SOLON SHORT DURATION GOVERNMENT FUNDS
1981 N. Broadway, Suite 325
Walnut Creek, California 94596
510-988-7110
Annual Report
For the fiscal year ended February 29, 1996
Dear Fellow Shareholder:
We are pleased to report on the performance of the Solon Short Duration
Government Funds for The Solon Funds' fiscal year ended February 29, 1996.
During the period the One Year Portfolio achieved a cumulative return of 7.09 %
and the Three Year Portfolio achieved a cumulative return of 8.73%. The Three
Year Portfolio is ranked first in its Lipper universe for the two year period
since its inception. Detail on Fund performance, indices and universes, follows.
The portfolio management team achieved this superior performance by pursuing
Solon's disciplined, consistent method which emphasizes liquidity, high credit
quality, and full analysis of all aspects of investment risk, especially:
o Interest rate risk, or the portfolio's exposure to changes in interest
rates, is controlled using portfolio effective duration, which gives the
most precise measure available of the amount by which a bond's price is
expected to change if interest rates rise or fall one percent.
o Credit risk, or the risk that obligations will not be repaid, is
controlled through investing only in very high quality bonds, mostly
issued by agencies or instrumentalities of the US government. Regardless
of the issuer, however, we do not buy a bond without a full analysis of
its creditworthiness.
o Liquidity risk, the risk that it will be difficult to sell a bond at an
expected price, is controlled through purchasing only highly liquid,
actively traded bonds, and then carefully watching price movement to be
sure that we can sell everything in Solon portfolios rapidly at the
carrying price. We must report to our board of Trustees any difference of
greater that 1% between a carrying price and the price at which we were
able to sell a bond. To date, we have not had such a variance.
o Derivative risk, the risk of changes in price and/or interest rate risk
due to changes in the allocation of cash flows, is controlled first and
foremost through the consistent, disciplined application of rigorous
analysis combined with market experience. Because we believe, however, in
the value of the objectivity an independent standard provides for our
shareholders' peace of mind, we also strictly adhere to the investment
guidelines established by federal banking regulators (the Federal
Financial Institutions Examination Council) which define "high risk"
derivatives. The Solon Funds are precluded by definition from investing
in any instrument that fails to satisfy these guidelines at purchase and
throughout the holding period.
At Solon, we control risk in other important ways. Specifically, we provide
detailed monthly reports including full portfolio composition, yield curve and
interest rate risk position, and related security level stress tests to all
shareholders and to anyone else who would like to see them. Please let us know
what we can do to serve you better. We appreciate your confidence in The Solon
Funds and Solon Asset Management, L.P. and look forward to another interesting
year.
Sincerely,
Deborah Hicks Midanek
Chairman
April 11, 1996
<PAGE>
FUND PERFORMANCE
Once again we offer our thanks to the portfolio management team for
extraordinary performance in challenging conditions. Presented below are a table
showing the Funds' cumulative total return for the year ended February 29, 1996
along with average annual returns since the Funds' March 1, 1994 inception. Also
provided is a graph showing each Fund's performance over time, expressed in
terms of the impact of the Funds' performance on an investment of $10,000 at
inception.
The Funds' performance shows the total return earned by each Fund: changes in
Fund share price, plus reinvestment of dividends (or income) and capital gains
or losses, earned by the Funds when they sell securities that have grown or
declined in value. Performance is shown in comparison to the Lehman Government
1-3 Year Index. The index is unmanaged and assumes reinvestment of all coupon
income.
Total Returns for the Period Ended February 29, 1996
Last
Twelve Average Annual
Months Since Inception
Solon Short Duration Government Funds:
One Year Portfolio 7.09% 6.10%
Three Year Portfolio 8.73% 6.40%
Lehman Government 1-3 Year Index 8.37% 5.78%
Solon Short Duration Government Funds Compared to Lehman Government 1-3 Year
Index
[GRAPHIC OMITTED]
<PAGE>
An interview with James I. Midanek, lead portfolio manager of The Solon Funds.
How did the Funds perform? We are very pleased with the performance of both the
One Year and the Three Year Portfolio's for this year. The Three Year
Portfolio's total return for the twelve months ended February 29, 1996 was 8.73%
and the One Year Portfolio's total return was 7.09%. The Lehman Government 1-3
Year Index had a return of 8.37% for the same time period.
The Solon Three Year Portfolio was ranked number one in its Lipper Universe for
its inception to date return. (the Lipper Short US Government Bond Fund Universe
is comprised of 90 funds).
What challenges did the funds face during the past year?
Although most pundits were bearish as the year began, interest rates fell
throughout the year with two year Treasury notes rates falling 1.43% and yields
on longer maturity Treasuries falling only slightly less. This steepening of the
yield curve coupled with the poor performance of mortgage backed securities
presented us with our greatest challenge. Nevertheless, The Solon Funds, which
focus on high quality, highly liquid securities, maintained superior performance
over the course of the year.
So in the face of a challenging year, how did you manage the Funds investments?
As rates fell, we increased the defensive nature of our holdings by increasing
our exposure to Treasuries, Adjustable Rate Mortgages ("ARM's") and cash while
reducing our exposure to Collateralized Mortgage Obligations ("CMO's"). This
prepared us for the turn in the market which began in February of 1996 when
rates began to rise. The increase in ARM, Treasury and cash exposures helped
protect us from the underperformance of the mortgage backed securities market
during 1995.
What do you see in the next year for both the fixed income market and the Funds?
Since February 1996, interest rates have risen nearly 100 basis points. While we
anticipated the possibility of rising rates, we believe that the severity of the
move is not justified by economic conditions. We do not believe that inflation
is a significant threat in the new year or that the rate of economic growth will
increase beyond current levels.
While at the end of 1995 the short end of the yield curve reflected an overly
enthusiastic view regarding the likelihood of a Federal Reserve rate cut in the
immediate future, current rates (almost 6% for the two year note) are overly
pessimistic. For the remainder of 1996, we expect rates to stabilize and then
fall.
How are the Funds positioned for the coming months?
As mentioned above, we have increased the Funds position in ARM's, Treasuries
and cash to defend against what was a hostile environment. Our outlook for the
rest of the year is quite optimistic, therefore we expect to extend the duration
and increase the mortgage backed securities holdings of the Funds while lowering
our cash position to take advantage of falling to stable rates and expected
excellent MBS performance.
<PAGE>
[Ernst & Young Letterhead]
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Trustees
Solon Short Duration Government Funds
We have audited the accompanying statement of assets and liabilities of Solon
Short Duration Government Funds (comprised of the One Year Portfolio and Three
Year Portfolio) (the Funds), including the schedules of investments, as of
February 29, 1996, and the related statements of operations for the year then
ended, and the statements of changes in net assets and financial highlights for
each of the two years in the period then ended. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the 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 as of
February 29, 1996, by correspondence with the custodian and brokers. 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 reasonably basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios comprising the Solon Short Duration Government
Funds at February 29, 1996 and the results of their operations, changes in their
net assets and their financial highlights for the periods indicated above in
conformity with generally accepted principles.
/s/ Ernst & Young LLP
March 29, 1996
<PAGE>
SOLON SHORT DURATION GOVERNMENT FUNDS:
ONE YEAR PORTFOLIO
SCHEDULE OF INVESTMENTS
February 29, 1996
Principal Value
Amount (Note 1)
- --------- --------
U.S. GOVERNMENT AGENCY SECURITIES-83.1%
Federal Home Loan Mortgage Corporation-20.6%
$10,000 5.300%due 3/5/96 $9,993
5,000 5.520%due 3/8/96 4,994
46,407 5.150%due 11/15/2006, REMIC 46,175
20,944 9.500%due 10/15/2019, REMIC 20,977
---------
$82,139
---------
Federal National Mortgage Association-42.0%
90,571 7.595%due 6/1/2018 93,260
71,384 7.892%due 11/1/2018 73,950
---------
167,210
---------
Government National Mortgage Association-10.0%
38,916 6.500%due 7/20/2025 39,598
---------
Federal Agriculture Mortgage Corporation Discount
Notes- 10.5%
42,000 5.130%due 3/15/96 41,910
---------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (Cost $330,750) $330,857
U.S. TREASURY OBLIGATIONS-15.0%
U.S. Treasury Notes:
59,000 7.250%due 11/30/1996 (Cost $59,628) 59,811
---------
TOTAL INVESTMENTS (Cost $390,378) 98.1% 390,668
OTHER ASSETS AND LIABILITIES (Net) 1.9% 7,398
--------- ---------
NET ASSETS 100.0% $398,066
======== =========
See accompanying notes
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SOLON SHORT DURATION GOVERNMENT FUNDS:
THREE YEAR PORTFOLIO
SCHEDULE OF INVESTMENTS
February 29, 1996
Principal Value
Amount (Note 1)
- --------- ----------
U.S. GOVERNMENT AGENCY SECURITIES-65.2%
Government National Mortgage Association-10.6%
$1,144,728 6.500%due 7/20/2025 $1,164,761
Federal National Mortgage Association-23.1%
516,000 6.750%due 11/25/2020 520,193
248,147 7.892%due 11/1/2018 257,065
206,652 7.500%due 1/25/1997, REMIC 205,942
612,218 9.000%due 4/1/1997, REMIC 650,864
257,475 5.000%due 9/25/2011, REMIC 256,349
358,348 7.595%due 6/1/2018 368,987
17,797 9.400%due 10/25/2017, REMIC 18,282
265,072 8.034%due 12/01/2017, REMIC 271,284
---------
2,548,966
---------
Federal Home Loan Mortgage Corp-31.5%
151,806 8.000%due 1/1/2026 155,696
880,000 6.500%due 3/1/2010, TBA 849,475
500,000 6.500%due 3/1/2010, TBA 495,469
565,000 8.000%due 3/1/2010, TBA 579,478
195,259 9.500%due 10/15/2019, REMIC 195,564
556,886 5.150%due 11/15/2006, REMIC 554,102
265,000 5.400%due 4/15/2014, REMIC 261,853
154,313 6.750%due 7/15/2003, REMIC 154,361
231,362 9.000%due 5/15/2020, REMIC 232,302
---------
3,478,300
---------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (Cost $7,190,7 7,192,027
U.S. TREASURY OBLIGATIONS-24.3%
U.S. Treasury Notes:
200,000 5.000%due 1/31/1998 198,437
1,355,000 7.750%due 12/31/1999 1,451,120
820,000 6.125%due 5/15/1998 830,762
200,000 5.000%due 2/15/1999 197,000
---------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $2,669,855) 2,677,319
REPURCHASE AGREEMENTS-27.3%
Repurchase agreement with Barclays de Zoette Wedd,
5.45%, dated 2/29/96, due 3/1/96 (Collateralized by
FNMA Strip, par value of $1,569,009,
1,000,000 due 1/1/24, value of $1,020,000 ) 1,000,000
Repurchase agreement with Paine Webber, 5.45%, dated
2/29/96, due 3/1/96 (Collateralized by FNMA, par value
of $2,170,000,
2,009,000 due 2/1/26, value of $ 2,043,185 ) 2,009,000
---------
TOTAL REPURCHASE AGREEMENTS (Cost $3,009,000) 3,009,000
TOTAL INVESTMENTS (Cost $12,869,618) 116.8% 12,878,346
OTHER ASSETS AND LIABILITIES (Net) (16.8%) (1,851,781)
-----------
NET ASSETS 100.0% $11,026,565
===== ===========
See accompanying notes
<PAGE>
THE SOLON FUNDS
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996
Solon Short Duration
Government Funds:
One Year Three Year
-------- ----------
ASSETS
Investment in securities, at value
(Identified cost $390,378 and
$12,869,618 respectively) $390,668 $12,878,346
Cash 460 896
Receivables:
Interest 2,816 70,781
Paydown and other receivables 4,288 529,920
Prepaid expenses 1,662 1,662
-------- ----------
Total Assets 399,893 13,481,605
======== ==========
LIABILITIES
Investment securities purchased 2,449,516
Payable to manager (Note 2) 1,662 3,114
Dividends payable 165 2,410
-------- ----------
Total Liabilities 1,827 2,455,040
-------- ----------
NET ASSETS $398,066 $11,026,565
======== ==========
Net Assets consist of:
Capital shares $396,561 $10,997,114
Accumulated undistributed net
investment income 98 0
Accumulated net realized gain
on investment transac 1,116 20,723
Net unrealized appreciation of
investments (Note 3) 290 8,728
-------- ----------
NET ASSETS $398,065 $11,026,565
======== ==========
Net Asset Value,
per share $10.03 $10.04
Capital shares outstanding $.01 per
Unlimited number of shares authorized 39,690 1,098,140
See accompanying notes
<PAGE>
THE SOLON FUNDS
STATEMENT OF OPERATIONS
For the Year Ended February 29, 1996
Solon Short Duration
Government Funds:
One Year Three Year
-------- ----------
INVESTMENT INCOME:
Interest $17,194 $580,067
Expenses:
Advisory fee (Note 2) 663 22,123
Custodian fee 15,041 31,016
Directors' fees & expenses
(Note 2) 4,500 4,500
Shareholder Services 3,657 30,810
Interest expense (Note 4) 11,053
Legal fee 8,238 8,238
Audit expense 6,775 9,775
Insurance expense 3,699 3,699
Other 1,277 7,286
-------- ----------
Total expenses 43,850 128,500
Expenses reimbursed by the
manager (Note 2) (43,850) (96,217)
-------- ----------
Total expenses - 32,283
-------- ----------
NET INVESTMENT INCOME 17,194 547,784
-------- ----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain 872 158,024
Unrealized appreciation (Note 3) 445 14,016
-------- ----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS: 1,317 172,040
-------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS: $18,511 $719,824
======== ==========
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
THE SOLON FUNDS
STATEMENT OF CHANGES IN NET ASSETS
Solon Short Duration Government Funds:
One Year Three Year
------------------------- ------------------------
For The Year Ended For The Year
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income $17,194 $6,402 $547,784 $535,397
Net realized gain (loss) from
investment 872 (44) 158,024 (167,698)
Net unrealized appreciation
(depreciation) of investments
(Note 3) 445 (155) 14,016 (5,288)
------- ------- -------- ---------
Net increase in net assets
resulting from 18,511 6,203 719,824 362,411
------- ------ -------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (17,017) (6,192) (530,162) (522,622)
-------- ------- --------- ---------
FROM CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from
capital share transactions
(Note 5) 251,905 144,656 3,772,091 7,225,023
------- ------- --------- ----------
NET INCREASE IN NET ASSETS 253,399 94,667 3,961,753 7,034,813
NET ASSETS:
Beginning of the year 144,667 50,000 7,064,812 50,000
-------- -------- ----------- -----------
End of year $398,066 $144,667 $11,026,565 $7,064,812
======== ======== =========== ===========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
THE SOLON FUNDS
FINANCIAL HIGHLIGHTS
Solon Short Duration Government Funds:
One Year Three Year
------------------------- ------------------------
For the Year Ended For the Year Ended
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $9.99 $10.00 $9.80 $10.00
Income from investment operations:
Net investment income 0.64 0.53 0.60 0.61
Net realized and unrealized gain (loss) o 0.05 (0.02) 0.23 (0.22)
Total from investment operations 0.69 0.51 0.83 0.39
Distributions:
Dividends from net investment income (0.65) (0.52) (0.59) (0.59)
Net asset value, end of period $10.03 $9.99 $10.04 $9.80
Total Return 7.09% 5.21% 8.73% 4.08%
Ratios/Supplemental Data:
Net assets, end of period $398,066 $144,667 $11,026,565 $7,064,812
Ratio of expenses to average net assets:
Before expense reimbursement of operati 16.47% 27.89% 1.45% 1.18%
After expense reimbursement of operatin 0.00% 0.00% 0.24% 0.15%
Interest expense 0.12% 0.04%
Ratio of net investment income to average 6.46% 5.74% 6.18% 6.21%
Portfolio turnover rate 251% 405%
Average debt outstanding during the perio $256,115 $75,604
Average shares outstanding during the per 901,238 895,472
Average debt per share during the period $0.28 $0.08
</TABLE>
* Average based upon amounts outstanding
at each month end.
<PAGE>
THE SOLON FUNDS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
a. ORGANIZATION. The Solon Funds are registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. As of February 29, 1996, The Solon Funds had two
series: Solon Short Duration Government Funds: One Year Portfolio (the
"One Year Portfolio") and Solon Short Duration Government Funds: Three
Year Portfolio (the "Three Year Portfolio") (each a "Fund" and
collectively the "Funds"). The Funds commenced operations on March 1,
1994. The costs of organization for the One Year Portfolio and the
Three Year Portfolio were assumed by Solon Asset Management, L.P. (the
"Manager").
b. SECURITY VALUATION. The Funds value portfolio securities at market
value, determined on the basis of last reported sales price, or if no
sales are reported, as is the case with most securities traded over the
counter, the mean between representative bid and asked quotations.
Short-term securities with maturities of 60 days or less are carried at
amortized cost, which approximates market value. Certain fixed income
securities for which market quotations are not readily available may be
valued, pursuant to guidelines established by the Board of Trustees,
with reference to fixed income securities whose prices are more readily
obtainable and whose durations are comparable to the securities being
valued. Subject to the foregoing, other securities for which market
quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
c. REPURCHASE AGREEMENTS. Securities which collateralize repurchase
agreements are held on the Funds' behalf by the Funds' custodian. The
Manager is responsible for determining that the value of the collateral
remains at least equal to the carrying amount of the repurchase
agreement.
d. REVERSE REPURCHASE AGREEMENTS. The Funds maintain cash, U.S. Government
Securities, or other liquid high grade debt instruments equal in value
to the Funds' obligations in a segregated account with the Funds'
custodian.
e. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Security transactions
are accounted for as of trade date. Realized gains and losses are
determined on the specific identified cost basis. Interest income
includes amortization of discounts and premiums. Securities purchased
on a when-issued or delayed delivery basis may be settled a month or
more after the trade date. Such securities are included in the
portfolio and are subject to market fluctuations during the period. On
the date of the commitment to purchase or sell, the Funds designate
specific assets with a current value at least equal to the amount of
the commitment to be used for settling the commitment.
<PAGE>
THE SOLON FUNDS
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
f. FEDERAL INCOME TAXES. The Funds comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
distribute taxable income and net realized gains sufficient to relieve
each Fund from federal income, excise, and state income taxes.
g. DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders are
recorded on the ex-dividend date. The Funds declare dividends daily and
pay them monthly. Distributions of any capital gains earned by a Fund
are distributed no less frequently than annually. Income and capital
gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles.
h. USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from such estimates.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
a. The Manager receives management fees at the annual rate of 0.25% of the
Fund's average net assets. The Manager performs administrative services
for the Funds for which the Manager receives compensation based upon an
annual rate of 0.07% of The Funds' average net assets. The Manager also
provides shareholder services to the Funds for annual fees of 0.25% of
the Fund's average net assets.
b. The Manager voluntarily agreed to absorb all the expenses of the One
Year Portfolio for the year ended February 29, 1996. The Manager
voluntarily agreed to limit the Three Year Portfolio's expenses,
excluding interest expense, to .24% of average net assets on an annual
basis. Reductions in fees are subject to recovery within the following
three years provided the Fund is able to effect such reimbursement and
remain in compliance with applicable expense limitations. Any of the
Manager's voluntary absorptions are also subject to recovery.
c. The Trust's Chairman and Chief Executive Officer is the sole
"affiliated person" as defined in the Investment Company Act. Each
Trustee who is not an "affiliated person" of the Trust receives an
annual retainer of $1,000 and a $500 fee for each meeting attended, as
well as reimbursement for expenses.
3. SECURITIES TRANSACTIONS:
a. Securities transactions (excluding short term securities) for the year
ended February 29, 1996, for the Three Year Portfolio were as follows:
Purchases: $25,872,953 Sales: $20,758,573
<PAGE>
THE SOLON FUNDS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
b. On February 29, 1996, the composition of unrealized appreciation and
depreciation for federal income tax purposes was as follows:
Net
Tax Basis Tax Basis Unrealized
Unrealized Unrealized Appreciation
Appreciation (Depreciation) (Depreciation)
------------ -------------- --------------
One Year Portfolio $ 669 ($ 379) $ 290
Three Year Portfolio $56,348 ($47,620) $8,728
c. At February 29,1996, the cost of investments for Federal income tax
purposes was the same as the cost for financial reporting purposes.
4. SHORT TERM BORROWINGS
For the year ended February 29, 1996, the maximum borrowings by the
Three Year Portfolio under reverse repurchase agreements amounted to
$1,327,625. Interest rates ranged from 2.50% to 6.00% during the
period.
5. TRANSACTIONS IN CAPITAL SHARES:
Transactions in capital shares were as follows:
For The Year Ended For The Year Ended
February 29,1996 February 28, 1995
---------------- -----------------
One Year Portfolio Shares Amount Shares Amount
------ ------ ------ ------
Shares Sold 24,084 $240,596 14,418 $144,079
Issued as Reinvestment
of Dividends 1,765 17,662 539 5,382
Shares Redeemed (635) (6,353) (481) (4,805)
Net increase 25,214 $251,905 14,476 $144,656
====== ======== ========= ========
Three Year Portfolio Shares Amount Shares Amount
------ ------ ------ ------
Shares Sold 340,414 $3,405,825 1,011,126 $10,054,133
Issued as Reinvestment
of Dividends 56,672 565,039 46,935 458,322
Shares Redeemed (19,715) (198,773) (337,292) (3,287,432)
Net increase 377,371 $3,772,091 720,769 $7,225,023
========= ========== ========== ===========
