PAUZE` TOMBSTONE FUND
Semi-Annual Report
October 31, 1997
<PAGE>
Dear Investor:
Thank you for investing in the Pauze` Tombstone Fund, the first-ever mutual fund
that invests in stocks of the death care industry. In the past, the death care
industry has been largely overlooked by the investing public. Now, with the
introduction of the Pauze` Tombstone Fund, investors are focusing in on this
growth industry where U.S. and Canadian companies are leading the way towards
globalizing and consolidating what has been traditionally and
independent-funeral home dominated industry. Of the 22,500 funeral homes in the
U.S., about 17% are now owned by consolidators such as Service Corporation
International, the Loewen Group, Equity Corporation International, Carriage
Services, and Stewart Enterprises. Eager for more market share, these companies
are aggressively purchasing funeral and cemetery properties at a brisk pace. It
is our opinion that over the next twenty years, consolidators will own over 80%
of the funeral homes in the country. In addition, many of these companies are
now international in scope with operations in Europe, Australia, New Zealand,
and Mexico. Again, in our opinion, that over the next twenty years, these
companies and other North American companies like them, will dominate funeral
service globally. As the world now turns to U.S. companies for computer chips,
airplanes, personal computers, telecommunications, and energy, the world will
also be turning to North American companies for funeral service.
Aside from the expansion of services offered by the consolidators, there are
also the demographics of an aging "baby boomer" population in not only the
United States and Canada, but in most countries that were Allies during World
War II. This fact leads to strong markets overseas as well.
The performance of the stocks which comprise the Pauze` Tombstone Common Stock
Index (the "Index") and the Pauze` Tombstone Fund was disappointing during the
first six months of the Fund. Many stocks had seen great appreciation during
1996 and the first half of 1997 with some being up as much as 50% during that 18
month period. Many realized their perk prices for the term during June and July.
As you might expect after great gains, some profit taking by investors set in
causing prices to fall. Adding to decline was the "crash" of October.
Since the investment policy of the Fund was to emulate the Index, there was
little flexibility in attempting to take advantage of stocks which we felt would
outperform the market or on a defensive side, reduce exposure to those stocks
which we felt would underperform. A recent change in investment policy was
therefore necessary in order to better serve our investors. Now, with added
investment flexibility, performance should hopefully improve relative to the
overall stock market.
Again thank you for your trust and confidence in allowing us to serve your
investment needs.
Sincerely yours,
Philip C. Pauze`
President
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<TABLE>
<CAPTION>
Pauze` Tombstone Fund
Schedule of Investments
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Number of Market Percent of
Shares Value Net Assets
------ ----- ----------
Equity securities
<S> <C> <C> <C>
American Annuity Group, Inc. 2,480 $49,910 1.2%
Carriage Services, Inc. 3,465 58,039 1.4%
Equity Corporation International 4,555 92,808 2.2%
Hillenbrand Industries, Inc. 6,690 285,998 6.9%
The Loewen Group, Inc. 15,535 384,491 9.2%
Matthews International Corporation, Class A 1,290 54,825 1.3%
Rock of Ages Corporation 2,000 38,000 0.9%
Service Corporation International 67,785 2,063,206 49.6%
Stewart Enterprises, Inc., Class A 19,875 824,813 19.8%
The York Group, Inc. 2,470 57,428 1.4%
---------- -----
Sub-total $3,909,517 93.9%
Cash equivalents
Star Treasury Fund 176,524 4.2%
---------- -----
Total investments, cost ($ 4,349,758) $4,086,041 98.1%
========== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Pauze` Tombstone Fund
Statement of Assets and Liabilities
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Assets:
<S> <C>
Investment in securities, at current market value (cost $ 4,349,758) $4,086,041
Cash 9,832
Receivables:
Subscriptions for shares 32,195
Interest 384
Dividends 110
Due from Adviser 5,141
Unamortized organization costs 17,928
Prepaid expenses 32,750
----------
Total assets 4,184,381
----------
Liabilities:
Payables:
Redemptions of shares 10,000
Accrued expenses 13,063
----------
Total liabilities 23,063
----------
Net assets $4,161,318
==========
Net assets:
Paid-in-capital 4,486,620
Undistributed net investment income (loss) (27,184)
Accumulated net realized loss from investments (34,401)
Net unrealized appreciation (depreciation) on investments (263,717)
----------
Net assets applicable to outstanding capital shares $4,161,318
==========
Class A:
Net assets $1,262,845
----------
Shares outstanding, no par value, unlimited shares authorized 139,214
----------
Net asset value and redemption price per share $9.07
==========
Offering price per share $9.42
==========
Class B:
Net assets $2,898,473
----------
Shares outstanding, no par value, unlimited shares authorized 320,454
----------
Net asset value and redemption price per share $9.04
==========
Offering price per share $9.04
==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Pauze` Tombstone Fund
Statement of Operations
for the six month period ended October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Net investment income:
Interest income $4,343
Dividend income 9,633
---------
Net investment income 13,976
---------
Expenses:
Investment advisory fees 5,051
Administrative fees 4,624
Distribution fees- Class A 980
Distribution fees- Class B 9,372
Accounting service fees 3,518
Transfer agent fees 4,984
Registration fees 7,623
Custodian fees 725
Professional fees 5,480
Trustees' fees and expenses 1,107
Amortization of organization expense 1,997
Insurance expense 267
Miscellaneous 573
---------
Total expenses 46,301
Expense reimbursement by Adviser (5,141)
---------
Net expenses 41,160
---------
Net investment income (27,184)
---------
Net realized and unrealized loss from investments:
Net realized loss on investments (34,401)
Net change in unrealized appreciation
(depreciation) of investments (263,717)
---------
Net realized and unrealized loss on investments (298,118)
---------
Net increase (decrease) in net assets resulting
from operations ($325,302)
=========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pauze` Tombstone Fund
Statement of Changes in Net Assets
for the six month period ended October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
From operations:
Net investment income (loss) ($27,184)
Net realized gain (loss) from investments (34,401)
Net change in unrealized appreciation
(depreciation) of investments (263,717)
----------
Net increase (decrease) in net assets
resulting from operations (325,302)
----------
Distributions to shareholders:
None
From capital share transactions:
Net proceeds from sale of shares 4,514,708
Net asset value of shares issued to shareholders
in reinvestment of distributions 0
----------
4,514,708
Cost of shares redeemed (28,088)
----------
Increase (decrease) in net assets derived
from capital share transactions 4,486,620
----------
Net increase (decrease) in net assets 4,161,318
Net assets at beginning of period 0
----------
Net assets at end of period $4,161,318
==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Pauze` Tombstone Fund
Financial Highlights Table
For the six months ended October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
For a capital share outstanding throughout each period:
Class A Class B
------- -------
<S> <C> <C>
Net asset value, Beginning of period $10.00 $10.00
------ ------
Income from investment operations:
Net investment income (0.04) (0.07)
Net realized and unrealized gain (loss)
on investments (0.89) (0.89)
------ ------
Total from investment operations (0.93) (0.96)
------ ------
Less distributions to shareholders:
None
Net asset value, end of period $9.07 $9.04
====== ======
Total investment return (1) (18.6%) (19.2%)
Ratios/Supplemental Data:
Net assets, end of period $1,262,845 $2,898,473
Ratio of expenses to average net assets (1)(2) 2.92% 3.72%
Ratio of net investment income to average net assets (1)(2) (1.72%) (2.54%)
Portfolio turnover rate 35.2% 35.2%
</TABLE>
(1) Annualized
(2) Net investment income is net of expense reimbursements and fee waivers of
$.002 and $.002 per share for Class A and Class B, respectively. Had such
reimbursements not been made, the annualized expense ratio would have been
3.34% and 4.16% for Class A and Class B, respectively, and the annualized
net investment income ratio would have been (2.16%) and (2.98%) for Class A
and Class B respectively.
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAUZE` TOMBSTONE FUND
NOTES TO FINANCIAL STATEMENTS
October 31, 1997 (Unaudited)
(1) ORGANIZATION
Pauze` Tombstone Fund (the "Fund") is a non-diversified, open-end
management investment company, organized as a series of Pauze` Funds (the
"Trust") on January 29, 1997, and commenced operations on May 1, 1997. The
Trust was organized as a Massachusetts business trust on October 15, 1993.
There are currently three additional series within the Trust which are not
a subject of these financial statements.
The Fund offers its shares in two classes. Class A shares are subject to a
sales charge at the time of purchase. Class B shares are subject to
contingent deferred sales charge on redemptions made within seven years of
purchase.
The investment objective of the Fund is to provide shareholders with
long-term capital appreciation by investing primarily in all or a
representative group of equity securities comprising the Pauze` Tombstone
Common Stock Index, an index of publicly traded companies providing goods
and/or services to the death care sector of the economy.
The death care sector consists of companies whose primary business is
concentrated in one or more of three broad categories: (1) funeral
services, (2) cemetery services, (3) funeral and cemetery support goods and
services. Any regulatory, demographic or other economic factor particularly
affecting the death care industry could have a material adverse impact on
the Fund. The Fund is a non-diversified fund, and, as such, presents
substantially more investment risk and potential for volatility than a
mutual fund which is diversified.
(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
Securities which are traded on any exchange or on the NASDAQ
over-the-counter market are valued at the last quoted sale price.
Lacking a last sale price, a security is valued at its last bid price
except when, in the Advisor's opinion, the last bid price does not
accurately reflect the current value of the security. All other
securities for which over-the-counter market quotations are readily
available are valued at their last bid price. When market quotations
are not readily available, when the Advisor determines the last bid
price does not accurately reflect the current value or when restricted
securities are being valued, such securities are valued as determined
in good faith by the Advisor, subject to review of the Board of
Trustees of the Trust.
<PAGE>
PAUZE` TOMBSTONE FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
October 31, 1997 (Unaudited)
INCOME AND EXPENSES
Expenses directly attributable the Fund are charged to the Fund; other
expenses of the Trust are allocated proportionately among each of the
Funds within the Trust in relation to the net assets of each Fund or
on another reasonable basis. Expenses directly attributable to a
particular class are charged directly to such class. In calculating
net asset value per share of each class, investment income, realized
and unrealized gains and losses and expenses other than class specific
expenses are allocated daily to each class of shares based upon the
proportion of net assets of each class at the beginning of each day.
SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date (the date
the order to buy or sell is executed). Securities gains and losses are
calculated on the identified cost basis. Interest income is determined
on the basis of coupon interest accrued, adjusted for amortization of
premiums, and accretion of discount. Dividend income is recorded on
the ex-dividend date.
REPURCHASE AGREEMENTS
The Trust'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 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
of the Fund. 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 shares being
redeemed bears to the number of initial shares outstanding at the time
of such redemption.
<PAGE>
PAUZE` TOMBSTONE FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
October 31, 1997 (Unaudited)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends and distributions to shareholders are recorded by the Fund
on ex-dividend date. The Fund generally pays dividends quarterly 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 the period ended October 31, 1997, the cost of purchases and proceeds
from sales of investments, excluding short-term investments, were
$5,121,921 and $914,307, respectively. At October 31, 1997, the unrealized
depreciation of investments was ($263,717). Gross unrealized appreciation
of investments aggregated $94,503 and gross unrealized depreciation of
investments aggregated $357,770. The cost of investments for federal income
tax purposes at October 31, 1997 was $4,173,234.
(4) CAPITAL SHARES TRANSACTIONS
May 1, 1997
To
October 31, 1997
Class A Shares Amount
------ ------
Shares sold 142,125 $1,387,782
Reinvestment of dividends
Shares redeemed (2,911) (26,670)
------- ----------
Net Increase 139,214 $1,361,112
======= ==========
Class B Shares Amount
------ ------
Shares sold 320,609 $3,126,927
Reinvestment of dividends
Shares redeemed 155 1,418
------- ----------
Net increase 320,454 $3,125,109
======= ==========
(5) 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 April 30,
1998, furnishes management and investment advisory services to the Fund.
<PAGE>
PAUZE` TOMBSTONE FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
October 31, 1997 (Unaudited)
This agreement provides for a monthly management fee at the annual rate of
0.38% of the average daily net assets of the Fund.
Expenses were initially limited by the Advisor. For the period ended
October 31, 1997, the Advisor reimbursed $5,141 to the Fund.
Certain officers/trustees of the Fund are also officers and/or directors of
the Manager.
Declaration Service Company serves as the Administrator to the Trust
pursuant to an Administrative Services Agreement with the Trust. As
Administrator, Declaration Service Company is responsible for services such
as financial reporting, compliance monitoring and corporate management. For
the Services provided, the Administrator received a fee of $4,624 for the
period.
Declaration Service Company determines the net asset value per share of the
Fund and provides accounting services to the Fund pursuant to an Accounting
Services Agreement with the Trust. For its services, Declaration Service
Company received a fee of $3,518 for the period from the Fund.
Declaration Distributors, Inc., an affiliate of Declaration Service
Company, serves as the Trust agent in connection with the distribution of
Fund shares. For the services provided, Declaration Distributors, Inc.
received $537 for the period from the Fund.
An officer of Declaration Service Company and Declaration Distributors,
Inc. (the underwriter of the Trust) is an officer/ trustee of the Trust.
The officer receives no compensation for these services
The independent trustees are each paid an annual fee of $10,000 from the
Trust plus $500 per meeting and out-of-pocket expenses. The Fund's share of
these expenses for for the period was $1,107.
Distribution and Underwriting Fees
Class A Shares
Class A shares of the Fund are sold at net asset value plus a sales charge
and are redeemed at net asset value (without a contingent deferred sales
charge).
During the period ended October 31, 1997, Declaration Distributors, Inc.,
the Fund's Underwriter (the "Underwriter) received $46,820 from commissions
earned on sales of Class A shares of the Fund of which $4,633 was retained
by the Underwriter and the remaining $42,187 was reallowed to investment
dealers. Of this amount $21,116 was paid to GS2 Securities, Inc., of which
officers/ directors of the Advisor may be deemed to be affiliates.
<PAGE>
PAUZE` TOMBSTONE FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
October 31, 1997 (Unaudited)
Class B Shares
Class B shares of the Fund are sold at net asset value and are redeemed at
net asset value less a contingent deferred sales charge if redeemed within
seven years of purchase.
A contingent deferred sales charge is imposed upon redemption of certain
Class B shares of the Fund within seven years of the original purchase. The
charge is a declining percentage starting at 3.75% of the lesser of net
asset value of the shares redeemed or the total cost of such shares
Rule 12b-1 Distribution Plan
A plan of distribution has been adopted under Rule 12b-1 of the Investment
Company Act of 1940 for the Fund, with separate provisions for each class
of shares. The plan provides that the Fund will pay a servicing or Rule
12b-1 fee of 0.25% of the Fund's average net assets (1/12 of 0.25% monthly)
to the Advisor for its ongoing services to prospective and existing Fund
shareholders, including payments to persons or institutions for performing
certain servicing functions for Fund shareholders. These payments will
generally be based on a percentage of the value of Fund shares held by the
institution's clients. With respect to the Class B shares, the distribution
plan provides that the Fund will use Fund assets allocable to those shares
to pay the Advisor additional Rule 12b-1 fees of 0.75% of said assets (1/12
of 0.75% monthly) for its services and expenditures related to the
distribution of Class B shares, including fees paid to broker-dealers for
sales and promotional services. The fees received by the Advisor for either
class of shares during any year may be more or less than its costs of
providing distribution and shareholder services to the class of shares.
