<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- ----------- -------- -----------
<C> <S> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 69.17%
FEDERAL HOME LOAN MORTGAGE CORPORATION -- 11.78%*
FHLMC:
$ 6,983,120 7.50%, due date to be announced.............................................................. $ 7,106,416
83,392 9.50%, due 7/1/02............................................................................ 86,615
-----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(COST $7,136,710).......................................................................... 7,193,031
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 1.20%*
FNMA:
101,671 12.50%, due 9/1/12........................................................................... 117,405
63,560 13.50%, due 1/1/15........................................................................... 75,988
FNMA ARM:
519,184 7.837%, due 9/1/18........................................................................... 541,095
-----------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (COST $714,843).................................. 734,488
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 52.59%*
GNMA:
1,996,814 8.00%, due 4/15/27........................................................................... 2,065,601
GNMA ARM:
3,514,500 5.00%, due 9/20/27........................................................................... 3,469,034
22,273,555 5.50%, due 2/20/27 to 9/20/27................................................................ 22,250,777
839,359 6.50%, due 10/26/27.......................................................................... 859,024
1,621,509 7.00%, due 2/20/16 to 2/20/21................................................................ 1,674,976
203,818 7.125%, due 9/20/21 to 9/20/22............................................................... 209,708
1,544,630 7.375%, due 6/20/16 to 5/20/22............................................................... 1,595,705
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(COST $31,904,869)......................................................................... 32,124,825
-----------
U.S. GOVERNMENT OBLIGATIONS -- 3.60%
U.S. TREASURY BILL **
100,000 5.21%, due 11/13/97***....................................................................... 99,421
830,000 5.52%, due 5/28/98***........................................................................ 801,842
100,000 5.32%, due 5/28/98***........................................................................ 96,608
750,000 5.20%, due 5/28/98***........................................................................ 724,108
500,000 5.25%, due 8/20/98***........................................................................ 476,717
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $2,195,991).......................................... 2,198,696
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (COST $41,952,413)................................ 42,251,040
-----------
<CAPTION>
CONTRACTS OPTION CONTRACTS -- 0.03%
- -----------
<C> <S> <C>
85 Call on Ten-Year US Treasury Note futures, expires 12/97, strike price $112.................. 15,938
74 Put on Ten-Year US Treasury Note futures, expires 12/97, strike price $105.5................. 4,625
-----------
TOTAL OPTION CONTRACTS (COST $60,309)........................................................ 20,563
-----------
TOTAL INVESTMENTS (COST $42,012,722) -- 69.20%............................................... 42,271,603
-----------
<CAPTION>
FACE AMOUNT REPURCHASE AGREEMENTS -- 30.12%:
- -----------
<C> <S> <C>
$13,000,000 Morgan Stanley, 5.58%, due 10/1/97 dated 9/24/97............................................. 13,000,000
5,400,000 Dresdner, 5.60%, due 10/6/97 dated 9/29/97................................................... 5,400,000
-----------
TOTAL REPURCHASE AGREEMENTS (COST $18,400,000)............................................... 18,400,000
-----------
CASH AND OTHER ASSETS LESS LIABILITIES -- 0.68%.............................................. 414,787
-----------
NET ASSETS -- 100.00%........................................................................ $61,086,390
-----------
-----------
</TABLE>
19
<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
SCHEDULE OF INVESTMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
- ---------------
* 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 September 30, 1997. 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.
*** Security is segregated as collateral.
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.
20
<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at market value (identified cost $42,012,722)(Note 1)........................................... $42,271,603
Cash........................................................................................................ 759,321
Repurchase Agreements (Cost $18,400,000)) (Note 1).......................................................... 18,400,000
Receivables:
Subscriptions............................................................................................ 7,661,442
Interest................................................................................................. 197,890
Maturities............................................................................................... 3,229
Securities sold.......................................................................................... 7,568,995
Other Assets................................................................................................ 25,365
-----------
TOTAL ASSETS............................................................................................. 76,887,845
-----------
LIABILITIES:
Variation margin on futures contracts (Note 2).............................................................. 467,645
Payables:
Redemptions.............................................................................................. 621,824
Securities purchased..................................................................................... 14,655,973
Due to adviser (Note 3)..................................................................................... 29,492
Accrued expenses............................................................................................ 26,521
-----------
TOTAL LIABILITIES........................................................................................ 15,801,455
-----------
NET ASSETS:
(Applicable to outstanding shares of 4,015,310; unlimited number of shares of beneficial interest
authorized; no stated par)............................................................................... $61,086,390
-----------
-----------
Net asset value, offering price and redemption price per share ($61,086,39044,015,310)...................... $ 15.21
-----------
-----------
SOURCE OF NET ASSETS:
Paid in capital............................................................................................. $56,240,220
Undistributed net investment income......................................................................... 217,425
Accumulated net realized gain on investments................................................................ 4,017,695
Net unrealized appreciation of investments.................................................................. 611,050
-----------
NET ASSETS............................................................................................... $61,086,390
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest and discount earned, net of premium amortization (Note 1)........................................... $ 919,615
EXPENSES:
Advisory fees (Note 3)....................................................................................... 110,914
Accounting and pricing services fees......................................................................... 13,312
Custodian fees............................................................................................... 8,875
Audit and tax preparation fees............................................................................... 2,855
Legal fees................................................................................................... 3,895
Amortization of organization expenses (Note 1)............................................................... 6,929
Transfer agent fees.......................................................................................... 18,329
Registration fees............................................................................................ 18,655
Trustees fees and expenses................................................................................... 7,195
Insurance expense............................................................................................ 3,448
Other........................................................................................................ 9,712
----------
TOTAL EXPENSES BEFORE REIMBURSEMENT....................................................................... 204,119
Expenses reimbursed by Adviser (Note 3)................................................................... (64,685)
----------
NET EXPENSES.............................................................................................. 139,434
----------
NET INVESTMENT INCOME..................................................................................... 780,181
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................................................................. 3,582,275
Change in unrealized appreciation (depreciation) of investments.............................................. 1,099,360
----------
Net realized and unrealized gain on investments.............................................................. 4,681,635
----------
Net increase in net assets resulting from operations......................................................... $5,461,816
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997
(UNAUDITED) (AUDITED)
------------------ --------------
<S> <C> <C>
OPERATIONS:
Net investment income................................................................ $ 780,181 $ 406,086
Net realized gain on investments..................................................... 3,582,275 1,374,343
Change in unrealized appreciation (depreciation) of investments...................... 1,099,360 (526,585)
------------------ --------------
Net increase in net assets resulting from operations................................. 5,461,816 1,253,844
------------------ --------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income................................................. (598,989) (382,446)
Distributions from net realized gains on investments................................. (429,677) (808,371)
------------------ --------------
Total distributions.................................................................. (1,028,666) (1,190,817)
------------------ --------------
CAPITAL SHARE TRANSACTIONS:
Shares sold.......................................................................... 50,138,951 8,844,701
Shares issued on reinvestment of distributions....................................... 930,749 1,125,870
Shares redeemed...................................................................... (7,923,837) (1,292,755)
------------------ --------------
Increase in net assets resulting from capital share transactions (a)................. 43,145,863 8,677,816
------------------ --------------
TOTAL INCREASE IN NET ASSETS...................................................... 47,579,013 8,740,843
NET ASSETS:
Beginning of year.................................................................... 13,507,377 4,766,534
------------------ --------------
End of year.......................................................................... $ 61,086,390 $ 13,507,377
------------------ --------------
------------------ --------------
(a) Transactions in capital shares were as follows:
Shares sold....................................................................... 3,404,871 695,525
Shares issued on reinvestment of distributions.................................... 63,589 93,492
Shares redeemed................................................................... (528,659) (102,037)
------------------ --------------
Net increase...................................................................... 2,939,801 686,980
Beginning balance................................................................. 1,075,509 388,529
------------------ --------------
Ending balance.................................................................... 4,015,310 1,075,509
------------------ --------------
------------------ --------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following average per share data, ratios and supplemental information
has been derived from information provided in the financial statements.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR PERIOD
SEPTEMBER 30, ENDED ENDED ENDED ENDED ENDED
1997 MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
(UNAUDITED) 1997 1996 1995 1994 1993 (1)
------------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.......................... $ 12.56 $ 12.27 $ 10.84 $ 9.88 $ 10.85 $ 10.00
------------- ----------- ---------- ---------- ---------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income........... 0.250 0.592 0.615 0.568 0.476 0.355
Net realized and unrealized gain
(loss) on investments........ 2.877 1.813 2.768 1.081 (0.216) 1.281
------------- ----------- ---------- ---------- ---------- ---------
Total from investment
operations................. 3.127 2.405 3.383 1.649 0.260 1.636
------------- ----------- ---------- ---------- ---------- ---------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (0.230) (0.590) (0.583) (0.568) (0.472) (0.311)
Dividends in excess of net
investment income............ -- -- -- (0.001) -- --
Distributions from net realized
gains on investments......... (0.247) (1.525) (1.370) (0.047) (0.701) (0.420)
Distributions in excess of net
realized gains on
investments.................. -- -- -- (0.073) (0.057) (0.055)
------------- ----------- ---------- ---------- ---------- ---------
Total distributions.......... (0.477) (2.115) (1.953) (0.689) (1.230) (0.786)
------------- ----------- ---------- ---------- ---------- ---------
NET ASSET VALUE, END OF PERIOD.... $ 15.21 $ 12.56 $ 12.27 $ 10.84 $ 9.88 $ 10.85
------------- ----------- ---------- ---------- ---------- ---------
TOTAL RETURN...................... 25.08% 21.41% 32.30% 17.18% 2.19% 16.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period....... $ 61,086,390 $13,507,377 $4,766,534 $2,107,346 $1,760,519 $ 903,846
Ratio of expenses to average net
assets (1)................... 0.88%* 0.88% 0.90% 0.90% 0.90% 0.57%*
Ratio of net investment income
to average net assets (2).... 4.95%* 5.30% 5.53% 7.44% 8.02% 5.28%*
Portfolio turnover rate......... 196% 182% 107% 120% 119% 271%
Ratio of expenses to average net
assets before reimbursement
of expenses by the Adviser... 1.28%* 2.60% 4.58% 7.75% 7.08% 28.48%*
Ratio of net investment income
to average net assets before
reimbursement of expenses by
the Adviser.................. 4.54%* 3.58% 1.85% 0.59% 1.84% -22.63%*
</TABLE>
- ---------------
(1) Commenced operations June 30, 1992.
* Annualized
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Breeden Equity Plus 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.
B. DISTRIBUTIONS AND TAXES: Dividends to shareholders are recorded on the
ex-dividend date. 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 carryforward. As of March 31, 1997, the Fund had no net capital
loss carryforward.
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.
Discounts and premiums on securities purchased are amortized over the life of
the respective 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 manage the Fund's interest-rate risk relative to its
benchmark. 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
25
<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
2. FINANCIAL INSTRUMENTS -- CONTINUED
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 September 30, 1997:
<TABLE>
<CAPTION>
NOTIONAL EXPIRATION UNREALIZED
TYPE AMOUNT POSITION MONTH GAIN/(LOSS)
----- ------------ --------- ---------------- -----------
<S> <C> <C> <C> <C>
3 Month Eurodollar.................................. $ 88,000,000 Long December, 1997 $ 17,716
3 Month Eurodollar.................................. (31,000,000) Short March, 1998 (22,602)
3 Month Eurodollar.................................. (34,000,000) Short September, 1998 (33,003)
3 Month Eurodollar.................................. (30,000,000) Short March, 1999 (20,885)
3 Month Eurodollar.................................. (36,000,000) Short September, 1999 (40,362)
3 Month Eurodollar.................................. (31,000,000) Short March, 2000 (22,039)
3 Month Eurodollar.................................. (36,000,000) Short September, 2000 (30,137)
3 Month Eurodollar.................................. (32,000,000) Short March, 2001 (23,169)
3 Month Eurodollar.................................. (36,000,000) Short September, 2001 (35,837)
5 Year Treasury..................................... (21,000,000) Short December, 1997 (12,781)
10 Year Treasury.................................... (38,000,000) Short December, 1997 (38,171)
-----------
Total $ (261,270)
-----------
-----------
</TABLE>
B. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES: The
Fund invests in futures contracts on the S&P 500 Index whose returns are
expected to track movements in the S&P 500 Index.
The Fund had the following open futures contracts on the S&P 500 Index as of
September 30, 1997:
<TABLE>
<CAPTION>
NOTIONAL EXPIRATION UNREALIZED
TYPE AMOUNT POSITION MONTH GAIN
----- ----------- --------- --------------- -----------
<S> <C> <C> <C> <C>
S&P 500............................................... $11,912,500 Long December, 1997 $ 372,284
S&P 500............................................... 3,853,200 Long March, 1998 241,155
-----------
Total $ 613,439
-----------
-----------
</TABLE>
The aggregate market value of investments pledged to cover margin requirements
for the open positions at September 30, 1997 was $2,198,696.
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 reduce or otherwise limit the expenses of
the Fund to 0.88% 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
0.88% through August 1, 1998. For the six-months ended September 30, 1997, the
Adviser received fees of $110,914 and reimbursed the Fund $64,685.
26
<PAGE>
SMITH BREEDEN EQUITY PLUS FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES -- CONTINUED
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 of the Trustees of the Fund to reduce the amount of
payments permitted under the Plan or to suspend the Plan for such periods as
they may determine. Subject to these limitations, the 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 six-months ended September 30, 1997, purchases and proceeds from
sales of securities, other than short-term investments, aggregated $77,305,082
and $47,990,202, respectively. The cost of securities for federal income tax
purposes is $42,012,723. Net unrealized depreciation of investments and futures
contracts consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation................................................ $650,797
Gross unrealized depreciation................................................ (39,747)
--------
Net unrealized depreciation.................................................. $611,050
--------
--------
</TABLE>
27
