<PAGE> 1
1999 Annual Report
[MAS LOGO]
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT
MILLER ANDERSON & SHERRERD, LLP
ADVISORY PORTFOLIOS
[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, 1999.
TABLE OF CONTENTS
MAS Overview and Statement of Net Assets
<TABLE>
<S> <C>
Advisory Foreign Fixed Income Portfolio..... 1
Advisory Mortgage Portfolio.............. 4
Statement of Operations..................... 16
Statement of Changes in Net Assets.......... 17
Financial Highlights........................ 18
Notes to Financial Statements............... 20
Report of Independent Accountants........... 25
</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
Morgan Stanley Dean Witter Investment Management uses the Advisory Foreign Fixed
Income Portfolio as a vehicle for opportunistic foreign bond investments in the
portfolios of its private advisory clients. 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.
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 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.
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 fiscal year, the Portfolio was invested in continental European
government bonds hedged back to U.S. dollars. These securities outperformed U.S.
government bonds.
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 only available to private advisory clients of Morgan Stanley
Dean Witter Investment Management.
1
<PAGE> 4
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME
[LINE GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS ENDED 9/30/99*
MAS ADVISORY SALOMON BROAD
FOREIGN INDEX
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 2.87% (0.27)%
Since Inception 11.09% 7.96%
</TABLE>
Total returns are net of all fees. Total returns represent past
performance and are not indicative of future results. Foreign
investments are subject to certain risks such as currency fluctuations,
economic instability, and political developments.
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.
Total returns for the Portfolio reflect expenses waived and/or
reimbursed by the Adviser for certain periods. Without such waivers
and/or reimbursements, total returns would have been lower.
* The Advisory Foreign Fixed Income Portfolio commenced operations on
10/7/94. Total 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 (46.3%)
<TABLE>
<CAPTION>
- -----------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1999 & POOR'S) (000) (000)!
- -----------------------------------------------------------
<S> <C> <C> <C>
DANISH KRONE (3.1%)
Kingdom of Denmark
6.00%, 11/15/02 AAA DKK 3,000 $ 447
- -----------------------------------------------------------
EURO (43.2%)
Deutsche Pfandbriefe &
Hypothekenbank AG
5.63%, 2/7/03 AAA EUR 511 564
Government of France
O.A.T.
8.50%, 4/25/03 AAA 1,906 2,303
Netherlands Government
6.50%, 4/15/03 AAA 454 516
Spanish Government
5.25%, 1/31/03 AAA 343 375
Treuhandanstalt
7.38%, 12/2/02 AAA 2,096 2,436
- -----------------------------------------------------------
GROUP TOTAL 6,194
- -----------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $6,799) 6,641
- -----------------------------------------------------------
CASH EQUIVALENTS (46.0%)
- -----------------------------------------------------------
DISCOUNT NOTES (46.0%)
Federal Home Loan Bank
5.16%, 10/20/99 $ 1,400 1,396
Federal Home Loan Mortgage
Corporation
5.17%, 10/4/99 1,400 1,399
5.19%, 10/21/99 1,400 1,396
Federal National Mortgage
Association
5.17%, 10/13/99 1,000 999
5.19%, 10/25/99 1,400 1,395
- -----------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $6,585) 6,585
- -----------------------------------------------------------
TOTAL INVESTMENTS (92.3%) (Cost $13,384) 13,226
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
- -----------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (7.7%)
Cash $ 732
Foreign Currency (Cost $1) 1
Foreign Currency Held as Collateral on Futures
Contracts (Cost $134) 134
Interest Receivable 282
Unrealized Gain on Forward Foreign Currency
Contracts 7
Other Assets 15
Payable for Investment Advisory Fees (12)
Payable for Administrative Fees (1)
Payable for Variation on Futures Contracts (26)
Payable for Trustees' Deferred Compensation
Plan-Note F (15)
Other Liabilities (21)
--------
1,096
- -----------------------------------------------------------
NET ASSETS (100%) $14,322
- -----------------------------------------------------------
INSTITUTIONAL CLASS
- -----------------------------------------------------------
NET ASSETS
Applicable to 3,722,312 outstanding shares of
beneficial interest (unlimited authorization,
no par value) $14,322
- -----------------------------------------------------------
NET ASSET VALUE PER SHARE $ 3.85
- -----------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $ 13,644
Undistributed Net Investment Income (Loss) 852
Unrealized Appreciation (Depreciation) on:
Investment Securities (158)
Foreign Currency Transactions 10
Futures (26)
- -----------------------------------------------------------
NET ASSETS $ 14,322
- -----------------------------------------------------------
</TABLE>
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
3
<PAGE> 6
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO
Morgan Stanley Dean Witter Investment Management uses the Advisory Mortgage
Portfolio as a vehicle for mortgage investing in the portfolios of its private
advisory clients. 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 1999, 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 towards the end of the
first quarter, the Portfolio's position in these securities was decreased.
However, in the third quarter, all non-Treasury securities' spreads widened, as
a renewed appetite for liquidity moved investors away from mortgages and
corporate bonds. Nonetheless, interest rates had increased to levels that made
prepayment risk relatively low. Therefore, the Portfolio responded by
re-establishing positions in mortgages to capture the wide spreads and low
prepayment risk available in the market. At fiscal year-end, the Portfolio has a
sensitivity to prepayment risk which is approximately equal to that of its
benchmark.
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 the
Securities and Exchange Commission requirements for shareholder reporting.
The Portfolio is only available to private advisory clients of Morgan Stanley
Dean Witter Investment Management.
4
<PAGE> 7
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
[LINE GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS ENDED 9/30/99*
LEHMAN
MAS ADVISORY MORTGAGE
MORTGAGE INDEX
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year (0.32)% 2.27%
Since Inception 7.48% 7.41%
</TABLE>
Total returns are net of all fees. Total 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.
Total returns for the Portfolio reflect expenses waived and/or
reimbursed by the Adviser for certain periods. Without such waivers
and/or reimbursements, total returns would have been lower.
* The Advisory Mortgage Portfolio commenced operations on 4/12/95.
Total returns are compared to the Lehman Mortgage Index, an unmanaged
market index.
5
<PAGE> 8
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (154.7%)
<TABLE>
<CAPTION>
- --------------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1999 & POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
AGENCY FIXED RATE MORTGAGES (107.5%)
Federal Home Loan
Mortgage Corporation,
Conventional Pools:
6.75%, 12/1/05 Agy $ 68 $ 67
8.00%, 3/1/07-9/1/08 Agy 698 716
8.25%, 10/1/06-7/1/08 Agy 855 877
8.75%, 4/1/08 Agy 128 134
9.00%, 10/1/16-4/1/21 Agy 4,491 4,764
9.50%, 11/1/16-12/1/22 Agy 29,295 31,395
10.00%, 10/1/04-4/1/25 Agy 31,615 34,214
10.25%, 1/1/09-9/1/16 Agy 117 126
10.50%, 7/1/00-3/1/21 Agy 14,744 16,178
11.00%, 2/1/10-9/1/20 Agy 9,124 10,182
11.25%, 6/1/10-12/1/15 Agy 63 70
11.50%, 1/1/07-6/1/20 Agy 4,613 5,171
11.75%, 3/1/11-8/1/14 Agy 322 361
12.00%, 10/1/09-7/1/20 Agy 5,288 5,931
12.50%, 10/1/09-7/1/19 Agy 580 652
13.00%, 9/1/10-11/1/13 Agy 55 61
13.50%, 12/1/09-2/1/10 Agy 66 74
Gold Pools:
9.50%, 7/25/22 Agy 851 914
10.00%, 2/1/10-2/1/18 Agy 3,998 4,315
10.50%, 5/1/16-3/1/27 Agy 1,382 1,516
11.00%,
5/01/12-11/1/15 Agy 274 306
11.50%, 3/1/14 Agy 38 43
12.00%, 3/01/15-6/1/20 Agy 3,485 3,912
October TBA
6.00%, 10/1/29 Agy 2,173,275 2,028,383
Federal National Mortgage
Association,
Conventional Pools:
6.00%, 4/1/27-4/1/29 Agy 638,764 596,554
7.00%, 3/1/11 Agy 2,455 2,455
7.50%, 6/1/24-8/1/24 Agy 1,825 1,838
8.00%, 10/1/07-12/1/16 Agy 126 130
8.50%, 4/1/09 Agy 479 499
9.00%, 6/1/18-12/1/21 Agy 18,239 19,311
9.50%, 7/1/16-5/1/28 Agy 34,878 37,453
10.00%, 3/1/06-4/1/27 Agy 71,201 77,222
10.50%, 9/1/05-2/1/28 Agy 19,743 21,676
10.75%, 11/1/07-6/1/13 Agy 107 119
11.00%, 5/1/11-11/1/20 Agy 6,047 6,759
11.25%, 1/1/11-1/1/16 Agy 254 284
11.50%, 2/1/11-9/1/25 Agy 3,069 3,462
12.00%, 9/1/10-5/1/20 Agy 5,044 5,743
12.50%, 9/1/09-9/1/15 Agy 3,758 4,296
12.75%, 7/1/14 Agy 6 7
14.00%, 9/1/11 Agy 32 37
14.50%, 1/1/13 Agy 43 49
October TBA
6.00%, 10/1/29 Agy 2,447,800 2,282,696
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
- --------------------------------------------------------------
<S> <C> <C> <C>
November TBA
6.00%, 11/1/29 Agy $ 646,350 $ 602,146
6.50%, 11/1/29 Agy 376,500 360,597
Government National Mortgage
Association:
Adjustable Rate Mortgages:
6.00%, 8/20/27 Tsy 11,974 12,077
6.125%,
12/20/25-12/20/27 Tsy 149,515 150,282
6.375%,
3/20/25-6/20/25 Tsy 106,312 107,135
6.50%, 1/20/28-2/20/28 Tsy 40,169 40,370
6.625%,
7/20/27-9/20/27 Tsy 65,564 66,128
6.875%,
1/20/25-6/20/26 Tsy 118,505 119,439
7.00%,
2/20/25-11/20/25 Tsy 90,487 91,264
7.125%, 7/20/25 Tsy 13,718 13,846
7.375%,
6/20/25-6/20/26 Tsy 4,035 4,075
Various Pools:
6.625%, 9/20/27 Tsy 22,377 22,518
6.875%,
4/20/25-2/20/27 Tsy 11,059 11,120
8.50%, 7/15/08-3/15/20 Tsy 19,581 20,483
9.00%,
10/15/17-11/15/24 Tsy 104,772 111,226
9.50%, 7/15/09-9/15/28 Tsy 239,323 257,149
10.00%,
10/15/09-10/15/28 Tsy 330,646 359,348
10.50%,
1/15/01-4/15/25 Tsy 67,086 73,849
11.00%,
12/15/99-1/15/29 Tsy 84,434 94,596
11.50%,
12/15/09-11/15/19 Tsy 4,506 5,088
12.00%,
11/15/12-5/15/16 Tsy 8,414 9,596
12.50%,
5/15/10-7/15/15 Tsy 490 561
13.00%,
1/15/11-9/15/14 Tsy 230 263
13.50%,
5/15/10-9/15/14 Tsy 157 180
October TBA
7.00%, 10/15/29 Tsy 1,381,450 1,355,755
- --------------------------------------------------------------
GROUP TOTAL 9,100,043
- --------------------------------------------------------------
ASSET BACKED CORPORATES (37.1%)
Advanta Mortgage
Loan Trust,
Series:
97-3 A2
6.61%, 4/25/12 AAA 1,296 1,291
97-4 A2
6.53%, 9/25/12 AAA 6,933 6,908
99-3 A1
6.81%, 5/25/14 AAA 43,000 42,929
AFG Receivables Trust,
Series 97-A A
6.35%, 10/15/02 AAA 108 108
Americredit Automobile Receivables
Trust,
Series:
96-B A
6.50%, 1/12/02 AAA 1,391 1,393
## 98-B A2
5.259%, 6/12/01 AAA 21,227 21,221
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
6
<PAGE> 9
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
Arcadia Automobile
Receivables Trust,
Series:
97-C A4
6.375%, 1/15/03 AAA $ 39,505 $ 39,483
97-D A3
6.20%, 5/15/03 AAA 59,881 59,789
98-A A3
5.90%, 11/15/02 AAA 20,795 20,736
Associates Manufactured Housing
Pass Through Certificates,
Series 97-1 A3
6.60%, 6/15/28 AAA 161 161
Banc One Home Equity
Trust,
Series 99-1 A1
6.06%, 1/25/12 AAA 167 166
BankBoston Home Equity
Loan Trust,
Series 98-2 A1
6.28%, 11/25/10 AAA 2,767 2,756
Block Mortgage Finance Co.,
Series 99-1 A1
5.94%, 8/26/13 AAA 929 923
BMW Vehicle Owner Trust,
Series 99-A A2
6.16%, 12/25/01 AAA 69,500 69,469
Boston Edison Co., Series
99-1 A1
5.99%, 3/15/03 AAA 70,850 70,730
Capital Auto Receivables
Asset Trust,
Series 99-2 A2
6.06%, 6/15/02 AAA 66,325 66,224
Caterpillar Financial
Asset Trust,
Series 99-A A2
5.90%, 3/25/02 AAA 50,000 49,875
Centex Home Equity,
Series:
99-1 A1
6.07%, 3/25/18 AAA 570 566
99-2 A1
5.91%, 4/25/19 AAA 1,329 1,318
Chevy Chase Auto
Receivables Trust,
Series 97-4 A
6.25%, 6/15/04 AAA 11,829 11,817
CIT RV Trust,
Series 99-A A1
5.33%, 12/15/05 AAA 1,604 1,597
## Citibank Credit Card
Master Trust I,
Series 98-7 A
5.279%, 5/15/02 AAA 77,175 77,126
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
COMED Transitional
Funding Trust, Series
98-1 A1
5.38%, 3/25/02 AAA $ 34,127 $ 34,027
Contimortgage Home Equity
Loan Trust,
Series:
## 98-2 A2B PAC (11)
5.41%, 3/15/13 AAA 14,452 14,445
99-1 A1
6.01%, 12/25/13 AAA 2,470 2,450
CPS Auto Grantor Trust,
Series:
96-3 A
6.30%, 8/15/02 AAA 1,016 1,014
97-2 A
6.65%, 10/15/02 AAA 4,277 4,281
Daimler Benz Auto
Grantor Trust,
Series 97-A A
6.05%, 3/31/05 AAA 11,869 11,852
Daimler Benz Vehicle
Trust,
Series:
98-A A2
5.23%, 12/20/01 AAA 56,444 56,270
98-A A3
5.16%, 12/20/07 AAA 16,055 15,851
Delta Funding Home
Equity Loan Trust,
Series:
98-4 A1F
6.16%, 2/15/16 AAA 29,574 29,466
99-1 A1F
5.81%, 11/15/15 AAA 58,898 58,581
EQCC Home Equity
Loan Trust,
Series:
98-1 A1F
6.21%, 12/15/07 AAA 15 15
98-2 A1F
6.235%, 4/15/08 AAA 448 446
99-1 A1F
5.77%, 5/20/10 AAA 61,935 61,508
99-2 A1F
6.05%, 1/25/10 AAA 61,655 61,289
99-3 A1F
6.548%, 4/25/10 AAA 147,775 147,318
First Merchants Auto
Receivables Corp.,
Series:
96-C A2
6.15%, 7/15/01 AAA 925 924
(+) 97-2 A1
6.85%, 11/15/02 AAA 2,417 2,420
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
7
<PAGE> 10
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
First Security Auto
Grantor Trust,
Series:
97-B A
6.10%, 4/15/03 AAA $ 23,528 $ 23,502
98-A A
5.97%, 4/15/04 AAA 23,217 23,141
First Security Auto
Owner Trust,
Series:
98-1 A2
5.182%, 6/15/01 AAA 28,175 28,135
99-1 A2
5.311%, 9/15/00 AAA 57,140 56,982
99-2 A2
5.492%, 5/15/02 AAA 3,450 3,437
## First USA Credit Card
Master Trust,
Series 97-10 A
5.471%, 9/17/03 AAA 56,010 55,975
Fleetwood Credit Corp.,
Series 92-A A
7.10%, 2/15/07 AAA 46 46
Ford Credit Auto
Owner Trust,
Series:
97-B A3
6.05%, 4/15/01 AAA 15,607 15,608
98-A A3
5.65%, 10/15/01 AAA 3,585 3,577
98-B A3
5.85%, 10/15/01 AAA 19,500 19,457
99-B A3
5.47%, 9/15/01 AAA 91,125 90,667
99-C A3
5.77%, 11/15/01 AAA 149,000 148,443
99-D A3
6.20%, 4/15/02 AAA 116,400 116,367
GE Capital Mortgage
Services, Inc.,
Series 99-HE3 A1
6.87%, 9/25/08 N/R 79,500 79,450
General Motors
Acceptance Corp.,
Series 97-A A
6.50%, 4/15/02 AAA 9,922 9,933
Green Tree Financial
Corp.,
Series:
97-7 A3
6.18%, 9/15/09 AAA 4,370 4,370
+ 98-E A2
5.829%, 11/15/29 Aaa 41,566 41,478
+ 98-E HIA1
5.907%, 12/15/24 Aaa 1,865 1,861
+ 98-1 A2
5.85%, 4/1/11 Aaa 14,673 14,637
99-1 A1
5.60%, 3/1/30 AAA 4,493 4,468
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
99-1 A2
5.43%, 3/1/30 AAA $ 1,750 $ 1,739
99-5 A1
6.27%, 4/1/31 AAA 31,800 31,771
Green Tree Home Equity
Loan Trust,
Series:
97-D HEA3
6.39%, 9/15/28 AAA 3,864 3,865
98-A A2
6.04%, 6/15/29 AAA 579 578
98-C A2
6.03%, 7/15/29 AAA 38,438 38,404
99-A A1
5.59%, 2/15/13 AAA 63,658 63,473
99-C A1
5.99%, 7/15/30 AAA 98,021 97,818
99-D A1
6.29%, 10/15/13 AAA 19,250 19,241
99-E A1
6.32%, 8/15/30 N/R 83,275 83,226
Green Tree Lease Finance,
Series 97-1 A3
6.17%, 9/20/05 AAA 254 253
Greenpoint Manufactured
Housing,
Series:
99-1 A1
5.78%, 12/15/09 AAA 64,061 63,365
99-3 I A1
5.013%, 5/25/29 AAA 56,980 56,815
Harley-Davidson Eaglemark
Motorcycle Trust,
Series:
98-3 A1
5.41%, 3/15/03 AAA 28,842 28,719
99-1 A1
5.25%, 7/15/03 AAA 423 420
Honda Auto Lease Trust,
Series 99-A A2
5.875%, 10/15/01 AAA 86,000 85,850
Honda Auto Receivables
Grantor Trust,
Series:
97-A A
5.85%, 2/15/03 AAA 18,255 18,201
97-B A
5.95%, 5/15/03 AAA 20,860 20,800
IMC Home Equity
Loan Trust,
Series:
96-4 A3
6.81%, 7/25/11 AAA 1,694 1,688
98-1 A2
6.31%, 12/20/12 AAA 23,355 23,276
## IndyMac Home Equity
Loan, Series 98-A AF1
5.47%, 9/25/20 AAA 34,565 34,529
</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>
(+) Long Beach Acceptance
Auto Grantor Trust,
Series:
97-2 A
6.69%, 9/25/04 AAA $ 8,656 $ 8,629
98-1 A
6.19%, 1/25/04 AAA 9,302 9,225
MMCA Automobile Trust,
Series 97-1 A3
6.06%, 5/15/01 AAA 9,433 9,427
Money Store (The) Home
Equity Trust, Series
98-A AF2
6.205%, 3/15/12 AAA 1,292 1,292
Navistar Financial Corp.
Owner Trust,
Series:
97-B A3
6.20%, 3/15/01 AAA 534 534
99-A A2
5.55%, 2/15/02 AAA 47,575 47,321
Nissan Auto Receivables
Grantor Trust,
Series:
97-A A
6.15%, 2/15/03 AAA 30,383 30,363
99-A A2
6.12%, 9/15/03 AAA 121,500 121,201
+ Oakwood Mortgage
Investors, Inc., Series
99-B A1
5.023%, 5/15/09 Aaa 309 309
Onyx Acceptance
Grantor Trust,
Series:
97-2 A
6.35%, 10/15/02 AAA 221 221
97-3 A
6.35%, 1/15/04 AAA 160 160
Option One Mortgage
Loan Trust, Series 99-2
A1
5.88%, 5/25/29 AAA 1,306 1,297
Premier Auto Trust,
Series:
99-2 A2
5.28%, 11/8/01 AAA 3,500 3,482
99-3 A2
5.82%, 2/8/02 AAA 57,075 56,902
Provident Bank Home Equity Loan
Trust, Series 98-4 A1
6.28%, 11/25/13 AAA 130 129
Residential Asset
Securities Corp.,
Series 99-KS2 A1
5.439%, 4/25/14 AAA 3,679 3,675
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
Residential Funding Mortgage
Securities Co., Inc.,
Series:
+## 98-HI2 A1
5.42%, 2/25/10 Aaa $ 1,634 $ 1,633
99-HI1 A2
6.05%, 9/25/08 AAA 37,271 37,062
99-HI4 A1
6.41%, 11/25/07 AAA 55,316 55,176
## Salomon Brothers Mortgage
Securities VII,
Series:
96-6E A1
5.837%, 3/30/25 AAA 5,496 5,467
98-NC7 A1
6.063%, 1/25/29 AAA 38,048 37,853
Saxson Asset Securities
Trust,
Series 99-2 AF1
4.993%, 3/25/14 AAA 37,316 37,234
(+) Textron Financial Corp.
Receivables Trust,
Series 98-A A1
5.82%, 2/15/02 AAA 28,472 28,377
Toyota Auto Receivables Owner
Trust,
Series 99-A A2
5.80%, 12/17/01 AAA 5,750 5,728
UCFC Home Equity Loan,
Series:
97-D A2
6.475%, 6/15/12 AAA 10,367 10,344
98-A A1
5.46%, 7/15/11 AAA 469 468
98-B A1
5.65%, 6/15/10 AAA 41 41
## 98-C A1
5.50%, 12/15/12 AAA 36,317 36,286
Union Acceptance Corp.,
Series 96-B A
6.45%, 7/9/03 AAA 250 249
USAA Auto Loan
Grantor Trust, Series
97-1 A
6.00%, 5/15/04 AAA 297 297
WFS Financial
Owner Trust,
Series:
97-C A3
6.10%, 3/20/02 AAA 14,827 14,817
98-C A2
5.524%, 8/20/01 AAA 2,007 2,003
97-D A3
6.25%, 3/20/02 AAA 247 247
99-B A2
5.83%, 4/20/02 AAA 65,750 65,563
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
9
<PAGE> 12
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
World Omni Automobile Lease
Securitization Corp.,
Series 97-B A2
6.08%, 11/25/03 AAA $ 39,418 $ 39,407
- --------------------------------------------------------------
GROUP TOTAL 3,136,727
- --------------------------------------------------------------
ASSET BACKED MORTGAGES (0.0%)
Cityscape Home Equity
Loan Trust,
Series:
96-3 A IO
1.00%, 10/25/26 N/R 14,233 278
(+) 96-3 A YMA
10/25/26 N/R 14,233 14
Contimortgage Home Equity
Loan Trust,
Series:
96-3 A9 IO
1.30%, 9/15/27 AAA 79,902 2,046
(+) 96-3 A9 I YMA
9/15/27 N/R 79,902 110
96-3 10 IO
0.90%, 9/15/27 AAA 18,776 394
(+) 96-3 10 I YMA
9/15/27 N/R 18,776 25
96-4 A11 I IO
1.10%, 1/15/28 AAA 7,913 165
(+) 96-4 A11 I YMA
1/15/28 AAA 7,913 9
96-4 A12 I IO
1.05%, 1/15/28 AAA 1,641 36
(+) 96-4 A12 I YMA
1/15/28 AAA 1,641 2
97-1 A10 I IO
1.10%, 3/15/28 AAA 9,961 213
(+) 97-1 A10 I YMA
3/15/28 N/R 9,961 11
- --------------------------------------------------------------
GROUP TOTAL 3,303
- --------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- AGENCY COLLATERAL SERIES
(5.8%)
Collateralized Mortgage
Obligation Trust,
Series 86-13 Q Inv Fl
16.222%, 1/20/03 AAA 71 76
Federal Home Loan
Mortgage Corporation,
Series:
13-B IO REMIC
10.00%, 6/1/20 Agy 1,059 266
16-B IO REMIC
10.00%, 6/1/20 Agy 603 152
18-B IO REMIC
10.00%, 5/1/20 Agy 283 71
88-17 I PAC-1 (11)
9.90%, 10/15/19 Agy 3,629 3,829
88-22 C PAC (11)
9.50%, 4/15/20 Agy 1,523 1,599
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
88-23 F PAC-1 (11)
9.60%, 4/15/20 Agy $ 1,244 $ 1,307
89-39 F PAC-2 (11)
10.00%, 5/15/20 Agy 2,108 2,233
89-47 F PAC-1
(12) REMIC
10.00%, 6/15/20 Agy 1,299 1,371
89-110 F PAC
8.55%, 1/15/21 Agy 602 617
90-164 B12 REMIC
9.50%, 7/15/21 Agy 3,000 3,202
1364-B Inv Fl IO REMIC
5.299%, 9/15/07 Agy 5,822 593
1364-E Inv Fl IO
9.432%, 9/15/07 Agy 6,994 1,128
1369-S Inv Fl IO REMIC
4.063%, 9/15/07 Agy 5,721 394
## 1377-F REMIC
5.938%, 9/15/07 Agy 5,068 5,093
1381-SB Inv Fl IO
11.568%, 10/15/07 Agy 2,499 498
1395-S Inv Fl IO
4.85%, 10/15/22 Agy 17,490 2,198
1415-S Inv Fl IO
20.063%, 11/15/07 Agy 172 59
1463-B Inv Fl IO
2.913%, 1/15/23 Agy 19,220 1,021
1476-S Inv Fl IO
REMIC PAC
4.746%, 2/15/08 Agy 1,801 165
1485-S Inv Fl IO REMIC
4.163%, 3/15/08 Agy 1,954 131
## 1506-SD IO
3.063%, 5/15/08 Agy 770 28
## 1591-FG REMIC
5.875%, 10/15/23 Agy 779 775
1600-SA Inv Fl IO REMIC
2.563%, 10/15/08 Agy 13,993 588
1603-QA PO REMIC
10/15/23 Agy 14,066 7,563
1621-SD Inv Fl
8.58%, 11/15/23 Agy 3,505 2,995
1634-SC Inv Fl
8.512%, 12/15/23 Agy 4,000 3,314
## 1710-D
5.888%, 6/15/20 Agy 17,388 17,427
## 1809-SC IO
3.05%, 12/15/23 Agy 97,259 11,389
1911-C PO
11/15/23 Agy 7,398 5,153
1936-A IO PAC
1.00%, 2/15/27 Agy 94,290 2,970
## 1963-SA IO
1.50%, 6/17/27 Agy 13,008 506
1983-IB IO
8.00%, 8/15/27 Agy 127,766 35,110
</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>
1985-PR IO
8.00%, 7/15/27 Agy $ 65,547 $ 17,717
## 2006-FA REMIC
5.838%, 10/15/23 Agy 2,418 2,420
2006-I IO
8.00%, 10/15/12 Agy 480 102
2193 B Inv Fl IO
3.025%, 9/15/29 Agy 177,711 11,658
E2 F
5.988%, 2/15/24 Agy 13,914 13,870
Federal National Mortgage
Association,
Series:
43-2 IO
9.50%, 9/1/18 Agy 20 5
89-22 G PAC (11)
10.00%, 5/25/19 Agy 3,725 3,988
89-86 E PAC (11)
8.75%, 11/25/19 Agy 106 109
89-92 G PAC (11)
8.60%, 12/25/04 Agy 750 770
90-106 J PAC
8.50%, 9/25/20 Agy 802 833
90-118 S Inv Fl REMIC
30.36%, 9/25/20 Agy 230 340
## 92-43 FC REMIC
6.006%, 10/25/21 Agy 1,280 1,286
92-89 SQ Inv Fl
IO PAC (11)
3603.206%, 6/25/22 Agy 3 235
92-186 S Inv Fl IO
3.75%, 10/25/07 Agy 2,936 206
93-9 SB Inv Fl IO
7.452%, 1/25/23 Agy 6,177 1,887
## 94-73 F
5.906%, 12/25/20 Agy 997 999
## 94-97 FC
6.044%, 3/25/24 Agy 12,978 13,084
96-14 PC PO
12/25/23 Agy 3,840 2,626
96-68 SC Inv Fl IO REMIC
2.694%, 1/25/24 Agy 6,607 560
## 97-24 FG REMIC
5.956%, 9/18/22 Agy 101 102
97-30 SP Inv Fl REMIC
3709.437%, 4/25/22 Agy 13 1,094
97-42 SG Inv Fl IO
2.594%, 7/18/27 Agy 23,706 1,121
97-53 PI IO PAC
8.00%, 8/18/27 Agy 5,658 1,494
97-57 PJ IO
7.50%, 10/18/26 Agy 23,525 5,964
97-57 PV IO
8.00%, 9/18/27 Agy 56,700 20,151
97-59 JA IO
8.00%, 7/18/27 Agy 7,000 3,175
97-61 PK IO REMIC
8.00%, 8/18/27 Agy 15,000 6,080
## 97-70 FA REMIC PAC (11)
5.856%, 7/18/20 Agy 3,419 3,424
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
## 98-22 FA REMIC
5.781%, 4/18/22 Agy $ 68,417 $ 68,152
98-22 SA Inv Fl IO
2.594%, 4/18/28 Agy 81,727 4,855
98-66 QH Inv Fl IO
3.261%, 5/25/26 Agy 39,539 1,317
98-66 QK Inv Fl IO
2.818%, 12/25/28 Agy 24,291 2,446
## 99-42 SA
2.818%, 10/25/28 Agy 211,267 10,711
186 IO
8.00%, 8/1/27 Agy 73,013 19,998
191 IO
8.00%, 1/1/28 Agy 60,934 17,286
195 IO
7.50%, 4/1/28 Agy 27,978 7,996
207 2 IO
8.00%, 2/1/23 Agy 11,073 3,159
264 2 IO
8.00%, 7/1/24 Agy 42,850 11,730
267 2 IO
8.50%, 10/1/24 Agy 38,066 10,194
270 2 IO
8.50%, 9/1/23 Agy 32,392 8,700
274 2 IO
8.50%, 10/1/25 Agy 46,215 12,377
275 2 IO
8.00%, 11/1/26 Agy 9,947 2,681
277 2 IO
7.50%, 4/1/27 Agy 23,772 6,716
281 2 IO
9.00%, 11/1/26 Agy 37,027 9,291
291 2 IO
8.00%, 11/1/27 Agy 25,638 7,138
296 2 IO
8.00%, 4/1/24 Agy 1,269 341
2163-SA Inv Fl IO
2.10%, 6/15/29 Agy 183,161 4,634
2171-B
6.28%, 6/25/09 Agy 190 181
G92-52 SQ Inv Fl IO REMIC
7721.192%, 9/25/22 Agy 21 3,518
G92-53 S Inv Fl IO REMIC
34.594%, 9/25/22 Agy 2,381 1,717
G93-11 FA REMIC
5.806%, 12/25/08 Agy 9,676 9,703
First Boston Mortgage
Securities Corp.,
Series 87-B2 IO
8.985%, 4/25/17 AAA 125 28
Government National Mortgage
Association,
Series:
96-12 S Inv Fl IO REMIC
3.063%, 6/16/26 Tsy 24,458 1,487
96-13 S Inv Fl IO REMIC
3.713%, 7/16/11 Tsy 14,004 963
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
11
<PAGE> 14
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
97-13 SB Inv Fl IO
2.563%, 9/16/27 Tsy $ 12,600 $ 999
99-29 SD Inv Fl IO
2.62%, 3/16/26 Tsy 2,100 103
99-30 SA Inv Fl IO
2.80%, 8/16/29 Tsy 363,179 19,612
99-32 Inv Fl IO
2.75%, 7/16/27 Tsy 260,425 12,943
+ Kidder Peabody Mortgage Assets
Trust, Series 87 B IO
9.50%, 4/22/18 Aaa 198 46
- --------------------------------------------------------------
GROUP TOTAL 490,143
- --------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- NON-AGENCY COLLATERAL
SERIES (0.8%)
American Housing Trust,
Series:
IV 2 C
9.553%, 9/25/20 A 2,051 2,120
V 1G
9.125%, 4/25/21 AAA 6,340 6,626
@ Chase Mortgage
Finance Corp., Series
93-1 B2
7.911%, 3/28/24
(acquired 4/28/95-
8/30/99, cost $5,228) N/R 5,342 5,314
Countrywide Funding Corp.,
Series 95-4 M
7.50%, 9/25/25 AA 6,322 6,180
GE Capital Mortgage
Services, Inc., Series
94-14 A7
7.50%, 4/25/24 AAA 4,000 3,883
Kidder Peabody Funding
Corp., Series 92-4 B2
8.285%, 5/28/22 N/R 1 1
Mid-State Trust II,
Series 88-2 A4
9.625%, 4/1/03 AAA 39,525 41,351
Rural Housing Trust,
Series 87-1 B1 REMIC
3.33%, 10/1/28 A- 1,844 1,827
Sears Mortgage Securities,
Series 89-A 1
9.00%, 9/25/19 N/R 37 37
- --------------------------------------------------------------
GROUP TOTAL 67,339
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL MORTGAGES (3.4%)
American Southwest Financial
Securities Corp.,
Series:
93-2 A1
7.30%, 1/18/09 N/R $ 8,474 $ 8,443
## 93-2 S1 IO
1.091%, 1/18/09 N/R 64,600 1,869
93-2 S2 IO
0.70%, 1/18/09 N/R 19,996 330
Asset Securitization Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 16,011 16,301
## 95-MD4 ACS2 IO
2.321%, 8/13/29 AAA 33,583 4,707
96-MD6 A1B
6.88%, 11/13/26 AAA 18,175 18,017
96-MD6 A1C
7.04%, 11/13/26 AAA 20,895 20,541
+## 97-D5 PS1 IO
1.59%, 2/14/41 Aaa 151,061 13,526
97-MD7 A1B
7.41%, 1/13/30 AAA 29,325 29,121
(+) Beverly Finance
Corp., Series 94-1
8.36%, 7/15/04 AA- 11,840 12,205
Carousel Center Finance, Inc.,
Series:
1 A1
6.828%, 11/15/07 AA 4,925 4,873
(+) 1 B
7.188%, 10/15/07 A 16,900 16,653
(+) 1 C
7.527%, 10/15/07 BBB+ 864 860
(+) Creekwood Capital
Corp., Series 95-1A
8.47%, 3/16/15 AA 6,390 6,716
(+) Crystal Run Properties, Inc.,
Series A
7.393%, 8/15/06 AA 15,900 15,912
(+) CVM Finance Corp.
7.19%, 3/1/04 AA 23,441 23,491
(+) DLJ Mortgage
Acceptance Corp.,
Series 97-CF1 S IO
1.097%, 3/15/17 AAA 103,335 4,562
+## GMAC Commercial
Mortgage Securities, Inc.,
Series:
96-C1 X2 IO
1.85%, 3/15/21 Aaa 99,104 6,530
97-C2 X IO
1.202%, 4/15/27 Aaa 367,108 22,541
</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>
+## GS Mortgage
Securities Corp. II,
Series:
97-GL X1A IO
0.651%, 7/13/30 Aaa $ 42,635 $ 160
97-GL X2 IO
0.93%, 7/13/30 Aaa 59,751 2,413
+ Midland Realty
Acceptance Corp.,
Series 96-C2 A1
7.02%, 1/25/29 Aaa 1,383 1,386
Nomura Asset Securities
Corp.,
Series:
## 94-MD1 A1B
7.711%, 3/15/18 N/R 3,305 3,301
## 94-MD1 A2
7.862%, 3/15/18 N/R 5,135 5,225
94-MD1 A3
8.211%, 3/15/18 N/R 5,015 5,132
(+) Park Avenue Finance Corp.,
Series 97-C1 A1
7.58%, 5/12/07 N/R 9,791 9,813
Prime Property Fund,
Series 1 A
6.633%, 7/23/03 AA 15,262 15,012
(+)!!! Stratford Finance
Corp.
6.776%, 2/1/04 AA 9,400 9,170
## Structured Asset
Securities Corp.,
Series:
96-CFL X1 IO
1.573%, 2/25/28 N/R 74,710 3,864
96-CFL X1A IO
1.096%, 2/25/28 N/R 54,446 561
96-CFL X2 IO
1.159%, 2/25/28 N/R 22,995 481
- --------------------------------------------------------------
GROUP TOTAL 283,716
- --------------------------------------------------------------
NON-AGENCY FIXED RATE MORTGAGES (0.1%)
Bank of America, Series A
8.375%, 5/1/07 AAA 512 512
California Federal
Savings & Loan, Series
86-1A
8.80%, 1/1/14 AA 43 43
@ Coast Federal,
Series 84-3
7.941%, 3/1/06
(acquired 4/28/95,
cost $86) N/R 86 86
@ ## Dedham Savings
Participation Certificate
8.198%, 5/1/01
(acquired 7/30/96,
cost $106) N/R 107 107
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
@ First Federal Savings & Loan
Association, Series 92-C
8.75%, 6/1/06
(acquired 4/28/95-
8/28/97, cost $0) AA $ 207 $ 207
@ ## Fortune Mortgage
Corp. Participation
Certificate
7.80%, 8/1/99
(acquired 7/30/96-
2/3/98, cost $83) N/R 84 83
Gemsco Mortgage Pass
Through Certificate,
Series 87-A
8.701%, 11/25/10 AA 529 533
@ Household Bank,
Series 85-1 CMO
7.94%, 5/1/02
(acquired 8/30/99,
cost $113) N/R 112 112
## Resolution Trust Corp., Series
92-5 C
8.60%, 1/25/26 AA 4,392 4,365
Ryland Acceptance Corp. IV,
Series 79-A
6.65%, 7/1/11 AA 4,785 4,696
Sears Mortgage Securities,
Series 82-3
10.00%, 11/1/12 AA 221 221
@ Shearson American
Express, Series A CMO
9.625%, 12/1/12
(acquired 4/28/95-
6/29/98, cost $283) AA 276 276
@ Virginia Beach Federal
Savings & Loan
Participation Certificate
6.90%, 3/1/01
(acquired 3/27/97,
cost $164) N/R 171 171
- --------------------------------------------------------------
GROUP TOTAL 11,412
- --------------------------------------------------------------
U.S. TREASURY SECURITY (0.0%)
!!! U.S. Treasury Bill
3/9/00 Tsy 5,000 4,892
- --------------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $13,090,071) 13,097,575
- --------------------------------------------------------------
PREFERRED STOCK (1.2%)
- --------------------------------------------------------------
<CAPTION>
SHARES
----------
<S> <C> <C> <C>
MORTGAGES-OTHER (1.2%)
(+)+ Home Ownership Funding Corp.
13.331% (Cost $97,046) Aaa 117,425 97,025
- --------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
13
<PAGE> 16
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
STRUCTURED INVESTMENT (0.0%)-SEE NOTE A6
- --------------------------------------------------------------
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 $9,656) N/R $ 146,787 $ 2,650
- --------------------------------------------------------------
CASH EQUIVALENTS (21.5%)
- --------------------------------------------------------------
COMMERCIAL PAPER (12.8%)
Abbey National N.A.
5.30%, 11/19/99 36,200 35,939
Albertson's Inc.
5.28%, 10/22/99 20,000 19,938
American Express Credit Corp.
5.28%, 10/21/99 50,000 49,853
ANZ (Delaware), Inc.
5.26%, 10/18/99 48,100 47,981
Associates Corp. of North America
5.25%, 10/4/99 50,000 49,978
Bank of America
5.30%, 11/1/99 43,850 43,650
Barclays U.S. Funding Corp.
5.27%, 10/20/99 50,000 49,861
Bell South Communications
5.20%, 10/4/99 35,000 34,985
5.28%, 10/26/99 9,750 9,714
Campbell Soup Co.
5.22%, 10/5/99 35,000 34,980
Canadian Imperial Holdings
5.28%, 10/21/99 50,000 49,853
Chase Manhattan Bank
5.32%, 11/12/99 20,100 19,975
Chevron Corp.
5.28%, 10/25/99 40,000 39,859
CIT Group Holdings
5.29%, 10/29/99 50,000 49,794
Daimler-Benz
5.18%, 10/4/99 46,700 46,680
Dresdner U.S. Finance, Inc.
5.29%, 10/22/99 50,000 49,841
Ford Motor Credit Corp.
5.29%, 10/15/99 50,000 49,894
General Electric Capital Corp.
5.31%, 10/29/99 50,000 49,794
H.J. Heinz Co.
5.33%, 10/29/99 32,000 31,867
Household Finance Corp.
5.25%, 10/14/99 50,000 49,905
IBM Credit Corp.
5.22%, 10/4/99 50,000 49,979
International Lease Finance Corp.
5.25%, 10/8/99 30,300 30,269
Lloyds Bank
5.26%, 10/4/99 22,000 21,990
Proctor & Gamble Co.
5.28%, 11/4/99 39,500 39,303
Prudential, Inc.
5.28%, 10/29/99 $ 50,000 $ 49,794
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)!
- --------------------------------------------------------------
<S> <C> <C> <C>
Toyota Motor Credit Corp.
5.28%, 10/25/99 $ 25,000 $ 24,912
Wal-Mart Stores, Inc.
5.28%, 10/25/99 25,000 24,912
5.30%, 11/8/99 25,000 24,860
- --------------------------------------------------------------
GROUP TOTAL 1,080,360
- --------------------------------------------------------------
REPURCHASE AGREEMENT (8.7%)
Chase Securities, Inc. 5.20%, dated
9/30/99, due 10/1/99, to be
repurchased at $734,883,
collateralized by various U.S.
Government Obligations, due
10/1/99-8/15/01 valued at $735,588 734,777 734,777
- --------------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $1,815,137) 1,815,137
- --------------------------------------------------------------
TOTAL INVESTMENTS (177.4%) (Cost $15,011,910) 15,012,387
- --------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-77.4%)
Cash 3,072
Dividends Receivable 3,914
Interest Receivable 41,396
Receivable for Investments Sold 6,180
Receivable for Forward Commitments 968,610
Receivable for Shares Sold 26,308
Receivable from Investment Adviser 323
Receivable for Daily Variation on Futures
Contracts 713
Other Assets 238
Payable for Investments Purchased (22,913)
Payable for Forward Commitments (7,544,603)
Payable for Fund Shares Redeemed (3,850)
Payable for Administrative Fees (549)
Payable for Trustees' Deferred Compensation
Plan-Note F (236)
Unrealized Loss on Swap Agreements (25,031)
Other Liabilities (2,391)
-----------
(6,548,819)
- --------------------------------------------------------------
NET ASSETS (100%) $ 8,463,568
- --------------------------------------------------------------
INSTITUTIONAL CLASS
- --------------------------------------------------------------
NET ASSETS
Applicable to 843,526,840 outstanding shares of
beneficial interest (unlimited authorization,
no par value) $ 8,463,568
- --------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.03
- --------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $ 8,735,982
Undistributed Net Investment Income (Loss) 57,608
Undistributed Realized Net Gain (Loss) (304,397)
Unrealized Appreciation (Depreciation) on:
Investment Securities 477
Futures and Swaps (26,102)
- --------------------------------------------------------------
NET ASSETS $ 8,463,568
- --------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
14
<PAGE> 17
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------
@ Restricted Security-Total market value of restricted
securities owned at September 30, 1999 was $6,356 or
0.1% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public sale may
exist.
!!! A portion of these securities was pledged to cover
margin requirements for futures contracts.
+ Moody's Investors Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
## Variable or floating rate security-rate disclosed is
as of September 30, 1999.
CMO Collateralized Mortgage Obligation
Inv Inverse Floating Rate-Interest rate fluctuates with an
Fl inverse relationship to an associated interest rate.
Indicated rate is the effective rate at September 30,
1999.
IO Interest Only
N/R Not rated by Moody's Investors Service, Inc. or
Standard & Poor's Corporation.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See Note A7
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, 1999
(In Thousands)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 659 $470,467
Dividends -- 6,016
- ------------------------------------------------------------------------------------------------------------
Total Income 659 476,483
- ------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B $ 56 $ 26,671
Less: Waived Fees (56) -- (26,671) --
Administrative Fee--Note C 6 5,688
Custodian Fee--Note E 2 477
Audit Fee 13 46
Legal Fee -- 149
Filing & Registration Fees -- 267
Other Expenses 1 358
Reimbursement of Expenses--Note B -- (819)
- ------------------------------------------------------------------------------------------------------------
Total Expenses 22 6,166
- ------------------------------------------------------------------------------------------------------------
Expense Offset--Note H (1) (477)
- ------------------------------------------------------------------------------------------------------------
Net Expenses 21 5,689
- ------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 638 470,794
- ------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities (1) (313,303)
Foreign Currency Transactions 1,062 --
Futures (60) (30,465)
- ------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 1,001 (343,768)
- ------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (844) (77,468)
Foreign Currency Transactions (282) --
Futures and Swaps (72) (35,421)
- ------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) (1,198) (112,889)
- ------------------------------------------------------------------------------------------------------------
Net Gain (Loss) (197) (456,657)
- ------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 441 $ 14,137
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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,
--------------------------
1998 1999
(In Thousands) 1998
1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS OPERATIONS:
Net Investment Income (Loss) $ 9,012 $ 638 $ 303,099 $ 470,794
Realized Net Gain (Loss) 9,480 1,001 110,081 (343,768)
Change in Unrealized Appreciation (Depreciation) 589 (1,198) 34,164 (112,889)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 19,081 441 447,344 14,137
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note A9
Net Investment Income (24,773) (9,526) (270,978) (390,191)
Realized Net Gain -- (1,724) (35,687) --
In Excess of Realized Net Gain -- -- -- (140,602)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (24,773) (11,250) (306,665) (530,793)
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
INSTITUTIONAL CLASS:
Issued 245,094 -- 3,594,760 4,166,442
In Lieu of Cash Distributions 19,123 9,223 244,268 452,674
Redeemed (334,781) (1,775) (654,370) (2,035,656)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share
Transactions (70,564) 7,448 3,184,658 2,583,460
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (76,256) (3,361) 3,325,337 2,066,804
NET ASSETS:
Beginning of Period 93,939 17,683 3,071,427 6,396,764
- ---------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 17,683 $ 14,322 $6,396,764 $ 8,463,568
- ---------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (loss) included
in end of period net assets $ 8,747 $ 852 $ 17,560 $ 57,608
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
INSTITUTIONAL CLASS:
Shares Issued 24,440 -- 337,613 408,195
In Lieu of Cash Distributions 1,981 2,231 23,087 43,874
Shares Redeemed (33,786) (246) (61,395) (197,750)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Institutional Class
Shares Outstanding (7,365) 1,985 299,305 254,319
- ---------------------------------------------------------------------------------------------------------------------------------
</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
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
October 7,
1994** to Year Ended September 30,
September 30, ---------------------------------------------
1995 1996 1997!! 1998!! 1999!!
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.80 $ 11.73 $ 10.32 $ 10.18
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.74 0.68 0.58 0.48 0.19
Net Realized and Unrealized Gain
(Loss) on Investments 0.44 1.02 0.80 0.48 --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.18 1.70 1.38 0.96 0.19
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.38) (0.66) (1.88) (1.10) (5.52)
Realized Net Gain -- (0.11) (0.88) -- (1.00)
In Excess of Realized Net Gain -- -- (0.03) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.38) (0.77) (2.79) (1.10) (6.52)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.80 $ 11.73 $ 10.32 $ 10.18 $ 3.85
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 12.12% 16.47% 14.08% 10.19% 2.87%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $537,133 $236,092 $93,939 $17,683 $14,322
Ratio of Expenses to Average Net
Assets (1) 0.16%* 0.12% 0.14% 0.12% 0.15%
Ratio of Net Investment Income to
Average Net Assets 7.44%* 6.06% 5.68% 4.84% 4.24%
Portfolio Turnover Rate 96% 170% 208% 318% 0%
- ---------------------------------------------------------------------------------------------------------------------------------
(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% 0.38% 0.39%
Ratio Including Expense Offsets 0.15%* 0.12% 0.14% 0.12% 0.14%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Commencement of Operations
++ Per share amounts for the years ended September 30, 1997, September 30, 1998
and September 30, 1999 are based on average shares outstanding.
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
ADVISORY MORTGAGE PORTFOLIO
April 12,
1995** to Year Ended September 30,
September 30, -----------------------------------------------------
1995 1996 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.41 $ 10.29 $ 10.59 $ 10.86
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) 0.25 0.72 0.75 0.69 0.66
Net Realized and
Unrealized Gain (Loss)
on Investments 0.35 (0.06) 0.34 0.36 (0.69)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 0.60 0.66 1.09 1.05 (0.03)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.19) (0.72) (0.71) (0.67) (0.58)
Realized Net Gain -- (0.03) (0.08) (0.11) --
In Excess of Realized Net
Gain -- (0.03) -- -- (0.22)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.19) (0.78) (0.79) (0.78) (0.80)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.41 $ 10.29 $ 10.59 $ 10.86 $ 10.03
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 6.03% 6.56% 11.03% 10.36% (0.32%)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(Thousands) $1,443,038 $1,974,592 $3,071,427 $6,396,764 $8,463,568
Ratio of Expenses to
Average Net Assets (1) 0.10%* 0.09% 0.09% 0.09% 0.09%
Ratio of Net Investment
Income to Average Net
Assets 6.72%* 7.17% 7.55% 6.83% 6.62%
Portfolio Turnover Rate 110% 139% 144% 126% 94%
- ---------------------------------------------------------------------------------------------------------------------------------
(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% 0.40% 0.39%
Ratio Including Expense
Offsets 0.08%* 0.08% 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, 1999, the Fund was
comprised of twenty-two 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.
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
- --------------------------------------------------------------------------------
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 interest rate 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.
Realized gains or losses on maturity or termination of interest rate 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. 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.
7. 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 with the
custodian. Securities held in segregated accounts cannot be sold while this
strategy is outstanding, unless replaced with other assets. As a result,
there is a possibility that as asset segregation reaches certain levels, a
portfolio may lose some flexibility in managing its investments, responding
to shareholder redemption requests, or meeting other current obligations.
8. 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 with-
- --------------------------------------------------------------------------------
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
holding 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.
At September 30, 1999, the Advisory Foreign Fixed Income Portfolio's net
assets included 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, the components of realized
and unrealized foreign currency gains (losses) representing foreign
exchange changes on investments 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.
9. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are declared and paid 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.
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.
10. 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 cannot be directly attributed are
apportioned among the Portfolios on the basis of their relative net assets.
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
- --------------------------------------------------------------------------------
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter & 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. DISTRIBUTOR: MAS Funds Distribution, Inc. ("MASDI" or the "Distributor"), a
wholly owned subsidiary of the Adviser, is the distributor for the Fund. MASDI
is a limited-purpose broker/dealer whose only function is to distribute
open-end mutual fund shares.
E. CUSTODY: The Chase Manhattan Bank serves as custodian for the Fund in
accordance with a custodian agreement.
F. 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 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, 1999 by
the Portfolios were $121,000.
Expenses incurred by the Fund for the year ended September 30, 1999 include
legal fees paid to Morgan, Lewis & Bockius, LLP. A partner of that firm is
secretary to the Fund.
G. PORTFOLIO INVESTMENT ACTIVITY:
1. PURCHASES AND SALES OF SECURITIES. For the year ended September 30, 1999,
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 $ -- $ --
Advisory Mortgage 14,848,350 10,219,943
</TABLE>
2. FEDERAL INCOME TAX COST AND UNREALIZED APPRECIATION (DEPRECIATION). At
September 30, 1999, 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 $ 13,384 $ -- $ (158) $(158)
Advisory Mortgage 15,011,912 103,862 (103,387) 475
</TABLE>
3. FORWARD FOREIGN CURRENCY CONTRACTS. Under the terms of the forward foreign
currency contracts open at September 30, 1999, the Advisory Foreign Fixed
Income Portfolio is obligated to deliver or receive currency in exchange for
U.S. dollars as indicated in the following table:
<TABLE>
<CAPTION>
(000)
-----------------------------------------------------------------
Net
Currency In Unrealized
to Exchange Settlement Appreciation
Deliver For Date Value (Depreciation)
-------- -------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
ADVISORY FOREIGN FIXED INCOME
Sales:
EUR 3,215 US$ 3,403 10/26/99 US$3,428 US$(25)
EUR 3,060 3,295 10/27/99 3,263 32
DKK 3,300 474 11/5/99 474 --
----------
US$ 7
----------
</TABLE>
<TABLE>
<S> <C> <C>
DKK -- Danish Krone
EUR -- Euro
US$ -- U.S. Dollar
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. FUTURES CONTRACTS. At September 30, 1999, the Portfolios had the following
futures contracts open:
<TABLE>
<CAPTION>
Unrealized
Number Aggregate Appreciation
of Face Value Expiration (Depreciation)
Portfolio Contracts (000) Date (000)
--------- --------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Purchases:
ADVISORY FOREIGN
FIXED INCOME
5 yr. Euro BOBL 47 EUR 4,927 US$ (26)
Dec-99
-----------
ADVISORY MORTGAGE
U.S. Treasury Long
Bond 1,275 US$ 145,270 US$(538)
Dec-99
-----------
Sales:
ADVISORY MORTGAGE
Dec-99-
90 day Euro$ 209 US$ 49,084 US$(218)
Mar-01
U.S. Treasury 10 yr.
Note 639 US$ 70,370 US$(315)
Dec-99
------------
US$(533)
-----------
</TABLE>
<TABLE>
<S> <C> <C>
EUR -- Euro
US$ -- U.S. Dollar
</TABLE>
5. SWAP AGREEMENTS. At September 30, 1999, the Advisory Mortgage Portfolio had
the following open Interest Rate Swap Agreements:
<TABLE>
<CAPTION>
Unrealized
Notional Appreciation
Amount (Depreciation)
(000) Description (000)
- --------------------------------------------------------------------
<C> <S> <C>
$115,000 Agreement with Bankers Trust Company
terminating August 25, 2008 to pay 3
month LIBOR monthly and to receive
fixed rate at 6.04% semiannually. $ (5,847)
$50,000 Agreement with Bankers Trust Company
terminating August 27, 2008 to pay 3
month LIBOR quarterly and to receive
fixed rate at 6.08% semiannually. (2,384)
$116,000 Agreement with Bankers Trust Company
terminating August 27, 2008 to pay 3
month LIBOR quarterly and to receive
fixed rate at 6.10% semiannually. (5,414)
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Notional Appreciation
Amount (Depreciation)
(000) Description (000)
- --------------------------------------------------------------------
<C> <S> <C>
$29,000 Agreement with Bankers Trust Company
terminating August 28, 2008 to pay 3
month LIBOR monthly and to receive
fixed rate at 6.03% semiannually. $ (1,503)
$47,500 Agreement with Bankers Trust Company
terminating September 17, 2008 to pay
3 month LIBOR quarterly and to receive
fixed rate at 5.64% semiannually. (3,645)
$78,000 Agreement with Bankers Trust Company
terminating September 21, 2008 to pay
3 month LIBOR quarterly and to receive
fixed rate at 5.59% semiannually. (6,238)
-----------
$(25,031)
-----------
</TABLE>
LIBOR -- London Interbank Offer Rate
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, 1999, the Advisory Mortgage Portfolio may elect to defer
capital losses occurring between November 1, 1998 and September 30, 1999 up to
$303,399,000.
I. EXPENSE OFFSETS. Custodian fees appearing in the Statement of Operations
have been adjusted to include expense offsets for custodian balance credits of
$1,000 and $477,000 for the Advisory Foreign Fixed Income and the Advisory
Mortgage Portfolios, respectively.
- --------------------------------------------------------------------------------
24
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
Advisory Foreign Fixed Income Portfolio & Advisory Mortgage Portfolio
In 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 a "Fund") at September 30, 1999, the results of each of their
operations, the changes in each of their net assets and their financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 19, 1999
- --------------------------------------------------------------------------------
25
<PAGE> 28
FEDERAL INCOME TAX INFORMATION: (UNAUDITED)
The Advisory Mortgage Portfolio hereby designates $38,346,000 as long-term 20%
capital gain dividends for the purpose of the dividend paid deduction on its
federal income tax return.
For the year ended September 30, 1999*, the Advisory Foreign Fixed Income
Portfolio and the Advisory Mortgage Portfolio earned 14.6% and 14.1%,
respectively, of income from direct U.S. Treasury obligations.
* Amounts for the period ended December 31, 1999 will be provided with Form
1099-DIV, to be mailed in January 2000.
- --------------------------------------------------------------------------------
26
<PAGE> 29
[MAS FUNDS LOGO]
[MAS LETTERHEAD]
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.
