PAUZE
U.S. GOVERNMENT
TOTAL RETURN BOND FUND
------------------
PRESIDENT'S LETTER
APRIL 30, 1996
This reporting period has experienced a "roller-coaster ride" for the bond
market. From May 1, 1995 through April 30, 1996, the figures do not appear to
be dramatic.
----------------------------------------------------------------------
| Security | 3 MO | 1YR | 2YR | 5YR | 10Y | 30YR |
| | Bill | Bill | TSY | TSY | TSY | TSY |
|------------------|--------|-------|-------|-------|-------|--------|
| Total Return* | 6.12 | 5.81 | 4.30 | 4.07 | 8.03 | 10.53 |
----------------------------------------------------------------------
*Includes capital gain (loss) and paid/accrued interest.
Source: Technical Data
However, the figures do not illustrate what transpired during the year.
The following graph illustrates the volatility of this market during the 12
month period. There were really two phases of the market this year; Phase 1
ended in January, 1996 and Phase 2 completed the year.
[ID: GRAPHIC -- LINE CHART]
------------------------------------------------------------
PRICE OF 30 YR. U.S. TREASURY BOND FUND
Maturing 2/15/25
------------------------------------------------------------
Date 5/95 6/95 7/95 8/95 9/95 10/95
Price 112.531 112.938 109.844 111.594 112.969 116.000
------------------------------------------------------------
Date 11/95 12/95 1/96 2/96 3/96 4/96
Price 119.031 122.313 121.156 113.438 110.156 107.000
------------------------------------------------------------
The cause of the drop in rates and the rise in prices during Phase 1 was
mainly due to slow economic growth, globally as well as in the United States,
and the perceived low inflation that traditionally results from a slow-growth
economy. Money managers and individual investors alike poured funds into
longer term bonds as rates started to tumble. This fueled a rally that ran
its course in January.
The rise in rates thereafter was caused primarily by the fears of
perceived future inflation resulting from higher raw materials prices
(commodities), declining unemployment, and generally sound economic
1
<PAGE>
reports from the Federal Government. These factors, coupled with a bond
market that had a dramatic rise since November 1994 without serious pause or
correction, brought about a sell-off in long and intermediate term bonds.
The short rates generally stayed steady.
The Fund was well-positioned to take advantage of the rally in Phase 1.
Our proprietary indicators started giving us indications in November of 1994
that the devastating decline of 1994 had come to an end. We commenced
extending our maturities at that time. Following a dramatic price
appreciation in the first quarter of this calendar year, we anticipated a sell
off during the summer and shortened our average duration in the May-June time
frame. We extended durations again in August and capitalized on the Fall
rally.
In December 1995, our proprietary indicators gave us ample warning that a
turn in the market was near. We liquidated most of our long positions and
dramatically reduced the duration of the portfolio to under 6 months. We
carried that posture throughout the end of the fiscal year. In so doing, we
avoided most of the decline experienced by others. Our one year return, May
1, 1995 to April 30, 1996 was a respectable 8.08% counting the reinvestment of
dividends into additional shares. We anticipate that the Federal Reserve will
not raise short term rates prior to the 1996 election. On a historical basis,
the Fed is generally "friendly" to the incumbent party by maintaining steady
rates even if some indicators show a strengthening of the economy. However,
we will be paying close attention to our proprietary indicators for any
surprises that may be anticipated by the market.
We are very pleased and proud of the growth of the Fund during this past
year. With many other bond funds seeing net outflows of cash, our Fund gained
119% in total asset size during this period. We thank all of our investors
for their confidence in our a bilities to manage cash prudently and wisely.
Philip C. Pauze, President
[ID: GRAPHIC -- LINE CHART]
- ------------------------------------------------------------------------------
PAUZE U.S. GOVERNMENT
TOTAL RETURN BOND FUND
------------------------------------------------------------------------------
LEHMAN TREASURY PAUZE LIPPER GENERAL
BOND INDEX FUND U.S. TREASURY INDEX
------------------------------------------------------------------------------
1/94 10,092 10,090 10,113
4/94 9,578 9,429 9,388
7/94 9,719 9,511 9,505
10/94 9,580 9,316 9,216
1/95 9,797 9,606 9,515
4/95 10,200 9,878 9,923
7/95 10,657 10,099 10,450
10/95 11,052 10,549 10,963
1/96 11,456 10,819 11,386
4/96 11,052 10,676 10,769
Legend
- ------
Dashes Lehman Treasury Bond Index
Solid Line Lipper General U.S. Treasury Fund Index
Dotted Line Pauze U.S. Government Total Return Bond Fund
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------
| Average Annual Returns |
|------------------------------------------------------------------------|
| Inception 1/10/94 Inception 1 Year |
|------------------------------------------------------------------------|
| Pauze U.S. Government Total Return Bond Fund 2.94% 8.08% |
|------------------------------------------------------------------------|
| Lehman Treasury Bond Index 4.68% 8.35% |
|------------------------------------------------------------------------|
| Lipper General U.S. Treasury Fund Index 3.42% 8.53% |
- --------------------------------------------------------------------------
2
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT
TOTAL RETURN BOND FUND
--------------------
FINANCIAL STATEMENTS
APRIL 30, 1996
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
Pauze U.S. Government Total Return Bond Fund
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Pauze U.S.
Government Total Return Bond Fund (the "Fund") at April 30, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at April 30, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
/s/ PRICE WATERHOUSE LLP
Philadelphia, PA
June 13, 1996
4
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
SCHEDULE OF INVESTMENTS
APRIL 30, 1996
- ------------------------------------------------------------------------------
Face
Amount Value
---------- -----------
United States Government Obligations (46.44%):
United States Treasury Bond, 2/15/26, 6.00% ... 25,000,000 $22,234,375
-----------
United States Treasury Notes:
due 6/30/97, 5.625% ......................... 5,000,000 4,993,750
due 1/31/99, 5.00% ......................... 1,000,000 970,000
due 6/30/00, 5.875% ......................... 5,000,000 4,909,375
-----------
10,873,125
-----------
Total United States Government Obligations
(cost $33,578,355) ...................... 33,107,500
-----------
Repurchase Agreements (53.07%):
Paine Webber repurchase agreement, 5.33%, dated
April 30, 1996, collateralized by
$39,445,000 GNMA II Pool No. ARM-150,
due 11/20/25, 6.00%, repurchase date
5/1/96, repurchase value $37,845,602 ........ 37,840,000 37,840,000
-----------
Total investments (99.51%)
(cost $71,418,355) ...................... $70,947,500
===========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996
- ------------------------------------------------------------------------------
Assets:
Investment in securities, at current market value
(cost $33,578,355) .......................................... $33,107,500
Repurchase agreement .......................................... 37,840,000
-----------
Total investments ........................................... 70,947,500
Cash ............................................................ 3,411
Receivables:
Interest ...................................................... 524,077
From adviser .................................................. 7,905
Unamortized organization costs .................................. 5,990
Other assets .................................................... 5,349
-----------
Total assets ................................................ 71,494,232
Liabilities:
Payables:
Accounts payable and accrued expenses ......................... 103,397
Dividends payable ............................................. 96,932
-----------
Total liabilities ........................................... 200,329
-----------
Net assets .................................................. $71,293,903
===========
Net assets:
Paid-in capital ............................................... 71,676,512
Undistributed net investment income ........................... 43,561
Accumulated undistributed net realized gain from investments .. 44,685
Net unrealized depreciation on investments .................... (470,855)
-----------
Net assets applicable to outstanding capital shares ........... $71,293,903
===========
Capital shares outstanding, no par value, indefinite
shares authorized ............................................. 7,475,540
===========
Net asset value, redemption price and offering price per share .. $ 9.54
===========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
STATEMENT OF OPERATIONS
APRIL 30, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income ............................................... $ 3,864,788
-----------
Expenses:
Investment advisory fees ...................................... 238,478
Administrative fees ........................................... 45,733
Distribution fees ............................................. 166,403
Accounting service fees ....................................... 34,209
Transfer agent fees ........................................... 28,798
Registration fees ............................................. 23,012
Custodian fees ................................................ 4,070
Legal fees .................................................... 123,834
Audit fees .................................................... 29,071
Pricing fees .................................................. 15,397
Trustees' fees and expenses ................................... 43,177
Amortization of organization expense .......................... 2,246
Insurance expense ............................................. 10,668
Miscellaneous ................................................. 30,686
-----------
Total expenses .............................................. 795,782
-----------
Net investment income ....................................... 3,069,006
-----------
Net realized and unrealized gain from investments:
Net realized gain on investments sold ......................... 919,282
Net change in unrealized depreciation of investments .......... (138,497)
-----------
Net realized and unrealized gain on investments ............. 780,785
-----------
Net increase in net assets resulting from operations ............ $ 3,849,791
===========
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
APRIL 30, 1996
- ------------------------------------------------------------------------------
For the Ten months
year ended ended
April 30, 1996 April 30, 1995
-------------- --------------
From operations:
Net investment income ........................ $ 3,069,006 $ 787,000
Net realized gain from investments ........... 919,282 181,250
Net change in unrealized appreciation
(depreciation) of investments .............. (138,497) 140,197
------------ ------------
Net increase in net assets resulting
from operations .......................... 3,849,791 1,108,447
------------ ------------
Distributions to shareholders:
Distributions from net investment income ..... (3,024,980) (784,052)
Distributions from net realized gain on
investments sold ........................... (1,055,847)
------------ ------------
Total distributions to shareholders ........ (4,080,827) (784,052)
------------ ------------
Capital share transactions(a):
Net proceeds from sale of shares ............. 393,939,313 48,931,980
Receipts from shares issued on reinvestment
of distributions ........................... 3,669,620 534,341
Cost of shares redeemed ...................... (358,078,410) (31,457,670)
------------ ------------
Increase in net assets derived from capital
shares transactions ...................... 39,530,523 18,008,651
------------ ------------
Net increase in net assets ..................... 39,299,487 18,333,046
Net assets at beginning of period .............. 31,994,416 13,661,370
------------ ------------
Net assets at end of period (including
undistributed net investment income of
$43,561 and $(465), respectively) ........ $ 71,293,903 $ 31,994,416
============ ============
(a) Transactions in capital shares were:
Shares sold .............................. 40,064,946 5,249,510
Shares issued on reinvestment of
distribution ........................... 379,187 57,779
Shares redeemed .......................... (36,381,963) (3,370,711)
------------ ------------
Net increase in shares ..................... 4,062,170 1,936,578
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
FINANCIAL HIGHLIGHTS TABLE
APRIL 30, 1996
- ------------------------------------------------------------------------------
For a capital share outstanding throughout each period:
May 1, 1995 July 1, 1994 January 10, 1994+
to to to
April 30, 1996 April 30, 1995 June 30, 1994
-------------- -------------- ---------------
Net asset value, beginning
of period ............... $ 9.37 $ 9.25 $ 10.00
------- ------- -------
Net investment income ..... .44 .35 .14
Net realized and unrealized
gain (loss) on
investments ............. .31 .12* (.75)*
------- ------- -------
Total from investment
operations .............. .75 .47 (.61)
------- ------- -------
Less distributions
to shareholders:
Net investment income ... (.44) (.35) (.14)
Net realized gain on
investments sold ... (.14)
------- ------- -------
Total distributions ....... (.58) (.35) (.14)
------- ------- -------
Net asset value, end of
period .................. $ 9.54 $ 9.37 $ 9.25
======= ======= =======
Total investment return ... 8.08% 5.21% (6.11)%
Ratio/Supplemental data:
Net assets, end of period
(in thousands) ........ $71,294 $31,994 $13,661
Ratio of expenses to
average net assets .... 1.23% 1.50%** 1.50%**
Ratio of net income to
average net assets .... 4.74% 4.87%** 4.06%**
Portfolio turnover rate.. 228.03% 168.90% 0.00%
- -----------------
+Date of commencement of operations.
*Net of expense reimbursements and fee waivers of $.02 and $.05 per share for
1995 and 1994, respectively.
**Ratios are annualized. The expense ratio is net of fee waivers. Had such
reimbursements not been made, the annualized expense ratio would have been
1.66% and 3.14% for 1995 and 1994, respectively, and the net annualized
investment income would have been 4.70% and 2.42% for 1995 and 1994,
respectively.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996
- ------------------------------------------------------------------------------
1. Organization
Pauze Funds (formerly Pauze/Swanson United Services Funds) (the "Trust") is
a diversified, open-end management investment company registered under the
Investment Company Act of 1940, as amended. The Trust was organized as a
Massachusetts business trust on October 15, 1993, with operations
commencing on January 10, 1994. The Pauze U.S. Government Total Return
Bond Fund (the "Fund"), a separate Fund of the Trust, commenced operations
on January 10, 1994. The initial capital of the Fund was contributed by a
Trustee on December 31, 1993.
On June 12, 1995, the Trustees of the Fund voted to change the Fund's
fiscal year end from June 30 to April 30.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Security Valuation. Investment securities which are listed on a securities
exchange for which market quotations are readily available are valued at
the mean of the last quoted bid-and-asked prices for such securities.
Unlisted securities for which market quotations are readily available are
valued at the most recent quoted bid price. Debt obligations sixty days or
less remaining until maturity are valued at amortized cost which
approximates market value.
Securities Transactions and Related Investment Income. Securities
transactions are accounted for on a trade date basis. Realized gain (loss)
from security transactions is calculated on the identified cost basis.
Interest income is accrued as earned. Market discounts on United States
Treasury Notes and Bonds are amortized on a straight-line basis from
acquisition date to maturity date. Premiums and original issue discount on
United States Treasury Notes and Bonds are amortized on a yield-to-maturity
basis.
Repurchase Agreements. The Fund's policy is for the custodian to receive
delivery of the underlying securities used to collateralize the repurchase
agreements in an amount at least equal to 102% of the resale price. In the
event of default of the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Provisions of each agreement require that the market value of
the collateral is sufficient to pay principal and interest; however, in the
event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
Federal Income Taxes. It is the intention of the Fund to continue to
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and to distribute all of its taxable and tax-exempt
income to its shareholders. Accordingly, no federal income tax provision
is required.
Deferred Organizational Costs. Costs incurred by the Fund in connection
with its organization have been deferred and are being amortized using the
straight-line method over a five-year period beginning with the
commencement of operations. In the event that any of the initial shares of
the Fund are redeemed during the amortization period by any holder thereof,
the redemption proceeds will be reduced by any unamortized organization
expenses in the same proportion as the number of initial
10
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996
- ------------------------------------------------------------------------------
shares being redeemed bears to the number of initial shares outstanding at
the time of such redemption.
Dividends and Distribution to Shareholders. Dividends and distributions to
shareholders are recorded by the Fund on ex-dividend date. The Fund
generally pays dividends monthly and capital gains distributions, if any,
at least annually. The Fund distributes tax basis earnings in accordance
with the minimum distribution requirements of the Internal Revenue Code,
which may result in dividends or distributions in excess of financial
statement (book) earnings. Income dividends and capital gain distributions
are determined in accordance with income tax regulations which may differ
from generally accepted accounting principles.
3. Investment Transactions
For federal income tax purposes, the identified cost of investments owned
at April 30, 1996 was $71,418,355, net unrealized depreciation of
investments aggregated $470,855, gross unrealized appreciation of
investments aggregated $0 and gross unrealized depreciation of investments
aggregated $470,855.
During the year ended April 30, 1996, the cost of purchases and proceeds
from sales/maturities of investments, excluding short-term investments,
were $172,193,359 and $146,796,484, respectively.
4. Transactions with the Manager and Affiliates
Pauze, Swanson & Associates Investment Advisors, Inc. d/b/a/ Pauze Swanson
Capital Management Co. (the "Advisor" or the "Manager"), under an
Investment Advisory Agreement with the Trust in effect through October 31,
1996 furnishes management and investment advisory services and, subject to
the supervision of the Trust's Board of Trustees, directs the investments
of the Trust in accordance with the Fund's investment objectives, policies
and limitations.
The Advisory Agreement with the Trust provides for the Fund to pay the
Advisor a monthly management fee at the annual rate of 0.40% of the Fund's
average daily net assets (1/12 of 0.40% monthly) on the first $50 million
of average daily net assets, and 0.24% of the Fund's average daily net
assets (1/12 of 0.24% monthly) on net assets in excess of $50 million.
Effective June 1, 1996, the advisory fees changed to 0.60% on the first
$100 million of average daily net assets, 0.50% on the next $150 million,
0.45% on the next $250 million and 0.40% on average daily net assets
thereafter.
Declaration Service Company serves at the Administrator to the Fund
pursuant to an Administrative Services Agreement with the Fund. As
Administrator, Declaration Service Company is responsible for services such
as financial reporting, compliance monitoring and corporate management.
For the Services provided, the Administrator receives a monthly fee from
the Fund at an annual rate of $24,000 plus standard out-of-pocket expenses.
Declaration Service Company serves as transfer agent and dividend paying
agent of the Fund pursuant to a separate transfer agency and shareholder
services agreement with the Fund. For its services, the Fund pays
Declaration Service Company an annual fee of $18 per account and a minimum
annual fee of $18,000, plus standard out-of-pocket expenses.
Declaration Service Company determines the net asset value per share of
each Portfolio and provides accounting services to the Fund pursuant to an
Accounting Services Agreement with the Fund. For its services, Declaration
Service Company receives an annual fee of $22,000, plus standard
out-of-pocket expenses.
11
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996
- ------------------------------------------------------------------------------
The service agreements with Declaration Service Company commenced February
14, 1996. Prior to Declaration Service Company, another affiliated firm
provided administrative, transfer agency, bookkeeping and accounting
services at a comparable fee structure.
Independent Trustees are each paid an annual fee of $4,000 from the Fund,
plus $500 per meeting attended, plus travel expenses in connection with
meetings. Effective June 1, 1996, independent trustees are each paid an
annual fee of $10,000 from the Fund plus $500 per meeting and expense fees.
An officer of Declaration Service Company and Declaration Distributors
Inc. (the underwriter of the fund) is a Trustee of the Fund. Fees earned
by Declaration Service Company and Declaration Distributors Inc. between
February 14 and April 30, 1996 amounted to $21,662, of which $7,000 was
payable at April 30, 1996.
The Fund may pay a "servicing fee" of up to 0.25% of the Fund's average net
assets (1/12 of 0.25% monthly) to persons or institutions for performing
certain servicing functions for the Fund shareholders pursuant to a
distribution plan which it has adopted under the rule 12b-1 of the
Investment Company Act of 1940. These fees will be paid periodically and
will generally be based on a percentage of the value of Fund shares held by
the institutions' clients. The Fund recorded $166,403 in 12b-1 fees during
the fiscal year ended April 30, 1996, of which $21,149 was payable at
April 30, 1996.
Expenses incurred by the Fund exclusive of interest, taxes, and
extraordinary items, which exceed the lowest expense limitation imposed in
any state in which shares of the Trust are registered, are reimbursed by
the Manager up to the amount of the management fee. Such limitation is
currently 2.5% of the first $30 million of average net assets, 2% of the
next $70 million of average net assets and 1.5% of the remaining average
net assets. For the period ended April 30, 1996, no expenses were required
to be reimbursed due to such limitation.
At April 30, 1996, one shareholder held, of record, more than 5% of the
outstanding shares of the Fund, with a cumulative percentage of 81%.
12
