JULY 23, 1997
SMITH BREEDEN MUTUAL FUNDS
PROSPECTUS
The Smith Breeden Mutual Funds consist of three no
load, diversified registered investment companies (the
"Funds"). Smith Breeden Associates, Inc. (the "Adviser")
serves as the investment adviser to the Funds.
Smith Breeden Equity Plus Fund (the "Equity Plus
Fund") seeks to provide a total return exceeding the
Standard & Poor's 500 Composite Stock Price Index without
additional equity market risk. The Fund is a series
fund of the Smith Breeden Trust. The Equity Plus
Fund does not generally invest in the common stocks that
make up the S&P 500 Index or any other index. The
Equity Plus Fund utilizes index futures contracts and
equity swap contracts to track the return of the S&P 500
Index, and invests substantially all of its assets in
fixed-income securities and related hedging instruments.
Whether the Fund's total return equals or exceeds the
performance of the S&P 500 Index depends on whether the
total return on the Equity Plus Fund's fixed-income
investments equals or exceeds the Fund's total operating
expenses, as well as other factors. See "Investment
Objectives, Policies, and Risk Considerations -
Equity Plus Fund."
Smith Breeden Short Duration U.S. Government Fund
(the "Short Fund", formerly known as the Smith Breeden Short
Duration U.S. Government Series) seeks a high level of current
income consistent with low volatility of net asset value.
The Short Fund seeks to match the interest-rate risk of
a portfolio that invests exclusively in six month
U.S. Treasury securities on a constant maturity basis.
The dollar weighted average maturity of the Fund's
securities may at times significantly exceed six
months.
Smith Breeden Intermediate Duration U.S. Government
Fund (the "Intermediate Fund", formerly known as the Smith Breeden
Intermediate Duration U.S. Government Series) seeks a total return in
excess of the total return of the major market
indices for mortgage-backed securities. The major
market indices for mortgage-backed securities currently
include, but are not limited to, the Salomon Brothers
Mortgage Index and the Lehman Brothers Mortgage Index.
These indices include all outstanding government
sponsored fixed-rate mortgagebacked securities,
weighted in proportion to their current market
capitalization. The duration, or interest-rate risk,
of these indices is similar to that of intermediateterm
U.S. Treasury Notes, and typically will range between
three and five years. The Intermediate Fund consistently
seeks to achieve a volatility of net asset value
similar to that of a portfolio that invests
exclusively in mortgage-backed securities, as weighted
in the major mortgage market indices.
1
An investment in any of the Funds is neither insured
nor guaranteed by the U.S. Government. There can
be no assurance that any of the Funds will meet their
investment objectives. This Prospectus sets forth
concisely the information about the Funds that you
should know before investing. Please read this
Prospectus carefully and keep it for future reference.
A Statement of Additional Information, dated July 23,
1997, which is incorporated herein by reference, has
been filed with the Securities and Exchange Commission
with respect to each Fund and is available on the
Commission's Web site (http://www.sec.gov). The
Statements of Additional Information, which may be
revised from time to time, contain further
information about the Funds, and are available
without charge by writing to the Funds at 100 Europa
Drive, Chapel Hill, North Carolina 27514 or by
calling 1-800-221-3138. THESE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
Expense Table 3
Financial Highlights--Equity Plus Fund 5
Financial Highlights--Short Fund 6
Financial Highlights--Intermediate Fund 7
Smith Breeden Mutual Funds 8
Investment Objectives, Policies and Risk Considerations 8
Other Investment Practices and Risk Considerations 21
Management of the Funds 24
Pricing of Fund Shares 28
How to Purchase Shares 29
How to Exchange Shares 32
How to Redeem Shares 33
Dividends and Distributions 36
Shareholder Reports and Information 37
Retirement Plans 38
Service and Distribution Plans 38
Taxes 39
Capital Structure 40
Transfer, Dividend Disbursing Agent, Custodian and
Independent Accountants 40
Fund Performance 41
No person has been authorized to give any information or to
make any representations not contained in this Prospectus
and, if given or made, such information or representations
must not be relied upon as having been authorized by
the Funds. The Prospectus does not constitute an offering
by the Funds in any jurisdiction in which such offering may
not be lawfully made.
2
EXPENSE TABLE
The following table is designed to assist you
in understanding the expenses you will bear as a shareholder
of the Funds. Shareholder Transaction Expenses are
charges that you pay when buying or selling shares of a
Fund. Annual Fund Operating Expenses are paid out of a
Fund's assets and include fees for portfolio
management,
maintenance of shareholder accounts, shareholder servicing,
accounting and other services. The expenses shown below are
based on each Fund's expenses for the past fiscal year.
Equity Short Intermediate
Plus
Fund Fund Fund
Shareholder Transaction Expenses
Maximum Sales Load Imposed on
Purchases None None None
Maximum Sales Load Imposed on
Reinvested Dividends None None None
Deferred Sales Load Imposed on
Redemptions None None None
Redemption Fees1 None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees2 0.70% 0.70% 0.70%
Other Expenses
(net of reimbursement) 0.18% 0.18% 0.18%
Total Fund Operating Expenses
(net of reimbursement)3 0.78% 0.88% 0.88%
_____________________________
1 A transaction cost of $9 may be imposed on
redemptions by wire transfer.
2 Pursuant to a distribution and services plan in
respect of each Fund, the Adviser may pay annual
distribution and servicing fees of up to 0.25% of
each of the Fund's net assets out of its management
fee. See "Service and Distribution Plans."
3 The Other Expenses in the table and Total
Fund Operating Expenses reflect undertakings by the
Adviser to bear expenses of each of the Funds and/or
waive its fees to the extent necessary to limit
Total Fund Operating Expenses to 0.78% for the
Short Fund and 0.88% for each of the Equity Plus
Fund and Intermediate Fund through August 1,
1998. Absent the expense limitation, Other
Expenses and Total Fund Operating Expenses would
be 0.23% and 0.93% for the Short
Fund, 0.46% and 1.16% for the Intermediate Fund, and
1.90% and 2.60% for the Equity Plus Fund.
3
The following examples illustrate the expenses that
apply to a $750 investment in each Fund over various
time periods assuming: (1) a 5% annual rate of return, and
(2) redemption or no redemption at the end of each time
period. Except as noted in the table above, the Funds
charge no redemption fees.
Short Duration Fund
1 Year 3 Years 5 Years 10 Years
$ 6 $ 18 $ 31 $67
Intermediate Duration Fund and Equity Plus Fund
Year 3 Years 5 Years 10 Years
$ 7 $ 21 $ 35 $75
These examples are based on the annual operating
expenses shown above and should not be considered a
representation of past or future expenses or
performance. Actual expenses may
be greater or less than those shown. The annual rate
of return may be more or less than 5%.
The Funds may be recommended to investors by
registered investment advisors. Such advisors customarily
impose fees that would be in addition to any fees and
expenses presented in the above table. Certain broker
dealers may also charge a fee for purchase or
redemption of shares through their network. Neither the
Funds, nor the Adviser, exercise any control over such
advisory or broker-dealer fees and may not be informed of
the level of such fees.
4
EQUITY PLUS FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
The following selected per share data and ratios cover the fiscal periods
from June 30, 1992, the date the Fund commenced operations, through March
31, 1997, and are a part of the Fund's financial statements, which have
been audited by Deloitte & Touche LLP, independent auditors. This data
should be read in conjunction with the Fund's most recent annual audited
financial statements and the report of Deloitte & Touche LLP thereon which
appear in the Fund's Statement of Additional Information.
<TABLE>
Selected Financial Data
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Period
March 31, March 31, March 31, March 31, March 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of $12.27 $10.84 $9.88 $10.85 $10.00
Period
Income From Investment
Operations
Net investment income 0.592 0.615 0.568 0.476 0.355
Net realized and unrealized
gain (loss) on investments 1.813 2.768 1.081 (0.216) 1.281
Total from investment
operations 2.405 3.383 1.649 0.260 1.636
Less Distributions
Dividends from net
investment income (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 (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 (2.115) (1.953) (0.689) (1.230) (0.786)
Net Asset Value,
End of Period $12.56 $12.27 $10.84 $9.88 $10.85
Total Return 21.41% 32.30% 17.18% 2.19% 22.59%*
Ratios/Supplemental Data
Net assets, end of period $13,507,377 $4,766,534 $2,107,346 $1,760,519 $903,846
Ratio of expenses to average net assets
Before expense limitation 2.60% 4.58% 7.75% 7.08% 28.48%*
After expense limitation 0.88% 0.90% 0.90% 0.90% 0.57%*
Ratio of net income to average net assets
Before expense limitation 3.58% 1.85% 0.59% 1.84% (22.63%)*
After expense limitation 5.30% 5.53% 7.44% 8.02% 5.28%*
Portfolio turnover rate 182% 107% 120% 119% 271%
* Annualized
Additional performance information is presented in the Fund's Annual Report,
which is available without charge upon request.
</TABLE>
5
SHORT DURATION FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
The following selected per share data and ratios cover the fiscal periods
from March 31, 1992, the date the Fund commenced operations, through March 31,
1997 and are a part of the Short Fund's financial statements which have been
audited by Deloitte & Touche LLP, independent auditors. This data should be
read in conjunction with the Short Fund's most recent annual audited
financial statements and the report of Deloitte & Touche LLP thereon which
appear in the Fund's Statement of Additional Information.
<TABLE>
Selected Financial Data
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Period
March 31, March 31, March 31, March 31, March 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $9.74 $9.90 $9.90 $10.00 $10.00
Income From Investment
Operations
Net investment income 0.476 0.621 0.628 0.432 0.552
Net gain (loss) on securities
(both realized and unrealized) 0.146 (0.148) -- (0.070) 0.002
Total from investment
operations 0.622 0.473 0.628 0.362 0.554
Less Distributions
Dividends from net investment
income (0.476) (0.621) (0.628) (0.462) (0.554)
Dividends in excess of net
investment income (0.056) (0.012) -- -- --
Total distributions (0.532) (0.633) (0.628) (0.462) (0.554)
Net Asset Value, End of
period $9.83 $9.74 $9.90 $9.90 10.00
Total Return 6.57% 4.95% 6.58% 3.67% 5.67%
Ratios/Supplemental Data
Net assets, end of
period $118,988,609 $221,825,136 $218,431,665 $218,167,491 48,531,206
Ratio of expenses to average net assets
Before expense limitation 0.93% 0.93% 0.92% 1.00% 2.58%
After expense limitation 0.78% 0.78% 0.78% 0.78% 0.78%
Ratio of net income to
average net assets
Before expense limitation 4.90% 6.13% 6.18% 3.95% 2.73%
After expense limitation 5.04% 6.29% 6.33% 4.17% 4.53%
Portfolio turnover rate 556% 225% 47% 112% 3%
</TABLE>
Additional performance information is presented in the Short Fund's Annual
Report, which is available without charge upon request.
6
INTERMEDIATE DURATION FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
The following selected per share data and ratios cover the fiscal periods
from March 31, 1992, the date the Fund commenced operations, through March 31,
1997 and are a part of the Intermediate Fund's financial statements which have
been audited by Deloitte & Touche LLP, independent auditors. This data
should be read in conjunction with the Intermediate Fund's most recent
annual audited financial statements and the report of Deloitte & Touche
LLP thereon which appear in the Fund's Statement of Additional Information.
<TABLE>
Selected Financial Data
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Period
March 31, March 31, March 31, March 31, March 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.01 $9.83 $10.01 $10.62 $10.00
Income From Investment
Operations
Net investment
income 0.599 0.660 0.664 1.05 0.826
Net gain (loss) on securities
(both realized and unrealized) (0.024) 2.77 (0.049) (0.601) 0.621
Total from investment
operations 0.575 0.937 0.615 0.449 1.447
Less Distributions
Dividends from net investment
income (0.604) (0.656) (0.664) (1.044) (0.826)
Dividends in excess of
net investment income ---- ---- (0.108) ---- --
Distributions from net
realized gains on investments (0.251) (0.101) -- (0.015) --
Distributions in excess of
net realized gains on investments -- -- (0.022) -- --
Total distributions (0.855) (0.757) (0.794) (1.059) (0.826)
Net Asset Value, End of Period $9.73 $10.01 $9.83 $10.01 $10.62
Total Return 5.92% 9.69% 6.10% 4.11% 14.93%
Ratios/Supplemental Data
Net assets, end of period $37,735,525 $36,446,940 $34,797,496 $6,779,666 $2,923,913
Ratio of expenses to average
net assets
Before expense limitation 1.16% 1.14% 2.33% 2.34% 17.52%
After expense limitation 0.88% 0.90% 0.90% 0.90% 0.82%
Ratio of net income to
average net assets
Before expense limitation 5.92% 6.26% 4.77% 6.30% (8.52%)
After expense limitation 6.19% 6.49% 6.20% 7.74% 8.18%
Portfolio turnover rate 409% 193% 557% 84% 42%
</TABLE>
Additional performance information is presented in the Intermediate Fund's
Annual Report, which is available without charge upon request.
7
SMITH BREEDEN MUTUAL FUNDS
The Short and Intermediate Funds are funds of the Smith
Breeden Series Fund (the "Series Fund"), an open-end diversified
management investment company. The Equity Plus Fund is currently
the only fund of the Smith Breeden Trust (the "Trust"), an open-
end diversified management investment company.
Smith Breeden Associates, Inc. ("Smith Breeden" or the
"Adviser") acts as investment adviser to the Funds. Smith Breeden
is a money management and consulting firm founded in 1982
whose clients include pension funds, financial institutions,
corporations, government entities, and charitable
foundations. The firm specializes in mortgage securities,
interest-rate risk management, and the application of option
pricing to investments and banking. Smith Breeden currently
advises assets totaling over $20 billion.
INVESTMENT OBJECTIVES, POLICIES, AND RISK CONSIDERATIONS
Each of the Funds has a different investment objective
and different investment policies, and is designed to meet
different investment needs.
The investment objectives and certain investment policies of
the Short and Intermediate Funds are fundamental and may not be
changed without a vote of shareholders of the relevant
Fund. The investment objective of the Equity Plus Fund is not
fundamental, and may be changed without a vote of the
majority of the shareholders of the Equity Plus Fund.
Shareholders of the Equity Plus Fund will receive a written
notification at least thirty days prior to any change in the
Equity Plus Fund's investment objective. If such a change in
the investment objective of the Equity Plus Fund occurs, such
changes may result in the Fund having an investment
objective different from the objective which the
shareholders considered appropriate at the time of their
investment in the Equity Plus Fund.
Since shares of each Fund represent an investment in
securities with fluctuating market prices, the net asset value
per share of each Fund will vary as the aggregate value of a
Fund's portfolio securities increases or decreases. Due to the
risks inherent in all investments, there can be no assurance that
the objectives of the Funds will be met. The descriptions
that follow are designed to help you choose the Fund or
combination of Funds that best fits your investment
objectives.
Short Fund
The Short Fund's investment objective is to provide investors
with a high level of current income, consistent with a volatility
of net asset value similar to that of a portfolio which
invests exclusively in six-month U.S. Treasury securities on a
constant maturity basis. There is no assurance that the Short
Fund will be able to maintain a low volatility of net asset
value.
8
The Short Fund will seek its investment objective by
investing, under normal circumstances, at least 70% of its total
assets in U.S. Government Securities. The Fund will also invest
in fixedrate and adjustable-rate mortgage-backed securities
issued by nongovernmental issuers. The Fund may hold a portion of
its assets in money market instruments and in time and
savings deposits (including fixed-rate or adjustable certificates
of deposit) in commercial banks or institutions whose accounts
are insured by the FDIC, BIF or SAIF.
Under normal circumstances the Short Fund will seek to achieve
an interest-rate risk or option-adjusted duration similar to that
of a six-month U.S. Treasury security on a constant maturity
basis. However, the Short Fund expects that, under normal
circumstances, the dollar-weighted average life (or period until
the next reset date) of its portfolio securities will be longer
than six months, sometimes significantly longer.
The Adviser believes that by investing in mortgage securities
from a variety of market sectors on a selective basis and
adjusting the overall option-adjusted duration of the portfolio
to approximate that of a six-month U.S. Treasury security, the
Short Fund will achieve a more consistent and less volatile net
asset value than is characteristic of mutual funds that invest
primarily in mortgage securities paying a fixed rate of
interest or those that invest exclusively in adjustable-rate
mortgage securities. The securities in which the Short Fund may
invest may not yield as high a level of income as other
securities in which other funds may invest. However, such
higher yielding securities may be more volatile and may be issued
by less creditworthy entities.
Intermediate Fund
The Intermediate Fund's investment objective is to
provide investors with a total return in excess of the total
return of the major market indices for mortgage-backed
securities. The Intermediate Fund will seek its investment
objective by investing, under normal circumstances, at least 70%
of its total assets in U.S. Government Securities. The Fund
will also invest in fixedrate and adjustable rate mortgage-
backed securities issued by nongovernmental issuers. The Fund may
hold a portion of its assets in money market instruments and
in time and savings deposits (including fixed-rate or
adjustable-rate certificates of deposit) in commercial banks or
institutions whose accounts are insured by the FDIC, BIF, or
SAIF.
The major market indices for mortgage-backed securities
currently include, but are not limited to, the Salomon Brothers
Mortgage Index and the Lehman Brothers Mortgage Index.
These indices include all outstanding government sponsored fixed-
rate mortgage backed securities, weighted in proportion to their
current market capitalization. Total return is the change
in value of the investment, assuming reinvestment of all
distributions. Under normal circumstances, the Intermediate Fund
will seek to achieve an interest-rate risk or option-adjusted
duration (see below) similar to that of a portfolio that invests
exclusively in mortgage-backed securities, as weighted in the
major market indices. The duration, or interest-rate risk, of
these indices is similar to the that of
intermediate-term U.S. Treasury Notes, and typically will
range between three and five years. When market interest rates
decline, the value of a portfolio invested in intermediate-term
9
fixed-rate obligations can be expected to rise. Conversely,
when market interest rates rise, the value of a portfolio
invested in intermediate-term fixed-rate obligations can be
expected to fall.
There is no assurance that the Intermediate Fund will be
able to maintain a total return in excess of the total return
of major market indices for mortgage-backed securities, or
that it will match the interest rate risk of a portfolio
investing exclusively in these securities.
U.S. Government Securities. The U.S. Government
Securities in which the Funds may invest include U.S. Treasury
Bills, Notes, Bonds, discount notes and other debt securities
issued by the U.S. Treasury, and obligations issued or
guaranteed by the U.S. Government, its agencies and
instrumentalities including, but not limited to, the
Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"). (Other U.S. Government
agencies or instrumentalities include Federal Home Loan Banks,
Bank for Cooperatives, Farm Credit Banks, Tennessee Valley
Authority, Federal Financing Bank, Small Business
Administration, and Federal Agricultural Mortgage Corporation.)
It is anticipated that the Funds will invest substantially all
of their assets in FNMA, FHLMC, and GNMA mortgage-backed
certificates and other U.S. Government Securities representing
ownership interests in mortgage pools.
Privately-issued Mortgage Backed Securities. The Short
and Intermediate Funds may invest in fixed-rate and adjustable-
rate mortgage-backed securities issued by private originators
of, or investors in, mortgage loans issued by private entities
that are rated AAA by Standard & Poor's ("S&P") or Aaa by
Moody's Investors Service ("Moody's"), or, if unrated,
determined by the Adviser to be of comparable quality. The
Short and Intermediate Funds will not pay any additional fees
for credit support and will not invest in
private mortgage pass-through securities unless they are rated
AAA by S&P or Aaa by Moody's, or are unrated but deemed to be
of comparable credit quality by the Adviser. In addition, the
Short and Intermediate Funds will only purchase
mortgage-backed securities which constitute "Mortgage
Related Securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984.
Option-adjusted Duration. Option-adjusted duration is a
measure of the price sensitivity of a portfolio to changes in
interest rates. The maturity of a security, another commonly
used measure of price sensitivity, measures only the time
until final payment is due, whereas option-adjusted duration
takes into account the pattern of all payments of interest
and principal on a security over time, including how these
payments are affected by prepayments and by changes in
interest rates. In computing the duration of a Fund's
portfolio, the Adviser will estimate the duration of
obligations that are subject to prepayment or redemption by
the issuer, taking into account the influence of changes
in interest rates on prepayments and coupon flows. The
Adviser may use certain hedging techniques (as described in
10
more detail in Appendix A) to lengthen or shorten the option-
adjusted duration of a Fund.
Fundamental Policies. As a matter of fundamental policy,
the Short and Intermediate Funds will limit purchases to
the following classes of assets:
1.Securities issued directly or guaranteed by the
U.S. Government or its agencies or instrumentalities;
2.Mortgage-Backed Securities rated AAA by S&P or Aaa by
Moody's or unrated but deemed of equivalent quality by the
Adviser;
3.Assets fully collateralized by assets in either of the
above classes;
4.Assets which would qualify as liquidity items under
federal regulations if held by a commercial bank or
savings
institution; and
5.Hedge instruments, which may only be used for risk
management purposes. Any securities described in the
"Hedging" section and any stripped Mortgage-Backed
Securities may only be used for risk management
purposes.
Equity Plus Fund
The Equity Plus Fund seeks to provide a total return
exceeding the Standard & Poor's Composite Stock Price Index
(the "S&P 500 Index") without additional equity market risk.
The Fund does not invest principally in the common stocks
that make up the S&P 500 Index or any other index. The Fund
utilizes index futures contracts and equity swap contracts to
track the return of the S&P 500 Index, and invests
substantially all of its assets in fixed-income securities and
related hedging and other instruments. Whether the Fund's
total return equals or exceeds the performance of the S&P 500
Index depends on whether the total return on the Fund's
fixed-income investments equals or exceeds the Fund's total
operating expenses, as well as other factors.
The S&P 500 Index is an unmanaged index composed of 500
common stocks, most of which are listed on the New York Stock
Exchange. Standard & Poor's, 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 Equity Plus Fund seeks its objective by dividing its
portfolio into two segments: an "Equity Simulation Segment"
and a "Fixed Income Segment." Through the Equity Simulation
Segment, the Fund invests in a combination of equity
swap contracts, futures contracts on the S&P 500 Index
and on other stock indices, including, but not limited
to, the New York Stock Exchange Composite Index, and
common stocks whose return (before deducting allocated costs)
11
is expected to track movements in the S&P 500 Index. By
employing this strategy, the Equity Plus Fund seeks to
achieve the same investment opportunity and risk profile for
the Equity Simulation Segment as that of a 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. In the Equity
Simulation Segment, the Equity Plus Fund expects its use of
stock index futures other than S&P 500 stock index futures to
be minimal.
Through the Fixed Income Segment, the Fund invests in fixed
income securities and uses related hedging techniques such
as futures, options, floors, caps and swaps. The Fixed-Income
Segment will invest substantially all of its assets in
U.S. Government Securities (as defined above), and may
also invest in bank certificates of deposit, corporate debt
obligations, and mortgagebacked and other asset-backed
securities of non-governmental issuers.
The Fund may also engage in loans of portfolio
securities, dollar rolls, and reverse repurchase agreements
to enhance income and total return. With these investments,
the Fund seeks to generate income (consisting primarily of
interest income) and gains which exceed the total costs of
operating the Fund (including the costs associated with
the Equity Simulation Segment). Thus, whether the Fund's
total return equals or exceeds the performance of the S&P 500
Index depends on whether the total return on the Fund's
Fixed-Income Segment equals or exceeds the Fund's total
operating expenses, as well as other factors described below.
The Equity Simulation Segment's actual opportunities for gain
or loss may be greater than a hypothetical portfolio invested
in the stocks comprising the S&P 500 Index depending upon
the Fund's exposure to the S&P 500 Index, which could at times
be higher or lower than the Fund's total assets. For
example, the total net notional amount of the Fund's equity
swap contracts, S&P 500 or other stock index futures plus
the market value of common stocks owned by the Fund may
exceed the Fund's total net assets as a result of
purchases and redemptions of Fund shares. In addition, since
S&P 500 Index futures can only be purchased for specific
amounts, the Fund might not be able to match accurately a
notional amount of futures contracts to the Fund's total net
assets. Under normal market conditions, the Fund expects that
such variations in S&P 500 Index exposure will generally be up
to 5% greater or less than the Fund's total net assets.
Also, the ability of the Equity Simulation Segment of the
Fund's portfolio to replicate the investment opportunity
and risk profile of a hypothetical stock portfolio may be
diminished by imperfect correlations between price movements of
the S&P 500 Index with price movements of S&P 500 and other
stock index futures and/or the 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. Equity swap contracts require the Fund to pay
interest on the notional amount of the contract. Therefore,
assuming the Fund has successfully tracked the movement of
12
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 (to the extent applicable)
(1) the Fund's transaction costs on S&P 500 and other stock
index futures and common stock transactions, (2) the interest
payments under the Fund's equity swap contracts and (3) the
Fund's operating expenses as described more fully under
"Management of the Fund."
Equity Swap Contracts. The counterparty to an equity swap
contract will typically be a bank, investment banking firm or
broker-dealer. The counterparty generally agrees 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 basket of stocks comprising the S&P 500
Index, plus the dividends that would have been received on
those stocks. The Fund agrees 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 enter into equity
swap contracts only on a net basis, i.e., where the two
parties' obligations are netted out, with the Fund paying or
receiving, as the case may be, only the net amount of any
payments. Payments under an equity swap contract may be made
at the conclusion of the contract or periodically during its
term. If there is 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 the equity swap contract
counterparties will be able to meet their obligations 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 these contracts. The Fund
will closely monitor the credit of equity swap contract
counterparties in order to minimize this risk. The Fund will
not use equity swap contracts for leverage.
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. These positions are
sometimes referred to as "reverse equity swap contracts".
The Equity Plus Fund will not enter into any 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 ("S&P"). In addition, the
staff of the SEC considers equity swap contracts and reverse
13
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 Equity Plus Fund do not believe that the
Fund's obligations under equity swap contracts or reverse
equity swap contracts are senior securities, so long as
such 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.
S&P 500 Index and Other Stock Index Futures. S&P 500 and
other stock index futures represent contracts to buy a number
of units of the S&P 500 Index or some other stock index 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 to and from the broker, called "variation margin",
will be made on a daily basis as the value of the futures
contract fluctuates. Purchased futures contracts may be closed out
only by entering into a futures contract sale with the same terms as the
contract to be closed out on the futures exchange on which the
futures are traded. The liquidity of the market in futures
contracts could be adversely affected by daily price
fluctuation limits established by an exchange which limit
the amount of fluctuation in the price of a futures contract
during a single trading day. In such case, 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. The Fund will not use futures
contracts for leverage.
The Equity Plus 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 contract is held by the
Fund, cash, U.S. government securities or other appropriate
14
securities 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. The amounts on
deposit will constitute a portion of the Fund's Fixed
Income Segment.
Common Stocks. When index futures contracts and/or equity
swap contracts are, in the judgment of the Adviser, overpriced
relative to the common stocks underlying the S&P 500 Index,
the Fund may invest directly in the common stocks represented
by the S&P 500 Index. The Fund will not own all 500 issues,
but will attempt to purchase a basket of common stocks which
the Adviser expects will, on average, match movements in
the S&P 500 Index. Subject to limits on the Fund's
investments 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.
Fixed Income Instruments. At the time of purchase, with
the exception of mortgage-backed and asset-backed
securities, the Fund's Fixed Income Segment's investments
will be of investment grade (rated at least Baa by S&P or
BBB by Moody's), or, if unrated, determined by the Adviser
to be of comparable quality. Its investment in mortgage-
backed and other asset-backed securities will be rated at
least A by Moody's or S&P. Securities rated Baa and BBB or
below 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 Equity Plus Fund's investments in
fixed income securities
and will cause the Equity Plus Fund to dispose of any such
security whose rating is reduced to below investment grade.
Example. Set forth below is an example of how the Equity Plus
Fund might invest a $100 million portfolio:
1. Enter into an equity swap contract with a notional amount of $50 million
2. Purchase S&P 500 index futures contracts with a total
contract value 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.
Because equity swap contracts and futures contracts may
generally be initially entered into without making cash
payments, the Fixed Income Segment would invest $95 million
in various fixed income securities with appropriate hedging
strategies. 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 following would occur:
15
1. The counterparty to the equity swap contract would be
required to pay the Fund $4 million ($7 million appreciation
and dividends minus $3 million interest);
2. The S&P 500 index futures contract would be closed out
at a gain of $3.6 million ($6.3 million S&P 500 Index
appreciation less $2.7 million for the S&P 500 Futures
implicit cost of carry);
3. Dividend income and gain on the common stocks would total
$0.7 million and in sum;
4. The Equity Simulation Segment's return, before
related operating expenses, would total $8.3 million dollars
or 8.3%.
The Fund's total operating expenses (other than brokerage
expenses and the interest on the notional amount of the equity
swap contract as described above) are 0.88% of total net
assets, or $0.88 million dollars. After consideration of
these expenses, the Equity Simulation Segment's return would
total 7.42%. Therefore, 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 6.93% per annum. If the Fixed
Income Segment achieves this result, then the Fund's total net
assets would 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 6.93% per
annum, the Fund's total return would, in turn, be greater or
less than the S&P 500 Index.
Characteristics and Risks of the Securities in which the Short
and Intermediate Funds and Fixed Income Segment of the Equity
Plus Fund Invest
Mortgage-Backed and Other Asset-Backed Securities. Mortgage
backed securities are securities that directly or indirectly
represent a participation in, or are collateralized by
and payable from, mortgage loans secured by real property.
The term "mortgage-backed securities," as used herein,
includes adjustable-rate mortgage securities, fixed-rate
mortgage securities, and derivative mortgage products such as
collateralized mortgage obligations, stripped mortgage-backed
securities and other instruments described below.
There are currently three basic types of mortgage-
backed securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as
GNMA, FNMA and FHLMC; (ii) those issued by private issuers
that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities; and
(iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans
or mortgage-backed securities without a government guarantee
but usually having some form of private credit
enhancement.
The Equity Plus Fund may invest in other mortgage-backed
and asset-backed securities. Asset-backed securities are
structured like mortgage-backed securities, but instead of
mortgage loans or interests in mortgage loans, the underlying
16
assets may include, but are not limited to, pools of
automobile loans, educational loans and credit card
receivables. Mortgage-backed and asset-backed securities have
yield and maturity characteristics corresponding to their
underlying assets. Unlike traditional debt
securities, which may pay a fixed rate of interest until maturity
when the entire principal amount comes due, payments on certain
mortgage-backed and asset backed securities include both interest
and a partial payment of principal. This partial payment of
principal may be comprised of a scheduled principal payment as well
as an unscheduled payment from the voluntary prepayment,
refinancing, or foreclosure of the underlying loans. As a
result of these unscheduled payments of principal, or
prepayments on the underlying securities, the price and
yield of mortgagebacked securities can be adversely affected.
For example, during periods of declining interest rates,
prepayments can be expected to accelerate, and the Funds
would be required to reinvest the proceeds at the lower
interest rates then available. 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.
In addition, like other interest-bearing securities, the
values of mortgage-backed securities generally fall when
interest rates rise, but when interest rates fall, their
potential for capital appreciation is limited due to the
existence of the prepayment feature. In order to hedge
against possible prepayment, the Funds may purchase certain
options and options on futures contracts as described more
fully in Appendix A.
Adjustable-Rate Securities. Adjustable-rate securities
have interest rates that are reset at periodic intervals,
usually by reference to some interest rate index or market
interest rate. Some adjustable-rate securities are backed by
pools of mortgage loans. The Short and Intermediate Funds
will only invest in adjustable-rate securities backed by
pools of mortgage loans ("ARMs"). The Fixed
Income Segment of the Equity Plus Fund may
invest in adjustable-rate securities backed by assets other
than mortgage pools.
Although the rate adjustment feature may act as a buffer to
reduce large 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 rate on adjustable-rate securities may lag
changes in prevailing market interest rates. Also, some
adjustablerate securities (or the underlying mortgages or
other underlying loans or receivables) 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. Adjustable-rate securities
are also subject to the prepayment risks associated
17
generally with mortgage-backed securities.
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. Payments of
interest or principal on some classes or series of CMOs may
be subject to contingencies, or some classes or series may
bear some or all of the risk of default on the underlying
mortgages. CMOs of different classes are generally retired
in sequence as the underlying mortgage loans in the mortgage
pools 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 a CMO held by the Funds would have the same
effect as the prepayment of mortgages underlying a mortgage-
backed pass-through security. Another type of CMO is a
real estate mortgage investment conduit ("REMIC") which
qualifies for special tax treatment under the Internal
Revenue Code and invests in certain mortgages principally
secured by interests in real property and other permitted
investments.
CMOs also include securities 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").
Residuals have value only to the extent that 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 classes or
series of the CMOs. 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. As a
non-fundamental policy (meaning it can be changed without the
vote of the shareholders), the Short and Intermediate Fund will
not invest in Residuals.
In reliance on an interpretation by the Securities and
Exchange Commission ("SEC"), the Funds' investments in
certain qualifying CMOs and REMICs are not subject to the
1940 Act's limitations on acquiring interests in other
investment companies. (See "Investment Restrictions" in
the Statement of Additional Information with respect to each
Fund.) CMOs and REMICs issued by an agency or instrumentality
of the U.S. Government are considered U.S. Government
securities for the purposes of this Prospectus.
Stripped Securities ("STRIPS"). The Funds may invest in
STRIPS. The Short and Intermediate Funds may invest only
in stripped mortgage-backed securities ("SMBS") which are
18
STRIPS represented by derivative multi-class mortgage securities. In
addition to SMBS issued by the U.S. Government, its
agencies or instrumentalities, the Short and Intermediate
Funds may purchase SMBS issued by private originators of,
or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special
purpose subsidiaries of these entities. However, the Short and
Intermediate Funds will purchase only SMBS that are
collateralized by mortgage-backed securities that are issued
or guaranteed by the U.S. Government or its
agencies or instrumentalities. The Equity Plus Fund may invest in
STRIPS collateralized by other fixed income securities,
including other types of asset-backed securities.
STRIPS are usually structured with two classes that
receive different proportions of the interest and principal
distributions from a pool of underlying assets. A common type
of STRIP will have one class receiving all of the interest
from the underlying assets ("interest-only" or "IO" class),
while the other class will receive all of the principal
("principal-only" or "PO" class). However, in some instances,
one class will receive some of the interest and most of the
principal while the other class will receive most of the
interest and the remainder of the principal. STRIPS are
unusually volatile in response to changes in interest rates.
The yield to maturity on an IO class of STRIPS is extremely
sensitive not only to changes in prevailing interest rates but
also to the rate of principal payments (including
prepayments) on the underlying assets. A rapid rate of
principal prepayments may have a measurably adverse effect on
a Fund's yield to maturity to the extent it invests in IOs.
Conversely, POs tend to increase in value if prepayments are
greater than anticipated and decline if prepayments are slower
than anticipated. Thus, if the underlying assets experience
greater than anticipated prepayments of principal, a Fund
may fail to fully recover its initial investment in these
securities, even if the STRIPS were rated of the highest
credit quality by S&P or Moody's, respectively. The Adviser
will seek to manage these risks (and potential benefits) by
investing in a variety of such securities and by using
certain hedging techniques, as described below in "Hedging
Instruments" and in
Appendix A. In addition, the secondary market for STRIPS may
be less liquid than that for other mortgage-backed or asset
backed securities, potentially limiting a Fund's ability to
buy or sell those securities at any particular time.
The Adviser expects that IO SMBS will be purchased by the Short
and Intermediate Funds for their hedging characteristics.
Such SMBS will reduce the variance of the Funds' respective
net asset values from their targeted option-adjusted
durations. Under no circumstances will the Short or Intermediate Funds
purchase SMBS if such purchase would cause SMBS to exceed 5%
of the assets of a Fund.
New instruments and variations of existing mortgage-
backed securities continue to be developed. The Funds may
invest in any such instruments or variations to the extent
consistent with their investment objectives and policies and
19
applicable regulatory requirements.
Zero Coupon Securities. The Funds 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. Zero
coupon securities tend to be more volatile than other
securities with similar stated maturities, but which make
regular payments of either principal or interest.
The Funds are required to accrue and distribute income from
zero coupon securities on a current basis, even though a Fund
does not receive the income currently. Thus, a Fund may have
to sell other investments to obtain cash needed to make
income distributions, which may reduce a Fund's assets and
may thereby increase its expense ratio and decrease its rate
of return.
Credit Risks. While certain U.S. Government securities such
as U.S. Treasury obligations and GNMAs are backed by the full
faith and credit of the U.S. Government, other securities in
which the Funds may invest are subject to varying degrees of
risk of default. These risk factors include the
creditworthiness of the issuer and, in the case of mortgage-
backed and assetbacked securities, the ability of the
mortgagor or other borrower to meet its obligations. The Short
and Intermediate Funds will seek to minimize this credit risk
by investing in securities of the highest credit quality
instruments, while the Equity Plus Fund will seek to minimize
this risk of default by investing in securities of investment
grade. The individual securities continue to be subject to the
risk that their prices can fluctuate, in some cases
significantly, due to changes in prevailing interest rates.
Hedging Instruments. The Funds may employ certain
active management techniques to achieve their duration
objectives and to hedge the interest-rate risks associated
with their fixed-income securities in accordance with such
objectives. Since some of the securities may have longer
or shorter durations than a Fund's specified duration
objectives, hedging may be required to either lengthen or
shorten the duration of a Fund's portfolio. The Funds will
seek continually to manage duration within a narrow range. The
Funds intend to use hedging transactions primarily to protect
against interestrate fluctuations, not as speculative
transactions. The Funds may also use hedging transactions as a temporary
substitute for purchasing particular securities. Each
Fund may enter into mortgage and interest-rate swaps, purchase
or sell interest-rate floors, caps or collars, enter into
interestrate futures contracts and related options, and
engage in short sales to hedge against interest rate
fluctuations. In addition, the Funds may use SMBS to better
maintain their respective targeted option-adjusted durations.
There can be no assurance that the hedging techniques employed
by the Funds will be successful. As a result, the Funds
may not achieve, and may at times exceed, their targeted
optionadjusted duration. The Funds' hedging techniques may
not be successful because the Adviser's computation of
option-adjusted duration is based on estimates of expected
prepayment rates, valuation of homeowners' prepayment
20
options, and the correlation of changes in the market prices
of the securities and the hedge instruments owned by the Funds.
Any or all of these techniques may be used at one time. Use of
any particular transaction is a function of market
conditions. The hedging transactions that the Funds currently
contemplate using are described in detail in Appendix A,
including a discussion of their respective risks.
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The Funds may also engage in the following investment practices
for hedging purposes or to increase investment returns, each
of which may involve certain special risks. The Statement of
Additional Information for each Fund contains more detailed
information about these practices, including limitations
designed to reduce these risks.
Securities Loans, Repurchase Agreements and Forward
Commitments. The Funds 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 Funds if the other party should
default on its obligations and a Fund is delayed in or
prevented from recovering the collateral. None of the Funds
will lend portfolio securities if, as a result, the
aggregate of such loans exceeds 33 1/3% of the total asset
value (including such loans). The Funds will only enter into
repurchase agreements with or lend securities to (i) member
banks of the Federal Reserve System having total assets
in excess of $500 million and (ii) securities dealers,
provided such banks or dealers meet the creditworthiness
standards established by the Board of Trustees ("Qualified
Institutions"). The Adviser will monitor the continued
creditworthiness of Qualified Institutions, subject to the
oversight of the Board of Trustees.
The Funds may also purchase securities for future delivery,
which may increase overall investment exposure and involves a
risk of loss if the value of the securities declines
prior to the settlement date. At the time a Fund enters into
a transaction on a when-issued or forward commitment basis,
a segregated account consisting of cash, U.S. Government
securities or other liquid high grade debt securities equal to
at least 100% of the value of the when-issued or forward
commitment securities will be established and maintained with
the Funds' custodian. Subject to this requirement, the
Funds may purchase securities on such basis without
limit. Settlements in the ordinary course, which may be
substantially more than three business days for mortgage-
backed securities, are not treated as when-issued or forward
commitment transactions, and are not subject to the
foregoing limitations, although some of the risks described
above may exist.
Reverse Repurchase Agreements, Dollar Roll Agreements
and Borrowing. In order to increase income, the Funds may
enter into reverse repurchase agreements or dollar roll
agreements with commercial banks and registered broker-dealers
21
in amounts up to 33 1/3% of their assets. The Short and
Intermediate Funds may only enter into these transactions
with commercial banks and registered broker-dealers which are
also Qualified Institutions. The Statement of Additional Information
for each Fund contains a more detailed explanation of these
practices. Reverse repurchase agreements and dollar rolls
are considered borrowings by a Fund and require segregation of
assets with a Fund's custodian in an amount equal to the
Fund's obligations pending completion of such transactions.
Each Fund may also borrow money from banks in an
amount up to 33 1/3% of a 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 a 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, a 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.
Short Sales. The Funds 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 Funds expect to engage in short
sales as a form of hedging in order to shorten the
overall duration of the portfolio and maintain portfolio
flexibility.
When a 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. A Fund may
have to pay a fee to borrow particular securities, and
is often obligated to relinquish any payments received on such borrowed
securities.
Until a Fund replaces a borrowed security, it will maintain
daily a segregated account with its custodian containing
cash, U.S. Government securities, or other liquid high-grade debt
obligations; such that the amount deposited in the account
plus any amount deposited with the broker as collateral
will equal the current value of the security sold short.
Depending on arrangements made with the broker, a Fund may
not receive any payments (including interest) on collateral
deposited with the broker. If the price
of the security sold short increases between the time of the
short sale and the time a Fund replaces the borrowed security,
the Fund will incur a loss; conversely, if the price declines,
the Fund will realize a gain. Although a 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.
22
A Fund will not make a short sale if, after giving affect to
such sale, the market value of all securities sold exceeds 25% of
the value of the Fund's total net assets. A Fund may also
effect short sales where the Fund owns, or has the right to
acquire at no additional cost, the identical security (a
technique known as a short sale "against the box").
Illiquid Securities. A 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 for each Fund.) The Adviser will monitor a
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 a
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
CMOs 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.
Portfolio Turnover. The Adviser buys and sells securities
for a Fund whenever it believes it is appropriate to do so.
Portfolio turnover generally involves some expense to a
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 each Fund's previous fiscal
periods is shown in the table under the heading "Financial
Highlights".
While the Funds will pay commissions in connection with options
and future transactions and, for the Equity Plus Fund only,
possibly in relation to any purchase of common stocks, most of
the securities in which the Funds invest are generally
traded on a "net" basis with dealers acting as principals
for their own account without a stated commission.
Nevertheless, high portfolio turnover may involve
correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by a Fund.
Another potential consequence of high portfolio turnover is
that if 30% or more of a Fund's gross income for a taxable
year is derived from gains from the sale of securities 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 Funds and to adjust the portfolio turnover, if
23
necessary, to ensure that each Fund will be eligible for
treatment as a regulated investment company.
MANAGEMENT OF THE FUNDS
The business affairs of the Funds are managed by its Board
of Trustees. Each of the Funds has entered into an
investment advisory agreement with Smith Breeden Associates,
Inc., 100 Europa Drive, Chapel Hill, North Carolina,
27514 ( the "Investment Advisory Agreements"). Pursuant to
such investment advisory agreements, the Adviser furnishes
continuous investment advisory services to each of the Funds.
Trustees and Officers
The following is a listing of the Trustees and officers of
the Series Fund and Trust, the legal entities that have issued
shares in the Funds. Unless otherwise indicated, all of
the named individuals serve in their capacities for both the
Series Fund and Trust.
Douglas T. Breeden* Trustee and Chairman
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 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. He serves as Chairman
Harrington Financial Group, the holding company for Harrington Bank, F.S.B., of
Richmond, Indiana.
Michael J. Giarla* Trustee and President
Mr. Giarla is Chief Operating Officer, President and Director
of Smith Breeden Associates. He also serves as a
Director of Harrington Financial Group, the holding company
for Harrington Bank, F.S.B., of Richmond, Indiana.
Formerly Smith Breeden's Director of Research, he was
involved in research and programming, particularly in the
development and implementation of models to evaluate and
hedge mortgage securities. He also consults with
institutional clients and conducts special projects.
Before joining Smith Breeden Associates, Mr. Giarla was a
Summer Associate in Goldman Sachs & Company's Equity Strategy
Group in New York. Mr. Giarla has published a number of
articles and book chapters regarding MBS investment, risk
management and hedging. He served as an Associate Editor
of The Journal of Fixed Income from 19911993. Mr.
Giarla holds a Master of Business Administration with
Concentration in Finance from the Stanford University Graduate
24
School of Business, where he was an Arjay Miller Scholar.
He earned a Bachelor of Arts in Statistics, summa cum laude,
from Harvard University, where he was elected to Phi Beta Kappa
and was a Harvard Club of Boston Scholar. Mr. Giarla is a
Trustee of the Roxbury Latin School, West Roxbury,
Massachusetts.
Stephen M. Schaefer Trustee
Stephen M. Schaefer is Esmee Fairbairn Professor of Finance at
the 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 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 a former Independent Board Member of
the Securities and Futures Authority of Great Britain.
Myron S. Scholes Trustee
Myron S. Scholes is a Principal in the money management
firm Long-Term Capital Management Co. (since 1993). He is the
Frank E. Buck Professor of Finance Emeritus at the Graduate School
of Business at Stanford University (since 1983. He is a member
of the Econometric Society. Professor Scholes was also a
Managing Director and co-head of the fixed income
derivatives group at Salomon Brothers between 1991-1993.
Prior to coming to Stanford University in 1983, 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 Ph.D. 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
cooriginator of the Black-Scholes Options Pricing Model as
described in the paper, "The Pricing of Options and
Corporate Liabilities," published in the Journal of Political
Economy (with Fischer Black, May 1973). His
other papers include such topics as risk-return
relationships, the effects of dividend policy on stock prices,
and 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.
25
William F. Sharpe Trustee
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
widelyused binomial method for the valuation of options and
other contingent claims. He also developed the computer
algorithm used in many asset allocation procedures, a
procedure for estimating the style of an investment manager
from its historic returns, and the Sharpe ratio for
measuring investment performance. 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 Jeffrey
Bailey, Prentice-Hall, 1990). Dr. Sharpe is a past President
of the American Finance Association. He also served as
consultant to a number of corporations and investment
organizations. He is Trustee of the Barr Rosenberg mutual
funds, a Director of Stanford Management Company and the
Chairman of the Board of Financial Engines, a company
providing electronic portfolio advice. He received the Nobel
Prize in Economic Sciences in 1990.
Daniel C. Dektar Vice President, Smith Breeden Series Fund
Portfolio Manager, Short and Intermediate Funds
Daniel C. Dektar is a Principal, Executive Vice President,
Director of Portfolio Management, and Director of Smith
Breeden Associates. Mr. Dektar has been primarily
responsible for the day-to-day management of the Short
and Intermediate Funds since their commencement of
operations in 1992. As head of Smith Breeden Associates'
portfolio management group, Mr. Dektar is constantly in touch
with developments on Wall Street. He serves as a liaison
among the portfolio management, client service, and research
groups to ensure accurate analysis and timely execution of
portfolio management opportunities. Mr. Dektar consults with
institutional clients in the areas of investments and risk
management. He made several presentations on mortgage
investments and risk management at seminars for
institutional investors. Mr. Dektar was an Associate in
the Mergers and Acquisitions Group of Montgomery Securities
in San Francisco, California and a Financial Analyst in the
Investment Banking Division of Morgan Stanley & Co.,
Incorporated, New York
before joining Smith Breeden Associates. He holds a Master
of Business Administration with Concentration in Finance from
Stanford University Graduate School of Business, where he was
an Arjay Miller Scholar. Mr. Dektar received a Bachelor of
Science in Business Administration, summa cum laude, from
the University of California at Berkeley, where he was
University of California Regent's Scholar, was elected to Phi
Beta Kappa and Phi Eta Sigma, and won the White Award as the
top student in finance.
26
John B. Sprow Vice President, Smith Breeden Trust
Portfolio Manager, Equity Plus Fund
John B.Sprow is a Principal, Director and Executive Vice
President of Smith Breeden Associates. Mr. Sprow has
been primarily responsible for the day-to-day management of
the Equity Plus Fund from the commencement of its operations
in 1992. Mr. Sprow is a senior portfolio manager who works
primarily with discretionary pension accounts. In addition
to traditional mortgage accounts, he also manages S&P 500
indexed accounts. Prior to directly managing discretionary
accounts, Mr. Sprow assisted in the development of the
Adviser's models for pricing and hedging mortgage-related
securities, risky commercial debt, and forecasting
mortgage prepayment behavior. Mr. Sprow came to Smith Breeden
Associates from the Fuqua School of Business, Duke University,
where he was Research Assistant. Previously, Mr. Sprow was a
Research Assistant to the Department Head of the Materials
Science Department, Cornell University. He received a Master of
Business Administration with
Emphasis in Finance from the Fuqua School of Business,
Duke University. Mr. Sprow holds a Bachelor of Science in
Materials Science and Engineering from Cornell University, where he
was awarded the Carpenter Technology Scholarship three
successive years.
Marianthe
S. Mewkill Vice President, Secretary, Treasurer,
and Chief Accounting
Officer
Marianthe S. Mewkill is a Principal, Vice President and
Chief Financial Officer of Smith Breeden Associates. Ms.
Mewkill handles financial reporting, budgeting, tax research
and planning for the Smith Breeden Mutual Funds and for Smith
Breeden Associates, Inc.. She ensures compliance with agency
regulations and administers the Adviser's internal trading and
other policies. She was previously employed as a Controller
for the Hunt Alternatives Fund, as an Associate at Goldman
Sachs & Co., and as a Senior Auditor at Arthur Andersen & Co.
She earned a Master of Business Administration with
Concentrations in Finance and Accounting from New York
University and graduated from Wellesley College, magna cum
laude with a Bachelor of Arts degree in History and French
and a Minor in Economics.
* Interested Party
Investment Adviser
Smith Breeden Associates, Inc., a registered investment
adviser, acts as investment adviser to the Funds.
Approximately 66% of the Adviser's voting stock is owned
by Douglas T. Breeden, its
Chairman. Under its Investment Advisory Agreement with each
Fund, the Adviser, subject to the general supervision of the
Board of Trustees, manages the Funds' portfolios and
provides for the administration of all of the Funds' other
27
affairs. For these services, the Adviser receives a fee,
computed daily and payable monthly, at the annual rate of
0.70% of the Funds' average daily net assets. Until the
renewal date of its contracts with the Funds, August 1,
1998, the Adviser has voluntarily agreed to reduce its
compensation, and to the extent necessary absorb other expenses
of the Funds, such that the total expenses (exclusive of
ordinary brokerage commissions, investment transaction,
taxes, and extraordinary expenses) do not exceed 0.88% of the average
net assets for each of the Equity Plus Fund and the
Intermediate Fund, and 0.78% of the average net assets
of the Short Fund.
The Adviser places all orders for purchases and sales of the
Funds' securities. Subject to seeking the most favorable
price and execution available, the Adviser may consider sales
of shares of the Funds as a factor in the selection of broker
dealers.
Distribution
FPS Broker Services, Inc. (the "Principal Underwriter") acts
as distributor for the Funds for which the Adviser pays the
Principal Underwriter a fee of $25,000. Shares may also be sold
by authorized dealers who have entered into dealer agreements
with the Principal Underwriter or the Adviser.
Expenses
The Funds pay all of their own expenses, including,
without limitation, the cost of preparing and printing their
registration statements required under the Securities Act of
1933 and the 1940 Act and any amendments thereto, the
expense of registering their shares with the Securities and
Exchange Commission and the various states, the printing and
distribution costs of prospectuses mailed to existing
investors, reports to investors, reports to government
authorities and proxy statements, fees paid to directors who
are not interested persons of the Adviser, interest charges,
taxes, legal expenses, association membership dues, auditing
services, insurance premiums, brokerage commissions and
expenses in connection with portfolio transactions, fees and expenses of
the custodian of their assets, printing and mailing
expenses and charges and expenses of dividend disbursing
agents, accounting services agents, registrars and stock
transfer agents.
PRICING OF FUND SHARES
The price you pay when buying a Fund's shares, and the price
you receive when selling (redeeming) a Fund's shares, is the
net asset value of the shares next determined after receipt of
a purchase or redemption request in proper form. No front end
sales charge or commission of any kind is added by the Fund
upon a purchase, and no charge is deducted upon a redemption.
These charges may apply if you purchase or sell shares
through certain broker-dealers. The Funds currently charge a
$9 fee for each redemption made by wire. See "How to Redeem
Shares."
28
The per share net asset value of a Fund is determined by
dividing the total value of its assets, less its liabilities,
by the total number of its shares outstanding at that time.
The net asset value is determined as of the close of regular
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 a Fund's
securities such that the net asset value of a
Fund's shares might be affected. Accordingly,
Purchase Applications accepted or redemption requests received in
proper form by the Transfer Agent, or other agent designated by
the Funds, prior to 4:00 p.m. Eastern time each day that
the Adviser and Transfer Agent are open for business, will
be confirmed at that day's net asset value. Purchase
Applications accepted or redemption requests received in proper
form after 4 p.m. Eastern Time by the Transfer Agent, or
other agent designated by the Funds, will be confirmed at
the net asset value of the following business day.
Current holiday schedules indicate that the Funds' net asset
values will not be calculated on New Year's Day, Martin Luther
King Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, the day
following Thanksgiving, Christmas Eve and Christmas Day. In
adddition, the Short and Intermediate Funds will not be be
priced on Columbus Day and Veterans' Day.
Under procedures approved by the Board of Trustees, a
Fund's securities for which market quotations are readily
available are valued at current market value provided by a
pricing service, bank or broker-dealer
experienced in such matters. Short-term
investments that will mature in 60 days or less may be
valued at amortized cost, which approximates market
value. All other securities and assets are valued at fair
market value as determined by following procedures approved
by the Board of Trustees.
HOW TO PURCHASE SHARES
All of the Funds are no-load, so you may purchase,
redeem or exchange shares directly at net asset value without
paying a sales charge. Because the Funds' net asset value
changes daily, your purchase price will be the next net
asset value determined after the Funds' Transfer Agent, or
other agent designated by the Funds, receives and accepts
your purchase order. See "Pricing of Fund Shares."
Initial Minimum Additional
Minimum Type of Account Investment Investment
Regular $750 $50
Automatic Investment Plan $50 $50
Individual Retirement Account $250 $50
Gift to Minors $250 $50
29
Each Fund reserves the right to reject any order for the
purchase of its shares or to limit or suspend, without prior
notice, the offering of its shares. The required minimum
investments may also be waived.
How to Open Your Account by Mail. Please complete the
Purchase Application. You can obtain additional copies of
the Purchase Application and a copy of the IRA Purchase
Application from the Funds by calling 1-800-221-3138. (Please
note that you must use a different application than the one
provided with the prospectus for an IRA.)
Your completed Purchase Application should be mailed directly to:
Smith Breeden Mutual Funds
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
All applications must be accompanied by payment in the form
of a check or money order made payable to "Smith Breeden
Mutual Funds." All purchases must be made in U.S. dollars, and
checks must be drawn on U.S. banks. No cash, credit cards or
third party checks will be accepted. When a purchase is made by check and a
redemption is made shortly thereafter, the Funds will delay
the mailing of a redemption check until the purchase check
has cleared your bank, which may take up to 10 calendar days
from the purchase date. If you contemplate needing access
to your investment shortly after purchase, you should
purchase the shares by wire as discussed below.
How to Open Your Account by Wire. You may make purchases by
direct wire transfers. To ensure proper credit to your
account, please call the Funds at 1-800-221-3137 for
instructions prior to wiring funds. Funds should be wired
through the Federal Reserve System as follows:
United Missouri Bank A.B.A.
Number 10-10-00695
For the account of FPS Services,
Account Number 98-7037-071-9
For credit to (identify which Fund to purchase)
For further credit to: (investor account number)
(name or account registration)
(Social Security or Tax Identification
Number)
Following such wire transfer, you must promptly complete a
Purchase Application and mail it to the Funds at the
following address: Smith Breeden Mutual Funds, 3200 Horizon
Drive, P.O. Box 61503, King of Prussia, PA 19406-0903. Shares
will not be redeemed until the Funds receive a properly
completed and executed Purchase Application.
Telephone Transactions. The privilege to initiate redemption
or exchange transactions by telephone is made automatically
available to shareholders when opening an account, unless
they indicate otherwise by checking the appropriate boxes
on the Purchase Application. Each Fund will employ reasonable
procedures to ensure that instructions communicated by
telephone are genuine. If
reasonable procedures are not implemented, the Funds may be
liable for any loss due to unauthorized or fraudulent
transactions. In all other cases, you are liable for any
30
loss due to unauthorized transactions. The Funds reserve the
right to refuse a telephone transaction if they believe it
is advisable to do so.
If you have any questions, please call the Funds at 1-800-221
3138.
How to Add to Your Account. You may make additional investments
by mail or by wire in an amount equal to or greater than $50.
When adding to an account by mail, you should send the Funds
your check, together with the additional investment form
from a recent statement. If this form is unavailable, you
should send a signed note giving the full name of the
account and the account number. For additional investments made by wire
transfer, you should use the wiring instructions listed
above. Be sure to include your account number.
Automatic Investment Plan. You may make purchases of shares of
each Fund automatically on a regular basis ($50
minimum per transaction). You must meet the Automatic Investment Plan's
("the Plan") minimum initial investment of $50 before the Plan
may be established. You have two options under the Plan
to make investments. One is by automatic payroll deduction.
Under this method, you authorize your employer to direct a portion of
each paycheck to be invested in the Fund of your choice. Your
employer must be using direct deposit to process its payroll
in order for you to elect this method. Under the other method,
your bank debits a preauthorized amount from your checking or
savings account each month and applies the amount to your
investment in Fund shares. In
order to have your bank account debited automatically
for investment into the Funds, your financial institution must be
a member of the Automated Clearing House. No service fee is
currently charged by the Funds for participation in either
method under the Plan. A $20 fee will be imposed by the Funds
if sufficient funds are not available in your bank account, or
if your bank account has been closed at the time of the
automatic transaction. You may adopt either method under the
Plan at the time an account is opened by completing the
appropriate section of the Purchase Application. Enclosed with
the application are the necessary forms to deliver to your
employer to set up the payroll deduction. You may obtain an
application to establish the Automatic Investment Plan after
an account is opened by calling the Funds at 1-800-221-3138. In
the event you discontinue participation in the Plan, the Funds
reserve the right to redeem your Fund account involuntarily,
upon sixty days' written notice, if the account's net asset
value is $500 or less.
Purchasing Shares Through Other Institutions. If you
purchase shares through a program of services offered or
administered by a broker-dealer, financial institution, or
other service provider, you should read the program
materials, including information relating to fees, in
addition to this Prospectus. Certain services of a Fund may
not be available or may be modified in connection with the
program of services provided, and service providers may
establish higher minimum investment amounts. The Funds may
only accept requests to purchase additional shares into a broker-
31
dealer street name account from the broker-dealer.
Certain broker-dealers, financial institutions, or other
service providers that have entered into an agreement with the
Adviser or Principal Underwriter may enter purchase orders on
behalf of their customers by phone, with payment to follow
within several days as specified in the agreement. The
Funds may effect such purchase orders at the net asset value
next determined after receipt of the telephone purchase
order. It is the responsibility of
the broker-dealer, financial institution, or other service provider
to place the order with the Funds on a timely basis. If payment
is not received within the time specified in the
agreement, the broker-dealer, financial institution, or other service
provider could be held liable for any resulting fees or losses.
Miscellaneous. The Funds will charge a $20 service fee against
your account for any check or electronic funds transfer that is
returned unpaid. You will also be responsible for any losses
suffered by the Funds as a result. In order to relieve you of
responsibility for the safekeeping and delivery of stock
certificates, the Funds do not currently issue certificates.
HOW TO EXCHANGE SHARES
Shares of any Fund may be exchanged for shares of another Fund
at any time. This exchange offer is available only in states
where shares of such other Fund may be legally sold. You may
open a new account, or purchase additional shares in an
existing account, by making an exchange from an identically
registered Smith Breeden Fund account. A new account will have
the same registration as the existing account from which the
exchange was made, and is subject to the same initial
investment minimums.
Exchanges may be made either in writing or by telephone.
Written instructions should be mailed to 3200 Horizon
Drive, King of Prussia, PA 19406 and must be signed by all
account owners, and accompanied by any properly endorsed
outstanding share certificates, if applicable. The telephone exchange
is automatically accepted unless checked otherwise. The
telephone exchange privilege is available only for
uncertificated shares. During periods of drastic economic
or market changes, it is possible that exchanges by telephone
may be difficult to implement. In this event, shareholders
should follow the written exchange procedures. The telephone
exchange privilege may be modified or discontinued by the
Funds at any time upon a 60 day notice to the shareholders.
To exchange by telephone, you must follow the instructions
below under "How to Redeem by Telephone."
The Funds will accept exchange orders by telephone or other
means of electronic transmission from broker-dealers, financial
institutions or other service providers who execute an
agreement with the Adviser or Principal Underwriter. It is the
responsibility of the broker-dealer, financial institution
or other service provider to place the exchange order on a
timely basis.
32
Exchanges are made on the basis of the Funds' relative net
asset values. Because the exchange is considered a
redemption and purchase of shares, the shareholder may
recognize a 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 Funds'
Statements of Additional Information.
There are differences among the Funds. Before making an
exchange, a shareholder should obtain and review the 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.
If you buy shares by check, you may not exchange those shares
for up to 10 calendar days to ensure your check has cleared.
If you intend to exchange shares soon after their purchase,
you should purchase the shares by wire or contact the Funds at
1-800-221-3137 for further information.
The Funds reserve the right to temporarily or
permanently terminate, with or without advance notice, the
exchange privilege of any investor who makes excessive use of
the exchange privilege (e.g., more than five exchanges per
calendar year).
Additional documentation may be required for exchange requests
if shares are registered in the name of a corporation,
partnership or fiduciary. Please contact the Funds for
additional information concerning the exchange privilege.
HOW TO REDEEM SHARES
You may redeem shares of the Funds at any time. The price at
which the shares will be redeemed is the net asset value per
share next determined after proper redemption instructions are
received by the Transfer Agent or other agent designated by the
Funds. See "Pricing of Fund Shares." There are no charges for
the redemption of shares, except that a fee of $9 is
charged for each wire redemption. Depending upon the
redemption price you receive, you may realize a capital gain or
loss for federal income tax purposes.
How to Redeem by Mail to Receive Proceeds by Check. To
redeem shares by mail, simply send an unconditional written
request to the Funds specifying the number of shares or dollar amount to
be redeemed, the name of the Fund, the name(s) on the
account registration and the account number. A request for redemption
must be signed exactly as the shares are registered. If the
amount requested is greater than $25,000, or the proceeds are to
be sent to a person other than the recordholder or to a
location other than the address of record, each signature
must be guaranteed by a commercial bank or trust company in
the United States, a member firm of the National Association
of Securities Dealers, Inc. or other eligible guarantor
institution. A notary public is not
33
an acceptable guarantor. Guarantees must be signed by an
authorized signatory of the bank, trust company, or
member firm, and "Signature Guaranteed" must appear with the
signature. Additional documentation may be required for the
redemption of shares held in corporate, partnership or
fiduciary accounts. In case of
any questions, please contact the Funds in advance.
A Fund will mail payment for redemption within seven days
after receiving proper instructions for redemption. However,
the Funds will delay payment for 10 calendar days on
redemptions of recent purchases made by check. This allows the
Funds to verify that the check used to purchase Fund shares
will not be returned due
to insufficient funds and is intended to protect the
remaining investors from loss.
How to Redeem by Telephone. The redemption of shares by
telephone is available automatically unless you elected to
refuse this redemption privilege on your Purchase Application.
Shares may be
redeemed by calling the Funds at 1-800-221-3137. Proceeds
redeemed by telephone will be mailed to your address, or wired
or credited to your preauthorized bank account. To establish
wire redemption privileges, you must select the appropriate
box on the Purchase Application and enclose a voided check.
In order to arrange for telephone redemptions after your
account has been opened, or to change the bank account or
address designated to receive redemption proceeds, you must send a
written request to your Fund. The request must be signed by each
registered holder of the account with the signatures
guaranteed by a commercial bank or trust company in the
United States, a member firm of the National Association of
Securities Dealers, Inc. or other eligible guarantor
institution. A notary public is not
an acceptable guarantor. Further documentation as provided
above may be requested from corporations, executors,
administrators, trustees and guardians.
Payment of the redemption proceeds for Fund shares redeemed
by telephone where you request wire payment will normally be
made in federal funds on the next business day. The Funds
reserve the right to delay payment for a period of up to seven
days after receipt of the redemption request. There is
currently a $9 fee for each wire redemption, which will be
deducted from your account.
The Funds reserve the right to refuse a telephone redemption
or exchange transaction if they believe it is advisable to do
so. Procedures for redeeming or exchanging shares of the Funds
by telephone may be modified or terminated by the Funds at any
time. In an effort to prevent unauthorized or fraudulent
redemption or exchange requests by telephone, the Funds have
implemented procedures designed to reasonably assure that
telephone instructions are genuine. These procedures
include: requesting verification of certain personal
information; recording telephone transactions; confirming
transactions in writing; and restricting transmittal of
34
redemption proceeds only to preauthorized designations.
Other procedures may be implemented from time to time. If
reasonable procedures are not implemented, the Funds may
be liable for any loss due to unauthorized or
frausfulent transactions. In all other cases, you are liable for any loss
for unauthorized transactions.
You should be aware that during periods of substantial economic
or market change, telephone or wire redemptions may be
difficult to implement. If you are unable to contact the Funds
by telephone, you may also redeem shares by delivering or
mailing the redemption request to: Smith Breeden Mutual
Funds, 3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA
19406-0903.
The Funds reserve the right to suspend or postpone
redemptions during any period when trading on the New York
Stock Exchange ("Exchange") is restricted as determined by
the Securities and Exchange Commission ("SEC"), or the
Exchange is closed for other than customary weekend and
holiday closing; the SEC has by order permitted such
suspension; or an emergency, as determined by the SEC,
exists, making disposal of portfolio securities or valuation of
net assets of a Fund not reasonably practicable.
Due to the relatively high cost of maintaining small accounts,
if your account balance falls below $500 as a result of a
redemption or exchange, or if you discontinue the Automatic
Investment Plan before your account balance reaches $500, you
may be given a 60-day notice to bring your balance to $500 or
reactivate an Automatic Investment Plan. If this requirement
is not met, your account may be closed and the proceeds sent to
you.
Check Writing. In addition to telephone and written
redemption requests, the Short Fund offers redemption through
check writing. Shareholders electing this option will receive
checks that may be used like personal or business checks.
There is no limit on the number of checks you may write.
Checks must be written for at least $100. There is a $30
fee for returned checks. Because dividends declared on shares
held in a shareholder's account, prior redemptions, and possible
changes in net asset value may cause the value of the account
to change, shareholders should not write a check for the
entire value of the account or close the account by writing a
check.
In using the check writing privilege, shareholders bear
the responsibility of ensuring that the check amount does not
exceed the value of their account on the day the check is
presented to the Transfer Agent for payment. The day the
check is presented for payment is the day the redemption of
Fund shares takes place.
If insufficient shares are in the account, the check will be
returned and no shares will be redeemed. The clearing agent
for the check writing facility is United Missouri Bank.
Shareholders utilizing check writing are subject to United
Missouri Bank's rules governing checking accounts. However,
this check writing facility is purely a means to redeem Fund
35
shares. No facilities characteristic of bank accounts, such
as deposit insurance, are provided along with the check writing
option.
If you would like to initiate check writing, please
call Shareholder Services at 1-800-221-3137 or check the
appropriate box on the Purchase Application.
Systematic Withdrawal Plan. A shareholder may establish
a Systematic Withdrawal Plan to receive regular periodic
payments from the account. An initial balance of $10,000 is
required to establish a Systematic Withdrawal 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 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 the Plan's payment may be
a return of capital.
A Systematic Withdrawal Plan may be terminated upon written
notice by the shareholder, or by a Fund on a 30 day written
notice, and it will terminate automatically if all shares
are liquidated or withdrawn from the account or upon the
Fund's receipt 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 five business days prior to the
next scheduled payment. Share certificates may not be issued
while a Systematic Withdrawal Plan is in effect.
DIVIDENDS AND DISTRIBUTIONS
The Short and Intermediate Funds intend to make
monthly distributions to their shareholders of net investment income.
The Equity Plus Fund intends to make quarterly distributions of
net investment income. All Funds will distribute net realized
gains at least annually. Each Fund may make additional
distributions if necessary to avoid imposition of a 4% excise
tax or other tax on undistributed income and gains.
The monthly distributions for the Short Fund's shares are quoted
exdividend on the business day after record date (the "ex
date"). Record date is usually the first or second business
day of the month. If a shareholder elects to reinvest
dividends, the date the dividends are reinvested is also the ex-
36
date. Dividends are paid in cash by the Short Fund generally
one week after the ex-date.
The Intermediate Fund will declare daily dividends for
shareholders of record. The Intermediate Fund's dividend
payable date, and the day that dividends are reinvested for
shareholders who have made this election, is the last business
day of the month. Shares begin accruing dividends on the
business day after federal funds (funds credited to a member
bank's account at the Federal Reserve Bank) are available
from the purchase payment for such shares, and continue to
accrue dividends through and including the day the redemption
order for the shares is executed. If an investor closes his
account, any accrued dividends through and including the day of
redemption will be paid as part of the redemption proceeds.
Dividends and capital gains distributions may be declared more
or less frequently at the direction of the Trustees. In order
to be entitled to a dividend or a distribution, an investor must
acquire a Fund's shares on or before the record date. Caution
should be exercised, however, before purchasing shares
immediately prior to a distribution record date. Since the
value of a Fund's shares is based directly on the amount of
its net assets, rather than on the principle of supply and
demand, any distribution of income or capital gain will
result in a decrease in the value of its shares equal to the
amount of the distribution. While a dividend or
capial gain distribution received shortly after purchasing
shares represents, in effect, a return of the shareholder's
investment, it may be taxable as dividend income or capital
gain. You may separately elect to reinvest income
dividends and capital gains distributions in shares of a Fund
or reveive cash as designated on the Purchase Application. You may
change your election at any time by sending written
notification to your Fund. The election is effective for
distributions with a dividend record date on or after the date
that the Funds receive notice of the election. If you do not
specify an election, all income dividends and capital gains
distributions will automatically be reinvested in full
and fractional shares of the Fund from which they were paid.
Shareholders may also elect to have dividends automatically reinvested
in a fund different than the one from which the dividends were paid.
A shareholder may write the transfer agent, or complete the appropriate
section of the Purchase Application, to designate such an election, but must
have already established an account in the other fund. Reinvested dividends
distributions receive the same tax treatment as those paid in
cash.
SHAREHOLDER REPORTS AND INFORMATION
The Funds will provide the following statements and reports:
Confirmation and Account Statements. After each transaction
that affects the account balance or account registration,
including the payment of dividends, you will receive a
confirmation statement.
Form 1099. By January 31 of each year, all shareholders
will receive Form 1099, which will report the amount and tax
status of distributions paid to you by the Funds for the
preceding calendar year.
37
Financial Reports. Financial reports are provided to
shareholders semiannually. Annual reports will include
audited financial statements. To reduce the Funds' expenses,
one copy of each report will be mailed to each Taxpayer
Identification Number even though the investor may have more
than one account in a Fund.
Reports to Depository Institutions. Shareholders of the Short
or Intermediate Funds who are financial institutions may
request receipt of monthly or quarterly reports which provide
information about the Short or Intermediate Fund's
investments considering regulatory risk-based asset
categories. If you need additional copies of previous
statements, you may order statements for the current and
preceding year at no charge. Call 1-800-221-3137 to order past
statements. If you need information on your account with the
Funds or if you wish to submit any applications,
redemption requests, inquiries or notifications, please
contact: Smith Breeden Mutual Funds, 3200 Horizon Drive,
P.O. Box 61503, King of Prussia, PA 19406-0903 or
call 1-800-221-3137.
RETIREMENT PLANS
The Funds have a program under which you may establish
an Individual Retirement Account ("IRA") with the Funds and
purchase shares through such account. Shareholders wishing to
establish an IRA should consult their tax adviser regarding
(1) their individual qualifying status and (2) the tax
regulations governing these accounts. The minimum initial
investment in each Fund for an IRA is $250. There is a $12
annual maintenance fee charged to process an account. This fee
is waived for accounts greater than $10,000. You may obtain
additional information regarding establishing such an account
by calling the Funds at 1-800-221-3138.
The Funds may be used as investment vehicles for
established defined contribution plans, including simplified
employee, 401(k), profit-sharing, money purchase, and
simple pension plans ("Retirement Plans"). For details
concerning Retirement Plans, please call 1-800-221-3138.
SERVICE AND DISTRIBUTION PLANS
Each Fund has adopted a Distribution and Services
Plan (the "Plans") pursuant to Rule 12b-1 under the 1940
Act. The purpose of the Plans 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 Funds,
reducing redemptions, or otherwise maintaining or improving
services provided to shareholders by such dealers or other
persons. The Plans provide for payments by the Adviser out of
its advisory fee to dealers and other persons at an annual rate
of up to 0.25% of a 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
38
which they are made shall be determined by the Adviser.
Any distribution and service related payments made by the
Adviser to investment dealers or other persons are
subject to the continuation of the Plans, the terms of
any related service agreements, and any applicable limits
imposed by the National Association of Securities Dealers,
Inc.
TAXES
Each Fund intends to qualify as a regulated investment
company under the Internal Revenue Code. In each taxable year
that a Fund so qualifies, such Fund (but not its shareholders)
will be relieved of federal income tax on the part of its net
investment income and net capital gain that is distributed to
shareholders. Each Fund will distribute annually,
substantially all of its net investment income and net capital
gains on a current basis.
All Fund distributions from net investment income (whether paid
in cash or reinvested in additional shares) will be taxable
to its shareholders as ordinary income, except that any
distributions of a Fund's net long-term capital gain will
be taxable to its shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Each Fund
provides federal tax information to its shareholders annually about
distributions paid during the preceding year.
It is not anticipated that any of the Funds' distributions
will qualify for either the corporate dividends-received
deduction or tax-exempt interest income. Distributions will
also probably be subject to state and local taxes, depending
on each shareholder's tax situation. While many states grant
tax-free status to mutual fund distributions paid from
interest income earned from direct obligations of the U.S.
Government, none of the Short
or Intermediate Fund's distributions are expected to qualify for
such tax-free treatment, and only an insignificant amount of the
Equity Plus Fund's distributions are expected to so qualify.
The Funds will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from distribution
payments and redemption and exchange proceeds if you fail to
properly complete the Purchase Application.
The foregoing is only a summary of some of the important
federal tax considerations generally affecting each Fund and its
Fund and its shareholders. See "Taxes" in the relevant Statement of
Additional Information for further discussion. There may be other
federal, state or local tax considerations applicable to you as
an investor. You therefore are urged to consult your tax
adviser regarding any tax-related issues.
39
CAPITAL STRUCTURE
The Smith Breeden Trust and the Smith Breeden Series Fund are
both Massachusetts business trusts. The Trust was organized
under an Agreement and Declaration of Trust, dated December
18, 1991. The Series Fund was organized under an Agreement
and Declaration of Trust dated October 3, 1991. Copies of both
Agreements, which are governed by Massachusetts law, are on
file with the Secretary of State of the Commonwealth of
Massachusetts. The Trust and the Series Fund have the same
Trustees. The Trustees have the authority to issue shares in an
unlimited number of funds of either the Series Fund or
Trust. Each such fund's shares may be further divided into
classes. The assets and liabilities of each such fund will be
separate and distinct. All shares when issued are fully paid,
non-assessable and redeemable, and have equal voting, dividend and
liquidation rights.
Shareholders of the separate funds of the Series Fund or Trust
will vote together in electing trustees and in certain other
matters. Shareholders in each fund of the Series Fund should be
aware that the outcome of the election of trustees and of
certain other matters could be controlled by the shareholders
of another fund. The shares have noncumulative voting
rights, which means that holders of more than 50% of the
shares voting for the election of the trustees can elect 100%
of the trustees if they choose to do so.
Although neither the Series Fund nor the Trust is 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 respective Declaration
of Trust. Upon written request by the holders of at least 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 the removal of a trustee, both the Series Fund and
Trust have undertaken to provide a list of shareholders or to
disseminate appropriate materials (at the expense of the
requesting shareholders).
Under Massachusetts law, shareholders of a business trust
may, under certain circumstances, be held personally liable as
partners for its obligations. However, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both (i) any
liability was greater than a Fund's insurance coverage and
(ii) a Fund itself was unable to meet its obligations.
TRANSFER AND DIVIDEND DISBURSING
AGENT, CUSTODIAN AND
INDEPENDENT ACCOUNTANTS
FPS Services, Inc. ("FPS Services" or the "Transfer Agent"),
3200 Horizon Drive, King of Prussia, PA 19406, acts as each
Fund's Transfer and Dividend Disbursing Agent. See
"Management of the Funds." The Bank of New York acts as the
custodian of each Fund's assets. The Bank of New York's
address is 48 Wall Street, New York, New York 10286. Neither
the Transfer and Dividend Disbursing Agent nor the Custodian
has any part in deciding the Funds' investment policies or
40
which securities are to be purchased or sold for the Funds'
portfolios.
Deloitte & Touche, LLP, has been
selected to serve as independent auditors of the Funds for
the fiscal year ending March 31, 1998.
FUND PERFORMANCE
Each Fund may quote the Fund's average annual total
and/or aggregate total return for various time periods in
advertisements or communications to shareholders. An average
annual total return refers to the rate of return which, if
applied to an initial investment at the beginning of a stated
period and compounded over that period, would result in the
redeemable value of the investment at the end of the period
assuming reinvestment of all dividends and distributions and
reflecting the effect of all recurring fees. An investor's
principal in each Fund and the Fund's return are not
guaranteed and will fluctuate according to market conditions.
When considering "average" total return figures for periods
longer than one year, you should note that a Fund's annual
total return for any one year in the period might have been
greater or less than the average for the entire period. Each
Fund also may use "aggregate" total return
figures for various periods, representing the
cumulative change in value of an investment in the Fund for
a specific period (again reflecting changes in the Fund's share
price and assuming reinvestment of dividends and distributions).
The Short and Intermediate Funds may also advertise current
yield and distribution rate information. Current yield
reflects the income per share earned by the Short or
Intermediate Fund's portfolio investments, and is calculated
by dividing a Fund's net investment income per share during a
recent 30-day period by a Fund's net asset value on the
last day of that period and annualizing the result. The
current yield (or "SEC Yield"), which is calculated according
to a formula prescribed by the SEC (see the relevant Statement
of Additional Information), is not indicative of the dividends
or distributions which were or will be paid to a Fund's
shareholders. SEC regulations require that net investment
income be calculated on a "yield-to-maturity" basis, which has
the effect of amortizing any premiums or discounts in the
current market value of fixed income securities.
Dividends or distributions paid to shareholders are reflected in the
current distribution rate which may be quoted to shareholders,
and may not reflect amortization in the same manner.
The Fund may also compare its performance to that of other
mutual funds and to stock and other relevant indices, or to
rankings prepared by independent services or industry
publications. For example, a Fund's total return may be
compared to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc., Value Line Mutual Fund Survey and CDA
Investment Technologies, Inc. Total return data as reported in
such national financial publications as The Wall Street
Journal, The New York Times, Investor's Business Daily, USA
Today, Barron's, Money and Forbes, as well as in
publications of a local or regional nature, may be used
41
in comparing Fund performance.
The Equity Plus Fund's total return may also be compared to
the returns of such indices as the Dow Jones Industrial
Average, Standard & Poor's 500 Composite Stock Price Index,
Nasdaq Composite OTC Index or Nasdaq Industrials Index,
Consumer Price Index and Russell 2000 Index. The Short
Fund's total return may also be compared to that of
taxable money funds as quoted in Donaghue's Money Fund
Report, and to total returns for the six month U.S. Treasury
as published by Merrill Lynch or other suppliers. The
Intermediate Fund's return will most likely be compared to
the total return of the Salomon Brothers Mortgage Index, or the
total return of intermediate U.S. Treasury Notes as published
by various brokerage firms and others. Further information
on performance measurement may be found in the relevant Statement of
Additional Information.
Performance quotations of a Fund represent the Fund's
past performance and should not be considered representative of
future results. The investment return and principal value of an
investment in a Fund will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their
original cost. The methods used to compute a Fund's total
return and yield are described in more detail in the
relevant Statement of Additional Information.
APPENDIX A
Hedging Instruments and Transactions (Short and Intermediate
Funds and Equity Plus Fund's Fixed Income Segment)
Hedging and risk management techniques require different
skills from those involved in the selection of portfolio
securities. One such skill is the ability to predict the correlation of
interest rate changes between markets. The Adviser has been
engaged in hedging target duration portfolios for more than
ten years. There can be no assurance that the Adviser will
accurately predict market movements that accompany interest
rate changes, in which event a Fund's overall performance may
be less than if the Fund had not entered into hedging
transactions.
Interest Rate and Mortgage Swaps, Caps, Floors and
Collars. Interest rate swaps involve the exchange by a Fund
with another party of their respective commitments to pay or
receive interest, for example, an exchange of floating-rate
payments for fixed-rate payments. Mortgage swaps are similar
to interest rate swaps in that they represent commitments to
pay and receive interest. The notional principal amount, however,
is tied to a reference pool or pools of mortgages.
The Short or Intermediate Funds will enter into interest rate
swaps only on a net basis, i.e., where the two payment streams
are netted out, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fixed Income
Segment of the Equity Plus Fund may enter into interest rate
swaps on other than a net basis.
42
The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on
a notional principal amount from the party selling such
interest rate floor. An interest rate collar combines the
elements of purchasing a cap and selling a floor. The collar
protects against an interest rate rise above the maximum
amount, but gives up the benefits of an interest rate
decline below the minimum amount. There can be no assurance that the Funds
will be able to enter into interest rate swaps, caps, floors
or collars on favorable terms. Furthermore, there can be no
assurance that any of the Funds will be able to terminate
an interest rate swap or sell or offset interest rate caps,
floors or collars notwithstanding any terms in the agreements
providing for such termination.
Inasmuch as these hedging transactions are entered into for
hedging purposes, the Adviser and the Funds believe swaps, caps,
floors and collars do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of a 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 securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a
segregated account by a custodian that satisfies the
requirements of the 1940 Act. To the extent that the Fixed
Income Segment of the Equity Plus Fund enters into interest
rate swaps on other than a net basis, the amount maintained in
its 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 Short and Intermediate Funds will not write interest rate
caps, floors and collars, and will not enter into any interest
rate swap, cap, floor or collar transaction unless the
unsecured commercial paper, unsecured senior debt or the
claimspaying ability of the other party is rated either AA
or A-1 or better by Standard & Poor's or Aa or P-1 or better
by Moody's Investors Service, Inc. at the time of entering
into such transaction. The Fixed Income Segment of the
Equity Plus Fund may enter into such transactions with
counterparties who are rated at least A by Moody's and S&P at
the time of entering into the contract. The Funds and the
Adviser will closely monitor, subject to the oversight of the
Board of Trustees, the creditworthiness of the counterparties
in order to minimize risk.
If there is a default by the other party to such a transaction,
the Funds will have contractual remedies pursuant to the
agreements related to the transaction. There is no
assurance that interest-rate swap, cap, floor or collar
counterparties will be able to meet their obligations
pursuant to their contracts, or that, in the event of
default, a Fund will succeed in pursuing contractual remedies.
43
The Funds thus assume the risk that one of them may be delayed
in or prevented from obtaining payments owed to it pursuant to
interest rate swaps, caps, floors or collars.
The swap, cap, floor and collar 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 documentation. As a result, this market
has become relatively liquid, although the Funds will
still treat these instruments as illiquid investments subject
to the limitation on such investments described in the
Prospectus under "Illiquid Securities".
Calls and Puts on Securities. In order to reduce fluctuations
in net asset value and portfolio holdings relative to their
targeted option-adjusted duration, a Fund may purchase call or
put options or sell options where it owns the security which
is the subject of the option (a "covered option") on United States
Treasury securities, mortgage-backed securities and Eurodollar
instruments that are traded on United States and foreign-
securities exchanges and in over-the-counter markets ("OTC
Options"). A Fund will not sell options which are not
covered. 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 Funds.
The Short and Intermediate Funds will not purchase a put or
call option on U.S. Government securities or mortgage-backed
securities if, as a result of such purchase, more than 10% of
its total assets would be invested in such options. A Fund's
ability to purchase put and call options may be limited by
Internal Revenue Code requirements.
The Adviser monitors the creditworthiness of dealers with
whom a Fund would enter into OTC option transactions under
the general supervision of the Board of Trustees. The Funds
will engage in OTC option transactions only with primary
United States government securities dealers recognized by the
Federal Reserve Bank of New York.
Futures and Related Options. In order to reduce fluctuations
in net asset value of portfolio holdings relative to their
targeted option-adjusted durations, or to employ temporary
substitutes for anticipated future transactions, the Funds
may buy or sell financial futures contracts, purchase call
or put options, or sell covered call options on such
futures. There is no overall limitation on the percentage
of a Fund's assets which may be subject to a hedge
position.
Options and futures transactions involve costs and may result
in losses. The effective use of options and futures strategies
depends on a Fund's ability to terminate options and futures
positions at times when the Adviser deems it desirable to do
so. This ability to terminate positions when the Adviser
deems it desirable to do so may be hindered by the lack of
existence of a liquid secondary market. Although a Fund
will take an options or futures contract position only if the
44
Adviser believes there is a liquid secondary market for the
option or futures contract, there is no assurance that a
Fund will be able to effect closing transactions at any
particular time or at an acceptable price.
The use of options and futures strategies also involves the
risk of imperfect correlation between movements in the
values of the securities underlying the futures and options
purchased and sold by a Fund, of the option and futures
contract itself, and of the securities which are the
subject of a hedge. A 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 for a Fund to incur a loss on both
the hedged securities and the hedging instrument.
At times, a 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.
A 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 these 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, a 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.
The Funds' ability to engage in options and futures
transactions and to sell related securities may be limited by
tax considerations and by certain regulatory requirements. See
"Additional Information Regarding
Taxation" in the relevant Statement of Additional
Information.
Other Portfolio Strategies (Equity Plus Fund's Equity
Simulation Segment)
Any investment in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of the Equity Plus
Fund's net assets. Included within that amount, but not to
exceed 2% of the value of the Equity Plus Fund's net assets,
may be warrants which are not listed on the New York or
American Stock Exchange. Warrants acquired by the Equity
Plus Fund in units or attached to securities may be deemed to
be without value.
45
Part B: Information Required in
Statement of Additional Information
N-1A
Item No. Item Location in the Registration
Statement
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 "Miscellaneous
and Policies Investment Practices and
Risk Considerations"
14. Management of the
Registrant "Management of the Fund
15. Control Persons and
Principal Holders of "Principal Holders of Securities
Securities and Controlling Persons"
16. Investment Advisory "The Investment Advisory
and Other Services Agreement and Other Services"
17. Brokerage Allocation "The Investment Advisory
Agreement and Other
Services"
18. Capital Stock and "Additional Information
Other Securities Regarding Purchases and
Redemptions of Fund Shares"
19. Purchase, Redemption "Additional Information
and Pricing of Regarding Purchases and
Securities Being Redemptions of Fund
Offered 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"
SMITH BREEDEN TRUST
SMITH BREEDEN EQUITY PLUS FUND
STATEMENT OF ADDITIONAL
INFORMATION JULY 23, 1997
100 Europa Drive, Suite 200 Chapel Hill, North
Carolina 27514-2310
(919) 967-7221
This Statement of Additional Information contains
information pertaining to Smith Breeden Equity Plus Fund
which may be useful to investors and is not included in
the Prospectus of the Smith Breeden Mutual Funds.
This Statement is not a Prospectus
and is only authorized for distribution when accompanied
or preceded by the Prospectus of the Smith Breeden Mutual
Funds dated July 23, 1997, as may be amended from time to
time. The Statement should be read together with the
Prospectus.
1
Contents Page
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .3
INVESTMENT RESTRICTIONS OF THE FUND. . . . . . . . . .3
MISCELLANEOUS INVESTMENT PRACTICES AND
RISK CONSIDERATIONS . . . . . . . . . . . . . . .6
TAXES . . . . . . . . . . . . . . . . . . . . . . . .9
FUND CHARGES AND EXPENSES. . . . . . . . . . . . . . 10
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . 11
INVESTMENT ADVISORY AGREEMENT AND OTHER SERVICES . . 12
PRINCIPAL HOLDERS OF SECURITIES AND
CONTROLLING PERSONS. . . . . . . . . . . . . . .17
DETERMINATION OF NET ASSET VALUE. . . . . . . . . . .17
ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES . . . . . . . . .18
SHAREHOLDER INFORMATION . . . . . . . . . . . . . . .20
SUSPENSION OF REDEMPTIONS . . . . . . . . . . . . . .20
SHAREHOLDER LIABILITY . . . . . . . . . . . . . . . .20
STANDARD PERFORMANCE MEASURES . . . . . . . . . . . .21
INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . .24
EXPERTS . . . . . . . . . . . . . . . . . . . . . . .24
REPORT OF INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS . . . . . . . . . . . . . .24
2
SMITH BREEDEN TRUST, SMITH
BREEDEN EQUITY PLUS FUND
Statement of Additional Information
DEFINITIONS
The "Trust" -- Smith Breeden Trust
The "Fund" -- Smith Breeden Equity Plus 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.
"FPS Services" -- FPS 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
3
Commission) are not deemed to be a pledge of
assets and 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
4
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).
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; or (b) sell options on futures contracts
which options it does not own.
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.
5
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 highgrade 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
6
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.
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 shortterm 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
7
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."
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.
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
8
repurchase agreements and dollar rolls are considered
borrowings by the Fund.
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
9
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.
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, 1997 were $53,341. Advisory fees for each of the
last three fiscal years ended March 31 were $11,056,
$21,727, and $53,341 respectively. The amounts paid
in prior fiscal years from March 31, 1994 through
August 1, 1994 reflect a previous advisory contract
rate of 0.35% of average net assets. For each of
10
the last three fiscal years ended March 31, the
Adviser reimbursed the Fund $128,959, $114,100 and
$131,965, respectively, 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 FPS
Services which serves as the Fund's shareholder
servicing and accounting agent are determined by
contract as approved by the Board of Trustees.
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. The
Trustees do not receive pension or retirement
benefits from the Fund. The table below shows the
fees paid to each independent Director for the fiscal
year ended March 31, 1997:
Director Aggregate
Compensation
William F. Sharpe $ 1,400
Myron S. Scholes $ 0
Stephen M. Schaefer $ 3,373
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.
11
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 approximately 61% of
the common stock of Harrington Financial Group, the
holding company for Harrington Bank, FSB of
Richmond, Indiana (the "Association"). As of May
31, 1997, the Association had total assets of $485
million. The Association invests in assets of the
same types as those to be held by the Fund.
Douglas T. Breeden, in combination with immediate
family members, controls over 75% of the common
stock of Community First Financial Group, Inc.
("CFFG"), the holding company for certain banks and
thrifts, to which the Adviser renders Investment
Advisory services. The Fund will transact no
business directly or indirectly with either CFFG or
the banks and thrifts which it owns. CFFG and its
subsidiaries 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.
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
12
and conducts the other affairs and business of the
Fund, furnishes office space and equipment,
provides bookkeeping and clerical 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 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
13
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 Advisor 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 August 1, 1998
such that total operating expenses would not exceed
0.88% 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
14
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 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 $3,000 in brokerage commissions on
futures and options transactions for the last
fiscal year and approximately $1,000 for each of
the two prior fiscal years ended March 31.
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
15
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.
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
FPS 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 FPS
Services. FPS 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.
16
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
To the best knowlege of the Equity Plus Fund,
there were no beneficial owners who owned 5%
or more of the shares of the Fund at June 30, 1997.
A Fund Trustee owns less than 1% of the
shares of the Fund as of June 30, 1997.
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
17
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.
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.
18
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. FPS Broker Services,
Inc. (the "Principal Underwriter"), 3200 Horizon
Drive, P.O. Box 61503, King of Prussia, PA 19406-
0903, is the principal underwriter for the Fund and
is acting on a best efforts basis. 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
brokerdealer. Under the underwriting agreement,the
Principal Underwriter may accept orders for Fund
shares at the offering price. For these services,
the Adviser pays the Principal Underwriter
approximately $8000. 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
19
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
FPS 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
20
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 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 one-year
period and 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,
1997, the average annual total return for the Fund
since inception is 18.50% and the average annual
total return for the one year period ended March
31, 1997 is 21.41%.
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. The agencies whose reports are commonly
used for Morningstar 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
21
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.
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
LongTerm HighYield Index, Intermediate-Term
HighYield 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
22
Yankee bonds.
j) Lehman Brothers Government/Corporate Bond
Index.
k) Other taxable investments including
certificatesof 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 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.
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.
23
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 attached to this Statement of
Additional Information have been so attached 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.
