[SMITH BREEDEN MUTUAL FUNDS LOGO APPEARS HERE]
ANNUAL REPORTS
SMITH BREEDEN SHORT DURATION
U.S. GOVERNMENT FUND
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT FUND
SMITH BREEDEN U.S. EQUITY MARKET PLUS(R) FUND
MARCH 31, 2000
<PAGE>
[SMITH BREEDEN MUTUAL FUNDS LOGO APPEARS HERE]
Dear Fellow Shareholder:
We are pleased to present to you the attached annual report for the Smith
Breeden Funds for the year ending March 31, 2000, our eighth year of operation.
As the Smith Breeden Funds and our shareholder base have grown, we have
endeavored to provide shareholders with more and better products and services.
Consistent with this desire, and in order to better position the Smith Breeden
Funds for the future, we are entering into a relationship (subject to
shareholder approval) with The Managers Funds LLC ("Managers"). As part of this
proposed agreement, Managers would become manager to the three Smith Breeden
mutual funds and Smith Breeden Associates would be hired as the sub-advisor for
each. You will soon receive a proxy statement that explains the details of the
proposal.
Managers manages and distributes two mutual fund families, The Managers Funds
and Managers AMG Funds. Organized in 1983, The Managers Funds family is a $3.1
billion no-load mutual fund complex with ten funds and approximately 125,000
shareholders. Using a proprietary selection process, Managers searches for and
selects investment advisors to serve as sub-advisors of the funds it sponsors.
Once chosen, the sub-advisors are subject to ongoing monitoring by Managers'
research team. In addition, Managers manages and distributes Managers AMG Funds,
a $250 million fund family whose sub-advisors are affiliates of its parent
company, Affiliated Managers Group, Inc. ("AMG").
Both Managers and AMG are fine organizations which share our philosophy of
bringing institutional money management expertise to retail investors on a
no-load basis. The partnership is attractive to us because it will provide Smith
Breeden Funds' shareholders with a combination of high quality investment
management and client service. Smith Breeden will be able to focus on its
strength -- portfolio management. Fund shareholders will experience no change in
this area, as the same individuals at Smith Breeden will continue to manage the
investment portfolio of each of the three Smith Breeden funds. Managers, with
greater experience and resources devoted to the mutual fund business, is better
able to service your day-to-day operational account and investment needs. Smith
Breeden Funds' shareholders will benefit from access to more extensive products
and services, as well as the higher level of customer service and technology
offered by Managers. For example, Managers is developing products to assist
customers with asset allocation decisions and expects to make internet access
available to account holders by year-end. We encourage you to visit the
Managers' web site at www.managersfunds.com to learn more about the
organization.
Thank you for the trust you have placed in the Smith Breeden Funds. We look
forward to the continuing opportunity to provide for your investing needs. For
more information, please call us at (800) 221-3138 or visit Smith Breeden's web
site at www.smithbreeden.com.
Sincerely,
/s/ Douglas T. Breeden /s/ Michael J. Giarla
Douglas T. Breeden Michael J. Giarla
Chairman President
Smith Breeden Mutual Funds Smith Breeden Mutual Funds
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
MARKET OVERVIEW
FIXED INCOME MARKETS
The Federal Reserve raised interest rates 0.75% during the twelve months
ended March 31, 2000. Since March 31, 2000, the Fed has raised rates another
1.00% in a continuing effort to slow economic growth and the risk of inflation.
At the outset of this year, Treasury yields were at their highest point of the
previous twelve months, with the 30-year bond yield as high as 6.75%, and the
two-year note approaching 6.40%. Since that time, the Treasury yield curve has
flattened substantially, and yield relationships at the long end of the curve
are inverted. At March 31, 2000, the yield on two-year Treasurys was 6.48%, the
five-year Treasury was at 6.32%, and the 30-year Treasury was 5.84%. Factors
contributing to this decline in long-term Treasury rates include: 1) reduced
demand for long-term credit, due to the expectation that the Federal Reserve's
campaign to slow economic growth will be successful, and 2) market fear of
declining supply of long-term Treasurys, as Federal surpluses mount and the
Treasury reduces the public debt.
The twelve months ended March 31, 2000 were a quite unusual period in the
annals of the government securities markets, in that the yield spreads of asset
classes with identical credit risk and similar trading liquidity widened quite
substantially. GNMA and FNMA mortgage security par yields increased by 1.1% to
1.3%, while the yield on ten-year Treasury securities increased only 0.8%. The
widening in this differential had less to do with the fundamental value of the
securities and more to do with the perceived possible shortage of Treasury
securities, as discussed above.
Mortgage securities performed well relative to other high-grade debt during
the year. Rising mortgage rates reduced refinancing opportunities, making
mortgage cashflows more stable. Mortgage rate volatility fell also, which helps
mortgage security returns.
EQUITY MARKETS
For the first time in history, the S&P 500 earned more than 20% for four
consecutive years with a return of 21.04% in 1999. While returns in excess of
20% are excellent, the technology heavy NASDAQ far surpassed that with an 86.13%
return. Clearly, technology dominated in 1999. In fact, the technology sector of
the S&P 500 returned 74%, and if that sector is excluded from the S&P 500, the
return drops to 8%. This points out a major factor about the equity markets in
1999 -- there was a great divergence in performance of stocks and sectors of
stocks. In general, prices soared for most technology-related stocks, but most
other issues had an undistinguished showing with almost 60% of the stocks on the
New York Stock Exchange falling in price in 1999.
Sector, group and stock selection mattered more in 1999 than perhaps at any
other time in the past 30 years. It is certainly evident why technology
dominated in 1998 and 1999. The new economy structured around the Internet is
powered by technology and, secondarily, technology provided the productivity
gains that have held inflation in check. Moreover, the under performance of the
broad market during the past two years can probably be attributed primarily to:
1) the predominantly disinflationary climate, where rising interest rates serve
to control inflation but restrain earnings growth, and (2) the momentum
generated by investors primarily motivated by the prospects for growth in
technology, especially Internet-related companies, but less interested in the
actual profits.
Indeed, during 1999 investors seemed to discard historical investment
concepts of earnings growth and price earnings multiples and focus instead on
sales growth. At the end of 1999, the resulting valuations had the top 20% of
the S&P 500 stocks priced at over 75 times earnings while the other 80% was
trading at around 14 times. This new market environment was also reflected by
the fact that during 1999, as reported by Morningstar, investors redeemed over
$50 billion in value fund assets and poured over $100 billion into tech-oriented
growth stock funds. As 1999 closed, there was general agreement that although
the technology sector might continue to boom for some time, the unprecedented
valuations had priced success into virtually every technology stock and could
not be sustained in the long run. It is interesting to note that the highly
touted Y2K concerns seemed to have had minimal effects on the market, if any.
<PAGE>
The two-tiered market continued into the first quarter of 2000 with the
NASDAQ up 12.41%, the S&P 500 up 2.29%, and the Dow Jones Industrial Average
down 4.65% at the end of March. In addition, the performance of the U.S. economy
continued to be exceptionally strong, fueled by consumer spending and
productivity gains. During this quarter, the general level of market interest
rates did not change significantly, but a shift in underlying factors resulted
in a flatter Treasury yield curve and substantially wider spreads on high
quality fixed-income securities. However, the Federal Reserve revealed its
intention to pursue a more aggressive policy to reign in growth, which
intensified market skittishness and clouded the outlook for some sectors, such
as new economy issues and interest-sensitive stocks.
<PAGE>
SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
--------------------------------------------------------------------------------
PERFORMANCE REVIEW
The Smith Breeden U.S. Equity Market Plus(R) Fund returned 14.91% in the
year ending March 31, 2000. The S&P 500 Index return was 17.98%, and the average
Growth and Income Fund, as tracked by Morningstar, returned 22.53%, over the
same period.
[BAR CHART APPEARS HERE]
(1) Fund returns are net of fees and sales charges. Index returns are market
returns without deduction of fees or rebalancing.
Past performance is no guarantee of future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR
PERIODS ENDING MARCH 31, 2000
------------------------------------------
FINAL VALUE OF
SINCE INCEPTION $10,000 INVESTMENT
1 YEAR 5 YEARS (6/30/92) (SINCE INCEPTION)
----------- ----------- ---------------- -------------------
<S> <C> <C> <C> <C>
Smith Breeden U.S. Equity Market Plus(R) Fund 14.91% 25.80% 21.05% $43,966
S&P 500 ...................................... 17.98% 26.78% 20.86% 43,425
Morningstar Avg. Growth and Income Fund ...... 22.53% 22.67% 18.71% 37,779
</TABLE>
The U.S. Equity Market Plus(R) Fund is comprised of two segments. The
equity segment will either purchase S&P 500 index futures contracts or enter
into S&P 500 index swaps with a total value approximately equal to fund net
assets. Each of these instruments (futures or swaps) has an implied funding
cost. The income segment invests in mortgage securities, and then reduces the
interest-rate and prepayment risk to a low level using interest rate futures and
options. The income segment of the fund aims to exceed the funding cost of the
S&P 500 futures or swaps plus the Fund's operating expenses.
In the year ending March 31, 2000 the fixed income segment underperformed
the implied funding cost of the S&P 500 futures contracts by about 2.8% after
expenses. This led to a shortfall in the Fund's performance as compared to the
benchmark S&P 500, and is primarily due to widening yield spreads between
mortgage securities and Treasurys.
While the supply concerns about Treasurys have reduced the Fund's recent
returns, the current yield advantage of the mortgage and Agency markets would
appear to offer generous compensation for bearing the uncertainty of future
Treasury supply. The Fund is positioned to profit as the Treasury market returns
to equilibrium relative to allied markets, although the spread between the
Fund's holding and Treasury securities may widen if the yield curve inverts
further, if equity market volatility increases, or if general demand for
liquidity increases in the fixed income markets.
At times during the past, the Fund has used hedge instruments other than
Treasury securities (such as interest-rate swaps) that reduce the Fund's
exposure to mortgage/Treasury spread movements. As mortgage/Treasury spreads
widened during the year, the Fund shifted the hedges to mostly Treasury
securities. If the recent volatility of mortgage/Treasury spreads continues, the
volatility of the Fund's returns relative to its benchmark may be greater than
it has been in the past.
<PAGE>
SMITH BREEDEN U.S. EQUITY MARKET PLUS(R) FUND
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS MARCH 31, 2000
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
---------------- -------------------------------------------------------------- --------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 113.3%
FREDDIE MAC -- 63.4%
Fixed-Rate (1)
$ 18,777,618 Gold 6.00%, due 1/1/29 ....................................... $17,118,473
30,518,991 Gold 7.00%, due 1/1/30 to 2/1/30 ............................. 29,366,930
75,850,000 Gold 7.50%, 30 Year, due date to be announced ................ 74,593,537
18,156 9.50%, due 7/1/02 ............................................ 18,358
Discount Notes
150,000 5.09%, due 6/2/00 (2),(3) .................................... 148,508
150,000 5.50%, due 8/4/00 (2),(3) .................................... 146,889
-----------
121,392,695
-----------
FANNIE MAE -- 28.3%
Fixed-Rate (1)
12,000,000 6.00%, 15 Year, due date to be announced ..................... 11,287,463
3,552,876 6.50%, due 3/1/29 ............................................ 3,333,509
15,122,315 7.00%, due 8/1/27 to 12/1/29 ................................. 14,546,081
10,000,000 7.50%, 30 Year, due date to be announced ..................... 9,834,349
50,664 12.50%, due 9/1/12 ........................................... 56,739
Adjustable-Rate (1)
258,762 7.11%, due 9/1/18 ............................................ 268,066
Discount Notes
50,000 4.65%, due 4/3/00 (2),(3) .................................... 49,987
1,000,000 4.67%, due 4/10/00 (2),(3) ................................... 998,831
200,000 4.75%, due 4/28/00 (2),(3) ................................... 199,288
6,500,000 4.83%, due 5/1/00 (2),(3) .................................... 6,473,804
1,700,000 4.91%, due 5/19/00 (2),(3) ................................... 1,688,871
1,500,000 5.09%, due 5/26/00 (2),(3) ................................... 1,488,335
1,300,000 5.25%, due 6/16/00 (2),(3) ................................... 1,284,046
200,000 5.20%, due 6/28/00 (2),(3) ................................... 197,148
500,000 5.15%, due 7/14/00 (2),(3) ................................... 491,458
1,820,000 5.33%, due 7/21/00 (2),(3) ................................... 1,786,770
200,000 5.46%, due 8/11/00 (2),(3) ................................... 195,616
-----------
54,180,361
-----------
GINNIE MAE -- 21.6%
Fixed-Rate (1)
17,716,004 6.50%, due 3/15/28 to 5/15/29 ................................ 16,727,136
4,260,625 7.00%, due 3/15/28 ........................................... 4,129,366
Adjustable-Rate (1)
13,947,833 5.00%, due 4/20/29 to 6/20/29 ................................ 13,497,338
6,839,515 6.375%, due 2/20/16 to 3/20/28 ............................... 6,872,857
58,524 6.75%, due 9/20/21 ........................................... 58,921
-----------
41,285,618
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $221,143,042)........................................... 216,858,674
-----------
CONTRACTS OPTIONS CONTRACTS -- 0.2%
------------
407 Call on Thirty-Year US Treasury Bond Futures, expires 5/00,
strike price $98.............................................. 483,313
238 Put on Thirty-Year US Treasury Bond Futures, expires 5/00,
strike price $82.............................................. 3,720
-----------
TOTAL OPTIONS CONTRACTS (COST $141,356) ...................... 487,033
-----------
</TABLE>
<PAGE>
SMITH BREEDEN U.S. EQUITY MARKET PLUS(R) FUND
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2000
<TABLE>
<CAPTION>
MARKET
NOTIONAL AMOUNT VALUE
----------------- ----------------
<S> <C> <C>
OPTION CONTRACTS ON THREE-MONTH LIBOR INTEREST RATE SWAP
AGREEMENTS -- 0.7%
$ 30,000,000 Option to enter a pay-fixed 6.5% interest-rate swap with Deutsche Bank AG
beginning 9/29/03 and expiring 9/29/08 ....................................... $ 1,159,697
30,000,000 Option to enter a receive-fixed 5.25% interest-rate swap with Deutsche Bank
AG beginning 9/29/03 and expiring 9/29/08 .................................... 114,610
-------------
TOTAL OPTION CONTRACTS ON THREE-MONTH LIBOR
INTEREST-RATE SWAP AGREEMENTS (COST $870,000)................................. 1,274,307
-------------
FACE AMOUNT
-----------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 7.1%
5,000,000 First Union-Lehman Brothers-Bank of America Commercial Mortage Trust,
6.56%, due 11/18/08 .......................................................... 4,719,439
5,500,000 GMAC Commercial Mortgage Securities, 6.42%, due 8/15/08 ...................... 5,123,814
4,000,000 Nomura Asset Securities Corporation Commercial Mortgage Trust, 6.59%,
due 3/17/28 .................................................................. 3,748,816
-------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $14,695,011)............................................................ 13,592,069
-------------
COLLATERALIZED BOND OBLIGATION -- 4.4%
8,500,000 Spinnaker I, Series A, 6.9125%, due 5/1/01 ................................... 8,480,280
-------------
TOTAL COLLATERALIZED BOND OBLIGATION (COST $8,483,680)........................ 8,480,280
-------------
SHARES
-----------
PREFERRED STOCK -- 4.8%
11,700 Home Ownership Funding Corporation (5) ....................................... 9,144,018
-------------
TOTAL PREFERRED STOCK (COST $9,788,337)....................................... 9,144,018
-------------
TOTAL INVESTMENTS (COST $255,121,426)--130.5%................................. 249,836,381
-------------
FACE AMOUNT
-----------------
REPURCHASE AGREEMENTS -- 18.3%
35,000,000 Morgan Stanley Dean Witter, 6.12%, due 4/4/00 dated 3/27/00 (4) .............. 35,000,000
-------------
TOTAL REPURCHASE AGREEMENTS (COST $35,000,000)................................ 35,000,000
-------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (48.8%) ............................ (93,461,218)
-------------
NET ASSETS -- 100.00% ........................................................ $ 191,375,163
=============
</TABLE>
---------
(1) Mortgage-backed obligations are subject to principal paydowns as a result of
prepayments or refinancings of the underlying mortgage instruments. As a
result, the average life may be substantially less than the original
maturity. Adjustable-rate mortgages have coupon rates that adjust
periodically. The interest rate shown is the rate in effect at March 31,
2000. The adjusted rate is determined by adding a spread to a specified
index.
(2) The interest rate shown for discount notes is the effective yield at the
time of purchase by the Fund.
(3) Security is held as collateral by Carr Futures, Inc.
(4) Repurchase agreement is collateralized by $19,786,530 face of Fannie Mae
9.00% due 3/1/2027 and $15,193,285 face of Fannie Mae 9.00% due 3/1/2027.
Market value of the collateral is $35,714,390.
(5) Security is exempt from registration under Rule 144(a) of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Such securities
represented 4.8% of net assets as of March 31, 2000.
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN U.S. EQUITY MARKET PLUS(R) FUND
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments at market value (identified cost $255,121,426) (Note 1)...................... $ 249,836,381
Repurchase agreements (Cost $35,000,000) (Note 1)........................................ 35,000,000
Cash .................................................................................... 8,987,350
Receivables:
Securities sold ....................................................................... 35,994,528
Variation margin on futures contracts (Note 2) ........................................ 1,199,356
Interest and maturities ............................................................... 954,927
Subscriptions ......................................................................... 576,462
Prepaid expenses ........................................................................ 37,430
-------------
TOTAL ASSETS .......................................................................... 332,586,434
-------------
LIABILITIES
Payables:
Securities purchased .................................................................. 140,238,543
Redemptions ........................................................................... 780,291
Due to advisor, net (Note 3) ............................................................ 80,355
Accrued expenses ........................................................................ 112,082
-------------
TOTAL LIABILITIES ..................................................................... 141,211,271
-------------
NET ASSETS
(Applicable to outstanding shares of 11,944,003; unlimited number of shares of beneficial
interest authorized; no stated par) ................................................... $ 191,375,163
=============
Net asset value, offering price and redemption price per share ($191,375,163 (divided by) $ 16.02
11,944,003) =============
SOURCE OF NET ASSETS
Paid in capital ......................................................................... $ 184,391,055
Undistributed net investment income ..................................................... 12,399
Accumulated net realized gain on investments, options and futures contracts ............. 364,447
Net unrealized depreciation of investments and options .................................. (5,285,045)
Net unrealized appreciation of futures contracts ........................................ 11,892,307
-------------
NET ASSETS ............................................................................ $ 191,375,163
=============
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN U.S. EQUITY MARKET PLUS(R) FUND
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest income, net of amortization and accretion (Note 1) ........................ $ 12,480,632
Dividend income .................................................................... 779,864
------------
TOTAL INVESTMENT INCOME ........................................................... 13,260,496
EXPENSES
Advisory fees (Note 3) ............................................................. 1,465,858
Trustees fees and expenses ......................................................... 186,420
Transfer agent fees ................................................................ 165,018
Custodian fees ..................................................................... 78,061
Accounting and pricing services fees ............................................... 66,714
Audit and tax preparation fees ..................................................... 51,038
Legal fees ......................................................................... 44,135
Registration fees .................................................................. 28,604
Other .............................................................................. 26,858
------------
TOTAL EXPENSES BEFORE REIMBURSEMENT ............................................... 2,112,706
Expenses reimbursed by Advisor (Note 3) ........................................... (269,913)
------------
NET EXPENSES ...................................................................... 1,842,793
------------
NET INVESTMENT INCOME ............................................................. 11,417,703
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments ................................................... (3,971,988)
Net realized loss on options ....................................................... (1,038,494)
Net realized gain on futures contracts ............................................. 14,824,016
Change in unrealized depreciation of investments ................................... (5,425,081)
Change in unrealized appreciation of options ....................................... 655,848
Change in unrealized appreciation of futures contracts ............................. 10,309,318
------------
Net realized and unrealized gain on investments, options and futures contracts ..... 15,353,619
------------
Net increase in net assets resulting from operations ............................... $ 26,771,322
============
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN U.S. EQUITY MARKET PLUS(R) FUND
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999
---------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income .................................................... $ 11,417,703 $ 7,177,578
Net realized gain on investments ......................................... 9,813,534 24,541,887
Change in unrealized appreciation (depreciation) of investments .......... 5,540,085 (8,018,115)
-------------- -------------
Net increase in net assets resulting from operations ..................... 26,771,322 23,701,350
-------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ..................................... (12,518,994) (6,376,285)
Distributions from net realized gains on investments ..................... (24,674,903) (17,138,874)
-------------- -------------
Total distributions ...................................................... (37,193,897) (23,515,159)
-------------- -------------
CAPITAL SHARE TRANSACTIONS
Shares sold .............................................................. 96,921,050 114,008,937
Shares issued on reinvestment of distributions ........................... 36,203,243 22,832,882
Shares redeemed .......................................................... (116,910,676) (88,111,328)
-------------- -------------
Increase in net assets resulting from capital share transactions (a) ..... 16,213,617 48,730,491
-------------- -------------
TOTAL INCREASE IN NET ASSETS ........................................... 5,791,042 48,916,682
NET ASSETS
Beginning of period ...................................................... 185,584,121 136,667,439
-------------- -------------
End of period ............................................................ $ 191,375,163 $ 185,584,121
============== =============
(a) Transactions in capital shares were as follows:
Shares sold .............................................................. 5,994,091 7,288,068
Shares issued on reinvestment of distributions ........................... 2,304,861 1,546,502
Shares redeemed .......................................................... (7,413,923) (5,883,230)
-------------- -------------
Net increase ............................................................. 885,029 2,951,340
Beginning balance ........................................................ 11,058,974 8,107,634
-------------- -------------
Ending balance ........................................................... 11,944,003 11,058,974
============== =============
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN U.S. EQUITY MARKET PLUS(R) FUND
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental information has
been derived from information provided in the financial statements.
For a share outstanding throughout the periods.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ........................... $ 16.78 $ 16.86 $ 12.56 $ 12.27 $ 10.84
----------- ----------- ----------- ---------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............ 0.877 0.686 0.591 0.592 0.615
Net realized and unrealized
gain on investments ............ 1.382 1.763 4.940 1.813 2.768
------------ ------------ ------------ ----------- ----------
Total from investment
operations ..................... 2.259 2.449 5.531 2.405 3.383
------------ ------------ ------------ ----------- ----------
LESS DISTRIBUTIONS
Dividends from net
investment income .............. (0.976) (0.624) (0.586) (0.590) (0.583)
Distributions from net realized
gains on investments ........... (2.043) (1.905) (0.645) (1.525) (1.370)
------------ ------------ ------------ ----------- ----------
Total distributions .............. (3.019) (2.529) (1.231) (2.115) (1.953)
------------ ------------ ------------ ----------- ----------
NET ASSET VALUE, END OF
PERIOD ........................... $ 16.02 $ 16.78 $ 16.86 $ 12.56 $ 12.27
------------ ------------ ------------ ----------- ----------
TOTAL RETURN ...................... 14.91% 17.17% 45.71% 21.41% 32.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ........ $191,375,163 $185,584,121 $136,667,439 $13,507,377 $4,766,534
Ratio of net expenses to
average net assets ............. 0.88% 0.88% 0.88% 0.88% 0.90%
Ratio of net investment
income to average net
assets ......................... 5.47% 4.62% 4.79% 5.30% 5.53%
Portfolio turnover rate .......... 442% 527% 424% 182% 107%
Ratio of expenses to average
net assets before
reimbursement of
expenses by the Advisor ........ 1.01% 1.04% 1.23% 2.60% 4.58%
Ratio of net investment
income to average net
assets before
reimbursement of
expenses by the Advisor ........ 5.34% 4.45% 4.44% 3.58% 1.85%
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
The Board of Trustees and Shareholders,
Smith Breeden U.S. Equity Market Plus Fund of the Smith Breeden Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Breeden U.S. Equity Market
Plus Fund of the Smith Breeden Trust (the "Fund") as of March 31, 2000, and the
related statements of operations, changes in net assets and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at March 31, 2000, by correspondence with the custodian and
brokers; where replies were not received, we performed other auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Breeden Equity Market Plus Fund of the Smith Breeden Trust as of March 31,
2000, the results of its operations, the changes in its net assets and the
financial highlights for the periods presented in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
May 12, 2000
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Breeden Series Fund and the Smith Breeden Trust (the "Trusts") are
open-end, diversified management investment companies registered under the
Investment Company Act of 1940, as amended. The Smith Breeden Series Fund offers
shares in two series: the Smith Breeden Short Duration U.S. Government Fund (the
"Short Duration Fund") and the Smith Breeden Intermediate Duration U.S.
Government Fund (the "Intermediate Duration Fund"). The Smith Breeden Trust
offers shares in the Smith Breeden U.S. Equity Market Plus(R) Fund (the "U.S.
Equity Market Plus(R) Fund"). The following is a summary of accounting policies
consistently followed by the Short Duration Fund, the Intermediate Duration
Fund, and the U.S. Equity Market Plus(R) Fund (collectively, the "Funds").
A. SECURITY VALUATION: Portfolio securities, including derivatives, are valued
at the current market value provided by a pricing service, or by a bank or
broker/dealer experienced in such matters when over-the-counter market
quotations are readily available. Securities (including derivatives) for which
market prices are not readily available are valued at fair market value as
determined in accordance with procedures approved by the Board of Trustees.
Short-term securities which mature in 60 days or less are valued at amortized
cost. Short-term securities with a term to maturity greater than 60 days from
the date of purchase are valued at current market quotations until maturity.
B. REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
member banks of the Federal Reserve System with total assets in excess of $500
million, and securities dealers, provided that such banks or dealers meet the
credit guidelines of the Funds' Board of Trustees. In a repurchase agreement, a
Fund acquires securities from a third party, with the commitment that they will
be repurchased by the seller at a fixed price on an agreed upon date. The Funds'
custodian maintains control or custody of the securities collateralizing the
repurchase agreement until maturity. The value of the collateral is monitored
daily, and, if necessary, additional collateral is received to ensure that the
market value of the collateral remains sufficient to protect the Fund in the
event of the seller's default. However, in the event of default or bankruptcy of
the seller, the Fund's right to the collateral may be subject to legal
proceedings.
C. REVERSE REPURCHASE AGREEMENTS: A reverse repurchase agreement involves the
lending of portfolio assets as collateral, together with an agreement to receive
the same assets at a fixed price on an agreed upon date. Additional assets are
maintained in a segregated account with the custodian, and are marked to market
daily. The segregated assets may consist of cash, U.S. Government securities, or
other liquid high-grade debt obligations at least equal in value to the
obligations under the reverse repurchase agreements. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, a Fund's use of the proceeds under the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the obligation to repurchase the securities.
D. DOLLAR ROLL AND REVERSE DOLLAR ROLL AGREEMENTS: A dollar roll is an agreement
to sell securities for delivery in the current month and to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, principal and interest paid on these securities
are not received. When a Fund invests in a dollar roll, it is compensated by the
difference between the current sales price and the forward price for the future
purchase (often referred to as the "drop") as well as by earnings on the cash
proceeds of the initial sale.
A reverse dollar roll is agreement to buy securities for delivery in the current
month and to sell substantially similar (same type and coupon) securities on a
specified future date, typically at a lower price. During the roll period, the
fund receives the principal and interest on the securities purchased in
compensation for the cash invested in the transaction.
E. DISTRIBUTIONS AND TAXES: Dividends to shareholders are recorded on the
ex-dividend date. Each Fund intends to continue to qualify for and elect the
special tax treatment afforded to regulated investment companies under
Subchapter M of the Internal Revenue Code, thereby relieving the Funds of
Federal income taxes. Accordingly, there is no provision for income taxes in
the accompanying financial statements. To so qualify, the Funds intend
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
to distribute substantially all net investment income and net realized capital
gains, if any, less any available capital loss carryforward. The following table
summarized the available capital loss carryforwards for each Fund.
<TABLE>
<CAPTION>
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
CARRYFORWARD CARRYFORWARD CARRYFORWARD
FUND EXPIRES 3/31/2004 EXPIRES 3/31/2005 EXPIRES 3/31/2008
--------------------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Short Duration Fund ............. $658,505 $829,556 $760,963
Intermediate Duration Fund ...... 0 0 0
U.S. Equity Market Plus(R) Fund . 0 0 0
</TABLE>
F. SECURITIES TRANSACTIONS, INVESTMENT INCOME AND OPERATING EXPENSES: Securities
transactions are recorded on the trade date. Interest income is accrued daily,
and includes accretion of discount and amortization of premium from the purchase
of fixed-income securities. Discounts and premiums on fixed-income securities
purchased are amortized over the life of the respective securities using the
effective yield method. Dividend income is recorded on the ex-dividend date.
Gains or losses on the sale of securities are calculated for accounting and tax
purposes on the identified cost basis.
Expenses are accrued daily. Common expenses incurred by the Funds are generally
based on the ratio of net assets of each Fund to the combined net assets of all
Funds. Other expenses are charged to each Fund on a specific identification
basis.
G. ACCOUNTING ESTIMATES: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.
2. FINANCIAL INSTRUMENTS
A. FUTURES CONTRACTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING: The Funds
use interest-rate futures contracts for risk management purposes in order to
reduce fluctuations in the Funds' net asset values relative to the Funds'
targeted option-adjusted durations.
Upon entering into a futures contract, either cash or securities in an amount
equal to a certain percentage of the contract value (initial margin) must be
deposited with the futures broker. Subsequent payments (variation margin) are
made or received each day. The variation margin payments equal the daily changes
in the contract value and are recorded as unrealized gains or losses. The Funds
recognize a realized gain or loss when the contract is closed or expires equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
The Short Duration Fund had the following open futures contracts as of March 31,
2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
---------------------------- ----------- ---------- ---------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 129 Short June 2000 $ (172,015)
10 Year Treasury ........... 58 Short June 2000 (120,425)
30 Year Treasury ........... 14 Short June 2000 (50,516)
3 Month Eurodollar ......... 23 Short June 2000 6,721
3 Month Eurodollar ......... 21 Short September 2000 8,056
3 Month Eurodollar ......... 6 Short December 2000 3,673
3 Month Eurodollar ......... 11 Long March 2001 (1,575)
3 Month Eurodollar ......... 50 Long September 2001 (154,438)
3 Month Eurodollar ......... 20 Short June 2002 47,022
3 Month Eurodollar ......... 17 Short March 2003 (3,164)
3 Month Eurodollar ......... 20 Short June 2003 37,160
3 Month Eurodollar ......... 20 Short June 2004 31,310
3 Month Eurodollar ......... 5 Short September 2004 3,290
3 Month Eurodollar ......... 1 Long December 2004 833
3 Month Eurodollar ......... 1 Long March 2005 908
3 Month Eurodollar ......... 8 Short June 2005 9,814
3 Month Eurodollar ......... 3 Short September 2005 986
3 Month Eurodollar ......... 11 Short December 2005 17,463
3 Month Eurodollar ......... 13 Short March 2006 21,992
3 Month Eurodollar ......... 2 Long June 2006 2,191
3 Month Eurodollar ......... 5 Long September 2006 3,278
3 Month Eurodollar ......... 3 Long December 2006 3,512
----------
Total $ (303,924)
==========
</TABLE>
The Intermediate Duration Fund had the following open futures contracts as of
March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
-------------------------- ----------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury .......... 57 Short June 2000 $ (101,054)
10 Year Treasury ......... 19 Short June 2000 (36,687)
30 Year Treasury ......... 43 Short June 2000 (147,957)
----------
Total $ (285,698)
==========
</TABLE>
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
The U.S. Equity Market Plus(R) Fund had the following open interest-rate futures
contracts as of March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
---------------------------- ----------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 1,316 Short June 2000 $ (1,637,482)
10 Year Treasury ........... 605 Short June 2000 (1,103,731)
30 Year Treasury ........... 48 Short June 2000 (165,560)
3 Month Eurodollar ......... 149 Short June 2000 24,380
3 Month Eurodollar ......... 96 Short September 2000 19,918
3 Month Eurodollar ......... 157 Long December 2000 29,756
3 Month Eurodollar ......... 142 Long March 2001 (25,477)
3 Month Eurodollar ......... 19 Long June 2001 5,065
3 Month Eurodollar ......... 86 Short September 2001 203,200
3 Month Eurodollar ......... 19 Long December 2001 9,302
3 Month Eurodollar ......... 11 Short March 2002 4,063
3 Month Eurodollar ......... 19 Long June 2002 11,440
3 Month Eurodollar ......... 80 Short September 2002 139,565
3 Month Eurodollar ......... 19 Long December 2002 13,077
3 Month Eurodollar ......... 83 Short March 2003 (6,999)
3 Month Eurodollar ......... 19 Long June 2003 14,052
3 Month Eurodollar ......... 65 Short September 2003 52,570
3 Month Eurodollar ......... 20 Long December 2003 15,348
3 Month Eurodollar ......... 29 Short March 2004 (2,430)
3 Month Eurodollar ......... 29 Long June 2004 22,169
3 Month Eurodollar ......... 54 Long September 2004 22,044
3 Month Eurodollar ......... 26 Long December 2004 18,408
3 Month Eurodollar ......... 122 Short March 2005 279,663
3 Month Eurodollar ......... 3 Short June 2005 (401)
3 Month Eurodollar ......... 9 Long December 2005 (828)
3 Month Eurodollar ......... 65 Short March 2006 122,608
3 Month Eurodollar ......... 8 Long June 2006 (236)
3 Month Eurodollar ......... 21 Long September 2006 (95)
3 Month Eurodollar ......... 16 Long December 2006 928
3 Month Eurodollar ......... 24 Short March 2007 58,392
------------
Total $ (1,877,291)
============
</TABLE>
Futures transactions involve costs and may result in losses. The effective use
of futures depends on the Funds' ability to close futures positions at times
when the Funds' Advisor deems it desirable to do so. The use of futures also
involves the risk of imperfect correlation among movements in the values of the
securities underlying the futures purchased and sold by the Funds, of the
futures contract themselves, and of the securities that are the subject of a
hedge. Should interest rates move unexpectedly, the Fund may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
B. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES: The
U.S. Equity Market Plus(R) Fund invests in futures contracts on the S&P 500
Index whose returns are expected to track movements in the S&P 500 Index.
The U.S. Equity Market Plus(R) Fund had the following open futures contracts on
the S&P 500 Index as of March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
---------------------- ----------- ---------- ---------------- --------------
<S> <C> <C> <C> <C>
S&P 500 ............ 372 Long June 2000 $12,279,315
S&P 500 ............ 58 Long September 2000 673,960
S&P 500 ............ 73 Long December 2000 816,323
-----------
Total $13,769,598
===========
</TABLE>
C. ASSETS PLEDGED TO COVER MARGIN REQUIREMENTS FOR OPEN FUTURES POSITIONS: The
aggregate market value of assets pledged to cover margin requirements for the
open futures positions at March 31, 2000 was:
<TABLE>
<CAPTION>
FUND ASSETS PLEDGED
--------------------------------------- ---------------
<S> <C>
Short Duration Fund ................. $ 343,131
Intermediate Duration Fund .......... 285,736
U.S. Equity Market Plus(R) Fund ..... 15,149,551
</TABLE>
D. INTEREST RATE SWAP CONTRACTS AND OPTIONS: The Funds may enter into
over-the-counter transactions swapping interest rates, or purchase options to
enter into such contracts in order to manage interest rate risk. Interest rate
swaps represent an agreement between two parties to exchange cash flows based on
the difference between two interest rates, applied to a notional principal
amount for a specified period. The most common type of interest rate swap
involves the exchange of fixed-rate cash flows for variable-rate cash flows.
Interest rate swaps do not involve the exchange of principal between the
parties. Purchased options on interest rate swap contracts ("swaptions") give
the right, but not the obligation, to enter into a swap contract with the
counterparty which has written the option on a date, at an interest rate, and
with a notional amount as specified in the swaption agreement. The Funds will
not enter into interest rate swap agreements or swaptions unless the unsecured
commercial paper, unsecured senior debt or the claims-paying ability of the
counterparty is rated either AA or A or better by Standard & Poor's Corporation,
or Aa or P-1 or better by Moody's Investors Service, Inc. (or is otherwise
acceptable to either agency) at the time of entering into such a transaction. If
the counterparty to the swap transaction defaults, the Funds will be limited to
contractual remedies pursuant to the agreements governing the transaction. There
is no assurance that counterparties to interest rate swap agreements or
swaptions will be able to meet their obligations under the contracts or that, in
the event of default, the Funds will succeed in pursuing contractual remedies.
The Funds may thus assume the risk that payments owed to the Funds under an
interest rate swap agreement or swaption will be delayed, or not received at
all. Should interest rates move unexpectedly, the Funds may not achieve the
anticipated benefits of the interest rate swaps or swaptions, and may realize a
loss. During the term of the interest rate swap agreement or swaptions,
unrealized gains or losses are recorded as a result of "marking-to-market". When
the interest rate swap agreement or swaption is terminated, the Funds will
record a realized gain or loss equal to the difference between the proceeds from
(or cost of) the closing transaction and the Funds' basis in the contract, if
any.
As of March 31, 2000, the Short Duration Fund had one open interest rate swap
contract. In the contract, the Short Fund has agreed to pay a fixed rate and
receive a floating rate. The Short Duration Fund's interest rate swap contract
has been entered into on a net basis, i.e., the two payment streams are netted
out, with the Short Duration Fund receiving or paying only the net amount of the
two payments. The floating rate on the contract resets quarterly and is the
three month London Inter-Bank Offered Rate ("LIBOR"). The Short Duration Fund's
net interest receivable on the interest rate swap agreement as of March 31, 2000
was $13,959. No collateral is required under these contracts.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FINANCIAL INSTRUMENTS -- CONTINUED
As of March 31, 2000, the U.S. Equity Market Plus(R) Fund had two open
swaptions. In each of the contracts, the Fund has paid a sum of money, called a
premium, to the counterparty, in return for the swaptions. These swaptions may
be exercised by entering into a swap contract with the counterparty only on the
date specified in each contract.
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Smith Breeden Associates, Inc. (the "Advisor"), a registered Investment Advisor,
provides the Funds with investment management services. As compensation for
these services, the Funds pay the Advisor a fee of 0.70% per annum, based on the
Funds' average net assets, computed daily rate and payable monthly.
The Advisor voluntarily agreed to reimburse normal business expenses of the
Funds during the year ended March 31, 2000 so that total direct and indirect
operating expenses do not exceed the percentages listed below of each Funds'
average net assets. The table below lists the fees received by the Advisor and
the expenses reimbursed by the Advisor to each Fund during the year ending March
31, 2000.
<TABLE>
<CAPTION>
NET EXPENSE FEES RECEIVED EXPENSES REIMBURSED
FUND RATIO BY ADVISOR BY ADVISOR
--------------------------------------- ------------ -------------- --------------------
<S> <C> <C> <C>
Short Duration Fund ............. 0.78% $ 374,112 $155,667
Intermediate Duration Fund ...... 0.88% 340,173 88,225
U.S. Equity Market Plus(R) Fund . 0.88% 1,465,858 269,913
</TABLE>
The Funds have adopted a Distribution and Services Plan (the "Plan") under Rule
12b-1 of the Investment Company Act of 1940. The purpose of the Plan is to
permit the Advisor to compensate investment dealers and other persons involved
in servicing shareholder accounts for services provided and expenses incurred in
promoting the sale of shares of the Funds, reducing redemptions, or otherwise
maintaining or improving services provided to shareholders by such dealers or
other persons. The Plan provides for payments by the Advisor, which may come out
of the advisory fee, to dealers and other persons at the annual rate of up to
0.25% of each Fund's average net assets, subject to the authority of the
Trustees of the Fund, to reduce the amount of payments permitted under the Plan
or to suspend the Plan for such periods as they may determine. Subject to these
limitations, the Advisor shall determine the amount of such payments and the
purposes for which they are made.
Certain officers and trustees of the Fund are also officers and directors of the
Advisor.
4. INVESTMENT TRANSACTIONS
During the year ended March 31, 2000 purchases and proceeds from sales of
securities, other than short-term investments, aggregated:
<TABLE>
<CAPTION>
PURCHASES OF PROCEEDS FROM
FUND SECURITIES SALES OF SECURITIES
--------------------------------------- ---------------- --------------------
<S> <C> <C>
Short Duration Fund ................. $ 174,957,932 $196,534,894
Intermediate Duration Fund .......... 292,984,465 294,024,494
U.S. Equity Market Plus(R) Fund ..... 1,052,303,795 974,674,170
</TABLE>
The cost of securities held for Federal tax purposes, and the net unrealized
appreciation (depreciation) of investments, forward sales and futures contracts
is as follows:
<TABLE>
<CAPTION>
COST OF SECURITIES NET UNREALIZED
FOR FEDERAL TAX APPRECIATION DEPRECIATION APPRECIATION
FUND PURPOSES GROSS UNREALIZED GROSS UNREALIZED (DEPRECIATION)
----------------------------------- ------------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Short Duration Fund ............... $ 48,460,616(1) $ 557,956 $2,911,836 $ (2,353,880)
Intermediate Duration Fund ........ 46,622,457 44,528 1,832,903 (1,788,375)
U.S. Equity Market Plus(R) Fund ... 255,121,426 16,037,007 9,429,745 6,607,262
</TABLE>
---------
(1) Includes securities cost basis of $58,118,428 and forward sales proceeds of
$9,657,812.
<PAGE>
SMITH BREEDEN MUTUAL FUNDS
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
Subsequently, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," was
issued which deferred the effective date of SFAS No. 133 to all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Funds have elected to
adopt the provisions of SFAS No. 133 for the fiscal year ended March 31, 2000.
SFAS No. 133 supersedes SFAS No. 119 and No. 105, which required the disclosure
of average aggregate fair values and contract/notional values, respectively, of
derivative financial instruments for an entity that carries its assets at fair
value. The application of SFAS No. 133 does not have a material effect on the
Funds' financial statements.
6. SUBSEQUENT EVENTS
Smith Breeden Associates, Inc. (the "Advisor") has entered into an agreement
with the Managers Funds LLC ("Managers") whereby the Advisor would sell certain
of its assets related to its management of the Funds to Managers and Managers
would assume certain of the Advisor's contractual liabilities (the
"Transaction"). The Transaction shall only be consummated if certain approvals
are received from the Funds' shareholders at a special meeting to be held on
July 21, 2000. Such approvals include (1) the appointment of Managers as
investment advisor to each Fund; (2) the appointment of the Advisor as
sub-advisor to each Fund; and (3) the election of new Trustees to replace the
current Trustees of the Trusts.
In addition, upon completion of the Transaction, the Funds would be renamed as
follows: the Short Duration Fund would become the Managers Short Duration
Government Fund, the Intermediate Duration Fund would become the Managers
Intermediate Government Fund, and the U.S. Equity Market Plus(R) Fund would
become the Managers Equity 500 Plus Fund.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
--------------------------------------------------------------------------------
IMPORTANT TAX INFORMATION
Dear Shareholder:
None of the ordinary income distributions paid by the Fund to shareholders
during the fiscal year ended March 31, 2000 qualify for the dividends received
deduction for corporations. Additionally, the Fund paid a long-term capital gain
distribution of $20,532 to shareholders during the fiscal year ended March 31,
2000.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
BOARD OF TRUSTEES INVESTMENT ADVISOR
Douglas T. Breeden Smith Breeden Associates, Inc.
Michael J. Giarla 100 Europa Drive, Suite 200
Stephen M. Schaefer Chapel Hill, NC 27514
Myron S. Scholes
William F. Sharpe
TRANSFER AND DIVIDEND PAYING AGENT
PFPC, Inc.
OFFICERS 211 South Gulph Road
PO Box 61767
King of Prussia, PA 19406
CHAIRMAN
Douglas T. Breeden
DISTRIBUTOR
Provident Distributors, Inc
PRESIDENT 3200 Horizon Drive
Michael J. Giarla King of Prussia, PA 19406
VICE PRESIDENTS CUSTODIAN
Daniel C. Dektar (Smith Breeden Series Fund) Bank of New York
Timothy D. Rowe (Smith Breeden Series Fund) 48 Wall Street
John B. Sprow (Smith Breeden Trust) New York, NY 10286
TREASURER AND SECRETARY INDEPENDENT AUDITORS
Marianthe S. Mewkill Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
</TABLE>
For information about:
o Establishing an account
o Account procedures and status
o Exchanges
o Prices
CALL 1-800-221-3137 (TRANSFER AGENT)
For all other information about the Funds:
CALL 1-800-221-3138 (INVESTMENT ADVISOR)
This report must be preceded or accompanied by a prospectus. Unlike U.S.
Treasury securities they may hold, no mutual fund is itself directly insured by
the U.S. Government and no fixed rate of return is guaranteed. Futures and
options contracts may involve special risks that may not be suitable for all
investors. DFU: 5/99
