<PAGE> 1
[1997 ANNUAL REPORT ADVISORY PORTFOLIOS LOGO]
[MAS FUNDS LOGO]
[MAS FUNDS LOGO]
<PAGE> 2
We are pleased to present the Annual Report for the Advisory Foreign Fixed
Income and Advisory Mortgage Portfolios of MAS Funds as of September 30, 1997.
TABLE OF CONTENTS
Portfolio Overview and Statement of Net Assets
<TABLE>
<S> <C>
Advisory Foreign Fixed Income
Portfolio............................. 1
Advisory Mortgage Portfolio.............. 5
Statement of Operations..................... 16
Statement of Changes in Net Assets.......... 17
Financial Highlights........................ 18
Notes to Financial Statements............... 20
Report of Independent Accountants........... 26
</TABLE>
THIS ANNUAL REPORT CONTAINS CERTAIN INVESTMENT RETURN INFORMATION. PAST
PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH EITHER MORE OR LESS THAN THEIR ORIGINAL COST.
THIS REPORT HAS BEEN PREPARED FOR SHAREHOLDERS AND MAY BE DISTRIBUTED TO OTHERS
ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 3
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
--
Miller Anderson & Sherrerd manages the Advisory Foreign Fixed Income Portfolio
as a vehicle for opportunistic foreign bond investments. The portfolio is
available only to private advisory clients of MAS or Morgan Stanley Asset
Management. By using the Portfolio instead of holding foreign fixed-income
securities directly, these clients may be able to benefit from some or all of
the following: (1) better diversification through ownership of a smaller share
of a larger number of holdings; (2) potentially enhanced performance resulting
from the ability to manage the foreign position on a broader scale; (3)
simplification of accounting as clients need only account for mutual fund shares
as opposed to individual securities, some of which are subject to withholding
taxes, fees, or other special treatment; (4) economies of scale in custodial
fees associated with holding foreign securities.
The Portfolio is actively managed by Miller Anderson & Sherrerd's global
fixed-income team, which makes strategic decisions about non-U.S. bond exposures
for client portfolios. All securities in the Portfolio have a credit quality
rating of A or better and derivatives may be used to represent country
investments or otherwise pursue portfolio strategy.
The Portfolio seeks to buy those foreign securities that will outperform U.S.
securities with the same duration. Interest-rate risk is not explicitly managed
in the Portfolio. Overall interest-rate risk is instead managed at the level of
the client's entire portfolio, of which the Advisory Foreign Fixed Income
Portfolio is only a part. If long-maturity foreign securities are more
attractive than long-maturity U.S. securities, the Portfolio will tend to have a
long maturity. Conversely, the Portfolio will tend to have a short maturity if
the best foreign values, relative to U.S. alternatives, are concentrated in the
front end of the yield curve.
Investments in the Portfolio reflect careful comparisons of relative interest
rates, yield curve slopes, and currency values. Historically, it has been
attractive to invest in those countries when a country offers higher real
interest rates than those available in other countries. In selecting
investments, however, MAS separates the currency decision from the country
decision and the Portfolio will hedge exposures to those foreign currencies that
are judged to be overvalued and likely to depreciate.
During the past year, the Portfolio benefited from its investments in Canadian
and European bonds as interest-rate movements for these countries were more
favorable than for bonds in the United States. In addition, the decision to
hedge exposure to European currencies protected the Portfolio from the
depreciation of these currencies versus the U.S. dollar over the course of the
year.
1
<PAGE> 4
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
The Advisory Foreign Fixed Income Portfolio is managed as a component of a
diversified portfolio and investment results from the Portfolio should not be
analyzed on a stand-alone basis. Results are presented in this report to comply
with Securities and Exchange Commission requirements for shareholder
reporting.--
The Portfolio is available only to private advisory clients of Miller Anderson &
Sherrerd and Morgan Stanley Asset Management.
ADVISORY FOREIGN
Growth of a $1 Million Dollar Investment
Since Inception
<TABLE>
<CAPTION>
Measurement
Period
(Fiscal Year MAS
Covered) Advisory Salomon
Foreign Broad
<S> <C> <C> <C>
Oct-94 1000 1000 10/7/94
Dec-94 1017 1007 12/31/94
Mar-95 1037 1058 3/31/95
Jun-95 1083 1123 6/30/95
Sep-95 1121 1144 9/30/95
Dec-95 1195 1194 12/31/95
Mar-96 1200 1173 3/31/96
Jun-96 1235 1179 6/30/96
Sep-96 1306 1201 9/30/96
Dec-96 1374 1237 12/31/96
Mar-97 1384 1231 3/31/97
Jun-97 1448 1275 6/30/97
Sep-97 1490 1318 9/30/97
</TABLE>
AVERAGE ANNUAL RETURNS
ENDED 9/30/97*
<TABLE>
<CAPTION>
MAS ADVISORY SALOMON BROAD
FOREIGN INDEX
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 14.08% 9.72%
Since Inception 14.31% 9.69%
</TABLE>
MAS Funds returns are net of all fees. Returns represent past
performance and are not indicative of future results.
The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth
either more or less than their original cost.
The Advisor has voluntarily agreed to waive its advisory fees and
reimburse certain expenses to the extent necessary to keep total annual
operating expenses for the Advisory Foreign Fixed Income Portfolio from
exceeding 0.15% of average daily net assets. Returns presented include
the effects of these waivers and reimbursements. If such waivers and
reimbursements had not been made, the actual returns would have been
lower.
* The Advisory Foreign Fixed Income Portfolio commenced operations on
10/7/94. All returns are compared to the Salomon Broad Investment
Grade Index, an unmanaged market index.
2
<PAGE> 5
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED
INCOME PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (45.2%)
<TABLE>
<CAPTION>
- ------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C> <C>
BRITISH POUND (3.9%)
United Kingdom Treasury
Bill
8.50%, 7/16/07 AAA GBP 2,000 $ 3,684
- ------------------------------------------------------
DANISH KRONE (12.7%)
Kingdom of Denmark
8.00%, 3/15/06 AA+ DKK 70,400 11,966
- ------------------------------------------------------
FRENCH FRANC (2.1%)
+ Government of France
O.A.T.
7.50%, 4/25/05 Aaa FRF 10,000 1,922
- ------------------------------------------------------
GERMAN MARK (18.9%)
(dd) Government of Germany
7.375%, 1/3/05 AAA DEM 27,900 17,736
- ------------------------------------------------------
NETHERLANDS GUILDER (3.9%)
Netherlands Government
6.00%, 1/15/06 AAA NLG 7,000 3,655
- ------------------------------------------------------
SPANISH PESETA (3.7%)
+ Spanish Government
11.30%, 1/15/02 Aa2 ESP 425,000 3,498
- ------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $41,931) 42,461
- ------------------------------------------------------
CASH EQUIVALENTS (52.6%)
- ------------------------------------------------------
COMMERCIAL PAPER (30.3%)
Asset Securitization Corp.
5.55%, 10/27/97 $2,000 1,992
Atlantic Asset Securitization
Corp.
5.60%, 10/16/97 2,000 1,995
Cargill Financial Services
5.52%, 10/20/97 2,000 1,994
Dow Jones & Co., Inc.
5.52%, 10/14/97 2,000 1,996
Daimler-Benz AG
5.57%, 10/7/97 2,000 1,998
Ford Motor Credit Corp.
5.54%, 10/7/97 2,000 1,998
General Electric Capital Corp.
5.53%, 10/14/97 2,035 2,031
Metlife Funding, Inc.
5.50%, 10/29/97 2,000 1,991
National Rural Utilities
Cooperative Finance Corp.
5.52%, 10/23/97 $2,200 $ 2,193
Transamerica Financial Corp.
5.51%, 10/30/97 2,000 1,991
Toys 'R' Us, Inc.
5.50%, 10/27/97 2,000 1,992
UBS Finance Inc.
5.58%, 10/6/97 2,300 2,298
USAA Capital Corp.
5.53%, 10/9/97 2,000 1,998
Xerox Credit Corp.
5.55%, 10/9/97 2,000 1,998
- ------------------------------------------------------
GROUP TOTAL 28,465
- ------------------------------------------------------
DISCOUNT NOTES (8.1%)
Federal Home Loan Mortgage
Corporation
10/3/97 4,000 3,999
Federal National Mortgage
Association
10/17/97 3,600 3,591
- ------------------------------------------------------
GROUP TOTAL 7,590
- ------------------------------------------------------
REPURCHASE AGREEMENTS (14.2%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97,
to be repurchased at $4,454,
collateralized by various
U.S. Government Obligations,
due 10/1/97-1/29/99, valued
at $4,495 4,454 4,454
Goldman Sachs & Co. 6.15%,
dated 9/30/97, due 10/1/97,
to be repurchased at $4,454,
collateralized by U.S.
Treasury Bonds, 8.00%, due
11/15/21, valued at $4,545 4,453 4,453
Merrill Lynch & Co., Inc.
5.90%, dated 9/30/97, due
10/1/97, to be repurchased
at $4,454, collateralized by
U.S. Treasury Notes, 7.50%,
due 10/31/99, valued at
$4,544 4,453 4,453
- ------------------------------------------------------
GROUP TOTAL 13,360
- ------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $49,415) 49,415
- ------------------------------------------------------
FOREIGN CURRENCY (0.0%)
- ------------------------------------------------------
Swedish Krona (Cost $1) SEK 8 1
- ------------------------------------------------------
TOTAL INVESTMENTS (97.8%) (Cost $91,347) 91,877
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
3
<PAGE> 6
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY FOREIGN FIXED
INCOME PORTFOLIO
VALUE
(CONT'D) (000)!
- ------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (2.2%)
Cash $ 1
Foreign Currency Held as Collateral on
Futures Contracts (Cost $290) 290
Interest Receivable 1,806
Receivable for Withholding Tax Reclaim 12
Receivable for Fund Shares Sold 150
Unrealized Gain on Futures Contracts 541
Other Assets 10
Payable for Investment Advisory Fees (1)
Payable for Administrative Fees (6)
Payable for Trustees' Deferred Compensation
Plan-Note E (10)
Unrealized Loss on Forward Foreign Currency
Contracts (673)
Other Liabilities (58)
2,062
- ------------------------------------------------------
NET ASSETS (100%) $ 93,939
- ------------------------------------------------------
INSTITUTIONAL CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 9,102,257 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $ 93,939
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.32
- ------------------------------------------------------
NET ASSETS CONSIST OF:
Paid In Capital $ 76,761
Undistributed Net Investment Income (Loss) 17,555
Undistributed Realized Net Gain (Loss) (812)
Unrealized Appreciation (Depreciation) on:
Investment Securities 530
Foreign Currency Transactions (636)
Futures 541
- ------------------------------------------------------
NET ASSETS $ 93,939
- ------------------------------------------------------
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(dd) A portion of these securities was pledged to cover
margin requirements for futures contracts.
+ Moody's Investor Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
4
<PAGE> 7
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO
--
Miller Anderson & Sherrerd manages the Advisory Mortgage Portfolio as a vehicle
for mortgage investing. The portfolio is available only to private advisory
clients of MAS or Morgan Stanley Asset Management. By using the Portfolio
instead of holding mortgages directly, these clients may be able to benefit from
some or all of the following: (1) better diversification through ownership of a
smaller share of a larger number of holdings; (2) potentially enhanced
performance resulting from the ability to manage the mortgage position on a
broader scale; (3) simplification of accounting as clients need only account for
mutual fund shares as opposed to individual mortgage securities, some of which
have unusual payment characteristics; (4) economies of scale in custodial fees
associated with the frequent pay-downs of mortgage securities.
The Portfolio invests in a full range of mortgage securities, collateralized
mortgage obligations (CMOs), asset-backed securities, U.S. Government, and other
fixed-income securities. Derivatives may be used to pursue portfolio strategy.
The Portfolio is actively managed by Miller Anderson & Sherrerd's fixed-income
team, which makes strategic decisions about its structure and composition. The
team seeks to achieve above-market returns by purchasing attractively-priced
securities and by carefully managing the amount of prepayment risk, or call
risk, within the Portfolio. Most mortgages contain an option to prepay the
principal amount prior to maturity. These securities have higher yields as a
result, and MAS calculates whether the additional yield is sufficient to
compensate for the prepayment risk. The sensitivity of the Portfolio to mortgage
prepayments is increased when yields, adjusted for probable prepayments, are
attractive.
At the beginning of fiscal 1997, the Portfolio's prepayment sensitivity was
approximately equal to that of its benchmark, the Lehman Mortgage Index. As
spreads on fixed-rate current-coupon mortgages tightened, the Portfolio's
position in these securities was gradually eliminated and replaced by a position
in older, more seasoned fixed-rate mortgage securities. These securities exhibit
a more stable prepayment profile. Opportunistically-selected mortgage securities
which significantly benefit from an increase in prepayments were purchased as
their spreads became attractive relative to their risk and their ability to
lower the overall prepayment exposure of the Portfolio. Currently, the Portfolio
has a sensitivity to prepayment risk which is approximately three-quarters that
of its benchmark.
5
<PAGE> 8
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
The Advisory Mortgage Portfolio is managed as a component of a diversified
portfolio and investment results from the Portfolio should not be analyzed on a
stand-alone basis. Results are presented in this report to comply with
Securities and Exchange Commission requirements for shareholder reporting. --
The Portfolio is available only to private advisory clients of Miller Anderson &
Sherrerd and Morgan Stanley Asset Management.
ADVISORY MORTGAGE
Growth of a $1 Million Dollar Investment Since Inception
<TABLE>
<CAPTION>
Measurement
Period
(Fiscal Year MAS
Covered) Advisory Lehman
Mortgage Mortgage
<S> <C> <C> <C>
Apr-95 1000 1000 4/12/95
Jun-95 1034 1042 6/30/95
Sep-95 1060 1064 9/30/95
Dec-95 1096 1099 12/31/95
Mar-96 1095 1094 3/31/96
Jun-96 1104 1103 6/30/96
Sep-96 1130 1126 9/30/96
Dec-96 1167 1158 12/31/96
Mar-97 1168 1160 3/31/97
Jun-97 1212 1203 6/30/97
Sep-97 1254 1239 9/30/97
</TABLE>
AVERAGE ANNUAL RETURNS
ENDED 9/30/97*
<TABLE>
<CAPTION>
MAS ADVISORY LEHMAN MORTGAGE
MORTGAGE INDEX
----------------------------------------------------------------------------
<S> <C> <C>
One Year 11.03% 10.04%
Since Inception 9.63% 9.06%
</TABLE>
MAS Funds returns are net of all fees. Returns represent past
performance and are not indicative of future results.
The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth
either more or less than their original cost.
The Advisor has voluntarily agreed to waive its advisory fees and
reimburse certain expenses to the extent necessary to keep total annual
operating expenses for the Advisory Mortgage Portfolio from exceeding
0.08% of average daily net assets. Returns presented include the
effects of these waivers and reimbursements. If such waivers and
reimbursements had not been made, the actual returns would have been
lower.
* The Advisory Mortgage Portfolio commenced operations on 4/12/95. All
returns are compared to the Lehman Mortgage Index, an unmanaged
market index.
6
<PAGE> 9
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (95.6%)
<TABLE>
<CAPTION>
- --------------------------------------------------------
SEPTEMBER 30, 1997 RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)
- --------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (16.7%)
## Government National Mortgage
Association II
Various Pools:
6.00%,
7/20/27-9/20/27 Agy $ 209,200 $ 210,769
6.50%, 1/20/28 Agy 37,000 37,613
October TBA
6.00%, 6/20/27 Agy 7,350 7,396
November TBA
6.00%, 11/20/27 Agy 254,600 256,112
- --------------------------------------------------------
GROUP TOTAL 511,890
- --------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (28.4%)
Federal Home Loan
Mortgage Corporation
Conventional Pools:
6.00%, 1/1/01 Agy 3 2
6.50%, 3/1/02 Agy 5 5
6.75%, 12/1/05 Agy 157 158
8.00%, 3/1/07-9/1/08 Agy 564 583
8.25%, 11/1/07-7/1/08 Agy 201 212
10.00%,
2/1/09-11/1/20 Agy 10,600 11,567
10.25%, 1/1/09-9/1/16 Agy 217 240
10.50%,
7/1/09-12/1/20 Agy 9,606 10,720
11.00%, 2/1/10-9/1/20 Agy 7,866 8,821
11.25%,
6/1/10-12/1/15 Agy 115 130
11.50%, 1/1/07-9/1/19 Agy 4,447 5,037
12.00%,
10/1/09-8/1/15 Agy 1,148 1,328
12.50%,
10/1/09-6/1/15 Agy 434 510
13.00%, 9/1/13 Agy 26 30
13.50%, 2/1/10 Agy 32 37
Gold Pools:
7.00%, 9/1/23-6/1/25 Agy 90,020 90,154
7.50%, 11/1/22-7/1/26 Agy 3,466 3,538
9.50%,
11/1/16-12/1/22 Agy 25,154 27,399
10.00%, 2/1/19-4/1/25 Agy 2,581 2,853
10.50%, 6/1/11-3/1/21 Agy 1,100 1,223
11.00%, 5/1/12 Agy 20 23
11.50%,
8/1/15-10/1/19 Agy 221 254
12.00%, 8/1/14-6/1/20 Agy 6,875 7,877
Federal National
Mortgage Association
Conventional Pools:
6.50%, 2/1/26 Agy 4,681 4,564
7.00%, 3/1/14-3/1/27 Agy 113,117 112,770
7.50%, 6/1/24 Agy 216 220
9.50%, 7/1/16-7/1/17 Agy 3,934 4,276
10.00%, 3/1/06-4/1/27 Agy 39,142 42,898
10.50%, 5/1/11-4/1/22 Agy 12,648 14,170
10.75%,
10/1/11-6/1/13 Agy 221 249
11.00%,
5/1/11-11/1/20 Agy 7,269 8,195
11.25%, 1/1/11-1/1/16 Agy 332 372
11.50%, 2/1/11-9/1/25 Agy 1,289 1,469
12.00%, 1/1/13-2/1/18 Agy 514 590
12.50%, 9/1/09-9/1/15 Agy 5,437 6,344
Government National Mortgage
Association
Various Pools:
7.00%,
12/15/22-6/15/24 Agy $ 283,820 $ 284,758
7.50%,
7/15/23-6/15/26 Agy 3,112 3,170
10.00%,
11/15/09-12/25/26 Agy 86,009 95,314
10.50%,
10/15/00-8/15/26 Agy 62,394 70,206
11.00%,
12/15/99-8/15/27 Agy 39,696 45,288
11.50%,
12/15/09-8/15/18 Agy 2,835 3,250
12.00%,
11/15/12-2/15/15 Agy 593 689
12.50%,
11/15/10-7/15/15 Agy 567 658
13.00%,
2/15/11-9/15/14 Agy 331 386
13.50%,
5/15/10-9/15/14 Agy 220 256
- --------------------------------------------------------
GROUP TOTAL 872,793
- --------------------------------------------------------
ASSET BACKED CORPORATES (0.1%)
Old Stone Credit Corp,
Series 92-3 B1
6.35%, 9/25/07 AAA 298 295
Security Pacific Home
Equity Trust, Series
91-AB
10.50%, 3/10/06 A+ 1,304 1,306
- --------------------------------------------------------
GROUP TOTAL 1,601
- --------------------------------------------------------
ASSET BACKED MORTGAGES (1.2%)
AFC Home Equity Loan Trust,
Series:
96-2 CL 1A6 SEQ
8.30%, 8/25/27 AAA 525 553
96-3 1A6
8.07%, 2/25/27 AAA 875 913
96-4 1A6
7.22%, 3/25/28 AAA 750 757
Advanta Mortgage Loan Trust,
Series 96-2 A5
8.08%, 6/25/27 AAA 3,586 3,729
Cityscape Home Equity
Loan Trust,
Series:
96-2 A5
8.10%, 8/25/26 AAA 7,500 7,866
96-3 A8
7.65%, 8/25/26 AAA 9,650 9,869
Contimortgage Home
Equity Loan Trust,
Series:
96-3 A7
8.04%, 9/15/27 AAA 250 262
96-3 A9 IO
1.30%, 9/15/27 AAA 192,826 6,398
96-3 10 IO
0.90%, 9/15/27 AAA 62,333 1,514
(+) 96-3 A3 YMA
9/15/27 N/R 263,405 492
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
7
<PAGE> 10
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY MORTGAGE
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- --------------------------------------------------------
<S> <C> <C> <C>
(+) 96-3 B YMA
9/15/27 N/R $ 99,205 $ 142
Crown Home Equity Loan
Trust, Series 96-1 A5
7.30%, 4/25/27 AAA 125 125
Delta Funding Home
Equity Loan Trust,
Series:
96-1 A7
7.95%, 6/25/27 AAA 1,245 1,306
96-2 A5
8.01%, 10/25/27 AAA 750 792
IMC Home Equity Loan Trust,
Series 96-3 A7
8.05%, 8/25/26 AAA 1,125 1,172
- --------------------------------------------------------
GROUP TOTAL 35,890
- --------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- AGENCY COLLATERAL
SERIES (6.1%)
## Collateralized
Mortgage Obligation
Trust,
Series 86-13 Q Inv Fl
15.276%, 1/20/03 AAA 202 222
Federal Home Loan
Mortgage Corporation,
Series:
88-17 I PAC-1 (11)
9.90%, 10/15/19 Agy 2,055 2,246
88-22 C PAC (11)
9.50%, 4/15/20 Agy 815 904
88-23 F PAC-1 (11)
9.60%, 4/15/20 Agy 1,025 1,138
89-39 F PAC-2 (11)
10.00%, 5/15/20 Agy 2,275 2,504
89-47 F PAC-1 (12) REMIC
10.00%, 6/15/20 Agy 1,925 2,112
89-110 F PAC
8.55%, 1/15/21 Agy 800 854
90-129 H PAC
8.85%, 3/15/21 Agy 135 147
90-164 B12 REMIC
9.50%, 7/15/21 Agy 4,700 5,194
90-1007 F Inv Fl
21.795%, 1/15/20 Agy 3 3
1364 B Inv Fl IO CMO
5.679%, 9/15/07 Agy 10,644 1,443
1364 E Inv Fl IO REMIC
8.849%, 9/15/07 Agy 12,787 2,761
1369 S Inv Fl IO REMIC
3.813%, 9/15/07 Agy 13,437 1,067
1415 S Inv Fl IO CMO
18.813%, 11/15/07 Agy 121 56
1476 S Inv Fl IO
REMIC PAC
4.363%, 2/15/08 Agy 1,290 151
1485 S Inv Fl IO REMIC
3.913%, 3/15/08 Agy 1,208 107
1600 SA Inv Fl IO REMIC
2.313%, 10/15/08 Agy $ 20,384 $ 1,127
1632 SA Inv Fl REMIC
5.336%, 11/15/23 Agy 2,175 1,813
1632 SB Inv Fl REMIC
4.225%, 11/15/23 Agy 9,720 6,216
1634 SC Inv Fl
7.194%, 12/15/23 Agy 4,000 3,182
1680 PB PAC-1 (11)
5.70%, 6/15/12 Agy 1,395 1,391
1699 SD Inv Fl IO CMO
2.313%, 3/15/24 Agy 85,850 6,860
1709 H PO REMIC
1/15/24 Agy 1,400 713
1750 C PD PO REMIC
3/15/24 Agy 2,107 1,496
1813 K PO REMIC
2/15/24 Agy 1,379 949
1839 A PAC (11) REMIC
6.50%, 7/15/17 Agy 5,128 5,151
1844 PC PO REMIC
3/15/24 Agy 2,524 1,594
1887 I PO REMIC
10/15/22 Agy 1,483 995
Federal National
Mortgage Association,
Series:
89-22 G PAC (11)
10.00%, 5/25/19 Agy 5,540 6,211
89-92 G PAC (11)
8.60%, 12/25/04 Agy 750 797
90-106 J PAC
8.50%, 9/25/20 Agy 2,077 2,188
90-118 S Inv Fl
28.975%, 9/25/20 Agy 444 691
90-126 S Inv Fl CMO
19.091%, 10/25/20 Agy 6,027 7,631
92-89 SQ Inv Fl IO PAC (11)
3321.956%, 6/25/22 Agy 3 287
92-186 S Inv Fl IO
3.363%, 10/25/07 Agy 2,123 182
93-9 SB Inv Fl IO
6.796%, 1/25/23 Agy 6,177 2,388
93-22 S Inv Fl
9.658%, 9/25/22 Agy 713 659
93-46 SD Inv Fl
4.158%, 4/25/23 Agy 8,330 5,308
93-46 SG Inv Fl
5.833%, 7/25/22 Agy 2,810 2,132
93-70 B REMIC
5.75%, 4/25/16 Agy 5,542 5,485
93-115 SB Inv Fl
4.005%, 7/25/23 Agy 4,760 3,450
93-149 O PO REMIC
8/25/23 Agy 3,197 2,030
93-205 G PO REMIC
9/25/23 Agy 12,640 8,145
93-235 H PO REMIC
9/25/23 Agy 5,049 3,950
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
8
<PAGE> 11
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------
<S> <C> <C> <C>
96-11 V PO REMIC
9/25/23 Agy $ 6,203 $ 4,181
96-14 PC PO
12/25/23 Agy 2,395 1,378
96-25 C PO
9/25/23 Agy 10,872 7,329
96-37 H PO REMIC
8/25/23 Agy 541 402
96-46 PB PO REMIC
9/25/23 Agy 2,480 1,660
96-54 N PO
7/25/23 Agy 1,784 1,334
96-54 O PO
11/25/23 Agy 1,982 1,234
96-68 SC Inv Fl IO
2.475%, 1/25/24 Agy 5,950 722
97-3 E PO
12/25/23 Agy 1,000 671
97-7 AE PO REMIC
2/15/23 Agy 628 453
97-7 EB PO REMIC
3/18/27 Agy 22,283 15,808
97-30 SP Inv Fl REMIC
3428.187%, 4/25/22 Agy 4 631
G92-52 SQ Inv Fl IO
REMIC
7166.853%, 9/25/22 Agy 46 8,747
G92-53 S Inv Fl IO
REMIC
32.625%, 9/25/22 Agy 5,276 4,373
282 1 PO
5/15/24 Agy 42,118 28,863
287 1 PO
12/17/07 Agy 273 179
Government National
Mortgage Association,
Series:
96-12 S Inv Fl IO
2.813%, 6/16/26 Agy 43,063 2,989
96-13 S Inv Fl IO
3.65%, 7/16/11 Agy 22,511 1,963
+ Kidder Peabody
Mortgage Assets Trust,
Series:
87 B PO
4/22/18 Aaa 143 107
87 B IO
9.50%, 4/22/18 Aaa 143 43
Morgan Stanley Mortgage Trust,
Series 88-28 8 PAC
9.40%, 10/1/18 AAA 417 432
- --------------------------------------------------------
GROUP TOTAL 187,429
- --------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- NON-AGENCY
COLLATERAL SERIES (19.0%)
American Housing Trust,
Series:
IV 2 C
9.553%, 9/25/20 A $ 2,513 $ 2,620
V 1G
9.125%, 4/25/21 AAA 7,712 8,191
Asset Securitization
Corp., Series 96-MD6
A1C
6.88%, 11/13/26 AAA 1,425 1,452
Bear Stearns Mortgage
Securities, Inc.,
Series:
96-4 AI10
8.125%, 9/25/27 AAA 9,026 9,417
96-5 A7
8.125%, 9/25/27 AAA 8,050 8,400
96-5 A10
8.125%, 9/25/27 AAA 10,750 11,217
96-9 AI11 NAS
8.00%, 12/25/27 AAA 1,875 1,951
Chase Mortgage Finance Corp.,
Series:
sec.++ 93-1 B2
7.911%, 3/28/24
(acquired 4/28/95-
7/30/96, cost $4,077) AAA 4,227 4,319
+ 93-N A8
6.75%, 11/25/24 Aaa 4,500 4,260
+ 94-H A7
7.25%, 6/25/25 Aaa 2,925 2,882
Chemical Mortgage Securities,
Inc.,
Series:
93-1 M
7.45%, 2/25/23 AA 4,683 4,723
93-3 M
7.125%, 7/25/23 AA 5,899 5,896
Citicorp Mortgage Securities,
Inc.,
Series:
+ 90-7 A7
9.50%, 6/25/05 Baa3 290 289
93-9 A1
7.00%, 3/25/20 AAA 256 257
94-7 A5
6.25%, 4/25/24 AAA 5,975 5,371
sec.++ 95-2 B1 REMIC
7.50%, 4/25/25
(acquired 9/4/97,
cost $99) AA 98 99
CMC Securities Corp. IV,
Series 94-G A4
7.00%, 9/25/24 AAA 9,810 9,374
Countrywide Funding Corp.,
Series:
93-C A11
6.50%, 1/25/24 AAA 10,877 10,395
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
9
<PAGE> 12
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY MORTGAGE
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- --------------------------------------------------------
<S> <C> <C> <C>
94-12 A10
7.00%, 5/25/24 AAA $ 855 $ 825
95-4 M
7.50%, 9/25/25 AA 6,524 6,606
DLJ Mortgage Acceptance
Corp.,
Series:
(+) 97-CF1 A1B
7.60%, 5/15/30 AAA 8,750 9,275
(+) 97-CF1 S IO
1.097%, 5/15/30 AAA 59,966 3,989
97-CF2 A1B
6.82%, 10/15/30 AAA 31,425 31,641
First Boston Mortgage
Securities Corp.,
Series:
sec. 92-4 B1
8.125%, 10/25/22
(acquired 4/28/95,
cost $67) A 74 76
sec. 93-2 B1
7.50%, 3/25/33
(acquired 4/28/95-
10/30/96, cost
$2,614) A 2,854 2,870
++ 93-5 B1
7.30%, 7/25/23 A 1,099 1,098
GE Capital Mortgage
Services, Inc.,
Series:
94-14 A7
7.50%, 4/25/24 AAA 4,000 3,979
94-24 A4
7.00%, 7/25/24 AAA 11,557 11,075
94-27 A6
6.50%, 7/25/24 AAA 10,825 10,037
(+)++ 95-6 B2
7.00%, 8/25/25 A 3,052 2,996
++ Headlands Mortgage
Securities, Inc., TBA
Series 97-5 1A5 NAS
7.25%, 10/25/27 AAA 14,123 14,137
ICI Funding Corp.,
Series 97-2 1A8
8.00%, 7/25/28 AAA 16,250 16,926
Independent National
Mortgage Corp.,
Series:
+ 94-O B1
7.875%, 9/25/24 A2 14,552 15,021
95-Q A11
7.40%, 11/25/25 AAA 981 986
95-U A3
7.13%, 9/25/24 AAA 11,603 11,501
95-V A3
7.12%, 2/25/26 AAA 16,619 16,464
J. P. Morgan Commercial
Mortgage Finance
Corp., Series 97-C5 A2
7.069%, 9/15/29 AAA 26,000 26,566
## Merrill Lynch
Mortgage Investors,
Inc.,
Series 95-C1 IO
2.188%, 5/25/15 AAA $ 2,123 $ 146
Mid-State Trust II,
Series 88-2 A4
9.625%, 4/1/03 AAA 22,720 24,675
PNC Mortgage Securities Corp.,
Series:
94-3 A8
7.50%, 7/25/24 AAA 7,050 7,017
96-1 B1
7.50%, 6/25/26 AA 4,461 4,517
Prudential Home Mortgage
Securities Co., Inc.,
Series:
90-5 A3
9.50%, 5/25/05 AAA 79 79
(+)+ 92-A B2-4
7.90%, 4/28/22 A1 1,484 1,452
+ 92-33 B1
7.50%, 11/15/22 Aa3 1,172 1,139
sec.+ 93-17 B1
6.50%, 3/1/23
(acquired 4/28/95,
cost $949) A2 1,020 1,005
(+)++## 94-A 3B3
6.803%, 4/28/24 A 10,330 9,991
(+)++ 94-A B3
6.802%, 4/28/24 A 8,250 7,964
sec. 95-2 M
8.50%, 6/25/25
(acquired 9/26/95,
cost $343) AA 334 352
95-6 M
7.50%, 9/25/25 AA 5,311 5,396
Residential Accredit
Loans, Inc.,
Series:
96-QS4 AI 10
7.90%, 8/25/26 AAA 1,350 1,398
96-QS7 AI 11
8.00%, 11/25/26 AAA 1,975 2,044
96-QS8 A13
7.75%, 12/25/26 AAA 1,825 1,879
+ 97-QS1 A11
7.50%, 2/25/27 Aaa 3,950 3,998
97-QS3 A8
7.75%, 4/25/27 AAA 175 180
97-QS4 A7
7.75%, 5/25/27 AAA 10,650 10,977
97-QS8 A10
7.50%, 8/25/27 AAA 11,475 11,662
+ 97-QS9 A8
7.25%, 9/25/27 Aaa 24,470 24,449
97-QS10 A7 TBA
7.25%, 9/15/27 AAA 31,220 31,202
97-QS12 A8 TBA
7.25%, 12/25/27 AAA 25,667 25,709
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
10
<PAGE> 13
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------
<S> <C> <C> <C>
97-Q52 A8
7.75%, 3/25/27 AAA $ 8,800 $ 9,067
Residential Asset
Securitization Trust,
Series:
96-A5 A9
7.75%, 9/25/26 AAA 4,750 4,858
96-A11 A9
7.75%, 2/25/27 AAA 1,000 1,023
97-A8 A9
7.25%, 10/25/27 AAA 8,021 8,024
97-A8 A10
7.00%, 10/25/27 AAA 20,068 19,649
97-A9 A5
7.25%, 9/15/27 AAA 22,378 22,426
Residential Funding Mortgage
Securities Co., Inc.,
Series:
++ 93-MZ3 A2
6.97%, 8/28/23 AA 14,900 14,510
93-S2 M2
8.00%, 1/25/23 A 874 894
93-S27 M2
7.50%, 6/25/23 A 474 479
94-S1 A19
6.75%, 1/25/24 AAA 9,699 9,439
Resolution Trust Corp.,
Series 92-16 C2
7.75%, 8/25/25 A 2,686 2,690
Rural Housing Trust,
Series 87-1 M
3.33%, 10/1/28 A- 13,661 13,022
Ryland Mortgage
Securities Corp.,
Series:
## 92-A 1A
8.265%, 3/29/30 A- 4,616 4,674
+ 93-4 A9
7.50%, 8/25/24 Aaa 12,020 12,050
94-7B 4A2
7.50%, 8/25/25 AAA 1,900 1,905
+ Salomon Brothers
Mortgage Securities,
Inc., Series 93-3 B1
7.20%, 8/25/23 Aa2 573 570
Saxon Mortgage
Securities Corp.,
Series 93-8A A6
7.375%, 9/25/23 AAA 390 387
Securitized Asset Sales,
Inc., Series 95-3 B1
7.50%, 10/25/25 A 4,407 4,458
- --------------------------------------------------------
GROUP TOTAL 584,537
- --------------------------------------------------------
COMMERCIAL MORTGAGES (16.7%)
American Southwest
Financial Securities
Corp.,
Series:
++ 93-2 A1
7.30%, 1/18/09 AA $ 7,831 $ 7,983
++## 93-2 S1 IO
1.056%, 1/18/09 AA 75,025 3,795
+ 95-C1 A1B
7.40%, 11/17/04 Aaa 19,350 20,008
Asset Securitization
Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 15,156 15,880
95-MD4 A1
7.10%, 8/13/29 AAA 51,641 53,138
## 95-MD4 ACS2 IO
2.381%, 8/13/29 AAA 28,728 5,105
(+)+ 96-D3 A1C
7.40%, 10/13/26 Aaa 17,775 18,680
96-MD6 A1C
7.04%, 11/13/26 AAA 16,650 17,113
97-MD7 A1B
7.41%, 1/13/30 AAA 29,050 30,561
Beverly Finance Corp.
8.36%, 7/15/04 AA- 10,265 11,052
(+) Carousel Center
Finance, Inc.,
Series:
1 A1
6.828%, 10/15/07 AA 2,425 2,442
1 B
7.188%, 10/15/07 A 16,650 16,956
1 C
7.527%, 10/15/07 BBB+ 3,983 4,061
CBM Funding Corp.,
Series 96-1 A3PI
7.08%, 2/1/13 AA 16,150 16,648
Chase Commercial
Mortgage Securities
Corp.,
Series:
96-2 A2
6.90%, 9/19/06 AAA 1,125 1,141
96-2 B
6.90%, 10/19/06 AA 1,042 1,050
(+) Creekwood Capital
Corp.,
Series 95-1A
8.47%, 3/16/15 AA 4,499 5,010
(+) Crystal Run
Properties,
Series A
7.393%, 8/15/06 AA 15,775 16,476
CS First Boston Mortgage
Securities Corp.,
Series 97-C1 A1C
7.24%, 6/20/29 AAA 24,625 25,541
(+) CVM Finance Corp.
7.19%, 3/1/04 AA 920 942
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
11
<PAGE> 14
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY MORTGAGE
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- --------------------------------------------------------
<S> <C> <C> <C>
DLJ Mortgage Acceptance
Corp.,
Series:
## 96-CF1 IO
0.74%, 3/12/06 AAA $ 175,329 $ 6,076
(+) 96-CF1 A1B
7.58%, 3/13/28 AAA 950 1,001
++## 96-CF2 S IO
1.643%, 11/12/21 AA 60,726 5,385
(+) 96-CF2 A1B
7.29%, 7/15/06 AAA 5,575 5,777
(+) Forum Finance
7.125%, 5/15/04 AA 875 894
+ GMAC Commercial
Mortgage Securities,
Inc.,
Series 96-C1 X2 IO
1.926%, 3/15/21 Aaa 79,278 7,401
+ GS Mortgage Securities
Corp. II,
Series:
97-GL A2D
6.94%, 7/13/30 Aaa 25,350 25,890
97-GL X1A IO
0.651%, 7/13/30 Aaa 50,000 711
97-GL X2 IO
1.07%, 7/13/30 Aaa 37,510 2,015
+ LB Commercial Conduit
Mortgage Trust,
Series 96-C2 A
7.416%, 10/25/26 Aaa 21,612 22,464
(+) Lakeside Finance
Corp.
6.47%, 12/15/00 AA 240 240
(+) Lakewood Mall
Finance Co.,
Series 95-C1 A
7.00%, 8/13/10 AA 12,675 12,915
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C1 A3
7.42%, 4/25/28 AAA 3,775 3,939
++ 96-C2 IO
1.529%, 10/25/26 AA 87,376 7,845
96-C2 A2
6.82%, 11/21/28 AAA 8,835 8,945
97-C1 A3
7.12%, 6/18/29 AAA 17,000 17,500
+ Midland Realty
Acceptance Corp.,
Series:
96-C2 A1
7.02%, 1/25/27 Aaa 791 806
96-C2 A2
7.233%, 1/25/27 Aaa 14,325 14,822
Mortgage Capital
Funding, Inc.,
Series:
95-MC1 A1B
7.60%, 5/25/27 AAA 13,298 13,724
+ 97-MC1 A3
7.288%, 7/20/27 Aaa $ 23,454 $ 24,389
++ Nomura Asset
Securities Corp.,
Series:
94-MD1 A1B
7.526%, 3/15/18 AAA 3,935 4,051
## 94-MD1 A2
7.664%, 3/15/18 AA 4,085 4,282
94-MD1 A3
8.026%, 3/15/18 A 4,450 4,789
(+) Park Avenue Finance
Corp.,
Series 97-C1 A1
7.58%, 5/12/07 N/R 471 495
(+) Prime Property
Funding,
6.633%, 7/23/03 AA 12,827 12,831
+ Salomon Brothers
Mortgage Securities,
Series 97-TZH A2
7.174%, 3/24/22 Aa2 12,550 12,906
Sawgrass Financial,
Series 93-A1
6.45%, 1/20/06 AAA 255 256
(+) Stratford Finance
Corp.
6.776%, 2/1/04 AA 6,030 6,001
++## Structured Asset
Securities Corp.,
Series:
96-CFL X1 IO
1.335%, 2/25/28 AAA 116,635 6,045
96-CFL X1A IO
1.483%, 2/25/28 AAA 113,846 3,023
96-CFL X2 IO
1.249%, 2/25/28 AAA 28,368 851
- --------------------------------------------------------
GROUP TOTAL 511,851
- --------------------------------------------------------
FINANCE (2.5%)
(+)+ Home Ownership
Funding, 13.331%
(Preferred Stock) Aaa (1)78,525 76,203
- --------------------------------------------------------
NON-AGENCY FIXED RATE MORTGAGES (0.0%)
sec. Coast Federal,
Series 84-3
7.941%, 3/1/06
(acquired 4/28/95,
cost $239) N/R 233 229
sec.## Dedham Savings
Participation
Certificate
8.144%, 5/1/01
(acquired 7/30/96,
cost $307) N/R 309 312
## Fortune Mortgage
Corp. Participation
Certificate
7.812%, 8/1/99 N/R 172 171
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
12
<PAGE> 15
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------
<S> <C> <C> <C>
sec. Great American
Federal Savings &
Loan, Series 84-2
8.595%, 4/1/99
(acquired 4/28/95,
cost $16) N/R $ 17 $ 17
sec. Household Bank,
Series 85-1 CMO
7.94%, 5/1/02
(acquired 5/31/95,
cost $255) N/R 253 254
sec. Virginia Beach
Federal Savings & Loan
Participation
Certificate
6.90%, 3/1/01
(acquired 3/27/97,
cost $364) N/R 380 370
- --------------------------------------------------------
GROUP TOTAL 1,353
- --------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (1.3%)
Bank of America,
Series A
8.375%, 5/1/07 AAA 917 926
California Federal
Savings & Loan,
Series 86-1A
8.80%, 1/1/14 AA 77 77
DLJ Mortgage Acceptance
Corp.,
Series:
93-MF7 A1
7.40%, 6/18/03 AAA 11,178 11,448
93-M10 A2
7.20%, 7/15/03 AAA 6,334 6,331
First Federal Savings &
Loan Association,
Series 92-C
8.75%, 6/1/06 AA 350 356
sec.## Gemsco Mortgage
Pass thru Certificate,
Series 87-A CMO
8.701%, 11/25/10
(acquired 4/28/95-
8/28/97, cost $923) AA 913 928
Residential Funding Mortgage
Securities Co., Inc.,
Series:
87-S7 A
9.00%, 8/25/17 AAA 40 42
90-2 A
10.50%, 3/25/20 AA 23 23
## Resolution Trust
Corp.,
Series 92-5 C
8.618%, 1/25/26 AA 5,974 6,026
Ryland Acceptance Corp.
IV,
Series 79-A
6.65%, 7/1/11 AA 3,405 3,279
sec. Sears Mortgage
Securities, Series
82-3
10.00%, 11/1/12
(acquired 4/28/95,
cost $472) AA $ 454 $ 464
sec. Shearson American
Express, Series A CMO
9.625%, 12/1/12
(acquired 4/28/95-
8/28/97, cost $374) AA 365 377
(dd)+ Town & Country
Funding Corp.,
5.85%, 8/15/98 Aa2 10,525 10,499
Travelers Mortgage
Services, Inc.,
Series 86-3 A
10.00%, 8/25/16 AA 72 74
- --------------------------------------------------------
GROUP TOTAL 40,850
- --------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES- AGENCY COLLATERAL
SERIES (3.2%)
Federal Home Loan
Mortgage Corporation,
Series:
13 B IO REMIC
10.00%, 6/1/20 Agy 2,253 661
16 B IO REMIC
10.00%, 6/1/20 Agy 1,155 327
18 B IO REMIC
10.00%, 5/1/20 Agy 612 174
1603 QA PO REMIC
10/15/23 Agy 15,266 7,010
1911 C PO
11/15/23 Agy 5,666 2,918
Federal National
Mortgage Association,
Series:
43-2 IO
9.50%, 9/1/18 Agy 43 13
93-146 G PO REMIC
5/25/23 Agy 15,843 10,382
93-243 C PO REMIC
11/25/23 Agy 3,470 2,677
93-M2 B IO REMIC
2.575%, 7/25/03 Agy 64,777 3,743
95-21 C PO REMIC
5/25/24 Agy 10,117 4,754
96-34 C PO
3/25/23 Agy 4,311 2,294
249 1 PO
10/25/23 Agy 48,402 31,984
254 1 PO
1/1/24 Agy 7,382 5,289
260 1 PO
4/1/24 Agy 9,904 7,036
263 1 PO
5/25/24 Agy 26,851 17,588
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
13
<PAGE> 16
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY MORTGAGE
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- --------------------------------------------------------
<S> <C> <C> <C>
First Boston Mortgage
Securities Corp.,
Series 87-B IO
8.985%, 4/25/17 AAA $ 109 $ 30
- --------------------------------------------------------
GROUP TOTAL 96,880
- --------------------------------------------------------
U.S. TREASURY SECURITY (0.4%)
U.S. Treasury Strip, PO
11/15/18 Tsy 55,000 13,897
- --------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost
$2,878,090) 2,935,174
- --------------------------------------------------------
STRUCTURED INVESTMENT (0.3%) -- SEE NOTE A7
- --------------------------------------------------------
Morgan Guaranty Trust
Co., 11/20/05; monthly
payments equal to 1%
per annum of the
outstanding notional
balance, indexed to
GNMA ARM pools (Cost
$11,321) N/R 284,884 8,224
- --------------------------------------------------------
INTEREST RATE CAP (0.1%) -- SEE NOTE A6
- --------------------------------------------------------
J.P. Morgan and Co.,
Inc., terminating
10/15/99, to receive
on 10/15/99 the
excess, as measured on
10/15/98, of 12 month
LIBOR over 6.34%
multiplied by the
notional amount
(Premium Paid $5,860) N/R 1,384,500 4,188
- --------------------------------------------------------
CASH EQUIVALENTS (16.3%)
- --------------------------------------------------------
COMMERCIAL PAPER (11.2%)
American Express Credit
5.50%, 10/17/97 35,000 34,914
Associates Corp.
5.52%, 10/6/97 50,000 49,962
Atlantic Asset Securitization
Corp.
5.57%, 10/16/97 20,282 20,235
Barclays U.S. Funding Corp.,
5.52%, 10/8/97 25,000 24,973
CIT Group Holdings, Inc.
5.50%, 10/14/97 50,000 49,901
Commercial Credit Corp.
5.50%, 10/2/97 25,000 24,996
5.50%, 10/27/97 25,000 24,901
Delaware Funding Corp.
5.53%, 10/14/97 50,000 49,900
sec. First Chicago Financial
Corp.
5.51%, 10/16/97
(acquired 9/16/97,
cost $19,954) 20,000 19,954
John Deere Capital Corp.
5.50%, 10/7/97 $ 25,000 $ 24,977
Societe Generale
5.52%, 10/17/97 20,000 19,951
- --------------------------------------------------------
GROUP TOTAL 344,664
- --------------------------------------------------------
AGENCY FLOATING RATE MORTGAGE (1.1%)
## Federal Home Loan
Mortgage Corporation
2/15/24 34,827 34,827
- --------------------------------------------------------
DISCOUNT NOTE (1.2%)
Federal National Mortgage
Association
10/30/97 35,000 34,846
- --------------------------------------------------------
REPURCHASE AGREEMENT (2.8%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97, to
be repurchased at $86,270,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at
$87,069 86,256 86,256
- --------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $500,593) 500,593
- --------------------------------------------------------
TOTAL INVESTMENTS (112.3%) (Cost
$3,395,864) 3,448,179
- --------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-12.3%)
Dividends Receivable 2,617
Interest Receivable 21,251
Receivable for Investments Sold 2,803
Receivable for Fund Shares Sold 2,613
Receivable from Investment Adviser 253
Receivable for Daily Variation on Futures
Contracts 45
Unrealized Gain on Swap Agreements 83
Other Assets 68
Payable for Investments Purchased (405,531)
Payable for Administrative Fees (201)
Payable for Trustees' Deferred Compensation
Plan-Note E (55)
Other Liabilities (698)
----------
(376,752)
- --------------------------------------------------------
NET ASSETS (100%) $ 3,071,427
- --------------------------------------------------------
INSTITUTIONAL CLASS
- --------------------------------------------------------
NET ASSETS
Applicable to 289,902,744 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $ 3,071,427
- --------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.59
- --------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
14
<PAGE> 17
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- --------------------------------------------------------
<S> <C>
NET ASSETS CONSIST OF:
Paid In Capital $ 2,980,365
Undistributed Net
Investment Income
(Loss) 20,429
Undistributed Realized Net Gain (Loss) 17,533
Unrealized Appreciation (Depreciation) on:
Investment Securities 52,315
Futures and Swaps 785
- --------------------------------------------------------
NET ASSETS $ 3,071,427
- --------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<S> <C>
sec. Restricted Security-Total market value of
restricted securities owned at September 30,
1997 was $31,626 or 1.0% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public
sale may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures
contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
++ Fitch rating. Security is not rated by Standard
& Poor's Corporation or Moody's Investor
Service, Inc.
## Variable or floating rate security-rate
disclosed is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
CMO Collateralized Mortgage Obligation
Inv Fl Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate. Indicated rate is the effective
rate at September 30, 1997.
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
YMA Yield Maintenance Agreement
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
15
<PAGE> 18
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY
FOREIGN ADVISORY
FIXED INCOME MORTGAGE
PORTFOLIO PORTFOLIO
------------------------------------------
Year Ended September 30, 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest + $11,076 $179,957
Dividends -- 6,495
- ------------------------------------------------------------------------------------------------------------------------------
Total Income 11,076 186,452
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B $ 713 $ 9,155
Less: Waived Fees (713) -- (9,155) --
Administrative Fee--Note C 152 1,954
Custodian Fee--Note D 49 228
Audit Fee 37 32
Other Expenses 32 477
Reimbursement of Expenses--Note B -- (509)
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses 270 2,182
- ------------------------------------------------------------------------------------------------------------------------------
Expense Offset--Note I (5) (228)
- ------------------------------------------------------------------------------------------------------------------------------
Net Expenses 265 1,954
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 10,811 184,498
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities (7,466) 35,014
Foreign Currency Transactions 23,155 --
Futures and Written Floors 2,567 (4,425)
- ------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 18,256 30,589
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 262 47,073
Foreign Currency Transactions (3,018) --
Futures and Swaps 251 (3,386)
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) (2,505) 43,687
- ------------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) 15,751 74,276
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $26,562 $258,774
==============================================================================================================================
</TABLE>
+ Net of $9 withholding tax for Advisory Foreign Fixed Income Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
16
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY
FOREIGN ADVISORY
FIXED INCOME MORTGAGE
PORTFOLIO PORTFOLIO
-------------------------------------------------------------------
Year Ended September 30, Year Ended September 30,
-------------------------- --------------------------
1996 1997 1996 1997
(In Thousands)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS OPERATIONS:
Net Investment Income $ 31,333 $ 10,811 $ 116,189 $ 184,498
Realized Net Gain (Loss) 57,997 18,256 2,215 30,589
Change in Unrealized Appreciation
(Depreciation) (18,730) (2,505) (9,809) 43,687
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 70,600 26,562 108,595 258,774
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS--Note A10
Net Investment Income (35,248) (46,240) (112,093) (164,543)
Realized Net Gain (6,574) (23,578) (4,475) (16,800)
In Excess of Realized Net Gain -- (812) (3,577) --
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions (41,822) (70,630) (120,145) (181,343)
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued 349,384 259,262 826,456 1,250,383
In Lieu of Cash Distributions 29,798 57,629 87,865 137,342
Redeemed (709,001) (414,976) (371,217) (368,321)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share
Transactions (329,819) (98,085) 543,104 1,019,404
- -------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (301,041) (142,153) 531,554 1,096,835
NET ASSETS:
Beginning of Period 537,133 236,092 1,443,038 1,974,592
- -------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 236,092 $ 93,939 $1,974,592 $ 3,071,427
===============================================================================================================================
Undistributed net investment income included in end
of period
net assets $ 37,078 $ 17,555 $ 11,202 $ 20,429
- -------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
Shares Issued 31,539 23,853 80,399 120,019
In Lieu of Cash Distributions 2,758 5,964 8,555 13,249
Shares Redeemed (63,889) (40,846) (35,654) (35,328)
- -------------------------------------------------------------------------------------------------------------------------------
(29,592) (11,029) 53,300 97,940
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
17
<PAGE> 20
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Institutional Class
-----------------------------------------------------------
October 7,
1994** to Year Ended September 30,
September 30, ------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO 1995 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.80 $ 11.73
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.74 0.68 0.58
Net Realized and Unrealized Gain (Loss) on Investments 0.44 1.02 0.80
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.18 1.70 1.38
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.38) (0.66) (1.88)
Realized Net Gain -- (0.11) (0.88)
In Excess of Realized Net Gain -- -- (0.03)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.38) (0.77) (2.79)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.80 $ 11.73 $ 10.32
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 12.12% 16.47% 14.08%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $537,133 $236,092 $93,939
Ratio of Expenses to Average Net Assets (1) 0.16%* 0.12% 0.14%
Ratio of Net Investment Income to Average Net Assets 7.44%* 6.06% 5.68%
Portfolio Turnover Rate 96% 170% 208%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.38%* 0.38% 0.38%
Ratio Including Expense Offsets 0.15%* 0.12% 0.14%
==============================================================================================================================
</TABLE>
* Annualized
** Commencement of Operations.
!! Per share amounts for the year ended September 30, 1997, are based on average
outstanding shares.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
18
<PAGE> 21
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Institutional Class
-----------------------------------------------------------
April 12,
1995** to Year Ended September 30,
September 30, -------------------------
ADVISORY MORTGAGE PORTFOLIO 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.41 $ 10.29
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.72 0.75
Net Realized and Unrealized Gain (Loss) on Investments 0.35 (0.06) 0.34
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.60 0.66 1.09
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.19) (0.72) (0.71)
Realized Net Gain -- (0.03) (0.08)
In Excess of Realized Net Gain -- (0.03) --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.19) (0.78) (0.79)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.41 $ 10.29 $ 10.59
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 6.03% 6.56% 11.03%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $1,443,038 $1,974,592 $3,071,427
Ratio of Expenses to Average Net Assets (1) 0.10%* 0.09% 0.09%
Ratio of Net Investment Income to Average Net Assets 6.72%* 7.17% 7.55%
Portfolio Turnover Rate 110% 139% 144%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.49%* 0.39% 0.40%
Ratio Including Expense Offsets 0.08%* 0.08% 0.08%
==============================================================================================================================
</TABLE>
* Annualized
** Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MAS Funds (the "Fund") is registered under the Investment Company Act of 1940
as an open-end investment company. At September 30, 1997, the Fund was
comprised of twenty-four active portfolios. The accompanying financial
statements and financial highlights are those of the Advisory Foreign Fixed
Income and Advisory Mortgage Portfolios (each referred to as a "Portfolio")
only. The financial statements of the remaining portfolios are presented
separately.
A. SIGNIFICANT ACCOUNTING POLICIES. The following significant accounting
policies are in conformity with generally accepted accounting principles for
investment companies. Such policies are consistently followed by the Fund in
the preparation of its financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results may differ from those estimates.
1. SECURITY VALUATION: Market values for equity securities listed on the New
York Stock Exchange ("NYSE") or other U.S. exchanges or NASDAQ are based on
the latest quoted sales prices as of the close of the NYSE (normally 4:00
p.m. Eastern Time) on the valuation date; securities not traded on the
valuation date are valued at the mean of the most recent quoted bid and
asked prices. Equity securities not listed are valued at the mean of the
most recent bid and asked prices. Securities listed on foreign exchanges
are valued at the latest quoted sales prices. Bonds and other fixed income
securities are valued using brokers' quotations or on the basis of prices,
provided by a pricing service, which are based primarily on institutional
size trading in similar groups of securities. Mortgage-backed securities
issued by certain government-related organizations are valued using
brokers' quotations which are based on a matrix system which considers such
factors as other security prices, yields and maturities. Short term
securities are valued using the amortized cost method of valuation, which
in the opinion of the Board of Trustees reflects fair value. Securities for
which no quotations are readily available are valued at their fair value as
determined in good faith using methods approved by the Board of Trustees.
2. FEDERAL INCOME TAXES: It is each Portfolio's intention to continue to
qualify as a regulated investment company and distribute all of its taxable
income. Accordingly, no provision for Federal income taxes is required in
the financial statements.
3. REPURCHASE AGREEMENTS: Securities pledged as collateral for repurchase
agreements are held by the Portfolios' custodian bank until maturity of the
repurchase agreements. Provisions of the agreements ensure that the market
value of the collateral is at least equal to the repurchase value in the
event of a default; 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.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Portfolios may transfer their uninvested cash balances into
a joint trading account with other Portfolios of the Fund which invests in
one or more repurchase agreements. This joint repurchase agreement is
covered by the same collateral requirements as discussed above.
4. FUTURES: Futures contracts (secured by cash and securities deposited with
brokers as "initial margin") are valued based upon their quoted daily
settlement prices; changes in initial settlement value (represented by cash
paid to or received from brokers as "variation margin") are accounted for
as unrealized appreciation (depreciation). When futures contracts are
closed, the difference between the opening value at the date of purchase
and the value at closing is recorded as realized gains or losses in the
Statement of Operations.
- --------------------------------------------------------------------------------
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Futures contracts may be used by each Portfolio in order to hedge against
unfavorable changes in the value of securities or to attempt to realize
profits from the value of the underlying securities. Futures contracts
involve market risk in excess of the amounts recognized in the Statement of
Net Assets. Risks arise from the possible movements in security values
underlying these instruments. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which
may not correlate with the change in value of the hedged investments. In
addition, there is the risk that a Portfolio may not be able to enter into
a closing transaction because of an illiquid secondary market.
5. SWAP AGREEMENTS: Each Portfolio may enter into swap agreements to exchange
the return generated by one instrument for the return generated by another
instrument. The following summarizes swaps entered into by the Portfolios:
Interest Rate Swaps: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
Total Return Swaps: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security or index underlying the transaction
exceeds or falls short of the offsetting interest obligation, the Portfolio
will receive a payment from or make a payment to the counterparty,
respectively. Total return swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gains or losses in the Statement of Operations. Periodic
payments received or made at the end of each measurement period, but prior
to termination, are recorded as realized gains or losses in the Statement
of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Portfolio terminated its position in the agreement. Risks
may arise upon entering into these agreements from the potential inability
of the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received, if any, at
the date of default.
6. INTEREST RATE FLOOR AND CAP AGREEMENTS: A Portfolio may hold or write
interest rate floors or caps to protect itself against fluctuation in
interest rates. When a Portfolio writes an interest rate floor, it agrees
to make periodic interest payments to the holder of the interest rate floor
based on a notional principal amount to the extent that a specified
interest index falls below a specified interest rate. When a Portfolio
writes an interest rate cap, it agrees to make periodic interest payments
to the holder of the interest rate cap based on a notional principal amount
to the extent that a specified interest index rises above a specified
interest rate. Any premium received by a Portfolio is recorded as a
liability and is amortized to interest income over the term of the
agreement. Any premium paid by a Portfolio is recorded as an asset and is
accreted against interest income over the term of the agreement. Interest
rate caps and floors are marked-to-market daily based on quotations from
market makers and the change, if any, is recorded as unrealized
appreciation or depreciation in the Statement
- --------------------------------------------------------------------------------
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of Operations. Periodic receipts or payments of interest, if any, are
recorded in the interest income account on the Statement of Operations.
Realized gains or losses from these agreements are disclosed in the
Statement of Operations.
Because there is no organized market for these agreements, the value
reported in the Statement of Net Assets may differ from that which would be
realized in the event the Portfolio terminated its position in the
agreement. Entering into these agreements involves, to varying degrees,
elements of interest rate and market risk in excess of the amount
recognized in the Statement of Net Assets. Such risks involve the
possibility that there may be no liquid market for these agreements and
that there may be adverse changes in interest rates or the index underlying
these transactions. Risks may arise upon entering into these agreements
from the potential inability of the counterparties to meet the terms of the
agreements and are generally limited to the amount of net interest payments
to be received.
7. STRUCTURED INVESTMENTS: Each Portfolio may invest in structured investments
whose values are linked either directly or inversely to changes in foreign
currencies, interest rates, commodities, indices, or other underlying
instruments. A Portfolio uses these securities to increase or decrease its
exposure to different underlying instruments and to gain exposure to
markets that might be difficult to invest in through conventional
securities. Structured investments may be more volatile than their
underlying instruments, but any loss is limited to the amount of the
original investment.
8. DELAYED DELIVERY COMMITMENTS: Each Portfolio may purchase or sell
securities on a when-issued or forward commitment basis. Payment and
delivery may take place a month or more after the date of the transaction.
The price of the underlying securities and the date when the securities
will be delivered and paid for are fixed at the time the transaction is
negotiated. Collateral consisting of liquid securities or cash is
maintained in an amount at least equal to these commitments.
9. FOREIGN EXCHANGE AND FORWARD CURRENCY CONTRACTS: The books and records of
the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the bid prices of such currencies against
U.S. dollars quoted by a bank. Net realized gains (losses) on foreign
currency transactions represent net foreign exchange gains (losses) from
forward foreign currency contracts, disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on a Portfolio's
books and the U.S. dollar equivalent of amounts actually received or paid.
A forward foreign currency contract is an agreement between two parties to
buy or sell currency at a set price on a future date. Each Portfolio may
enter into forward foreign currency contracts to protect securities and
related receivables and payables against future changes in foreign exchange
rates. Fluctuations in the value of such contracts are recorded as
unrealized appreciation or depreciation; realized gains or losses, which
are disclosed in the Statement of Operations, include net gains or losses
on contracts which have been terminated by settlements. Risks may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and are generally
limited to the amount of unrealized gain on the contract, if any, at the
date of default. Risks may also arise from unanticipated movements in the
value of the foreign currency relative to the U.S. dollar.
10. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are declared and paid
- --------------------------------------------------------------------------------
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
quarterly for the Advisory Foreign Fixed Income Portfolio and monthly for
the Advisory Mortgage Portfolio. Net realized capital gains are distributed
at least annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing book and tax treatments for foreign currency
transactions.
Permanent book and tax differences relating to shareholder distributions
may result in reclassifications to undistributed net investment income
(loss), undistributed realized net gain (loss) and paid in capital.
11. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recognized on the accrual basis.
Discounts and premiums on securities purchased are amortized over their
respective lives. Most expenses of the Fund can be directly attributed to a
particular Portfolio. Expenses which can not be directly attributed are
apportioned among the Portfolios on the basis of their relative net assets.
Permanent book-tax differences, if any, are not included in ending
undistributed net investment income (loss) for the purpose of calculating
net investment income (loss) per share in the Financial Highlights.
B. INVESTMENT ADVISORY FEE: Under the terms of an Investment Advisory
Agreement, each Portfolio pays Miller Anderson & Sherrerd, LLP ("MAS" or the
"Adviser"), wholly owned by indirect subsidiaries of Morgan Stanley, Dean
Witter, Discover & Co., for investment advisory services performed at a fee
calculated by applying a quarterly rate based on an annual percentage rate of
0.375% of the Portfolio's average daily net assets for the quarter.
The Adviser has voluntarily agreed to reduce the fees payable to it and, if
necessary, reimburse the Portfolios if annual operating expenses exceed 0.15%
and 0.08% of average daily net assets of the Advisory Foreign Fixed Income and
Advisory Mortgage Portfolios, respectively.
C. ADMINISTRATION FEE: MAS serves as Administrator to the Fund pursuant to an
Administration Agreement. Under the Agreement, MAS receives an annual fee,
accrued daily and payable monthly of 0.08% of each Portfolio's average daily
net assets. Chase Global Funds Services Company ("CGFSC") serves as Transfer
Agent to the Fund and provides fund accounting and other services pursuant to a
sub-administration agreement with MAS and receives compensation from MAS for
these services.
D. CUSTODY: Morgan Stanley Trust Company (NY) ("MSTC"), an affiliate of the
Fund, serves as custodian for certain of the Fund's assets held outside of the
United States in accordance with a custodian agreement. MSTC is a wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
For the year ended September 30, 1997, the Advisory Foreign Fixed Income
Portfolio incurred custody fees of $44,000 with MSTC, of which $7,000 was
payable to MSTC at September 30, 1997.
E. TRUSTEES' FEES: The Fund pays each Trustee, who is not also an officer or
affiliated person, an annual fee plus travel and other expenses incurred in
attending Board meetings. Trustees who are also officers or affiliated persons
receive no remuneration for their service as Trustees.
Each eligible Trustee of the Fund who is not an officer or affiliated person,
as defined under the Investment Company Act of 1940, as amended, participates
in the Trustees' Deferred Compensation Plan. Under the Trustees' Deferred
Compensation Plan, such Trustees must defer at least
- --------------------------------------------------------------------------------
23
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
25% of their fees and may elect to defer payment up to 100% of their total fees
earned as a Trustee of the Fund. These deferred amounts are invested in the
Portfolios selected by the Trustee. Total trustees fees incurred, for the year
ended September 30, 1997, by the Portfolios were $47,000.
Expenses for the year ended September 30, 1997 include legal fees paid to
Morgan, Lewis & Bockius, LLP in the amount of $48,000. A partner of that firm
is secretary to the Fund.
F. PORTFOLIO INVESTMENT ACTIVITY:
1. PURCHASES AND SALES OF SECURITIES. For the year ended September 30, 1997,
purchases and sales of investment securities other than temporary cash
investments were:
<TABLE>
<CAPTION>
(000)
------------------------
Portfolio Purchases Sales
- ---------------------------------- ----------- -----------
<S> <C> <C>
Advisory Foreign
Fixed Income $ 227,231 $ 322,706
Advisory Mortgage 4,555,784 3,322,148
</TABLE>
2. FEDERAL INCOME TAX COST AND UNREALIZED APPRECIATION (DEPRECIATION). At
September 30, 1997, cost, unrealized appreciation, unrealized depreciation
and net unrealized appreciation (depreciation) of securities for Federal
income tax purposes were:
<TABLE>
<CAPTION>
(000)
-----------------------------------------------
Portfolio Cost Appreciation Depreciation Net
- ------------------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Advisory Foreign
Fixed Income $ 91,346 $ 530 $ -- $ 530
Advisory Mortgage 3,396,717 64,892 (13,430) 51,462
</TABLE>
3. FORWARD FOREIGN CURRENCY CONTRACTS. Under the terms of the forward foreign
currency contracts open at September 30, 1997, the Advisory Foreign Fixed
Income Portfolio is obligated to deliver or receive currency in exchange for
U.S. dollars as indicated in the following table:
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------------------
Net
Currency In Unrealized
to Exchange Settlement Appreciation
Deliver For Date Value (Depreciation)
-------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales
FRF 11,700 US$ 1,920 10/22/97 US$ 1,975 US$ (55)
DEM 26,455 14,632 10/24/97 14,997 (365)
DKK 32,800 4,762 10/24/97 4,884 (122)
GBP 2,210 3,692 10/24/97 3,561 131
NLG 7,530 3,701 10/24/97 3,790 (89)
DEM 20,620 11,545 12/2/97 11,718 (173)
-----------
US$ (673)
===========
DEM -- German Mark
DKK -- Danish Krone
FRF -- French Franc
GBP -- British Pound
NLG -- Netherlands Guilder
US$ -- U.S. Dollar
</TABLE>
4. FUTURES CONTRACTS. At September 30, 1997, the following Portfolios had
futures contracts open:
<TABLE>
<CAPTION>
Unrealized
Aggregate Appreciation
Number of Face Value Expiration (Depreciation)
Contracts (000) Date (000)
--------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Purchases:
ADVISORY FOREIGN
FIXED INCOME
German 10 yr.
Government
Bond 257 DEM 66,145 Dec-97 US$ 541
ADVISORY MORTGAGE
U.S. Treasury 2
yr. Note 1,076 US$ 222,782 Dec-97 733
Sales:
ADVISORY MORTGAGE
90 day
Eurodollar 691 US$ 162,088 Dec-97 - Mar-01 238
U.S. Treasury
10 yr. Note 793 US$ 87,329 Dec-97 (269)
DEM -- German Mark
US$ -- U.S. Dollar
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. SWAP AGREEMENTS. At September 30, 1997, the following Portfolio had an open
Interest Rate Swap Agreement:
<TABLE>
<CAPTION>
Unrealized
Notional Appreciation
Amount (Depreciation)
(000) Description (000)
- --------------------------------------------------------
<S> <C> <C>
ADVISORY MORTGAGE
$230,000 Agreement with Bankers Trust
Company terminating July 21, 1999
to pay 1 month LIBOR monthly and
to receive fixed rate at 6.12%
semiannually. $83
===========
LIBOR -- London Interbank Offer Rate
</TABLE>
G. CAPITAL LOSS CARRY FORWARD. At September 30, 1997, the Advisory Foreign
Fixed Income Portfolio had $525,000 unused capital losses available for Federal
income tax purposes, all of which will expire on September 30, 2005.
H. POST OCTOBER LOSSES. Under current tax law, certain capital and net foreign
exchange losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended September 30, 1997, the Advisory Foreign Fixed Income Portfolio may elect
to defer capital losses occurring between November 1, 1996 and September 30,
1997 up to the amount of $287,000.
I. EXPENSE OFFSETS. Custodian fees appearing in the Statement of Operations
have been adjusted to include expense offsets for custodian balance credits of
$5,000 and $228,000 for the Advisory Foreign Fixed Income and the Advisory
Mortgage Portfolios, respectively.
J. OTHER. At September 30, 1997, the Advisory Foreign Fixed Income Portfolio's
net assets were substantially comprised of foreign denominated securities and
currency. The net assets of the Portfolio are presented at the foreign exchange
rates and market values at the close of the period. The Portfolio does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end. Similarly,
the Portfolio does not isolate the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of securities
sold during the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and unrealized gains
(losses) on investment transactions and balances. Changes in currency exchange
rates will affect the value of and investment income from such securities and
currency.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibly lower level of
governmental supervision and regulation of foreign securities markets and the
possibility of political or economic instability.
- --------------------------------------------------------------------------------
25
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
MAS Funds
I n our opinion, the accompanying statements of net assets (excluding Standard &
Poor's ratings) and the related statements of operations and of changes in net
assets and the financial highlights present fairly, in all material respects,
the financial position of the Advisory Foreign Fixed Income Portfolio and the
Advisory Mortgage Portfolio, each a portfolio of the MAS Funds (hereafter
referred to as the "Fund") at September 30, 1997 and the results of their
operations, the changes in each of their net assets and their financial
highlights for the periods presented in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit incudes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1997 by correspondence with the
custodians and the application of alternative auditing procedures where
securities purchased were not yet received by the custodians, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
November 20, 1997
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26
<PAGE> 29
FEDERAL INCOME TAX INFORMATION: (UNAUDITED)
- --------------------------------------------------------------------------------
The Advisory Foreign Fixed Income Portfolio hereby designates $1,072,000 as a
long-term capital gain dividends for the purpose of the dividend paid deduction
on its federal income tax return.
For the year ended September 30, 1997*, the percentage of income earned from
direct U.S. treasury obligations was as follows:
<TABLE>
<CAPTION>
INCOME
PORTFOLIO EARNED
--------------------------------------------------------------- --------
<S> <C>
Advisory Foreign Fixed Income 11.7%
Advisory Mortgage 11.9
</TABLE>
* Amounts for the period ending December 31, 1997 will be provided with form
1099-DIV, to be mailed in January 1998.
SHAREHOLDER MEETINGS: (UNAUDITED)
At two special shareholder meetings held on May 1 and May 12, 1997, the
shareholders of Miller Anderson & Sherrerd, LLP (the "Fund") were held for the
purpose of voting on the following proposals:
1. To approve an amendment to the investment advisory agreement between the Fund
and Miller Anderson & Sherrerd, LLP.
<TABLE>
<CAPTION>
VOTED VOTED ABSTAIN
PORTFOLIO FOR AGAINST VOTES
----------------------------------------- ----------- ------- ---------
<S> <C> <C> <C>
Advisory Foreign Fixed Income 7,816,665 0 76,884
Advisory Mortgage 111,122,185 0 2,161,029
</TABLE>
2. To elect the following Trustees to serve the Fund effective May 1, 1997 until
such time as their successors have been duly appointed.
<TABLE>
<CAPTION>
VOTED
FOR WITHHELD
----------- ---------
<S> <C> <C>
Thomas L. Bennett 532,562,575 2,503,229
Thomas P. Gerrity 532,791,783 2,274,021
Joseph P. Healey 532,778,972 2,286,832
Joseph J. Kearns 532,802,368 2,263,436
Vincent R. McLean 532,776,415 2,289,389
C. Oscar Morong, Jr. 532,791,627 2,274,177
</TABLE>
3. To approve the proposal of the Board of Trustees' selection of Price
Waterhouse LLP as the Fund's independent accountants.
<TABLE>
<CAPTION>
VOTED VOTED ABSTAIN
FOR AGAINST VOTES
----------- ------- ---------
<S> <C> <C> <C>
530,883,223 655,873 3,528,115
</TABLE>
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27
<PAGE> 30
[MAS FUNDS LOGO]
MILLER
ANDERSON
& SHERRERD, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
Investment Adviser: (610) 940-5000
MAS Funds: (800) 354-8185
Printed in U.S.A.
This Report has been prepared for
shareholders and may be distributed to
others only if preceded or accompanied by a
current prospectus.
