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)
ANNUAL REPORT
APRIL 30, 1998
This reporting period has experienced another interesting year for the interest
sensitive markets. From May 1, 1997 through April 30, 1998, the figures were
dramatic.
================================================================================
2YR 5YR 10Y 30YR
Security 3 MO Bill 1 YR Bill TSY TSY TSY TSY
- --------------------------------------------------------------------------------
Total Return* 5.2 5.21 6.33 9.19 12.33 19.125
================================================================================
* Includes capital gain (loss) and paid/accrued interest.
During 1997, the market first declined in price and then staged an impressive
advance as interest rates fell. The rate on the bellwether 30 year U.S.
Government bond was 6.85% at the beginning of the period and rose to 7.05% in
late May of '97. By the end of 1997, the yield had fallen to 6% and subsequently
to 5.79% in January of 1998.1 Our indicators cautioned us that the advance had
run its course and we liquidated all of our securities in January and shifted to
short term maturities including overnight Repurchase Agreements where we stayed
for the remainder of the fiscal year to avoid capital depreciation of the
portfolios. Those moves proved to be correct as interest rates once again rose.
Our actions held us in good stead with our peers. Most analytical services
ranked our Total Return Fund in the Top 10 of all U.S. Government Funds and the
Intermediate Term Fund ranked very favorably as well.
The fluctuation in rates was caused by factors which normally influence bond
markets: economic activity and anticipated inflation and by some that occur only
occasionally. In 1997, economic activity appeared to be progressing slowly, at a
2-3% growth rate. This did little to spark inflation fears and concerns that
investors might have for a tightening of short term interest rates by the
Federal Reserve. The other factor that affected prices at the end of 1997 was
that of the "Asian Crises". As the economic problems of some
- ---------------
* Source: Salomon Brothers Indices
<PAGE>
Southeast Asian nations became critical, a flight to quality caused the dollar
to strengthen and with it the subsequent rise in the price of U.S. Government
securities. If deep seated problems such as we have recently seen do not soon
get corrected, Southeast Asian problems will linger for quite some time. Add to
that situation the banking and recessionary problems in Japan, and a strong
dollar will persist well into 1998.
The Federal Reserve will have a difficult time this year and next should
inflation become problematical. The only tool it has to fight inflation is that
of raising short term interest rates. If they use that tool, it will strengthen
the dollar. As a result, U.S. goods will be more expensive overseas causing
fewer exports. The domino effect of a widening trade gap and possible U.S.
recession would result. Thus, should inflation occur, some tough decisions will
have to be made with possible grave consequences. Having said that, we
anticipate that the Federal Reserve will not raise short term rates in 1998.
PAUZE' U.S. GOVERNMENT TOTAL RETURN FUND
[GRAPHIC OMITTED]
Comparison of the change in value since April 1994 of a $10,000 investment in
the Pauze' U.S. Government Total Return Fund - No Load Class, Pauze' U.S.
Government Total Return Fund - Class "B" and the Lehman Government Bond Index.
4/30/98
-------
Pauze' U.S. Government Total Return Fund - No Load Class $11,567
Pauze' U.S. Government Total Return Fund - Class B 13,576
Lehman Government Bond Index 13,643
AVERAGE ANNUAL RETURNS
Annualized
1 Year Since Inception
------ ---------------
No Load Shares (Inception 01/01/94 18.91% 6.50%
Class "B" Shares (Inception 09-03-96) 14.41% 9.20%
Lehman Government Bond Index (Since 1/10/94) 11.05% 8.08%
<PAGE>
PAUZE' U.S. INTERMEDIATE BOND FUND
[GRAPHIC OMITTED]
Comparison of the change in value since April 1996 of a $10,000 investment in
the Pauze' U.S. Intermediate Bond Fund - No Load Class, Pauze' U.S. Government
Intermediate Bond Fund - Class "B" and the Lehman Gen. US Treas Intermediate
Index.
4/30/98
-------
Pauze' U.S. Government Intermediate Bond Fund - No Load Class $10,789
Pauze' U.S. Government Intermediate Bond Fund - Class B 10,371
Lehman Gen. US Treas Intermediate Index 11,238
AVERAGE ANNUAL RETURNS
Annualized
1 Year Since Inception
------ ---------------
No Load Shares (Inception 01/01/94) 8.01% 5.07%
Class "B" Shares (Inception 09-03-96) 3.38% 2.24%
Lehman Gen. US Treas
Intermediate Index (Since 1/10/94) 8.28% 7.15%
PAUZE' U.S. GOVERNMENT SHORT TERM BOND FUND
[GRAPHIC OMITTED]
Comparison of the change in value since April 1996 of a $10,000 investment in
the Pauze' U.S. Government Short Term Bond Fund - No Load Class, Pauze' U.S.
Government Short Term Bond Fund - Class "C" and the Lehman 1-3 Gov't. Index.
4/30/98
-------
Pauze' U.S. Government Short Term Bond Fund - No Load Class $10,513
Pauze' U.S. Government Short Term Bond Fund - Class B 10,285
Lehman 1-3 Gov't. Index 11,079
AVERAGE ANNUAL RETURNS
Annualized
1 Year Since Inception
------ ---------------
No Load Shares (Inception 01/01/94 3.76% 3.23%
Class "C" Shares (Inception 09-03-96) 2.93% 1.93%
Lehman 1-3 Gov't. Index (Since 1/10/94) 6.71% 6.45%
We thank all of our investors for their confidence in our abilities to manage
cash prudently and wisely.
Philip C. Pauze', President
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
PAUZE' FUNDS
HOUSTON, TEXAS
We have audited the accompanying statements of assets and liabilities of Pauze'
U.S. Government Intermediate Bond Fund, Pauze' U.S. Government Short-Term Bond
Fund and Pauze' U.S. Government Total Return Bond Fund, each a series of shares
of Pauze' Funds, including the schedules of investments, as of April 30, 1998,
and the related statements of operations and changes in net assets and the
financial highlights for the year then ended. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial statements and financial highlights presented for the year
ended April 30, 1997 and prior were audited by other auditors whose report dated
June 13, 1997, expressed an unqualified opinion on those statements.
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 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 April
30, 1998, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Pauze'
U.S. Government Intermediate Bond Fund, Pauze' U.S. Government Short-Term Bond
Fund and Pauze' U.S. Government Total Return Bond Fund as of April 30, 1998, the
results of their operations, the changes in their net assets and the financial
highlights for the year then ended in conformity with generally accepted
accounting principles.
PHILADELPHIA, PENNSYLVANIA
JUNE 11, 1998
<PAGE>
Pauze' Funds
Schedule of Investments
April 30, 1998
<TABLE>
<CAPTION>
Face
Amount Value
Pauze' U.S. Government Total Return Bond Fund ----------- -----------
- ---------------------------------------------
U.S. Government Obligations (96.58%):
<S> <C> <C> <C>
U.S. Treasury Bill, 4.73%, 05/07/98 $76,000,000 $75,937,300
----------- -----------
Total U. S. Government Obligations
(Cost $75,937,300) 75,937,300
-----------
U.S. Government Mortgage - Backed Obligation (3.08%):
GNMA Pool 8874, 6.50%, 05/20/26 2,372,729 2,425,022
----------- -----------
Total U.S. Government Mortgage - Backed Obligation
(Cost $2,425,375) 2,425,022
-----------
Total Investments (Cost $78,362,675) (99.66%) $78,362,322
Other assets in excess of liabilities (0.34%) 266,945
------- -----------
Net Assets (100.00%) $78,629,267
======= ===========
Pauze' U.S. Government Intermediate Term Bond Fund
- --------------------------------------------------
U.S. Treasury Obligations (72.93%):
U.S. Treasury Note, 5.75%, 11/15/00 2,300,000 2,307,907
----------- -----------
Total U.S. Treasury Obligations
(Cost $2,321,930) 2,307,907
-----------
U.S. Government Agency Obligations (23.82%):
Federal Home Loan Bank, 6.00%, 10/15/02 50,000 49,812
Federal Home Loan Bank, 6.10%, 12/24/07 700,000 703,826
----------- -----------
Total U.S. Government Agency Obligations 753,638
(Cost $749,652) -----------
Total Investments (Cost $3,071,582) (96.75%) $3,061,545
Other assets in excess of liabilities (3.25%) 102,752
------- -----------
Net Assets (100.00%) $3,164,297
======= ===========
Pauze' U.S. Government Short Term Bond Fund
- -------------------------------------------
U.S. Treasury Obligations (71.85%):
U.S. Treasury Note, 6.375%, 05/15/00 1,435,000 1,456,077
----------- -----------
Total U.S. Treasury Obligations
(Cost $1,449,754) 1,456,077
-----------
U.S. Government Agency Obligations (24.65%):
Federal Home Loan Bank, 6.06%, 01/05/01 400,000 399,934
Federal Home Loan Bank, 6.00%, 10/15/02 100,000 99,625
----------- -----------
Total U.S. Government Agency Obligations
(cost $499,937) 499,559
-----------
Total Investments (Cost $1,949,691) (96.50%) $1,955,636
Other assets in excess of liabilities (3.50%) 70,888
------- -----------
Net Assets (100.00%) $2,026,524
======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pauze' Funds
Statement of Assets and Liabilities
April 30, 1998
- --------------------------------------------------------------------------------
<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 market
value (cost $78,362,675, $3,071,582,
and $1,949,691,respectively) $ 78,362,322 $ 3,061,545 $ 1,955,636
Cash 587,448 32,079 21,140
Receivables:
Interest 12,852 76,206 50,044
Fund shares sold 12,280 303 --
Due From Advisor -- -- 3,185
Unamortized organizational costs 1,490 4,957 4,957
------------ ----------- -----------
Total assets 78,976,392 3,175,090 2,034,962
------------ ----------- -----------
Liabilities:
Accounts payable and accrued expenses 121,471 7,054 5,773
Dividends payable 225,654 3,739 2,665
------------ ----------- -----------
Total liabilities 347,125 10,793 8,438
------------ ----------- -----------
Net Assets $ 78,629,267 $ 3,164,297 $ 2,026,524
============ =========== ===========
Net assets:
Paid-in-capital 78,629,620 3,174,255 2,024,601
Undistributed net investment income -- 79 188
Accumulated net realized gain(loss) from investments -- -- (4,210)
Net unrealized appreciation (depreciation)
on investments (353) (10,037) 5,945
------------ ----------- -----------
Net assets applicable to outstanding
capital shares $ 78,629,267 $ 3,164,297 $ 2,026,524
============ =========== ===========
No load class:
Net assets $ 78,349,523 $ 2,722,279 $ 1,868,053
============ =========== ===========
Shares outstanding, no par value, unlimited
shares authorized 8,158,755 269,587 185,707
============ =========== ===========
Net asset value, offering and redemption
price per share $ 9.60 $ 10.10 $ 10.06
============ =========== ===========
Class B
Net assets $ 279,744 $ 442,018 --
============ =========== ===========
Shares outstanding, no par value, unlimited
shares authorized 26,881 43,659 --
============ =========== ===========
Net asset value and offering price per share $ 10.41 $ 10.12 --
============ =========== ===========
Minimum redemption price per share(net asset
value X 96.25%) $ 10.02 $ 9.74 --
============ =========== ===========
Class C:
Net assets $ 158,471
===========
Shares outstanding, no par value, unlimited
shares authorized 15,881
===========
Net asset value, offering and redemption
price per share $ 9.98
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pauze' Funds
Statement of Operations
Year Ended April 30, 1998
- --------------------------------------------------------------------------------
<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 $ 4,448,459 $ 153,484 $ 84,555
----------- ----------- -----------
Expenses:
Investment advisory fees 442,281 13,686 7,608
Administrative fees 211,584 8,104 4,480
Distribution fees- No load class 183,328 4,453 2,779
Distribution fees- Class B 3,824 9,561 1,127
Distribution fees- Class C 2,962
Accounting service fees 160,948 6,095 3,498
Transfer agent fees 4,813 1,570 1,523
Registration fees 15 5,015 5,115
Custodian fees 14,610 2,344 2,188
Legal fees 60,610 2,298 1,546
Audit fees 28,065 4,943 4,757
Trustees' fees and expenses 52,914 2,358 1,406
Amortization of organization expense 2,245 1,482 1,482
Insurance expense 7,198 446 165
Miscellaneous 41,939 4,373 3,020
----------- ----------- -----------
Total expenses 1,214,374 66,728 43,656
Expense reimbursement by advisor -- -- (3,185)
----------- ----------- -----------
Net expenses 1,214,374 66,728 40,471
----------- ----------- -----------
Net investment income 3,234,085 86,756 44,084
----------- ----------- -----------
Net realized and unrealized gain (loss) from investments:
Net realized gain on investments 7,968,571 81,096 2,407
Net change in unrealized appreciation
(depreciation) of investments 1,474,810 22,194 5,561
----------- ----------- -----------
Net realized and unrealized gain on investments 9,443,381 103,290 7,968
----------- ----------- -----------
Net increase in net assets resulting from
operations $12,677,466 $ 190,046 $ 52,052
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pauze' Funds
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
U.S. U.S. U.S. U.S.
Government Government Government Government
Total Return Total Return Intermediate Term Intermediate Term
Bond Fund Bond Fund Bond Fund Bond Fund
May 1, 1997 to May 1, 1996 to May 1, 1997 to September 3, 1996** to
April 30, 1998 April 30, 1997 April 30, 1998 April 30, 1997
-------------- -------------- -------------- --------------
From operations:
<S> <C> <C> <C> <C>
Net investment income $ 3,234,085 $ 3,342,491 $ 86,756 $ 59,111
Net realized gain (loss) on investments 7,968,571 (1,699,050) 81,096 (35,850)
Net change in unrealized appreciation
(depreciation) of investments 1,474,810 (1,004,308) 22,194 (32,231)
----------- ----------- ----------- -----------
Net increase (decrease) in net
assets resulting from operations 12,677,466 639,133 190,046 (8,970)
----------- ----------- ----------- -----------
Distribution to shareholders from:
Net investment income:
No load class (3,277,065) (3,353,991) (62,517) (14,004)
Class B (13,087) (20,582) (24,241) (45,026)
Class C -- -- (6,535) (3,036)
Net realized gain on investments:
No load class (6,241,068) -- (14,178) (491)
Class B (32,719) -- (3,695) (27,916)
Class C -- -- (1)
----------- ----------- ----------- -----------
Total distributions to shareholders (9,563,939) (3,374,573) (104,631) (87,437)
----------- ----------- ----------- -----------
Capital share transactions
- net (Note 4) 7,192,638 (235,361) 413,917 2,761,372
----------- ----------- ----------- -----------
Net increase (decrease) in net assets 10,306,165 (2,970,801) 499,332 2,664,965
Net assets at beginning of period 68,323,102 71,293,903 2,664,965 714,302
----------- ----------- ----------- -----------
Net assets at end of period $78,629,267 $68,323,102 $ 3,164,297 $ 2,664,965
=========== =========== =========== ===========
*Including undistributed net
investment income of: $ -- $ 11,477 $ 79 $ 80
=========== =========== =========== ===========
</TABLE>
U.S. U.S.
Government Government
Short Term Short Term
Bond Fund Bond Fund
May 1, 1997 to September 3, 1996
April 30, 1998 April 30, 1997
From operations:
Net investment income $ 44,084 $ 12,309
Net realized gain (loss) on investments 2,407 (5,636)
Net change in unrealized appreciation
(depreciation) of investments 5,561 384
----------- -----------
Net increase (decrease) in net
assets resulting from operations 52,052 7,057
----------- -----------
Distribution to shareholders from:
Net investment income:
No load class (35,290) (2,512)
Class B (2,258) (6,573)
Class C
Net realized gain on investments:
No load class (5) (60)
Class B (1) (914)
Class C
----------- -----------
Total distributions to shareholders (44,090) (13,095)
----------- -----------
Capital share transactions
- net (Note 4) 1,304,260 720,340
----------- -----------
Net increase (decrease) in net assets 1,312,222 714,302
Net assets at beginning of period
----------- -----------
Net assets at end of period $ 2,026,524 $ 714,302
=========== ===========
*Including undistributed net
investment income of: $ 188 $ 187
=========== ===========
** Commencement of operations
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pauze' Funds
Notes to Financial Statements
April 30, 1998
================================================================================
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
is not a subject of these financial statements. The three series included in
these financial statements are collectively referred to herein as the "Funds"
and individually as a "Fund".
Each of the three bond funds seek to provide investors with a high total return
(investment income plus or minus realized and unrealized capital appreciation
and depreciation) consistent with preservation of capital and liquidity.
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.
During the year ended April 30, 1998, the sole shareholder in the U.S.
Government Short Term Bond Fund Class B shares redeemed 17,736 shares of the
Fund, resulting in a complete liquidation of this class of shares.
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.
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 reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
<PAGE>
Pauze' Funds
Notes to Financial Statements
April 30, 1998
================================================================================
2. Significant Accounting Policies (continued)
-------------------------------------------
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.
SECURITY VALUATION. All securities (except securities with less than 60 days to
maturity and repurchase agreements) held by the Fund are valued at market value
based on an independent pricing service; and, in the event such service is not
available, at the mean between the most recent bid and ask prices as obtained
from one or more dealers that make markets in the securities. Short-term
investments with maturities of 60 days or less at the time of purchase
ordinarily are valued on the amortized cost. This involves valuing an instrument
at its cost initially and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. If the Advisor determines
that amortized cost does not reflect fair value of a security, the Board may
select an alternative method of valuing the security.
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
daily, 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 its taxable income to its shareholders. Accordingly, no
federal income tax provision is required.
<PAGE>
Pauze' Funds
Notes to Financial Statements
April 30, 1998
================================================================================
2. Significant Accounting Policies (continued)
-------------------------------------------
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 DISTRIBUTIONS 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
For the year ended April 30, 1998, the costs of purchases and proceeds from
sales/maturities of investments, excluding short-term investments, were
$133,784,067 and $206,907,793, respectively. All purchases and sales were U.S.
Government securities. At April 30, 1998, the unrealized depreciation of
investments for tax purposes was $353. Gross unrealized appreciation of
investments aggregated $ -0- and gross unrealized depreciation of investments
aggregated $353. The cost of investments for federal income tax purposes at
April 30, 1998 was $78,362,675.
Pauze' U.S. Government Intermediate Term Bond Fund
During the year ended April 30, 1998, the costs of purchases and proceeds from
sales/maturities of investments, excluding short-term investments, were
$8,165,959 and $6,631,536, respectively. All purchases and sales were U.S.
Government securities. At April 30, 1998, the unrealized depreciation of
investments for tax purposes was $10,037. Gross unrealized appreciation of
investments aggregated $4,143 and gross unrealized depreciation of investments
aggregated $14,180. The cost of investments for Federal income tax purposes at
April 30, 1998 was $3,071,582.
<PAGE>
Pauze' Funds
Notes to Financial Statements
April 30, 1998
================================================================================
3. Investment Transactions (continued)
-----------------------------------
Pauze' U.S. Government Short-Term Bond Fund
During the year ended April 30, 1998, the costs of purchases and proceeds from
sales/maturities of investments, excluding short-term investments, were
$2,649,336 and $705,856, respectively. All purchases and sales were U.S.
Government securities. At April 30, 1998, the unrealized appreciation of
investments for tax purposes was $5,945. Gross unrealized appreciation of
investments aggregated $6,324 and gross unrealized depreciation of investments
aggregated $379. The cost of investments for Federal income tax purposes at
April 30, 1998 was $1,949,691. Accumulated net realized losses on investment
transactions at April 30, 1998 amounted to $3,229; these carryforwards will
expire in 2005. The loss carryforwards will be reduced by future realized gains.
4. Capital Shares Transactions
---------------------------
The following is a summary of capital share activity for the period indicated:
<TABLE>
<CAPTION>
U.S. Government Total
Return Bond Fund
-----------------------------------------------------
Year Ended Year ended
April 30, 1998 April 30, 1997
----------------------- ---------------------
No load class Shares Amount Shares Amount
- ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 21,599,128 $ 218,408,588 274,554 $ 2,581,218
Reinvestment of dividends 762,166 7,358,710 249,153 2,335,712
Shares redeemed (21,608,748) (218,443,033) (593,038) (5,555,591)
----------- ------------- -------- -----------
Net increase
(decrease) 752,546 $ 7,324,265 (69,331) ($ 638,661)
=========== ============= ======== ===========
Class B Shares Amount Shares Amount
- ------- ------ ------ ------ ------
Shares sold 19,649 $ 202,254 132,139 $ 1,328,078
Reinvestment of dividends 4,292 44,826 627 6,252
Shares redeemed (36,416) (378,707) (93,410) (931,030)
----------- ------------- -------- -----------
Net increase
(decrease) (12,475) ($ 131,627) 39,356 $ 403,300
=========== ============= ======== ===========
</TABLE>
<PAGE>
Pauze' Funds
Notes to Financial Statements
April 30, 1998
================================================================================
4. Capital Shares Transactions (Continued)
---------------------------------------
<TABLE>
<CAPTION>
U.S. Government
Intermediate
Term Bond Fund
-----------------------------------------------------
Year ended September 3, 1996*
April 30, 1998 to April 30, 1997
----------------------- ---------------------
No load class Shares Amount Shares Amount
- ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 249,080 $ 2,527,103 130,180 $ 1,286,469
Reinvestment of dividends 4,098 41,049 866 8,467
Shares redeemed (111,774) (1,136,503) (2,863) (28,158)
----------- ------------- -------- -----------
Net increase 141,404 $ 1,431,649 128,183 $ 1,266,778
=========== ============= ======== ===========
Class B Shares Amount Shares Amount
- ------- ------ ------ ------ ------
Shares sold 5,326 $ 51,878 442,251 $ 4,437,187
Reinvestment of dividends 2,350 23,518 1,647 16,404
Shares redeemed (109,587) (1,093,128) (298,328) (2,958,997)
----------- ------------- -------- -----------
Net increase
(decrease) (101,911) ($ 1,017,732) 145,570 $ 1,494,594
=========== ============= ======== ===========
<CAPTION>
U.S. Government
Short Term
Bond Fund
----------------------------------------------------
Year ended September 3, 1996*
April 30, 1998 to April 30, 1997
---------------------- ---------------------
No load class Shares Amount Shares Amount
- ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 286,828 $ 2,885,235 34,121 $ 342,615
Reinvestment of dividends 1,799 18,035 178 1,781
Shares redeemed (126,558) (1,275,235) (10,661) (107,340)
Net increase 162,069 $ 1,628,035 23,638 $ 237,056
=========== ============= ======== ===========
</TABLE>
<PAGE>
Pauze' Funds
Notes to Financial Statements
April 30, 1998
================================================================================
4. Capital Shares Transactions (Continued)
---------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount Shares Amount
- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold -- -- 68,186 $ 681,860
Reinvestment of dividends -- -- -- --
Shares redeemed (17,736) (177,860) (40,450) (504,000)
----------- ------------- -------- -----------
Net increase
(decrease) (17,736) ($ 177,860) 27,736 $ 177,860
=========== ============= ======== ===========
Class C Shares Amount Shares Amount
- ------- ------ ------ ------ ------
Shares sold -- -- 48,069 $ 480,694
Reinvestment of dividends 657 6,537 305 3,036
Shares redeemed (15,230) (152,452) (17,920) (178,306)
----------- ------------- -------- -----------
Net increase
(decrease) (14,573) ($ 145,915) 30,454 $ 305,424
=========== ============= ======== ===========
</TABLE>
* Inception
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 from April 30, 1997 and good through
February 28, 1999, 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 an annual fee $196,000, payable in equal
installments which are allocated to each series based upon the relative net
assets of each series. The series also pay standard
<PAGE>
Pauze' Funds
Notes to Financial Statements
April 30, 1998
================================================================================
5. Transactions with the Manager and Affiliates (Continued)
--------------------------------------------------------
out-of-pocket costs to Declaration Service Company. The Funds' share of these
fees and expenses for the year ended April 30, 1998 were $211,584, $8,104 and
$4,480 for U.S. Government Total Return Bond Fund, U.S. Government Intermediate
Term Bond Fund and U.S. Government Short Term Bond Fund, respectively.
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 currently pays Declaration
Service Company an annual fee of $18 per account and a minimum annual fee of
$24,000 plus standard out-of-pocket expenses. The Funds' share of these fees and
expenses for the year ended April 30, 1998 were $4,813, $1,570 and $1,523 for
U.S. Government Total Return Bond Fund, U.S. Government Intermediate Term Bond
Fund and U.S. Government Short Term Bond Fund, respectively.
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 $178,000, payable in equal monthly installments which
are allocated to each series based upon the relative net assets of each series.
The series also pay standard out-of-pocket costs to Declaration Service Company.
The Funds' share of these fees and expenses for the year ended April 30, 1998,
were $160,948, $6,095 and $3,498 for U.S. Government Total Return Bond Fund,
U.S. Government Intermediate Term Bond Fund and U.S. Government Short Term Bond
Fund, respectively.
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 from the Trust. The Bond Funds' share of these expenses for the year
ended April 30, 1998 was $19,000.
For the year ended April 30, 1998, Declaration Service Company and Declaration
Distributors, Inc. earned $402,615 and $19,000, respectively, for the three
series included in these financial statements. On April 30, 1998, the liability
to Declaration Service Company and Declaration Distributors, Inc. was $33,391
and $1,587, respectively.
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 Declaration Service Company and Declaration Distributors Inc. (the
underwriter of the Trust) is a Trustee of the Trust. The officer receives no
compensation for these services.
<PAGE>
Pauze' Funds
Notes to Financial Statements
April 30, 1998
================================================================================
5. Transactions with the Manager and Affiliates (Continued)
--------------------------------------------------------
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 0.25%
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 for 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 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 year ended April 30, 1998. For the year ended April 30, 1998,
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.
