PAUZE' FUNDS(TM)
Pauze' U.S. Government Total Return Bond Fund(TM)
Pauze' U.S. Government Intermediate Term Bond Fund(TM)
Pauze' U.S. Government Short Term Bond Fund(TM)
PRESIDENT'S LETTER
October 31, 1997
This reporting period has experienced a dramatic rise of all interest sensitive
securities markets. From May 1, 1997 through October 31, 1997, the figures speak
for themselves.
- --------------------------------------------------------------------------------
Security 3 MO 1YR 2YR 5YR 10Y 30YR
Bill Bill TSY TSY TSY TSY
- --------------------------------------------------------------------------------
Total 2.44% 2.89% 3.98% 6.39% 9.10% 14.07%
Return*
- --------------------------------------------------------------------------------
*Includes capital gain (loss) and paid/accrued interest.
As we stated in our last Annual Report, it was our opinion that the economic
fundamentals were in place for benign inflation in the United States and that,
as a result, interest rates would fall. Our opinion was contrary to the then
popular belief that interest rates would rise as a result of an overheating
economy. While we called for stable short term rates with the Federal Reserve
not raising rates in 1997, many were forecasting that the "Fed" would raise
rates as early as June and "certainly by the end of the year".
The news and statistics published by the Federal government during the past six
months have proven us right. Low inflation has prevailed causing the Fed to
stay-the-course on interest rates and not raise short term rates. This same low
inflation has caused longer term rates to fall and thereby create capital gains
across all maturities. All Pauze' Funds were well-positioned to take advantage
of the drop of rates with all funds posting substantial capital appreciation
during the period.
Going forward, it is our opinion that inflation will continue to be subdued with
the rate of inflation actually going down, not up. Our leading indicators which
track foreign currencies, gold shares, gold bullion, and the Commodity Research
Bureau Index ("CRB") all point to less inflation and lower rates. Our work
currently sees the U.S. dollar getting stronger. We see gold shares and gold
1
<PAGE>
bullion getting weaker. The CRB Index is giving us every indication of dropping
in price. The implication of this last event is that basic raw materials prices
should go down off-setting any inflationary pressure that may be caused by
falling unemployment. Therefore, we feel that the Fed will have little cause to
raise short term rates. In fact, with a strengthening of the U.S. dollar, there
might be incentive for the Fed to lower short term rates to off-set what could
be a dramatic rise in the dollar. Again, the Pauze' Funds are well-positioned to
take advantage of these events.
We thank all of our investors for your confidence in our abilities to manage
cash prudently and wisely.
Philip C. Pauze', President
2
<PAGE>
PAUZE' FUNDS(TM)
Pauze' U.S. Government Total Return Bond Fund(TM)
Pauze' U.S. Government Intermediate Term Bond Fund(TM)
Pauze' U.S. Government Short Term Bond Fund(TM)
FINANCIAL STATEMENTS
OCTOBER 31, 1997
3
<PAGE>
Pauze' U.S. Government Bond Funds
Schedule of Investments
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face
Amount Value
---------- ---------
Pauze' U.S. Government Total Return Bond Fund
- ---------------------------------------------
United States Government Obligations (95.95%):
<S> <C> <C>
United States Treasury Bond:
due 2/15/27, 6.625% 66,500,000 $70,510,815
-----------
Total United States Government Obligations
(cost $69,075,191) 70,510,815
-----------
Repurchase Agreement (2.99%):
Paine Webber repurchase agreement, repurchase date 11/3/97,
5.55%, dated October 31, 1997, collateralized by
$2,271,000 GNMA Pool No. 80076, due 5/20/27,
6.50%, repurchase value $2,246,494 2,196,000 2,196,000
-----------
Total Investments (98.94%) (cost $71,271,191) $72,706,815
===========
Pauze' U.S. Government Intermediate Term Bond Fund
- --------------------------------------------------
United States Government Obligations (93.40%):
United States Treasury Note. 05/15/07, 6.625% 2,000,000 2,001,532
-----------
Total Investments (93.40%) (cost $1,977,204) $2,001,532
===========
Pauze' U.S. Government Short Term Bond Fund
- -------------------------------------------
United States Government Obligations (93.25%):
United States Treasury Note. 05/15/00, 6.375% 1,450,000 1,474,016
-----------
Total Investments (93.25%) (cost $1,468,530) $1,474,016
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Pauze' U.S. Government Bond Funds
Statement of Assets and Liabilities
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
U.S. Government U.S.
Government Intermediate Government
Total Return Term Short Term
Bond Fund Bond Fund Bond Fund
------------- ------------ ------------
Assets:
<S> <C> <C> <C>
Investment in Securities, at current
market value (cost $69,075,191,
$1,977,204 and $1,468,530, respectively) $70,510,815 $2,001,532 $1,474,016
Repurchase agreement (cost $2,196,000, $0
and $0, respectively) 2,196,000 0 0
------------ ------------ ------------
Total Investments 72,706,815 2,001,532 1,474,016
Cash 14,784 103,618 64,425
Receivables:
Interest 934,140 58,149 42,702
Fund shares sold 50,533 0 0
Due From Advisor 0 0 3,185
Unamortized organizational costs 2,474 5,564 5,719
------------ ------------ ------------
Total assets 73,708,746 2,168,863 1,590,047
Liabilities:
Accounts payable and accrued expenses 80,010 24,311 5,624
Dividends payable 138,929 1,680 553
------------ ------------ ------------
Total liabilities 218,939 25,991 6,177
------------ ------------ ------------
Net Assets 73,489,807 2,142,872 1,583,870
============ ============ ============
Net assets:
Paid-in-capital 72,054,110 2,164,917 1,582,639
Undistributed net investment income 56,161 82 188
Accumulated net realized loss from investments (56,088) (46,455) (4,443)
Net unrealized appreciation (depreciation)
on investments 1,435,624 24,328 5,486
------------ ------------ ------------
Net assets applicable to outstanding
capital shares 73,489,807 2,142,872 1,583,870
No load class:
Net assets 73,058,145 1,293,332 1,099,191
Shares outstanding, no par value, unlimited
shares authorized 7,464,682 129,182 109,323
------------ ------------ ------------
Net asset value, offering and redemption
price per share 9.79 10.01 10.05
============ ============ ============
Class B
Net assets 431,662 849,540 178,000
Shares outstanding, no par value, unlimited
shares authorized 40,973 84,653 17,736
------------ ------------ ------------
Net asset value and offering price per share 10.54 10.04 10.04
============ ============ ============
Minimum redemption price per share (net asset
value X 96.25%) 10.14 9.66 9.66
============ ============ ============
Class C
Net assets 306,679
Shares outstanding, no par value, unlimited
shares authorized 30,747
------------
Net asset value, offering and redemption
price per share 9.97
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Pauze' U.S. Government Bond Funds
Statement of Operations
May 1, 1997 to October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
U.S. Government U.S.
Government Intermediate Government
Total Return Term Short Term
Bond Fund Bond Fund Bond Fund
------------ ------------ ------------
Net investment income:
<S> <C> <C> <C>
Interest income $2,292,716 $68,922 $32,414
------------ ------------ ------------
Expenses:
Investment advisory fees 212,246 6,068 2,987
Administrative fees 107,659 3,834 1,803
Distribution fees- No load class 87,972 1,586 887
Distribution fees- Class B 1,855 5,794 893
Distribution fees- Class C 0 0 1,529
Accounting service fees 81,895 2,916 1,371
Transfer agent fees 3,801 971 951
Registration fees 3,710 3,710 3,710
Custodian fees 8,165 655 524
Legal fees 23,004 819 385
Audit fees 8,581 4,466 4,449
Trustees' fees and expenses 26,535 917 431
Amortization of organization expense 1,132 747 747
Insurance expense 5,966 231 104
Miscellaneous 14,285 303 193
------------ ------------ ------------
Total expenses 586,806 33,017 20,964
Expense reimbursement by advisor 0 0 (3,185)
------------ ------------ ------------
Net expenses 586,806 33,017 17,779
------------ ------------ ------------
Net investment income 1,705,910 35,905 14,635
------------ ------------ ------------
Net realized and unrealized gain from investments:
Net realized gain on investments 2,635,121 13,871 2,362
Net change in unrealized appreciation
(depreciation) of investments 1,435,623 24,329 5,487
------------ ------------ ------------
Net realized and unrealized gain on investments 4,070,744 38,200 7,849
------------ ------------ ------------
Net increase in net assets resulting from
operations $5,776,654 $74,105 $22,484
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Pauze' U.S. Government Bond Funds
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
U.S. U.S. U.S.
Government Government Government
Total Return Total Return Intermediate Term
Bond Fund Bond Fund Bond Fund
---------------- -------------- ----------------
Six months ended Year ended Six months ended
October 31, 1997 April 30, 1997 October 31, 1997
---------------- -------------- ----------------
From operations:
<S> <C> <C> <C>
Net investment income $1,705,910 $3,342,491 $35,905
Net realized gain from investments 2,635,121 (1,699,050) 13,871
Net change in unrealized appreciation (depreciation)
of investments 1,435,623 (1,004,308) 24,329
----------- ----------- -----------
Net increase in net assets resulting
from operations 5,776,654 639,133 74,105
----------- ----------- -----------
Distribution to shareholders:
Distributions from net investment income:
No load class (1,754,549) (3,353,991) (21,482)
Class B (7,447) (20,582) (14,486)
Class C 0 0 0
Distributions from net realized gain on investments:
No load class (930,961) 0 (338)
Class B (5,113) 0 (221)
Class C 0 0 0
----------- ----------- -----------
Total distributions to shareholders (2,698,070) (3,374,573) (36,527)
----------- ----------- -----------
From capital share transactions:
Net proceeds from sale of shares 2,392,666 3,909,296 83,142
Net asset value of shares issued to shareholders
in reinvestment of distributions 1,902,236 2,341,964 23,903
----------- ----------- -----------
4,294,902 6,251,260 107,045
Cost of shares redeemed (3,691,606) (6,486,621) (699,938)
----------- ----------- -----------
Increase (decrease) in net assets derived
from capital share transactions 603,296 (235,361) (592,893)
----------- ----------- -----------
Net increase (decrease) in net assets 5,166,705 (2,970,801) (522,093)
Net assets at beginning of period 68,323,102 71,293,903 2,664,965
----------- ----------- -----------
Net assets at end of period (including undistributed
net investment income of $56,162, $11477,
$81, $81, $187 and $187, respectively) $73,489,807 $68,323,102 $2,142,872
=========== =========== ===========
<CAPTION>
(Unaudited)
U.S. U.S. U.S.
Government Government Government
Intermediate Term Short Term Short Term
Bond Fund Bond Fund Bond Fund
-------------- ---------------- --------------
Year ended Six months ended Year ended
April 30, 1997 October 31, 1997 April 30, 1997
-------------- ---------------- --------------
From operations:
<S> <C> <C> <C>
Net investment income $59,111 $14,635 $12,309
Net realized gain from investments (35,850) 2,362 (5,636)
Net change in unrealized appreciation (depreciation)
of investments (32,231) 5,487 384
----------- ----------- -----------
Net increase in net assets resulting
from operations (8,970) 22,484 7,057
----------- ----------- -----------
Distribution to shareholders:
Distributions from net investment income:
No load class (14,004) (10,269) (2,512)
Class B (45,026) (1,655) (6,573)
Class C 0 (2,901) (3,036)
Distributions from net realized gain on investments:
No load class (491) (5) (60)
Class B (27,916) (1) (914)
Class C 0 (1) 0
----------- ----------- -----------
Total distributions to shareholders (87,437) (14,832) (13,095)
----------- ----------- -----------
From capital share transactions:
Net proceeds from sale of shares 5,723,656 850,000 1,505,169
Net asset value of shares issued to shareholders
in reinvestment of distributions 24,871 12,302 4,817
----------- ----------- -----------
5,748,527 862,302 1,509,986
Cost of shares redeemed (2,987,155) 0 (789,646)
----------- ----------- -----------
Increase (decrease) in net assets derived
from capital share transactions 2,761,372 862,302 720,340
----------- ----------- -----------
Net increase (decrease) in net assets 2,664,965 869,568 714,302
Net assets at beginning of period 0 714,302 0
----------- ----------- -----------
Net assets at end of period (including undistributed
net investment income of $56,162, $11477,
$81, $81, $187 and $187, respectively) $2,664,965 $1,583,870 $714,302
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Pauze' U.S. Government Bond Funds
Financial Highlights Table
- --------------------------------------------------------------------------------
PAUZE' U.S. GOVERNMENT TOTAL RETURN BOND FUND
For a capital share outstanding throughout each period:
<TABLE>
<CAPTION>
No load Class Class B
---------------------------------- ------------------------------------
(Unaudited) (Unaudited)
Six months Year Six months September 3, 1996*
ended ended ended to
October 31, 1997 April 30, 1997 October 31, 1997 April 30, 1997
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.17 $9.54 $9.84 $10.00
--------- --------- --------- ---------
Income from investment operations:
Net investment income 0.25 0.45 0.20 0.27
Net realized and unrealized gain
on investments 0.74 (0.37) 0.83 (0.16)
--------- --------- --------- ---------
Total from investment operations 0.99 0.08 1.03 0.11
--------- --------- --------- ---------
Less Distributions to shareholders:
Net investment income (0.24) (0.45) (0.20) (0.27)
Net realized gain on investments sold (0.13) 0.00 (0.13) 0.00
--------- --------- --------- ---------
Total distributions (0.37) (0.45) (0.33) (0.27)
Net asset value, end of period 9.79 9.17 10.54 9.84
========= ========= ========= =========
Total investment return 10.80% 0.80% 10.47% 1.09%
Ratios/Supplemental Data:
Net assets, end of period (000's) $73,058 $67,936 $434 $387
Ratio of expenses to average net assets** 1.67%** 1.40% 2.48% 2.33%
Ratio of net investment income to
average net assets** 4.86%** 4.75% 4.08% 3.82%
Portfolio turnover rate 199.00% 202.01% 199.00% 76.45%
</TABLE>
* Date of commencement of operations
** Ratios for period of less than one year are annualized
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Pauze' U.S. Government Bond Funds
Financial Highlights Table
- --------------------------------------------------------------------------------
PAUZE' U.S. GOVERNMENT INTERMEDIATE TERM BOND FUND
For a capital share outstanding throughout each period:
<TABLE>
<CAPTION>
No load Class Class B
------------------------------------ -----------------------------------
(Unaudited) (Unaudited)
Six months October 10, 1996* Six months September 3, 1996*
ended to ended to
October 31, 1997 April 30, 1997 October 31, 1997 April 30, 1997
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.72 $10.00 $9.74 $10.00
--------- --------- --------- ---------
Income from investment operations:
Net investment income 0.17 0.18** 0.13 0.18**
Net realized and unrealized gain
on investments 0.29 (0.19) 0.30 (0.15)
--------- --------- --------- ---------
Total from investment operations 0.46 (0.01) 0.43 0.03
--------- --------- --------- ---------
Less Distributions to shareholders:
Net investment income (0.17) (0.18) (0.13) (0.17)
Net realized gain on investments sold 0.00 (0.09) 0.00 (0.12)
--------- --------- --------- ---------
Total distributions (0.17) (0.27) (0.13) (0.29)
Net asset value, end of period 10.01 9.72 10.04 9.74
========= ========= ========= =========
Total investment return 4.73% (.12%) 4.41% 0.32%
Ratios/Supplemental Data:
Net assets, end of period (000's) $1,293 $1,247 $850 $1,418
Ratio of expenses to average net assets*** 2.39% 2.47%** 3.16% 3.18**%
Ratio of net investment income to
average net assets*** 3.34% 3.23%** 2.60% 2.64**%
Portfolio turnover rate 203.74% 298.88% 203.74% 447.36%
</TABLE>
* Date of commencement of operations
** Net investment income is net of expense reimbursements of $.001 and $.001
per share for no load class and Class B for 1997, respectively. Had such
reimbursements not been made, the annualized expense ratio would have been
2.48% and 3.20% for the no load class and Class B for 1997, respectively,
and the net annualized investment income would have been 3.22% and 2.62%
for the No load class and Class B for 1997, respectively.
*** Ratios for period of less than one year are annualized
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Pauze' U.S. Government Bond Funds
Financial Highlights Table
- --------------------------------------------------------------------------------
PAUZE' U.S. GOVERNMENT SHORT TERM BOND FUND
For a capital share outstanding throughout each period:
<TABLE>
<CAPTION>
No load Class Class B
----------------------------------- ----------------------------------
(Unaudited) (Unaudited)
Six months September 30, 1996* Six months September 3, 1996*
ended to ended to
October 31, 1997 April 30, 1997 October 31, 1997 April 30, 1997
---------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.98 $10.00 $9.96 $10.00
--------- --------- --------- ---------
Income from investment operations:
Net investment income 0.13 0.14 0.09 0.13
Net realized and unrealized gain
on investments 0.07 (0.01) 0.08 (0.03)
--------- --------- --------- ---------
Total from investment operations 0.20 0.13 0.17 0.10
--------- --------- --------- ---------
Less Distributions to shareholders:
Net investment income (0.13) (0.14) (0.09) (0.13)
Net realized gain on investments sold 0.00 (0.01) 0.00 (0.01)
--------- --------- --------- ---------
Total distributions (0.13) (0.15) (0.09) (0.14)
Net asset value, end of period 10.05 9.98 10.04 9.96
========= ========= ========= =========
Total investment return 2.00% 1.25% 1.70% 1.05%
Ratios/Supplemental Data:
Net assets, end of period (000's) $1,099 $236 $178 $177
Ratio of expenses to average net assets*** 2.21% 3.03% 3.52% 3.85%
Ratio of net investment income to
average net assets** 2.34%* 2.58% 2.00% 1.96%
Portfolio turnover rate 121.50% 351.63% 121.50% 395.58%
</TABLE>
Class C
--------------------------------
(Unaudited)
Six months November 7, 1996*
ended to
October 31, 1997 April 30, 1997
---------------- --------------
Net asset value, beginning of period $9.91 $10.00
--------- ---------
Income from investment operations:
Net investment income 0.09 0.09
Net realized and unrealized gain
on investments 0.06 (0.10)
--------- ---------
Total from investment operations 0.15 (0.01)
--------- ---------
Less Distributions to shareholders:
Net investment income (0.09) (0.08)
Net realized gain on investments sold 0.00 0.00
--------- ---------
Total distributions (0.09) (0.08)
Net asset value, end of period 9.97 9.91
========= =========
Total investment return 1.51% (0.07%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $307 $302
Ratio of expenses to average net assets** 3.52% 3.53%
Ratio of net investment income to
average net assets** 2.00% 1.74%
Portfolio turnover rate 121.50% 255.61%
* Date of commencement of operations
** Net investment income is net of expense reimbursements of $.01,$.04 and
$.03 per share for no load class, Class B and Class C for 1997,
respectively. Had such reimbursements not been made, the annualized expense
ratio would have been 2.46%, 4.72% and 4.22% for the no load class, Class B
and Class C for 1997, respectively, and the net annualized investment
income would have been 2.58%, 3.19% and 2.70% for the No load class, Class
B and Class C for 1997, respectively.
*** Ratios for period of less than one year are annualized
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Pauze' U.S. Government Bond Funds
Notes to Financial Statements
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
1. Organization
Pauze' 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. There
are presently four series within the Trust: the Pauze' U.S. Government Total
Return Bond Fund (the "Total Return Fund"), which commenced operations on
January 10, 1994; the Pauze' U.S. Government Intermediate Term Bond Fund (the
"Intermediate Term Fund"), which commenced operations on September 3, 1996; the
Pauze' U.S. Government Short Term Bond Fund (the "Short Term Fund"), which
commenced operations on September 3, 1996; and the Pauze' Tombstone Fund, which
commenced operations on May 1, 1997. The Pauze' Tombstone Fund is not a subject
of these financial statements. The three Bond Funds are collectively referred to
herein as the "Funds" and individually as a "Fund."
Effective September 3, 1996, shares of each Fund are issued in classes. No load
shares are sold at net asset value without sales commission or redemption fees.
Class B shares are sold at net asset value and are subject to a contingent
deferred sales charge. Class C shares are sold at net asset value and are
subject to an on-going trail commission of .75% paid by the Fund.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Trust 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
11
<PAGE>
Pauze' U.S. Government Bond Funds
Notes to Financial Statements (Continued)
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
quotations are readily available are valued based on an independent pricing
service. In the event such service is not available, the securities are valued
at the mean of the last quoted bid-and-asked prices as obtained from one or more
dealers that make a market in such securities. Debt obligations with sixty days
or less remaining until maturity are valued at amortized cost which approximates
market value.
Income and Expenses. Expenses directly attributable to a Fund are charged to
that 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 each Fund to continue to qualify as
regulated investment companies under Subchapter M of the Internal Revenue Code
and to distribute all of their taxable income to its shareholders. Accordingly,
no federal income tax provision is required. If the Total Return Bond Fund's tax
year had ended on October 31, 1997, the Fund would not have qualified as a
regulated investment company and would therefore be subject to corporate income
tax. The Advisor believes that the Fund will comply at tax year end, April 30,
1998.
12
<PAGE>
Pauze' U.S. Government Bond Funds
Notes to Financial Statements (Continued)
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Deferred Organizational Costs. Costs incurred by the Trust in connection with
the organization of each of its funds 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 Funds. In the event that any of the initial
shares of the Trust 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.
Dividends and Distribution to Shareholders. Dividends and distributions to
shareholders are recorded by each Fund on ex-dividend date. The Funds generally
pay dividends monthly and capital gains distributions, if any, at least
annually. The Funds distribute 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
Pauze' U.S. Government Total Return Bond Fund
- ---------------------------------------------
During the six months ended October 31, 1997, the costs of purchases and
proceeds from sales/maturities of investments, excluding short-term investments,
were $131,102,303 and $132,260,094 respectively. All purchases and sales were
U.S. Government securities. At October 31, 1997, the unrealized appreciation of
investments was $1,435,624. Gross unrealized appreciation of investments
aggregated $1,435,624 and gross unrealized depreciation of investments
aggregated $-0-. Accumulated net realized losses on investment transactions at
October, 31, 1997 amounted to $56,088; the loss carryforwards will expire in
2005. The cost of investments for federal income tax purposes at October 31,
1997 was $69,075,191. To the extent future capital gains are offset by capital
loss carryforwards, such gains will generally not be distributed to
shareholders.
13
<PAGE>
Pauze' U.S. Government Bond Funds
Notes to Financial Statements (Continued)
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Pauze' U.S. Government Intermediate Term Bond Fund
- --------------------------------------------------
During the six months ended October 31, 1997, the costs of purchases and
proceeds from sales/maturities purchases and sales were U.S. Government
securities. At October 31, 1997, the unrealized appreciation of investments,
excluding short-term investments, were $4,791,928 and $4,288,599, respectively.
All purchases and sales were U.S. Government securities. At October 31, 1997,
the unrealized appreciation of investments was $24,328. Gross unrealized
appreciation of investments aggregated $24,329 and gross unrealized depreciation
of investments aggregated $ -0-. Accumulated net realized losses on investment
transactions at October 31, 1997 amounted to $46,455; the loss carryforwards
will expire in 2005. The cost of investments for Federal income tax purposes at
October 31, 1997 was $1,977,204. To the extent future capital gains are offset
by capital loss carryforwards, such gains will generally not be distributed to
shareholders.
Pauze' U.S. Government Short-Term Bond Fund
- -------------------------------------------
During the period ended October 31, 1997, the costs of purchases and proceeds
from sales/maturities of investments, excluding short-term investments, were
$2,149,398 and $1,336,481, respectively. All purchases and sales were U.S.
Government securities. At October 31, 1997, the unrealized appreciation of
investments was $5,486. Gross unrealized appreciation of investments aggregated
$5,486 and gross unrealized depreciation of investments aggregated $ -0-.
Accumulated net realized losses on investment transactions at October 31, 1997
amounted to $4,443; the loss carryforwards will expire in 2005. The cost of
investments for Federal income tax purposes at October 31, 1997 was $1,468,530.
To the extent future capital gains are offset by capital loss carryforwards,
such gains will generally not be distributed to shareholders.
4. Capital Share Transactions
<TABLE>
<CAPTION>
U.S. Government Total
Return Bond Fund
----------------
6 months ended Year ended
October 31, 1997 April 30, 1997
---------------- --------------
(Unaudited)
Shares Amount Shares Amount
------ ------ ------ ------
No load class
- ---------------------------------------
<S> <C> <C> <C> <C>
Shares Sold 232,795 $2,292,664 274,554 $2,581,218
Reinvestment of dividends 198,596 1,890,657 249,153 2,335,712
Share Redeemed (370,346) (3,595,609) (593,038) (5,555,591)
-------- ---------- -------- ----------
Net increase 61,045 $587,712 (69,331) ($638,661)
======== ========== ======== ==========
Class B
- ---------------------------------------
Shares Sold 9,662 100,002 132,139 1,328,078
Reinvestment of dividends 1,115 11,579 627 6,252
Share Redeemed (9,160) (95,997) (93,410) (931,030)
-------- ---------- -------- ----------
Net increase 1,617 $15,584 39,356 $403,300
======== ========== ======== ==========
</TABLE>
14
<PAGE>
Pauze' U.S. Government Bond Funds
Notes to Financial Statements (Continued)
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Government
Intermediate
Term Bond Fund
--------------
6 Months ended Year ended
October 31, 1997 April 30, 1997
---------------- --------------
(Unaudited)
Shares Amount Shares Amount
No load class ------ ------ ------ ------
- ---------------------------------------
<S> <C> <C> <C> <C>
Shares Sold 3,276 $32,064 130,180 $1,286,469
Reinvestment of dividends 1,119 13,522 866 8,467
Share Redeemed (3,670) (35,938) (2,863) (28,158)
-------- ---------- -------- ----------
Net increase 725 $9,648 128,183 $1,266,778
======== ========== ======== ==========
Class B
- ---------------------------------------
Shares Sold 5,326 $51,078 442,251 $4,437,187
Reinvestment of dividends 1,053 10,381 1,647 16,404
Share Redeemed (67,297) (664,000) (298,328) (2,958,997)
-------- ---------- -------- ----------
Net increase (60,918) ($602,541) 145,570 $1,494,594
======== ========== ======== ==========
<CAPTION>
U.S.
Government
Short Term
Bond Fund
---------
6 Months ended Year ended
October 31, 1997 April 30, 1997
---------------- --------------
(Unaudited)
Shares Amount Shares Amount
No load class ------ ------ ------ ------
- ---------------------------------------
<S> <C> <C> <C> <C>
Shares Sold 84,746 $850,000 34,121 $342,615
Reinvestment of dividends 939 9,400 178 1,781
Share Redeemed 0 0 (10,661) (107,340)
-------- ---------- -------- ----------
Net increase 85,685 $859,400 23,638 $237,056
======== ========== ======== ==========
Class B
- ---------------------------------------
Shares Sold 0 0 68,186 681,860
Reinvestment of dividends 0 0 0 0
Share Redeemed 0 0 (50,450) (504,000)
-------- ---------- -------- ----------
Net increase 0 $0 17,736 $177,860
======== ========== ======== ==========
Class C
- ---------------------------------------
Shares Sold 0 $0 48,069 $480,694
Reinvestment of dividends 292 2,902 305 3,036
Share Redeemed 0 0 (17,920) (178,306)
-------- ---------- -------- ----------
Net increase 292 $2,902 30,454 $305,424
======== ========== ======== ==========
</TABLE>
15
<PAGE>
Pauze' U.S. Government Bond Funds
Notes to Financial Statements (Continued)
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
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 and, subject to the supervision of
the Trust's Board of Trustees, directs the investments of the Trust in
accordance with the individual Fund's investment objectives, policies and
limitations.
This agreement provides for a monthly management fee at the annual rate of 0.60%
of the average daily net assets (1/12 of 0.60% monthly) on the first $100
million, 0.50% on the next $150 million, 0.45% on the next $250 million and
0.40% on net assets in excess of $500 million for the Total Return Fund. For the
Intermediate Term and Short Term Funds, the agreement provides for a monthly
management fee at the annual rate of 0.50% of the average daily net assets (1/12
of 0.50% monthly).
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 receives a monthly fee from the Trust at an annual
rate of $156,000, plus standard out-of-pocket expenses.
16
<PAGE>
Pauze' U.S. Government Bond Funds
Notes to Financial Statements (Continued)
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Declaration Service Company serves as transfer agent and dividend paying agent
of the Trust pursuant to a separate transfer agency and shareholder services
agreement with the Trust. For its services, the Trust pays Declaration Service
Company an annual fee of $18 per account and a minimum annual fee of $21,000,
plus standard out-of-pocket expenses. Declaration Service Company determines the
net asset value per share of each Fund and provides accounting services to the
Fund pursuant to an Accounting Services Agreement with the Trust. For its
services, Declaration Service Company receives an annual fee of $141,000, plus
standard out-of-pocket expenses.
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. receives an annual fee
of $20,000. For the six months ended October 31, 1997, Declaration Service
Company and Declaration Distributors, Inc. earned $197,298 and $10,000,
respectively. On October 31, 1997, the liability to Declaration Service Company
and Declaration Distributors, Inc. was $32,883 and $1,667, respectively.
Effective June 1, 1996, independent trustees are each paid an annual fee of
$10,000 from the Trust plus $500 per meeting and out-of-pocket expenses.
An officer of the Advisor is a Trustee of the Trust. An officer of Declaration
Service Company and Declaration Distributors Inc. (the underwriter of the Trust)
is a Trustee of the Trust. Neither officer receives compensation for their
services.
A separate plan of distribution has been adopted under Rule 12b-1 of the
Investment Company Act of 1940 for each Fund, with separate provisions for each
class of shares. Each plan provides that a Fund may pay a servicing or Rule
12b-1 fee of up to 0.25% of the Fund's average net assets (1/12 of monthly) to
persons or institutions for performing certain servicing functions for Fund
shareholders. These fees will be paid periodically and will generally be based
on a percentage of the value of Fund shares held by the institution's clients.
The distribution plans allow the Funds to pay off or reimburse expenditures in
connection with sales and promotional services related to the distribution of
Fund shares, including personal services provided to prospective and existing
Fund shareholders. With respect to Class B shares and Class C shares, the
distribution plans allow the use of Fund assets allocable to those shares to be
used to pay additional Rule
17
<PAGE>
Pauze' U.S. Government Bond Funds
Notes to Financial Statements (Continued)
October 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
12b-1 fees of up to 0.75% of said assets (1/12 of 0.75% monthly) to cover fees
paid to broker-dealers for sales and promotional services.
Expenses were limited by the Advisor to 3.5% of total average net assets for
each Fund for the six months ended October 31, 1997. For the six months ended
October 31, 1997, the Advisor reimbursed $3,185 to the Short Term Fund. The
expense limitation is voluntary and can be discontinued at any time by the
Advisor.
18
