholders, (ii) with respect to any Manager or Sub-Adviser as
provided in Article IV, Section 6 of the Declaration of Trust to
the extent required by the 1940 Act, (iii) with respect to any
plan of distribution adopted by the Trustees with respect to one
or more series or classes pursuant to Rule 12b-1 under the 1940
Act, (iv) with respect to any termination of this Trust to the
extent and as provided in Article IX, Section 4 of the
Declaration of Trust, (v) with respect to any amendment of the
Declaration of Trust to the extent and as provided in Article IX,
Section 7 of the Declaration of Trust, (vi) to the same extent as
the stockholders of a Massachusetts business corporation as to
whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class
action on behalf of the Trust or the Shareholders, and (vii) with
respect to such additional matters relating to the Trust as may
be required by law, the Declaration of Trust, these Bylaws or any
registration of the Trust with the Commission (or any successor
agency) or any state, or as the Trustees may consider necessary
or desirable. Annual meetings of Shareholders are not required
by these Bylaws. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each
fractional Share shall be entitled to a proportionate fractional
vote. The Shareholders of any particular series or class shall
not be entitled to vote on any matters as to which such series or
class is not affected. Except with respect to matters as to
which the Trustees have determined that only the interests of one
or more particular series or classes are affected or as required
by law, all of the Shares of each series or class shall, on
matters as to which such series or class is entitled to vote,
vote with other series or classes so entitled as a single class.
Notwithstanding the foregoing, with respect to matters which
would otherwise be voted on by two or more series or classes as a
single class, the Trustees may, in their sole discretion, submit
such matters to the Shareholders of any or all such series or
classes, separately. There will be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy.
A proxy with respect to Shares held in the name of two or more
persons shall be valid if executed by any one of them unless at
or prior to exercise of the proxy the Trust receives a specific
written notice to the contrary from any one of them. A proxy
purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and
the burden of proving invalidity shall rest on the challenger.
The placing of a Shareholder's name on a proxy pursuant to
telephonic or electronically transmitted instructions obtained
pursuant to procedures reasonably designed to verify that such
instructions have been authorized by such Shareholder shall
constitute execution of such proxy by or on behalf of such
Shareholder. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take action required by law,
the Declaration of Trust or these Bylaws to be taken by
Shareholders.
11.2. Voting Power and Meetings. Meetings of the
Shareholders of the Trust or of one or more series or classes of
Shares may be called by the Trustees for the purpose of electing
Trustees as provided in Article IV, Section 1 of the Declaration
of Trust and for such other purposes as may be prescribed by law,
by the Declaration of Trust or by these Bylaws. Meetings of the
Shareholders of the Trust or of one or more series or classes of
Shares may also be called by the Trustees from time to time for
the purpose of taking action upon any other matter deemed by the
Trustees to be necessary or desirable. A meeting of Shareholders
may be held at any place designated by the Trustees. Written
notice of any meeting of Shareholders shall be given or caused to
be given by the Trustees by mailing such notice at least seven
days before such meeting, postage prepaid, stating the time and
place of the meeting, to each Shareholder at the Shareholder's
address as it appears on the record of the Trust. Whenever
notice of a meeting is required to be given to a Shareholder
under the Declaration of Trust or these Bylaws, a written waiver
thereof, executed before or after the meeting by such Shareholder
or his attorney thereunto authorized and filed with the records
of the meeting, shall be deemed equivalent to such notice.
11.3. Quorum and Required Vote. Ten percent (10%) of
Shares entitled to vote shall be a quorum for the transaction of
business at a Shareholders' meeting, except that where any
provision of law or of the Declaration of Trust or these Bylaws
permits or requires that holders of any series or class of Shares
shall vote as a series or class, as the case may be, then ten
percent (10%) of the aggregate number of Shares of that series or
that class entitled to vote shall be necessary to constitute a
quorum for the transaction of business by that series or class.
Any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable
time after the date set for the original meeting, without the
necessity of further notice. Except when a larger vote is
required by any provision of law or the Declaration of Trust or
these Bylaws, a majority of the Shares voted shall decide any
questions and a plurality shall elect a Trustee, provided that
where any provision of law or of the Declaration of Trust or
these Bylaws permits or requires that the holders of any series
or class shall vote as a series or class, as the case may be,
then a majority of the Shares of that series or that class voted
on the matter (or a plurality with respect to the election of a
Trustee) shall decide that matter insofar as that series or class
is concerned.
11.4. Action by Written Consent. Any action taken by
Shareholders may be taken without a meeting if a majority of
Shareholders entitled to vote on the matter (or such larger
proportion thereof as shall be required by any express provision
of law or the Declaration of Trust or these Bylaws) consent to
the action in writing and such written consents are filed with
the records of the meetings of Shareholders. Such consent shall
be treated for all purposes as a vote taken at a meeting of
Shareholders.
11.5. Record Dates. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or
any adjournment thereof, or who are entitled to receive payment
of any dividend or of any other distribution, the Trustees may
from time to time fix a time, which shall be not more than 60
days before the date of any meeting of Shareholders or the date
for the payment of any dividend or of any other distribution, as
the record date for determining the Shareholders having the right
to notice of and to vote at such meeting and any adjournment
thereof or the right to receive such dividend or distribution,
and in such case only Shareholders of record on such record date
shall have such right notwithstanding any transfer of Shares on
the books of the Trust after the record date; or without fixing
such record date the Trustees may for any of such purposes close
the register or transfer books for all or any part of such
period.
ARTICLE 12
Amendments to the Bylaws
12.1. General. These Bylaws may be amended or repealed, in
whole or in part, by a majority of the Trustees then in office at
any meeting of the Trustees, or by one or more writings signed by
such a majority.
INVESTMENT ADVISORY AGREEMENT
Between
SMITH BREEDEN TRUST
and
SMITH BREEDEN ASSOCIATES, INC.
INVESTMENT ADVISORY AGREEMENT dated August 1, 1994
between SMITH BREEDEN TRUST, a Massachusetts trust ("the Trust"),
on behalf of its Smith Breeden Market Tracking Fund series (the
"Portfolio"), and SMITH BREEDEN ASSOCIATES, INC., a corporation
organized and existing under the laws of the State of Kansas (hereinafter
called the "Manager").
W I T N E S S E T H:
Whereas, the Portfolio is engaged in business as an open-end
management investment company and has registered as such under the
federal Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Manager is engaged principally in the business of
rendering investment management and administrative services and is
registered as an investment adviser under the federal investment Advisers
Act of 1940, as amended: and
WHEREAS, the Portfolio wishes to engage the Manager to provide
certain investment management and administrative services, and the
Manager is willing to provide such services, all on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. Duties and Responsibilities of Manager.
A. Investment Advisory Services. The Manager shall act
as investment adviser to and shall supervise and direct the investments of
the Portfolio in accordance with the Portfolio's investment objectives,
program and restrictions as provided in the Portfolio's then current
Registration Statement under the Act, and such other directions or
limitations as the Portfolio may impose by notice in writing to the
Manager. The Manager shall obtain and evaluate such information
relating to the economy, industries, businesses, securities markets and
securities as it may deem necessary or useful in the discharge of its
obligations hereunder and shall formulate and implement a continuing
program for the management of the assets and resources of the Portfolio
in a manner consistent with its investment objective. The Manager shall
for all purposes be deemed to be an independent contractor and shall,
except as expressly provided or authorized (whether herein or otherwise),
have no authority to act for or represent the Portfolio in any way or
otherwise be deemed an agent of the Portfolio.
In furtherance of its duties hereunder, the Manager is authorized, in
its discretion and without prior consultation with the Portfolio, to:
(i) buy, sell, exchange, convert, lend, and otherwise
trade in any stocks, bonds, and other securities, financial futures, swap
contracts or other assets; and
(ii) directly place orders and negotiate the
commissions (if any) for the execution of transactions in securities,
financial futures, swap contracts or other assets with or through such
brokers, dealers, underwriters or issuers as the Manager may select.
B. Administrative Services. Subject to the overall authority
of the Board of Trustees of the Portfolio, the Manager shall provide
general administrative services and oversee the operation of the Portfolio
("Administrative Services"). Such Administrative Services shall not include
investment advisory, custodial, underwriting and distribution, transfer
agency, shareholder or accounting services, or the preparation and filing
of the Portfolio's tax returns, but shall include, without limitation:
(i) the provision of office space and equipment
necessary in connection with the maintenance of the headquarters of the
Portfolio;
(ii) the maintenance of the books and records of the
Portfolio, and making arrangements for the meetings of the Trustees of
the Portfolio including the preparation of agendas and supporting
materials therefor;
(iii) the preparation of communications and reports to
investors in the Portfolio and making arrangements for meetings of such
investors;
(iv) the preparation and filing of all required reports and
all updating and other amendments to the Portfolio's registration
statement under the Act and the rules and regulations thereunder;
(v) the periodic computation and, as necessary,
reporting to the Trustees of the Portfolio of the Portfolio's compliance with
its investment objective and policies with the Portfolio diversification and
other Portfolio requirements of the Act and, to the extent required, the
Internal Revenue Code; and
(vi) the negotiation of agreements or other arrangements
with, and general oversight and coordination of the activities of, agents
and others retained by the Portfolio to provide custodial, net asset value
computation, Portfolio accounting, legal, tax and accounting services.
It is understood that the Manager may, in its discretion and at its
expense, delegate some or all of its administrative duties and
responsibilities under this paragraph 1.B to any person provided that the
Manager gives prior notice to the Portfolio.
C. Reports to Portfolio. The Manager shall furnish to or
place at the disposal of the Portfolio such information, reports,
evaluations, analyses and opinions relating to the Manager and its
investment management of the Portfolio's portfolio securities as the
Portfolio may, at any time or from time to time, reasonably request or as
the Manager may deem helpful.
D. Reports and Other Communications to Investors. The
Manager shall assist the Portfolio in providing communications to
investors as may reasonably be necessary.
E. Portfolio Personnel. the Manager will permit individuals
who are officers or employees of the Manager to serve (if duly elected or
appointed) as officers, trustees, members of any committee of trustees,
members of any advisory board, or members of any other committee of
the Portfolio, without remuneration or other cost to the Portfolio.
F. Personnel, Office Space, and Facilities of Manager.
The Manager at its own expense shall furnish or provide and pay the cost
of such office space, office equipment, office personnel, and office
services as the Manager requires in the performance of its investment
advisory, administrative and other obligations under this Agreement.
2. Allocation of Expenses.
A. Expenses Paid by Manager.
(i) Expenses Paid by Manager. The Manager shall
pay all salaries, expenses, and fees of the officers and trustees of the
Portfolio who are employees of the Manager. The Manager is not
obligated to bear any other expenses incidental to the operations and
business of the Portfolio.
(ii) Assumption of Expenses by Manager. The
payment or assumption by the Manager of any expense of the Portfolio
that the Manager is not required by this Agreement to pay or assume shall
not obligate the Manager to pay or assume the same or any similar
expense on any subsequent occasion.
B. Expenses Paid by Portfolio. The Portfolio shall bear all
expenses of its organization, operations, and business not specifically
assumed or agreed to be paid by the Manager as provided in this
Agreement. In particular, but without limiting the generality of the
foregoing, the Portfolio shall pay:
(i) Management Fees. the fees of the Manager as
provided in paragraph 3 below;
(ii) Custody and Accounting Services. All expenses
of the transfer, receipt, safekeeping, servicing and accounting for the
cash, securities, and other property of the Portfolio, including all charges
of depositories, custodians, and other agents, if any;
(iii) Investor Servicing. All expenses of establishing,
maintaining and servicing investor accounts, including all charges of
agents for account transfers, account record keeping, and account
distribution or disbursement;
(iv) Distribution and Service Fees. The fees, if any,
payable pursuant to any plan heretofore or hereafter adopted by the
Portfolio pursuant to Rule 12b-1 under the Act.
(v) Investor Meetings. All expenses incidental to
holding meetings of the Portfolio's investors;
(vi) Pricing. All expenses of computing the Portfolio's
net asset value, including the cost of any equipment or services used for
obtaining price quotations and the fees of any independent pricing service
authorized by the Trustees of the Portfolio;
(vii) Communication Equipment. All charges for
equipment or services used for communication between the Manager or
the Portfolio and the custodian, transfer agent or any other agent selected
by the Portfolio;
(viii) Legal and Accounting Fees and Expenses. All
charges for services and expenses of the Portfolio's legal counsel and
independent auditors;
(ix) Trustees' Fees and Expenses. All compensation of
Trustees of the Portfolio, other than those who are interested persons of
the Portfolio, and all expenses (including fees and disbursements of their
legal counsel) incurred in connection with their service;
(x) Federal Registration Fees. All fees and expenses
of registering and maintaining the registration of the Portfolio under the
Act, including all fees and expenses incurred in connection with the
preparation and filing of any registration statement under the Act, and any
amendments or supplements that may be made from time to time;
(xi) Bonding and Insurance. All expenses of bond,
liability, and other insurance coverage required by law or deemed
advisable by the Trustees of the Portfolio;
(xii) Brokerage Commissions. All brokers'
commissions and other charges incident to the purchase, sale, or lending
of the Portfolio's portfolio securities.
(xiii) Interest and Taxes. Interest on borrowed money
and all taxes or governmental fees payable by or with respect to the
Portfolio to federal, state, or other governmental agencies, domestic or
foreign, including stamp or other transfer taxes;
(xiv) Trade Association Fees. All fees, dues, and other
expenses incurred in connection with the membership of the Portfolio in
the Investment Company Institute or any other trade association or other
investment organization; and
(xv) Nonrecurring and Extraordinary Expenses. Such
nonrecurring expenses as may arise, including the costs of actions, suits,
or proceedings to which the Portfolio is a party and the expenses that the
Portfolio may incur as a result of its legal obligation to provide
indemnification to its officers, trustees, employees and agents.
3. Management Fees. The Portfolio shall pay the Manager a fee
at an annual rate computed as follows based on the value of the net
assets of the Portfolio.
A. Method of Computation. The fee shall be accrued for
each calendar day and the sum of the daily fee accruals shall be paid
monthly to the Manager on the first business day of the next succeeding
calendar month. The daily fee accruals will be computed by multiplying
the fraction of one over the number of calendar days in the year by
0.70%, and multiplying the resulting product by the net assets of the
Portfolio as determined in accordance with the Portfolio's Registration
Statement under the Act as of the close of business on the previous
business day on which the Portfolio was open for business.
B. Proration of Fee. If this Agreement becomes effective
or terminates before the end of any calendar month, the fee for the period
from the effective date to the end of such calendar month or from the
beginning of such calendar month to the date of termination, as the case
may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
4. Limitation of Portfolio's Normal Business Expenses. In the
event that expenses of the Portfolio for any fiscal year (not including any
distribution expenses paid by the Portfolio pursuant to any distribution
plan) should exceed the expense limitation on investment company
expenses enforced by any statute or regulatory authority of any
jurisdiction in which shares of the Trust are qualified for offer and sale, the
compensation due the Manager for such fiscal year shall be reduced by
the amount of such excess by a reduction or refund thereof. In the event
that the expenses of the Portfolio exceed any expense limitation which the
Manager may, by written notice to the Trust, voluntarily declare to be
effective with respect to the Portfolio, subject to such terms and conditions
as the Manager may prescribe in such notice, the compensation due the
Manager shall be reduced, and, if necessary, the Manager shall bear the
Portfolio's expenses to the extent required by such expense limitation.
5. Brokerage. In the selection of brokers or dealers and the
placing of orders for the purchase and sale of portfolio investments for the
Portfolio , the Manager shall seek to obtain the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described
below. In using its best efforts to obtain for the Portfolio the most
favorable price and execution available, the Manager, bearing in mind the
Portfolio 's best interests at all times, shall consider all factors it deems
relevant, including, by way of illustration, price, the size of the transaction,
the nature of the market for the security, the amount of the commission,
the timing of the transaction taking into account market prices and trends,
the reputation, experience and financial stability of the broker or dealer
involved and the quality of service rendered by the broker or dealer in
other transactions. Subject to such policies as the Trustees may
determine, the Manager shall not be deemed to have acted unlawfully or
to have breached any duty created by this Contract or otherwise solely by
reason of its having caused the Trust to pay, on behalf of the Portfolio , a
broker or dealer that provides brokerage and research services to the
Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Manager
determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided
by such broker or dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Portfolio and to other clients of the Manager as to which the Manager
exercises investment discretion. The Trust hereby agrees with the
Manager that any entity or person associated with the Manager which is a
member of a national securities exchange is authorized to effect any
transaction on such exchange for the account of the Portfolio which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 and
Rule 11a-2-2(T) thereunder, and the Trust hereby consents to the retention
of compensation for such transactions in accordance with Rule 11a2-
2(T)(2)(iv).
6. Manager's Use of the Services of Others. The Manager may
(at its cost except as contemplated by Paragraph 5 of this Agreement)
employ, retain or otherwise avail itself of the services or facilities of other
persons or organizations for the purpose of providing the Manager or the
Portfolio with such statistical and other factual information, such advice
regarding economic factors and trends, such advice as to occasional
transactions in specific securities or such other information, advise or
assistance as the Manager may deem necessary, appropriate or
convenient for the discharge of its obligations hereunder or otherwise
helpful to the Portfolio or in the discharge of the Manager's overall
responsibility with respect to other accounts which it serves as investment
adviser or manager.
7. Ownership of Records. All records required to be maintained
and preserved by the Portfolio pursuant to the rules or regulations of the
Securities and Exchange Commission under Section 31(a) of the Act and
maintained and preserved by the manager on behalf of the Portfolio are
the property of the Portfolio and will be surrendered by the Manager
promptly on request by the Portfolio. The Manager may retain, for itself,
copies of all such records.
8. Reports to Manager. The Portfolio shall furnish or otherwise
make available to the Manager such prospectuses, financial statements,
proxy statements, reports, and other information relating to the business
and affairs of the Portfolio as the Manager may, at any time or from time
to time, reasonably require in order to discharge its obligations under this
Agreement.
9. Other Agreements, Etc. It is understood that any of the
shareholders, Trustees, officers and employees of the Trust may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the Manager, and in any person controlled by or under common control
with the Manager, and that the Manager and any person controlled by or
under common control with the Manager may have an interest in the
Trust. It is also understood that the Manager and persons controlled by
or under common control with the Manager have and may have advisory,
management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
10. Limitation of Liability of Manager. Neither the Manager nor
any of its officers, directors, stockholders (or partners of stockholders),
agents or employees, nor any person performing executive,
administrative, trading, or other functions for the Portfolio (at the direction
or request of the manager) or the Manager in connection with the
Manager's discharge of its obligation undertaken or reasonably assumed
with respect to this Agreement, shall be liable for any error of judgment or
mistake of law or for any loss suffered by the Portfolio in connection with
the matters to which this Agreement relates, except for loss resulting from
willful misfeasance, bad faith, or gross negligence in the performance of
its or his duties on behalf of the Portfolio or from reckless disregard by the
Manager or any such person of the duties of the Manager under this
Agreement.
11. Limitation of Liability of Portfolio. The term "Smith Breeden
Trust" means and refers to the trustees from time to time serving under
the Declaration of Trust of the Trust dated December 18, 1991, as the
same may subsequently thereto have been, or subsequently hereto be,
amended (the "Declaration of Trust"). It is expressly agreed that the
obligations of the Portfolio hereunder shall not be binding upon any of the
trustees, shareholders, nominees, officers, agents or employees of the
Portfolio personally, but shall bind only the trust property of the Portfolio,
as provided in the Declaration of Trust of the Portfolio. The execution and
delivery of this Agreement have been authorized by the trustees and
shareholders of the Portfolio and this Agreement has been signed by an
authorized officer of the Portfolio, acting as such, and neither such
authorization by such trustees and shareholders nor such execution and
delivery by such officer shall be deemed to have been made by any of
them but shall bind only the trust property of the Portfolio as provided in
its Declaration of Trust.
12. Use of Name. The Manager owns the name "Smith Breeden,"
which may be used by the Trust only with the consent of the Manager.
The Manager consents to the use by the Trust of the name "Smith
Breeden Funds" or any other name embodying the name "Smith
Breeden," but only on the condition and so long as (i) this Agreement
shall remain in full force, (ii) the Trust shall fully perform, fulfill
and comply with all provisions of this Agreement expressed herein
to be performed, fulfilled or complied with by it, and
(iii) Smith Breeden Associates, Inc. is the Manager of the Trust.
No such name shall be used by the Trust at any time or in any place
or for any purposes or under any conditions except as in this
section provided. The foregoing authorization by the
Manager to the Trust to use the name "Smith Breeden" as a part of a
business or name is not exclusive of the right of the Manager itself to use,
or to authorize others to use, the same; the Trust acknowledges and
agrees that as between the Manager and the Trust, the Manager has the
exclusive right so to use, or authorize others to use, said name, and the
Trust agrees to take such action as may reasonably be requested by the
Manager to give full effect to the provisions of this section (including,
without limitation, consenting to such use of said name). Without limiting
the generality of the foregoing, the Trust agrees that, upon (i) any
termination of this Agreement by either party, (ii) the violation of any of its
provisions by the Trust or (iii) termination of this Investment Advisory
Agreement between Smith Breeden Associates, Inc. and the Trust, the
Trust will, at the request of the Manager made within six months after
such termination or violation, use its best efforts to change the name of
the Trust so as to eliminate all reference, if any, to the name "Smith
Breeden" and will not thereafter transact any business in a name
containing the name "Smith Breeden" in any form or combination
whatsoever, or designate itself as the same entity as or successor to an
entity of such name, or otherwise use the name "Smith Breeden" or any
other reference to the Manager. Such covenants on the part of the Trust
shall be binding upon it, its Trustees, officers, stockholders, creditors and
all other persons claiming under or through it.
13. Term of Agreement. The term of this Agreement shall begin
on the date first above written, and unless sooner terminated as
hereinafter provided, this Agreement shall remain in effect through the
second anniversary of its execution. Thereafter, this Agreement shall
continue in effect from year to year, subject to the termination provisions
and all other terms and conditions hereof, so long as such continuation
shall be specifically approved at least annually (a) by either the Board of
Trustees of the Portfolio, or by vote of a majority of the outstanding voting
securities of the Portfolio, and (b) in either event by the vote, cast in
person at a meeting called for the purpose of voting on such approval, of
a majority of the Trustees of the Portfolio who are not interested persons
of the Trust or the Manager; provided, however, that if the continuance of
this Agreement is submitted to the shareholders of the Portfolio for their
approval and such shareholders fail to approve such continuance of this
Contract as provided herein, the Manager may continue to serve
hereunder in a manner consistent with the Investment Company Act of
1940 and the rules and regulations thereunder. The Manager shall furnish
to the Portfolio, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement or any
extension, renewal or amendment hereof.
14. Amendment and Assignment of Agreement. This Agreement
may not be amended in any material respect or assigned without the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio, and this Agreement shall automatically and immediately
terminate in the event of its assignment.
15. Termination of Agreement. This Agreement may be
terminated by either party hereto, without the payment of any penalty,
upon 60 days' prior notice in writing to the other party; provided, that in
the case of termination by the Portfolio, such action shall have been
authorized by resolution of a majority of the Trustees of the Portfolio who
are not parties to this Agreement or interested persons of any such party,
or by vote of a majority of the outstanding voting securities of the
Portfolio.
16. Miscellaneous.
A. Captions. The captions in this Agreement are included
for convenience of reference only and in no way define or delineate any of
the provisions hereof or otherwise affect their construction or effect.
B. Interpretation. Nothing herein contained shall be
deemed to require the Portfolio to take any action contrary to its
Declaration of Trust or By-Laws, or any applicable statutory or regulatory
requirement to which it is subject or by which it is bound, or to relieve or
deprive the Board of Trustees of the Portfolio of its responsibility for and
control of the conduct of the affairs of the Portfolio. This Agreement shall
be construed and enforced in accordance with and governed by the laws
of The Commonwealth of Massachusetts.
C. Definitions. For the purposes of this Agreement, the
"affirmative vote of a majority of the outstanding shares" of the Portfolio
means the affirmative vote, at a duly called and held meeting of
shareholders, (a) of the holders of 67% or more of the shares of the
Portfolio present (in person or by proxy) and entitled to vote as such
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio entitled to vote at such meeting are present in person or by
proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person,"
"interested person" and "assignment" shall have their respective meanings
defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the
term "specifically approve at least annually" shall be construed in a
manner consistent with the Investment Company Act of 1940 and the
rules and regulations thereunder; and the term "brokerage and research
services" shall have the meaning given in the Securities Exchange Act of
1934 and the rules and regulations thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers thereunto duly
authorized and their respective corporate seals to be hereunto affixed, as
of the date and year first above written.
SMITH BREEDEN TRUST
(on behalf of Smith Breeden Market
Tracking Fund)
Attest: Marianthe S. Mewkill By: Michael J. Giarla
SMITH BREEDEN ASSOCIATES, INC.
Attest: Marianthe S. Mewkill By: Michael J. Giarla
UNDERWRITING AGREEMENT
This Agreement, dated as of the 20th day of July, 1994, made by
and between Smith Breeden Trust, a Massachusetts business trust (the
"Trust") operating as a registered investment company under the
Investment Company Act of 1940, as amended (the "Act"), Smith Breeden
Associates, Inc., ("the Advisor"), a registered investment adviser existing
as a corporation duly organized and existing under the laws of the State
of Kansas; and Fund/Plan Broker Services, Inc. ("Fund/Plan"), a
corporation duly organized and existing under the laws of the State of
Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is authorized by its Agreement and Declaration
of Trust, as amended (the "Declaration of Trust"), to issue separate series
of shares representing interests in separate investment portfolios (the
"Series"), which Series are identified on Schedule "C" attached hereto, and
which Schedule "C" may be amended from time to time by mutual
agreement among the Parties; and
WHEREAS, the Advisor has been appointed investment adviser to
the Trust; and
WHEREAS, Fund/Plan is a broker-dealer registered with the U.S.
Securities and Exchange Commission and a member in good standing of
the National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Parties are desirous of entering into an agreement
providing for the distribution by Fund/Plan of shares of beneficial interest
of the Series of the Trust (the "Shares"), and that Fund/Plan be
compensated by the Advisor for providing such services.
NOW, THEREFORE, in consideration of the premises and mutual
promises of the Parties contained herein, the Parties agree as follows:
1. Appointment.
The Trust hereby appoints Fund/Plan as its agent for the
underwriting and distribution of the Shares, and Fund/Plan hereby
accepts such appointment under the terms of this Agreement.
Notwithstanding any other provision hereof, the Trust may terminate,
suspend, or withdraw the offering of the Shares whenever, in its sole
discretion, it deems such action to be desirable.
2. Sale and Repurchase of Shares.
(a) Subject to applicable federal and state law and the Declaration
of Trust,
By-laws and current Prospectus and Statement of Additional
Information of the Trust, Fund/Plan is hereby granted the right
as agent for the Trust, to sell Shares to the public against
orders therefor at the public offering price (as defined in sub-
paragraph 2.(c) hereof).
(b) Subject to applicable federal and state law and the
Declaration of Trust, By-laws and current
Prospectus and Statement of Additional Information
of the Trust, Fund/Plan will also have the right to
take, as agent for the Trust, all actions which, in
Fund/Plan's judgment, are necessary to carry into
effect the distribution of the Shares.
(c) The public offering price shall be the net asset
value of the Shares then in effect.
(d) The net asset value of the Shares shall be
determined in the manner provided in the then
current prospectus, and statement of additional
information relating to the Shares and when
determined shall be applicable to all transactions
as provided in the prospectus. The net asset value
of the Shares shall be calculated by the Trust or by
another entity on behalf of the Trust. Fund/Plan
shall have no duty to inquire into or liability for the
accuracy of the net asset value per Share as
calculated.
(e) On every sale, the Trust shall receive the applicable
net asset value of the Shares promptly.
(f) Upon receipt of purchase instructions, Fund/Plan
will transmit such instructions to the Trust or its
transfer agent for registration of the Shares
purchased.
(g) Nothing in this Agreement shall prevent Fund/Plan
or any affiliated person (as defined in the Act) of
Fund/Plan from acting as underwriter or distributor
for any other person, firm or corporation (including
other investment companies) or in any way limit or
restrict Fund/Plan or such affiliated person from
buying, selling or trading any securities for its or
their own account or for the accounts of others for
whom it or they may be acting; provided, that
Fund/Plan expressly agrees that it will not for its
own account purchase any shares of the Trust
except for investment purposes and that it will not
for its own account sell any such shares except by
redemption of such shares by the Trust, and that it
will not undertake in any activities which, in its
judgment, will adversely affect the performance of
its obligations to the Trust under this Agreement.
(h) Fund/Plan may repurchase Shares at such prices
and upon such terms and conditions as shall be
specified in the then current Prospectus.
3. Rules of Sale of Shares.
Fund/Plan does not agree to sell any specific number of Shares.
Fund/Plan, as Underwriter for the Trust, undertakes to sell Shares on
a best efforts basis and only against orders received therefor.
The Trust reserves the right to refuse at any time or times to sell any
of its Shares for any reason deemed adequate by it.
4. Rules of NASD.
(a) Fund/Plan will conform to the Rules of Fair Practice
of the NASD and the securities laws of any
jurisdiction in which it directly or indirectly sells any
Shares.
(b) Fund/Plan will require each dealer with whom
Fund/Plan has a selling agreement to conform to
the applicable provisions of the Prospectus with
respect to the public offering price of the Shares,
and Fund/Plan shall not cause the Trust to withhold
the placing of purchase orders so as to make a
profit thereby.
(c) The Trust agrees to furnish to Fund/Plan sufficient
copies of any agreements, plans, communications
with the public or other materials it intends to use
in connection with any sales of Shares in adequate
time for Fund/Plan to file and clear such materials
with the proper authorities before they are put in
use. In addition, the Trust agrees not to use any
such materials until so filed and cleared for use by
appropriate authorities and Fund/Plan.
(d) Fund/Plan, at its own expense, will qualify as a
dealer or broker, or otherwise, under all applicable
state or federal laws as required in order that the
Shares may be sold in such states as may be
mutually agreed upon by the Parties.
(e) Fund/Plan shall not, in connection with any sale or
solicitation of a sale of the Shares, make or
authorize any representative, Service Organization,
broker or dealer to make, any representations
concerning the Shares except those contained in
the then current Prospectus covering the Shares
and in communications with the public or sales
materials approved by Fund/Plan and the Trust as
information supplemental to such Prospectus.
Copies of the Prospectus will be supplied by the
Trust to Fund/Plan in reasonable quantities upon
request.
5. Records to be Supplied by the Trust.
The Trust shall furnish to Fund/Plan copies of all information,
financial statements and other papers which Fund/Plan may
reasonably request for use in connection with the distribution of the
Shares including, but not be limited to, one certified copy of all
financial statements prepared for the Trust by its independent public
accountants.
6. Expenses.
(a) The Trust will bear the following expenses:
(i) preparation, setting in type, and printing of sufficient
copies of the prospectuses and statements of additional
information for distribution to shareholders, and the
distribution of same to the shareholders;
(ii) preparation, printing and distribution of reports and
other communications to shareholders;
(iii) registration of the Shares under the federal securities
laws;
(iv) qualification of the Shares for sale in the jurisdictions
mutually agreed upon by the Trust and Fund/Plan;
(v) maintaining facilities for the issue and transfer of the
Shares;
(vi) supplying information, prices and other data to be
furnished by the Trust under this Agreement; and
(vii) any original issue taxes or transfer taxes applicable to
the sale or delivery of the Shares or certificates therefor.
(b) the Advisor will pay all other expenses incident to the sale and
distribution of the Shares sold hereunder.<PAGE>
7.
Term and Compensation.
(a) The term of this Agreement shall commence on the date
hereinabove first written (the "Effective Date").
(b) This Agreement shall remain in effect for two (2) years from the
Effective Date. The Agreement shall continue thereafter for
periods not exceeding one (1) year if approved at least
annually (i) by a vote of a majority of the outstanding voting
securities of each Series or by a vote of the Trustees of the
Trust, and (ii) by a vote of a majority of the trustees of the
Trust who are not interested persons of the Trust or parties to
this Agreement (other than as Trustees of the Trust), cast in
person at a meeting called for the purpose of voting on such
approval.
(c) Fees payable to Fund/Plan shall be paid by the Advisor as set
forth in Schedule "B" attached and shall be fixed for the two (2)
years period commencing on the Effective Date of this
Agreement. Thereafter, the fee schedule will be subject to
annual review and adjustment.
(d) This Agreement (i) may at any time be terminated without the
payment of any penalty, either by a vote of the Trustees of the
Trust or by a vote of a majority of the outstanding voting
securities of each Series with respect to such Series, on sixty
(60) days' written notice to Fund/Plan; and (ii) may be
terminated by Fund/Plan on sixty (60) days' written notice to
the Trust with respect to any Series.
(e) This Agreement shall automatically terminate in the event of its
assignment.
8. Indemnification of Fund/Plan by Advisor.
The Advisor will indemnify and hold Fund/Plan harmless for the
actions of the Advisor's employees registered with the NASD as
Fund/Plan representatives and the Advisor will undertake to maintain
compliance with all rules and regulations concerning any and all
sales presentations made by such employees.
9. Liability and Indemnification of Fund/Plan and the Trust.
(a) Fund/Plan, its directors, officers, employees, shareholders and
agents shall not be liable for any suffered by the Trust in
connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence on the
part of Fund/Plan in the performance of its obligations and
duties or by reason of its reckless disregard of its obligations
and duties under this Agreement.
(b) The Trust agrees to indemnify and hold harmless Fund/Plan,
and each person who controls Fund/Plan within the meaning
of Section 15 of the Securities Act of 1933, as amended (the
"Securities Act"), or Section 20 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), against any and all
losses, claims, damages and liabilities, joint or several
(including any reasonable investigative, legal and other
expenses incurred in connection therewith) to which they, or
any of them, may become subject under the Act, the Securities
Act, the Exchange Act or other federal or state law or
regulation, at common law or otherwise insofar as such losses,
claims, damages or liabilities (or actions, suits or proceedings
in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact
contained in a prospectus, statement of additional information,
supplement thereto, sales literature or other written information
prepared by the Trust and furnished by the Trust to Fund/Plan
for Fund/Plan's use hereunder, disseminated by the Trust or
arise out of or are based upon any omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading.
Such indemnity shall not, however, inure to the benefit of
Fund/Plan (or any person controlling Fund/Plan) on account of
any losses, claims, damages or liabilities (or actions, suits or
proceedings in respect thereof) arising from the sale of the
shares of the Trust to any person by Fund/Plan (i) if such
untrue statement or omission or alleged untrue statement or
omission was made in the prospectus, statement of additional
information, sales or other literature, in reliance upon and in
conformity with information furnished in writing to the Trust by
Fund/Plan specifically for use therein, (ii) if such losses, claims,
damages or liabilities arise out of or are based upon an untrue
statement or omission or alleged untrue statement or omission
found in any prospectus, statement of additional information,
supplement, sales or other literature, although subsequently
corrected, but, negligently distributed by Fund/Plan and a copy
of the corrected document was not delivered to such person at
or before the confirmation of the sale to such person, or (iii) if
such losses, claims, damages or liabilities result from
Fund/Plan's willful misfeasance, bad faith, or gross negligence
in the performance of its obligations and duties or by reason of
its reckless disregard of its obligations and duties hereunder.
(c) Fund/Plan agrees to indemnify and hold harmless the Trust, its
several trustees and officers and each person who controls the
Trust within the meaning of Section 15 of the Securities Act, or
Section 20 of the Exchange Act, against any and all losses,
claims, damages, damages or liabilities, joint or several (including
any reasonable investigative, legal and other expenses incurred in
connection therewith) to which they, or any of them, may become subject
under the Act, the Securities Act, the Exchange Act or other federal or
state law or regulation, at common law or otherwise
insofar as such losses, claims, damages or liabilities (or
actions, suits or proceedings in respect thereof) arise out of or
are based upon (i) any untrue statement of material fact or
omission of material fact contained in information furnished in writing to
the Trust by Fund/Plan for use in the prospectus, statement of additional
information, or sales or other literature, (ii) the negligent distribution
of any document relating to the sale of Shares containing an untrue
statement of material fact or omitting to state a material fact
which error is later corrected by the Fund but where such
corrected document is not delivered at or before the confirmation
of any related sale of Shares, or (iii) Fund/Plan's willful
misfeasance, bad faith, or gross negligence in the performance of its
obligations and duties or by reason of its reckless disregard of its
obligations and duties hereunder.
10. Amendments.
No provision of this Agreement may be amended or modified, in any
manner whatsoever except by a written agreement properly
authorized and executed by the Parties.
11. Section Headings.
Section and Paragraph headings are for convenience only and shall
not be construed as part of this Agreement.
12. Reports.
Fund/Plan shall prepare reports for the Board of Trustees of the
Trust on a quarterly basis showing such information as from time to
time shall be reasonably requested by such Board.
13. Severability.
If any part, term or provision of this Agreement is held by any court
to be illegal, in conflict with any law or otherwise invalid, the
remaining portion or portions shall be considered severable and not
affected, and the rights and obligations of the parties shall be
construed and enforced as if the Agreement did not contain the
particular part, term or provision held to be illegal or invalid provided
that the basic agreement is not thereby substantially impaired.
14. Certain Definitions
As used in this Agreement, the terms "prospectus" and "statement of
additional information" shall mean the form of prospectus and statement
of additional information filed by the Trust on behalf of the Series as
part of the Registration Statement most recently filed by the Trust on
behalf of the Series with the Securities and Exchange Commission and
effective under the 1933 Act, as such Registration Statement is amended
by any amendments thereto at the time in effect, as such form of
prospectus and statement of additional information may be amended or
supplemented from time to time.
As used in this Agreement, the term "net asset value" shall have the
meaning ascribed to it in the Trust's Declaration of Trust; and the term
"assignment," "interested person," and "majority of the outstanding
voting securities" shall have the meanings given to them by section
2(a) of the 1940 Act, subject to such exemptions as may be granted by
the Securities and Exchange Commission by any rule, regulation or order.
15. Limitation of Liability of Trust.
It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the trustees, shareholders, nominees,
officers, agents or employees of the Trust personally, but shall bind
only the trust property of the Trust, as provided in the Declaration of
Trust of the Trust. The execution and delivery of this Agreement have
been authorized by the trustees of the Trust and this Agreement has been
signed by an authorized officer of the Trust, acting as such, and
neither such authorization by such trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of
them but shall bind only the trust property of the Trust as provided in
its Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
consisting of nine type written pages, together with Schedules "A", "B" and
"C", to be signed by their duly authorized officers, as of the day and year
first above written.
<PAGE>
<PAGE>
Smith Breeden Trust
By:Michael J. Giarla
Smith Breeden Associates, Inc.
By:Michael J. Giarla
<PAGE>
Fund/Plan Broker Services, Inc.
By: Nancy E. Kuhn, President
Schedule "A"
UNDERWRITER/DISTRIBUTION SERVICES FOR
SMITH BREEDEN TRUST
A) Compliance and maintenance of Trust share registration limits
B) Preparation and execution of Underwriter and 12b-1 Plan
Agreements
Monitoring accruals
Monitoring expenses
Disbursements for expenses and trail commissions
C) Quarterly Reports to Board of Trustees
D) Literature review, recommendations and submission to the NASD
E) All NASD required files and bookkeeping
F) Initial NASD Licensing and Transfers of Registered Representatives
G) Written supervisory procedures and manuals for Registered
Representatives
H) Annual on-site compliance review for Representatives regarding:
disbursement of Trust literature, written correspondence and
communications with the public.
<PAGE>
Schedule "C"
Identification of Series
Below are listed the "Series" to which services under this Agreement are
to be performed as of the execution date of this Agreement:
Smith Breeden Trust
This Schedule "C" may be amended from time to time by agreement of
the Parties.
CUSTODY AGREEMENT
Agreement made as of this 16th day of December,
1994, between Smith Breeden Trust, a Massachusetts business
trust organized and existing under the laws of the Com-
monwealth of Massachusetts, having its principal office and
place of business at 100 Europa Drive, Chapel Hill, NC
27514 Suite 200
(hereinafter called the "Trust"), and THE BANK OF NEW YORK, a
New York corporation authorized to do a banking business, hav-
ing its principal office and place of business at 48 Wall
Street, New York, New York 10286 (hereinafter called the "Cus-
todian").
W I T N E S S E T H :
WHEREAS, the Trust represents that pursuant to the Cus-
tody Administration and Agency Agreement between Fund/Plan
Services, Inc. ("Fund/Plan") and the Trust, Fund/Plan (a) has
agreed to perform certain administrative functions which may
include the functions of administrator, transfer agent and
accounting services agent and (b) has been appointed by the
Trust to act as its agent in respect of certain transactions
contemplated in this Agreement; and
WHEREAS, the Trust represents that (a) Fund/Plan has
agreed to act as Trust's agent in respect of certain transac-
tions contemplated in this Agreement and (b) the Bank is au-
thorized and directed to rely upon and follow Certificates and
instructions given by Fund/Plan, the Trust's agent, in respect
of transactions contemplated in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
hereinafter set forth, the Trust and the Custodian agree as
follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:<PAGE>
1. "Administrator" shall mean Fund/Plan Services, Inc.
and such successors or permitted assigns as may succeed and
perform its duties under the Administration Agreement.
2. "Administration Agreement" shall mean that certain
separate agreement entitled "Custody Administration and Agency
Agreement" dated as of December 20, 1994 between the Trust
and the Fund/Plan Services, Inc.
3. "Book-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for United States and fed-
eral agency securities, its successor or successors and its
nominee or nominees.
4. "Call Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and payment of the exercise
price, as specified therein, to purchase from the writer
thereof the specified underlying Securities.
5. "Certificate" shall mean any notice, instruction, or
other instrument in writing, authorized or required by this
Agreement to be given to the Custodian which is actually re-
ceived by the Custodian and signed on behalf of the Trust by
any two Officers, and the term Certificate shall also include
instructions communicated to the Custodian by the Administra-
tor by Terminal Link.
6. "Clearing Member" shall mean a registered
broker-dealer which is a clearing member under the rules of
O.C.C. and a member of a national securities exchange quali-
fied to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such
a clearing member.
7. "Collateral Account" shall mean a segregated account
so denominated which is specifically allocated to a Series and
pledged to the Custodian as security for, and in consideration
of, the Custodian's issuance of (a) any Put Option guarantee
letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII
herein.
8. "Covered Call Option" shall mean an exchange traded
option entitling the holder, upon timely exercise and payment
of the exercise price, as specified therein, to purchase from
the writer thereof the specified underlying Securities (ex-
cluding Futures Contracts) which are owned by the writer
thereof and subject to appropriate restrictions.
9. "Depository" shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and
- 2 -<PAGE>
Exchange Commission, its successor or successors and its nomi-
nee or nominees. The term "Depository" shall further mean and
include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, specifically identi-
fied in a certified copy of a resolution of the Trust's Board
of Trustees specifically approving deposits therein by the
Custodian.
10. "Financial Futures Contract" shall mean the firm
commitment to buy or sell fixed income securities including,
without limitation, U.S. Treasury Bills, U.S. Treasury Notes,
U.S. Treasury Bonds, domestic bank certificates of deposit,
and Eurodollar certificates of deposit, during a specified
month at an agreed upon price.
11. "Futures Contract" shall mean a Financial Futures
Contract and/or Stock Index Futures Contracts.
12. "Futures Contract Option" shall mean an option with
respect to a Futures Contract.
13. "Margin Account" shall mean a segregated account in
the name of a broker, dealer, futures commission merchant, or
a Clearing Member, or in the name of the Trust for the benefit
of a broker, dealer, futures commission merchant, or Clearing
Member, or otherwise, in accordance with an agreement between
the Trust, the Custodian and a broker, dealer, futures commis-
sion merchant or a Clearing Member (a "Margin Account Agree-
ment"), separate and distinct from the custody account, in
which certain Securities and/or money of the Trust shall be
deposited and withdrawn from time to time in connection with
such transactions as the Trust may from time to time deter-
mine. Securities held in the Book-Entry System or the Deposi-
tory shall be deemed to have been deposited in, or withdrawn
from, a Margin Account upon the Custodian's effecting an ap-
propriate entry in its books and records.
14. "Money Market Security" shall be deemed to include,
without limitation, certain Reverse Repurchase Agreements,
debt obligations issued or guaranteed as to interest and prin-
cipal by the government of the United States or agencies or
instrumentalities thereof, any tax, bond or revenue anticipa-
tion note issued by any state or municipal government or pub-
lic authority, commercial paper, certificates of deposit and
bankers' acceptances, repurchase agreements with respect to
the same and bank time deposits, where the purchase and sale
of such securities normally requires settlement in federal
funds on the same day as such purchase or sale.
15. "O.C.C." shall mean the Options Clearing Corpora-
tion, a clearing agency registered under Section 17A of the
Securities Exchange Act of 1934, its successor or successors,
and its nominee or nominees.
- 3 -<PAGE>
16. "Officers" shall be deemed to include the President,
any Vice President, the Secretary, the Clerk, the Treasurer,
the Controller, any Assistant Secretary, any Assistant Clerk,
any Assistant Treasurer, and any other person or persons, in-
cluding officers or employees of the Administrator, whether or
not any such other person is an officer of the Trust, duly au-
thorized by the Board of Trustees of the Trust to execute any
Certificate, instruction, notice or other instrument on behalf
of the Trust and listed in the Certificate annexed hereto as
Appendix A or such other Certificate as may be received by the
Custodian from time to time.
17. "Option" shall mean a Call Option, Covered Call Op-
tion, Stock Index Option and/or a Put Option.
18. "Oral Instructions" shall mean verbal instructions
actually received by the Custodian from an Officer or from a
person reasonably believed by the Custodian to be an Officer.
19. "Put Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and tender of the specified un-
derlying Securities, to sell such Securities to the writer
thereof for the exercise price.
20. "Reverse Repurchase Agreement" shall mean an agree-
ment pursuant to which the Trust sells Securities and agrees
to repurchase such Securities at a described or specified date
and price.
21. "Security" shall be deemed to include, without limi-
tation, Money Market Securities, Call Options, Put Options,
Stock Index Options, Stock Index Futures Contracts, Stock In-
dex Futures Contract Options, Financial Futures Contracts,
Financial Futures Contract Options, Reverse Repurchase Agree-
ments, common stocks and other securities having characteris-
tics similar to common stocks, preferred stocks, debt obliga-
tions issued by state or municipal governments and by public
authorities, (including, without limitation, general obliga-
tion bonds, revenue bonds, industrial bonds and industrial
development bonds), bonds, debentures, notes, mortgages or
other obligations, and any certificates, receipts, warrants or
other instruments representing rights to receive, purchase,
sell or subscribe for the same, or evidencing or representing
any other rights or interest therein, or any property or as-
sets.
22. "Senior Security Account" shall mean an account
maintained and specifically allocated to a Series under the
terms of this Agreement as a segregated account, by recorda-
tion or otherwise, within the custody account in which certain
- 4 -<PAGE>
Securities and/or other assets of the Trust specifically al-
located to such Series shall be deposited and withdrawn from
time to time in accordance with Certificates received by the
Custodian in connection with such transactions as the Trust
may from time to time determine.
23. "Series" shall mean the various portfolios, if any,
of the Trust as described from time to time in the current and
effective prospectus for the Trust and listed on Appendix B
hereto as amended from time to time.
24. "Shares" shall mean the shares of beneficial inter-
est of the Trust, each of which is, in the case of a Trust
having Series, allocated to a particular Series.
25. "Stock Index Futures Contract" shall mean a bilat-
eral agreement pursuant to which the parties agree to take or
make delivery of an amount of cash equal to a specified dollar
amount times the difference between the value of a particular
stock index at the close of the last business day of the con-
tract and the price at which the futures contract is origi-
nally struck.
26. "Stock Index Option" shall mean an exchange traded
option entitling the holder, upon timely exercise, to receive
an amount of cash determined by reference to the difference
between the exercise price and the value of the index on the
date of exercise.
26. "Terminal Link" shall mean an electronic data trans-
mission link between the Administrator on behalf of the Trust
and the Custodian requiring in connection with each use of the
Terminal Link by or on behalf of the Administrator on behalf
of the Trust use of an authorization code provided by the Cus-
todian and at least two access codes established by the Admin-
istrator on behalf of the Trust.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Trust hereby constitutes and appoints the Custo-
dian as custodian of the Securities and moneys at any time
owned by the Trust during the period of this Agreement.
2. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as herein-
after set forth.
- 5 -<PAGE>
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this
Article and in Article VIII, the Trust will deliver or cause
to be delivered to the Custodian all Securities and all moneys
owned by it, at any time during the period of this Agreement,
and shall specify with respect to such Securities and money
the Series to which the same are specifically allocated. The
Custodian shall segregate, keep and maintain the assets of the
Series separate and apart. The Custodian will not be respon-
sible for any Securities and moneys not actually received by
it. The Custodian will be entitled to reverse any credits
made on the Trust's behalf where such credits have been previ-
ously made and moneys are not finally collected. The Trust
shall deliver to the Custodian a certified resolution of the
Board of Trustees of the Trust, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the
Custodian on a continuous and on-going basis to deposit in the
Book-Entry System all Securities eligible for deposit therein,
regardless of the Series to which the same are specifically
allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, includ-
ing, without limitation, in connection with settlements of
purchases and sales of Securities, loans of Securities and
deliveries and returns of Securities collateral. Prior to a
deposit of Securities specifically allocated to a Series in
the Depository, the Trust shall deliver to the Custodian a
certified resolution of the Board of Trustees of the Trust,
substantially in the form of Exhibit B hereto, approving, au-
thorizing and instructing the Custodian on a continuous and
ongoing basis until instructed to the contrary by a Certifi-
cate actually received by the Custodian to deposit in the De-
pository all Securities specifically allocated to such Series
eligible for deposit therein, and to utilize the Depository to
the extent possible with respect to such Securities in connec-
tion with its performance hereunder, including, without limi-
tation, in connection with settlements of purchases and sales
of Securities, loans of Securities, and deliveries and returns
of Securities collateral. Securities and moneys deposited in
either the Book-Entry System or the Depository will be repre-
sented in accounts which include only assets held by the Cus-
todian for customers, including, but not limited to, accounts
in which the Custodian acts in a fiduciary or representative
capacity and will be specifically allocated on the Custodian's
books to the separate account for the applicable Series.
Prior to the Custodian's accepting, utilizing and acting with
respect to Clearing Member confirmations for Options and
transactions in Options for a Series as provided in this
Agreement, the Custodian shall have received a certified reso-
lution of the Trust's Board of Trustees, substantially in the
- 6 -<PAGE>
form of Exhibit C hereto, approving, authorizing and instruct-
ing the Custodian on a continuous and on-going basis, until
instructed to the contrary by a Certificate actually received
by the Custodian, to accept, utilize and act in accordance
with such confirmations as provided in this Agreement with
respect to such Series.
2. The Custodian shall establish and maintain separate
accounts, in the name of each Series, and shall credit to the
separate account for each Series all moneys received by it for
the account of the Trust with respect to such Series. Money
credited to a separate account for a Series shall be disbursed
by the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name
and address of the person to whom the payment is to be made,
the Series account from which payment is to be made and the
purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of
the expenses and liabilities of the Custodian attributable to
such Series.
3. Promptly after the close of business on each day,
the Custodian shall furnish the Administrator with confirma-
tions and a summary, on a per Series basis, of all transfers
to or from the account of the Trust for a Series, either here-
under or with any co-custodian or sub-custodian appointed in
accordance with this Agreement during said day. Where Securi-
ties are transferred to the account of the Trust for a Series,
the Custodian shall also by book-entry or otherwise identify
as belonging to such Series a quantity of Securities in a fun-
gible bulk of Securities registered in the name of the Custo-
dian (or its nominee) or shown on the Custodian's account on
the books of the Book-Entry System or the Depository. At
least monthly and from time to time, the Custodian shall fur-
nish the Administrator with a detailed statement, on a per
Series basis, of the Securities and moneys held by the Custo-
dian for the Trust.
4. Except as otherwise provided in paragraph 7 of this
Article and in Article VIII, all Securities held by the Custo-
dian hereunder, which are issued or issuable only in bearer
form, except such Securities as are held in the Book-Entry
System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the
Trust, in the name of any duly appointed registered nominee of
the Custodian as the Custodian may from time to time deter-
mine, or in the name of the Book-Entry System or the Deposi-
tory or their successor or successors, or their nominee or
nominees. The Trust agrees to furnish or cause to be fur-
nished to the Custodian appropriate instruments to enable the
- 7 -<PAGE>
Custodian to hold or deliver in proper form for transfer, or
to register in the name of its registered nominee or in the
name of the Book-Entry System or the Depository any Securities
which it may hold hereunder and which may from time to time be
registered in the name of the Trust. The Custodian shall hold
all such Securities specifically allocated to a Series which
are not held in the Book-Entry System or in the Depository in
a separate account in the name of such Series physically seg-
regated at all times from those of any other person or per-
sons.
5. Except as otherwise provided in this Agreement and
unless otherwise instructed to the contrary by a Certificate,
the Custodian by itself, or through the use of the Book-Entry
System or the Depository with respect to Securities held here-
under and therein deposited, shall with respect to all Securi-
ties held for the Trust hereunder in accordance with preceding
paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount pay-
able upon such Securities which are called, but only if either
(i) the Custodian receives a written notice of such call, or
(ii) notice of such call appears in one or more of the publi-
cations listed in Appendix C annexed hereto, which may be
amended at any time by the Custodian without the prior notifi-
cation or consent of the Trust;
(c) Present for payment and collect the amount pay-
able upon all Securities which mature;
(d) Surrender Securities in temporary form for de-
finitive Securities;
(e) Execute, as custodian, any necessary declara-
tions or certificates of ownership under the Federal Income
Tax Laws or the laws or regulations of any other taxing au-
thority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System
or the Depository with respect to Securities therein depos-
ited, for the account of a Series, all rights and similar se-
curities issued with respect to any Securities held by the
Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the
Custodian, directly or through the use of the Book-Entry Sys-
tem or the Depository, shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authoriza-
tions, and any other instruments whereby the authority of the
- 8 -<PAGE>
Trust as owner of any Securities held by the Custodian hereun-
der for the Series specified in such Certificate may be exer-
cised;
(b) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate in ex-
change for other Securities or cash issued or paid in con-
nection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation,
or the exercise of any conversion privilege and receive and
hold hereunder specifically allocated to such Series any cash
or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate to any
protective committee, reorganization committee or other person
in connection with the reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets of any cor-
poration, and receive and hold hereunder specifically al-
located to such Series such certificates of deposit, interim
receipts or other instruments or documents as may be issued to
it to evidence such delivery;
(d) Make such transfers or exchanges of the assets
of the Series specified in such Certificate, and take such
other steps as shall be stated in such Certificate to be for
the purpose of effectuating any duly authorized plan of liqui-
dation, reorganization, merger, consolidation or recapitaliza-
tion of the Trust; and
(e) Present for payment and collect the amount pay-
able upon Securities not described in preceding paragraph 5(b)
of this Article which may be called as specified in the Cer-
tificate.
7. Notwithstanding any provision elsewhere contained
herein, the Custodian shall not be required to obtain posses-
sion of any instrument or certificate representing any Futures
Contract, any Option, or any Futures Contract Option until
after it shall have determined, or shall have received a Cer-
tificate from the Trust stating, that any such instruments or
certificates are available. The Trust shall deliver to the
Custodian such a Certificate no later than the business day
preceding the availability of any such instrument or certifi-
cate. Prior to such availability, the Custodian shall comply
with Section 17(f) of the Investment Company Act of 1940, as
amended, in connection with the purchase, sale, settlement,
closing out or writing of Futures Contracts, Options, or Fu-
tures Contract Options by making payments or deliveries speci-
fied in Certificates received by the Custodian in connection
with any such purchase, sale, writing, settlement or closing
out upon its receipt from a broker, dealer, or futures commis-
sion merchant of a statement or confirmation reasonably be-
lieved by the Custodian to be in the form customarily used by
- 9 -<PAGE>
brokers, dealers, or future commission merchants with respect
to such Futures Contracts, Options, or Futures Contract Op-
tions, as the case may be, confirming that such Security is
held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or
any nominee of the Custodian) as custodian for the Trust, pro-
vided, however, that notwithstanding the foregoing, payments
to or deliveries from the Margin Account and payments with
respect to Securities to which a Margin Account relates, shall
be made in accordance with the terms and conditions of the
Margin Account Agreement. Whenever any such instruments or
certificates are available, the Custodian shall, notwithstand-
ing any provision in this Agreement to the contrary, make pay-
ment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are
available only against the delivery to the Custodian of such
instrument or such certificate, and deliver any Futures Con-
tract, Option or Futures Contract Option for which such in-
struments or such certificates are available only against re-
ceipt by the Custodian of payment therefor. Any such instru-
ment or certificate delivered to the Custodian shall be held
by the Custodian hereunder in accordance with, and subject to,
the provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE TRUST
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the
Trust, other than a purchase of an Option, a Futures Contract,
or a Futures Contract Option, the Trust shall deliver or cause
the Administrator to deliver to the Custodian (i) with respect
to each purchase of Securities which are not Money Market Se-
curities, a Certificate, and (ii) with respect to each pur-
chase of Money Market Securities, a Certificate or Oral In-
structions, specifying with respect to each such purchase: (a)
the Series to which such Securities are to be specifically
allocated; (b) the name of the issuer and the title of the
Securities; (c) the number of shares or the principal amount
purchased and accrued interest, if any; (d) the date of pur-
chase and settlement; (e) the purchase price per unit; (f) the
total amount payable upon such purchase; (g) the name of the
person from whom or the broker through whom the purchase was
made, and the name of the clearing broker, if any; and (h) the
name of the broker to whom payment is to be made. The Custo-
dian shall, upon receipt of Securities purchased by or for the
Trust, pay to the broker specified in the Certificate out of
the moneys held for the account of such Series the total
- 10 -<PAGE>
amount payable upon such purchase, provided that the same con-
forms to the total amount payable as set forth in such Cer-
tificate or Oral Instructions.
2. Promptly after each sale of Securities by the Trust,
other than a sale of any Option, Futures Contract, Futures
Contract Option, or any Reverse Repurchase Agreement, the
Trust shall deliver or cause the Administrator to deliver to
the Custodian (i) with respect to each sale of Securities
which are not Money Market Securities, a Certificate, and (ii)
with respect to each sale of Money Market Securities, a Cer-
tificate or Oral Instructions, specifying with respect to each
such sale: (a) the Series to which such Securities were spe-
cifically allocated; (b) the name of the issuer and the title
of the Security; (c) the number of shares or principal amount
sold, and accrued interest, if any; (d) the date of sale; (e)
the sale price per unit; (f) the total amount payable to the
Trust upon such sale; (g) the name of the broker through whom
or the person to whom the sale was made, and the name of the
clearing broker, if any; and (h) the name of the broker to
whom the Securities are to be delivered. The Custodian shall
deliver the Securities specifically allocated to such Series
to the broker specified in the Certificate against payment
upon receipt of the total amount payable to the Trust upon
such sale, provided that the same conforms to the total amount
payable as set forth in such Certificate or Oral Instruc-
tions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the
Trust, the Trust shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to each Option purchased: (a) the Series to which such Option
is specifically allocated; (b) the type of Option (put or
call); (c) the name of the issuer and the title and number of
shares subject to such Option or, in the case of a Stock Index
Option, the stock index to which such Option relates and the
number of Stock Index Options purchased; (d) the expiration
date; (e) the exercise price; (f) the dates of purchase and
settlement; (g) the total amount payable by the Trust in con-
nection with such purchase; (h) the name of the Clearing Mem-
ber through whom such Option was purchased; and (i) the name
of the broker to whom payment is to be made. The Custodian
shall pay, upon receipt of a Clearing Member's statement con-
firming the purchase of such Option held by such Clearing Mem-
ber for the account of the Custodian (or any duly appointed
and registered nominee of the Custodian) as custodian for the
Trust, out of moneys held for the account of the Series to
which such Option is to be specifically allocated, the total
- 11 -<PAGE>
amount payable upon such purchase to the Clearing Member
through whom the purchase was made, provided that the same
conforms to the total amount payable as set forth in such Cer-
tificate.
2. Promptly after the sale of any Option purchased by
the Trust pursuant to paragraph 1 hereof, the Trust shall de-
liver or cause the Administrator to deliver to the Custodian a
Certificate specifying with respect to each such sale: (a) the
Series to which such Option was specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer
and the title and number of shares subject to such Option or,
in the case of a Stock Index Option, the stock index to which
such Option relates and the number of Stock Index Options
sold; (d) the date of sale; (e) the sale price; (f) the date
of settlement; (g) the total amount payable to the Trust upon
such sale; and (h) the name of the Clearing Member through
whom the sale was made. The Custodian shall consent to the
delivery of the Option sold by the Clearing Member which pre-
viously supplied the confirmation described in preceding para-
graph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the
Trust, provided that the same conforms to the total amount
payable as set forth in such Certificate.
3. Promptly after the exercise by the Trust of any Call
Option purchased by the Trust pursuant to paragraph 1 hereof,
the Trust shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying with respect to such
Call Option: (a) the Series to which such Call Option was spe-
cifically allocated; (b) the name of the issuer and the title
and number of shares subject to the Call Option; (c) the expi-
ration date; (d) the date of exercise and settlement; (e) the
exercise price per share; (f) the total amount to be paid by
the Trust upon such exercise; and (g) the name of the Clearing
Member through whom such Call Option was exercised. The Cus-
todian shall, upon receipt of the Securities underlying the
Call Option which was exercised, pay out of the moneys held
for the account of the Series to which such Call Option was
specifically allocated the total amount payable to the Clear-
ing Member through whom the Call Option was exercised, pro-
vided that the same conforms to the total amount payable as
set forth in such Certificate.
4. Promptly after the exercise by the Trust of any Put
Option purchased by the Trust pursuant to paragraph 1 hereof,
the Trust shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying with respect to such
Put Option: (a) the Series to which such Put Option was spe-
cifically allocated; (b) the name of the issuer and the title
and number of shares subject to the Put Option; (c) the expi-
ration date; (d) the date of exercise and settlement; (e) the
exercise price per share; (f) the total amount to be paid to
the Trust upon such exercise; and (g) the name of the Clearing
- 12 -<PAGE>
Member through whom such Put Option was exercised. The Custo-
dian shall, upon receipt of the amount payable upon the exer-
cise of the Put Option, deliver or direct the Depository to
deliver the Securities specifically allocated to such Series,
provided the same conforms to the amount payable to the Trust
as set forth in such Certificate.
5. Promptly after the exercise by the Trust of any
Stock Index Option purchased by the Trust pursuant to para-
graph 1 hereof, the Trust shall deliver or cause the Adminis-
trator to deliver to the Custodian a Certificate specifying
with respect to such Stock Index Option: (a) the Series to
which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number
of Options being exercised; (d) the stock index to which such
Option relates; (e) the expiration date; (f) the exercise
price; (g) the total amount to be received by the Trust in
connection with such exercise; and (h) the Clearing Member
from whom such payment is to be received.
6. Whenever the Trust writes a Covered Call Option, the
Trust shall deliver or cause the Administrator to deliver to
the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered
Call Option was written; (b) the name of the issuer and the
title and number of shares for which the Covered Call Option
was written and which underlie the same; (c) the expiration
date; (d) the exercise price; (e) the premium to be received
by the Trust; (f) the date such Covered Call Option was writ-
ten; and (g) the name of the Clearing Member through whom the
premium is to be received. The Custodian shall deliver or
cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call
Option, such receipts as are required in accordance with the
customs prevailing among Clearing Members dealing in Covered
Call Options and shall impose, or direct the Depository to
impose, upon the underlying Securities specified in the Cer-
tificate specifically allocated to such Series such restric-
tions as may be required by such receipts. Notwithstanding
the foregoing, the Custodian has the right, upon prior written
notification to the Trust, at any time to refuse to issue any
receipts for Securities in the possession of the Custodian and
not deposited with the Depository underlying a Covered Call
Option.
7. Whenever a Covered Call Option written by the Trust
and described in the preceding paragraph of this Article is
exercised, the Trust shall deliver or cause the Administrator
to deliver to the Custodian a Certificate instructing the Cus-
todian to deliver, or to direct the Depository to deliver, the
Securities subject to such Covered Call Option and specifying:
(a) the Series for which such Covered Call Option was written;
(b) the name of the issuer and the title and number of shares
subject to the Covered Call Option; (c) the Clearing Member to
- 13 -<PAGE>
whom the underlying Securities are to be delivered; and (d)
the total amount payable to the Trust upon such delivery.
Upon the return and/or cancellation of any receipts delivered
pursuant to paragraph 6 of this Article, the Custodian shall
deliver, or direct the Depository to deliver, the underlying
Securities as specified in the Certificate against payment of
the amount to be received as set forth in such Certificate.
8. Whenever the Trust writes a Put Option, the Trust
shall deliver or cause the Administrator to deliver to the
Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written;
(b) the name of the issuer and the title and number of shares
for which the Put Option is written and which underlie the
same; (c) the expiration date; (d) the exercise price; (e) the
premium to be received by the Trust; (f) the date such Put Op-
tion is written; (g) the name of the Clearing Member through
whom the premium is to be received and to whom a Put Option
guarantee letter is to be delivered; (h) the amount of cash,
and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Secu-
rity Account for such Series; and (i) the amount of cash
and/or the amount and kind of Securities specifically al-
located to such Series to be deposited into the Collateral
Account for such Series. The Custodian shall, after making
the deposits into the Collateral Account specified in the Cer-
tificate, issue a Put Option guarantee letter substantially in
the form utilized by the Custodian on the date hereof, and
deliver the same to the Clearing Member specified in the Cer-
tificate against receipt of the premium specified in said Cer-
tificate. Notwithstanding the foregoing, the Custodian shall
be under no obligation to issue any Put Option guarantee let-
ter or similar document if it is unable to make any of the
representations contained therein.
9. Whenever a Put Option written by the Trust and de-
scribed in the preceding paragraph is exercised, the Trust
shall deliver or cause the Administrator to deliver to the
Custodian a Certificate specifying: (a) the Series to which
such Put Option was written; (b) the name of the issuer and
title and number of shares subject to the Put Option; (c) the
Clearing Member from whom the underlying Securities are to be
received; (d) the total amount payable by the Trust upon such
delivery; (e) the amount of cash and/or the amount and kind of
Securities specifically allocated to such Series to be with-
drawn from the Collateral Account for such Series and (f) the
amount of cash and/or the amount and kind of Securities, spe-
cifically allocated to such Series, if any, to be withdrawn
from the Senior Security Account. Upon the return and/or
cancellation of any Put Option guarantee letter or similar
document issued by the Custodian in connection with such Put
Option, the Custodian shall pay out of the moneys held for the
- 14 -<PAGE>
account of the Series to which such Put Option was specifi-
cally allocated the total amount payable to the Clearing Mem-
ber specified in the Certificate as set forth in such Certifi-
cate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
10. Whenever the Trust writes a Stock Index Option, the
Trust shall deliver or cause the Administrator to deliver to
the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index
Option was written; (b) whether such Stock Index Option is a
put or a call; (c) the number of options written; (d) the
stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the Clearing Member through
whom such Option was written; (h) the premium to be received
by the Trust; (i) the amount of cash and/or the amount and
kind of Securities, if any, specifically allocated to such
Series to be deposited in the Senior Security Account for such
Series; (j) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to
be deposited in the Collateral Account for such Series; and
(k) the amount of cash and/or the amount and kind of Securi-
ties, if any, specifically allocated to such Series to be de-
posited in a Margin Account, and the name in which such ac-
count is to be or has been established. The Custodian shall,
upon receipt of the premium specified in the Certificate, make
the deposits, if any, into the Senior Security Account speci-
fied in the Certificate, and either (1) deliver such receipts,
if any, which the Custodian has specifically agreed to issue,
which are in accordance with the customs prevailing among
Clearing Members in Stock Index Options and make the deposits
into the Collateral Account specified in the Certificate, or
(2) make the deposits into the Margin Account specified in the
Certificate.
11. Whenever a Stock Index Option written by the Trust
and described in the preceding paragraph of this Article is
exercised, the Trust shall deliver or cause the Administrator
to deliver to the Custodian a Certificate specifying with re-
spect to such Stock Index Option: (a) the Series for which
such Stock Index Option was written; (b) such information as
may be necessary to identify the Stock Index Option being ex-
ercised; (c) the Clearing Member through whom such Stock Index
Option is being exercised; (d) the total amount payable upon
such exercise, and whether such amount is to be paid by or to
the Trust; (e) the amount of cash and/or amount and kind of
Securities, if any, to be withdrawn from the Margin Account;
and (f) the amount of cash and/or amount and kind of Securi-
ties, if any, to be withdrawn from the Senior Security Account
for such Series; and the amount of cash and/or the amount and
kind of Securities, if any, to be withdrawn from the Col-
lateral Account for such Series. Upon the return and/or can-
cellation of the receipt, if any, delivered pursuant to the
preceding paragraph of this Article, the Custodian shall pay
- 15 -<PAGE>
out of the moneys held for the account of the Series to which
such Stock Index Option was specifically allocated to the
Clearing Member specified in the Certificate the total amount
payable, if any, as specified therein.
12. Whenever the Trust purchases any Option identical to
a previously written Option described in paragraphs, 6, 8 or
10 of this Article in a transaction expressly designated as a
"Closing Purchase Transaction" in order to liquidate its posi-
tion as a writer of an Option, the Trust shall deliver or
cause the Administrator to deliver to the Custodian a Certifi-
cate specifying with respect to the Option being purchased:
(a) that the transaction is a Closing Purchase Transaction;
(b) the Series for which the Option was written; (c) the name
of the issuer and the title and number of shares subject to
the Option, or, in the case of a Stock Index Option, the stock
index to which such Option relates and the number of Options
held; (d) the exercise price; (e) the premium to be paid by
the Trust; (f) the expiration date; (g) the type of Option
(put or call); (h) the date of such purchase; (i) the name of
the Clearing Member to whom the premium is to be paid; and (j)
the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Collateral Account, a speci-
fied Margin Account, or the Senior Security Account for such
Series. Upon the Custodian's payment of the premium and the
return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Op-
tion being liquidated through the Closing Purchase Transac-
tion, the Custodian shall remove, or direct the Depository to
remove, the previously imposed restrictions on the Securities
underlying the Call Option.
13. Upon the expiration, exercise or consummation of a
Closing Purchase Transaction with respect to any Option pur-
chased or written by the Trust and described in this Article,
the Custodian shall delete such Option from the statements
delivered to the Trust pursuant to paragraph 3 Article III
herein, and upon the return and/or cancellation of any re-
ceipts issued by the Custodian, shall make such withdrawals
from the Collateral Account, and the Margin Account and/or the
Senior Security Account as may be specified in a Certificate
received in connection with such expiration, exercise, or con-
summation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Trust shall enter into a Futures Con-
tract, the Trust shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to such Futures Contract, (or with respect to any number of
- 16 -<PAGE>
identical Futures Contract(s)): (a) the Series for which the
Futures Contract is being entered; (b) the category of Futures
Contract (the name of the underlying stock index or financial
instrument); (c) the number of identical Futures Contracts
entered into; (d) the delivery or settlement date of the Fu-
tures Contract(s); (e) the date the Futures Contract(s) was
(were) entered into and the maturity date; (f) whether the
Trust is buying (going long) or selling (going short) on such
Futures Contract(s); (g) the amount of cash and/or the amount
and kind of Securities, if any, to be deposited in the Senior
Security Account for such Series; (h) the name of the broker,
dealer, or futures commission merchant through whom the Fu-
tures Contract was entered into; and (i) the amount of fee or
commission, if any, to be paid and the name of the broker,
dealer, or futures commission merchant to whom such amount is
to be paid. The Custodian shall make the deposits, if any, to
the Margin Account in accordance with the terms and conditions
of the Margin Account Agreement. The Custodian shall make
payment out of the moneys specifically allocated to such Se-
ries of the fee or commission, if any, specified in the Cer-
tificate and deposit in the Senior Security Account for such
Series the amount of cash and/or the amount and kind of Secu-
rities specified in said Certificate.
2. (a) Any variation margin payment or similar payment
required to be made by the Trust to a broker, dealer, or fu-
tures commission merchant with respect to an outstanding Fu-
tures Contract, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment
from a broker, dealer, or futures commission merchant to the
Trust with respect to an outstanding Futures Contract, shall
be received and dealt with by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian
hereunder is retained by the Trust until delivery or settle-
ment is made on such Futures Contract, the Trust shall deliver
or cause the Administrator to deliver to the Custodian a Cer-
tificate specifying: (a) the Futures Contract and the Series
to which the same relates; (b) with respect to a Stock Index
Futures Contract, the total cash settlement amount to be paid
or received, and with respect to a Financial Futures Contract,
the Securities and/or amount of cash to be delivered or re-
ceived; (c) the broker, dealer, or futures commission merchant
to or from whom payment or delivery is to be made or received;
and (d) the amount of cash and/or Securities to be withdrawn
from the Senior Security Account for such Series. The Custo-
dian shall make the payment or delivery specified in the Cer-
tificate, and delete such Futures Contract from the statements
delivered to the Trust pursuant to paragraph 3 of Article III
herein.
- 17 -<PAGE>
4. Whenever the Trust shall enter into a Futures Con-
tract to offset a Futures Contract held by the Custodian here-
under, the Trust shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying: (a) the
items of information required in a Certificate described in
paragraph 1 of this Article, and (b) the Futures Contract be-
ing offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commis-
sion, if any, specified in the Certificate and delete the Fu-
tures Contract being offset from the statements delivered to
the Trust pursuant to paragraph 3 of Article III herein, and
make such withdrawals from the Senior Security Account for
such Series as may be specified in such Certificate. The
withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and con-
ditions of the Margin Account Agreement.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract
Option by the Trust, the Trust shall deliver or cause the Ad-
ministrator to deliver to the Custodian a Certificate specify-
ing with respect to such Futures Contract Option: (a) the Se-
ries to which such Option is specifically allocated; (b) the
type of Futures Contract Option (put or call); (c) the type of
Futures Contract and such other information as may be neces-
sary to identify the Futures Contract underlying the Futures
Contract Option purchased; (d) the expiration date; (e) the
exercise price; (f) the dates of purchase and settlement; (g)
the amount of premium to be paid by the Trust upon such pur-
chase; (h) the name of the broker or futures commission mer-
chant through whom such option was purchased; and (i) the name
of the broker, or futures commission merchant, to whom payment
is to be made. The Custodian shall pay out of the moneys spe-
cifically allocated to such Series, the total amount to be
paid upon such purchase to the broker or futures commissions
merchant through whom the purchase was made, provided that the
same conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Op-
tion purchased by the Trust pursuant to paragraph 1 hereof,
the Trust shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying with respect to each
such sale: (a) Series to which such Futures Contract Option
was specifically allocated; (b) the type of Future Contract
Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d)
the date of sale; (e) the sale price; (f) the date of settle-
ment; (g) the total amount payable to the Trust upon such
- 18 -<PAGE>
sale; and (h) the name of the broker of futures commission
merchant through whom the sale was made. The Custodian shall
consent to the cancellation of the Futures Contract Option
being closed against payment to the Custodian of the total
amount payable to the Trust, provided the same conforms to the
total amount payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the
Trust pursuant to paragraph 1 is exercised by the Trust, the
Trust shall deliver or cause the Administrator to deliver to
the Custodian a Certificate specifying: (a) the Series to
which such Futures Contract Option was specifically allocated;
(b) the particular Futures Contract Option (put or call) being
exercised; (c) the type of Futures Contract underlying the
Futures Contract Option; (d) the date of exercise; (e) the
name of the broker or futures commission merchant through whom
the Futures Contract Option is exercised; (f) the net total
amount, if any, payable by the Trust; (g) the amount, if any,
to be received by the Trust; and (h) the amount of cash and/or
the amount and kind of Securities to be deposited in the Se-
nior Security Account for such Series. The Custodian shall
make, out of the moneys and Securities specifically allocated
to such Series, the payments, if any, and the deposits, if
any, into the Senior Security Account as specified in the Cer-
tificate. The deposits, if any, to be made to the Margin Ac-
count shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
4. Whenever the Trust writes a Futures Contract Option,
the Trust shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures
Contract Option was written; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d)
the expiration date; (e) the exercise price; (f) the premium
to be received by the Trust; (g) the name of the broker or fu-
tures commission merchant through whom the premium is to be
received; and (h) the amount of cash and/or the amount and
kind of Securities, if any, to be deposited in the Senior Se-
curity Account for such Series. The Custodian shall, upon
receipt of the premium specified in the Certificate, make out
of the moneys and Securities specifically allocated to such
Series the deposits into the Senior Security Account, if any,
as specified in the Certificate. The deposits, if any, to be
made to the Margin Account shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account
Agreement.
5. Whenever a Futures Contract Option written by the
Trust which is a call is exercised, the Trust shall deliver or
cause the Administrator to deliver to the Custodian a Certifi-
cate specifying: (a) the Series to which such Futures Contract
- 19 -<PAGE>
Option was specifically allocated; (b) the particular Futures
Contract Option exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Fu-
tures Contract Option was exercised; (e) the net total amount,
if any, payable to the Trust upon such exercise; (f) the net
total amount, if any, payable by the Trust upon such exercise;
and (g) the amount of cash and/or the amount and kind of Secu-
rities to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon its receipt of the net to-
tal amount payable to the Trust, if any, specified in such
Certificate make the payments, if any, and the deposits, if
any, into the Senior Security Account as specified in the Cer-
tificate. The deposits, if any, to be made to the Margin Ac-
count shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written
by the Trust and which is a put is exercised, the Trust shall
deliver or cause the Administrator to deliver to the Custodian
a Certificate specifying: (a) the Series to which such Option
was specifically allocated; (b) the particular Futures Con-
tract Option exercised; (c) the type of Futures Contract un-
derlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Fu-
tures Contract Option is exercised; (e) the net total amount,
if any, payable to the Trust upon such exercise; (f) the net
total amount, if any, payable by the Trust upon such exercise;
and (g) the amount and kind of Securities and/or cash to be
withdrawn from or deposited in, the Senior Security Account
for such Series, if any. The Custodian shall, upon its re-
ceipt of the net total amount payable to the Trust, if any,
specified in the Certificate, make out of the moneys and Secu-
rities specifically allocated to such Series, the payments, if
any, and the deposits, if any, into the Senior Security Ac-
count as specified in the Certificate. The deposits to and/or
withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
7. Whenever the Trust purchases any Futures Contract
Option identical to a previously written Futures Contract Op-
tion described in this Article in order to liquidate its posi-
tion as a writer of such Futures Contract Option, the Trust
shall deliver or cause the Administrator to deliver to the
Custodian a Certificate specifying with respect to the Futures
Contract Option being purchased: (a) the Series to which such
Option is specifically allocated; (b) that the transaction is
a closing transaction; (c) the type of Future Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Option Contract; (d)
the exercise price; (e) the premium to be paid by the Trust;
(f) the expiration date; (g) the name of the broker or futures
commission merchant to whom the premium is to be paid; and (h)
- 20 -<PAGE>
the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for
such Series. The Custodian shall effect the withdrawals from
the Senior Security Account specified in the Certificate. The
withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and con-
ditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a
closing transaction with respect to, any Futures Contract Op-
tion written or purchased by the Trust and described in this
Article, the Custodian shall (a) delete such Futures Contract
Option from the statements delivered to the Trust pursuant to
paragraph 3 of Article III herein and, (b) make such withdraw-
als from and/or in the case of an exercise such deposits into
the Senior Security Account as may be specified in a Certifi-
cate. The deposits to and/or withdrawals from the Margin Ac-
count, if any, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Trust through the
exercise of a Futures Contract Option described in this Ar-
ticle shall be subject to Article VI hereof.
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of the
Trust, the Trust shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying: (a) the
Series for which such short sale was made; (b) the name of the
issuer and the title of the Security; (c) the number of shares
or principal amount sold, and accrued interest or dividends,
if any; (d) the dates of the sale and settlement; (e) the sale
price per unit; (f) the total amount credited to the Trust
upon such sale, if any, (g) the amount of cash and/or the
amount and kind of Securities, if any, which are to be depos-
ited in a Margin Account and the name in which such Margin
Account has been or is to be established; (h) the amount of
cash and/or the amount and kind of Securities, if any, to be
deposited in a Senior Security Account, and (i) the name of
the broker through whom such short sale was made. The Custo-
dian shall upon its receipt of a statement from such broker
confirming such sale and that the total amount credited to the
Trust upon such sale, if any, as specified in the Certificate
is held by such broker for the account of the Custodian (or
any nominee of the Custodian) as custodian of the Trust, issue
a receipt or make the deposits into the Margin Account and the
Senior Security Account specified in the Certificate.
- 21 -<PAGE>
2. In connection with the closing-out of any short
sale, the Trust shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to each such closing out: (a) the Series for which such
transaction is being made; (b) the name of the issuer and the
title of the Security; (c) the number of shares or the princi-
pal amount, and accrued interest or dividends, if any, re-
quired to effect such closing-out to be delivered to the bro-
ker; (d) the dates of closing-out and settlement; (e) the pur-
chase price per unit; (f) the net total amount payable to the
Trust upon such closing-out; (g) the net total amount payable
to the broker upon such closing-out; (h) the amount of cash
and the amount and kind of Securities to be withdrawn, if any,
from the Margin Account; (i) the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from
the Senior Security Account; and (j) the name of the broker
through whom the Trust is effecting such closing-out. The
Custodian shall, upon receipt of the net total amount payable
to the Trust upon such closing-out, and the return and/ or
cancellation of the receipts, if any, issued by the Custodian
with respect to the short sale being closed-out, pay out of
the moneys held for the account of the Trust to the broker the
net total amount payable to the broker, and make the withdraw-
als from the Margin Account and the Senior Security Account,
as the same are specified in the Certificate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Trust enters a Reverse Repurchase
Agreement with respect to Securities and money held by the
Custodian hereunder, the Trust shall deliver or cause the Ad-
ministrator to deliver to the Custodian a Certificate, or in
the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions specifying: (a)
the Series for which the Reverse Repurchase Agreement is en-
tered; (b) the total amount payable to the Trust in connection
with such Reverse Repurchase Agreement and specifically al-
located to such Series; (c) the broker or dealer through or
with whom the Reverse Repurchase Agreement is entered; (d) the
amount and kind of Securities to be delivered by the Trust to
such broker or dealer; (e) the date of such Reverse Repurchase
Agreement; and (f) the amount of cash and/or the amount and
kind of Securities, if any, specifically allocated to such
Series to be deposited in a Senior Security Account for such
Series in connection with such Reverse Repurchase Agreement.
The Custodian shall, upon receipt of the total amount payable
to the Trust specified in the Certificate or Oral Instructions
make the delivery to the broker or dealer, and the deposits,
if any, to the Senior Security Account, specified in such Cer-
tificate or Oral Instructions.
- 22 -<PAGE>
2. Upon the termination of a Reverse Repurchase Agree-
ment described in preceding paragraph 1 of this Article, the
Trust shall deliver or cause the Administrator to deliver a
Certificate or, in the event such Reverse Repurchase Agreement
is a Money Market Security, a Certificate or Oral Instructions
to the Custodian specifying: (a) the Reverse Repurchase Agree-
ment being terminated and the Series for which same was en-
tered; (b) the total amount payable by the Trust in connection
with such termination; (c) the amount and kind of Securities
to be received by the Trust and specifically allocated to such
Series in connection with such termination; (d) the date of
termination; (e) the name of the broker or dealer with or
through whom the Reverse Repurchase Agreement is to be termi-
nated; and (f) the amount of cash and/or the amount and kind
of Securities to be withdrawn from the Senior Securities Ac-
count for such Series. The Custodian shall, upon receipt of
the amount and kind of Securities to be received by the Trust
specified in the Certificate or Oral Instructions, make the
payment to the broker or dealer, and the withdrawals, if any,
from the Senior Security Account, specified in such Certifi-
cate or Oral Instructions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE TRUST
1. Promptly after each loan of portfolio Securities
specifically allocated to a Series held by the Custodian here-
under, the Trust shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying with respect
to each such loan: (a) the Series to which the loaned Securi-
ties are specifically allocated; (b) the name of the issuer
and the title of the Securities, (c) the number of shares or
the principal amount loaned, (d) the date of loan and deliv-
ery, (e) the total amount to be delivered to the Custodian
against the loan of the Securities, including the amount of
cash collateral and the premium, if any, separately identi-
fied, and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall
deliver the Securities thus designated to the broker, dealer
or financial institution to which the loan was made upon re-
ceipt of the total amount designated as to be delivered
against the loan of Securities. The Custodian may accept pay-
ment in connection with a delivery otherwise than through the
Book-Entry System or Depository only in the form of a certi-
fied or bank cashier's check payable to the order of the Trust
or the Custodian drawn on New York Clearing House funds and
may deliver Securities in accordance with the customs prevail-
ing among dealers in securities.
- 23 -<PAGE>
2. Promptly after each termination of the loan of Secu-
rities by the Trust, the Trust shall deliver or cause the Ad-
ministrator to deliver to the Custodian a Certificate specify-
ing with respect to each such loan termination and return of
Securities: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the
title of the Securities to be returned, (c) the number of
shares or the principal amount to be returned, (d) the date of
termination, (e) the total amount to be delivered by the Cus-
todian (including the cash collateral for such Securities mi-
nus any offsetting credits as described in said Certificate),
and (f) the name of the broker, dealer, or financial institu-
tion from which the Securities will be returned. The Custo-
dian shall receive all Securities returned from the broker,
dealer, or financial institution to which such Securities were
loaned and upon receipt thereof shall pay, out of the moneys
held for the account of the Trust, the total amount payable
upon such return of Securities as set forth in the Certifi-
cate.
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such
deposits to, or withdrawals from, a Senior Security Account as
specified in a Certificate received by the Custodian. Such
Certificate shall specify the Series for which such deposit or
withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such
Series to be deposited in, or withdrawn from, such Senior Se-
curity Account for such Series. In the event the Certificate
fails to specify the Series, the name of the issuer, the title
and the number of shares or the principal amount of any par-
ticular Securities to be deposited by the Custodian into, or
withdrawn from, a Senior Securities Account, the Custodian
shall be under no obligation to make any such deposit or with-
drawal and shall so notify the Administrator.
2. The Custodian shall make deliveries or payments from
a Margin Account to the broker, dealer, futures commission
merchant or Clearing Member in whose name, or for whose ben-
efit, the account was established as specified in the Margin
Account Agreement.
3. Amounts received by the Custodian as payments or
distributions with respect to Securities deposited in any Mar-
gin Account shall be dealt with in accordance with the terms
and conditions of the Margin Account Agreement.
- 24 -<PAGE>
4. The Custodian shall have a continuing lien and secu-
rity interest in and to any property at any time held by the
Custodian in any Collateral Account described herein. In ac-
cordance with applicable law the Custodian may enforce its
lien and realize on any such property whenever the Custodian
has made payment or delivery pursuant to any Put Option guar-
antee letter or similar document or any receipt issued hereun-
der by the Custodian. In the event the Custodian should real-
ize on any such property net proceeds which are less than the
Custodian's obligations under any Put Option guarantee letter
or similar document or any receipt, such deficiency shall be a
debt owed the Custodian by the Trust within the scope of Ar-
ticle XIV herein.
5. On each business day the Custodian shall furnish the
Trust with a statement with respect to each Margin Account in
which money or Securities are held specifying as of the close
of business on the previous business day: (a) the name of the
Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custo-
dian shall make available upon request to any broker, dealer,
or futures commission merchant specified in the name of a Mar-
gin Account a copy of the statement furnished the Trust with
respect to such Margin Account.
6. Promptly after the close of business on each busi-
ness day in which cash and/or Securities are maintained in a
Collateral Account for any Series, the Custodian shall furnish
the Administrator with a statement with respect to such Col-
lateral Account specifying the amount of cash and/or the
amount and kind of Securities held therein. No later than the
close of business next succeeding the delivery to the Trust of
such statement, the Trust shall deliver or cause the Adminis-
trator to deliver to the Custodian a Certificate specifying
the then market value of the Securities described in such
statement. In the event such then market value is indicated
to be less than the Custodian's obligation with respect to any
outstanding Put Option guarantee letter or similar document,
the Trust shall promptly specify or cause the Administrator to
promptly specify in a Certificate the additional cash and/or
Securities to be deposited in such Collateral Account to
eliminate such deficiency.
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Trust shall deliver or cause the Administrator
to deliver to the Custodian a copy of the resolution of the
Board of Trustees of the Trust, certified by the Secretary,
the Clerk, any Assistant Secretary or any Assistant Clerk,
either (i) setting forth with respect to the Series specified
- 25 -<PAGE>
therein the date of the declaration of a dividend or distribu-
tion, the date of payment thereof, the record date as of which
shareholders entitled to payment shall be determined, the
amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent
of the Trust on the payment date, or (ii) authorizing with
respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing
the Custodian to rely on Oral Instructions or a Certificate
setting forth the date of the declaration of such dividend or
distribution, the date of payment thereof, the record date as
of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the sharehold-
ers of record as of that date and the total amount payable to
the Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution,
Oral Instructions or Certificate, as the case may be, the Cus-
todian shall pay out of the moneys held for the account of
each Series the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Trust with
respect to such Series.
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Trust shall sell any Shares, it shall
deliver or cause the Administrator to deliver to the Custodian
a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade
date, and price; and
(b) The amount of money to be received by the Cus-
todian for the sale of such Shares and specifically allocated
to the separate account in the name of such Series.
2. Upon receipt of such money from the Transfer Agent,
the Custodian shall credit such money to the separate account
in the name of the Series for which such money was received.
3. Upon issuance of any Shares of any Series described
in the foregoing provisions of this Article, the Custodian
shall pay, out of the money held for the account of such Se-
ries, all original issue or other taxes required to be paid by
the Trust in connection with such issuance upon the receipt of
a Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Trust
desires the Custodian to make payment out of the money held by
- 26 -<PAGE>
the Custodian hereunder in connection with a redemption of any
Shares, it shall deliver or cause the Administrator to deliver
to the Custodian a Certificate specifying:
(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice
setting forth the Series and number of Shares received by the
Transfer Agent for redemption and that such Shares are in good
form for redemption, the Custodian shall make payment to the
Transfer Agent out of the moneys held in the separate account
in the name of the Series the total amount specified in the
Certificate delivered pursuant to the foregoing paragraph 4 of
this Article.
6. Notwithstanding the above provisions regarding the
redemption of any Shares, whenever any Shares are redeemed
pursuant to any check redemption privilege which may from time
to time be offered by the Trust, the Custodian, unless other-
wise instructed by a Certificate, shall, upon receipt of an
advice from the Trust or its agent setting forth that the re-
demption is in good form for redemption in accordance with the
check redemption procedure, honor the check presented as part
of such check redemption privilege out of the moneys held in
the separate account of the Series of the Shares being re-
deemed.
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion ad-
vance funds on behalf of any Series which results in an over-
draft because the moneys held by the Custodian in the separate
account for such Series shall be insufficient to pay the total
amount payable upon a purchase of Securities specifically al-
located to such Series, as set forth in a Certificate or Oral
Instructions, or which results in an overdraft in the separate
account of such Series for some other reason, or if the Trust
is for any other reason indebted to the Custodian with respect
to a Series, including any indebtedness to The Bank of New
York under the Trust's Cash Management and Related Services
Agreement, (except a borrowing for investment or for temporary
or emergency purposes using Securities as collateral pursuant
to a separate agreement and subject to the provisions of para-
graph 2 of this Article), such overdraft or indebtedness shall
be deemed to be a loan made by the Custodian to the Trust for
such Series payable on demand and shall bear interest from the
date incurred at a rate per annum (based on a 360-day year for
the actual number of days involved) equal to 1/2% over
- 27 -<PAGE>
Custodian's prime commercial lending rate in effect from time
to time, such rate to be adjusted on the effective date of any
change in such prime commercial lending rate but in no event
to be less than 6% per annum. In addition, the Trust hereby
agrees that the Custodian shall have a continuing lien and
security interest in and to any property specifically al-
located to such Series at any time held by it for the benefit
of such Series or in which the Trust may have an interest
which is then in the Custodian's possession or control or in
possession or control of any third party acting in the
Custodian's behalf. The Trust authorizes the Custodian, in
its sole discretion, at any time to charge any such overdraft
or indebtedness together with interest due thereon against any
balance of account standing to such Series' credit on the
Custodian's books. In addition, the Trust hereby covenants
that on each Business Day on which either it intends to enter
a Reverse Repurchase Agreement and/or otherwise borrow from a
third party, or which next succeeds a Business Day on which at
the close of business the Trust had outstanding a Reverse Re-
purchase Agreement or such a borrowing, it shall prior to
9 a.m., New York City time, advise the Custodian, in writing,
of each such borrowing, shall specify the Series to which the
same relates, and shall not incur any indebtedness not so
specified other than from the Custodian.
2. The Trust will cause to be delivered to the Custo-
dian by any bank (including, if the borrowing is pursuant to a
separate agreement, the Custodian) from which it borrows money
for investment or for temporary or emergency purposes using
Securities held by the Custodian hereunder as collateral for
such borrowings, a notice or undertaking in the form currently
employed by any such bank setting forth the amount which such
bank will loan to the Trust against delivery of a stated
amount of collateral. The Trust shall promptly deliver to the
Custodian a Certificate specifying with respect to each such
borrowing: (a) the Series to which such borrowing relates; (b)
the name of the bank, (c) the amount and terms of the borrow-
ing, which may be set forth by incorporating by reference an
attached promissory note, duly endorsed by the Trust, or other
loan agreement, (d) the time and date, if known, on which the
loan is to be entered into, (e) the date on which the loan
becomes due and payable, (f) the total amount payable to the
Trust on the borrowing date, (g) the market value of Securi-
ties to be delivered as collateral for such loan, including
the name of the issuer, the title and the number of shares or
the principal amount of any particular Securities, and (h) a
statement specifying whether such loan is for investment pur-
poses or for temporary or emergency purposes and that such
loan is in conformance with the Investment Company Act of 1940
and the Trust's prospectus. The Custodian shall deliver on
the borrowing date specified in a Certificate the specified
collateral and the executed promissory note, if any, against
delivery by the lending bank of the total amount of the loan
payable, provided that the same conforms to the total amount
- 28 -<PAGE>
payable as set forth in the Certificate. The Custodian may,
at the option of the lending bank, keep such collateral in its
possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such Se-
curities as additional collateral as may be specified in a
Certificate to collateralize further any transaction described
in this paragraph. The Trust shall cause all Securities re-
leased from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time
such return of collateral as may be tendered to it. In the
event that the Trust fails to specify in a Certificate the Se-
ries, the name of the issuer, the title and number of shares
or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall
not be under any obligation to deliver any Securities.
ARTICLE XV
TERMINAL LINK
1. At no time and under no circumstances shall the Ad-
ministrator on behalf of the Trust be obligated to have or
utilize the Terminal Link, and the provisions of this Article
shall apply if, but only if, the Trust in its sole and abso-
lute discretion directs the Administrator to utilize the Ter-
minal Link to transmit Certificates to the Custodian.
2. The Terminal Link shall be utilized by the Adminis-
trator on behalf of the Trust only for the purpose of provid-
ing Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be ap-
plied to the payment of dividends, distributions or redemp-
tions of Trust Shares, and shall be utilized by the Custodian
only for the purpose of providing notices to the Administra-
tor. Such use shall commence only after the Trust shall have
delivered or caused the Administrator to have delivered to the
Custodian a Certificate substantially in the form of Exhibit D
and shall have established access codes. Each use of the Ter-
minal Link by the Administrator shall constitute a representa-
tion and warranty that the Terminal Link is being used only
for the purposes permitted hereby, that at least two Officers
have each utilized an access code, that such safekeeping pro-
cedures have been established, and that such use does not con-
travene the Investment Company Act of 1940, as amended, or the
rules or regulations thereunder.
3. The Administrator shall obtain and maintain at its
own cost and expense all equipment and services, including,
but not limited to communications services, necessary for it
to utilize the Terminal Link, and the Custodian shall not be
responsible for the reliability or availability of any such
equipment or services.
- 29 -<PAGE>
4. The Trust and the Administrator each acknowledge
that any data bases made available as part of, or through the
Terminal Link and any proprietary data, software, processes,
information and documentation (other than any such which are
or become part of the public domain or are legally required to
be made available to the public) (collectively, the "Informa-
tion"), are the exclusive and confidential property of the
Custodian. The Trust and the Administrator shall, and shall
cause others to which either discloses the Information, to
keep the Information confidential by using the same care and
discretion it uses with respect to its own confidential prop-
erty and trade secrets, and shall neither make nor permit any
disclosure without the express prior written consent of the
Custodian.
5. Upon termination of this Agreement for any reason,
the Trust and the Administrator shall return to the Custodian
any and all copies of the Information which are in its respec-
tive possession or under its respective control, or which ei-
ther distributed to third parties. The provisions of this
Article shall not affect the copyright status of any of the
Information which may be copyrighted and shall apply to all
Information whether or not copyrighted.
6. The Custodian reserves the right to modify the Ter-
minal Link from time to time without notice to the Trust or
the Administrator except that the Custodian shall give the
Administrator notice not less than 75 days in advance of any
modification which would materially adversely affect the
Administrator's operation, and the Administrator agrees that
the it shall not modify or attempt to modify the Terminal Link
without the Custodian's prior written consent. The Trust ac-
knowledges that any software or procedures provided the Trust
as part of the Terminal Link are the property of the Custodian
and, accordingly, the Administrator agrees that any modifica-
tions to the Terminal Link, whether by the Administrator, or
by the Custodian and whether with or without the Custodian's
consent, shall become the property of the Custodian.
7. Neither the Custodian nor any manufacturers and sup-
pliers it utilizes or the Trust utilizes in connection with
the Terminal Link makes any warranties or representations,
express or implied, in fact or in law, including but not lim-
ited to warranties of merchantability and fitness for a par-
ticular purpose.
8. The Administrator will cause its officers and
employees to treat the authorization codes and the access
codes applicable to Terminal Link with extreme care, and the
Trust and the Administrator irrevocably authorizes the Custo-
dian to act in accordance with and rely on Certificates re-
ceived by it through the Terminal Link. The Trust acknowl-
edges that it is the Administrator's responsibility to assure
- 30 -<PAGE>
that only Officers use the Terminal Link, and that Custodian
shall not be responsible nor liable for use of the Terminal
Link by persons other than such persons or Officers, or by
only a single Officer, nor for any alteration, omission, or
failure to promptly forward.
9(a). Except as otherwise specifically provided in
Section 9(b) of this Article, the Custodian shall have no li-
ability for any losses, damages, injuries, claims, costs or
expenses arising out of or in connection with any failure,
malfunction or other problem relating to the Terminal Link
except for money damages suffered as the direct result of the
negligence of the Custodian in an amount not exceeding for any
incident $100,000 provided, however, that the Custodian shall
have no liability under this Section 9 if the Administrator
fails to comply with the provisions of Section 11.
9(b). The Custodian's liability for its negligence in
executing or failing to execute in accordance with a Certifi-
cate received through Terminal Link shall be only with respect
to a transfer of funds which is not made in accordance with
such Certificate after such Certificate shall have been duly
acknowledged by the Custodian, and shall be contingent upon
the Administrator complying with the provisions of Section 12
of this Article, and shall be limited to (i) restoration of
the principal amount mistransferred, if and to the extent that
the Custodian would be required to make such restoration under
applicable law, and (ii) the lesser of (A) the Trust's actual
pecuniary loss incurred by reason of its loss of use of the
mistransferred funds or the funds which were not transferred,
as the case may be, or (B) compensation for the loss of the
use of the mistransferred funds or the funds which were not
transferred, as the case may be, at a rate per annum equal to
the average federal funds rate as computed from the Federal
Reserve Bank of New York's daily determination of the effec-
tive rate for federal funds, for the period during which a
Trust has lost use of such funds. In no event shall the Cus-
todian have any liability for failing to execute in accordance
with a Certificate a transfer of funds where the Certificate
is received by the Custodian through Terminal Link other than
through the applicable transfer module for the particular in-
structions contained in such Certificate.
10. Without limiting the generality of the foregoing, in
no event shall the Custodian or any manufacturer or supplier
of its computer equipment, software or services relating to
the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which the Trust or the Ad-
ministrator may incur or experience by reason of its use of
the Terminal Link even if the Custodian or any manufacturer or
supplier has been advised of the possibility of such damages,
nor with respect to the use of the Terminal Link shall the
Custodian or any such manufacturer or supplier be liable for
acts of God, or with respect to the following to the extent
- 31 -<PAGE>
beyond such person's reasonable control: machine or computer
breakdown or malfunction, interruption or malfunction of com-
munication facilities, labor difficulties or any other similar
or dissimilar cause.
11. The Trust shall cause the Administrator to notify
the Custodian of any errors, omissions or interruptions in, or
delay or unavailability of, the Terminal Link as promptly as
practicable, and in any event within 24 hours after the earli-
est of (i) discovery thereof, (ii) the Business Day on which
discovery should have occurred through the exercise of reason-
able care and (iii) in the case of any error, the date of ac-
tual receipt of the earliest notice which reflects such error,
it being agreed that discovery and receipt of notice may only
occur on a business day. The Custodian shall promptly advise
the Trust whenever the Custodian learns of any errors, omis-
sions or interruption in, or delay or unavailability of, the
Terminal Link.
12. The Custodian shall verify to the Administrator, by
use of the Terminal Link, receipt of each Certificate the Cus-
todian receives through the Terminal Link, and in the absence
of such verification the Custodian shall not be liable for any
failure to act in accordance with such Certificate and neither
the Trust nor the Administrator may claim that such Certifi-
cate was received by the Custodian. Such verification, which
may occur after the Custodian has acted upon such Certificate,
shall be accomplished on the same day on which such Certifi-
cate is received.
ARTICLE XVI
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to
employ, as sub-custodian for each Series' Foreign Securities
(as such term is defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, as amended) and
other assets, the foreign banking institutions and foreign
securities depositories and clearing agencies designated on
Schedule I hereto ("Foreign Sub-Custodians") to carry out
their respective responsibilities in accordance with the terms
of the sub-custodian agreement between each such Foreign Sub-
Custodian and the Custodian, copies of which have been previ-
ously delivered to the Trust and receipt of which is hereby
acknowledged (each such agreement, a "Foreign Sub-Custodian
Agreement"). The Custodian shall be liable for the acts and
- 32 -<PAGE>
omissions of each Foreign Sub-Custodian constituting negli-
gence or willful misconduct in the conduct of its responsi-
bilities under the terms of the Foreign Sub-Custodian Agree-
ment. Upon receipt of a Certificate, together with a certi-
fied resolution substantially in the form attached as Exhibit
E of the Trust's Board of Trustees, the Trust may designate
any additional foreign sub-custodian with which the Custodian
has an agreement for such entity to act as the Custodian's
agent, as its sub-custodian and any such additional foreign
sub-custodian shall be deemed added to Schedule I. Upon re-
ceipt of a Certificate, the Custodian shall cease the employ-
ment of any one or more Foreign Sub-Custodians for maintaining
custody of the Trust's assets and such Foreign Sub-Custodian
shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be
substantially in the form previously delivered to the Trust
and will not be amended in a way that materially adversely
affects the Trust without the Trust's prior written consent.
3. The Custodian shall identify on its books as
belonging to each Series of the Trust the Foreign Securities
of such Series held by each Foreign Sub-Custodian. At the
election of the Trust, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims by
the Trust or any Series against a Foreign Sub-Custodian as a
consequence of any loss, damage, cost, expense, liability or
claim sustained or incurred by the Trust or any Series if and
to the extent that the Trust or such Series has not been made
whole for any such loss, damage, cost, expense, liability or
claim.
4. Upon request of the Trust, the Custodian will,
consistent with the terms of the applicable Foreign Sub-
Custodian Agreement, use reasonable efforts to arrange for the
independent accountants of the Trust to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as
such books and records relate to the performance of such For-
eign Sub-Custodian under its agreement with the Custodian on
behalf of the Trust.
5. The Custodian will supply to the Trust from
time to time, as mutually agreed upon, statements in respect
of the securities and other assets of each Series held by For-
eign Sub-Custodians, including but not limited to, an identi-
fication of entities having possession of each Series' Foreign
Securities and other assets, and advices or notifications of
any transfers of Foreign Securities to or from each custodial
account maintained by a Foreign Sub-Custodian for the Custo-
dian on behalf of the Series.
6. The Custodian shall furnish annually to the
Trust, as mutually agreed upon, information concerning the
- 33 -<PAGE>
Foreign Sub-Custodians employed by the Custodian. Such infor-
mation shall be similar in kind and scope to that furnished to
the Trust in connection with the Trust's initial approval of
such Foreign Sub-Custodians and, in any event, shall include
information pertaining to (i) the Foreign Custodians' finan-
cial strength, general reputation and standing in the coun-
tries in which they are located and their ability to provide
the custodial services required, and (ii) whether the Foreign
Sub-Custodians would provide a level of safeguards for safe-
keeping and custody of securities not materially different
form those prevailing in the United States. The Custodian
shall monitor the general operating performance of each For-
eign Sub-Custodian, and at least annually obtain and review
the annual financial report published by such Foreign Sub-
Custodian to determine that it meets the financial criteria of
an "Eligible Foreign Custodian" under Rule 17f-5(c)(2)(i) or
(ii). The Custodian will promptly inform the Trust in the
event that the Custodian learns that a Foreign Sub-Custodian
no longer satisfies the financial criteria of an "Eligible
Foreign Custodian" under such Rule. The Custodian agrees that
it will use reasonable care in monitoring compliance by each
Foreign Sub-Custodian with the terms of the relevant Foreign
Sub-Custodian Agreement and that if it learns of any breach of
such Foreign Sub-Custodian Agreement believed by the Custodian
to have a material adverse effect on the Trust or any Series
it will promptly notify the Trust of such breach. The Custo-
dian also agrees to use reasonable and diligent efforts to
enforce its rights under the relevant Foreign Sub-Custodian
Agreement.
7. The Custodian shall transmit promptly to the
Trust all notices, reports or other written information re-
ceived pertaining to the Trust's Foreign Securities, including
without limitation, notices of corporate action, proxies and
proxy solicitation materials.
8. Notwithstanding any provision of this Agreement
to the contrary, settlement and payment for securities re-
ceived for the account of any Series and delivery of securi-
ties maintained for the account of such Series may be effected
in accordance with the customary or established securities
trading or securities processing practices and procedures in
the jurisdiction or market in which the transaction occurs,
including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expecta-
tion of receiving later payment for such securities from such
purchaser or dealer.
- 34 -<PAGE>
ARTICLE XVII
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in
Article XVI neither the Custodian nor its nominee shall be
liable for any loss or damage, including counsel fees, result-
ing from its action or omission to act or otherwise, either
hereunder or under any Margin Account Agreement, except for
any such loss or damage arising out of its own negligence or
willful misconduct. The Custodian agrees to indemnify and
hold harmless the Trust and Trust's Trustees and officers to
the extent described above (including reasonable counsel fees)
incurred or assessed against any of them as a result of any
breach or violation of this Agreement by the Custodian or its
officers, employees and agents or its nominees, resulting from
their negligence or willful misconduct. The Custodian may,
with respect to questions of law arising hereunder or under
any Margin Account Agreement, apply for and obtain the advice
and opinion of counsel to the Trust or of its own counsel, at
the expense of the Trust, and shall be fully protected with
respect to anything done or omitted by it in good faith in
conformity with such advice or opinion. The Custodian shall
be liable to the Trust for any loss or damage resulting from
the use of the Book-Entry System or any Depository arising by
reason of any negligence or willful misconduct on the part of
the Custodian or any of its employees or agents.
Notwithstanding the foregoing, or any other provision
contained in this Agreement, in no event shall the Custodian
be liable to the Trust, its Trustees or officers, or any third
party, for special, indirect or consequential damages, or lost
profits or loss of business, arising under or in connection
with this Agreement, even if previously informed of the
possibility of such damages and regardless of the form of
action.
2. Without limiting the generality of the foregoing,
the Custodian shall be under no obligation to inquire into,
and shall not be liable for:
(a) The validity of the issue of any Securities
purchased, sold, or written by or for the Trust, the legality
of the purchase, sale or writing thereof, or the propriety of
the amount paid or received therefor;
(b) The legality of the sale or redemption of any
Shares, or the propriety of the amount to be received or paid
therefor;
- 35 -<PAGE>
(c) The legality of the declaration or payment of
any dividend by the Trust;
(d) The legality of any borrowing by the Trust us-
ing Securities as collateral;
(e) The legality of any loan of portfolio Securi-
ties, nor shall the Custodian be under any duty or obligation
to see to it that any cash collateral delivered to it by a
broker, dealer, or financial institution or held by it at any
time as a result of such loan of portfolio Securities of the
Trust is adequate collateral for the Trust against any loss it
might sustain as a result of such loan. The Custodian spe-
cifically, but not by way of limitation, shall not be under
any duty or obligation periodically to check or notify the
Trust that the amount of such cash collateral held by it for
the Trust is sufficient collateral for the Trust, but such
duty or obligation shall be the sole responsibility of the
Trust. In addition, the Custodian shall be under no duty or
obligation to see that any broker, dealer or financial insti-
tution to which portfolio Securities of the Trust are lent
pursuant to Article XIV of this Agreement makes payment to it
of any dividends or interest which are payable to or for the
account of the Trust during the period of such loan or at the
termination of such loan, provided, however, that the Custo-
dian shall promptly notify the Trust in the event that such
dividends or interest are not paid and received when due; or
(f) The sufficiency or value of any amounts of
money and/or Securities held in any Margin Account, Senior
Security Account or Collateral Account in connection with
transactions by the Trust. In addition, the Custodian shall
be under no duty or obligation to see that any broker, dealer,
futures commission merchant or Clearing Member makes payment
to the Trust of any variation margin payment or similar pay-
ment which the Trust may be entitled to receive from such bro-
ker, dealer, futures commission merchant or Clearing Member,
to see that any payment received by the Custodian from any
broker, dealer, futures commission merchant or Clearing Member
is the amount the Trust is entitled to receive, or to notify
the Trust of the Custodian's receipt or non-receipt of any
such payment.
3. The Custodian shall not be liable for, or considered
to be the Custodian of, any money, whether or not represented
by any check, draft, or other instrument for the payment of
money, received by it on behalf of the Trust until the Custo-
dian actually receives and collects such money directly or by
the final crediting of the account representing the Trust's
interest at the Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall
not be liable for ascertaining or acting upon any calls, con-
versions, exchange offers, tenders, interest rate changes or
- 36 -<PAGE>
similar matters relating to Securities held in the Depository,
unless the Custodian shall have actually received timely no-
tice from the Depository. In no event shall the Custodian
have any responsibility or liability for the failure of the
Depository to collect, or for the late collection or late
crediting by the Depository of any amount payable upon Securi-
ties deposited in the Depository which may mature or be re-
deemed, retired, called or otherwise become payable. However,
upon receipt of a Certificate from the Trust of an overdue
amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the
Trust, except that the Custodian shall not be under any obli-
gation to appear in, prosecute or defend any action suit or
proceeding in respect to any Securities held by the Depository
which in its opinion may involve it in expense or liability,
unless indemnity satisfactory to it against all expense and
liability be furnished as often as may be required.
5. The Custodian shall not be under any duty or obliga-
tion to take action to effect collection of any amount due to
the Trust from the Transfer Agent of the Trust nor to take any
action to effect payment or distribution by the Transfer Agent
of the Trust of any amount paid by the Custodian to the Trans-
fer Agent of the Trust in accordance with this Agreement.
6. The Custodian shall not be under any duty or obliga-
tion to take action to effect collection of any amount if the
Securities upon which such amount is payable are in default,
or if payment is refused after due demand or presentation,
unless and until (i) it shall be directed to take such action
by a Certificate and (ii) it shall be assured to its satisfac-
tion of reimbursement of its costs and expenses in connection
with any such action.
7. The Custodian may in addition to the employment of
Foreign Sub-Custodians pursuant to Article XVI appoint one or
more banking institutions as Depository or Depositories, as
Sub-Custodian or Sub-Custodians, or as Co-Custodian or
Co-Custodians including, but not limited to, banking institu-
tions located in foreign countries, of Securities and moneys
at any time owned by the Trust, upon such terms and conditions
as may be approved in a Certificate or contained in an agree-
ment executed by the Custodian, the Trust and the appointed
institution.
8. The Custodian shall not be under any duty or obliga-
tion (a) to ascertain whether any Securities at any time de-
livered to, or held by it or by any Foreign Sub-Custodian, for
the account of the Trust and specifically allocated to a Se-
ries are such as properly may be held by the Trust or such
Series under the provisions of its then current prospectus, or
(b) to ascertain whether any transactions by the Trust,
whether or not involving the Custodian, are such transactions
as may properly be engaged in by the Trust.
- 37 -<PAGE>
9. The Custodian shall be entitled to receive and the
Trust agrees to pay to the Custodian all out-of-pocket ex-
penses and such compensation as may be agreed upon from time
to time between the Custodian and the Trust. The Trust repre-
sents that the Administrator has agreed to pay such compensa-
tion and expenses promptly upon receipt of statements there-
for, and hereby directs the Custodian to (i) send all state-
ments for compensation to its attention care of Fund/Plan at
the following address: Fund/Plan Services, Inc., 2 W. Elm
Street, Conshohocken, PA 19428, Attention: Mr. Elmer Gardner,
Senior Vice President, and (ii) accept all payments made by
Fund/Plan in the Trust's name as if such payments were made
directly by the Trust. The Trust shall pay to Fund/Plan fees
for services (including custodian services provided by the
Custodian) in accordance with the Administration Agreement.
The Custodian's compensation for services rendered hereunder
is set forth in a separate agreement between the Custodian and
Fund/Plan. Should Fund/Plan fail to pay or remit such com-
pensation to the Custodian within 20 days of the date the same
is due and payable, Custodian shall notify the Trust. If such
payment or remittance is not received from Fund/Plan within 15
days of such notice, then the Custodian will be entitled to
debit the Custody Account directly for such compensation. The
Custodian may charge compensation with respect to which it has
properly sent a notice to the Trust, as provided in the pre-
ceding sentence, and any expenses with respect to a Series
incurred by the Custodian in the performance of its duties
pursuant to such agreement against any money specifically al-
located to such Series. Unless and until the Trust or the
Administrator instructs the Custodian by a Certificate to ap-
portion any loss, damage, liability or expense among the Se-
ries in a specified manner, the Custodian shall also be en-
titled to charge against any money held by it for the account
of a Series such Series' pro rata share (based on such Series
net asset value at the time of the charge to the aggregate net
asset value of all Series at that time) of the amount of any
loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the pro-
visions of this Agreement. The expenses for which the Custo-
dian shall be entitled to reimbursement hereunder shall in-
clude, but are not limited to, the expenses of sub-custodians
and foreign branches of the Custodian incurred in settling
outside of New York City transactions involving the purchase
and sale of Securities of the Trust.
10. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received by
the Custodian and reasonably believed by the Custodian to be a
Certificate. The Custodian shall be entitled to rely upon any
Oral Instructions actually received by the Custodian. The
Trust agrees to forward or cause the Administrator to forward
to the Custodian a Certificate or facsimile thereof confirming
- 38 -<PAGE>
such Oral Instructions in such manner so that such Certificate
or facsimile thereof is received by the Custodian, whether by
hand delivery, telecopier or other similar device, or other-
wise, by the close of business of the same day that such Oral
Instructions are given to the Custodian. The Trust agrees
that the fact that such confirming instructions are not re-
ceived by the Custodian shall in no way affect the validity of
the transactions or enforceability of the transactions hereby
authorized by the Trust. The Trust agrees that the Custodian
shall incur no liability to the Trust in acting upon Oral In-
structions given to the Custodian hereunder concerning such
transactions provided such instructions reasonably appear to
have been received from an Officer.
11. The Custodian shall be entitled to rely upon any
instrument, instruction or notice received by the Custodian
and reasonably believed by the Custodian to be given in ac-
cordance with the terms and conditions of any Margin Account
Agreement. Without limiting the generality of the foregoing,
the Custodian shall be under no duty to inquire into, and
shall not be liable for, the accuracy of any statements or
representations contained in any such instrument or other no-
tice including, without limitation, any specification of any
amount to be paid to a broker, dealer, futures commission mer-
chant or Clearing Member.
12. The books and records pertaining to the Trust which
are in the possession of the Custodian shall be the property
of the Trust. Such books and records shall be prepared and
maintained as required by the Investment Company Act of 1940,
as amended, and other applicable securities laws and rules and
regulations. The Trust, or the Trust's authorized representa-
tives, shall have access to such books and records during the
Custodian's normal business hours. Upon the reasonable re-
quest of the Trust, copies of any such books and records shall
be provided by the Custodian to the Trust or the Trust's au-
thorized representative, and the Trust shall reimburse the
Custodian its expenses of providing such copies. Upon reason-
able request of the Trust, the Custodian shall provide in hard
copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by
the Custodian on a computer disc, or are similarly maintained,
and the Trust shall reimburse the Custodian for its expenses
of providing such hard copy or micro-film.
13. The Custodian shall provide the Trust with any re-
port obtained by the Custodian on the system of internal ac-
counting control of the Book-Entry System, the Depository or
O.C.C., and with such reports on its own systems of internal
accounting control as the Trust may reasonably request from
time to time.
14. The Trust agrees to indemnify the Custodian against
and save the Custodian harmless from all liability, claims,
- 39 -<PAGE>
losses and demands whatsoever, including attorney's fees, how-
soever arising or incurred because of or in connection with
this Agreement, including the Custodian's payment or
non-payment of checks pursuant to paragraph 6 of Article XIII
as part of any check redemption privilege program of the
Trust, except for any such liability, claim, loss and demand
arising out of the Custodian's own negligence or willful mis-
conduct. For any legal proceeding giving rise to the indemni-
fication set forth above in this paragraph, the Trust shall be
entitled to defend or prosecute any claim in the name of the
Custodian at its own expense and through counsel of its own
choosing reasonably acceptable to the Custodian if it gives
written notice to the Custodian within ten (10) Business days
of receiving notice of such claim. Notwithstanding the fore-
going, the Custodian may participate in the litigation at its
own expense and with counsel of its own choosing.
15. Subject to the foregoing provisions of this Agree-
ment, including, without limitation, those contained in Ar-
ticle XVI the Custodian may deliver and receive Securities,
and receipts with respect to such Securities, and arrange for
payments to be made and received by the Custodian in ac-
cordance with the customs prevailing from time to time among
brokers or dealers in such Securities. When the Custodian is
instructed to deliver Securities against payment, delivery of
such Securities and receipt of payment therefor may not be
completed simultaneously. The Trust assumes all responsibil-
ity and liability for all credit risks involved in connection
with the Custodian's delivery of Securities pursuant to Cer-
tificates or instructions of the Trust or the Administrator
which responsibility and liability shall continue until final
payment in full has been received by the Custodian.
16. In the event the Custodian is advised by the Trust
that the Trust is no longer utilizing the services of the Ad-
ministrator, then the Custodian shall furnish or give to the
Trust the statements or notices described above as to be fur-
nished or given to the Administrator.
17. The Custodian shall have no duties or responsibili-
ties whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement, and no covenant or
obligation shall be implied in this Agreement against the Cus-
todian. Without limiting the generality of the foregoing, the
Custodian shall have no duties or responsibilities by reason
of any terms or provisions in the Administration Agreement,
and if such Administration Agreement shall cease to be in ef-
fect the Custodian shall have no additional duties hereunder.
- 40 -<PAGE>
ARTICLE XVIII
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
less than ninety (90) days after the date of giving of such
notice, provided, however, that if such notice is sent by the
Trust and recites that it is being given contemporaneously
with a termination of the Custody Administration any Agency
Agreement with Fund/Plan, such notice may specify any date of
termination selected by the Trust. In the event such notice
is given by the Trust, it shall be accompanied by a copy of a
resolution of the Board of Trustees of the Trust, certified by
the Secretary, the Clerk, any Assistant Secretary or any As-
sistant Clerk, electing to terminate this Agreement and desig-
nating a successor custodian or custodians, each of which
shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided profits.
In the event such notice is given by the Custodian, the Trust
shall, on or before the termination date, deliver to the Cus-
todian a copy of a resolution of the Board of Trustees of the
Trust, certified by the Secretary, the Clerk, any Assistant
Secretary or any Assistant Clerk, designating a successor cus-
todian or custodians. In the absence of such designation by
the Trust, the Custodian may designate a successor custodian
which shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided profits.
Upon the date set forth in such notice this Agreement shall
terminate, and the Custodian shall upon receipt of a notice of
acceptance by the successor custodian on that date deliver
directly to the successor custodian all Securities and moneys
then owned by the Trust and held by it as Custodian, after
deducting all fees, expenses and other amounts for the payment
or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the
Trust or the Custodian in accordance with the preceding para-
graph, the Trust shall upon the date specified in the notice
of termination of this Agreement and upon the delivery by the
Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Trust) and
moneys then owned by the Trust be deemed to be its own custo-
dian and the Custodian shall thereby be relieved of all duties
and responsibilities pursuant to this Agreement, other than
the duty with respect to Securities held in the Book Entry
System which cannot be delivered to the Trust to hold such Se-
curities hereunder in accordance with this Agreement.
- 41 -<PAGE>
ARTICLE XIX
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed
by two of the present Officers of the Trust under its seal,
setting forth the names and the signatures of the present Of-
ficers. The Trust agrees to furnish to the Custodian a new
Certificate in similar form in the event that any such present
Officer ceases to be an Officer or in the event that other or
additional Officers are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement
upon Oral Instructions or signatures of the present Officers
as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, autho-
rized or required by this Agreement to be given to the Custo-
dian, shall be sufficiently given if addressed to the Custo-
dian and mailed or delivered to it at its offices at 90 Wash-
ington Street, New York, New York 10286, or at such other
place as the Custodian may from time to time designate in
writing.
3. Any notice or other instrument in writing, autho-
rized or required by this Agreement to be given to the Trust
shall be sufficiently given if addressed to the Trust and
mailed or delivered to it at its office at the address for the
Trust first above written, or at such other place as the Trust
may from time to time designate in writing, and any notice or
other instrument in writing authorized or required to be given
to the Administrator shall be sufficiently given if addressed
to the Administrator at such address as the Administrator may
from time to time designate in writing.
4. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties
with the same formality as this Agreement and approved by a
resolution of the Board of Trustees of the Trust.
5. This Agreement shall extend to and shall be binding
upon the parties hereto, and their respective successors and
assigns; provided, however, that this Agreement shall not be
assignable by the Trust without the written consent of the
Custodian, or by the Custodian without the written consent of
the Trust, authorized or approved by a resolution of the
Trust's Board of Trustees.
6. This Agreement shall be construed in accordance with
the laws of the State of New York without giving effect to
conflict of laws principles thereof. Each party hereby con-
sents to the jurisdiction of a state or federal court situated
in New York City, New York in connection with any dispute
- 42 -<PAGE>
arising hereunder and hereby waives its right to trial by
jury.
7. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but such counterparts shall, together, constitute only one
instrument.
8. A copy of the Declaration of Trust of the Trust is
on file with the Secretary of The Commonwealth of Mas-
sachusetts, and notice is hereby given that this instrument is
executed on behalf of the Board of Trustees of the Trust as
Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or share-
holders individually but are binding only upon the assets and
property of the Trust; provided, however, that the Declaration
of Trust of the Trust provides that the assets of a particular
Series of the Trust shall under no circumstances be charged
with liabilities attributable to any other Series of the Trust
and that all persons extending credit to, or contracting with
or having any claim against a particular Series of the Trust
shall look only to the assets of that particular Series for
payment of such credit, contract or claim.
- 43 -<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agree-
ment to be executed by their respective Officers, thereunto
duly authorized and their respective seals to be hereunto af-
fixed, as of the day and year first above written.
SMITH BREEDEN TRUST
[SEAL] By:Michael J. Giarla
Attest:
Marianthe S. Mewkill
THE BANK OF NEW YORK
[SEAL] By:Masao Yamaguchi
Attest:
Vincent Blazewicz
- 44 -<PAGE>
APPENDIX A
I, Michael J. Giarla, President and Trustee , of the Smith
Breeden Trust, a Massachusetts business trust (the "Trust"),
do hereby certify that:
The following individuals including officers and employ-
ees of the Administrator have been duly authorized by the
Board of Trustees of the Trust in conformity with the Trust's
Declaration of Trust and By-Laws to give Certificates or Oral
Instructions on behalf of the Trust, and the signatures set
forth opposite their respective names are their true and cor-
rect signatures:
Name Signature
St. John Kelliher _________________________
Arthur Coyne
Denise Tawwab
Elizabeth Holder
Cindi Hooks
Lezlie Butts
William Drourr
Elmer Gardner
Kathy Nace
Gus Pittaoulis
Joseph Gessner
<PAGE>
APPENDIX B
SERIES
Smith Breeden Market Tracking Fund
APPENDIX C
I, Vincent Blazewicz, a Vice President with THE BANK OF
NEW YORK do hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned,Marianthe S. Mewkill, hereby certifies
that he or she is the duly elected and acting
Treasurer of Smith Breeden Trust, a Massachusetts busi-
ness trust (the "Trust"), and further certifies that the fol-
lowing resolution was adopted by the Board of Trustees of the
Trust at a meeting duly held on October 18, 1994, at
which a quorum was at all times present and that such resolu-
tion has not been modified or rescinded and is in full force
and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Trust dated as of December 16, 1994,
(the "Custody Agreement") is authorized and instructed on
a continuous and ongoing basis to deposit in the Book-
Entry System, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of
the Series to which the same are specifically allocated,
and to utilize the Book-Entry System to the extent pos-
sible in connection with its performance thereunder, in-
cluding, without limitation, in connection with settle-
ments of purchases and sales of securities, loans of se-
curities, and deliveries and returns of securities col-
lateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Trust, as of the 16th day of
December, 1994.
[SEAL]<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, Marianthe S. Mewkill, hereby certifies
that he or she is the duly elected and acting
Treasurer of Smith Breeden Trust, a Massachusetts
business trust (the "Trust"), and further certifies that the
following resolution was adopted by the Board of Trustees of
the Trust at a meeting duly held on October 18, 1994,
at which a quorum was at all times present and that such reso-
lution has not been modified or rescinded and is in full force
and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Trust dated as of December 16, 1994,
(the "Custody Agreement") is authorized and instructed on
a continuous and ongoing basis until such time as it re-
ceives a Certificate, as defined in the Custody Agree-
ment, to the contrary to deposit in the Depository, as
defined in the Custody Agreement, all securities eligible
for deposit therein, regardless of the Series to which
the same are specifically allocated, and to utilize the
Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in
connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and re-
turns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Trust, as of the 16th day of
December, 1994.
[SEAL]<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, Marianthe S. Mewkill, hereby certifies
that he or she is the duly elected and acting
Treasurer of Smith Breeden Trust, a Massachusetts
business trust (the "Trust"), and further certifies that the
following resolution was adopted by the Board of Trustees of
the Trust at a meeting duly held on October 18,
1994, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full
force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Trust dated as of December 16,
1994, (the "Custody Agreement") is authorized and in-
structed on a continuous and ongoing basis until such
time as it receives a Certificate, as defined in the Cus-
tody Agreement, to the contrary to deposit in the Par-
ticipants Trust Company as Depository, as defined in the
Custody Agreement, all securities eligible for deposit
therein, regardless of the Series to which the same are
specifically allocated, and to utilize the Participants
Trust Company to the extent possible in connection with
its performance thereunder, including, without limita-
tion, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries
and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Trust, as of the 16th day of
December , 1994.
[SEAL]<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, Marianthe S. Mewkill, hereby
certifies that he or she is the duly elected and acting
Treasurer of Smith Breeden Trust, a Massachusetts
business trust (the "Trust"), and further certifies that the
following resolution was adopted by the Board of Trustees of
the Trust at a meeting duly held on October 18,
1994, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full
force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Trust dated as of December 16, 1994,
(the "Custody Agreement") is authorized and instructed on
a continuous and ongoing basis until such time as it re-
ceives a Certificate, as defined in the Custody Agree-
ment, to the contrary, to accept, utilize and act with
respect to Clearing Member confirmations for Options and
transaction in Options, regardless of the Series to which
the same are specifically allocated, as such terms are
defined in the Custody Agreement, as provided in the Cus-
tody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Trust, as of the 16 day of
December , 1994.
[SEAL]<PAGE>
EXHIBIT D
The undersigned, Marianthe S. Mewkill, hereby cer-
tifies that he or she is the duly elected and acting
Treasurer of Smith Breeden Trust, a Mas-
sachusetts business trust (the "Trust"), further certifies
that the following resolutions were adopted by the Board of
Trustees of the Trust by unanimous consent on December 20, 1994
and that such resolutions have not been modified or
rescinded and are in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian pursu-
ant to the Custody Agreement between The Bank of New York and
the Trust dated as of December 16, 1994 (the "Custody Agree-
ment") is authorized and instructed on a continuous and ongo-
ing basis to act in accordance with, and to rely on Certifi-
cates (as defined in the Custody Agreement) given by to the
Custodian by a Terminal Link (as defined in the Custody Agree-
ment).
RESOLVED, that the Trust shall establish access codes and
grant use of such access codes only to Officers of the Trust as
defined in the Custody Agreement, shall establish internal
safekeeping procedures to safeguard and protect the confiden-
tiality and availability of such access codes, shall limit its
use of the Terminal Link to those purposes permitted by the
Custody Agreement, shall require at least one such Officers to
utilize their respective access codes in connection with each
such Certificate, and shall use the Terminal Link only in a
manner that does not contravene the Investment Company Act of
1940, as amended, or the rules and regulations thereunder.
RESOLVED, that Officers of the Trust shall, following the
establishment of such access codes and such internal safekeep-
ing procedures, advise the Custodian that the same have been
established by delivering a Certificate, as defined in the
Custody Agreement, and the Custodian shall be entitled to rely
upon such advice.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of Smith Breeden Trust, as of the 20 day of
December , 1994.
[SEAL]<PAGE>
SHAREHOLDER SERVICES AGREEMENT
This Agreement, dated as of the 20th day of February, 1994, made by
and between Smith Breeden Trust (the "Trust"), a business trust operating as
an open-end management investment company, duly organized and existing
under the laws of the Commonwealth of Massachusetts and Fund/Plan
Services, Inc. (the "Company"), a corporation duly organized and existing
under the laws of the State of Delaware (collectively the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is a registered open-end investment company
under the Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Trust desires to appoint the Company as its Transfer,
Redemption and Dividend Disbursing Agent as set forth in this Agreement
and to perform certain other functions as set forth in the attached Schedule
"A",; and
WHEREAS, the Trust is authorized by its Trust Instrument to issue
separate series of shares representing interests in separate investment
portfolios (the "Series"), which Series are identified on Schedule "C" attached
hereto, and which Schedule "C" may be amended from time to time by
mutual agreement of the Trust and Fund/Plan; and
WHEREAS, the Company is willing to perform such functions upon the
terms and conditions set forth below; and
WHEREAS, the Trust will cause to be provided certain information to the
Company as set forth below.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, the parties hereto, intending to be legally
bound, do hereby agree as follows:
Section 1. The terms as defined in this Section wherever used in this
Agreement, or in any amendment or supplement hereto, shall have the
meanings herein specified unless the context otherwise requires.
The Series: The term Series shall mean any series issued by the
authority of the Board of Trustees.
Share Certificates: The term Share Certificates shall mean the share
certificates for the Shares of the Series.
Shareholders: The term Shareholders shall mean the registered owners
from time to time of the Shares of the Series in accordance with the share
registry records of the Series.
Shares: The term Shares shall mean the issued and outstanding
shares of the Series.
Oral Instruction: The term Oral Instruction shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to the Company in person or by telephone, telegram, telecopy
or other mechanical or documentary means lacking a signature, by a person
or persons believed in good faith by the Company to be a person or persons
authorized by a resolution of the Board of Trustees of the Trust, to give Oral
Instructions on behalf of the Series.
Written Instruction: The term Written Instruction shall mean an
authorization, instruction, approval, item or set of data or information of any
kind transmitted to the Company in original writing containing original
signatures or a copy of such document transmitted by telecopy including
transmission of such signature believed in good faith by the Company to be
the signature of a person authorized by a resolution of the Board of Trustees
of the Trust to give Written Instructions on behalf of the Series.
TRANSFER AGENCY
Section 2. The Series shall furnish to Company as Transfer Agent a
sufficient supply of blank Share Certificates and from time to time will renew
such supply upon the request of Company. Such blank Share Certificates
shall be signed manually or by facsimile signatures of officers of the Series
authorized by law or the by-laws of the Trust to sign Share Certificates and,
if required, shall bear the corporate seal or a facsimile thereof.
Section 3. Company as Transfer Agent, shall make original issues of
Shares in accordance with Section 14 and 15 below and with the Series'
Prospectus and Statement of Additional Information upon the written request
of the Series and upon being furnished with (i) a certified copy of a
resolution or resolutions of the Board of Trustees of the Trust authorizing
such issue; (ii) an opinion of counsel as to the validity of such additional
Shares; and (iii) necessary funds for the payment of any original issue tax
applicable to such additional Shares.
Section 4. Transfers of Shares shall be registered and new Share
Certificates issued by Company upon surrender of outstanding Share
Certificates, (i) in form deemed by Company to be properly endorsed for
transfer, (ii) with all necessary endorser's signatures guaranteed by a
member firm of a national securities exchange or a commercial bank, or
savings institution, and (iii) satisfactory evidence of compliance with all
applicable laws relating to the payment or collection of taxes.
Section 5. When mail is used for delivery of Share Certificates,
Company shall forward Share Certificates in "non-negotiable" form by first-
class mail, and Share Certificates in "negotiable" form by registered mail, all
mail deliveries to be covered while in transit to the addressee by insurance
arranged for by Company.
Section 6. In registering transfers, Company, as Transfer Agent, may
rely upon the Uniform Commercial Code or any other statutes which, in the
opinion of counsel, protect Company and the Series in not requiring
complete documentation, in registering transfers without inquiry into adverse
claims, in delaying registration for purposes of such inquiry, or in refusing
registration where in its judgment an adverse claim requires such refusal.
Section 7. Company as Transfer Agent may issue new Share
Certificates in place of Share Certificates represented to have been lost,
destroyed or stolen, upon receiving indemnity satisfactory to Company and
may issue new Share Certificates in exchange for and upon surrender of
mutilated Share Certificates.
Section 8. In case any officer of the Series who shall have signed
manually or whose facsimile signature shall have been affixed to blank Share
Certificates shall die, resign or be removed prior to the issuance of such
Share Certificates, Company as Transfer Agent may issue or register such
Share Certificates as the Share Certificates of the Series notwithstanding
such death, resignation or removal; and the Series shall file promptly with
Company such approval, adoption or ratification as may be required by law.
Section 9. With respect to confirmed trades received by the Company
as Transfer Agent for the Series, the Company shall periodically notify the
Series of the current status of outstanding confirmed trades. The Company
is authorized to cancel confirmed trades which have been outstanding for
thirty (30) days. Upon such cancellation, the Transfer Agent shall instruct the
Series Accounting Agent to adjust the books of the Series accordingly.
Section 10. Company will maintain stock registry records in the usual
form in which it will note the issuance, transfer and redemption of Shares
and the issuance and transfer of Share Certificates, and is also authorized
to maintain an account entitled Unissued Certificate Account in which it will
record the Shares and fractions issued and outstanding from time to time for
which issuance of Share Certificates is deferred. The Series is responsible
to provide Company reports of Series Share purchases, redemptions, and
total Shares outstanding on the next business day after each net asset
valuation. Company is authorized to keep records, which will be part of the
stock transfer records, in which it will note the names and registered address
of Shareholders and the number of Shares and fractions from time to time
owned by them for which no Share Certificates are outstanding. Each
Shareholder will be assigned a single account number even though Shares
for which Certificates have been issued will be accounted for separately.
Section 11. Company will issue Share Certificates for Shares of the
Series, only upon receipt of a written request from a Shareholder. In all
other cases, the Series authorizes Company to dispense with the issuance
and countersignature of Share Certificates whenever Shares are purchased.
In such case Company as Transfer Agent, shall merely note on its stock
registry records the issuance of the Shares and fractions (if any), shall credit
the Unissued Certificate Account with the Shares and fractions issued and
shall credit the proper number of Shares and fractions to the respective
Shareholders. Likewise, whenever Company has occasion to surrender for
redemption Shares and fractions owned by Shareholders, it shall be
unnecessary to issue Share Certificates for redemption purposes. The Series
authorizes Company in such cases to process the transactions by
appropriate entries in its Share transfer records, and debiting of the Unissued
Certificate Account and the record of issued Shares outstanding.
Section 12. Company in its capacity as Transfer Agent will, in addition
to the duties and functions above-mentioned, perform the usual duties and
functions of a Stock Transfer Agent for a corporation. It will countersign for
issuance or reissuance Share Certificates representing original issue or
reissued Shares as directed by the Written Instructions of the Series and will
transfer Share Certificates registered in the name of Shareholders from one
Shareholder to another in the usual manner. Company may rely conclusively
and act without further investigation upon any list, instruction, certification,
authorization, Share Certificate or other instrument or paper believed by it in
good faith to be genuine and unaltered, and to have been signed,
countersigned, or executed by duly authorized person or persons, or upon
the instructions of any officer of the Series, or upon the advice of counsel for
the Trust or for Company. Company may record any transfer of Share
Certificates which is believed by it in good faith to have been duly authorized
or may refuse to record any transfer of Share Certificates if in good faith
Company in its capacity as Transfer Agent deems such refusal necessary in
order to avoid any liability either to the Series, the Trust, or to Company.
The Trust agrees to indemnify and hold harmless Company from and against
any and all losses, costs, claims, and liability which it may suffer or incur by
reason of so relying or acting or refusing to act.
Section 13. In case of any request or demand for the inspection of the
Share records of the Series, Company as Transfer Agent, shall endeavor to
notify the Trust and to secure instructions as to permitting or refusing such
inspection. However, Company may exhibit such records to any person in
any case where it is advised by its counsel that it may be held liable for
failure to do so.
ISSUANCE OF SHARES
Section 14. Prior to the daily determination of net asset value in
accordance with the Series' Prospectus, Company shall process all purchase
orders received since the last determination of the Series' net asset value.
Company shall calculate daily the amount available for investment in
Shares at the net asset value determined by the Company as pricing agent
(see Accounting Services Agreement) as of the close of trading on the New
York Stock Exchange, the number of Shares and fractional Shares to be
purchased and the net asset value to be deposited with the Custodian.
Company, as agent for the Shareholders, shall place a purchase order daily
with the Series for the proper number of Shares and fractional Shares to be
purchased and confirm such number to the Series in writing.
Section 15. Company having made the calculations provided for in
Section 14, shall thereupon pay over the net asset value of Shares
purchased to the Custodian. The proper number of Shares and fractional
Shares shall then be issued daily and credited by Company to the Unissued
Certificate Account. The Shares and fractional Shares purchased for each
Shareholder will be credited by Company to his separate account. Company
shall mail to each Shareholder a confirmation of each purchase, with copies
to the Series if requested. Such confirmations will show the prior Share
balance, the new Share balance, the Shares for which Stock Certificates are
outstanding (if any), the amount invested and the price paid for the newly
purchased Shares. Under normal circumstances, such confirmation shall be
mailed within three days of purchase.
REDEMPTIONS
Section 16. Company shall, prior to the daily determination of net asset
value in accordance with the Series' Prospectus and Statement of Additional
Information, process all requests from Shareholders to redeem Shares and
determine the number of Shares required to be redeemed to make monthly
payments, automatic payments or the like. Thereupon, Company shall
advise the Series of the total number of Shares available for redemption and
the number of Shares and fractional Shares requested to be redeemed. The
Company as Pricing Agent shall then determine the applicable net asset
value, whereupon Company shall furnish the Series with an appropriate
confirmation of the redemption and process the redemption by filing with the
Custodian an appropriate statement and making the proper distribution and
application of the redemption proceeds in accordance with the Series'
Prospectus and Statement of Additional Information. The stock registry
books recording outstanding Shares, the Unissued Certificate Account and
the individual account of the Shareholder shall be properly debited.
Section 17. The proceeds of redemption shall be remitted by Company
in accordance with the Series' Prospectus by check mailed to the
Shareholder at his registered address. If Share Certificates have been issued
for Shares being redeemed, then such Share Certificates and a stock power
with a signature guarantee of a commercial bank, trust company, savings
bank, savings and loan association, or a member firm of a national securities
exchange shall accompany the redemption request. If Share Certificates
have not been issued to the redeeming Shareholder, the signature of the
Shareholder on the redemption request must be similarly guaranteed. The
Series may authorize Company to waive the signature guarantee in certain
cases by Written Instructions.
For the purposes of redemption of Shares which have been purchased
within 15 days of a redemption request, the Series shall provide Company,
from time to time, with Written Instructions concerning the time within which
such requests may be honored.
DIVIDENDS
Section 18. Upon the declaration of each dividend and each capital
gains distribution by the Board of Trustees of the Series, the Series shall
notify Company of the date of such declaration, the amount payable per
share, the record date for determining the shareholders entitled to payment,
the payment, and the reinvestment date price.
Section 19. On or before each payment date the Series will transfer,
or cause the Custodian to transfer, to Company in its capacity as Dividend
Disbursing Agent, the total amount of the dividend or distribution currently
payable to those shareholders who have elected to receive dividends or
distributions in cash. Company will, on the designated payment date, mail
distribution checks to the Shareholders for the proper amounts payable to
them.
GENERAL PROVISIONS
Section 20. Company shall maintain records (which may be part of the
stock transfer records) in connection with the issuance and redemption of
Shares, and the disbursement of dividends and dividend reinvestments, in
which will be noted the transactions effected for each Shareholder and the
number of Shares and fractional Shares owned by each for which no Share
Certificates are outstanding. Company agrees to make available upon
request and to preserve for the periods prescribed in Rule 31a-2 under the
Investment Company Act of 1940 any records relating to services provided
under this Agreement which are required to be maintained by Rule 31a-1
under the Act. Company acknowledges that the records created or
maintained by the Company on behalf of the Trust are the property of the
Trust and will be surrendered promptly as required under Rule 31a-3 under
the Investment Company Act of 1940, as amended.
Section 21. In addition to the services as Transfer Agent and Dividend
Disbursing Agent as above set forth, Company will perform other services for
the Series as agreed from time to time, including but not limited to,
preparation of and mailing Federal Tax Information Forms, mailing annual
and semi-annual reports of the Series, preparation of one annual list of
Shareholders, and mailing notices of Shareholders' meetings, proxies and
proxy statements.
Section 22. Nothing contained in this Agreement is intended to or shall
require Company in any capacity hereunder, to perform any functions or
duties on any holiday recognized by the Trust, as set forth in its current
Prospectus, day of special observance or any other day on which the
Custodian or the New York Stock Exchange are closed. Functions or duties
normally scheduled to be performed on such days shall be performed on,
and as of, the next business day on which both the New York Stock
Exchange and the Custodian are open.
Section 23. The Trust agrees to pay Company compensation for its
services and to reimburse it for expenses, as set forth in Schedule "B"
attached hereto, or as shall be set forth in amendments to such Schedule.
The Trust agrees to make payment to the Company for the services
performed for the applicable function within 30 days following receipt by the
Trust of an invoice detailing such services.
Section 24. (a) The Company, its directors, officers, employees,
shareholders and agents shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with the
performance of this Agreement, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard on the part
of the Company in the performance of its obligations and duties under this
Agreement.
(b) Any person, even though also a director, officer,
employee, shareholder or agent of the Company, who may be or become
an officer, trustee, employee, or agent of the Series, shall be deemed, when
rendering services to the Series or acting on any business of the Series
(other than services or business in connection with the Company's duties
hereunder), to be rendering such services to or acting solely for the Series
and not as a trustee, officer, employee, shareholder or agent of, or one
under the control or direction of the Company even though paid by it.
(c) Notwithstanding any other provision of this Agreement,
the Trust shall indemnify and hold harmless the Company, its directors,
officers, employees, shareholders and agents from and against any and all
claims, demands, expenses and liabilities (whether with or without basis in
fact or law) of any and every nature which the Company may sustain or incur
or which may be asserted against the Company by any person by reason of,
or as a result of: (i) any action taken or omitted to be taken by the Company
in good faith hereunder; (ii) in reliance upon any certificate, instrument,
order, or stock certificate or other document reasonably believed by it to be
genuine and to be signed, countersigned or executed by any duly authorized
person, upon the Oral Instructions or Written Instructions of an authorized
person of the Series or upon the opinion of legal counsel for the Trust or its
own counsel; or (iii) any action taken or omitted to be taken by the Company
in connection with its appointment as Shareholder Services Agent in good
faith in reliance upon any law, act, regulation or interpretation of the same
even though the same may thereafter have been altered, changed,
amended, or repealed. However, indemnification under this subparagraph
shall not apply to actions or omissions of the Company or its directors,
officers, employees, shareholders, or agents in cases of its or their own
negligence, willful misconduct, bad faith, or reckless disregard of its or
their own duties hereunder.
(d) The Company shall give written notice to the Trust
within ten (10) business days of receipt by the Company of a written
assertion or claim of any threatened or pending legal proceeding which may
be subject to this indemnification. However, the failure to notify the Trust of
such written assertion or claim shall not operate in any manner whatsoever
to relieve the Trust of any liability arising from this Section or otherwise.
(e) For any legal proceeding giving rise to this
indemnification, the Trust shall be entitled to defend or prosecute any claim
in the name of the Company at its own expense and through counsel of its
own choosing if it gives written notice to the Company within ten (10)
business days of receiving notice of such claim. Notwithstanding the
foregoing, the Company may participate in the litigation at its own expense
through counsel of its own choosing. If the Trust does choose to defend or
prosecute such claim, then the parties shall cooperate in the defense or
prosecution thereof and shall furnish such records and other information as
are reasonably necessary.
(f) The Trust shall not settle any claim subject to the
indemnification provisions of paragraph 24(c) above without the Company's
express written consent which shall not be unreasonably withheld; provided,
however, in the event the Company withholds such consent the Trust may,
at its option, elect to deliver to the Company an amount of money equal to
the proposed settlement amount for such claim along with a written copy of
the proposed settlement as agreed to by the claimant and the Company
shall thereafter be responsible for the defense of any such claim and any and
all costs associated therewith.
Section 25. Company is authorized, upon receipt of Written Instructions
from the Trust, to make payment upon redemption of Shares without a
signature guarantee. The Trust hereby agrees to indemnify and hold
Company, its successors and assigns, harmless of and from any and all
expenses, damages, claims, suits, liabilities, actions, demands, losses
whatsoever arising out of or in connection with a payment by Company upon
redemption of Shares without a signature guarantee, if such redemption has
been authorized by the Trust in Written Instructions to the Company, and
upon the request of Company the Trust shall assume the entire defense of
any action, suit or claim subject to the foregoing indemnity. Company shall
notify the Trust of any such action, suit or claim within ten (10) days after
receipt by Company of notice thereof.
Section 26. (a) The term of this Agreement shall be one year,
commencing on the date hereof and shall continue in force from year to year
thereafter upon review and agreement of the Parties.
(b) Either Party may give written notice to the other of the
termination of this Agreement, such termination to take effect at the time
specified in the notice, not less than ninety (90) days after the giving of the
notice. Upon the effective termination date, the Trust shall pay to the
Company such compensation as may be due as of the date of termination
and shall likewise reimburse the Company for any out-of-pocket expenses
and disbursements reasonably incurred by the Company to such date.
(c) In the event that in connection with termination of this
Agreement a successor to any of the Company's duties or responsibilities
under this Agreement is designated by the Trust by written notice to the
Company, the Company shall, promptly upon such termination and at the
expense of the Trust, transfer all Required Records to such person as the
Trust may designate and shall cooperate in the transfer of such duties and
responsibilities.
Section 27. The Trust shall file with Company a certified copy of each
resolution of its Board of Trustees authorizing the execution of Written
Instructions or the transmittal of Oral Instructions, as provided in Section 1
of this Agreement.
Section 28. This Agreement may be amended from time to time by a
supplemental agreement executed by the Trust and the Company.
Section 29. Any notice or other communication required by or
permitted to be given in connection with this Agreement shall be in writing,
and shall be delivered in person or sent by first class mail, postage prepaid,
to the respective parties as follows:
If to the Trust:
Smith Breeden Trust
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
Attention: Gerald J. Madigan, President
If to the Company:
Fund/Plan Services, Inc.
P.O. Box 874
Conshohocken, PA 19428
Attention: Kenneth J. Kempf, President
Section 30. (a) The Trust represents and warrants to Company that
the execution and delivery of this Shareholder Services Agreement by the
undersigned officers of the Trust has been duly and validly authorized by
resolution of the Board of Trustees of the Trust.
(b) The Company represents and warrants to the Trust
that the execution and delivery of this Shareholder's Services Agreement by
the undersigned officers of the Company has been duly and validly
authorized by resolution of the Board of Directors of the Company.
Section 31. This Agreement may be executed in two or more
counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the
same instrument.
Section 32. This Agreement shall extend to and shall be binding upon
the parties hereto and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Trust without the
written consent of Company or by Company without the written consent of
the Trust, authorized or approved by a resolution of its Board of Trustees.
Section 33. The Company acknowledges that it has received
notice of and accepts the limitations of the Trust's liability as set forth
in its Declaration of Trust and this Agreement. The Company agrees that the
Trust's obligations under this Agreement with respect to a particular Series
and any other specific Series shall be limited to such Series and to its assets,
and that the Company shall not seek satisfaction of any such obligation from
the Shareholders of the Series nor from any trustee, officer, employee or
agent of the Trust or the Series, nor from the assets of Shareholders of any
other Series.
Section 34. This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania.
Section 35. The Company agrees that, except as otherwise
required by law as set forth in an opinion of Company's counsel, the
Company will use its best efforts to keep confidential all records and
information in its possession relating to the Trust or Shareholder accounts,
and will not disclose the same to any person except at the request of or with
the consent of the Trust or, with respect to Shareholder accounts, at the
request of with the consent of the holder of the account.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement, together with Schedules "A", "B" and "C", to be signed by their
duly authorized officers and their corporate seals hereunto duly affixed and
attested, as of the day and year first above written.
SMITH BREEDEN TRUST
Attest: Marianthe S. Mewkill By:
________________________________
Gerald J. Madigan
President
FUND/PLAN SERVICES, INC.
Attest: Mary Efstration By:
_____________________________
Kenneth J. Kempf
President<PAGE>
Schedule A
TRANSFER AGENT UNIT
TRANSFER AGENT SERVICES FOR
SMITH BREEDEN TRUST
The following is a list of Transfer Agency Services to be provided:
Opening new accounts and entering demographic data into
shareholder base.
Real-time Customer Information File (CIF) to link accounts within the
Fund and across Funds. Facilitates account maintenance, lead
tracking, quality control, household mailings and combined statements.
100% Quality Control of new accounts opened on a same-day basis
performed by the New Accounts Processing Unit. All of the above
information is checked by a separate unit.
Account Maintenance with quality control.
Processing all investments to include:
- initial investments
- subsequent investments through lock box computer interface
- pre-authorized investments through ACH
- government allotments through ACH
- wire and Fund/SERV trades.
Establishing and maintaining Rights of Accumulation and Letters of
Intent with escrow handling as needed.
Processing tax ID certifications and NRA processing and handling
back-up withholding.
Processing regular and legal transfers of accounts.
Exchange processing via automated exchange system. Calls will be
automatically recorded.
Responding to shareholder calls and written inquires. Fund/Plan shall
assign a specific dedicated institutional representative.
Processing reinvested dividends of one fund into another fund.
Processing sweep purchases and redemptions for brokerage, bank, or
other accounts via tape or transmission.*
Generating account statements with copies to appropriate interested
parties.
Generating trade confirmations with copies to dealers, representatives
and fund.
Redemption processing to include:
- complete and partial redemptions
- selected group redemptions
- wire trade redemptions
- accommodate special liquidation processing
Interface to Fund/SERV System.*
Maintain dealer file by fund group to include dealer, branch,
representative number and name.
Commission processing with up to four commission tables.
Issuing and canceling of certificates (if applicable).
Replacement of certificates through surety bonds (if applicable).
Processing dividends from annual to daily dividend with monthly
payments.
Maintain Blue Sky reporting and produce daily and monthly reports.
Daily reports reflect a "warning system" that informs the funds'
administrator when it is within a certain percentage of shares registered
in a state, or within a certain time period for permit renewal.
Producing daily, monthly or periodic reports of shareholder activity.
Producing shareholder lists, labels, Ad Hoc reports to management,
etc.*
Addressing, mailing, and tabulation of annual proxy cards, as
necessary.
Preparation of federal tax information forms to include 1099-DIV's,
1099-B's, 1042S's, etc. to shareholders with tape to IRS.
Microfilming and indexing in PC system of all application, check
certification, correspondence and other pertinent shareholder
documents to provide automated location of these records.
System access by PC dial-up or by dedicated line (if applicable).*
Retirement Plan processing.*
Purchases or Sales by investors in the Series Funds will be mirrored
by the related purchase or sale in the Institutional Funds on the same
day.
Procedures will be instituted to ensure that purchases or sales by
investors in the Market Tracking Fund will be mirrored by a sale or
purchase by Smith Breeden on the same day.
Schedule B
SHAREHOLDER SERVICES AND TRANSFER AGENT FEE SCHEDULE
I. The following is our schedule for Shareholder and Transfer Agent
Services:
A) Account Fees
1) Short Duration Fund
$15.60 per Account per Year
2) Intermediate Duration Fund
$19.80 per Account per Year
3) Market Tracking Fund
$13.20 per Account per Year
B) Monthly Minimums Per Portfolio
1) Short Duration Portfolios
Short Duration Portfolio $2,000
2) Intermediate Duration Portfolios
Intermediate Duration Portfolio $2,000
3) Market Tracking Portfolios
Market Tracking Portfolio $1,667
II. Retirement Plans: (if applicable)
$12.00 per Account - Annual Maintenance Fee
(charged to shareholder account)
III. Fund/SERV:
$50.00 Connection Fee per Portfolio per Month
$5,000 One-Time Set Up Charge (applicable across all Retail Funds)
OUT-OF-POCKET EXPENSES
The Funds will reimburse Fund/Plan Services monthly for all out-of-pocket
expenses, including telephone, postage, telecommunications, special reports,
record retention.
ADDITIONAL SERVICES
Additional/enhanced services or reports will be quoted upon request. To the
extent the Funds should decide to issue separate classes of shares,
additional fees will apply. Fees for activities of a non-recurring nature
such as fund consolidations, mergers or reorganizations will be subject to
negotiation.<PAGE>
Schedule C
As of the date of this Agreement, the Trust has authorized the issuance of
the following separate series of shares:
Smith Breeden Market Tracking Fund
ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT, dated as of the 20th day of February, 1994
made by and between Smith Breeden Trust (the "Trust") a business trust
operating as an open-end management investment company, duly
organized and existing under the laws of the Commonwealth of
Massachusetts, and Fund/Plan Services, Inc. (the "Company") a
corporation duly organized and existing under the laws of the State of
Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is a registered open-end, management
investment company under the Investment Company Act of 1940, as
amended (the "Act"); and
WHEREAS, the Trust desires to appoint the Company as its
Accounting Services Agent to maintain and keep current the books,
accounts, records, journals or other records of original entry relating to the
business of the Fund as set forth in Schedule "A" of this Agreement (the
"Accounts and Records") and to perform certain other functions in
connection with such accounts and records; and
WHEREAS, the Trust is authorized by its Trust Instrument to issue
separate series of shares representing interests in separate investment
portfolios (the "Series"), which Series are identified on Schedule "C"
attached hereto, and which Schedule "C" may be amended from time to
time by mutual agreement of the Parties; and
WHEREAS, the Company is willing to perform such functions upon
the terms and conditions set forth below; and
WHEREAS, the Trust will cause to be provided certain information to
the Company as set forth below; and
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereto, intending to be legally
bound, do hereby agree as follows:
Section 1. For purposes of this Agreement, the terms Oral
Instructions and Written Instructions shall mean:
Oral Instructions: The term Oral Instruction shall mean
an authorization, instruction, approval, item or set of data, or information
of any kind transmitted to the Company in person or by telephone,
telegram, telecopy, or other mechanical or documentary means lacking a
signature, by a person or persons believed in good faith by the Company
to be a person or persons authorized by a resolution of the Board of
Trustees of the Trust, to give Oral Instructions on behalf of the Trust.
Written Instructions: The term Written Instruction shall
mean an authorization, instruction, approval, item or set of data or
information of any kind transmitted to the Company in original writing
containing original signatures or a copy of such document transmitted by
telecopy including transmission of such signature believed in good faith
by the Company to be the signature of a person authorized by a
resolution of the Board of Trustees of the Trust to give Written Instructions
on behalf of the Trust.
The Trust shall file with the Company a certified
copy of each resolution of its Board of Trustees authorizing execution of
Written Instructions or the transmittal of Oral Instructions as provided
above.
Section 2. To the extent it receives the necessary information
from the Trust or its agents by Written or Oral Instructions, the Company
shall maintain and keep current the following Accounts and Records
relating to the business of the Trust, in such form as may be mutually
agreed to between the Trust and the Company:
(a) Cash Receipts Journal
(b) Cash Disbursements Journal
(c) Dividends Paid and Payable Schedule
(d) Purchase and Sales Journals - Portfolio Securities
(e) Subscription and Redemption Journals
(f) Security Ledgers - Transaction Report and Tax Lot
Holdings Report
(g) Broker Ledger - Commission Report
(h) Daily Expense Accruals
(i) Daily Interest Accruals
(j) Daily Trial Balance
(k) Portfolio Interest Receivable and Income Journal
(l) Portfolio Dividend Receivable and Income Register
(m) Listing of Portfolio Holdings - showing cost, market
value and percentage of portfolio comprised of
each security.
The necessary information to perform the above
functions and the calculation of the Trust's net asset value as provided
below, is to be furnished by Written or Oral Instructions to the Company
daily (in accordance with the time frame identified in Section 7) prior to
the close of trading on the New York Stock Exchange.
Section 3. The Company shall perform the ministerial
calculations necessary to calculate the Trust's net asset value daily, in
accordance with the Trust's current Prospectus and utilizing the
information described in this Section. Portfolio items for which market
quotations are available by the Company's use of an automated financial
information service ("Service") shall be based on the closing prices of
such Service except where the Trust has given or caused to be given
specific Written or Oral Instructions to Utilize a different value. All of the
portfolio securities shall be given such values as the Trust provides by
Written or Oral Instructions including all restricted securities and other
securities requiring valuation not readily ascertainable solely by such
Service. The Company shall have no responsibility or liability for the
accuracy of prices quoted by such Service; for the accuracy of the
information supplied by the Trust; or for any loss, liability, damage, or cost
arising out of any inaccuracy of such data. The Company shall have no
responsibility or duty to include information or valuations to be provided
by the Trust in any computation unless and until it is timely supplied to
the Company in usable form.
Section 4. For all purposes under this Agreement, the
Company is authorized to act upon receipt of the first of any Written or
Oral Instruction it receives from the Trust or its agents on behalf of the
Trust. In cases where the first instruction is an Oral Instruction that is not
in the form of a document or written record, a confirmatory Written
Instruction or Oral Instruction in the form of a document or written record
shall be delivered, and in cases where the Company receives an
Instruction, whether Written or Oral, to enter a portfolio transaction on the
records, the Trust shall cause the broker/dealer to send a written
confirmation to the Company. The Company shall be entitled to rely on
the first Instruction received, and for any act or omission undertaken in
compliance therewith shall be free of liability and fully indemnified and
held harmless by the Trust, provided however, that in the event a Written
or Oral Instruction received by the Company is countermanded by a
timely later Written or Oral Instruction received by the Company prior to
acting upon such countermanded Instruction, the Company shall act upon
such later Written or Oral Instruction. The sole obligation of the company
with respect to any follow-up or confirmatory Written Instruction, Oral
Instruction in documentary or written form, or broker/dealer written
confirmation shall be to make reasonable efforts to detect any such
discrepancy between the original Instruction and such confirmation and to
report such discrepancy to the Trust. The Trust shall be responsible, at
the Trust's expense, for taking any action, including any reprocessing,
necessary to correct any discrepancy or error, and to the extent such
action requires the Company to act the Trust shall give the Company
specific Written Instruction as to the action required.
Section 5. The Trust shall cause the Trust's Custodian to
forward to the Company a daily statement of cash and portfolio
transactions and, at the end of each month, the Trust shall cause the
Trust's Custodian to forward to the Company a monthly statement of
portfolio transactions, which will be reconciled with the Company's
Accounts and Records maintained for the Trust. The Company will report
any discrepancies to the Custodian, and report any unreconciled items to
the Trust.
Section 6. The Company shall promptly supply daily and
periodic reports of the Trust as requested by the Trust and agreed upon
by the Company.
Section 7. The Trust shall provide and shall require each of its
agents (including without limitation its Transfer Agent and its Custodian) to
provide the Company as of the close of each business day, or on such
other schedule as the Trust determines is necessary, with Written or Oral
Instructions (to be delivered to the company by 11:00 AM Eastern Time
the next following business day) containing all data and information
necessary for the Company to maintain the Trust's Accounts and Records
and the Company may conclusively assume that the information it
receives by Written or Oral Instructions is complete and accurate. The
Trust is responsible to provide or cause to be provided to the Company
reports of share purchases, redemptions, and total shares outstanding on
the next business day after each net asset valuation.
Section 8. The Accounts and Records, in the agreed upon
format, maintained by the Company shall be the property of the Trust, and
shall be made available to the Trust promptly upon request and shall be
maintained for the periods prescribed in Rule 31a-2 under the Investment
Company Act of 1940, as amended. The Company shall assist the Trust's
independent auditors, or upon approval of the Trust, or upon demand,
any regulatory body, in any requested review of the Trust's Accounts and
Records but shall be reimbursed for all expenses and employee time
invested in any such review of the Trust's Accounts and Records outside
of routine and normal periodic review and audits. Upon receipt from the
Trust of the necessary information, the Company shall supply the
necessary data for the Trust or accountant's completion of any necessary
tax returns, questionnaires, periodic reports to Shareholders and such
other reports and information requests as the Trust and the Company
shall agree upon from time to time. Company acknowledges that the
records created or maintained by the Company on behalf of the Trust are
the property of the Trust and will be surrendered promptly as required
under Rule 31a-3 under the Investment Company Act of 1940, as
amended.
Section 9. In case of any request or demand for the
inspection of the Share records of the Trust, Company, as Accounting
Services Agent, shall endeavor to notify the Trust and to secure
instructions as to permitting or refusing such inspection. However,
Company may exhibit such records to any person in any case where it is
advised by its counsel that it may be held liable for failure to do so.
Section 10. The Company and the Trust may from time to time
adopt such procedures as they agree upon in writing, and the Company
may conclusively assume that any procedure approved by the Trust or
directed by the Trust, does not conflict with or violate any requirements of
its Prospectus, Articles of Incorporation, By-Laws, or any rule or regulation
of any regulatory body or governmental agency. The Trust shall be
responsible for notifying the Company of any changes in regulations or
rules which might necessitate changes in the Company's procedures, and
for working out with the Company such changes.
Section 11. (a) The Company, its directors, officers,
employees, shareholders, and agents shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of this Agreement, except losses
resulting from willful misfeasance, bad faith or gross negligence on the
part of the Company in the performance of its obligations and duties
under this Agreement.
(b) Any person, even though also a director, officer,
employee, shareholder or agent of the Company, who may be or become
an officer, trustee, employee or agent of the Trust, shall be deemed, when
rendering services to the Trust or acting on any business of the Trust
(other than services or business in connection with the Company's duties
hereunder), to be rendering such services to or acting solely for the Trust
and not as a director, officer, employee, shareholder or agent of, or one
under the control or direction of the Company even though paid by it.
(c) Notwithstanding any other provision of this
Agreement, the Trust shall indemnify and hold harmless the Company, its
directors, officers, employees, shareholders and agents from and against
any and all claims, demands, expenses and liabilities (whether with or
without basis in fact or law) of any and every nature which the Company
may sustain or incur or which may be asserted against the Company by
any person by reason of, or as a result of: (i) any action taken or omitted
to be taken by the Company in good faith hereunder; (ii) in reliance upon
any certificate, instrument, order or stock certificate or other document
reasonably believed by it to be genuine and to be signed, countersigned
or executed by any duly authorized person, upon the Oral Instructions or
Written Instructions of an authorized person of the Trust or upon the
opinion of legal counsel for the Trust or its own counsel; or (iii) any action
taken or omitted to be taken by the Company in connection with its
appointment in good faith in reliance upon any law, act, regulation or
interpretation of the same even though the same may thereafter have
been altered, changed, amended, or repealed. However, indemnification
under this subparagraph shall not apply to actions or omissions of the
Company or its directors, officers, employees, shareholders, or agents in
cases of its or their own negligence, willful misconduct, bad faith, or
reckless disregard of its or their own duties hereunder.
(d) The Company shall give written notice to the Trust
within ten (10) business days of receipt by the Company of a written
assertion or claim of any threatened or pending legal proceeding which
may be subject to this indemnification. However, the failure to notify the
Trust of such written assertion or claim shall not operate in any manner
whatsoever to relieve the Trust of any liability arising from this Section or
otherwise.
(e) For any legal proceeding giving rise to this
indemnification, the Trust shall be entitled to defend or prosecute any
claim in the name of the Company at its own expense and through
counsel of its own choosing if it gives written notice to the Company
within ten (10) business days of receiving notice of such claim.
Notwithstanding the foregoing, the Company may participate in the
litigation at its own expense through counsel of its own choosing. If the
Trust does choose to defend or prosecute such claim, then the parties
shall cooperate in the defense or prosecution thereof and shall furnish
such records and other information as are reasonably necessary.
(f) The Trust shall not settle any claim without the
Company's express written consent which shall not be unreasonably
withheld. The Company shall not settle any claim without the Trust's
express written consent which shall not be unreasonably withheld.
Section 12. All financial data provided to, processed by, and
reported by the Company under this Agreement shall be stated in United
States dollars. The Company shall have no obligation to convert to,
equate, or deal in foreign currencies or values, and expressly assumes no
liability for any currency conversion or equation computations relating to
the affairs of the Trust.
Section 13. The Trust agrees to pay Fund/Plan compensation
for its services and to reimburse it for expenses, at the rates and amounts
as set forth in Schedule "B" attached hereto, and as shall be set forth in
any amendments to such Schedule "B" approved by the Trust and
Fund/Plan.
Section 14. Nothing contained in this Agreement is intended to
or shall require the Company, in any capacity hereunder, to perform any
functions or duties on any holiday, day of special observance or any other
day on which the New York Stock Exchange is closed. Functions or
duties normally scheduled to be performed on such days shall be
performed on, and as of, the next succeeding business day on which the
New York Stock Exchange is open. Not withstanding the foregoing, the
Company shall compute the net asset value of the Trust on each day
required pursuant to Rule 22c-1 promulgated under the Investment Act of
1940, as amended.
Section 15. (a) The term of this Agreement shall be one year,
commencing on the date hereof and shall continue in force from year to
year thereafter upon review and agreement of the Parties.
(b) Either Party may give written notice to the other of
the termination of this Agreement, such termination to take effect at the
time specified in the notice, not less than ninety (90) days after the giving
of the notice. Upon the effective termination date, the Trust shall pay to
the Company such compensation as may be due as of the date of
termination and shall likewise reimburse the Company for any out-of-
pocket expenses and disbursements reasonably incurred by the Company
to such date.
(c) In the event that in connection with termination of
this Agreement a successor to any of the Company's duties or
responsibilities under this Agreement is designated by the Trust by written
notice to the Company, the Company shall, promptly upon such
termination and at the expense of the Trust, transfer all Required Records
and shall cooperate in the transfer of such duties and responsibilities.
Section 16. Any notice or other communication required by or
permitted to be given in connection with this Agreement shall be in
writing, and shall be delivered in person or sent by first class mail,
postage prepaid to the respective parties as follows:
If to the Trust:
Smith Breeden Trust
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
Attention: Gerald J. Madigan, President
If to the Company:
Fund/Plan Services, Inc.
P.O. Box 874
Conshohocken, PA 19428
Attention: Kenneth J. Kempf, President
Section 17. The Trust represents and warrants to Company that
the execution and delivery of this Accounting Services Agreement by the
undersigned officers of the Trust has been duly and validly authorized by
resolution of the Board of Trustees of the Trust.
Section 18. This Agreement may be amended from time to time
by supplemental agreement executed by the Trust and the Company and
the compensation stated in Schedule "B" attached hereto may be adjusted
accordingly as mutually agreed upon.
Section 19. This Agreement shall extend to and shall be
binding upon the parties hereto and their respective successors and
assigns; provided, however, that this Agreement shall not be assignable
by the Trust without written consent of Company or by Company without
the written consent of the Trust, authorized by a resolution of its Board of
Trustees.
Section 20. This Agreement shall be governed by the laws of
the Commonwealth of Pennsylvania.
Section 21. The Company acknowledges that it has received
notice of and accepts the limitations of the Trust's liability as set forth
in its Agreement and Declaration of Trust. The Company agrees that the
Trust's obligations under this Agreement with respect to the Trust and any
other specific Trust shall be limited to such Trust and to its assets, and
that the Company shall not seek satisfaction of any such obligation from
the Shareholders of the Trust nor from any trustee, officer, employee or
agent of the Trust or the Series, nor from the assets of Shareholders of
any other Funds.
Section 22. This Agreement sets forth the entire understanding
of the parties with respect to the provisions contemplated hereby, and
supersedes any and all prior agreements, arrangements and
understandings relating to such services.
Section 23. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original agreement
but such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement, together with Schedules "A", "B" and "C", to be signed by their
duly authorized officers and their corporate seals hereunto duly affixed
and attested, as of the day and year first above written.
SMITH BREEDEN TRUST
Attest: Marianthe S. Mewkill By:
________________________________
Gerald J. Madigan
President
FUND/PLAN SERVICES, INC.
Attest: Mary P. Efstration By:
_____________________________
Kenneth J. Kempf
President<PAGE>
Schedule A
ACCOUNTING SERVICES UNIT
ACCOUNTING & PORTFOLIO VALUATION SERVICES FOR
THE SMITH BREEDEN TRUST
Daily Accounting Services
1) Calculate Net Asset Value (and Offering Price) Per Share:
- Update the daily market value of securities held by the Funds
using Smith Breeden supplied prices. Prices will be
transmitted electronically from Smith Breeden to Fund/Plan
and then uploaded directly into the Accounting System.
- If necessary, enter manual prices supplied by client and/or
broker.
- Prepare NAV proof sheet. Review components of change in
NAV for reasonableness.
- Review variance reporting on-line and in hard copy for price
changes in individual securities using variance levels
established by client. Verify US dollar security prices
exceeding variance levels by notifying client and pricing
sources of noted variance.
- Review for ex-dividend items indicated by pricing sources;
trace to general ledger for agreement.
- Communicate required pricing information (NAV/POP) to client,
Transfer Agent and, electronically, to NASDAQ.
2) Complete Daily Dividend Fund Requirements - Intermediate Funds:
- Calculate net investment income available for distribution daily.
- Calculate daily dividend rate, and 1, 7, 30-day yields.
- Supply Transfer Agent with distribution rates.
- Verify system calculated dollar weighted average maturity.
3) Determine and Report Cash Availability to Fund by approximately
10:00 AM Eastern Time:
- Receive daily cash and transaction statements from the
custodian by 8:30 AM Eastern time.
- Fax hard copy calculations with all details to client.
- Supply client with 5-day cash projection report, upon request.
- Prepare and complete daily bank cash reconciliations
including documentation of any reconciling items and notify
the custodian/client.
- The Funds' Transfer Agent will also support the client in receipt
of timely cash information.
4) Reconcile and Record All Daily Expense Accruals:
- Accrue expenses based on F/PS Administration supplied
budget either as percentage of Fund's net assets or specific
dollar amounts.
- If applicable, monitor expense limitations established by client.
- If applicable, accrue daily amortization of organization
expense.
- If applicable, complete daily accrual of 12(b)1 expenses.
5) Verify and Record All Daily Income Accruals for Debt Issues:
- Review and verify all system generated Interest and
Amortization reports.
- Establish unique security codes for bond issues to permit
segregated Trial Balance income reporting.
6) Monitor Domestic Securities Held for Cash Dividends, corporate
actions and capital changes such as splits, mergers, spinoffs, etc.
and process appropriately.
- Monitor electronically received information from Muller Data
Corporation for all domestic securities.
- Review current daily security trades for dividend activity.
- Interface with custodian for timely collection and postings of
corporate actions, dividends and interest/pre-payments.
7) Enter All Security Trades on Investment Accounting System (IAS)
based on written instructions from the client or custodian.
- Review system verification of trade and interest calculations.
- Verify settlement through the custodian statements.
- Maintain security ledger transaction reporting.
- Maintain tax lot holdings.
- Determine realized gains or losses on security trades.
- Provide complete broker commission reporting.
8) Enter All Fund Share Transactions on IAS:
- Process activity identified on the Transfer Agent reports.
- Verify settlement through the custodian statements.
- Reconcile to the Fund/Plan Services' Transfer Agent report
balances.
- Account for mirror trades between the Institutional and Retail
Funds, as required.
9) Prepare and Reconcile/Prove Accuracy of the Daily Trial Balance
(listing all asset, liability, equity, income and expense accounts)
- Post manual entries to the general ledger.
- Post custodian bank activity.
- Post shareholder and security transactions.
- Post and verify system generated activity, i.e., income and
expense accruals.
- Prepare general ledger net cash proof used in NAV calculation.
10) Review and Reconcile With Custodian Statements:
- Verify all posted interest, dividends, expenses, and shareholder
and security payments/receipts, etc. (discrepancies will be
reported to and resolved by the custodian).
- Post all cash settlement activity to the Trial Balance.
- Reconcile to ending cash balance accounts.
- Clear IAS subsidiary reports with settled amounts.
- Track status of past due items and failed trades with the
custodian.<PAGE>
11) Submission of Daily Accounting Reports to Client:
- Trial Balance
- Portfolio Valuation (listing inclusive of holdings, cost, market
value, unrealized appreciation/depreciation and percentage of
portfolio comprised of each security).
- NAV Calculation Report (with Daily Distribution Rate, if
applicable).
- Cash Availability
- 5-day Cash Projection Report, if requested.
- Additional reports readily available.
Monthly Accounting Services
1) Full Financial Statement preparation (automated Statements of
Assets and Liabilities, of Operations and of Changes in Net Assets)
and submission to Smith Breeden by 10th business day.
2) Submission of Monthly Automated IAS Reports to Fund/Client:
- Security Purchase/Sales Journal
- Interest and Maturity Report
- Brokers Ledger (Commission Report)
- Security Ledger Transaction Report with Realized
Gains/Losses
- Security Ledger Tax Lot Holdings Report
- Additional reports available upon request.
3) Reconcile Accounting Asset Listing to Custodian Asset Listing and
provide to Smith Breeden:
- Report any security balance discrepancies to the
custodian/client.
4) Provide Monthly Analysis and Reconciliation of Additional Trial
Balance Accounts to Smith Breeden, inclusive of:
- Cash reconciliation
- Share reconciliation
- Subscription/Liquidation Schedule
- I.O. Schedule
- Interest/dividend receivable and income
- Payable/receivable for securities purchased and sold
- Payable/receivable for Fund shares; issued and redeemed
- Upon request, security cost and realized gains/losses schedule
(presently available semi-annually)
5) If Appropriate, Prepare and Submit to Client:
- SEC yield reporting (non-money market funds with domestic
and ADR securities only).
- Income by state reporting
- Standard Industry Code Valuation Report
- Alternative Minimum Tax Income segregation schedule<PAGE>
Annual (and Semi-Annual) Accounting Services
1) Assist and supply Deloitte & Touche with schedules supporting
securities and shareholder transactions, income and expense
accruals, etc. during the year in accordance with standard audit
assistance requirements.
2) Provide NSAR Reporting (Accounting Questions):
If applicable, answer the following items:
2, 12B, 20, 21, 22, 23, 28, 30A, 31, 32, 35, 36, 37, 43, 53, 55, 62,
63, 64B, 71, 72, 73, 74, 75, 76
BASIC ASSUMPTIONS
The Fee Schedule in Schedule "B" for The Smith Breeden Funds is based
upon review of the Funds' most recent N1A and other information
provided to us by Gerald J. Madigan. To the extent our understanding of
your current requirements and procedures should be incorrect, please
advise us.
Basic Assumptions:
1. It is our understanding that the Institutional Funds will hold an
average 50-100 issues with approximately 50-100 trades per year
per fund. The US Government Series Fund will invest all of its
assets in the appropriate Institutional Fund. To the extent
incremental increases in number of issues and trading activity levels
correspond to portfolio/Fund asset level increases, no additional
fees are anticipated.
2. The portfolios'/Funds' tax year-end coincides with its fiscal year-end.
No additional accounting requirements are expected to identify or
maintain book-tax differences.
To the extent tax accounting for certain securities differs from the
book accounting, it will be done by the Funds' administrator or the
Funds' independent accountants. We would recommend book/tax
differences be minimized. Wherever possible ASU will include on
the books of the Fund necessary tax adjustments and proper
security cost basis. ASU will assist the client and the Administrator
in this process by supplying segregated Trial Balance reporting and
supplemental reports as necessary.
3. Smith Breeden will supply Fund/Plan Services with prices on
Mortgage/Asset-Backed Securities and hedges within their portfolios.
Initially, Fund/Plan would receive all prices via fax, with follow-up via
telephone. (It is our understanding these prices would be available
and supplied to the Accounting Services Unit (ASU) no later than
4:30 PM Eastern time.) As of date of this contract, Smith Breeden
and Fund/Plan Services have built an interface into the Investment
Accounting System to download prices systematically. Mutually
agreed upon costs for improvements to this interface will be borne
by Smith Breeden. Smith Breeden and ASU will continue to
enlarge the daily price file and minimize the number of manually
priced securities such as TBA/non-standard cusips.
4. To the extent the portfolios should ever purchase/hold open-end
investment companies (RIC's), procedural discussions should take
place between Fund/Plan Services and Fund management clarifying
the appropriate pricing and dividend rate sources.
5. The Accounting Services Unit will supply daily Portfolio Valuation
Reports (via fax or remote printing) to Smith Breeden identifying
current security positions, original/ amortized cost, security market
values and changes in unrealized appreciation/ depreciation.
Smith Breeden will review these reports and promptly notify the
Accounting Unit of any possible problems, trade discrepancies,
incorrect security prices or capital change information that could
result in a misstated portfolio/Fund NAV or daily distribution rate.
6. It is assumed for all debt and hedge issues that the advisor will
supply the Accounting Unit with critical income information such as
accrual methods, principal and interest payment frequency details,
coupon payment dates, floating/adjustable rate changes, and
complete security descriptions with issue types and cusip numbers.
If applicable for proper income accrual accounting, Accounting
Services Unit will look to Fund Management to supply PSA and
related cash flow models for the mortgage/asset backed securities
and IO/PO positions held in the Funds.
7. Fund/Plan Services as Custody Administrator will provide the
Accounting Unit with daily custodian statements (through on-line
access to the custody system) reflecting all prior-day cash activity on
behalf of each portfolio by 8:30 AM Eastern time. Complete and
clear descriptions of any postings, inclusive of cusip numbers,
interest and principal payment dates, capital stock details, expense
authorizations, beginning/ending balances, etc. will be provided by
the custodian's reports or system.
8. It is assumed that the custodian (supported by Fund/Plan Services'
Custody Administration) will monitor and report on all failed trades,
trade/income discrepancies, and unsettled
dividends/interest/paydowns and capital changes. Additionally, the
custodian will process all applicable capital change paperwork
based upon advice from the client and Fund/Plan. Fund/Plan
Services will supply segregated Trial Balance reporting and
supplemental reports to assist in this process.
9. Specific deadlines and complete advisor supplied information will be
identified for all security trades in order to minimize any settlement
problems, NAV miscalculations or income accrual/daily distribution
rate adjustments.
Trade Authorization Forms, with the appropriate officer signature,
should be supplied to Fund/Plan on all security trades placed by the
Fund no later than settlement date by 12:30 PM Eastern time for
money market (same day) issues, and trade date plus one, by 11:00
AM Eastern time for non-money market securities. Receipt of trade
information within these identified deadlines may be via telex, fax, or
on-line system access. To the extent applicable, the investment
advisor will also communicate all required trade information directly
to Fund/Plan Services' Custody Administration who in turn will
supply Accounting Services Unit with the details in accordance with
the above stated deadlines.
10. To the extent the Funds/portfolios should establish a Line of Credit
with the custodian for temporary administrative purposes and/or
leveraging the portfolio, the administrator will complete the
appropriate paperwork/monitoring the segregation of assets and
adequacy of collateral. Accounting will reflect appropriate interest
expense accrual charges on the daily Trial Balance and adjust as
necessary at month-end.
11. The Funds do not currently expect to participate in Short Sales (not
against the box) or Security Lending of their portfolio securities,
other than Dollar Rolls. To the extent they do so in the future,
additional fees will apply after the appropriate discussions have
taken place with Fund management.
12. The Funds do not expect to invest in foreign (non-US dollar
denominated) securities, futures or options on foreign securities,
currencies, or related indices. To the extent these investment
strategies should change, additional fees will apply after the
appropriate procedural discussions have taken place between
Accounting Services Unit and Fund management. (Advance notice
is requested should the Funds/portfolios commence trading in these
investments.)
13. To the extent that the Funds/portfolios will hold any issues with
Original Issue Discount (OID), it is our understanding that OID is a
tax requirement and, as such, not necessarily reflected on the books
of the Fund. ASU's current clients have not required any OID
support. To the extent the Funds/portfolios should, in the future,
own securities with OID, it is expected that the Funds' auditors will
complete the necessary OID adjustments for financial statements
and/or tax reporting.
14. With respect to Mortgage/Asset-Backed securities such as GNMA's,
FHLMC's, FNMA's, CMO's, ARM's, etc. the custodian or the client
will provide ASU with current principal repayment factors on a timely
basis in accordance with the appropriate securities' schedule.
Income accrual adjustments (to the extent necessary) based upon
initial estimates will be completed by ASU when actual
principal/income payments are collected by the custodian. <PAGE>
Schedule B
Effective 4/01/95
FUND ACCOUNTING AND PORTFOLIO VALUATION SERVICES:
(Investments in Domestic and ADR Securities Only)
All Accounting Services fees are quoted with the assumption that Fund
Administration, Transfer Agent Services, and Custody Administration will
be provided by Fund/Plan Services, Inc.
I. Annual Fee Schedule Per Portfolio: (1/12th payable monthly)
A) Short Duration Series
$27,350 On the First $ 10 Million of Average Net Assets
.0004 On the Next $ 40 Million of Average Net Assets
.0003 On the Next $ 50 Million of Average Net Assets
.0001 Over $100 Million of Average Net Assets
B) Intermediate Duration Series
$27,350 On the First $ 10 Million of Average Net Assets
.0004 On the Next $ 40 Million of Average Net Assets
.0003 On the Next $ 50 Million of Average Net Assets
.0001 Over $100 Million of Average Net Assets
C) Market Tracking Fund
$25,000 On the First $ 10 Million of Average Net Assets
.0004 On the Next $ 40 Million of Average Net Assets
.0003 On the Next $ 50 Million of Average Net Assets
.0001 Over $100 Million of Average Net Assets
II. Pricing Service Quotation Fee: (Based on individual cusip or
security identification numbers.)
A) Muller Data Corporation *(if applicable)
*Based on current vendor costs, subject to change.
GNMA Quotes $ .25 per Quote per Bond
Government/Corporate
Short & Long Term Quotes $ .50 per Quote per
Bond
Tax-Exempt Short & Long Term Quotes $ .55 per Quote
per Bond
Tax-Exempt Variable Rate Change $ .55 per Rate Change
per Issue
Information
Minimum Weekly File Transmission is Assumed
There is currently no charge for the domestic dividend and
capital change information transmitted daily to Fund/Plan
Services from Muller Data Corporation.<PAGE>
B) Telerate Systems, Inc. *(if applicable)
*Based on current vendor costs, subject to change.
Specific costs will be identified based upon options selected
by the client and will be billed monthly.
C) Quotron Systems, Inc. (if applicable)
There is currently no charge for the domestic security prices
supplied by Quotron Systems, Inc.
III. Yield Calculation: (if applicable)
Provide up to 12 reports per year to reflect the yield calculations for
non-money market funds required by the SEC. $1,000 per year per
fund (domestic and ADR securities only).
OUT-OF-POCKET EXPENSES
The Funds will reimburse Fund/Plan Services monthly for all out-of-pocket
expenses, including telephone, postage, telecommunications, special
reports, record retention, and the cost of copying and sending materials
to auditors for off-site audits will be an additional expense.
ADDITIONAL SERVICES
To the extent the Funds commence using investment techniques such as
Security Lending, Precious Metals, and/or Foreign Trading, additional fees
will apply. Additional/enhanced services or reports will be quoted upon
request. To the extent the Funds should decide to issue separate classes
of shares, additional fees will apply. Fees for activities of a non-recurring
nature such as fund consolidations, mergers or reorganizations will be
subject to negotiation.<PAGE>
Schedule C
As of the date of this Agreement, the Trust has authorized the issuance of
the following separate series of shares:
Smith Breeden Market Tracking Fund
INDEPENDENT AUDITORS' CONSENT
Smith Breeden Market Tracking Fund of the Smith Breeden Trust:
We consent to the use of Post-Effective Amendment No. 7 to
Registration Statement No. 33-44909 of our report dated May 12,
1995 appearing in the Statement of Additional Information, which
is a part of such Registration Statement, and to the reference to
us under the captions "Experts" appearing in the Statement of
Aditional Information and "Financial Highlights" appearing in the
Prospectus, which also is a part of such Registration Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 28, 1995
DISTRIBUTION AND SERVICES PLAN
This Plan (the "Plan") constitutes the Distribution and Services Plan of Smith
Breeden Market Tracking Fund (the "Fund"), a separate series of Smith Breeden
Trust,a Massachusetts business trust (the "Trust"), adopted pursuant
to the provisions of Rule 12b-1 under the Investment Company Act of
1940 (the "Act"). During the effective term of this Plan, Smith Breeden
Associates, Inc., the Fund's investment advisor ("Smith Breeden") may
make payments out of the investment advisory to be received by Smith Breeden
from the Fund to investment dealers and other persons providing services the
Fund upon the terms and conditions hereinafter set forth. No payments by the
Fund shall be made directly by the Fund under this plan for the purposes set
forth in Section 1. Smith Breeden may make payments to investment dealers or
other person providing services to the Fund, in the form of fees or
reimbursements, as compensation for services provided and expenses
incurred for purposes of promoting the sale of shares of the Fund,
reducing redemptions of shares, or maintaining or improving services
provided to shareholders by investment dealers and other persons. The amount
of such payments and the purposes for which they are made shall be determined
by Smith Breeden Breeden. Smith Breeden's payments covered by this Plan shall
not exceed in any fiscal year the annual rate of 0.25% of the average net asset
value of the Fund,as determined at the close of each business day
during the year. A majority of the Qualified Trustees (as defined below)
may, at any time, and from time to time, may reduce the amount of
such payemnts covered by this Plan, or may suspend the operation
of the Plan for such period or periods as they may determine.
Section 2. This Plan shall not take effect until:
(a) it has been approved by a vote of a majority of the
outstanding voting securities of the Fund; and
(b) it has been approved, together with any related agreements,
by votes, of the majority (or whatever greater percentage may, from time to
time, be required by Section 12(b) of the Act or the rules and regulations
thereunder) of both (i) the Trustees of the Trust, and (ii) the Qualified
Trustee of the Trust, cast in person at a meeting called for the purpose of
voting on this Plan or such agreement.
Section 3. This Plan shall continue in effect for a period of more than one
year after it takes effect only so long as such continuance is
specifically approved at least annually in the manner provided
for approval of this Plan in Section 2(b).
Section 4. Smith Breeden shall provide to the Trustees of the Trust,
and the Trustees shall review, at least quarterly, a written report of the
amounts covered by this
Plan and the purposes for which such expenditures were made.
Section 5. This Plan may be terminated at any time by vote of a majority of
the Qualified Trustees, or by vote of a majority of the Fund's
outstanding voting securities.
Section 6. All agreements with any person relating to implementation of this
Plan shall be in writing, and any agreement related to this Plan shall
provide:
(a) that such agreement may be terminated at any time, without
payment of any penalty, by vote of a majority of the Qualified Trustees or
by vote of a majority of the Fund's outstanding voting securities, on not
more than 60 days' written notice to any other party to the agreement; and
(b) that such agreement shall terminate automatically in the
event of its assignment.
Section 7. This Plan may not be amended to increase materially the amount of
distribution expenses permitted pursuant to Section 1 hereof without the
approval of a majority of the outstanding voting securities of the Fund,
and all material amendments to this Plan shall be approved in the manner
provided for approval of this Plan in Section 2 (b).
Section 8. As used in this Plan, (a) the term "Qualified Trustees" shall mean
those Trustees of the Trust who are not interested persons of the Trust, and
have no direct or indirect financial interest in the operation of this
Plan or any related to it, and (b) the terms "assignment", "interested person"
and "vote of a majority" of the outstanding voting securities" shall have the
respective meaning specified in the Act and the rules and regulations
thereunder, subject to such exemptions as may be granted by the Securities and
Exchange Commission.
Section 9. A copy of the Amended and Restated Declaration of Trust of the
Trust is on file with the Secretary of The Commonwealth of Massachusetts and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually, and that the
obligations of or arising out of this instrument are not binding upon
any of the Trustees, officers or shareholders individually but are
binding only upon the assets and property of the Trust.
Adopted as of August 1, 1994.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> SMITH BREEDEN MARKET TRACKING FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 1925748
<INVESTMENTS-AT-VALUE> 2004873
<RECEIVABLES> 19140
<ASSETS-OTHER> 146410
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2170423
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63077
<TOTAL-LIABILITIES> 63077
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2040914
<SHARES-COMMON-STOCK> 194482
<SHARES-COMMON-PRIOR> 178278
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (38496)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 104928
<NET-ASSETS> 2107346
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 156990
<OTHER-INCOME> 0
<EXPENSES-NET> 16875
<NET-INVESTMENT-INCOME> 140115
<REALIZED-GAINS-CURRENT> (64050)
<APPREC-INCREASE-CURRENT> 229458
<NET-CHANGE-FROM-OPS> 305523
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 104085
<DISTRIBUTIONS-OF-GAINS> 9133
<DISTRIBUTIONS-OTHER> 14213
<NUMBER-OF-SHARES-SOLD> 19300
<NUMBER-OF-SHARES-REDEEMED> 14689
<SHARES-REINVESTED> 11593
<NET-CHANGE-IN-ASSETS> 346827
<ACCUMULATED-NII-PRIOR> 1052
<ACCUMULATED-GAINS-PRIOR> (1343)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (13920)
<GROSS-ADVISORY-FEES> 11056
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 145834
<AVERAGE-NET-ASSETS> 1887022
<PER-SHARE-NAV-BEGIN> 9.88
<PER-SHARE-NII> 0.568
<PER-SHARE-GAIN-APPREC> 1.081
<PER-SHARE-DIVIDEND> 0.568
<PER-SHARE-DISTRIBUTIONS> 0.047
<RETURNS-OF-CAPITAL> 0.074
<PER-SHARE-NAV-END> 10.84
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
